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The Legal and Regulatory Environment of BUSINESS

Nineteenth Edition

Marisa Anne PAGNATTARO Josiah Meigs Distinguished Teaching Professor of Legal Studies,

University of Georgia

Daniel R. CAHOY Professor of Business Law and Dean’s Faculty Fellow,

Pennsylvania State University

Julie Manning MAGID Professor of Business Law and Kelley Venture Fellow, Indiana University

Peter J. SHEDD University Professor Emeritus of Legal Studies, University of Georgia

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THE LEGAL AND REGULATORY ENVIRONMENT OF BUSINESS, NINETEENTH EDITION

Published by McGraw Hill LLC, 1325 Avenue of the Americas, New York, NY 10121. Copyright © 2022 by McGrawHill LLC. All rights reserved. Printed in the United States of America. Previous editions © 2019, 2016, and 2013. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw Hill LLC, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

This book is printed on acid-free paper.

1 2 3 4 5 6 7 8 9 LWI24 23 22 21

ISBN 978-1-260-73428-7 (bound edition) MHID 1-260-73428-5 (bound edition) ISBN 978-1-264-12581-4 (loose-leaf edition) MHID 1-264-12581-X (loose-leaf edition)

Portfolio Manager: Kathleen Klehr Product Developers: Elizabeth Pappas (Agate) Marketing Manager: Claire McLemore Content Project Managers: Fran Simon;/Jodi Banowetz Buyer: Susan K. Culbertson Designer: Beth Blech Content Licensing Specialists: Gina Oberbrockling Cover Image: Gavel - Kelly Redinger/Design Pics; Buildings - CHROMORANGE/Karl-Heinz Spremberg/Alamy Stock Photo; People - Maskot/Getty Images; Wind Turbines - Ingram Publishing/SuperStock Compositor: SPi Global

All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.

Library of Congress Cataloging-in-Publication Data

Names: Pagnattaro, Marisa Anne, 1961- author. | Cahoy, Daniel R., author. | Magid, Julie Manning, author. | Reed, O. Lee (Omer Lee), author. | Shedd, Peter J., author. Title: The legal and regulatory environment of business / Marisa Anne Pagnattaro, Josiah Meigs, Distinguished Teaching Professor of Legal Studies, University of Georgia; Daniel R. Cahoy, Professor of Business Law and Dean’s Faculty Fellow, Pennsylvania State University; Julie Manning Magid, Professor of Business Law, Indiana University; O. Lee Reed, Emeritus Professor of Legal Studies, University of Georgia; Peter J. Shedd, University Professor Emeritus of Legal Studies, University of Georgia. Description: Nineteenth edition. | New York, NY : McGraw Hill LLC, [2021] | Includes index. Identifiers: LCCN 2020027610 (print) | LCCN 2020027611 (ebook) | ISBN 9781260734287 (hardcover) | ISBN 1260734285 (bound edition) | ISBN 9781264125814 (loose-leaf edition) | ISBN 126412581X (loose-leaf edition) | ISBN 9781264125838 (ebook) Subjects: LCSH: Trade regulation--United States. | Commercial law--United States. | Industrial laws and legislation--United States. | LCGFT: Textbooks. Classification: LCC KF1600 .C6 2021 (print) | LCC KF1600 (ebook) | DDC 346.7307--dc23 LC record available at https://lccn.loc.gov/2020027610 LC ebook record available at https://lccn.loc.gov/2020027611

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw Hill LLC, and McGraw Hill LLC does not guarantee the accuracy of the information presented at these sites.

mheducation.com/highered

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Marisa Anne PAGNATTARO Marisa Anne Pagnattaro is a Josiah Meigs Distinguished Teaching Professor of Legal Studies in the Terry College of Business at the University of Georgia. She received her Ph.D. in English at the University of Georgia, her J.D. from New York Law School, and her B.A. from Colgate University. Prior to joining the Georgia fac- ulty, Dr. Pagnattaro was a litigation attorney with Kilpatrick & Cody (now known as Kilpatrick Townsend) in Atlanta. Dr. Pagnattaro is the recipient of numerous teach- ing awards, and she also won the Academy of Legal Studies in Business Charles M. Hewett Master Teacher Competition. She is the author of many scholarly articles on national and international employment law issues, as well as labor issues related to international trade and the protection of trade secrets in China. She is an active member of the Academy of Legal Studies in Business and is a former Editor in Chief of the American Business Law Journal.

Daniel R. CAHOY Dan Cahoy is a Professor of Business Law, Dean’s Faculty Fellow and Research Director of the Center for the Business of Sustainability in the Smeal College of Business at The Pennsylvania State University. He is a registered patent attorney, with a J.D. from the University of New Hampshire School of Law and a B.A. from the University of Iowa. Prior to joining Penn State, Professor Cahoy was a litigator at an intellectual property firm in New York City, where he specialized in pharma- ceutical and biotechnology cases. He is the author of numerous scholarly articles on technology law, regulatory policy, and sustainability, and he received a Fulbright Scholarship in 2009 to serve as the Visiting Chair in International Humanitarian Law at the University of Ottawa. Professor Cahoy is a former Editor in Chief of the American Business Law Journal and IDEA: The Journal of Law and Technology. He has also held various leadership positions in academic organizations including serv- ing as the President of the Academy of Legal Studies in Business.

about the authors

Simone Beasley

Pennsylvania State University

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Julie Manning MAGID Julie Manning Magid is a Professor of Business Law and Kelley Venture Fellow in the Kelley School of Business at Indiana University. She also is the Director of the Randall L. Tobias Center for Leadership Excellence at Indiana University. She received her J.D. from the University of Michigan Law School and her A.B. from Georgetown University. Prior to joining the Kelley School faculty, Professor Magid was a litigation attorney specializing in employment and business litigation. Profes- sor Magid is recognized for her teaching in the undergraduate, graduate, specialized graduate, and online teaching environments, with numerous teaching awards, includ- ing the Kelley School of Business MBA Teaching Excellence Award and the Schuy- ler F. Otteson Undergraduate Teaching Excellence Award. Her teaching received international recognition from the Academy of Legal Studies in Business as the over- all winner of the Charles M. Hewitt Master Teacher Award. Professor Magid is the author of numerous scholarly articles and book chapters focused on public policy related to health care, diversity and inclusion, innovation, and privacy. She is a Life Sciences Research Fellow with the Center for the Business of Life Science and for- mer Editor in Chief of the American Business Law Journal.

Peter J. SHEDD Peter Shedd is the University Professor Emeritus of Legal Studies in the Terry Col- lege of Business at the University of Georgia where he received his B.B.A. and J.D. degrees. He also has been a Visiting Professor in the Ross School of Business at the University of Michigan and the Warrington College of Business at the Univer- sity of Florida. Professor Shedd has extensive experience as a teacher, researcher, administrator, and author of business-related texts. His teaching of undergraduate and MBA courses has earned Professor Shedd numerous teaching awards including being named a Josiah Meigs Distinguished Teaching Professor. Professor Shedd is a member of the Academy of Legal Studies in Business and its Southeastern Regional. He served as national president during 1999–2000. Professor Shedd is a member of the State Bar of Georgia and is an experienced arbitrator and mediator. In 2020, Professor Shedd was honored by the University of Georgia Alumni Association with their Faculty Service Award.

Indiana University

Peter Shedd

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T his nineteenth edition continues the long, rich tradition of our commitment to presenting timely examples and cases that underscore the relevance of the law for business. We are passionate about helping students understand the

importance of the legal and regulatory environment of business. Our goal is to make this text accessible, and we hope that they will embrace the study of the law with enthusiasm. In this preface, we strive to highlight themes, additions, and pedagogical devices—including important electronic features—that are key to this edition.

The Nineteenth Edition: Themes and New Additions With each new edition, we endeavor to maintain the reputation of this text as being the most up-to-date on the latest important developments in the law for business. As we prepare each new edition, we consider the events that affect the business environment and discuss how to incorporate them into the text. The nineteenth edition includes a new focus on sustainability and innovation, including the ethical issues. Because we were in the midst of revising the text during COVID-19, issues related to the pan- demic are also incorporated throughout this edition. We also continue to highlight ongoing legal fallout from the 2008 financial crisis. In this edition, we spotlight the U.S. Supreme Court case Iancu v. Brunetti, which addresses issues at the intersection of business and the law related to the protection (trademarks) and the First Amend- ment. We also added a number of recent federal cases and Supreme Court decisions.

Each chapter includes a range of relevant examples and case opinions, with key points noted for each case. Sidebars within each chapter provide students and instructors with opportunities to learn about topics that illustrate the principles dis- cussed within the text. Margin comments also reinforce key themes and points of emphasis. We hope that that this layering of the law with examples reinforces each student’s understanding of the law for business.

We believe that this text is well suited for both legal environment and business law classes. The fundamental message we wish our readers to grasp is that the law is at the core of private enterprise. The law determines ownership and protects busi- ness and individual ownership interests, which is why property law is at the heart of this text. Law defines property, enforces property rights, resolves disputes about where the boundaries of property lie, and recognizes that compensation is appropri- ate when one person infringes across the boundary of what is owned by another. Nations enforcing property rights under the rule of law establish conditions for cre- ating prosperous, diversified economies, which are crucial for businesses to thrive.

All of the current examples and sidebars are designed to teach business students the relevance of the law for business and to prepare them to make informed decisions about how the law can be used strategically to protect their rights and business interests.

Organization of the Nineteenth Edition This edition consists of 22 chapters, divided into four parts. Part One introduces students to the legal foundations for business. The first chapter in this section under- scores the importance of the legal environment of business to appreciate the role of law as the foundation for business in the private market system. This section also includes a chapter on ethics, as well as three chapters pertaining to dispute

preface

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resolution: courts, litigation, and alternative dispute resolution. Lastly, this first part includes a chapter on the U.S. Constitution (including the Commerce Clause) and its fundamental role in the legal system for business.

Part Two consists of basic legal principles, incorporating eight chapters: property, contract formation, contractual performance, torts, intellectual property, international law, criminal law, and business organizations. These chapters are designed to help stu- dents learn basic legal principles, as well as how to identify them in business contexts.

Part Three details the regulatory landscape for business. Five chapters cover essential regulatory aspects of business: the regulatory process, antitrust, financial and securities regulation, privacy and consumer protection, and environmental regulation.

The final section, Part Four, contains three chapters pertaining to the employer– employee relationship: discrimination, employment laws (including agency), and the labor–management relationship.

Taken together, these chapters should provide students with a comprehensive, yet accessible, sense of the laws and regulations crucial for companies doing busi- ness in the United States.

WHAT’S NEW PART ONE

Chapter 1 Law as Foundation for Business

• Edited the Introduction to incorporate new themes for the text, including sus- tainability, integrity, and corporate social responsibility.

• Updated Sidebar 1.1, adding information about Wells Fargo to underscore the kind of liability that can result from a lack of integrity.

• Added new Sidebar 1.2 about the importance of lawyers in the boardroom. • Updated Sidebar 1.3 with information from the AmCham China 2019 Climate Survey. • Updated Sidebar 1.4 with a new example involving a $1 billion scandal at Gold-

man Sachs. • Replaced Sidebar 1.5 with a new topic about the enforceability of corporate

social responsibility.

Chapter 2 Ethics in Decision Making

• Added discussion in introduction about the Business Roundtable Statement calling for fair and ethical treatment of suppliers.

• Added new Learning Objective 2-1 about ethical challenges facing business in the 21st century.

• Added new subsection “Modern Ethical Challenges in Innovation and Technol- ogy” addressing artificial intelligence.

• Added information about FTC fine for violations of user privacy against Facebook. • Added 2018 National Business Ethics Survey results. • Added new Sidebar 2.3 “Facebook Tackles Fake News.” • Updated Hertz standards of business conduct. • Updated Sidebar 2.7 with Boeing Code of Conduct.

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Chapter 3 Courts

• Updated the federal caseload statistics in Sidebar 3.1. • Updated Sidebar 3.3 with new examples. • Sidebar 3.4 updated with the 2018 term stats. • Updated the statistics in Sidebar 3.5 and added information about 5-4 Supreme

Court decisions. • Revised Sidebar 3.6, adding information about the role of the chief justice. • Updated Sidebar 3.7 with information about the process of selection of a

Supreme Court justice. • Updated Sidebar 3.8 with new information about how business fares in the Rob-

erts Court. • Updated Sidebar 3.9. • Updated Sidebar 3.11 with new information about the Supreme Court justices. • Added new Case 3.1 Iancu v. Brunetti and commentary in the text, replacing

Spokeo, Inc. v. Robins. The corresponding Case Briefing in Appendix I has been updated as well.

Chapter 4 Litigation

• Added a new Case 4.1 Juliana v. United States regarding standing to sue related to climate change.

• Updated Sidebar 4.3 adding information about Paul Ceglia. • Added a new example to Sidebar 4.4 about allegations regarding Apple and throttling. • Updated Sidebar 4.5 with new cases including major securities-related class

action cases, Facebook litigation, and a class action related to a data breach. • Revised Sidebar 4.7 with a new example related to discovery abuse. • Updated Sidebar 4.8 adding commentary about big data being used to predict lawsuits. • New Sidebar 4.10 with examples of frivolous lawsuits. • Added new examples to Sidebar 4.11 about social media and jurors. • Updated Sidebar 4.15 with new information about cameras in the courtroom,

including Congressional testimony by Justices Kagen and Alito.

Chapter 5 Alternative Dispute Resolution

• Updated conflict example to reflect modern global office culture. • Updated marginalia concerning number of tort cases settled out of court. • Replaced Sidebar 5.4 referencing trends in arbitration including #MeToo and

Uber agreement examples. • Replaced Sidebar 5.11 with a summary of four recent Supreme Court rulings

developing arbitration law.

Chapter 6 The Constitution

• Added a new Sidebar 6.3 with the case involving the sale of wine and spirits in Tennessee as an example of litigation related to the Commerce Clause.

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• Updated Sidebar 6.4 with information about the kinds of acts that can jeopar- dize tax-exempt status.

• Updated Sidebar 6.7 with an example from the 2020 Superbowl and a FCC fine involving Jimmy Kimmel.

• Updated Sidebar 6.9 with a new case involving the First Amendment and a rap artist. • Updated Sidebar 6.10 with new 2020 label on cigarette packaging and issues

related to vaping. • Updated Sidebar 6.12 regarding the Second Amendment. • Updated information about the Oberfeld case. • Clarified information about the levels of scrutiny.

PART TWO

Chapter 7 Property

• Updated Sidebar 7.4 to address recent Supreme Court case on intangible property.

• Updated Sidebar 7.5 to address current drone use and include current references. • Added new Case 7.1 Briggs v. Southwestern Energy Prod. Co. and commentary

in the text, replacing Coastal Oil v. Garza. • Added Sidebar 7.9 on property rights impact of light, odor and noise. • Added Sidebar 7.10 discussing how property restrictions contribute to sustainability.

Chapter 8 Contract Formation

• Added Sidebar 8.7, Overcharging into Invalidity to address contractual issues related to price gouging.

• Updated Sidebar 8.8 to reflect new legislation regarding non-compete covenants. • Added Sidebar 8.9 to address truth in sustainability advertising and greenwashing.

Chapter 9 Contract Performance and Breach

• Replaced Sidebar 9.1 to more broadly address the judge’s role in interpreting contracts and highlight recent case.

• Added section on Force Majeure clauses as excuses for non-performance. • Added Sidebar 9.4 to address when a global pandemic will be considered a

Force Majeure.

Chapter 10 Torts

• Added a definition for business invitee. • Revised Trespass section to distinguish trespass from business invitee. • Added new marginalia about defamation on web pages that allow comments. • Added new marginalia describing 2019 defamation claim filed against Amazon’s

Jeff Bezos. • New Sidebar 10.2 addressing Section 230 of the Communications Decency Act

and Trump Administration Executive Order.

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• Included discussion about manipulation of audio or visual files as potential mis- appropriation concern.

• Revised Sidebar 10.6 updating medical malpractice claims. • Condensed Case 10.4 for readability. • Replaced Sidebar 10.11 describing the increase in billion dollar jury verdicts.

Chapter 11 Intellectual Property

• Revised Sidebar 11.1 to include discussion of 2018 Nobel Prize winner Paul Romer’s work.

• Added Sidebar 11.3 on the role of trade secrets in international trade relations, particularly with China.

• Updated text on trade secrets to include current UTSA adoptions. • Added Sidebar 11.6 to address whether artificial intelligence (AI) can be an

inventor on a patent. • Added Sidebar 11.8 to discuss sharing intellectual property related to the

COVID-19 pandemic as an emergency response. • Revised Sidebar 11.10 to address Matal v. Tam and Iancu v. Brunetti cases and

cross reference Case 3.1. • Added Sidebar 11.13 to discuss Public Domain Day and the expiration of copy-

right on a new set of works. • Added new Case 11.4 Skidmore v. Led Zeppelin and commentary in the text,

replacing Campbell v. Acuff Rose. • Added Sidebar 11.14 concerning two recent Supreme Court cases that address

state copyright ownership and infringement.

Chapter 12 International Law

• Updated Figure 12.1, Top Ten Trading Partners, with 2019 year-end data. • Updated Sidebar 12.1 with current information from Transparency Interna-

tional, including new commentary about corruption and inequality. • Updated Sidebar 12.3 with new FCPA prosecutions. • Updated marginalia with new information about export controls. • Added a new example of a $1 billion fraud scheme involving fraudulently

obtained funds and money laundering. • Updated the text and Table 12.2 to reflect the withdrawal of the United King-

dom from the EU (Brexit). • Updated Sidebar 12.4 to focus on export violations. • Updated Sidebar 12.5 with new information about pirate attacks. • Updated all information about NAFTA, now known as USMCA. • Updated Sidebar 12.9 about the top international franchises. • Updated Sidebar 12.10 regarding Chiquita’s liability for alleged acts in Colombia. • Updated Sidebar 12.12 regarding Chevron and Texaco’s liability for alleged acts

in Ecuador.

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Chapter 13 Criminal Law

• Made general chapter updates, including the chapter introduction. Updates include the Wells Fargo $3 billion criminal fine and marginalia regarding incar- ceration in the United States.

• Revised Sidebar 13.1 to add potential fraud related to COVID-19. • Updated information about the grand jury process. • Updated Sidebar 13.2 with additional information regarding the death of Bernard

Ebbers who was incarcerated for fraud at WorldCom. • Added new material to Sidebar 13.5 about checking identification and the case

Kansas v. Glover. • Updated Sidebar 13.6 with additional information about Bernie Madoff. • Updated Sidebar 13.7 and added more examples of fraud schemes. • Case 13.1 added a note about Carpenter v. U.S. involving searches and cell phones. • Case 13.2 added updated information about Jeffrey Skilling. • Updated Sidebar 13.8 with new information about preventing identity theft. • Updated Sidebar 13.9 with new information about the Department of Justice

priorities related to false claims act cases • Updated Sidebar 13.12 with new information about the post-prison life of Don

Blankenship. • Replaced Sidebar 13.13 with a new example involving the prosecution of execu-

tives at the New England Compounding Center.

Chapter 14 Business Organizations

• Revised Taxation overview to include information about the 2017 Tax Cuts and Jobs Act.

• Added Sidebar 14.2 to provide detail of changes that Tax Cuts and Jobs Act made to corporate tax rates.

• Revised Trends in Managing the Organization to describe increasing emphasis on sustainability.

• Added new Case 14.2 Marchand v. Barnhill and commentary in text, replacing FCC v. AT&T.

• Revised Trends in Managing the Organization to discuss how businesses are dealing with remote workspaces.

PART THREE

Chapter 15 Regulatory Process

• Updated Sidebar 15.2 examining the unique structure of the Consumer Finan- cial Protection Bureau to include 2018 D.C. Circuit Court opinion.

• Added marginalia concerning FTC request for information from big tech companies.

• Replaced Case 15.1 with Free Lucia v. SEC highlighting the authority of admin- istrative law judges in federal agencies.

• Added Key Points for Case 15.1.

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Chapter 16 Antitrust Regulation

• Added new Case 16.1 Prosterman v. American Airlines and commentary in text, replacing U.S. v. Apple.

• Added Sidebar 16.2, addressing debate regarding whether Big Tech firms are monopolists.

• Added new Case 16.3, Apple v. Pepper, and commentary in text, replacing Kolon Industries v. E.I. Dupont De Nemours.

• Updated Figure 16.3 on criminal antitrust fines (2008-2019).

Chapter 17 Financial and Securities Regulation

• Updated marginalia with quote concerning capital formation trends. • Replaced Case 17.1 with Lorenzo v. SEC in which the Supreme Court addressed

Rule 10b-5 liability. • Added Key Points for Lorenzo v. SEC. • Added reference to Case 17.1 in discussion of PSLRA. • Updated number of filings of securities claims against foreign companies with

2019 data. • Update Table 17.2 with data from 2010-2019. • Added new marginalia providing link to the 2019 PCAOB five-year strategic plan. • Updated Dodd-Frank whistleblower discussion with Supreme Court’s 2018 deci-

sion in Digital Realty Trust, Inc. v. Somers. • Added findings from 2019 SEC crowdfunding study under the JOBS Act. • Added Figure 17.1 demonstrating the geographical distribution of crowdfunding

offerings.

Chapter 18 Privacy and Consumer Protection

• Added new Case 18.1 Carpenter v. United States and commentary in text, replacing In re Zynga.

• Added Sidebar 18.2 discussing the possible exchange of privacy rights for increased protection and security during a crisis.

• Updated Sidebar 18.3 discussing the development and impact of the GDPR. • Added discussion of 2018 Economic Growth, Regulatory Relief and Consumer

Protection Act that revised system for credit freezes and fraud alerts.

Chapter 19 Environmental Regulation and Resource Sustainability

• Updated Learning Objective 19-4 to reflect 21st century sustainability issues. • Updated NEPA discussion to include 2020 proposed rule limiting its impact. • Updated data regarding international air quality rankings. • Changed the title of Table 19.1 to better reflect its contents. • Replaced marginalia with Supreme Court’s 2020 Clean Water Act decision in

County of Maui v. Hawaii Wildlife Fund. • Updated Superfund cleanup discussion with Supreme Court’s 2019 case Atlan-

tic Richfield v. Christian.

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• Changed the final section title to Sustainability Approaches to better reflect updated contents.

• Reorganized discussion of the Kyoto Protocol as a precursor to the Paris Agree- ment and updated the Paris Agreement discussion.

• Added discussion about government and business leaders around the world engaging in new actions to preserve the environment and promote jobs, such as education and ecotourism.

PART FOUR

Chapter 20 Employment Discrimination

• Updated marginalia and added additional information to the text, including the McDonald’s sexual harassment class action.

• Updated Figure 20.1 EEOC data. • Updated Sidebar 20.3 with new material about concerns related to COVID-19. • Updated Sidebar 20.4 with additional examples about religious accommodation

claims related to Muslims. • Updated Sidebar 20.5 with additional information about the many forms of sex-

ual harassment for women in the workplace. • Updated Sidebar 20.6 with information about #MeToo and the unintended con-

sequences and backlash in the workplace. • Updated Sidebar 20.7 information about pregnancy discrimination claims and

added more information about the Young v. UPS case. • Updated Sidebar 20.9 with information about cases brought in the U.S. Supreme

Court involving LGBT discrimination. • Updated Sidebar 20.10 with a case involving age discrimination at PwC. • Updated Sidebar 20.11 with additional examples.

Chapter 21 Employment Laws

• Updated minimum wage information and added statistics on COVID-19 unemployment.

• Updated Sidebar 21.1 with the FLSA overtime rules and new examples. • Updated Sidebar 21.2 with information about the department of Labor’s new

primary beneficiaries test for internships. • Updated Sidebar 21.4 FMLA statistics information. • Added an example to Sidebar 21.9 about OSHA’s severe violator program. • Updated Sidebar 21.10 with information about Families First Coronavirus

Response legislation.

Chapter 22 Labor–Management Relationship

• Updated Table 22.1 with statistics on union membership. • Updated Sidebar 22.1 with information on union membership. • Replaced Sidebar 22.2 with details of three Trump Administration Executive

Orders.

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• Replaced Sidebar 22.5 with information about Kickstarter, the first technology company to unionize.

• Update statistics regarding state right-to-work laws.

Authorship Team One of the strengths of this text is its continuity of authorship and the coordina- tion among the authorship team. Marisa Pagnattaro, who joined the team on the fourteenth edition, continues to lead the authorship team. Dan Cahoy (who began on the sixteenth edition) and Julie Manning Magid (who joined on the seventeenth edition) have played a significant role in shaping this edition. Peter Shedd, who has long been a steward of the text, joined the book as a co-author on the eighth edition in 1990. Although he is no longer part of the authorship team, we want to recognize Lee Reed who joined the team in 1977 on the fourth edition.

Acknowledgments We want to thank a number of people who contributed to the nineteenth edition. We greatly appreciate the efforts of our team at McGraw-Hill, especially Tim Vertovec and Kathleen Klehr. We greatly appreciate their support of the authorship team and the continued development of new electronic features of the text. We are also grateful to all of the regional sales team representatives for their enthusiastic marketing support.

The following colleagues gave of their time and provided insight during the review process. For their expert comments and suggestions, we are most grateful.

Perry Binder Georgia State University

Aaron Butler Warner Pacific College

Elizabeth Cameron Alma College

Amy Chataginer Mississippi Gulf Coast Community College

Marsha Cooper California State University, Long Beach

Joe Easton Pueblo Community College

Mark Edison North Central College

Howard Ellis Millersville University of Pennsylvania Jackson

Ken Ginsberg Hodges University

Earl Clayton Hipp Jr. Wake Forest University

Johndavid Kerr Harris-Stowe State University

Michael Koval Salisbury University

Sharlene McEvoy Fairfield University

Michael Monhollon Hardin-Simmons University

Nancy Oretskin New Mexico State University

David Orozco Florida State University

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Susan O’Sullivan-Gavin Rider University

Victor Parker University of North Georgia

Matthew Phillips Wake Forest University

Debra Strauss Fairfield University

Byron Stuckey Dallas Baptist University

Lee Usnick University of Houston, Downtown

Mary-Kathryn Zachary University of West Georgia

Benjamin Akins Georgia Gwinnett College School of Business

Dr. Christy Ann Powers St. Petersburg College

Gene Blackmun III Rio Hondo College

John Washington Florida Agricultural and Mechanical University

Lora J. Koretz Arizona State University

Roberto Sandoval University of Texas El Paso

Vlad A. Bursuc Georgia Gwinnett College

Finally, we thank all of the professors and students who have used or are using our text. Your feedback continues to be important. Please feel free to share your thoughts with us. Your feedback also may be sent to The McGraw-Hill Companies.

Marisa Anne PAGNATTARO Daniel R. CAHOY

Julie Manning MAGID

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This nineteenth edition continues the reputation of our prior editions for having many valuable teaching elements. The following list highlights the various pedagogical tools in this edition:

guided tour

Remote Proctoring & Browser-Locking Capabilities New remote proctoring and browser-locking capabilities, hosted by Proctorio within Connect, provide control of the assessment environment by enabling security options and

verifying the identity of the student.

Seamlessly integrated within Connect, these services allow instructors to control students’ assess- ment experience by restricting browser activity, recording students’ activity, and verifying students are doing their own work.

Instant and detailed reporting gives instructors an at-a-glance view of potential academic integrity concerns, thereby avoiding personal bias and supporting evidence-based claims.

SmartBook® SmartBook® makes study time as productive and efficient as possible. SmartBook identifies and closes knowledge gaps through a continu- ally adapting reading experience that highlights portions of the content based on comprehension. Students have a visual representation of the areas in which they have demon- strated understanding, as well as areas in which they need to focus. The result? More confidence, better grades, and greater success.

Interactive Applications Interactive Applications like “drag and drop” and “comprehension case” help students apply important con- cepts they learned in each chapter. These engaging materials are assign- able and auto-gradable, so students receive feedback on their work immediately.

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Business Law Case Repository The Case Repository is a collection of cases from previous editions and the current edition, accessible and assignable in Connect. Cases can be selected based on Topic, Type, or State.

Case Brief Case Briefs, found in the Instructor Resources, contain a brief of each edited case found in the text. For ease of use, the briefs are numbered by chapter in the order they appear in the text. Case Briefs offer additional information like the Facts, the Issue, the Decision, and the Reasoning, for each case.

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Procedural History This case was brought as a class action in the U.S. District Court for the Central District of California, claiming (among other things) that Spokeo willfully failed to comply with the requirements of the Fair Credit Reporting Act. The District Court ini- tially denied Spokeo’s motion to dismiss the complain for lack of jurisdiction. Upon reconsideration of the motion, the district court dismissed the complaint with prejudice holding that Robins had not properly pleaded “injury in fact.”

The Court of Appeals for the Ninth Circuit reversed, holding that Robins adequately alleged an injury in fact.

The case was then appealed to the U.S. Supreme Court.

Issue Appealed The key issue on appeal was: 1. Whether Robins had standing to maintain an action

in federal court against Spokeo under the Fair Credit Reporting Act.

Who Wins and Why? 1. In that the Supreme Court held that the Ninth Circuit

failed to consider both aspects of the injury-in-fact requirement and, as such, its standing analysis was incomplete, Spokeo prevailed.

2. The Supreme Court, vacated the Ninth Circuit decision and remanded the case back to the district court.

What Does This Mean? Overall, this case was a narrow victory for Spokeo, but the case is not over. By remanding the case back to the lower court, it allows Robins another chance to allege injury in fact. If he can success- fully demonstrate the kind of injury necessary to support his claim, he could prevail in the long run. Many watch- ing the case hoped for a clear ruling from the Supreme Court that would define the parameters for lawsuits based on violation of statutes such as the Fair Credit Reporting Act.

Source: Spokeo, Inc. v. Robins, 578 U.S. __ (2016)

in its decision; also to ask a higher court to review (decide) the case. dissent To disagree with both the result and the legal reasoning of the majority opinion. opinion The court’s decision in a case. petitioner The losing party in the court of appeals who asks (i.e., “petitions”) the Supreme Court to decide whether the lower court made a mistake. respondent The prevailing party in the court of appeals who is responding to the petitioner. reversed What an appeals court says when it dis- agrees with the court beneath it. If it agrees with the lower court, it says “affirmed.”

CASE BRIEF Spokeo, Inc. v. Robins, 578 U.S. __ (2016). How do I read this citation?

∙ “Spokeo, Inc.” refers to the petitioner. ∙ “v” means versus or against. ∙ “Robins” refers to the respondent. ∙ 578 is the volume number of the official U.S. Supreme

Court Reporter, and __ refers to the page number where the case begins (once it is assigned a page num- ber). The date, 2016, is the year the case was decided.

Facts Thomas Robins discovered that his Spokeo- generated profile contained inaccurate information. Spokeo Inc. describes itself as a “people search engine,” which organizes public information from white pages, public records, and social networks. Robins contended that the information indicated that he was wealthy, married with children, and worked in a professional or technical field. He contended that the inaccuracies could make it seem that he is overqualified for employment positions he was seeking, or could suggest that he might want a salary higher that the position, or that he might be unwilling to relocate.

Quizzes Quizzes are available for each chapter and test students’ overall comprehen- sion of the concepts presented in the chapter.

Test Bank Instructors can test students’ mastery of concepts as the instructors create exams with the use of this Test Bank. Organized by chapter, the Test Bank contains multiple-choice, true/false, and essay questions. Many of the questions have been modified to correspond with the text’s revision. Answers immediately follow each question, along with corresponding Learning Objectives.

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Learning Objectives In this chapter you will learn:

2-1 To consider ethical challenges facing business in the 21st century.

2-2 To compare the connection between law and ethical principles.

2-3 To analyze why ethical consequentialism and not ethical formalism has been the chief source of values for business ethics.

2-4 To generate an individual framework for ethical values in business.

2-5 To evaluate the obstacles and rewards of ethical business practice in our property-based legal system.

The Role of Ethics in Decision Making2 Michael Hitoshi/Getty Images

Do understand that an amendment must be ratified by 38 states through leg- islative action or by a con- stitutional convention. The United States has never held a convention for the purposes of amending the Constitution.

Marginalia In the margins, each chapter includes notes, points of emphasis, definitions, quotes, and recom- mendations about what to do and what to avoid.

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Does the emphasis on profit in a property-based private market mean that only profit must be considered in business decision making? For an example of a nation where not only profit is important in business, see Sidebar 2.8.

The Effect of the Group The social critic Ambrose Bierce once remarked that the corporation is “an ingenious device for obtaining individual profit without individual responsibility.” He was referring to the fact that individuals in large groups such as the corporation feel less responsibility for what happens in the group than they do for what happens in their individual lives. They may also act differently, and to some extent less ethically, in a group.

Ambrose Gwinnett Bierce (1842 – 1914)

That individuals will do unethical things as part of a group which they would never do alone is widely recognized, and the same pattern can be observed in cor- porate behavior. Within corporations, it becomes easy for a researcher not to pass on lately discovered concerns about the possible (yet not certain) side effects of a new skin lotion that upper management is so enthusiastic about. In corporate life, it is not difficult to overlook the unethical behavior of a superior when many fellow employees are also overlooking it. And of course, “I did it because everyone else did it” is a common rationalization in groups of all kinds. “Just following orders” is a similar rationalization.

That individuals in groups may feel a diminished sense of responsibility for deci- sions made and actions taken invites ethical compromise. Coupled with an over- emphasis on profit, the group effect increases the difficulty of achieving an ethical business corporation.

The Control of Resources by Nonowners In the modern corporation, the owners (or shareholders) are often not in possession and control of corporate resources. Top management of many corporations effectively possess and control vast resources that they do not own. This produces the problems of corporate gov- ernance mentioned in Chapter 1. Managerial agents like the president and vice

Don’t forget that a nation is just a large group. This means that “culture matters” in the implementation (or not) of moral values.

“Study after study con- firms it: the vast majority of people act based on the circumstances in their environment and the standards set by their leaders and peers, even if it means com- promising their personal moral ideals. ‘Good’ peo- ple do bad things if they are put in an environ- ment that doesn’t value values, if pressured to believe that they don’t have any choice but to get the job done— whatever it takes.”

–Ethics Resource Center (2008)

The Swedes have a strong property-based private mar- ket, but the business emphasis in Sweden is not solely on profit making. Instead, the Swedes have a strong ethic of lagom, which means “not too much, not too little, but just enough.”

As a result, the pay of corporate chief executive officers (CEOs) is only a small fraction of what it is in the United States, and the average take-home pay of employ- ees (excluding CEOs) varies from highest to lowest by a ratio of only 3 to 1. Sweden provides universal health care, public nursing homes, and subsidized child care

and parental leave-taking during a child’s first year. When Swedish companies go overseas, they treat employees there with much of the same ethic as in Sweden.

Lagom means that there are few wealthy Swedes, and Sweden’s social welfare system of “just enough” depends on a tax rate of approximately twice that in the United States. Note also that Sweden is a small, homog- enous country whose citizens share a common ethical culture that is often not found in larger nations. Source: Susan Wennemyer, “Sweden: The Kindness Economy,” Business Ethics, Fall 2003.

sidebar 2.8

The Swedish Example of Lagom

Learning Objectives Learning Objectives are included at the beginning of each chapter. These objectives will act as a helpful road map of each chapter, narrow- ing the focus of each topic for both instructor and students. You will also find these Learning Objectives tagged for every test bank question to ensure that key points from each chapter are covered in every quiz and exam.

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Sidebars Examples or further descriptions are separated from the text into boxes labeled Sidebars. As in the courtroom setting, when a judge calls for a conversation with the lawyers away from the jury, these boxes are sidebars to the overall discussion. Through these side- bars, the text is explained in more detail or is brought to life with a business-related example.

Concept Summary At appropriate points in each chap- ter, a summary of the preceding material appears. Through these summaries, complex and lengthy presentations are easily reviewable by the reader.

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sidebar 2.5

American Marketing Association Statement of Ethics PREAMBLE The American Marketing Association commits itself to pro- moting the highest standard of professional ethical norms and values for its members (practitioners, academics and students). Norms are established standards of conduct that are expected and maintained by society and/or profes- sional organizations. Values represent the collective con- ception of what communities find desirable, important and morally proper. Values also serve as the criteria for evaluat- ing our own personal actions and the actions of others. . . .

ETHICAL VALUES Honesty—to be forthright in dealings with customers and stakeholders. To this end, we will: • Strive to be truthful in all situations and at all times. • Offer products of value that do what we claim in our

communications. • Stand behind our products if they fail to deliver their

claimed benefits. • Honor our explicit and implicit commitments and

promises. Responsibility—to accept the consequences of our marketing decisions and strategies. To this end, we will: • Strive to serve the needs of customers. • Avoid using coercion with all stakeholders. • Acknowledge the social obligations to stakeholders that

come with increased marketing and economic power. • Recognize our special commitments to vulnerable

market segments such as children, seniors, the eco- nomically impoverished, market illiterates and others who may be substantially disadvantaged.

• Consider environmental stewardship in our decision-making.

Fairness—to balance justly the needs of the buyer with the interests of the seller. To this end, we will: • Represent products in a clear way in selling, advertis-

ing and other forms of communication; this includes the avoidance of false, misleading and deceptive promotion.

• Reject manipulations and sales tactics that harm cus- tomer trust.

• Refuse to engage in price fixing, predatory pricing, price gouging or “bait-and-switch” tactics.

• Avoid knowing participation in conflicts of interest.

• Seek to protect the private information of customers, employees and partners.

Respect—to acknowledge the basic human dignity of all stakeholders. To this end, we will: • Value individual differences and avoid stereotyping

customers or depicting demographic groups (e.g., gender, race, sexual orientation) in a negative or dehumanizing way.

• Listen to the needs of customers and make all rea- sonable efforts to monitor and improve their satisfac- tion on an ongoing basis.

• Make every effort to understand and respectfully treat buyers, suppliers, intermediaries and distribu- tors from all cultures.

• Acknowledge the contributions of others, such as consultants, employees and coworkers, to marketing endeavors.

• Treat everyone, including our competitors, as we would wish to be treated.

Transparency—to create a spirit of openness in marketing operations. To this end, we will: • Strive to communicate clearly with all constituencies. • Accept constructive criticism from customers and

other stakeholders. • Explain and take appropriate action regarding signifi-

cant product or service risks, component substitutions or other foreseeable eventualities that could affect cus- tomers or their perception of the purchase decision.

• Disclose list prices and terms of financing as well as available price deals and adjustments.

Citizenship—to fulfill the economic, legal, philanthropic and societal responsibilities that serve stakeholders. To this end, we will: • Strive to protect the ecological environment in the

execution of marketing campaigns. • Give back to the community through volunteerism

and charitable donations. • Contribute to the overall betterment of marketing

and its reputation. • Urge supply chain members to ensure that trade is

fair for all participants, including producers in devel- oping countries.

Source: AMA Statement of Ethics, published at https://www.ama.org/. Repro- duced with the permission of the American Marketing Association.

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When you are convinced that a law itself is morally wrong, you may be justified in disobeying it. Even then, to be ethical, you should be willing to make public your disobedience and to accept the consequences for it. Both Mohandas Gandhi and Martin Luther King Jr. deliberately disobeyed laws they thought were morally wrong, and they changed society by doing so. Ulti- mately, they changed both laws and ethics. But they made their disobedience to these laws public, and they willingly accepted punishment for violating them. Dr. King famously wrote about his decision to disobey a law that he evaluated as unjust as he accepted the consequences of that decision in “Letter from a Birmingham Jail.”

Leading an ethical business life may be difficult at times. You will make mis- takes. You will be tempted. It is unlikely that you will be perfect. But if you want to be ethical and will work hard toward achieving your goal, you will be rewarded. As with achieving other challenging business objectives, there will be satisfaction in ethical business decision making.

• Have I thought about whether the action I may take is right or wrong?

• Will I be proud to tell of my action to my family? To my employer? To the news media?

• Am I willing for everyone to act as I am thinking of acting?

• Will my decision cause harm to others or to the environment?

• Will my actions violate the law?

concept summary

Self-Examination for Self-Regulation

In business as well as in personal life, the key to ethical decision making is wanting to be ethical and having the will to be ethical. If you do not want to be ethical, no code of conduct can make you ethical. Potential harm you may cause to individuals and to society will best be deterred by the threat of legal punishment and the sanctions of professional and corporate codes. You may never get caught, lose your job, or go to jail. But, as Mortimer Adler observed, you will lack “much that is needed for the good life.”

Achieving an Ethical Business Corporation The dominant form of organization in modern business is the corporation. Currently, the top 100 manufacturing corporations produce more than two-thirds of the nation’s entire manufacturing output. In 1840, the largest manufacturing firm in the United States, the Springfield Armory, employed only 250 workers. Today, many corporations have tens of thousands of employees. Some have hundreds of thousands. In substantial part, the development of the corporate form of business organization made possible this growth in business size.

Ethical problems, however, arise in corporate life that are not present in one’s individual experience. In a study of Harvard MBAs during their first five years

The primary reason that corporations dominate the business landscape is that their ownership is divisible into small shares that make them easily sellable.

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Cases Except for the first two chapters, chapters include edited portions of actual court decisions. These cases illustrate the parties’ argu- ments and the judge’s decision of the issues. We have deleted most of the procedural aspects, citations, and footnotes. An alternative to these edited cases appears in some sidebars; there a case may be explained in our own language.

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case 4.1

JULIANA v. UNITED STATES ___ F.3d ___ (9th Cir. 2020)

The panel reversed the district court’s interlocutory orders in this action which was brought by 21 individual plaintiffs (all young citizens) and environmental organizations against the federal government alleging climate-change related inju- ries caused by the federal government continuing to “permit, authorize, and subsidize” fossil fuel.

COWEN, Circuit Judge In the mid-1960s, a popular song warned that we were “on the eve of destruction.” (Barry McGuire, “Eve of Destruction,” on Eve of Destruction, Dunhill Records, 1965.) The plaintiffs in this case have presented compelling evidence that climate change has brought that eve nearer. A substantial evidentiary record documents that the federal government has long pro- moted fossil fuel use despite knowledge that it can cause cata- strophic climate change, and that failure to change existing policy may hasten an environmental apocalypse.

The plaintiffs claim that the government has violated their constitutional rights, including a claimed right under the Due Process Clause of the Fifth Amendment to a “cli- mate system capable of sustaining human life.” The central issue before us is whether, even assuming such a broad constitutional claim exists, an Article III court can provide plaintiffs with the redress they seek—an order requiring the government to develop a plan to “phase out fossil fuel emis- sions and draw down excess atmospheric CO2.” Reluctantly, we conclude that such relief is beyond our constitutional power. Rather, the plaintiffs’ impressive case for redress must be presented to the political branches of government.

The district court denied the government’s motion to dis- miss, concluding that the plaintiffs had standing to sue, raised justiciable questions, and stated a claim for infringement of a Fifth Amendment due process right to a “climate system capa- ble of sustaining human life.” The court defined that right as one to be free from catastrophic climate change that “will cause human deaths, shorten lifespans, result in widespread damage to property, threaten food sources, and dramatically alter the planet’s ecosystem.” The court also concluded that the plaintiffs

had stated a viable “danger-creation due process claim” arising from the government’s failure to regulate third-party emissions. Finally, the court held that the plaintiffs had stated a public trust claim grounded in the Fifth and Ninth Amendments. . . .

The government . . . argues that the plaintiffs lack Article III standing to pursue their constitutional claims To have standing under Article III, a plaintiff must have (1) a concrete and particularized injury that (2) is caused by the challenged conduct and (3) is likely redressable by a favorable judicial decision. . . .

[After expressing skepticism that the first redressability prong is satisfied, the court stated] even assuming that it is, the plaintiffs do not surmount the remaining hurdle--establishing that the specific relief they seek is within the power of an Arti- cle III court. There is much to recommend the adoption of a comprehensive scheme to decrease fossil fuel emissions and combat climate change, both as a policy matter and in general and a matter of national survival in particular. But it is beyond the power of an Article III court to order, design, supervise, or implement the plaintiffs’ requested remedial plan. . . .

The plaintiffs have made a compelling case that action is needed; it will be increasingly difficult in light of that record for the political branches to deny that cli- mate change is occurring, that the government had a role in causing it, and that our elected officials have a moral responsibility to seek solutions. We do not dispute that the broad judicial relief that plaintiffs seek could well goad the political branches to action. . . . We reluctantly con- clude, however, that the plaintiffs’ case must be made to the political branches or to the electorate at large, thee latter of which can change the composition of the political branches through the ballot box. That the other branches may have abdicated their responsibility to remediate the problem does not confer on Article III courts, no matter how well- intentioned, the ability to step into their shoes. . . .

*Note: On March 3, 2020, the plaintiffs filed a petition for rehearing, asking the Ninth Circuit to hear the matter en banc.

KEY POINTS • To maintain a lawsuit, a plaintiff must have standing or a legally cognizable claim and the

court must have the authority to hear the matter. • The Ninth Circuit found that the court lacked Article III standing. • Accordingly, the case was remanded with instructions to dismiss the case for lack of

Article III standing. Case Icon: McGraw-Hill Education.

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case 4.1

JULIANA v. UNITED STATES ___ F.3d ___ (9th Cir. 2020)

*Note: On March 3, 2020, the plaintiffs filed a petition for rehearing, asking the Ninth Circuit to hear the matter en banc.

KEY POINTS • To maintain a lawsuit, a plaintiff must have standing or a legally cognizable claim and the

Article III standing. Case Icon: McGraw-Hill Education.

Key Points At the end of each edited case, key points can be found. These key points help students gasp the essential elements and rel- evance of each case.

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Review Questions and Problems Following the text of each chap- ter is a series of questions and problems. These are tied to the sections of each chapter and serve as an overview of the material covered.

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Review Questions and Problems Litigation—An Overview

1. Parties A building contractor is sued by homeowners alleging that their homes were poorly constructed resulting in several defects. The contractor adds to the lawsuit a build- ing supplier that it claims provided faulty support beams. How can the contractor add the building supplier as a party to the lawsuit? What is this procedure called and how does it work?

2. Standing to Sue A group of environmentalists filed a lawsuit challenging commercial fishing in Gla- cier Bay National Park and sued the secretary of the interior and the National Park Service in order to prevent more commercial fishing. (a) What must the environmentalists show in order to satisfy the requirement of

standing to sue in this case? (b) At what point should the issue of standing be decided by the court during the

course of litigation? 3. Personal Jurisdiction

Smith, a resident of Michigan, was in Florida for a business meeting where he was served with a divorce petition filed by his wife, who had moved to Florida recently. Smith objected to the Florida court’s exercise of personal jurisdiction. What is the basis of Smith’s objection? Should he prevail? Why or why not?

4. Class-Action Suits How have the federal courts discouraged class-action lawsuits? What are the key requirements for federal courts to permit class-action suits?

Pretrial Procedures

5. Pleadings Describe the purpose of a complaint and an answer in civil litigation. What is the function of the pleading stage in a lawsuit?

6. Steps in Discovery (a) Why do surprises rarely occur at trial? (b) What are some of the key devices a litigant can use in discovery?

7. Scope of Discovery How do abusive discovery practices raise the cost of litigation?

8. Motions Under what circumstances may a court grant a motion for summary judgment?

9. Frivolous Cases Federal Rule 11 sanctions are available against both lawyers and their clients to curb frivolous litigation. Under what circumstances may sanctions be imposed?

The Trial

10. Jury Selection In light of recent court decisions restricting the use of peremptory challenges, should they be eliminated from litigation altogether? Would the elimination of peremptory challenges improve the efficiency of the trial process?

11. Other Steps during a Trial What is the purpose of jury instructions?

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12. Burden of Proof There are three distinct levels of proof required by law depending upon the kind of case involved. Describe them and when they are used.

13. Deciding the Case Under what circumstances should a judge enter a judgment notwithstanding the verdict?

Posttrial Issues

14. Appeals What normally is contained in an appellate brief? An oral argument?

15. Enforcement of Judgments and Decrees How does the court enforce judgments?

16. Res Judicata Why is the notion of res judicata critical in civil litigation?

1. You are the manager of a used car firm known as Reliant Motor Company. Your lawyer has called to tell you that John Doe, a customer you have been dealing with for several months, has filed a lawsuit against the firm. The customer claims the vehicle he purchased is a lemon and no longer even operates. You knew the vehicle was not in the best of condi- tion at the time of sale, but you believe the buyer caused most of the problems by taking the vehicle “off road” several times. You are not looking forward to discovery or trial in this case. You have several questions. • How does discovery work? • Can you be required to testify twice in a deposition and at trial? • Should you shred all documents you have about this case? You know that some of the

documents will not put the firm in the best light. You wonder what will happen at trial. Will it be like what you have seen on TV or in the movies? 2. You are the owner of a small firm that manufactures lawn mowers. While using one of your products, a person suffers severe injury and now is suing, claiming that your product was negligently designed because it did not adequately protect the user. You have no experience with the legal system. You learn that lawyers charge as much as $250 per hour and must be paid whether they win or lose their cases. You are surprised at what must happen before a trial can occur to determine who is at fault. First, your lawyer may move to dismiss the case on jurisdictional grounds. If that fails, both sides will take costly deposi- tions of likely witnesses. You will have to turn over reams of internal documents related to the design of your mower. Each side also will have to pay several hundred dollars per hour for experts as the lawyers prepare the case. These experts will have to be paid again when they testify at trial. As the time for the trial approaches, each side will spend money trying to discern the most sympathetic type of jury. Years after the lawsuit was first filed, the par- ties will be sitting in the courtroom waiting for jury selection to begin. More money will have been spent defending this case than the plaintiff was seeking when the lawsuit was first filed. Many questions come to mind:

• Should you have settled the case at the beginning? • Has your attorney been getting rich at your expense? • Is discovery more of a burden than a help?

business discussions Expanded Business Discussions The last item in each chapter is a scenario designed to stimulate conversation among students, allowing them to review and apply the material within the chapter.

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Key Terms A list of critical words or phrases is found at the end of each chapter. These terms are boldfaced in the text, and definitions are repeated in the glossary.

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RES JUDICATA Once a decision of the court has become final, it is said to be res judicata (the thing has been decided), meaning that a final decision is conclusive on all issues between the parties, whether raised in the litigation or not. Res judicata means either that the case has been finally decided on appeal or that the time for appeal has expired and a cause of action finally determined by a competent court cannot be litigated by the parties in a new proceeding by the same court or in any other court. Res judicata prevents successive suits involving the same factual setting between the same parties and brings disputes to a conclusion. A matter once litigated and legally determined is conclusive between the parties in all subsequent proceedings.

Ideally, companies will avoid litigation. See Sidebar 4.18 for practical tips to prevent lawsuits.

• Make sure supervisors and managers have access to legal counsel and use it before small issues explode into major disputes.

• Encourage teambuilding and development of coop- erative relationships in the workplace.

• Develop internal mechanisms for resolving disputes. • Perform regular audits to ensure compliance with

legal rules and best practices. • Require legal analysis of major decisions under

consideration.

sidebar 4.18

How Do You Prevent a Lawsuit in Your Firm?

Key Terms Affidavits 100 Answer 96 Appellant 110 Appellee 110 Beyond a reasonable doubt 107 Brief 111 Burden of proof 107 Class-action suit 92 Clear and convincing proof 108 Complaint 95 Counterclaim 88 Counterdefendant 89 Counterplaintiff 89 Default 96 Defendant 88 Depositions 98

Directed verdict 106 Discovery 97 Execution 113 Extradition 92 Garnishment 113 Interrogatories 97 Judgment 109 Judgment notwithstanding the

verdict 109 Judgment on the pleadings 100 Jury instructions 107 Long-arm statutes 91 Motion 100 Oral argument 111 Peremptory challenges 103 Personal jurisdiction 91

Petitioner 110 Plaintiff 88 Pleadings 95 Preponderance of evidence 108 Request for an admission 98 Request for production of

documents 97 Res judicata 114 Respondent 110 Standing to sue 89 Statute of limitations 100 Summary judgment 100 Summons 91 Third-party defendants 89 Verdict 109 Voir dire 102

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Instructor’s Resources Manual This manual consists of the teaching outline. The teaching outline section makes up the bulk of this Instructor’s Manual, which is organized by text chapter. This section corresponds with the headings in the text and typically includes suggestions on points of emphasis, answers to the case questions that appear within each chapter of the text, cases for discussion, and additional matters for discussion. Each chapter of this manual also includes a list of references that might be useful secondary sources of information and suggested answers to all case questions and responses to the end-of-chapter review questions.

Test Bank Instructors can test students’ mastery of concepts as the instructors create exams with the use of this Test Bank. Organized by chapter, the Test Bank contains multiple-choice, true/ false, and essay questions. Many of the questions have been modified to correspond with the text’s revision. Answers immediately follow each question, along with corresponding Learning Objectives.

PowerPoint Presentation The PowerPoint Presentation provides detailed lecture outlines for discussing key points and figures from the book.

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AACSB Statement The McGraw-Hill Companies is a proud corporate member of AACSB International. Understanding the importance and value of AACSB accreditation, The Legal and Regulatory Environment of Business, 18e, recognizes the curricula guidelines detailed in the AACSB standards for business accreditation by connecting selected questions in the text and the test bank to the six general knowledge and skill guidelines in the AACSB standards. The statements contained in The Legal and Regulatory Environment of Business, 19e, are provided only as a guide for the users of this textbook. The AACSB leaves content coverage and assessment within the purview of individual schools, the mission of the school, and the faculty. While The Legal and Regulatory Environment of Business, 19e, and the teaching package make no claim of any specific AACSB qualification or evaluation, we have within The Legal and Regulatory Environment of Business, 19e, labeled selected questions according to the six general knowledge and skills areas.

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PartONE Introduction: Legal Foundations for Business 1 Law as a Foundation for Business 4 2 The Role of Ethics in Decision Making 26 3 Understanding the Court System 60 4 Litigation 86 5 Alternative Dispute Resolution 118 6 The Constitution 150

PartTWO Basic Legal Principles 7 The Property System 186 8 Contract Formation 224 9 Contractual Performance and Breach 258 10 Torts Affecting Business 282 11 Intellectual Property 312 12 Global Expansion and International Law 352 13 Criminal Law and Business 380 14 Business Organizations 414

PartTHREE The Regulatory Landscape for Business 15 The Regulatory Process 450 16 Regulating Competition—Antitrust Laws 476 17 Financial and Securities Regulations 510 18 Privacy and Consumer Protection 550 19 Environmental Regulation and Resource Sustainability 582

PartFOUR The Employer—Employee Relationship 20 Employment Discrimination Laws 616 21 Employer Responsibilities and Employee Rights -Employment Laws 654 22 Labor—Management Relationship 684

Appendix I: Case Briefing and Legal Study Tips 709 Appendix II: Sample Complaint 711 Appendix III: The Constitution of the United States of America 714 Appendix IV: Selected Sections of Article 2 of Uniform Commercial Code 723 Appendix V: Selected Sections of the Sarbanes-Oxley Act of 2002 729 Appendix VI: Selected Sections of Securities Act of 1933 733 Appendix VI: Selected Sections of Securities Exchange Act of 1934 735 Glossary 737 Index 757

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PartONE Introduction: Legal Foundations for Business

1. Law as a Foundation for Business 4 INTRODUCTION 5

WHY LAW AND REGULATIONS ARE FUNDAMENTAL FOUNDATIONS FOR BUSINESS 6

sidebar 1.1 Sustainability and Integrity: Cautionary Tales of Legal Liability 6

Law, the Rule of Law, and Property 7 LAW 7

THE RULE OF LAW 7

PROPERTY 8 sidebar 1.2 Lawyers in the Boardroom 9

PROPERTY IN ITS BROADEST SENSE 9 sidebar 1.3 China: The Rule of Law and Property Rights are Key 11

JURISPRUDENCE 11

Classifications of Law 12 COMMON LAW AND CIVIL LAW 12

PUBLIC AND PRIVATE LAW 13

CIVIL LAW AND CRIMINAL LAW 13 sidebar 1.4 Goldman Sachs: “Rouge” Bankers and a $1 Billion Legal Charge 14

SUBSTANTIVE LAW AND PROCEDURAL LAW 14

Sources of Law 14 FEDERAL LAW 15

STATE LAW 15

JUDICIAL DECISIONS OR CASE LAW 15 Advantages 16

Disadvantages 16

SOURCES OF LAW HIERARCHY IN REVIEW 17

LEGAL SANCTIONS 17

SANCTIONS FOR CRIMINAL CONDUCT 18

SANCTIONS FOR BREACH OF CONTRACT 18

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SANCTIONS FOR TORTIOUS CONDUCT 19

SANCTIONS FOR VIOLATING STATUTES AND REGULATIONS 19

Property and Corporate Governance 20 THE SPECIFIC SENSE OF CORPORATE GOVERNANCE 20

THE GENERAL SENSE OF CORPORATE GOVERNANCE 21 sidebar 1.5 Corporate Social Responsibility: Good Faith 22

2. The Role of Ethics in Decision Making 26 Contemporary Business Ethics 28 MODERN ETHICAL CHALLENGES IN INNOVATION AND

TECHNOLOGY 29

ETHICS AND SOCIETY 30 Changing Normative Values 30

Economic Interdependence 30

News Media and the Internet 31

ETHICS AND GOVERNMENT 31 sidebar 2.1 Wells Fargo Sham Accounts 31

The Nature of Ethics 32 ETHICS AND MORALITY 32

ETHICS AND LAW 33 sidebar 2.2 Price Gouging after Hurricane Katrina 34

Two Systems of Ethics 35 FORMALISM 35

Kant and Formalism 35

The Social Contract 36

CONSEQUENTIALISM 37 sidebar 2.3 Facebook Tackles Fake News 38

The Protestant Ethic 38

COMPARING THE TWO ETHICAL SYSTEMS 39 sidebar 2.4 Tobacco Facts 40

Sources of Values for Business Ethics 40 LEGAL REGULATION 41

Liberty and Rights 41

Good Faith 41

Due Care 42

Confidentiality 42

Conflicts of Interest 43

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PROFESSIONAL CODES OF ETHICS 43 sidebar 2.5 American Marketing Association Statement of Ethics 44 sidebar 2.6 American Institute of Certified Public Accountants Code of Professional Conduct 45

ORGANIZATIONAL CODES OF ETHICS 46 Different Approaches to Ethical Codes 46

sidebar 2.7 Boeing Code of Conduct 47

INDIVIDUAL VALUES 48

Achieving an Ethical Business Corporation 50 THE OBSTACLES 50

The Emphasis on Profit 50

sidebar 2.8 The Swedish Example of Lagom 51 The Effect of the Group 51

The Control of Resources by Nonowners 51

THE STEPS 52 Involvement of Top Management 52

sidebar 2.9 Failure and Collapse 52 Openness in Communication 53

Consideration of All Stakeholders 54

THE REWARDS 54 sidebar 2.10 Removing Conflict Minerals from the Supply Chain 55

CAN A BUSINESS HAVE A CONSCIENCE? 55 sidebar 2.11 Same-Sex Marriage Debate and “Kiss-Ins” 56

3. Understanding the Court System 60 sidebar 3.1 The “Daunting Workload” of Federal Trial Judges 62

Personnel 62 JUDGES AND JUSTICES 62

JURORS 63 sidebar 3.2 Trial Consultants and Technical Support: Other Key Parties in Litigation 64

LAWYERS 65

Organization of the Court System 66 SUBJECT MATTER JURISDICTION 66

STATE COURTS 66 Trial Courts 66

Appellate Courts 67

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FEDERAL COURTS 67 sidebar 3.3 Small-Claims Courts 68

District Courts 69

Appellate Courts 69

sidebar 3.4 Circuit Scorecard 71

DECISIONS BY THE U.S. SUPREME COURT 71 sidebar 3.5 Very Slim Odds 72 sidebar 3.6 The Role of the Supreme Court and Chief Justice 73

The Power of Judicial Review 73 sidebar 3.7 Choosing a Supreme Court Justice 74 sidebar 3.8 Business and the Roberts Court 75

JUDICIAL RESTRAINT 75

JUDICIAL ACTIVISM 76 sidebar 3.9 Typical Alignment of Justices 77

A SAMPLE U.S. SUPREME COURT CASE 77 sidebar 3.10 Labeling Judges as Liberal or Conservative 77

case 3.1 IANCU v. BRUNETTI 78

THE NATURE OF THE JUDICIAL PROCESS 79 sidebar 3.11 U.S. Supreme Court Justices 80 sidebar 3.12 The Nature of the Judicial Process (1921) 82

4. Litigation 86 Litigation—An Overview 88

sidebar 4.1 Inadequate Risk Management Leads to High Legal Costs 88

PARTIES 88

STANDING TO SUE 89

case 4.1 JULIANA v. UNITED STATES 90

PERSONAL JURISDICTION 91 sidebar 4.2 Personal Jurisdiction: Minimum Contacts 91 sidebar 4.3 Where Does Mark Zuckerberg Reside? 92

CLASS-ACTION SUITS 92 sidebar 4.4 Consumer-Related Liability Watch: Allegations Against Apple and the Fallout from Volkswagen’s Emissions Scandal 93 sidebar 4.5 Record Number of Securities Class-Action Lawsuit Settlements 94

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Pretrial Procedures 95 sidebar 4.6 Understanding the Sample Complaint 95

PLEADINGS 95

STEPS IN DISCOVERY 96 Purpose 97

Methods 97

sidebar 4.7 Discovery Abuse: Alleged Failure to Produce Documents 97

SCOPE OF DISCOVERY 98 sidebar 4.8 Data Analytics and Litigation 98 sidebar 4.9 Litigation Holds and E-Discovery 99

MOTIONS 99

FRIVOLOUS CASES 100 sidebar 4.10 Wacky Warning Label Contest 101

The Trial 102 JURY SELECTION 102

sidebar 4.11 The Intersection of the Internet and Juries 103 sidebar 4.12 The Jury and Constitutional Limits on Peremptory Challenges 104 sidebar 4.13 Religion and Peremptory Challenges 104

OTHER STEPS DURING A TRIAL 104

case 4.2 WAL-MART STORES, INC. v. DUKES 105

BURDEN OF PROOF 107 Criminal Cases 107

Civil Cases 108

sidebar 4.14 Cameras in the Courtroom 109

DECIDING THE CASE 109

Posttrial Issues 110 APPEALS 110

sidebar 4.15 Qualcomm and Posttrial Sanctions 111 Appellate Procedures 111

Deference to Trial Courts 112

ENFORCEMENT OF JUDGMENTS AND DECREES 112 sidebar 4.16 Appealing an Evidentiary Ruling 113 sidebar 4.17 Discovery of Misconduct Causes Lockheed to Lose Its $37 Million Verdict 113

RES JUDICATA 114 sidebar 4.18 How Do You Prevent a Lawsuit in Your Firm? 114

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5. Alternative Dispute Resolution 118 Conflicts and Negotiation 120 CONFLICTS AND DISPUTES 120

STYLES AND METHODS OF NEGOTIATION 121 sidebar 5.1 Negotiation Styles 121 sidebar 5.2 A Business Dispute 122

POSITIONAL NEGOTIATION 122

PRINCIPLED NEGOTIATION 123 Communication 123

Relationship 123

Interests 124

Options 124

Legitimacy 124

Alternatives 124

Commitment 124

Alternative Dispute Resolution (ADR) Systems 125 RANGE OF OPTIONS 125

SETTLEMENTS 125

FOCUS GROUPS 126

Arbitration 127 sidebar 5.3 Examples of Contracts with Arbitration Clauses 128 sidebar 5.4 Trends in Arbitration 128

SUBMISSIONS 129 sidebar 5.5 Sample Arbitration Clause 129

ARBITRATORS 129 Expertise 129

sidebar 5.6 To Arbitrate or Litigate 130 Number Chosen 130

Authority over Certain Matters 130

case 5.1 RENT-A-CENTER, WEST, INC., v. ANTONIO JACKSON 131

AWARDS 132

THE FEDERAL ARBITRATION ACT 133 Impact on Policy 133

Impact on State Laws 133

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STATUTORILY MANDATED ARBITRATION 133

case 5.2 14 PENN PLAZA LLC. v. PYETT 134 sidebar 5.7 Enforcing Arbitration in Cases of Identity Theft? 135 sidebar 5.8 Strict Enforcement of a Class-Action Waiver in an Arbitration Agreement 136

Types of Cases 136

Procedures 136

VOLUNTARY/CONTRACT-BASED ARBITRATION 137

JUDICIAL REVIEW 137 Review of Voluntary/Contract-Based Arbitration Awards 137

sidebar 5.9 Single Claims v. Class Actions 138 sidebar 5.10 Judicial Review of Arbitrator’s Award 139

Review under the Federal Arbitration Act 140

sidebar 5.11 Supreme Court Continues to Develop Arbitration Law 141

Mediation 142 sidebar 5.12 Bill’s and M&N Revisited 143

PROCEDURES 143 sidebar 5.13 Steps in the Mediation Process 143

ADVANTAGES/DISADVANTAGES 144

LACK OF JUDICIAL INVOLVEMENT 145

COMBINATION OF ADR SYSTEMS 145

6. The Constitution 150 Basic Concepts 153 SEPARATION OF POWERS 153

SUPREMACY CLAUSE 153 Preemption 154

sidebar 6.1 Examples of State Laws Preempted by Federal Law 154

Federal Government’s Authority to Regulate Business— The Commerce Clause 155 REGULATION OF FOREIGN COMMERCE 155

REGULATION OF INTERSTATE COMMERCE 155

IMPACT ON INTERSTATE COMMERCE 156

LIMITATION ON FEDERAL AUTHORITY 156

Source: Carol M. Highsmith Archive, Library of Congress [LC-DIG-highsm-12945]

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CONTRACT CLAUSE 156

State and Local Government’s Authority to Regulate Business—Police Powers 157 LIMITATION OF POLICE POWERS 157

Exclusively Federal 157

Exclusively State 157

sidebar 6.2 Federalism and State Rights under the Commerce Clause 158

Dual Regulation 159

sidebar 6.3 State Protectionism Struck Down 160

Amendments and Basic Protections 160 FIRST AMENDMENT PROTECTIONS 161

Freedom of Religion 161

sidebar 6.4 How Does the IRS Define “Churches”? 161 sidebar 6.5 Business and the Religious Freedom Restoration Act 162

Freedom of Speech 162

sidebar 6.6 Art and Obscenity 163 sidebar 6.7 The FCC Is Not Amused: Controversies over the Super Bowl & More 164 sidebar 6.8 Picketing as Free Speech 164

case 6.1 SNYDER v. PHELPS 165

case 6.2 BROWN v. ENTERTAINMENT MERCHANTS ASSOCIATION 167 sidebar 6.9 When Does a Communication Become a Threat Unprotected by the First Amendment? 169 sidebar 6.10 The Controversy over Cigarette Warning Labels 170

Freedom of the Press 170

sidebar 6.11 WikiLeaks, Edward Snowden, and Freedom of the Press 171

Second Amendment: The Right to Possess Guns 171

sidebar 6.12 The Second Amendment After the Heller Case 172 The Fifth Amendment: Takings Clause 172

Eminent Domain and the Common Good 172

Public Use 173

case 6.3 KELO v. CITY OF NEW LONDON, CONNECTICUT 173 Just Compensation 176

The Fourteenth Amendment: Equal Protection and Due Process of Law 176

DUE PROCESS OF LAW 176 Incorporation Doctrine 177

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EQUAL PROTECTION 177 Minimum Rationality 178

Strict Scrutiny 178

Quasi-Strict Scrutiny 178

sidebar 6.13 Same-Sex Marriage and the Constitution 179 sidebar 6.14 Analysis of Equal Protection 180

PartTWO Basic Legal Principles 7. The Property System 186

Introduction to the Property-Based Legal System 188 sidebar 7.1 Property as the Foundation of the Private Market 189

Rationale for the Property System 189 THE PROBLEM OF LIMITED RESOURCES 190

sidebar 7.2 The Three Faces of Property 190

PROPERTY AND PROSPERITY 191 sidebar 7.3 The Mystery of Capital 192

Defining Property in the Legal System 193 TWO BASIC DIVISIONS OF PROPERTY 193

PROPERTY BOUNDARIES IN THE PHYSICAL WORLD 194 sidebar 7.4 Additional Complexity in Defining Intangible Property 194

Defining Land 195

Air Rights 195

sidebar 7.5 Trespassing Drones? 195 Subsurface Rights 196

case 7.1 BRIGGS v. SOUTHWESTERN ENERGY PRODUCTION CO. 196

Fixtures on Land 198

Interests in Property with Respect to Others and Time 198 TYPES OF OWNERSHIP 198

Fee Simple 198

Life Estate 198

Leasehold Estate 198

Concurrent Ownership 199

Specialty Applications of Property 199 EASEMENTS 199

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BAILMENTS 200

case 7.2 DUKE ENERGY CAROLINAS v. GRAY 201 sidebar 7.6 Is Your Financial Data “Property” That Is Bailed? 204

Acquiring Resources in a Property System 204 ACQUIRING RESOURCES THROUGH EXCHANGE 204

ACQUIRING RESOURCES THROUGH POSSESSION 205 sidebar 7.7 Barry Bonds’ Home-Run Ball 205

Lost Items 206

Adverse Possession 206

sidebar 7.8 Curing Blight through Adverse Possession? 206

ACQUIRING RESOURCES THROUGH CONFUSION 207

ACQUIRING RESOURCES THROUGH ACCESSION 207

ACQUIRING RESOURCES THROUGH GIFT 208

TITLE AND PROPERTY REGISTRATION 208

Property and Security Interests 209 SECURITY INTERESTS IN LAND 209

Recording Statutes 210

Foreclosure, Deficiency, and Redemption 210

SECURED TRANSACTIONS 211 Perfection 211

ARTISAN’S LIENS AND MECHANIC’S LIENS 212

Limitations on Property and the Common Good 212 PROPERTY, THE USE OF RESOURCES, AND THE EQUAL RIGHTS OF OTHERS 212

NUISANCE AND ZONING 213 sidebar 7.9 Light, Odor, Noise, and the Property Fence 214

case 7.3 COOK v. SULLIVAN 215

PROPERTY LIMITATIONS AND THE COMMON GOOD 217 Duration Limitations on Property 217

Taxation 217

PROPERTY: A CONCLUSION AND COMMENT 218 sidebar 7.10 Property Restrictions for a More Sustainable Future 218

8. Contract Formation 224 Basic Concepts 226 CONTRACT LAW IN PRIVATE ENTERPRISE 226

SOURCES OF CONTRACT LAW 227

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Contractual Classifications and Terminology 227 BILATERAL AND UNILATERAL CONTRACTS 228

EXPRESS AND IMPLIED-IN-FACT CONTRACTS 229

case 8.1 LEYDEN v. AMERICAN ACCREDITATION HEALTHCARE COMMISSION 230 sidebar 8.1 Idea Submission 231 sidebar 8.2 Implied Warranties 232

IMPLIED-IN-LAW OR QUASI-CONTRACTS 232

CONTRACTUAL ENFORCEMENT TERMINOLOGY 233

CONTRACTUAL PERFORMANCE TERMINOLOGY 233

Contract Formation 234 OFFER TO CONTRACT 235

sidebar 8.3 Are You Serious? 235 Definite Terms 235

sidebar 8.4 Is an Online “Policy” a Definite Offer? 236 Termination of Offer 236

ACCEPTANCE OF OFFER 237 Mirror Image Rule 237

UCC Battle of the Forms 237

Silence Not Acceptance 237

case 8.2 GOTTLIEB & CO., INC. v. ALPS SOUTH CORPORATION 238 Mailbox Rule 239

sidebar 8.5 Is the Mailbox Rule Still Relevant? 240

CONSIDERATION 240 Agreement Not to Sue 241

case 8.3 VASSILKOVSKA v. WOODFIELD NISSAN, INC. 241 Preexisting Obligation 243

sidebar 8.6 Consideration Not Necessary 243 Past Consideration 243

Promise to Make a Gift 243

Option Contract 244

Promissory Estoppel 244

CAPACITY OF PARTIES TO CONTRACT 244 Minors 244

Intoxicated and Mentally Incompetent Persons 245

LAWFUL PURPOSE 245 sidebar 8.7 Overcharging Into Invalidity 245

Contracts That Restrain Trade 246

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When a “Meeting of the Minds” Is Lacking 246 FRAUD OR INNOCENT MISREPRESENTATION 246

sidebar 8.8 Restraining Competition in Sandwiches? 247 sidebar 8.9 How Green is My Ad? 248

MISTAKE 248

DURESS OR UNDUE INFLUENCE 249

Contract Form 249 ORAL CONTRACTS 249

STATUTE OF FRAUDS 250 sidebar 8.10 Examples of Contracts Required to Be Evidenced by a Signed Writing 250

Sale of an Interest in Land 250

Collateral Promise to Pay Another’s Debt 250

Cannot Be Performed within One Year 251

Sale of Goods of $500 or More 251

sidebar 8.11 Are Electronic Contracts Considered Writings? 252 Others Contracts 252

EXCEPTIONS TO THE WRITING REQUIREMENT 252 Part Performance 252

Rules Involving Goods 253

sidebar 8.12 Exceptions to Statute-of-Frauds Requirement That Sale-of-Goods Contracts Be in Writing 253

Judicial Admissions 253

9. Contractual Performance and Breach 258 Interpretation of Contracts 260 RULES OF INTERPRETATION 260

THE PAROL EVIDENCE RULE 260 sidebar 9.1 Judging What the Contract Says 261

Performance 261 CONDITIONS OF PERFORMANCE 263

case 9.1 ST. LOUIS PRODUCE MARKET v. HUGHES 263

PAYMENT, DELIVERY, SERVICES TENDERED IN GOODS CONTRACTS 265

sidebar 9.2 Terms of Delivery in the UCC 265 DISCHARGE OF DUTIES THROUGH PERFORMANCE 266

sidebar 9.3 Levels of Performance 266 DIVISIBILITY OF PERFORMANCE 267

Excuses for Nonperformance 267

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FORCE MAJEURE 267 sidebar 9.4 Is a Global Pandemic Considered a Force Majeure? 268

IMPOSSIBILITY OF PERFORMANCE AND FRUSTRATION OF PURPOSE 268

case 9.2 EAST CAPITOL VIEW COMMUNITY DEVELOPMENT CORP. v. ROBINSON 269

COMMERCIAL IMPRACTICABILITY 270

WAIVER OR RELEASE 270

Breach of Contract 271 DAMAGES 271

sidebar 9.5 Opening the Door to Related Liability 273

EQUITABLE REMEDIES 273

case 9.3 OLIVER v. BALL 273

EFFICIENT BREACH 275 sidebar 9.6 Walking Away from a Mortgage 275

Third Parties’ Rights 275 BENEFICIARIES 276

ASSIGNMENT AND DELEGATION IN CONTRACTS 276 Notice of Assignment 277

Contracts That Cannot Be Assigned or Delegated 277

NOVATIONS 278

Practical Perspective on Contracts 278 sidebar 9.7 Suggestions for Businessperson/Lawyer Relationship on the Drafting of Contracts 279

10. Torts Affecting Business 282 Intentional Torts 284

sidebar 10.1 Types of Intentional Torts 284

ASSAULT AND BATTERY 284

case 10.1 HARPER v. WINSTON COUNTY 285

INTENTIONAL INFLICTION OF MENTAL DISTRESS 286

INVASION OF PRIVACY 287

case 10.2 EHLING v. MONMOUTH-OCEAN HOSPITAL SERVICE CORP. 287

FALSE IMPRISONMENT AND MALICIOUS PROSECUTION 289

TRESPASS 289

CONVERSION 290

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DEFAMATION 290 Defamation and the First Amendment 291

sidebar 10.2 Section 230 and President Trump’s Executive Order 291

FRAUD 292 sidebar 10.3 Tort or Crime? or Both? 293

INTERFERENCE WITH BUSINESS RELATIONS 293 Injurious Falsehood 293

sidebar 10.4 One Set of Facts but Several Tort Claims? 294 Intentional Interference with Contractual Relations 294

Negligence 294 sidebar 10.5 Elements of Negligence 295

DUTY OF CARE 295

case 10.3 IANNELLI v. BURGER KING CORP. 296 sidebar 10.6 Medical Malpractice Claims 297

UNREASONABLE BEHAVIOR—BREACH OF DUTY 298 Examples of Negligence 298

Willful and Wanton Negligence 298

sidebar 10.7 Strip Search Hoax Costs McDonald’s $6.1 Million 299

CAUSATION IN FACT 299

PROXIMATE CAUSATION 300

DEFENSES TO NEGLIGENCE 300 Contributory Negligence 300

sidebar 10.8 Explosion on the Long Island Railroad 301

Assumption of Risk 301

Strict Liability in Tort 302 STRICT PRODUCTS LIABILITY 302

sidebar 10.9 Tort Reform 303

case 10.4 BRANHAM v. FORD MOTOR CO. 304

ULTRAHAZARDOUS ACTIVITY 305

OTHER STRICT LIABILITY TORTS 305 sidebar 10.10 The Great Molasses Flood 306

Damages 306 sidebar 10.11 The Rise of Billion Dollar Jury Verdicts 306

COMPENSATORY DAMAGES 307

PUNITIVE DAMAGES 307 sidebar 10.12 Punitive Damage Guidelines 308

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11. Intellectual Property 312 sidebar 11.1 The Importance of Intellectual Property (IP) 314

THE JUSTIFICATION FOR INTELLECTUAL PROPERTY 315

INTELLECTUAL PROPERTY AND COMPETITION 315 sidebar 11.2 The Open-Source Alternative 316

CAPTURING INTELLECTUAL PROPERTY 316

Trade Secrets 317 sidebar 11.3 Trade Secrets and International Relations 318

ESTABLISHING THE EXISTENCE OF A TRADE SECRET 318

case 11.1 AL MINOR & ASSOCIATES, INC. v. MARTIN 319

DEMONSTRATING MISAPPROPRIATION 321 Employee Mobility and Trade Secrets 321

CIVIL ENFORCEMENT OF TRADE SECRETS 321

CRIMINAL ENFORCEMENT OF TRADE SECRETS 322 sidebar 11.4 Soda Secrets 322 sidebar 11.5 Federal Government Intellectual Property Enforcement 323

Patent Law 323 OBTAINING A PATENT 324

Patent Type 324

sidebar 11.6 Can AI Be an Inventor? 325

PATENTABLE SUBJECT MATTER 325

case 11.2 ALICE CORPORATION PTY. LTD. v. CLC BANK INTERNATIONAL 326

NOVELTY, NONOBVIOUSNESS, AND UTILITY 327 sidebar 11.7 Is Software Patentable? Maybe. 328

PATENT ENFORCEMENT 329

PATENT TROLLS AND THE LITIGATION THREAT 330 sidebar 11.8 Invention Sharing During a Public Emergency 331

Trademark Law 331 TYPES OF TRADEMARKS 332

sidebar 11.9 Brands vs. Trademarks 332 Trade Dress 333

TRADEMARK REGISTRATION 333 sidebar 11.10 Can you Register an Offensive Mark? 334

Source: Library of Congress, Prints & Photographs Division, Reproduction number LC-USZ62-127779 (b&w film copy neg.)

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TRADEMARK ENFORCEMENT 335

case 11.3 KRAFT FOODS GROUP BRANDS LLC. v. CRACKER BARREL OLD COUNTRY STORE, INC. 336 sidebar 11.11 Counterfeiting Has a Global Economic Impact 338

Trademarks and the Internet 338

TRADEMARK DILUTION 339

sidebar 11.12 When Is a Uniform Expressive? 341 sidebar 11.13 Public Domain Day Finally Arrives 341

case 11.4 SKIDMORE V. LED ZEPPELIN 343

sidebar 11.15 Knowledge of Users’ Infringing Activity 346

International Intellectual Property Rights 346 A Conclusion about Intellectual Property 347

12. Global Expansion and International Law 352 Risks Involved in International Trade 355

sidebar 12.1 Pharmaceutical Products to Toys: Issues Related to Sourcing 355

PRESSURES FOR BRIBES 355 sidebar 12.2 Turning Back the Tide of Corruption 356

MONEY LAUNDERING 357 sidebar 12.3 FCPA Prosecutions: U.S. Government Success Stories 358

EXPROPRIATION AND NATIONALIZATION 359

EXPORT CONTROLS 359 sidebar 12.4 U.S. Export Enforcement and Economic Espionage: Sample of Major Cases 360 sidebar 12.5 Twenty-First-Century Pirates 361

International Law and Organizations 362 sidebar 12.6 What Are Corporate Codes of Conduct? 362

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SOURCES OF INTERNATIONAL LAW 362 Public International Law 363

Private International Law 364

INTERNATIONAL ORGANIZATIONS 364 United Nations 364

World Trade Organization 365

The European Union 366

MAJOR AGREEMENTS AFFECTING TRADE 367 Convention on Contracts for the International Sale of Goods 367

North American Free Trade Agreement 368

Central America-Dominican Republic Free Trade Agreement 368

sidebar 12.7 Key Achievements of the U.S-Mexico-Canada Agreement 369

Other Important Trade Agreements 369

sidebar 12.8 Philip Morris: Restrictions Affecting Their Global Business 370

Methods of Transacting International Business 370 FOREIGN SALES 370

LICENSES OR FRANCHISES 371 sidebar 12.9 Successful International Franchising Ventures 371

DIRECT FOREIGN INVESTMENT 372 sidebar 12.10 Chiquita Brands International: Ongoing Actions Related to Alleged Payments to Death Squads for “Protection” 372

Resolving International Disputes 373 ALIEN TORT STATUTE 373

case 12.1 KIOBEL v. ROYAL DUTCH PETROLEUM, CO. 374

SUING FOREIGN GOVERNMENTS IN THE UNITED STATES 375

SUING FOREIGN FIRMS IN THE UNITED STATES 375 sidebar 12.11 The Reach of U.S. Law: Spector v. Norwegian Cruise Line, Ltd. 545 U.S. 119 (2005) 376

INTERNATIONAL ARBITRATION 376 sidebar 12.12 Chevron and Texaco in Ecuador: $18 Billion Judgment 376

China International Economic and Trade Arbitration Commission 377

The World Intellectual Property Organization: Arbitration and Mediation Center 377

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13. Criminal Law and Business 380 Terms and Procedures 383 CLASSIFICATIONS OF CRIMINAL CONDUCT 383

sidebar 13.1 U.S. Department of Justice: Fraud Prosecutions 383

BASIC CONCEPTS 384

THE GRAND JURY 384 sidebar 13.2 One of the Worst Accounting Scandals of All Time: $11 Billion Accounting Fraud at WorldCom 385

Constitutional Issues 386 THE FOURTH AMENDMENT: ILLEGAL SEARCH AND SEIZURE 386

sidebar 13.3 The Fourth Amendment: Exigent Circumstances and Identification Checks 387

case 13.1 RILEY v. CALIFORNIA 388 sidebar 13.4 Know Your Miranda Rights 389

THE FIFTH AMENDMENT: PROTECTION AGAINST SELF-INCRIMINATION 389

THE FIFTH AMENDMENT: DOUBLE JEOPARDY 390 sidebar 13.5 Fifth Amendment Rights: Mere Silence Does Not Invoke Miranda 390

THE SIXTH AMENDMENT: RIGHTS IN A CRIMINAL CASE 391

THE EIGHTH AMENDMENT 392

Specific Crimes 392 FRAUD 392

sidebar 13.6 Madoff’s Multi-Billion-Dollar Ponzi Scheme 393 Mail and Wire Fraud 394

sidebar 13.7 FBI (Federal Bureau of Investigation) Report: Common Fraud Schemes 394

case 13.2 SKILLING v. UNITED STATES 395 Securities Fraud 397

sidebar 13.8 Preventing Identity Theft 397 Health Care Fraud 398

Counterfeiting 398

sidebar 13.9 False Claims Act and Whistleblower Lawsuits 398 Bankruptcy Fraud 399

CONSPIRACY 399 sidebar 13.10 Anatomy of a Prosecution: The Demise of Enron 400

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OBSTRUCTION OF JUSTICE 400 sidebar 13.11 Think Before You Act: Examples of Obstruction of Justice 401

FALSE STATEMENT TO A BANK 402

FALSE STATEMENT TO A FEDERAL AGENCY 402 sidebar 13.12 Massey Energy Co. Explosion: Multiple Charges 403

LARCENY 403

RACKETEER INFLUENCED AND CORRUPT ORGANIZATIONS ACT (RICO) 404

sidebar 13.13 Major RICO Prosecutions 405

CYBER CRIME 406

ENDANGERING WORKERS 406 sidebar 13.14 HACKED! The Increasing Problem of Cyber Crime 407

AIDING AND ABETTING 408

BRIBERY AND KICKBACKS 408 sidebar 13.15 Bribery Prosecutions 409

SENTENCING GUIDELINES 409

TRENDS 410

14. Business Organizations 414 FORMS OF BUSINESS ORGANIZATIONS 416

sidebar 14.1 Possible Forms of Business Organizations 416

Factors to Consider when Selecting a Business’s Organizational Form 416 CREATION 417

CONTINUITY 417

MANAGERIAL CONTROL 417

LIABILITY 417

TAXATION 418 sidebar 14.2 U.S. Corporate Taxes are No Longer the Highest in the World 418

Selecting the Best Organizational Form 419 SOLE PROPRIETORSHIPS 420

Creation 420

Continuity 420

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Managerial Control 420

Liability 420

Taxation 420

PARTNERSHIPS 420 Creation 421

sidebar 14.3 Formation and Naming of a Partnership 421 Continuity 421

sidebar 14.4 Anticipating a Partnership’s Dissolution—Buy and Sell Agreements 422

Managerial Control 422

Liability 422

Taxation 422

CORPORATIONS 423 Creation 424

sidebar 14.5 Steps in Creation of a Corporation 424 Continuity 424

Managerial Control 425

sidebar 14.6 Why Are So Many Companies Incorporated in Delaware? 425

Liability 426

case 14.1 ALLI v. U.S. 427 Taxation 429

LIMITED PARTNERSHIPS 430 Creation 431

Continuity 431

Managerial Control 431

Liability 431

sidebar 14.7 Actions by Limited Partner 432

S CORPORATIONS 432

LIMITED LIABILITY ORGANIZATIONS 433 Creation 433

Continuity 433

Managerial Control 433

sidebar 14.8 Fiduciary Duties in LLCs 434 Liability 434

Taxation 434

NON-PROFITS 434

MAKING THE DECISION 435

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Operating the Organization through Agents 435 TERMINOLOGY 436

CONTRACTUAL LIABILITY FROM AN AGENT’S ACTS 436 Actual Authority 437

Implied Authority 437

Apparent Authority 437

Ratification 438

TORT LIABILITY FROM AN AGENT’S ACTS 438

CRIMINAL LIABILITY 439

Trends in Managing the Organization 439 case 14.2 MARCHAND v. BARNHILL. 440

PartTHREE The Regulatory Landscape for Business 15. The Regulatory Process 450

Regulatory Process—Administrative Agencies 452 REASONS FOR AGENCIES 452

sidebar 15.1 Major Federal Agencies 453 Providing Specificity 453 Providing Expertise 454 Providing Protection 454 Providing Regulation 454 Providing Services 454

FUNCTIONS OF AGENCIES 455 Rule Making 455 Adjudicating 456 Advising 456 Investigating 456

sidebar 15.2 Is the Structure of the Consumer Financial Protection Bureau Constitutional? 457

ORGANIZATION OF AGENCIES 457 In General 457 Quasi-Judicial Staff 459

case 15.1 FREE LUCIA v. SEC 459 sidebar 15.3 Procedures Followed in Quasi-Judicial Proceedings 461

INFLUENCING AGENCY DECISIONS 461

Judicial Review of Agency Decisions 462

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STANDING TO SUE 462 Reviewability 462 Aggrieved Party 462

REVIEW OF RULE MAKING 462 sidebar 15.4 Standing to Sue or Who May Challenge an Administrative Policy 463

Is Delegation Valid? 463 Authority Exceeded? 464

sidebar 15.5 Standard of Review of Agency Actions 464 case 15.2 FOOD AND DRUG ADMINISTRATION v. BROWN & WILLIAMSON TOBACCO CORPORATION 465

REVIEW OF ADJUDICATIONS: PROCEDURAL ASPECTS 467 Exhaustion of Remedies 468

Primary Jurisdiction 468

sidebar 15.6 Exceptions to Requirement of Exhaustion 468

REVIEW OF FACTUAL DETERMINATIONS 469

Criticism of Administrative Agencies 470 sidebar 15.7 Criticisms of Administrative Process 470

THE COSTS TO BUSINESS 471

THE COSTS TO SOCIETY 471

CONCLUSION 472 sidebar 15.8 Trends in Regulations: Growth of Government in the 20th Century 473

16. Regulating Competition—Antitrust Laws 476 HISTORICAL DEVELOPMENT 478

The Sherman Act, Section 1—Agreements in Restraint of Trade 479 ANALYSIS IN ANTITRUST LAW 481

Rule of Reason 481

Per Se Illegality 481

HORIZONTAL PRICE FIXING 482

case 16.1 PROSTERMAN v. AMERICAN AIRLINES, INC. 482

VERTICAL PRICE FIXING 485

INDIRECT PRICE FIXING 486

TERRITORIAL AGREEMENTS 486

CONCERTED ACTIVITIES 487

case 16.2 AMERICAN NEEDLE, INC. v. NATIONAL FOOTBALL LEAGUE 487

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sidebar 16.1 Basic Provisions of National Cooperative Research and Production Act 489

The Sherman Act, Section 2—Monopolization 490 sidebar 16.2 Are Big Tech Companies Monopolists? 490

case 16.3 APPLE, INC. V. PEPPER. 491 sidebar 16.3 Proving That an Illegal Monopoly Exists is Not Easy 493

Sherman Act Sanctions and Exceptions 494 SANCTIONS 494

EXEMPTIONS 496 sidebar 16.4 Antitrust vs. Securities Regulation 497

The Clayton Act 498 PRICE DISCRIMINATION 498

SPECIAL ARRANGEMENTS 499 sidebar 16.5 Tying Contracts, Patents, and Standard of Review 500

MERGERS AND ACQUISITIONS 502 sidebar 16.6 Preserving Competition in Pens, Post-Its, and Paper Clips 503

The Federal Trade Commission Act—Unfair Competition 503

sidebar 16.7 Read it!—The FTC and DOJ Guidelines 504

INTERNATIONAL ANTITRUST ENFORCEMENT 505

17. Financial and Securities Regulations 510 WHAT IS A SECURITY? 513

SECURITIES AND EXCHANGE COMMISSION 514

The Securities Act of 1933: Going Public 514 PARTIES REGULATED 515

DOCUMENTS INVOLVED 515 Registration Statement 515

Prospectus 516

LIABILITY 517 Section 11: Registration Statement 517

Section 12: Prospectus and Other Communications 518

Section 17: Fraudulent Transactions 518

DEFENSES 518 Materiality 518

Statute of Limitations 519

Due Diligence 519

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Securities Exchange Act of 1934: Being Public 520 sidebar 17.1 Language of Section 10(b) of the 1934 Act and SEC’s Rule 10b-5 521

SECTION 10(B) AND RULE 10B-5 521 Liability 521

Damages 521

case 17.1 FRANCIS V. LORENZO V. SECURITIES AND EXCHANGE COMMISSION. 522 sidebar 17.2 Proof of Loss Due to Fraud 523

Materiality 524

sidebar 17.3 Right to Contribution from Others 524 sidebar 17.4 Statute of Limitations for Fraud Claims 525

International Application 525

case 17.2 MORRISON v. NATIONAL AUSTRALIA BANK LTD. 526

INSIDER TRANSACTIONS 528

NONPUBLIC INFORMATION 529

case 17.3 UNITED STATES v. O’HAGAN 530

ADDITIONAL CIVIL LIABILITY 532

CRIMINAL LIABILITY 532

Other Considerations 534 PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 534

case 17.4 HALLIBURTON CO. v. ERICA P. JOHN FUND, INC. 535

STATE BLUE SKY LAWS 538 Registration Requirements 538

Exemptions 538

Sarbanes-Oxley Act of 2002 539 REVITALIZATION OF SEC 540

ACCOUNTING REFORMS 540

CORPORATE GOVERNANCE 540

FINANCIAL STATEMENTS AND CONTROLS 541

WHISTLEBLOWER PROTECTION 542 sidebar 17.5 Extending Whistleblower Protection 542

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 543

sidebar 17.6 CFPB Files Brief Addressing Spokeo v. Robins Petition 545

Jumpstart Our Business Startups (JOBS) Act of 2012 545

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18. Privacy and Consumer Protection 550 The Federal Trade Commission 552 THE FTC AND TRADE PRACTICE REGULATION 552

FTC PENALTIES AND REMEDIES 554 Civil Fines 554

Other Remedies 554

sidebar 18.1 When Clean Diesel Isn’t so Clean 555

POLITICS, ECONOMICS, AND THE LAW: THE FTC TODAY 555

Privacy 556 LIMITATIONS ON GOVERNMENT INTRUSIONS 556

case 18.1 CARPENTER v. UNITED STATES 557

TRADITIONAL BUSINESS PRIVACY 559

ELECTRONIC AND ONLINE PRIVACY PROTECTION 560

STATE AND INTERNATIONAL PRIVACY PROTECTION 561 sidebar 18.2 Exchanging Privacy for Protection During A Crisis 562 sidebar 18.3 The Long Reach of the GDPR 563

False Advertising 563 case 18.2 LEXMARK INTERNATIONAL, INC. V. STATIC CONTROL COMPONENTS, INC. 565

Federal Credit Regulations 567 THE EQUAL CREDIT OPPORTUNITY ACT 567

ECOA Prohibitions 567

Responsibilities of the Credit Extender 567

ECOA Remedies and Penalties 568

sidebar 18.4 Who Regulates FinTech? 568

THE FAIR CREDIT REPORTING ACT 569 Consumer Rights under FCRA 569

Investigative Consumer Reports 569

Observing Reasonable Procedures 570

FCRA Penalties and Remedies 570

case 18.3 SAFECO INSURANCE CO. v. BURR 570 Fair and Accurate Credit Transactions Act Amendments 571

Economic Growth, Regulatory Relief, and Consumer Protection Act 571

THE TRUTH-IN-LENDING ACT 572 Truth-in-Lending Coverage 572

Finance Charge and Annual Percentage Rate 572

Financing Statement 572

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Penalties and Remedies under Truth-in-Lending 573

sidebar 18.4 Truth-in-Lending and the Subprime Mortgage Mess 573

Truth-in-Lending Trends 574

Debt Collection and Consumer Protection 574 THE FAIR DEBT COLLECTION PRACTICES ACT 574

FDCPA Remedies and Enforcement 574

State Laws Regulating Debt Collection 575

CONSUMER FINANCIAL PROTECTION ACT 575

BANKRUPTCY 576 Bankruptcy Proceedings 576

Trustee in Bankruptcy 576

Creditor Priority 576

Discharge 577

ADDITIONAL CONSUMER PROTECTION 577

19. Environmental Regulation and Resource Sustainability 582

sidebar 19.1 Categories of Environmental and Pollution-Control Laws 584

Government’s Regulation of Itself 585 THE NATIONAL ENVIRONMENTAL POLICY ACT 585

NEPA Basics 585

EVALUATION OF ENVIRONMENTAL IMPACT STATEMENTS 586

case 19.1 SIERRA FOREST LEGACY v. SHERMAN 586 NEPA Trends 588

Government’s Regulation of Business 588 THE ENVIRONMENTAL PROTECTION AGENCY 589

sidebar 19.2 Responsibilities of the EPA 589

AIR POLLUTION 589 Clean Air Act and Amendments 589

Clean Air Act Enforcement 590

Air Pollution Sources 590

CLEAN AIR ACT TODAY 591 Emissions Reduction Banking 591

Prevention of Significant Deterioration 592

The Permitting Process 592

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Indoor Pollution 592

Conclusion 592

case 19.2 ENVIRONMENTAL PROTECTION AGENCY v. EME HOMER CITY GENERATION L.P. 593

WATER POLLUTION 594 Goals and Enforcement 595

sidebar 19.3 The Dakota Access Pipeline Controversy 596

ENDANGERED SPECIES ACT 596 Application of the ESA 597

PESTICIDE CONTROL 597 The Federal Pesticide Acts 598

Enforcement 598

SOLID WASTE 599 The Solid Waste Disposal Act 599

TOXIC AND HAZARDOUS SUBSTANCES 600 The Problem 600

Toxic Substances Control Act 600

Resource Conservation and Recovery Act 601

The Superfund 602

case 19.3 BURLINGTON NORTHERN AND SANTA FE RAILWAY CO. v. UNITED STATES 603

Radiation 606

Suits by Private Individuals 606 CITIZEN ENFORCEMENT 606

TORT THEORIES 607 Nuisance 607

Other Tort Doctrines 607

Sustainability Approaches 608 AREAS OF ENVIRONMENTAL CONCERN 609

Loss of Natural Ecosystems 609 Ozone 609 Greenhouse Effect 610

sidebar 19.4 Mass Extinction and Its Consequences 610

CORPORATE GOVERNANCE AND THE ENVIRONMENT 610 sidebar 19.5 Hersey Commits to Environmental Sustainability 611

PRIVATE PROPERTY AND THE ENVIRONMENT 611

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PartFOUR The Employer–Employee Relationship 20. Employment Discrimination Laws 616

The Civil Rights Act of 1964 618 GENERAL PROVISIONS 618

ENFORCEMENT PROCEDURES 619 The 1991 Amendments 619

Winning a Title VII Civil Action 620

case 20.1 THOMPSON v. NORTH AMERICAN STAINLESS, LP 621

DISCRIMINATION ON THE BASIS OF RACE OR COLOR 623 sidebar 20.1 Hithon v. Tyson Foods, Inc.: The Use of the Word “Boy” 624

case 20.2 RICCI v. DESTEFANO 625 sidebar 20.2 Abercrombie & Fitch’s $40 Million Diversity Lesson 627

DISCRIMINATION ON THE BASIS OF NATIONAL ORIGIN 627 sidebar 20.3 National Origin: Problematic Discrimination and Slurs 628

DISCRIMINATION ON THE BASIS OF RELIGION 628 sidebar 20.4 Workplace Discrimination against Muslims 629

DISCRIMINATION ON THE BASIS OF SEX 629 sidebar 20.5 Women in Business: A Tough Go for Many 630

Sexual Harassment 631

sidebar 20.6 Sexual Harassment in the Workplace 632 Pregnancy Discrimination Act 633

sidebar 20.7 Pregnancy Discrimination: Claims on the Rise 634 Equal Pay Act 634

sidebar 20.8 Did the Supreme Court Get It Wrong? Legislative Action Post-Ledbetter 635

Sexual Orientation Discrimination 636

sidebar 20.9 Sexual Orientation Discrimination 636

Employment Practices That May Be Challenged 637 QUESTIONNAIRES, INTERVIEWS, TESTING, AND EDUCATIONAL

REQUIREMENTS 637

HEIGHT AND WEIGHT REQUIREMENTS 638

APPEARANCE REQUIREMENTS 638

AFFIRMATIVE ACTION PROGRAMS AND REVERSE DISCRIMINATION 638 Private Employer Affirmative Action 639

SENIORITY SYSTEMS 640

Other Statutes and Discrimination in Employment 640

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CIVIL RIGHTS ACT OF 1866 641 Unlimited Damages 641

DISCRIMINATION ON THE BASIS OF AGE 641 Types of Age Discrimination 642

sidebar 20.10 Did You Read the Law? A Law Firm Runs Afoul of the ADEA 642

Employer Defenses in ADEA Cases 643

Remedies under the ADEA 643

DISCRIMINATION ON THE BASIS OF DISABILITIES 643 Reasonable Accommodation under the ADA 644

sidebar 20.11 Chipotle Mexican Grill: Must Accommodate Disabled Patrons 645

Remedies under the ADA 646

GENETIC DISCRIMINATION 646 sidebar 20.12 Protecting against Inadvertent Acquisition of Medical Information in Violation of GINA 647

DISCRIMINATION IN GETTING AND KEEPING HEALTH INSURANCE 647

OTHER FEDERAL LEGISLATION 647

STATE ANTIDISCRIMINATION LAWS 648

TRENDS IN EMPLOYMENT DISCRIMINATION AND LITIGATION 648 Surge in Private Lawsuits 648

sidebar 20.13 Is It Important to Investors if the CEO Is a Man or a Woman? 643

Arbitration in Employment Discrimination Disputes 649

Insuring against Employment Discrimination Claims 650

21. Employer Responsibilities and Employee Rights— Employment Laws 654

sidebar 21.1 Fair Labor Standards Act: To Pay or Not to Pay Overtime? 656

Employment Laws 656 MINIMUM WAGES AND MAXIMUM HOURS 656

case 21.1 SANDIFER v. UNITED STATES STEEL CORP. 658 sidebar 21.2 Internship Programs under the FLSA 659 sidebar 21.3 Break Time for Nursing Moms 660

case 21.2 KASTEN V. SAINT-GOBAIN PERFORMANCE PLASTICS CORP. 660

THE WARN ACT 662

THE FAMILY AND MEDICAL LEAVE ACT 663

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sidebar 21.4 FMLA: Facts and Statistics 664 sidebar 21.5 EEOC: Best Practices Recommendations on Work/ Family Balance 664 sidebar 21.6 States Are Immune from FMLA Self-Care Claims 665

FMLA and Military Families 666

UNIFORMED SERVICES EMPLOYMENT AND REEMPLOYMENT RIGHTS ACT 666

sidebar 21.7 Rand Study: Invisible Wounds of War 667

case 21.3 STAUB v. PROCTOR HOSPITAL 667

OCCUPATIONAL SAFETY AND HEALTH ADMINISTRATION 669 sidebar 21.8 New OSHA Crowd Management Safety Guidelines 670 sidebar 21.9 OSHA’s Severe Violator Enforcement Program 670

PENSION PLANS 671

HEALTH CARE 671 sidebar 21.10 Families First Coronavirus Response Act 672

LIMITATIONS ON EMPLOYMENT AT WILL 672 sidebar 21.11 IRS Whistleblowers Rewards Program 673 sidebar 21.12 Privacy, Technology and Social Media 674

WORKERS’ PRIVACY 674 sidebar 21.13 Is There Any Reasonable Expectation of Privacy in the Workplace? 675

WORKERS’ COMPENSATION ACTS 675 History 675

The System 676

Tests for Determining Compensation 677

Exclusive Remedy Rule 677

The Future of State Workers’ Compensation 678

EMPLOYMENT ELIGIBILITY VERIFICATION 678 sidebar 21.14 Arizona Law on Hiring Foreign Workers Is Upheld 679

Employee Lawsuits 679 sidebar 21.15 What Can Employers Do to Avoid Employment Litigation? 680

22. Labor—Management Relationship 684 Labor Laws 686

sidebar 22.1 2019 Statistics on Union Membership 687

LAWS BEFORE 1935 687 The Clayton Act 687

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The Railway Labor Act 688

The Norris-LaGuardia Act 689

The Wagner Act 689 sidebar 22.2 Three Executive Orders Impacting Unions 690

THE NATIONAL LABOR RELATIONS BOARD 690 NLRB Organization 690

Jurisdiction 691

case 22.1 HISPANICS UNITED OF BUFFALO, INC. AND CARLOS ORTIZ 691

Quasi-Judicial Authority 692

sidebar 22.3 Are College Football Players Employees? 693

CERTIFICATION OF UNIONS 693 Certification Elections 693

sidebar 22.4 Limitation of NLRB’s Remedies 694 Certification through Cards 694

UNFAIR LABOR PRACTICES BY MANAGEMENT 694 sidebar 22.5 An Historic Vote to Unionize at Kickstarter 695

Interfering with Unionization 695

Dominating a Labor Organization 696

Discriminating Based on Union Affiliation 696

Discriminating as a Result of NLRB Proceedings 697

Refusing to Bargain in Good Faith 696

sidebar 22.6 This Was No Joke: The Writers Guild of America Strike 698 sidebar 22.7 Fired! Venting about the Boss on Facebook 699

The Taft-Hartley Act 699 EIGHTY-DAY COOLING-OFF PERIOD 700

FREE SPEECH 700 sidebar 22.8 Tweeting His Way to Termination 701

UNION SHOP—MEMBERSHIPS AND FEES 701 sidebar 22.9 Restricting Workplace Speech: Setting the Parameters 702

SUITS AGAINST UNIONS 702 sidebar 22.10 Making a Point: Union Protests with Giant Inflatable Rats 703

UNFAIR LABOR PRACTICES BY UNIONS 703 Restraining or Coercing an Employee into Joining a Union 704

Causing an Employer to Discriminate against a Nonunion Member 704

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Striking or Picketing for Illegal Purposes or Engaging in Secondary Boycotts 704

AMENDMENTS 705 Agreeing to Engage in a Secondary Boycott 705

Picketing When Not Certified 705

Appendix I: Case Briefing and Legal Study Tips 709

Appendix II: Sample Complaint 711

Appendix III: The Constitution of the United States of America 714

Appendix IV: Selected Sections of Article 2 of Uniform Commercial Code 723

Appendix V: Selected Sections of the Sarbanes-Oxley Act of 2002 729

Appendix VI: Selected Sections of Securities Act of 1933 733

Appendix VII: Selected Sections of Securities Exchange Act of 1934 735

Glossary 737

Index 757

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I n the 21st century, business managers who under- stand how to handle legal challenges will be in a position to use law to their strategic advantage.

As President John Adams said, the United States is a nation “of law.” Certainly, law is all around us. The news media are full of stories about law, and many of our most popular television programs concern lawyers, courts, and law enforcement. Law surrounds how we buy and sell goods, when we can drive a car and vote, and who we can see for many licensed ser- vices. Law taxes and punishes us as well as grants rights and privileges. Marriage and divorce apply rules of law, and even birth and death have legal sig- nificance. The conduct of modern business is hardly possible without the support of law, and everything you own is yours because of law. Part One of this book helps you understand the legal foundations for business.

Chapter 1 emphasizes the importance of under- standing the fundamental role of law for business. The chapter explains that there are understand- able organizing principles to the legal system, and it asserts that these principles—law, the rule of law, and property—provide a necessary foundation for successful modern business. Chapter 1 also covers the concepts of jurisprudence, explains the sources of law, sets out various classifications of law, iden- tifies legal sanctions, and introduces the concept of corporate governance. A good part of what you do in this course is to learn a legal vocabulary. Even more

important, you must then learn to apply it. Chapter 1 gets this important process under way.

Chapter 2 emphasizes that the social basis of legal rules in a democracy are the traditional values, morals, and ethics of society. In a democracy, law is a very significant expression of society’s moral beliefs and concerns. Law often prohibits behavior that we consider morally wrong and permits or tol- erates customary behaviors. Chapter 2 looks at two ethical systems: formalism and consequentialism. It then examines various sources of values for business ethics, including legal regulation, professional and organizational codes of ethics, and individual values. It also suggests an approach to individual ethics in business organizations.

The next three chapters address dispute reso- lution, by explaining the U.S. court system, as well as the process of litigation and alternative dispute resolution mechanisms. Learning about the court system and ways to resolve disputes will help you understand how business can use the law strategi- cally. Also, as you read law-related news, these basic concepts are fundamental to grasp how and why a company resolves disputes.

Chapter 3 explains the court system, identifying key players: judges, jurors, and lawyers. Each plays a distinct and important role. This chapter also sets forth the organization of the state and federal court systems, including the appellate courts. This chapter also includes a guided reading of the text’s first court

Introduction: Legal Foundations for Business

Part ONE

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opinion, the U.S. Supreme Court case Iancu v. Bru- netti, which addresses issues related to the Lanham Act, specifically whether the prohibition on the reg- istration of “immoral” or “scandalous” trademarks infringes on the First Amendment.

Chapter 4 focuses on how civil cases move through the court system in a process known as litigation. This chapter describes how the filing of a complaint commences cases and then explains all of the other pleadings that can be filed, as well as all of the pretrial discovery procedures and motions. The chapter concludes with information about the stages of a trial and any posttrial appeals.

There are many drawbacks to litigation, and Chapter 5 illustrates alternative ways to resolve dis- putes. This chapter explains different negotiating techniques to settle disputes. It also demonstrates the key differences between mediation and arbitra- tion. Although both use a neutral third party to assist in resolving the dispute, they have significantly dif- ferent features, which are important to know before agreeing to resolve a dispute.

Chapter 6, the final chapter in Part One, dis- cusses the U.S. Constitution and constitutional guarantees relevant to business, including First Amendment protections, due process, and equal pro- tection. This chapter also explains the significance of the Commerce Clause. Decisions involving the Com- merce Clause have played a major role in defining how business works in the United States. This clause has a rich history of empowering the federal govern- ment’s authority to regulate business.

Taken together, these chapters introduce readers to the legal foundations for business. The following section makes suggestions about the best way to read and study The Legal and Regulatory Environment of Business.

How to Study This Textbook To read this textbook, we highly recommend a cer- tain method called Survey, Question, Read, Recite, Review (SQ3R). SQ3R is much more effective than simply starting at the beginning of a chapter and reading straight through to the end. But it should not take much longer than reading straight through.

If you are allowing two hours for the reading of a chapter, first take no more than five or six minutes and “survey” the chapter. Flip through the chapter and look at all of the main headings and subhead- ings of the sections, perhaps also looking at the first sentences of several paragraphs in each section. In surveying you are not trying to learn or even under- stand the material but rather to get an idea of what the chapter is about.

After surveying the material, develop a “ques- tion” for each section as you read. If the section heading says “Why Nations Are Economically Weak or Strong,” turn the heading into a question, like “Why are some nations economically weak and oth- ers economically strong?” Then “read” the section with the purpose of answering your question. When you finish reading, “recite” aloud or silently to your- self the answer to the question.

The last “R” refers to “review.” Spend the last 10 minutes of your study time reviewing the chapter. A good way to do this is to go back to your ques- tions and answer them again. If you will study by this method, we guarantee more effective results than if you simply read the chapter straight through. We have included a longer explanation of SQ3R as Appendix 1 in the back of the book, along with an explanation of the case briefing system, which you may need beginning with Chapter 3. •

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Learning Objectives In this chapter you will learn:

1-1 To understand that laws and regulations are fundamental foundations for business.

1-2 To explain that “property” in the law refers not to something that is owned but to the right of ownership itself, which gives incentive for wealth creation.

1-3 To analyze why stare decisis is different in common law nations than in civil law nations.

1-4 To classify what legal sources lawyers turn to in answering legal questions from their clients and the hierarchy of those sources.

Law as a Foundation for Business1 Pixtal/AGE Fotostock

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Introduction

B usiness school students may wonder why they

need to study the law. The answer is quite

straightforward. Law is an essential foundation

for business. Learning about the law is key to understand-

ing how law can be used for strategic advantage and to

develop sustainable business practices. Law is pivotal to

successful innovation. Consider, for example, the impor-

tance of substantive legal topics such as torts, contracts,

intellectual property, and labor and employment for

business. A culture of legal compliance is necessary for

business practices to be sustainable. As you learn about

the law, also consider the ethical implications of deci-

sions and how integrity is critical to long-term viability.

This text and its accompanying electronic fea-

tures are designed to create a learning environment in

which you will gain:

• The legal vocabulary to communicate with law-

yers and business colleagues about areas of the

law in a sophisticated manner.

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6 PART 1 Introduction: Legal Foundations for Business

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• The ability to identify legal issues potentially relevant to a particular business situation. • The judgment to make sound business decisions to prevent legal disputes. • The knowledge to determine legal issues that require advice from counsel. • The foundation to act as a sophisticated consumer of legal services.

As you read this book, consider the impact of the law on business. This chapter provides a basic overview of the law, helping you understand the common classifica- tions and sources of law. Many examples are provided throughout the chapters to underscore the relevance of the law for business.

WHY LAW AND REGULATIONS ARE FUNDAMENTAL FOUNDATIONS FOR BUSINESS In the 21st century, it is crucial for companies doing business in the United States to be aware of the legal and regulatory landscape. Lawyers are increasingly taking on key leadership roles within corporations as their expertise is key to sustainable busi- ness practices. As vividly evidenced by the experience of JPMorgan Chase & Co. and Deutsche Bank in Sidebar 1.1, companies must take steps to ensure that they are in

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When the former chief executive of Wells Fargo John G. Stumpf was fined $17.5 million in 2020 for his role in the company’s fake accounts scandal, it became clear that the tone from the top not only matters—it can give rise to individual liability. More individual fines are expected to follow sending a strong signal that corporate cultures that foster fraud will lead to personal liability.

JPMorgan Chase & Co. has come a long way from the significant legal liability it experienced a few years ago. If there was ever a question about the toll that wrongdoing can take on a company, it was addressed by Jamie Dimon, CEO of JPMorgan Chase & Co. In his 2013, 30-page letter to shareholders, Dimon addressed the ramifications of the bank’s legal cases with multiple government agencies, stating that the previous year was “the most painful, difficult, and nerve wracking experience that I have ever dealt with professionally.” At that time, the company had already spent more than $20 billion to set- tle a range of cases.

JPMorgan undertook to add more than 13,000 employees to handle regulatory compliance and risk control, including approximately 8,000 employees whose primary responsibility is to combat money laundering. The company expected to spend $2 billion to com- ply with new rules and regulations. In the same letter to

shareholders, Dimon acknowledged that the company was too self-assured when it saw regulators investigating its competitors and that the company needs to be “bet- ter listeners and do a better job at examining critiques of others so [it] can learn from other people’s mistakes, too.”

Also facing massive liability, Deutsche Bank agreed to a $7.2 billion settlement in 2016 with the U.S. Depart- ment of Justice in connection with its sale of toxic mort- gage securities. The settlement included a $3.1 billion civil penalty and $4.1 billion in consumer relief, primarily in the form of loan forgiveness. In early 2017, Deutsche Bank agreed to a $95 million settlement to resolve a lawsuit brought by the U.S. government that accused Deutsche Bank of tax fraud involving shell companies.

These examples underscore the importance of integ- rity for sustainability, including the key role boards of directors play to assure stakeholders that the company is engaged in business practices with an eye to long-term value creation.

Sources: Stacy Cowley and Emily Flitter, “Wells Fargo’s Ex-Chief Fined $17.5 Million Over Fake Accounts, New York Times, January 23, 2020; John H. Stout, “Sustainability Meets Integrity,” ABA Journal, December 20, 2016; “Deutsche Bank Agrees to Pay $95 Million to End Tax Fraud Case,” Reuters, January 5, 2017; “Deutsche Bank Agrees to a $7.2 Billion Settlement with the U.S.,” Reuters, December 23, 2016; David Henry, “JPMorgan’s Dimon Calls Settling Legal Issues ‘Nerve Wracking,’” Reuters, April 9, 2014.

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Sustainability and Integrity: Cautionary Tales of Legal Liability

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full compliance with the law to avoid a range of civil and criminal liability. By study- ing the legal and regulatory environment of business, you will gain an understanding of basic legal vocabulary and gain the ability to identify problematic situations that could result in liability. Moreover, whether you are involved in contract negotiations, the development of intellectual property, or dealing with employees, learning the fundamentals of the law will not only help you make informed decisions but also to know when to call an attorney for advice.

Law, the Rule of Law, and Property

Three concepts establish a necessary framework for the most effectively functioning market in the modern nation: law, the rule of law, and property. Note how they con- nect to each other.

LAW In the last 10,000 years, human society has moved from roving bands of hunter- gatherers to large modern nations with populations in the hundreds of millions. The social forces that hold together societies range from custom and religion to law and economic ties. In the modern nation, however, the most significant of the social forces is law because law can glue together diverse peoples of different backgrounds into very large, organized groups. Law is known by everyone as being intended to tell members of society what they can or cannot do. Strangers to a society may not under- stand or appreciate complex and subtle customs of behavior, but they can observe the formal laws governing what kinds of activities are permitted and prohibited in society. Lawyers, judges, and other trained interpreters of the rules can help them in this process.

A simple definition of law follows:

• Law is made up of rules. • These rules are laid down by the state and backed up by enforcement.

Law is a formal social force, meaning that laws come from the state and are usually written down and accessible so those who need to understand and obey them can. To maintain order in society, adequate enforcement institutions such as courts and the police are a necessary part of the legal system. As countries such as China are finding out, written laws mean little unless they can be promptly and fairly enforced. Without adequate enforcement, resources can be taken from those who have them, and agreements can be disregarded. The certainty and trust necessary to make complex, long-term business arrangements are absent. People must spend much of their time guarding their resources rather than developing them.

THE RULE OF LAW In a modern nation, law is important to implement either the commands of a dicta- tor or the will of the people in a democracy. However, only in democracies is there true concern for the rule of law, which goes beyond merely thinking of law as govern- mental commands backed up by force. Under the rule of law, laws that are made are generally and equally applicable. They apply to all or most members of society and they apply to various groups in the same way.

The first known written set of laws was the Code of Hammurabi, named after the Babylonian king of the 18th century BC.

“Privatization without necessary institutional infrastructure [such as law] in the transition countries led to asset stripping rather than wealth creation.”

–Joseph E. Stiglitz, economist

“Without the rule of law, major economic institutions such as corporations, banks, and labor unions would not function, and the government’s many involvements in the economy—regulatory mechanisms, tax sys- tems, customs structure, monetary policy, and the like—would be unfair, inefficient, and opaque.”

–Thomas Carothers, Director, Democracy

and Rule of Law Proj- ect, Carnegie Endow- ment for International

Peace

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According to the World Justice Project, an organization seeking to advance the rule of law around the world, four universal principles define the rule of law:

1. The government and its officials and agents, as well as individuals and private entities, are accountable under the law.

2. The laws are clear, publicized, stable, and just; are applied evenly; and protect fundamental rights, including the security of persons and property and certain core human rights.

3. The process by which the laws are enacted, administered, and enforced is acces- sible, fair, and efficient.

4. Justice is delivered timely by competent, ethical, and independent representa- tives and neutrals who are of sufficient number, have adequate resources, and reflect the makeup of the communities they serve.

In today’s international business environment, more and more voices are calling for the rule of law. The secretary-general of the United Nations says that “without confidence based on the rule of law; without trust and transparency—there could be no well-functioning markets.” The managing director of the International Monetary Fund asserts that “high quality” economic growth depends “in particular on the rule of law,” which is a “lodestar for all countries.” Observes the managing director of JPMorgan Chase: “An environment in which courts cannot be relied upon to adhere to the rule of law is an environment in which businesses will be reluctant to invest and in which development will be stunted.” He calls the rule of law “a cornerstone of free trade.”

Unfortunately, the rule of law is an ideal rather than a complete fact in even the most democratic nation. Special interest groups attempt to persuade lawmakers to ben- efit these groups at the expense of others. And it is not always clear what it means to apply laws generally and equally. Still, in a democracy, well-educated voters who under- stand the importance of the rule of law can hold to account lawmakers who excessively favor special interests. Judges also play a vital role in maintaining the rule of law.

Because of their key role in understanding the rule of law and promoting corporate governance, lawyers are increasingly being asked to join corporate boards. In 2000, only 24 percent of U.S. companies had lawyer-directors on their boards, but by 2009, 43 percent did. A recent study demonstrated that having lawyer-directors resulted in an average 9.5 percent increase in firm value. Without question, lawyers on boards can help companies navigate a myriad of issues and help manage risk.1 (See Sidebar 1.2.)

Almost all wealthy countries embrace the rule of law; for example, most European countries. Article 6 of the Treaty on European Union, called the Maastricht Treaty, says the EU is “founded” on “the rule of law.” There are no countries with strong, diverse economies that do not have the rule of law. As former President Eisenhower warned, “The clearest way to show what the rule of law means to us in everyday life is to recall what has happened when there is no rule of law.”

PROPERTY The third concept necessary for a successful private market in the modern nation is property. In a dictionary, property has two common meanings: (1) something that is owned and (2) ownership. We will be using the word in its second definition as

1See Lubormi Litov, Simone Sepe and Charles Whitehead, “Lawyers and Fools: Lawyer Directors in Public Corpo- rations,” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2218855 (January 14, 2014).

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Property is a legal right that allows you to exclude others from your resources.

“While economic growth can occur in the short run with autocratic regimes, long-run eco- nomic growth entails the development of the rule of law.”

–Douglas C. North, acceptance speech

for the Nobel Prize in Economics, 1993

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“ownership.” In law, the word “property” (or “ownership”) means the right to turn to public authorities like the police or the courts to help you keep others from inter- fering with what you own. Property is a legal fence that keeps others out without your permission. It allows you to exclude others from something without your permission.

Three types of ownership fences are

• Public property, which applies to public resources owned by the government (or “state”) like roads, public buildings, public lands, and monuments.

• Private property, which applies to resources that you own as an individual. • Common property, which applies to resources like land that more than one indi-

vidual owns jointly.

So important is the right of private property that in this book we often just refer to private property as “property.” We will specifically say “public property” or “com- mon property” if we mean those applications of exclusionary right.

It is through the law of property that individuals and business organizations can possess, use, and transfer their private resources. The enforcement of the prop- erty right under the rule of law gives people incentive to develop the resources they own and a property-based legal system that enables such control by allowing people to exclude others from interfering with what their efforts produce. The exclusion- ary right of property provides a basis for the private market and modern business. Scholars have traced the economic flourishing of Western civilization during the last several hundred years to the increasing recognition of the right of property in the nations of the West.

PROPERTY IN ITS BROADEST SENSE Property can be thought of as the central concept underlying Western legal systems. (See Figure 1.1.) Most of the topics discussed in this book relate to the exclusionary right of property. Contract law enables an owner to exchange resources (Chapters 8 and 9), especially at a future date. Tort law compensates owners whose resources are wrong- fully harmed by the actions of others (Chapter 10). Criminal law punishes those who harm an owner’s resources in particular ways, for example, by theft (Chapter 13). The law of corporate governance and business organizations identifies how individu- als can own and use private resources in groups (Chapter 14).

Do remember that the property right gives a major incentive to develop resources.

Property is the central concept of Western legal systems.

Here are a few examples of high-profile executives who bring their legal acumen with them into the boardroom:

- Belinda H. Johnson, Director of Paypal since 2017; appointed as the Chief Operating Officer of Airbnb, Inc. in 2018, where she previously served as Chief Business Affairs and Legal Officer and also General Council.

- Erika Rottenberg, General Council for the Chan- Zuckerburg Initiative, previously general council of

LinkedIn, who serves as on the board of diectors for Wix. com and Twilio.

- Michelle Wilson, serves as a director for Stripe, Zendesk, Okta, and Pinterest; she is the former general counsel of Amazon.

Sources: LinkedIn bios (February 16, 2020); Olga V. Mack and Katia Bloom, “From the Courtroom to the Boardroom: Lawyers Belong on Boards, not in Punchlines,” Above the Law, April 10, 2017.

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Lawyers in the Boardroom

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Figure 1.1 The wheel of property.

CON STITUTION

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Regulatory law both protects ownership and sets limits on private resource use (Chapter 15). Antitrust law forbids owners from monopolizing classes of resources and sets rules for how businesses can compete to acquire ownership in new resources (Chapter 16). Securities laws regulate the transfer of ownership in certain profit- making opportunities (Chapter 17). Environmental law controls how owners can use their resources when creating pollution (Chapter 19). Even labor laws and antidiscrimi- nation laws involve property in the sense they protect the employees’ right to exclude employers from interfering with certain self-ownership interests of the employees (Chapters 20, 21, and 22). Finally, a theme of the entire book, corporate governance, specifically concerns the law protecting the owners of a business organization from the managers who run it for them. Generally speaking, corporate governance also refers to any law regulating and limiting private owners’ productive resources and their use.

In its broadest sense, property includes an ownership of individual constitutional and human rights in ourselves that excludes the state from interfering with these rights. Today, we usually call our relationship to these rights “liberty,” but liberty and property in this sense have almost identical meanings. John Locke, the 17th century English philosopher who greatly influenced the framers of the Constitution, asserted that private property begins with the right we have in ourselves and in our efforts and actions. He said that an individual is the “proprietor [owner] of his own person, and

To say that you have a “right” means that legally you can keep others from interfering with that right. To be able to exclude others is the essence of property.

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the actions or labour of it” and that this is “the great foundation of property.” Later, James Madison wrote that property “in its larger and juster meaning . . . embraces everything to which a man may attach value and have a right . . . . [A] man has prop- erty in his opinions and free communication of them. . . . In a word, as a man is said to have a right to his property, he may be equally said to have a property in his rights.” For Madison and other constitutional framers, property protected not only physical resources like land but also human rights like freedom of speech, freedom of religion, and freedom from unreasonable intrusion by the government. The individual’s very relationship to society was defined by the word property. Scholars have pointed out that the modern understanding of human rights began with the concept of property.

According to Tim Stratford, Chairman of the American Chamber of Commerce in China, “Substantial improve- ments in market access, intellectual property rights protection, regulatory transparency and evenhanded enforcement are all cited by members as critical to their continued success. Additionally, members are asking the US government to advocate even more strongly for a level playing field, pursue investment reciprocity, and engage in results-oriented discussions between the two sides.” Although there are concerns about trade conflicts, most American companies in China continue to see revenues growing and the market in China remains a “high priority.”

Background: When China joined the World Trade Organization in 2001, concerns persisted about its pro- tection of real and intellectual property. Foreign firms faced an uncertain landscape of property rights, including the enforcement of the laws. In late 2016, China released

new guidelines about the protection of property to “raise people’s sense of wealth security, boost social confi- dence, foster positive expectations and raise the impetus for entrepreneurship and innovation.”

The new guidelines pertain to real property and intel- lectual property. Importantly, the guidelines are designed to shore up legal enforcement mechanisms. Although China implemented intellectual property protection laws when it joined the WTO to comply with TRIPS, enforce- ment has been a continuing issue. This can be at odds with innovation. One study found that “intellectual prop- erty protection leads Chinese firms to innovate more, with patenting rates going up by as much as 7.2% in high intellectual property protection regions.” Sources: Growth Continues Amid Heightened Uncertainty, AmChamChina, February 26, 2019; Sara Hsu, “China is Finally Improving Property Rights Pro- tections,” Forbes, Nov. 30, 2016.

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China: The Rule of Law and Property Rights are Key

JURISPRUDENCE Over the centuries, several ideas have developed that help explain the origin of law and its justification. We call these ideas (or philosophies) of law jurisprudence. Briefly, the main types or “schools” of jurisprudence include the following:

• Natural law. Going back to Aristotle and other ancient philosophers, natural law theory asserts that law contains universal moral principles. These principles are observable in nature, and we can determine them through human reason. John Locke, the British philosopher whose writing influenced the framers of the U.S. Constitution, thought that “property” was part of natural law. Merely human laws that contradict the principles of natural law are improper. Compare natural law to “formalism,” discussed in Chapter 2.

• Positive law. Positive law jurisprudence believes that law is simply the commands of the state backed up by force and punishments. It is contrary to the philosophy

Jurisprudence is the philosophy of law.

“True law is right rea- son in agreement with nature; it is of universal application, unchanging and everlasting. . . .”

–Cicero, Roman historian

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of natural law. Eighteenth century philosopher Jeremy Bentham ridiculed the idea of natural law as “nonsense upon stilts.” Compare positive law to “conse- quentialism,” discussed in Chapter 2.

• Historical school. The historical school of jurisprudence emphasizes that con- temporary law should focus on legal principles that have withstood the test of time in a nation. The historical school believes that law reflects the cultural traditions of a people and recognizes that different nations may have different traditions and, consequently, different laws. Friedrich Savigny, a prominent German legal philosopher, helped develop this jurisprudence.

• Sociological jurisprudence. Sociological jurisprudence supports the idea that law can and should change to meet new developments in society. From this point of view, the Second Amendment to the U.S. Constitution, which asserts the right to “bear arms,” or weapons, should not be interpreted today to allow citizens to own and carry lightweight fully automatic rifles that can fire hundreds of rounds per minute. When the Second Amendment was written, a highly trained person carrying a 25-pound rifle could fire only about two rounds per minute.

• Legal realism. Legal realism tries to go beyond just the words of law to examine what police, administrators, prosecutors, and judges are actually doing as they enforce, interpret, and apply laws. When Supreme Court Justice Oliver Wendell Holmes Jr. said that “law is what officials do about it,” he reflected the jurisprudence of legal realism. For instance, the posted speed limit around the Atlanta perimeter highway, Interstate 285, is 55 mph. However, almost no one drives within the posted speed limit and traffic police rarely ticket drivers until they go faster than 75 mph. In terms of legal realism, what is the actual speed limit on Atlanta’s perimeter highway?

Several of these types of jurisprudence overlap. For instance, sociological jurispru- dence and legal realism are types of legal positivism. Jurisprudence may also certainly influence the actual rules of law, but jurisprudence is a philosophy about law rather than the law itself. However, complicating matters is that the word jurisprudence also refers to the general body of law interpretations by judges as different from legisla- tion passed by legislators.

Classifications of Law

Even when you understand jurisprudence and grasp the significance of our property- based legal system to the private marketplace, you still have much left to know about the legal and regulatory environment of business. In large part, learning about law demands an extensive vocabulary of legal terms and concepts. It will be useful in organizing this vocabulary to examine several major classifications of law.

COMMON LAW AND CIVIL LAW The world has two major legal systems: common law and civil law. The United Kingdom, the United States, Canada, Jamaica, India, Nigeria, New Zealand, and a few other countries—all colonized by England—follow the common law. The common law legal system emphasizes the role of judges in determining the meaning of laws and how they apply. It arose beginning in the 11th and 12th centuries as the English monarch appointed royal judges to ride circuits around the English countryside and to resolve disputes in the name of the king (or queen). As there was little formal law to apply to many disputes, the decisions handed down by the judges literally made the law.

The definition of law at the beginning of this chapter is taken from positive law jurisprudence.

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Common law emphasizes the role of judges in determining the meaning of laws.

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By the time the English legislature (Parliament) emerged, a huge body of writ- ten judicial decisions was “common” to all of England. The role of judges in making and interpreting law was in place. English colonists then brought the common law to what became the United States and various other countries. The common law continues its development even today, and so significant is the role of judges in the United States that they determine the meaning of the Constitution and can declare void the legislation of Congress and the acts of the president.

The world’s nations not colonized by England generally observe civil law legal systems. The civil law relies more on legislation than judicial decisions to deter- mine what the law is. Like common law courts, courts in civil law nations decide the facts in a disputed case (e.g., who did what, who committed a crime or breached a contract), but civil law courts do not make law nor do their judges think themselves obligated to follow prior judicial decisions, called precedents, as they do in common law nations, although they do refer to “settled” cases. Essentially, judges play a much more important role in determining law and its meaning in common law nations than in civil law nations. Only Louisiana, among the U.S. states, follows a partial civil law system. This is due to Louisiana’s historical ties with France, a civil law nation.

PUBLIC AND PRIVATE LAW Another way of classifying the law is to divide it into matters of public law and mat- ters of private law. Public law includes those matters that involve the regulation of society as opposed to individuals interacting. In each of these matters, a government official represents society, or “the people,” and the official is responsible for seeking justice to achieve the ends of society. The main types of public law include:

• Constitutional law, which involves the interpretation and application of either the federal or state constitutions.

• Administrative law, which covers the legal principles that apply to government agencies, bureaus, boards, or commissions.

• Criminal law, which specifies various offenses against the proper order of the state.

Private law covers those legal problems and issues that concern your private resource relationships with other people. Private law traditionally includes:

• Property law, which involves the recognition of exclusive right in both tangible (physically touchable) and intangible resources. Special areas of property law concern land, goods, copyrights, trademarks, patents, and trade secrets.

• Contract law, which covers the rules of how owners transfer resources by exchanging them. Contracts often involve enforceable promises to exchange resources in the future.

• Tort law, which establishes rules for compensation when an owner’s legal boundaries are wrongfully crossed by another. Tort law often but not always requires actual injury to the owner’s resources.

CIVIL LAW AND CRIMINAL LAW Another means of classifying the law is to divide it into civil law and criminal law. For administrative purposes, courts usually separate criminal actions from all other lawsuits. Civil cases may include suits for breach of contract or tort cases, such as suits for personal injuries. Typically, they involve a request for damages or other appropriate relief that does not involve punishment of the wrongdoer. Criminal cases

Civil law relies more on legislation than judicial decisions for law.

Public law includes constitutional law, administrative law, and criminal law.

Special areas of prop- erty concern land, goods, copyrights, pat- ents, and trademarks.

Don’t confuse our reference to civil (or noncriminal) lawsuits with a civil law legal system, which is one emphasizing the importance of the legislature in determining the meaning of laws.

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involve a representative of government attempting to prove the wrong committed against society and seeking to have the wrongdoer punished by the court system. See Sidebar 1.4 for an example criminal liability arising from the financial transactions.

SUBSTANTIVE LAW AND PROCEDURAL LAW Another important classification or distinction in law is between substance and pro- cedure. Substantive law defines the legal relationship of people with other people or between them and the state. Thus, the rules of law governing the creation or enforcement of a contractual promise are substantive in nature. Procedural law deals with the method and means by which substantive law is made and adminis- tered. The time allowed for one party to sue another and the rules of law governing the process of the lawsuit are examples of procedural laws. Thus, substantive rules of law define rights and duties, while procedural rules of law provide the machinery for enforcing those rights and duties.

Judicial procedures involve the conduct of lawsuits and appeals and the enforce- ment of judgments. The rules for conducting civil trials are different from those for criminal trials. For example, each party may call the other party to the witness stand for cross-examination in a civil trial, but the defendant may not be required to testify in a criminal case. Procedural problems sometimes arise concerning papers filed in lawsuits, the admission of evidence, and various other techniques involved in trying the case. They are the rules of the game. In Chapter 4, you will study these proce- dural aspects of law in greater depth.

Sources of Law

In the following sections, consider that you have a dry cleaning business and have gone to a lawyer to ask what the law says about your emitting certain chemical clean- ing pollutants into the air. What sources of law will the lawyer have to be familiar

That a plaintiff must prove the defendant failed to use reasonable care in order to establish the tort of negligence is an example of substan- tive law.

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Here are the key facts: • 1MBD (Malaysia Development Fund) was owned and

controlled by the Malaysian government to attract foreign investment and development.

• Goldman made $6.5 billion in loans was arranged for 1MDB, which was involved in bond deals and earned approximately $600 million.

• Criminal allegations included misappropriation of funds/embezzlement (including to purchase, New York Condos, hotels, yachts, and a jet), conspiracy, and bribery.

• 2018: A Goldman Sachs partner pleaded guilty to conspiracy to launder money and conspiracy to

violate the Foreign Corrupt Practices Act and for- feited $43.7 million

• 2020: Goldman Sachs set aside $1.09 billion to set- tle allegations with the Department of Justice (DOJ).

• Goldman Sachs is involved in ongoing talks with the DOJ regarding U.S. bribery laws.

• The Malaysian government is seeking massive fines from Goldman.

Sources: Kori Hale, “Goldman Sachs Takes a $1 Billion Hit Due to Ex-Hip Hop Banker, Forbes, January 21, 2020; and Callum Burroughs and Yusuf Khan, “The Bizarre Story of 1MDB, the Goldman Sachs-backed Malaysian fund that turned into one of the Biggest Scandals in Financial History,” Business Insider, August, 9, 2019.

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Goldman Sachs: “Rouge” Bankers and a $1 Billion Legal Charge

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with in order to answer your questions? The following sources form a hierarchy of law, which means that if a lower source of law conflicts with a higher source of law, it is legally void; that is, the higher source trumps, or prevails over, the lower.

FEDERAL LAW Federal law is a very important source of law. It includes the U.S. Constitution, which is the supreme law of the nation. Any law, federal or state, that conflicts with the Constitution is said to be void and has no legal effect. In consulting sources of law, your attorney will look closely indeed to determine how the Constitution affects any other rules of law that adversely affect you. Chapter 6 examines more closely how the U.S. Constitution in particular applies to business practice.

Next in the hierarchy of federal law comes the legislation passed by Congress, also called acts or statutes (collections of legislation, often on the same subject, are codes). The Clean Air Act discussed in Chapter 19 is an example of such legisla- tion that will be very important in answering the legal questions you have. Federal legislation that is constitutional prevails over all other sources of law. Finally, in federal law, your attorney will also have to look at administrative law—specifically, administrative law that regulates business. Administrative law or regulation is made by agencies of the federal government like the Environmental Protection Agency. To answer your legal questions, the Environmental Protection Agency’s regulation will be the most important regulatory law of the 15 independent regulatory agencies of the federal government. Chapter 15 will tell you more about administrative regula- tion in general.

STATE LAW All federal law prevails over all state law in the hierarchy of our sources of law. But state law will still be very important in answering your legal questions about dry cleaning and putting certain pollutants into the air. At the state level, the hierarchy of law sources begins with the state constitution, followed by the statutes or acts adopted by the state legislature, like its commercial code. You will study the Uniform Commercial Code or UCC in Chapter 8. Then there is also the regulatory law of the state administrative agencies. Even lower in the hierarchy of law at the state level is the law in the counties and cities called ordinances. Counties and cities also sometimes have administrative agencies that help plan local development, such as zoning boards that specify where businesses and housing can be located.

JUDICIAL DECISIONS OR CASE LAW Finally, your attorney must consult the decisions of judges as a source of law. Even after considering constitutional language, reading legislation, and referring to admin- istrative regulation, your attorney must still know the judicial decisions, called case law, that apply to your legal problem. These decisions interpret the relevant constitu- tional, legislative, and regulatory laws. As previously discussed, judges also make and interpret the common law.

When judges, especially judges who decide appeals from trial courts, make deci- sions on legal issues, they write their decisions, or opinions, setting out reasons. These case opinions are collected and published in book volumes known as “report- ers,” and these opinions now become precedents for future cases involving similar facts and legal issues. To locate prior precedents, it is helpful to know the citation

“The American Constitu- tion is the most wonder- ful work ever struck off at a given time by the brain and purpose of man.”

–William Gladstone, four-time prime minis- ter of Great Britain in

the 1800s

Do remember that there are court systems in all 50 states plus a federal system. According to the U.S. Department of State, more than 31,000 judges nationwide make numerous decisions every year, including approximately 1,700 federal judges.

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for the case where a precedent is found. For example, a case opinion cited as 675 F.3d 23 (2014) can be located on page 23 of volume 675 of the Federal Reporter, third edition, a case decided in 2014. Knowing a case citation, you can easily locate the case in a library or through computer databases.

The extensive reliance of our legal system on judicial case law has both advan- tages and disadvantages. It is useful to summarize these.

Advantages Stare decisis is the doctrine of prior precedents. The Latin meaning of these words is “let the prior decision stand.” Under stare decisis, judges in current cases follow whenever possible the interpretation of law determined by judges in prior cases. This doctrine arose from the desire for certainty and predictability in the law. One important advantage of stare decisis was people became secure in their right of property. They then became willing to invest resources in fixed locations for factories and other immovable valuables because they were certain the state would not seize these resources for its own use. Case law helps specify in great detail the boundaries of our property-based legal system, and it protects what is “proper” to people from the interference of others.

Disadvantages Several disadvantages of case law are also important to know. Keep in mind, however, that we do not believe these disadvantages destroy the ben- efits of certainty, predictability, and stability provided by case law and stare decisis. Disadvantages of case law include:

• Volume of cases. Even with computers, searching through hundreds of thousands of cases and then identifying and reading the significant ones is often a very great task. At the very least, it is both time consuming for the attorney and expensive for the client.

• Conflicting precedents. Sometimes in searching prior cases, attorneys find cases in which judicial decisions conflict with each other. Conflicting precedents do not create confidence in the certainty of law.

• Dicta. Increasing the difficulty of determining how to follow prior precedent is the distinction between the holding in a prior case and mere dicta. The hold- ings in prior cases are precisely what was necessary to the decision reached. Dicta are whatever else the court said. Judges in future cases are not so likely to follow the dicta in prior cases as they are the holdings.

• Rejection of precedent. Because of stare decisis, courts usually hesitate to reject the precedents of prior cases, but sometimes they do. They may think that prior cases were wrongly decided, or they may think that times have changed. In con- stitutional law, the idea that courts should understand the meaning of the Consti- tution relative to the times in which they interpret it is known as constitutional relativity. Originalism is the opposite of constitutional relativity. It stands for the idea that courts should interpret the Constitution only according to the intentions of those who wrote it.

• Conflicts of law. A buyer in Georgia orders equipment by telephone from a sell- er’s representative in Illinois. The buyer directs the seller to ship the equipment to New York. When the equipment breaks down while being used in Pennsylvania, the buyer sues the seller in Ohio where the seller is incorporated. What state’s law applies? Courts resolve such problems by applying conflicts of law rules, but even these rules may vary from state to state. A better solution is for the buyer and seller to specify in the contract which state’s law will apply in case of a dispute. In a tort case, the usual conflicts of law rule applies the law of the state where the

“Stare decisis is the viaduct over which the law travels in transport- ing the precious cargo of justice.”

–Bosely v. Andrews, 393 Pa. 161 (1958)

A baseball fan is hurt by a foul ball and sues the baseball team’s owner. The court writes, “Whether a fan is injured by a foul ball or an accidentally thrown bat, the result is the same. The fan cannot recover damages against the team because the fan assumes the risk.” The comment about “thrown bat” is dicta because the case involved only a foul ball. Bats are heavier and more dangerous than balls, and a judge in a future case may not feel obligated to follow the dicta in this case concerning bats.

Do make sure to include a provision for the payment of attorney’s fees in any contract loaning money or extending credit to someone.

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injury occurred, no matter where the injury occurred. If a contract specifies no particular state’s law for the parties to a dispute to follow, a court interpreting the contract will usually apply the law of the state where the contract was made.

Regarding case law, you should note that courts are the institution in our legal system that interpret the meaning of the law, whether that law is the U.S. Constitu- tion, legislation, administrative law, or the common law. Because there are an infi- nite number of possible cases, each a little bit different on its facts, the power of courts to interpret meaning is very important. Consider the Second Amendment to the Constitution. It says that “the right to bear arms shall not be infringed.” What do these words mean? Do they apply constitutionally only to protect seven-foot muskets weighing 20 pounds that a well-trained person could only fire twice per minute? Do they apply constitutionally to protect possession of semiautomatic pistols that an eight-year-old child can fire 20 times per minute? Do they apply to protect ownership of machine guns that can be fired hundreds of times per minute? Now are you begin- ning to understand the powerful role that courts play in interpreting the meaning not only of the Constitution but of all laws in our legal system?

SOURCES OF LAW HIERARCHY IN REVIEW So your lawyer has to know many sources of law and how they interact in order to answer your question about the pollutants from your cleaning business. It is mis- taken to think that lawyers know all of the law that applies to every legal question that you may ask them. However, they should know how to go about answering your questions, including the fact that some questions may not have answers that can be known in advance and that require formal dispute resolution—that is, they require that a judge, or perhaps an arbitrator, decide them.

The hierarchy of the sources of law, however, is well understood. That hierarchy is as follows. Remember that each higher source of law voids, or prevails, over every lower source of law in the hierarchy, except that in many instances there will be no conflict between higher and lower sources of law and in other instances it may not be clear whether or not a higher source of law (such as a constitutional right of speech) conflicts with a lower source of law (such as a law regulating advertising expression).

Hierarchy of sources of law from highest to lowest:

• U.S. Constitution and Amendments. • Statutes (also called “acts” or “legislation”) of Congress. • Federal administration regulation. • State constitutions (apply only in individual states). • State statutes (apply only in individual states). • State administrative regulation (applies only in individual states). • Local ordinances (apply only in cities, towns, and other such areas). • Case law (court cases, as they interpret all of the other sources, may or may not

void sources lower than the source being interpreted).

LEGAL SANCTIONS The enforcement of the law is vital to the rule of law and a “proper” legal system. Law enforcement officials and the courts use several methods to encourage or to force compliance with the law. These methods, often called sanctions, may be used

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against a person who has failed to comply with the law. The sanctions are, in effect, a form of punishment for violating the law. Sanctions also have a preventive function. The threat of sanctions usually results in compliance with the requirements of law.

Because punishment is used to secure obedience to the law, the Fourteenth Amendment to the Constitution of the United States provides in part: “No State shall . . . deprive any person of life, liberty or property without due process of law.” This provision recognizes that the law is enforced by taking a person’s life, freedom, or the resources that he or she owns. The taking of an owner’s resources may be (1) for the benefit of society generally, as when land is taken through eminent domain; (2) to punish someone, as with a traffic fine; or (3) for the benefit of another person, as an award of damages. The right of an individual to take another person’s resources (especially money) because that person has failed to meet the require- ments of the law (e.g., the breach of a contract) is known as a remedy. As you study the following sections, identify the remedies available to those seeking through the courts what belongs to another, and keep in mind how important adequately and fairly enforced sanctions are to a property-based legal system and how nations lack- ing adequate enforcement sanctions tend to be poor even when they claim to believe in private property.

SANCTIONS FOR CRIMINAL CONDUCT A crime is a public wrong against society. Criminal cases are brought by the govern- ment on behalf of the people. The people are represented by a state’s attorney or U.S. attorney or other public official. When a person is convicted of a crime, one of the following punishments may be imposed:

• Death. • Imprisonment. • Fine. • Removal from office. • Disqualification from holding any office and from voting.

Among the purposes of such punishments are to protect the public and to deter persons from wrongful conduct.

SANCTIONS FOR BREACH OF CONTRACT Legally enforceable agreements, called contracts (see Chapter 8), are vitally impor- tant to business because they allow buyers and sellers to exchange resources and shape their agreements any legal way they wish. When one party to a contract fails to do what he or she agreed to do, a breach of contract occurs. The usual remedy for a breach is a suit for dollar damages. These damages, called compensatory damages, are awarded to make the victim of the breach “whole” in the economic sense. Such damages compensate the party for all losses that are the direct and foreseeable result of the breach of contract. The objective is that the party be in as good a position as he or she would have been in had the contract been performed. Damages do not make most parties totally “whole,” however, because they do not as a general rule include attorney’s fees. Unless the contract or some special law provides to the con- trary, parties to the contract litigation pay their own attorneys.

In addition to compensatory damages, breach-of-contract cases may award consequential damages when the breaching party knew or had reason to know that

Do remember that the law divides crimes into misdemeanors and felonies.

Compensatory damages awarded for breach of contract attempt to make a plaintiff “whole,” as though in an economic sense the defendant had not breached the contract.

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special circumstances existed that would cause the other party to suffer additional losses if the contract were breached.

There are other remedies available for a breach of contract. If a breach by one party is serious enough, the other party may be permitted to rescind or cancel the contract. In some circumstances, the remedy of an injured party may be a decree of specific performance—an order by the court commanding the other party actually to perform a bargain as agreed. The single largest number of lawsuits today, espe- cially in the federal courts, involves one business suing another business for breach of contract.

SANCTIONS FOR TORTIOUS CONDUCT A tort is a civil wrong other than a breach of contract. Torts involve improper cross- ing of property boundaries, usually causing injury to our person or other things we own. The boundaries may be physical as when someone trespasses across the bound- aries of another’s land. Boundaries may also be behavioral as when someone acts unreasonably and injures another.

The law divides torts into the following three categories:

• Intentional torts. These torts all require the plaintiff (the person who initiates a lawsuit) to prove the defendant intended to cross the boundaries protecting the plaintiff. Intentional torts include assault (intentionally placing someone in apprehension of his physical safety), battery (intentionally making offen- sive, unconsented to physical contact with someone), conversion (intentionally depriving someone of goods owned), and trespass (intentionally crossing some- one else’s land boundaries without permission).

• Negligence. This tort requires the plaintiff to show that the defendant injured what was proper to the plaintiff through unreasonable behavior.

• Strict liability. Strict liability torts usually require the plaintiff to prove only that the defendant has injured something proper to the plaintiff. Injury caused by an ultrahazardous activity like blasting is an example.

In law, the sanction (or remedy) for tortious conduct is money damages. The damages compensate injured plaintiffs for medical expenses, lost wages or earning power, pain and suffering, and damages to other owned goods and land. Punitive damages—also called exemplary damages—are also appropriate when the tort is intentional or the unreasonable conduct is extremely severe.

SANCTIONS FOR VIOLATING STATUTES AND REGULATIONS Statutes at both the federal and state levels of government impose a variety of sanc- tions for violating the statutes or regulations of administrative agencies adopted to accomplish statutory purposes. These sanctions are often similar to those imposed for criminal conduct, breach of contract, or tortious conduct. Many statutes, for example, impose a fine for a violation and authorized damages to injured parties as well. Although common law did not make a defendant pay a plaintiff’s attorney fees, many statutes do require so in various circumstances.

You should keep in mind that the sanctions imposed for violating statutes or administrative agency regulations are an important part of enforcing the property- based legal system. These laws help define boundaries and protect us from the

Tort law helps protect property boundaries by providing compensa- tion when someone wrongfully crosses such boundaries.

Punitive damages are a civil punishment for intentional or extremely negligent wrongdoing. Their purpose is to deter others from such conduct in the future.

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1. Persons and businesses convicted of criminal con- duct may be fined, imprisoned, or both.

2. A party who breaches a contract may be required to pay as compensatory damages to the other party the sum of money required to make the victim whole. In addition, special circumstances may justify conse- quential damages.

3. A tort victim is entitled to collect as damages the amount of money necessary to compensate the

concept summary

injured party for the total harm caused by the inten- tional or negligent conduct of the wrongdoer.

4. Punitive damages may be awarded in the case of intentional torts.

5. Statutes and regulations issued by government agencies often authorize sanctions similar to those used in the criminal law, contracts, and torts. They usually go further by using a multiplier for damages and award attorney’s fees as well.

boundary infringements of others. Regulations often set boundaries of what it is proper for businesses to do in producing and selling goods and competing with other producers in the market. Many of the chapters in this book examine the boundaries set by various business regulations.

Property and Corporate Governance

Under the rule of law in a property-based legal system, all persons have an equal right to their resources. Property problems arise when one person harms another’s resources or takes them without permission or authorization. When a stranger takes your car without permission, we call this “theft,” and it is easy to appreciate how it violates your right of property under the rule of law. However, more complex prop- erty problems can arise.

Much, if not most, business in the United States is transacted through large corporate business organizations. A corporation is a business chartered by the state to do business as a legal person in a certain form of organization. Chapter 11 will explain the details of corporate legal ownership, but, briefly, a corporation is owned by shareholders who have stock in the business. They vote to elect the board of direc- tors who legally run the business but who often hire managers to be in charge of day-to-day business operations. In large corporations, few shareholders sit on the board of directors or are managers of these businesses, and thus ownership is usually separate from resource control.

THE SPECIFIC SENSE OF CORPORATE GOVERNANCE Because of the separation of ownership and control, corporate governance is very important. Corporate governance refers to the legal rules that structure, empower, and regulate the agents (primarily the board of directors and managers) of corpora- tions and define their relationship to the owners (shareholders). Specifically, corpo- rate governance rules protect the property interest that the owners have in corporations.

Because of the complexity of modern corporations, there are sometimes break- downs in corporate governance. Managers like the president, vice presidents, or

Corporations are businesses chartered by the state to do business as legal persons.

Corporate governance defines the legal relationship between corporate agents like managers or boards of directors and the shareholder owners of the corporation.

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chief financial officer of a corporation can abuse their control of its resources to benefit themselves in ways that impair or even destroy the corporation’s value to the shareholders. For example, often these top managers have salaries, bonuses, or stock options that are tied to the corporation’s profitability or stock price. If they manipu- late the corporation’s profit by puffing up assets or concealing debts, they may be able to raise their incomes by millions of dollars even as they mislead the owners about the true value of the corporation and risk corporate collapse when the true situation is disclosed. Other examples of corporate misgovernance include manag- ers’ engaging in insider trading of stock, running up stock prices in order to exercise stock options, and taking advantage of business opportunities that rightfully belong to the corporation and its shareholders.

Corporate governance can fail even when corporate managers do nothing ille- gal. An economically painful recession began in 2008 in part because lenders at large banks allowed and encouraged risky loans that loan applicants could not repay unless the market value of their homes went up substantially. Millions of homeown- ers borrowed under these conditions. When the market value of housing did not increase and borrowers could not repay their loans, the entire banking system came close to collapse.

Businesses depend on credit, and when they could not borrow money from banks because of the near collapse, many businesses either failed or had to lay off employees. Much harm was done to investors and others because those in control of the banks took risks they should not have. Why did they take these risks? That the risky loans they generated led to large salary increases, personal bonuses, stock options, and resale commissions and profits on packaged loans was a significant reason. Bank executives and managers chose to ignore the risk that the housing market might stop its rapid increase in value. After all, the risk was being taken not with their personal money, but with the money of the bank’s shareholders and investors. As Nobel laureate Paul Krugman wrote, “[I]t was mainly about gambling with other people’s money. The financial industry took big, risky bets with borrowed funds—bets that paid high returns until they went bad—but was able to borrow cheaply because investors didn’t understand how fragile the industry was.”

THE GENERAL SENSE OF CORPORATE GOVERNANCE In a general sense, corporate governance also applies to the legal relationships that businesses have with each other, with their customers, and with society. The eco- nomic collapse of 2008 illustrates the need for corporate governance in this general sense. As previously explained, a major factor in the collapse was the risky home- owner lending practice of banks, added to by the risky practices of other financial institutions that repackaged, sold, and resold hundreds of billions of dollars of poor- quality housing loans that were inadequately secured. As long as housing prices were rising, many people made a great deal of money, but when the housing bubble burst and prices began to decline, economic collapse occurred, affecting not only the financial institutions but also the entire economy because credit was too expensive or unavailable. It has been suggested that lack of adequate corporate governance allowed the risky lending practices that ultimately led to the biggest recession since the Great Depression of the 1930s. A number of the chapters that follow discuss the general corporate governance that has followed this recession.

In a broad general sense, corporate gover- nance includes the legal property relations that large businesses have with each other, with their customers, and with society.

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Key Terms Act 15 Administrative law 13 Breach of contract 18 Citation 15 Civil law 13 Codes 15 Common law 12 Compensatory damages 18 Conflicts of law 16 Constitution 15 Constitutional law 13 Constitutional relativity 16 Contract law 13 Corporate governance 20 Corporation 20 Criminal law 13

Dicta 16 Exemplary damages 19 Holding 16 Intentional torts 19 Jurisprudence 11 Law 7 Legislation 15 Negligence 19 Opinion 15 Ordinances 15 Originalism 16 Ownership 9 Precedent 15 Private law 13 Procedural law 14 Property 8

Property law 13 Public law 13 Punitive damages 19 Remedy 18 Rule of law 7 Sanctions 17 Specific performance 19 Stare decisis 16 Statute 15 Strict liability 19 Substantive law 14 Tort 19 Tort law 13 Uniform Commercial Code

(UCC) 15

As you study law, ethics, and consider corporate social responsibility (CSR), one concern comes to mind: Is there any enforcement mechanism? Or is CSR a good-faith movement? At this point, CSR is a form of what is known as “soft law,” rules that are not legally binding (as opposed to statutes and regulations).

There are, however, international trends to raise the commitment to CSR. Most notably, the United Nations endorsed the UN Guiding Principles on Business and Human Rights in 2011. This document details the global standard for “preventing and addressing the risk of adverse impacts on human rights linked to business activ- ity.” The principles are formulated around three pillars:

1. the state duty to protect against human rights abuses by third parties, including business;

2. the corporate responsibility to respect human rights; and 3. greater access by victims to effective remedy, both

judicial and non-judicial. Some companies also include corporate social respon-

sibility and/or statements about the sustainability of their business practices in their communications to stakeholders.

Source: Elizabeth George, “Can Corporate Social Responsibility be Enforced?” Forbes, October 11, 2019; UN Guiding Principles on Business and Human Rights, available at https://www.ohchr.org/Documents/Publications/ GuidingPrinciplesBusinessHR_EN.pdf.

sidebar 1.5

Corporate Social Responsibility: Good Faith

Review Questions and Problems Introduction

1. Why Nations Are Economically Weak or Strong (a) Identify several reasons put forth to explain why nations are prosperous or poor. (b) What does this section say is the foundation of the private market and prosperity?

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Law, the Rule of Law, and Property 2. Law

(a) Define law. Compare and contrast law and custom. (b) What role do the courts and police play in the legal system?

3. The Rule of Law (a) Define the rule of law. How does the rule of law differ from law as the

commands of the state? (b) Explain why the rule of law is “an ideal rather than a complete fact.”

4. Property (a) What is property? How does property differ from “resources”? (b) Why is property important to society? To private enterprise?

5. Property in Its Broadest Sense (a) Explain why property can be thought of as the central concept underlying

Western legal systems. (b) What does James Madison mean when he says we have property in our

opinions “and free communication of them”? 6. Jurisprudence

(a) Define jurisprudence and name four schools of jurisprudence. (b) Describe the main difference between the jurisprudences of natural law and

sociological jurisprudence. Classifications of Law 7. Common Law and Civil Law

(a) What is “common law”? Why is the United States a “common law country”? (b) What is the primary distinction between common law and civil law legal

systems? 8. Public and Private Law

(a) What is public law? Give three examples of public law. (b) Explain private law. Give three examples.

9. Civil Law and Criminal Law (a) What is the difference between civil law and criminal law? (b) Explain the two ways that the words civil law are used in this chapter.

10. Substantive Law and Procedural Law (a) Define substantive law and procedural law. (b) Is contract law substantive law or procedural law? How about a rule specifying

that a defendant has 30 days to respond to a complaint? Sources of Law 11. Federal Law

(a) Explain what it means to say that constitutions are the “highest laws of the nation.”

(b) Explain the important distinctions between state and federal constitutions. 12. State Law

(a) Give two additional terms for legislation. (b) Why is uniformity of law important to business? How can legislators achieve

uniformity of the laws affecting business? What is the most significant uniform law affecting business?

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13. Judicial Decisions or Case Law (a) Define stare decisis. What are its advantages? Disadvantages? (b) What is the distinction between a precedent and dicta in judicial decisions, and

how does this distinction relate to stare decisis? (c) Alex was on a coast-to-coast trip by automobile. While passing through Ohio,

Alex had a flat tire. It was fixed by Sam’s Turnpike Service Station, and later, while Alex was driving in Indiana, the tire came off and Alex was injured. Alex was hospitalized in Indiana, so he sued Sam in Indiana for the injuries. What rules of substantive law will the Indiana court use to determine if Sam is at fault? Explain.

14. Sources of Law Hierarchy in Review (a) Explain the relationship of case law to the other sources of law.

15. Legal Sanctions (a) Why are legal sanctions important in a property-based legal system? (b) What is the difference between a sanction and a remedy?

16. Sanctions for Criminal Conduct (a) What are the sanctions for criminal conduct? (b) Name three purposes of criminal sanctions.

17. Sanctions for Breach of Contract (a) What is the purpose of compensatory damages? (b) What is specific performance of a contract?

18. Sanctions for Tortious Conduct (a) What are the two premises of tort liability? (b) When are punitive damages appropriate in a tort case?

19. Sanctions for Violating Statutes and Regulations (a) What types of sanctions are used for the violation of statutes and regulations? (b) What is an injunction?

Property and Corporate Governance 20. The Specific Sense of Corporate Governance

(a) What is the “specific” sense of corporate governance? (b) Why might some managers try to artificially raise or “puff up” the market price

of their stocks? Describe several ways they could do this. 21. The General Sense of Corporate Governance

(a) What is the “general” sense of corporate governance? (b) Discuss how effective corporate governance contributes to the creation of

economic wealth.

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1. As the vice president of finance for a company producing and selling electronic switchboards, you are considering foreign investment to build a plant to assemble electronic components. A source in China advises you that a town near Shenzhen may be an excellent location for a new plant. Chinese workers are well educated and willing to work for reasonable wages. Projected construction costs are acceptable. Both rail lines and airports are nearby, and the current Chinese government seems politically stable. The town even has a technical college that will be an excellent source for skilled employees. The plant will ship most of the finished electronic components back to the United States.

• Do you know everything you need to make an investment decision? • If not, what else do you need to know about investment in foreign countries? • What does it mean to say that law is the foundation of the private enterprise

system? 2. Three years ago, the Darden Corporation bought a thousand acres of land that borders the Potowac River in Washam County. While waiting on development opportunities, Darden cut timber to help repay the mortgage loan it took out to buy the land. On March 2, the Washam County Commission proposed an ordinance to establish a 250-foot-wide greenway along the south side of the Potowac that will effectively ban both development and timbering on nearly 80 acres of Darden’s land. The same day, in an unrelated accident, a Darden truck ran over a hunter who was hunting without permission on the company’s land. Darden immediately contacted an attorney in Washam City.

• What is law? • What does it mean to say that Darden has “property” in the land? That the hunter

has “property” in himself? • What sources of law will the attorney have to understand in order to advise Darden

about the proposed greenway? The company’s potential responsibility to the hunter?

business discussions

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Learning Objectives In this chapter you will learn:

2-1 To consider ethical challenges facing business in the 21st century.

2-2 To compare the connection between law and ethical principles.

2-3 To analyze why ethical consequentialism and not ethical formalism has been the chief source of values for business ethics.

2-4 To generate an individual framework for ethical values in business.

2-5 To evaluate the obstacles and rewards of ethical business practice in our property-based legal system.

The Role of Ethics in Decision Making2 Michael Hitoshi/Getty Images

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A re we at the beginning of a new era of busi-

ness purpose? On August 19, 2019, the

highly influential Business Roundtable,

comprised of 200 CEOs from the largest and most

powerful companies in the United States, issued a

statement that surprised and even shocked the busi-

ness community and beyond. In the statement, the

group challenged the widely accepted notion that

the purpose of businesses is to increase shareholder

wealth, an idea that the Business Roundtable pro-

moted for more than two decades.

The statement begins: “Americans deserve an

economy that allows each person to succeed through

hard work and creativity and to lead a life of meaning

and dignity. We believe the free-market system is the

best means of generating good jobs, a strong and sus-

tainable economy, innovation, a healthy environment,

and economic opportunity for all.” The statement

goes on to state that companies share a commit-

ment to all stakeholders and that each stakeholder is

essential. In particular, the members of the Business

Roundtable committed to:

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1. Delivering value to customers. 2. Investing in employees. 3. Dealing fairly and ethically with suppliers. 4. Supporting local communities. 5. Generating long-term value for shareholders.

It remains to be seen if “stakeholder capitalism,” as many refer to the idea of businesses addressing the needs of multiple stakeholders in decision making, gains traction over the theory of “shareholder primacy,” a focus championed by Milton Friedman, a Nobel economist, and embraced by U.S. businesses for decades. Friedman wrote in 1970 that, “There is one and only one social responsibility of business,” to “engage in activities designed to increase its profits.” But there is a growing sense that businesses can participate in creating better communities and that they have a unique role in solving complex problems in the 21st century.

Treating supply chain partners fairly and ethically, a commitment made in the Business Roundtable statement, is just one example of the importance of ethical decision making in the modern business environment. With technology develop- ments that challenge notions of privacy, sustainability efforts that challenge the use of limited resources, and innovations that challenge equal access to economic opportunities, the need for developing an ethical mindset is clear.

In our interconnected economy, an individual’s conduct affects many others, making a discussion of the ethical mindset especially significant in a book on the legal and regulatory environment of business. Ethical values underlie much law, including the law of how business operates and is regulated, making it important for business students to know about the nature of ethics, sources of ethics, and problems of achieving an ethical business organization. This chapter introduces the study of business ethics. It explores the relationship of morality and ethics and then of ethics and law. Two principal approaches to ethics are presented: formalism and consequentialism.

Next, the chapter looks at ethical values for business decision making. It exam- ines trends and looks at four sources of ethical values:

• Legal regulation. • Professional codes of ethics. • Codes of ethics from business organizations. • Individual values.

The chapter also considers the problems faced in achieving an ethical business organization. When in groups, people often decide and act differently from the way they act as individuals. This fact has special significance for ethics in business cor- porations. The chapter examines how the profit motive and business bureaucracy put pressure on ethical decision making and how ethical reform must begin with the top leadership of business organizations. The importance of open communication to the ethical life of a business organization is emphasized, and several strategies for implementing corporate ethics are presented.

Contemporary Business Ethics

In 2019, the Federal Trade Commission (FTC) imposed the largest privacy or data security penalty ever when it ordered Facebook to pay $5 billion and increase cor- porate accountability and transparency after finding that Facebook deceived users

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about the use of their personal information. More than 185 million people in the United States and Canada use Facebook on a daily basis. Facebook sells targeted advertising developed from users’ personal information, generating most of its $55.8 billion in revenue in 2018. The FTC found that Facebook’s disclosures about how it uses personal information were deceptive and that the company undermined users’ privacy preferences so it could share their information with third-party apps.

The FTC held Facebook executives responsible for the lack of accountability and transparency about user privacy. It ordered new structures to enforce privacy protec- tion from the corporate board-level to lower levels of the company. The restructuring limited CEO Mark Zuckerberg’s ability to have exclusive control over decisions about users’ privacy.

Press Release, FTC Imposes $5 Billion Penalty and Sweeping New Privacy Restrictions on Facebook, July 24, 2019

More than ever before, business ethics are of concern to the business commu- nity and to society. In the 1980s, few corporations hired people as ethics officers. Today more than 20 percent of big companies have ethics officers whose job is to develop ethics policies, listen to complaints of ethics violations, and investigate eth- ics abuses. The role has various titles. Salesforce hired an ethics officer in January 2019 who has the title of chief ethical and humane use officer. The research firm, Cognizant, identified “chief trust officer” as one of its “21 Jobs of the Future.” The increase in the number of organizations with a chief ethics and compliance officer is tied to increases in regulations following several high-profile business ethics fail- ings. Often, businesses navigate the ethics and compliance requirements through an executive who operates across business functions to hold the organization account- able for high ethical standards.

Importantly, there is evidence that creating ethics programs are working. The 2018 National Business Ethics Survey found a significant decline in misconduct and vio- lating standards when organizations have effective ethics and compliance programs. Only 33 percent of workers reported observing misconduct in large companies with effective ethics programs, as compared to 51 percent of workers observing misconduct in large companies overall. The Ethics & Compliance Initiative, which sponsors the survey, concluded that, “Companies that invest in ethics reap an enormous return.”

MODERN ETHICAL CHALLENGES IN INNOVATION AND TECHNOLOGY New ethical questions have emerged in the 21st century due to significant advances in technology and innovation in all aspects of our lives. Artificial intelligence, for example, poses risks from cybersecuity to bias in algorithms. How to minimize the threats posed by these important advances is the tremendous ethical challenge that we must face today. It is not enough to address these challenges for the present because it also requires considering sustainability; that is, how to address present challenges without compromising future generations’ opportunities.

A March 2019 New York Times article asked, “Is Ethical AI Even Possible?” It noted that employee protests were requiring businesses to address the ethical ques- tions raised by technologically advanced products. Employees at Google in 2018 staged a walkout to protest a contract with the Pentagon for use of its technology in weapons. Since 2001, Google’s Code of Conduct included the phrase, “Don’t be evil,” and these employees asserted that the Pentagon contract violated the code. In response, Google CEO Sundar Pichai released a Code of Ethics to guide similar issues and agreed not to

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“The extent to which employees feel pressure to compromise organizational standards is a leading indicator of a larger potential threat: the presence of actual wrongdoing. Nearly three-quarters (a median of 73 percent) of all public and private sector employees surveyed who felt pressure also said they witnessed misconduct where they worked. In the absence of pressure, by comparison, a median of only 17 percent said they observed misconduct in their place of business.” Source: 2016 Global Business Ethics Survey

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renew the Pentagon contract. Similar walkouts were staged by employees at Microsoft, Amazon, and Salesforce protesting contracts with police and customs agencies.

Susan Liautaud, founder of the Ethics Incubator, argues that now is the time to reexamine who is involved in ethical decision making. “Increasingly, the people and companies with the technological or scientific ability to create new products or inno- vations are de facto making policy decisions that affect human safety and society. But these decisions are often based on the creator’s intent for the product, and they don’t always take into account its potential risks and unforeseen uses. What if gene- editing is diverted for terrorist ends?”

Source: Susan Liautaud, “Ethical innovation means giving society a say,” Wired, June 13, 2017

Innovation has eliminated disease through new medical therapies and created opportunities to engage with businesses around the world through advanced commu- nication system. Ethical decision making is a necessary aspect of continued positive innovation.

ETHICS AND SOCIETY On April 29, 2014, Adam Silver, still new to the job as NBA Commissioner, banned Los Angeles Clippers owner Donald Sterling from association with the NBA for life and fined him $2.5 million following public release of a recording in which the longest-tenured NBA owner made repeated racist comments. Commissioner Silver announced the decisive punishment for violation of NBA rules that all owners agree to follow. Commissioner Silver stated in reference to the racist statements that were universally condemned by players and defended by none, “Sentiments of this kind are contrary to the principles of inclusion and respect that form the foundation of our diverse multicultural and multiethnic league.” During the 33 years that Donald Sterling owned an NBA team, society had changed. As society changes, shared val- ues emerge that strengthen ethical foundations.

Changing Normative Values Ours is a diverse society formed from many ethnic backgrounds, races, and religions. When a business decision maker, such as Donald Sterling, does not share common values with society, the entire business organization is affected, as the NBA was in this context. Diversity fosters concern over values, and as America becomes increasingly pluralistic, changes in traditional norms create challenges in establishing shared values. Rather than a threat to ethics, however, the inevitable changes in societal norms create the opportunity to focus on foundational principles that bind all members of the society.

Economic Interdependence Increasing economic interdependence promotes concerns about business ethics. Not even farm families are self-sustaining. Each of us depends on business and industry for our every necessity—food, clothing, shelter, and energy. The marketplace dominates all aspects of life, and how the marketplace is conducted concerns us. The decisions people in business make have a significant impact on us. When there is a labor-management dispute in the coal industry, our source of electricity is threatened. When manufacturers conspire to raise prices, the cost of our goods goes up. The sale of dangerous pesticides or impure drugs threat- ens our health. A management decision to close a plant may threaten our jobs.

The 2008 recession also illustrates economic interdependence. As credit from the banks dried up, the adverse economic effects spiraled throughout the economy.

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A serious ethical problem arises from economic interdependence and the modern corporation, which is the structure of most large businesses in this country. The problem is that the corporate leaders are not the real owners of corporations; the shareholders are. Although corporate executives and managers may own some stock, they seldom own significant percentages of very large companies. The ethical problem that can arise is that the executives and managers who control what the shareholders own are sometimes able to manipulate corporate actions for their own benefit, actions that have unacceptable risks to the owners and others. Executives, managers, and other employees are sometime able to take actions that if successful benefit themselves greatly, but if unsuccessful impact many others harmfully.

News Media and the Internet Extensive coverage of business decisions and their impact on society makes us more aware than ever of failures of business ethics. The news media and the Internet make it increasingly difficult to hide the question- able behavior of large organizations. From the coverage of stock market manipula- tions to safety violations, the news media and Internet heighten public attention and concern. The ethical issues that surround nearly every significant business decision are easier to see than they once were. As a result of greater visibility, more individu- als can comment on the fairness, justice, and values reflected by actions, or inac- tions, of business executives. Changes in the law and workplace can improve the ethical processes that affect us all in our economically interdependent world.

Refer now to Sidebar 2.1. This recent case highlights the widespread impact of high-pressure work environments and lack of organizational ethical standards.

ETHICS AND GOVERNMENT These changes in society have been accompanied by changes in the role of govern- ment. When business fails to make ethical decisions, when it fails to live up to soci- ety’s expectations for ethical behavior, government may step in. As noted in a prior

The watchdog group, Citizen Works, documented the dips in stock prices that businesses experience following a corporate scandal. Source: Citizen Works

sidebar 2.1

Wells Fargo Sham Accounts

A 2013 Los Angeles Times investigative story helped uncover a massive internal fraud at one of the United States’ oldest and most respected financial services insti- tutions, Wells Fargo. The fraud apparently originated from CEO John Stumpf’s mantra for employees that “Eight is Great.” This mantra meant that Wells Fargo’s employees should sell each customer eight bank products. However, Wells Fargo employees struggled to achieve the demand- ing quota and, to artificially meet the quota, began open- ing fake accounts without their customers’ knowledge. From 2011 to 2016, employees created 1.5 million unau- thorized deposit accounts and 500,000 credit card appli- cations. These products resulted in $2.6 million in fees for the bank.

On September 8, 2016, regulators ordered Wells Fargo to pay $185 million in fines. Wells Fargo also announced that it had fired more than 5,300 employees for creating sham accounts. However, there was a public outcry that no executives were terminated for failing to protect customers and to properly supervise and incentivize employees. On September 20, 2016, the Senate Banking Committee called for Stumpf’s testimony. Despite his apologizing for the bank’s actions and abolishing all sales goals in the retail banking business, Senator Elizabeth Warren, among others, called on Stumpf to resign. Under increasing pressure, Stumpf announced his resignation on October 12, 2016.

Source: Wasik, John, “The Wells Fargo Fake Account Scandal: A Timeline,” Forbes, November 4, 2016.

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section, and detailed throughout the chapters of this book, government regulates business when there are ethical failures such as those that preceded the Sarbanes- Oxley Act of 2002 when business scandals dominated headlines.

Business leaders have incentive to promote corporate integrity, and thereby to limit further governmental regulation. They recognize that by encouraging ethical conduct and self-regulation within business organizations, they will prevent out- side standards from being imposed on them through public law. As a consequence, both business and industry have, in recent decades, developed codes of ethics. Such efforts by professions and businesses to set standards of behavior are evidence of the increasing tendency toward self-regulation. Self-regulation can mean more than helping a business stay out of trouble. Companies that are perceived as ethical and acting in a responsible manner can attract loyal customers, employees, and investors.

Federal law also encourages self-regulation. Federal sentencing guidelines reduce criminal fines for legal violations in companies that have taken specific steps to self- police ethical/legal conduct. (See Chapter 13.) In an increasingly international busi- ness environment, it is worth noting that outside the United States, governments value compliance programs. For example, in Italy, businesses may defend against charges of corrupt practices with evidence of a compliance program. (See Chapter 12.)

The Nature of Ethics

In 1759, Adam Smith wrote, “However selfish man believes himself to be, there is no doubt that there are some elements in his nature which lead him to concern himself about the fortune of others, in such a way that their happiness is necessary for him, although he obtains nothing from it except the pleasure of seeing it.” With this statement, the author of The Wealth of Nations, perhaps the most famous book on economic theory ever written, recognized a moral element in human nature that goes beyond self-interest.*

What is it that makes us care about the fortunes of others? The next sections examine the nature of ethics. What is morality? What are ethics? How are morality and ethics similar? How do ethics relate to law? What are the major ethical systems? How do these systems apply to business decision making? When you have finished reading these sections, come back to these questions and see if you can answer them.

ETHICS AND MORALITY In 2011, Gil Meche, a 32-year-old right-handed pitcher for the Kansas City Royals, had a baseball contract that called for a $12 million salary. The previous season, he had hurt his arm, but, under the terms of his contract, all he had to do was show up for spring training to earn his salary, even if he could not pitch well or needed surgery. Instead of collecting his $12 million salary as he was legally entitled to do, he retired, which meant that he would not be paid at all. Gil said, “Honestly, I didn’t feel like I deserved the salary. Retiring is the right thing to do.” This statement shows the pitcher’s morality, which is the collection of values that guides human behavior.

In society at large, the sharing of moral values promotes social cooperation and is a significant means of social control. Shared moral values lead us to accept and trust others. Shared values allow us to recognize when there is proper behavior in

Morality is the collection of values that guides our behavior.

A study conducted by establishing an “ethics index” of companies with high rankings in corporate citizenship, governance, social responsibility, and sustainability practices showed an average five- year investment return of 102% compared to 26% for the S&P 500. Source: Corpedia

* Adam Smith (1723-1790)

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others and where limits to behavior rightfully belong. Shared moral values create social harmony.

The sharing of values in business life is as important as it is in other aspects of our lives. Today, many businesses try to foster shared moral values in employees. It is right to strive for quality in products and service. It is wrong to discriminate against or harass a person because of race, gender, or religion. One of the successes of many Japanese companies has been to instill shared moral values in their employees.

Internationally, businesses often face problems when they do business with nations with different moral values. What is wrong in the United States may be right somewhere else and vice versa. Is it right to bribe customs officials so that your com- pany’s goods can enter a country? Is it wrong for a woman to appear in public with- out her face covered? Is it right to eat meat and consume alcohol? Is it wrong to talk business on Sunday? On Saturday? On Friday evening? To succeed in international operations, businesses must be sensitive to differences in moral values.

If morals involve what is right and wrong, ethics is a systematic statement of right and wrong together with a philosophical system that both justifies and neces- sitates rules of conduct. In the Judeo-Christian tradition, for example, private owner- ship of land and goods is highly valued. It is wrong to take something that does not belong to you—hence the rule “Thou shalt not steal.”

Ethics involves a rational method for examining our moral lives, not only for rec- ognizing what is right and wrong but also for understanding why we think something is right or wrong. “The unexamined life is not worth living,” said the Greek philoso- pher Socrates. In other words, ethical self-examination is necessary for a meaningful human life.

The end result of ethical examination is what philosophers call the good. The con- cept of the good is central to the study of morality. The good may be defined as those moral goals and objectives we choose to pursue. It serves to define who we are. Thus, leading a good life means more than having the good life. It means more than material possessions and luxury. It means pursuing intangibles, being concerned, as Adam Smith put it, about the fortunes of others. That many in contemporary society do not achieve the good is evident. Too often, we confuse a good time with a good life.

In summary, morality involves what we mean by our values of right and wrong. Ethics is a formal system for deciding what is right and wrong and for justifying deci- sions that involve competing or conflicting values. In everyday language, the terms morality and ethics are often used interchangeably.

ETHICS AND LAW Chief Justice Earl Warren once remarked: “In civilized life, law floats in a sea of eth- ics.” Ethics and law have similar or complementary purposes. Both consist of rules to guide conduct and foster social cooperation. Both deal with what is right and wrong. Society’s ethical values may become law through legislation or court deci- sions, and obedience to law is often viewed as being ethically correct. That society’s ethical values often become law is the subject of Sidebar 2.2.

Chief Justice Earl Warren (1891-1974)

However, there are also differences between ethics and law. Unlike ethical sys- tems, the legal system is an institution of the state. The state enforces legal rules through civil and criminal sanctions, like monetary damage awards, fines, and imprisonment. Many ethical values (e.g., regarding the treatment of animals) are

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“If you don’t have integrity, you have nothing. You can’t buy it. You can have all the money in the world, but if you are not a moral and ethical person, you really have nothing.”

–Henry Kravis, co-founder

KKR equity firm

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not enforced by the state, and many laws (e.g., regarding traffic violations) do not address ethical concerns.

An important difference between morality and law concerns motivation. Although values found in ethics may be imposed on an individual (by the family, the company, or the law), the motivation to observe moral rules comes from within. On the other hand, even though the values expressed through law also may be the personal moral values of an individual, the motivation to observe the law comes from outside the individual in the form of state sanctions. As Justice Oliver Wendell Holmes explained:

You can see very plainly that a bad man has as much reason as a good one for wishing to avoid an encounter with the public force, and therefore you can see the practical importance of the distinction between morality and law. A man who cares nothing for an ethical rule which is believed and practiced by his neighbors is likely nevertheless to care a good deal to avoid being made to pay money, and will want to keep out of jail if he can.

Oliver Wendell Holmes, Jr. (1841–1935)

Ethical systems also involve a broader-based commitment to proper behavior than does the law. Law sets only the minimum standards acceptable to a society. As a former chief executive officer of Procter & Gamble points out: “Ethical behavior is based on more than meeting minimum legal requirements. It invariably involves a higher, moral standard.”

Ultimately, the commitment to ethical values is superior to mere observance of the law in ensuring responsible business behavior. Legal rules can never be specific enough to regulate all business actions that may have socially undesirable or even dangerous consequences. And lawmakers often do not have the information to know whether specific conduct threatens employees, consumers, or the public generally. They may also lack the consensus to act quickly, or to act at all, in the face of poten- tially harmful business actions. However, a commitment to acceptable business eth- ics will usually ensure responsible business behavior.

Ethical values are ulti- mately superior to law in ensuring responsible business behavior.

sidebar 2.2

Price Gouging after Hurricane Katrina

In 2005, Hurricane Katrina crippled many oil rigs in the Gulf of Mexico and temporarily put out of commission sev- eral oil refineries along the coast. The devastation caused a shortage of gasoline.

Responding to reduced supply and constant or increased demand, the price of gasoline shot up, doubling or, in some instances, tripling in price. Economists urge that retail price increases help ensure that those drivers who need and want gasoline the most will be able to get it dur- ing times of shortage. Price increases reduce unimportant driving and promote conservation.

However, many people see soaring prices during times of emergency as unethical. Almost half the states have passed laws prohibiting too-rapid rises of retail prices during times of declared emergency. Throughout the South, there were numerous fines imposed for illegal “price gouging” after Katrina. And when following the hur- ricane the oil companies reported record profits, there was an outpouring of public criticism. Do you think it should be illegal to profit during times of public emergency?

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Two Systems of Ethics

Two principal systems of reasoning dominate ethical decision making in Western civilization. They are formalism and consequentialism. Although these two systems are not mutually exclusive in the outcomes of their ethical analyses, they begin from different assumptions. Most people adopt elements of both systems in making ethical choices. It is very important to appreciate how these systems have influenced your own values and ethical mindset even though, until now, you may have been unaware of it.

FORMALISM Formalism is an approach to ethics that affirms an absolute morality. A particular act is in itself right or wrong, always and in every situation. For example, lying is wrong. There are no justifications for it, and its wrongness does not depend on the situation in which the lie is told. Formalism is primarily a duty-based view of ethics. To be ethical, you have a duty, or moral obligation, not to lie. You have a duty to keep promises. You have a duty not to divulge confidences.

For the formalist (one who expresses the ethics of formalism), the ethical focus is on the worth of the individual. Individuals have rights, and these rights should not be infringed, even at the expense of society as a whole, because they have an intrinsic moral value to them. The Bill of Rights illustrates this view of the rights of individu- als. When the First Amendment states “Congress shall make no law . . . abridging the freedom of speech,” it takes the formalist approach.

First Amendment of the U.S. Constitution

Kant and Formalism For the formalist thinker Immanuel Kant (1724–1804), to be ethical requires that you act with a good intent. To have a good intent, you have to act in ways that are ethically consistent. This emphasis on consistency Kant called the categorical imperative. You have a moral duty to act in the way you believe everyone should act. You should never act in a certain way unless you are willing to have every- one else act in the same way. You cannot make an exception for your own action. You cannot say, “I can lie (cheat) (steal) (cause injury), but others should not do this to me (to my family) (to my friends).” Kant said that to make an exception for your own behavior is immoral and unethical. Note the similarities between Kant’s categorical imperative and the Golden Rule: “Do to others as you would have others do to you.”

Formalist thinking raises many questions for business ethics. Are you treating your employees with respect for their rights as individuals, or are you treating them only as units of production to make a profit? If you are willing to lie about your ability to meet a produc- tion schedule in order to get a new customer, are you willing to have the customer lie to you about his or her ability to pay? If you pass on information that was told to you in con- fidence, are you willing to have your confidences passed on? Can business function with widespread lying, cheating, and stealing and without respect for the rights of individuals?

In his novel The Turquoise Lament, John D. MacDonald puts words into the mouth of his Travis McGee character that illustrate well a formalist approach:

Integrity is not a conditional word. It doesn’t blow in the wind or change in the weather. It is your inner image of yourself, and if you look in there and see a man who won’t cheat, then you know he never will. Integrity is not a search for the rewards for integrity.

John D. MacDonald, The Turquoise Lament

Table 2.1 illustrates other examples of a formalist approach to ethics.

Do remember that formalism says certain behaviors are always wrong.

Categorical imperative (Kant) says that you have a moral duty to act in the way you believe everyone should act.

“Two things fill the mind with ever new and increasing wonder and awe—the starry heavens above me and the moral laws within me.”

–Immanuel Kant, philosopher

(1724-1804)

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The Social Contract The social contract theory of Harvard philosopher John Rawls furnishes an important recent example of how formalism has influenced thinking about business and personal ethics. This theory is based not on duty but on contract (agreement).

Social contract theory concerns itself with how to construct a just society given the many inequalities of wealth, knowledge, and social status. Rawls suggests a simple first step in determining the ethical values on which a just society can be built. We should assume that we do not know our age, gender, race, intelligence, strength, wealth, or social status. This step is vital because it keeps us from being self-interested in the ethical values we consider. For example, not knowing our sex or race, will we agree that it is ethical to discriminate in employment compensation based on sex or race? Not knowing our wealth, will we agree that owning property is a fair prerequisite to being able to vote? Not knowing our age or work status, will we agree that it is just for a company to have mandatory retirement of its officers at age 65? Freeing ourselves of self-knowledge, Rawls argues, improves our ability to evalu- ate the terms of a fair agreement (contract) under which we enter society or join an organization like a corporation.

Placing himself behind a veil of self-ignorance, Rawls proposes two ethical prin- ciples. First, everyone is entitled to certain equal basic rights, including liberty, free- dom of association, and personal security. Second, although there may be social and economic inequalities, these inequalities must be based on what a person does, not on who a person is, and everyone must have an equal opportunity for achievement. Since there are natural differences of intelligence and strength and persistent social differences of wealth, class, and status, defining “equal opportunity” is crucial to this second ethical principle. Rawls insists that individuals in a just society have the right to an equal place at the starting line. This is as true within a corporation as it is within a country.

Because of its emphasis on individual rights and self-worth, social contract the- ory has its origin in formalism. It provides a powerful process for ethical business decision making. Social contract theory is especially valuable in international busi- ness. In this arena, in the absence of much law, businesses from various cultures must agree as to the terms under which international business is to take place.

Rawls’s “veil of igno- rance” means, to think ethically, you must lose the assumption that what you personally need or want is neces- sarily morally correct.

Statement Source

“We hold these truths to be self-evident.” Declaration of Independence “Thou shalt not steal.” The Ten Commandments “A sale made because of deception is wrong. . . . The end doesn’t justify the means.”

Caterpillar Code of Ethics

“There are fundamental values that cross cultures, and companies must uphold them.”

Thomas Donaldson, business ethics scholar

“Openness in communications is deemed fundamental.”

Business Roundtable

The moral sense is “the sense of what is inherently right and wrong. . . .”

Barbara Tuchman, historian (1912-1989)

table 2.1 Examples of Ethical Formalism

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CONSEQUENTIALISM The second principal system of ethics is consequentialism. Consequentialism con- cerns itself with the moral consequences of actions rather than with the morality of the actions themselves. For the consequentialist, lying itself is not unethical. It is the consequences, or end results of lying, that must be evaluated for their ethical impli- cations. It is the loss of trust or harm done by lying that is unethical.

If formalism focuses on individual rights, consequentialism focuses on the com- mon good. The ethics of actions are measured by how they promote the common good. If actions increase the common good, they are ethical. If actions cause overall harm to society, they are unethical.

The dominant form of consequentialism is utilitarianism. Utilitarianism judges actions by usefulness, by whether they serve to increase the common good. For utilitarians, the end justifies the means. But to judge the utility of a particular action, it is neces- sary to consider alternative courses of action. Only after you consider all reasonable courses of action can you know whether a particular one has the greatest utility.

The International Franchising Association (IFA) adopted a new code of ethics. Officers of the association indicated that an important reason for adopting the new code was to head off government regulation of franchising through self-policing. The code states that when a franchiser is going to make a decision about adding a new franchise outlet into an area where a franchisee already owns an existing outlet, it should weigh “the positive or negative effect of the new outlet on the existing outlet.” Another factor to be considered is “the benefit or detriment to the franchise system as a whole in operating the new outlet.” The motivation of the IFA in adopting the new ethics code and the quoted language of the code suggest a consequentialist ethi- cal view. Table 2.2 gives other examples of consequentialism.

Although business ethics reflect elements of both formalism and consequential- ism, they focus more heavily on the latter. Business leaders feel a need to justify what they do in terms of whether or not it produces dividends for their shareholders. Their primary goal or end is to produce a profit. This orientation reflects consequentialism.

The many statements of business leaders that ethics are “good for business” illus- trate this point. These statements imply that certain values are important because

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Modern economic theory reflects utilitarianism.

Statement Source

“There is no doubt that ethics pays off at the bottom line.”

CEO, Procter & Gamble

“Loss of confidence in an organization is the single greatest cost of unethical behavior.”

CEO, KPMG

“The strongest argument for raising the ethics bar boils down to self-interest.”

CEO, KPMG

“Cost-benefit analysis (used by various governmental agencies and in business and finance).”

Economic theory, finance theory, and policy studies

“The greatest happiness of the greatest number is the foundation of morals and legislation.”

Jeremy Bentham (1748–1832), English social philosopher

table 2.2 Examples of Ethical Consequentialism

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their end result is useful in increasing productivity and profit rather than because the values are intrinsically good. The way business managers evaluate alternative courses of action through cost-benefit analysis is a form of consequentialism.

One approach to business ethics, called “values-based management,” also illus- trates consequentialism. The emphasis of this approach teaches ethical values to employees that enhance the profitability of the company. Examples include why it is wrong to use company computers for personal entertainment during work hours and why it is unethical to use company long-distance phone service to contact friends and relatives.

Sidebar 2.3 is one example of a business response to concerns that it profited from misinformation while undermining a common good.

The Protestant Ethic In part, the current focus on consequentialism in business ethics is due to the decline in business life of what has been described as the Protestant ethic. With the Protestant Reformation of the 16th century came a new emphasis on the importance of the individual. Instead of relying on the intercession of a church hierarchy to achieve grace, each person, Protestants asserted, had the means to address God personally. Thus religion provided the impetus to hard work and achievement. Human desire and indulgence, said Protestants, should be bent to God’s will through self-denial, rational planning, and productivity. The Protestant ethic was rooted in a formalist approach: honesty and keeping promises were intrinsically good.

The Protestant ethic was a boon to capitalism. The quest for economic inde- pendence fueled commercial growth, which fueled industrial growth, which created our modern consumer society. Along the way, however, the religious basis of the Protestant ethic was eroded by rising wealth and the encouragement of mass con- sumption. The part of the ethic that supported hard work, success, and rational planning continued, but without the original absolute moral values. The Protestant ethic became transformed into an organizational ethic that supports the modern

In the book Moral Intelligence: Enhancing Business Performance & Leadership Success (2004), Doug Lennick and Fred Kiel use research to show that the best performing companies are led by those who can effec- tively promote moral principles throughout their organizations.

sidebar 2.3

Facebook Tackles Fake News In the wake of a divisive 2016 presidential election, the social media giant, Facebook, received a great deal of criticism that it was a primary driver of “fake news”—false stories that injected confusion in the election process. Fake news and conspiracy theories spread through Face- book also were identified as a motivating factor in a man firing a rifle at a pizzeria in Washington, DC. Following the election, Facebook CEO Mark Zuckerberg acknowledged that there was “much more work” to do to eliminate false news stories, many produced by individuals to drive some of the 1.8 billion users who log on to Facebook each month to their websites.

In December 2016, Facebook announced steps to identify misinformation. A reporting and flagging sys- tem relies on users to report a story as false, “along with

other signals.” Although Facebook users can share the false stories, the stories are labeled with a warning, and attempts to turn the misinformation into promoted ads are rejected.

In February 2020, with another divisive presidential election underway, Facebook announced that it would hire fact-checkers from Reuters, an international news organizations, to verify the information on its platform. However, Facebook does not fact-check political ads and has received criticism for refusing to ban inaccurate politi- cal ads.

Sources: “Facebook Details Its New Plan To Combat Fake News Stories,” National Public Radio, December 15, 2016; Allison Matyus, “Reuters to Fact-Check Facebook Posts But Not Political Ads,” Digital Trends, February 12, 2020.

The absolute moral values of the Protestant ethic declined. Hard work and planning become justified by the consequentialist results they produce.

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bureaucratic managerial system. The sociologist Robert Jackall identifies this system as having “administrative hierarchies, standardized work procedures, regularized timetables, uniform policies, and centralized control.” The goal of this system is to produce profit. Business actions are justified by their usefulness in accomplishing the goal. The religious formalism of the Protestant ethic has become a type of utili- tarian consequentialism.

COMPARING THE TWO ETHICAL SYSTEMS Formalists and consequentialists can arrive at the same conclusion for an ethical course of action, but they use a different evaluation process. Figure 2.1 illustrates how this might happen. Take as an example a company’s decision whether or not to secretly monitor its employees’ use of the e-mail system. The company suspects that some employees are using the system for personal business and to spread damaging rumors about the company and its executives. How would formalists and consequen- tialists approach this decision?

Formalists might say that secret monitoring treats employees only as a means to the end of increasing organizational efficiency and does not respect their self-worth as individuals. The monitoring also does not respect their dignity and their privacy. Formalists might conclude that secret monitoring is unethical. Explaining the prob- lem to the employees and asking for their consent to monitor would be a more ethi- cal action to take.

For a consequentialist, the act of secret monitoring itself is ethically neither right nor wrong. It is the end result that is ethically important. Secret monitoring and the punishment of wrongdoers are useful in improving productivity, which is an appropriate company goal and beneficial to society at large. To that extent, secret monitoring is ethically acceptable. But the punishment of wrongdoers will likely reveal to all employees that their e-mail has been secretly monitored. This breach of trust can lower employee morale and lessen employee loyalty to the com- pany. Overall productivity may fall. In the examination of alternative solutions to the problem, a more beneficial overall solution, and thus a more ethical one, might

In 2005, someone dis- covered that Sony BMG had secretly inserted a spyware program in several million CDs. The spyware installed itself when buyers ran the CDs on their computers. What are the ethics of this business decision?

Figure 2.1 A common result.Dilemma

Resolution

Formalism • Absolutism • Morality of actions • Test: Am I willing to permit others to act in this way?

Consequentialism • Relativism • Morality of actions • Test: Do the results promote the common good?

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sidebar 2.4

Tobacco Facts Consider the ethical significance of the following facts: • Tobacco products have been consumed in the

United States since at least the early 1600s. • Hundreds of thousands of people are involved in the

growing, manufacturing, distributing, and selling of tobacco products.

• In the first 20 years of tobacco litigation, juries did not award plaintiffs a single penny against tobacco companies.

• Scientists and doctors accept that tobacco consump- tion is an important contributing factor in cancer and heart disease. Excess consumption of fatty foods and lack of exercise are also contributing factors to these diseases.

• Some 435,000 people in the United States, or 1 percent of all cigarette smokers, die prematurely every year due to tobacco consumption.

• Health-related tobacco disease costs more than $75 billion annually in spending for medical care.

• The average age of beginning tobacco consumption is around 16.

• Almost no one begins tobacco consumption past age 21. Three thousand new teenagers begin tobacco consumption every day.

• Tobacco companies spend billions of dollars annu- ally in advertising and marketing tobacco sales. A main strategy of tobacco promotion is to associate glamour, excitement, sex, and desirable life images with tobacco consumption. Another strategy is to get young people to sample cigarettes and other tobacco products.

• The law requires that health warnings accompany the advertising and sale of tobacco products.

• The nicotine in tobacco is considered addictive. How- ever, millions have stopped tobacco consumption.

Primary sources: Federal Trade Commission Cigarette Report (2007); Centers for Disease Control; The New York Times.

be to explain the problem to the employees and ask for their consent to monitor all e-mail messages.

This example of the thinking processes of formalists and consequentialists does not exhaust all of the possible approaches that these groups might take to the e-mail problem. It does emphasize the fact that both formalist and consequentialist thinking can lead to the same business decision.

One of the most complex problems of contemporary business ethics concerns the promotion and sale of tobacco products. Cigarette smoking alone kills hun- dreds of thousands of people every year in the United States. Bring to bear your new knowledge about ethics by evaluating the tobacco facts presented in Sidebar 2.4. No one ever said that ethical evaluation would be easy.

Sources of Values for Business Ethics

There are at least four sources of values for business ethics. The sections that follow identify them as:

• Legal regulation. • Professional codes of ethics. • Organizational codes of ethics. • Individual values.

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LEGAL REGULATION Insider trading, bribery, fraudulent practices, and conflicts of interest are often cited as examples of ethical failures. But these practices are illegal as well. That the unethi- cal may be illegal and vice versa is often confusing to students.

The way to understand the ethical-legal relationship is to realize that in our society ethical values frequently become law and that legal regulation can reflect society’s ethical values. For example, society’s ethical commitment to equal opportunity became law in the Civil Rights Act of 1964, which prohibits employment discrimina- tion based on “race, sex, color, religion, and national origin.”

At the same time, the very existence of legal regulation can influence society’s view of what is ethical. In 1964, when the Civil Rights Act was passed, few people were concerned about sex discrimination in employment. Some, such as Justice Gorsuch in the Bostock v. Clayton County, GA decision, maintain that opponents of the bill inserted the prohibition against sex discrimination in hopes of preventing its passage. The Civil Rights Act passed, and over the years, as legal battles involving sex discrimi- nation in employment were fought, Americans’ moral sense of the importance of equal employment opportunity regardless of sex caught up with the law. Today a great major- ity of Americans believe women should not be discriminated against in employment simply because they are women and that such discrimination is wrong. In 2020 the court clarified that Title VII prohibited discrimination against LGBT in the Bostock decision. To a significant extent, the law itself contributed to the change in values.

Legal regulation is, then, a significant source of values for business ethics. In fact, many business and professional organizations look to the law when drawing up their codes of ethical conduct. At least five major ethical rules can be drawn from the law. These include:

• Respect for the liberty and rights of others. • The importance of acting in good faith. • The importance of exercising due care. • The importance of honoring confidentiality. • Avoidance of conflicts of interest.

The following sections elaborate these concepts. These values derived from legal regulation are appropriate for use in ethical business decision making even when decisions do not involve legal issues.

Liberty and Rights First, the law requires respect for the liberty and rights of oth- ers. We see this requirement in legislation protecting the right of privacy, promoting equal employment opportunity, and guaranteeing freedom of expression and due process of law. In one form or another, these legal rights often appear in ethical codes. Do you think that the concern for individual rights represents formalism or consequentialism?

Remember from Chapter 1 that respect for individual rights is historically connected to the legal concept of private property. To have exclusive legal rights over what you say (freedom of speech), for example, is quite similar to having exclusive rights to an area of land or a piece of machinery. The philosopher John Locke, who influenced the framers of the U.S. Constitution, even referred to “lives, liberties, and estates which I call by the general name property.”

Good Faith The law requires that good faith be demonstrated in various eco- nomic and other transactions. An example comes from the Uniform Commercial

Don’t forget that respect for law itself can help change moral values. Anti- discrimination laws have helped convince many people that discrimination based on race, gender, and religion is morally wrong.

“At this moment, America’s highest economic need is higher ethical standards—standards enforced by strict laws and upheld by respon- sible business leaders.”

–President George W. Bush

As legal principles, both liberty and property involve keeping others from interfering with what is yours.

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Code, adopted in 49 of the 50 states. It requires that all sales of goods must be car- ried out in good faith, which means “honesty in intent” and “honesty in fact.”

The reverse of good faith is bad faith, which can be understood as dishonesty in intent. In cases involving a bad faith withholding of amounts due under insurance policies, some courts and juries have severely punished defendant insurance compa- nies with large punitive damage awards. Acting with an honest intent is the key to understanding good faith. Is looking at the intent of parties to a business contract evidence of formalism or consequentialism?

Due Care Another ethical value reflecting legal rules requires the exercise of due care in our behavior. This value comes from the law of torts, which Justice Oliver Wendell Holmes said “abounds in moral phraseology.” Due care derives from soci- ety’s expectations about how fair and reasonable actions are. Due care promotes the common good. In negligence law, failure to exercise due (or reasonable) care is the principal element that triggers liability against the defendant. Courts have examined due care in negligence cases in terms of a balancing test. The likelihood that the defendant’s conduct will cause harmful consequences, taken with the seriousness of the harmful consequences, is balanced against the effort required to avoid the harm- ful consequences. The balancing test is central to the concept of due care.

Consider the following problem of due care. Bridgestone/Firestone became aware that certain of its tires were showing defects at much higher rates than what might be thought of as normal. Still, the tires operated perfectly on hundreds of thousands of vehicles. Was the company ethically required to warn the public about the tires? To recall the tires? A very small fraction of all tires showed defects. What level of defect is acceptable without warning those who use a product? Ford Explorer sport utility vehicles used the Firestone tire, and Ford decided to recall and replace the tires in Saudi Arabia. But Ford did not notify U.S. safety authorities or the public about what it was doing overseas, even though the same tires were on Ford Explorers in the United States. Was Ford acting ethically? What would you need to know in order to decide?

Another form of the requirement to exercise due care comes from the Federal Guidelines for Sentencing for Criminal Convictions, which focus specifically on corporate white-collar crime. In determining what punishment a company should receive for the illegal business acts of its employees, the guidelines look at whether the company has “an effective program to prevent and detect violations of the law.” An effective program is measured by whether “the organization exercised due dili- gence in seeking to prevent and detect criminal conduct by its employees and other agents.” Due diligence is another way of saying “due care.”

As with the determination of due care in negligence law, the determination of due diligence in sentencing guidelines requires use of a balancing test. Considering the significance of the balancing test to the exercise of due care (or due diligence), do you think that formalist or consequentialist values are reflected?

Confidentiality Honoring confidentiality is the fourth major ethical value emerging from the law and legal regulation. The legal requirement of honoring confi- dentiality appears in agency law generally and in the professional-client relationship in particular. For a CPA to share with unauthorized third parties what has been learned during a client’s audit is professional malpractice. Likewise, it is malpractice for an attorney, physician, real estate broker, or any professional agent to tell others what a client (principal) has related in confidence.

Constitutional law also involves many balancing tests. Do these tests illustrate formalism or consequentialism?

Chapter 13 further dis- cusses the Federal Sen- tencing Guidelines.

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In addition to not telling others of a confidence, an agent must in many instances not act on the confidence related by a principal. The securities laws make it a crime for agents like the officers and managers of a corporation to buy and sell corporate stock on information only they know. (See Chapter 17.) Many “insider trading” scan- dals have occurred because corporate agents illegally traded on confidential infor- mation they learned from their positions in the corporation.

The legal requirement of honoring confidences contains both formalist and con- sequentialist ethical values. Can you identify these values?

Conflicts of Interest Often embodied in business codes of ethics, avoiding con- flicts of interest is a final ethical value flowing from the law, especially from agency law. A conflict of interest occurs when one attempts to “serve two masters,” and no agent or employee of one principal can secretly work for another whose interest competes with that of the first principal. That is why a real estate agent may not represent both the seller and the buyer in a real estate transaction without permission from both parties.

Sometimes when corporations “go public” or otherwise sell new stock issues, they will give employees of their customers or suppliers the option of buying a num- ber of the new stock shares at a special fixed price. If the market value of the stock rises, exercise of the stock options can be quite valuable to these employees as they resell the stock at market price. Is it a conflict of interest for employees of other companies to accept these stock options? Does it impair their objective judgment about continuing to do business with the corporation that has given them such a gift? Compaq Computer Corporation, Cisco Systems, and AT&T specifically forbid employees from accepting stock options from their suppliers or customers.

Conflicts of interest also arise in public service. For instance, it is a conflict of interest for a judge or administrative regulator to make a decision involving a company in which he or she owns stock. Note that in this instance the conflict of interest does not involve “serv- ing two masters.” The conflict arises because of the ownership interests that will make it difficult for the judge or regulator to make an unbiased decision. In terms of formalism and consequentialism, how do you evaluate the prohibition against conflicts of interest?

Many people consider it a type of conflict of interest for accounting firms to both advise their clients on general financial matters and to audit them when audits may uncover financial wrongdoing.

concept summary

Ethical Values from Legal Regulation 1. Respect the liberty and rights of others. 2. Act in good faith. 3. Exercise due care. 4. Honor confidentiality. 5. Avoid conflicts of interest.

PROFESSIONAL CODE OF ETHICS Another important source of business ethics comes from the historic tradition of the professional codes of ethics. Professions such as law and medicine have long tradi- tions of codes of ethical conduct. Other professions—and, more recently, business and industry in general—have developed and adopted codes of ethical conduct. Here

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ETHICAL VALUES Honesty—to be forthright in dealings with customers and stakeholders. To this end, we will:

• Strive to be truthful in all situations and at all times. • Offer products of value that do what we claim in our