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Business Law

Principles and Practices

Goldman, A., & Sigismond, W. (2014). Business Law: Principles and Practices (9th ed.). South- Western Cengage Learning.

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Cengage Advantage Books



Understanding Your Legal Environment

CHAPTER 1 Foundations of Law and the Role of Ethics in Business 4

CHAPTER 2 The Legal System in the United States and Its Constitutional Foundation 25

CHAPTER 3 Personal, Business, Cyber Crimes and the American Criminal Justice System 49

CHAPTER 4 Tort Law: Traditional Torts and Cyber Torts 77

CHAPTER 5 Litigation and Alternatives for Settling Civil Disputes 103

After studying Part 1, you should be able to:

1. Name and explain the four functions of law. 6 2. Demonstrate knowledge of the primary sources of law in the United States. 9

3. Realize the impact of unethical behavior in the workplace. 16

4. Outline the structure of the federal and state court systems in the United States. 29

5. Demonstrate a knowledge of selected personal, business, and cyber crimes and the steps in the criminal justice system faced by a person accused of committing a crime. 51

6. Demonstrate an understanding of wrongful acts called torts and the legal rights of victims against whom a tort has been committed. 79

7. Outline the steps in a civil law suit and the several alternatives for settling legal disputes outside the courtroom. 109

Foundations of Law and the Role of Ethics in Business CHAPTER PREVIEW

Why Laws Are Important

The Nature of Law

The Legitimate Functions of Law Settlement of Disputes Protection of the Individual and Society Protection of Property Promotion of Worthwhile Social Objectives

Development of Law Roman Law Common Law

Sources of Law in the United States Constitutions Statutes Court Decisions Administrative Regulations

Civil Law Versus Criminal Law

Uniform Laws

The Impact of Unethical Behavior in the Workplace

Business Ethics The Role of Ethics in a Business Setting

Ethical Challenges in the Workplace Role of Managers Ethical Issues Faced by Managers Building Sound Ethical Practices Development of Business Codes of Ethics The Role of the Legal System in Ethical





This opening chapter focuses on law and ethics. It describes what law is, why

it is needed, where it came from, and what functions it serves. This chapter

also points out that although the modern emphasis in the United States is on

statutory law, Americans also rely heavily on case law and rules of

administrative agencies to protect a right or to correct a wrong. Civil law,

which protects individuals from harm by other individuals, is discussed

in contrast to criminal law, which protects society from harmful acts of

individuals. The second half of the chapter focuses on business ethics

and the impact of ethical behavior on the workplace.

Ramega, a key employee in a large corporation in a large city, favored a particular candidate for mayor of that city. The employee on her own time actively supported this candidate by making speeches to people in many neighborhoods, had people to her house with the candidate present to meet these neighbors, and made political contributions to this candidate's campaign. The employee's candidate won the election. Shortly after taking office, the new major awarded a very lucrative contract for the purchase of office equipment to this employee's company. Is awarding of this contract by the new mayor ethically correct?

Questions 1. What is the meaning of the term ethics? 2. What are reasons for unethical behavior in the workplace? 3. Is it important to a corporation to be seen as ethical by consumers of its

products? 4. Are legal standards the same as ethical standards? 5. Is it okay for a company manager to use her position to determine what

is ethically right or wrong when it comes to workplace issues that arise on the job?

hy Laws Are Important

LEARNING OBJECTIVE~ Identify reasons why laws

are important.

Living in the twenty-first century is not easy, especially when it comes to under- standing why we cannot do our own thing rather than obey regulations imposed on us at all levels of government. Throughout history, violence by individuals and groups has been used as a way to resolve disputes. People's individual feel- ings or biases have caused them to take action that has resulted in terror, loss of life, and destruction of property. Clearly, then, we must have laws to regulate human behavior. Otherwise, anything goes. The law provides a guarantee that justice will be carried out according to rules established by federal and state courts and the judiciary and not as the result of individuals' feelings or biases. Those who obey the law will be protected, and those who do not will be punished. The following instances of violent crimes demonstrate that violence by individu- als and groups has indeed been used as a way to resolve disputes.

On the evening of April 4, 1968, while standing on the balcony of his hotel room in Memphis, Tennessee, where he had led a nonviolent protest march, Martin Luther King Jr., leader of an organization that was involved in the burgeoning civil rights movement, was assassinated. In July 1994, Megan Kanka, a seven-year-old girl living in New Jersey, was raped and murdered by a twice-convicted sex offender who lived across the street from her home. Dr. Barnett Slepian was murdered in his home near Buffalo, New York, in October 1998 by a sniper because he per- formed abortions. James Brady, press secretary to former President Ronald Reagan,

The Nature of Law

LEARNING OBJECTIVE ~ Verbalize the meaning

of the term law.

law: enforceable set of rules of conduct

was seriously injured in an assassination attempt on the president in March 1981 These instances of violent crimes serve as reminders that, throughout history, vio- lence by individuals and groups has been used as a way to resolve disputes.

It has therefore become obvious that the only alternative to violence is some system of rules of order (laws) for society's members. The federal government re- sponded to these acts of violence by passing legislation such as Megan's Laws an the Brady Law. Megan's Laws require local law enforcement agencies and the public to be notified when known sex offenders move into their communities. The Brady Law establishes a five-day waiting period and a criminal background check on individuals who purchase handguns from firearms dealers. Without these laws and other protective laws, living in a modern society would parallel living in a primitive society where lawlessness prevailed.

As individuals living in the United States, we are guided by the rule of law. Law- can be defined as rules established and enforceable by a government-federal state, or local- to regulate the conduct of individuals and groups in a society. No person or institution is above the law. Just as there are rules for playing a game, so there are rules for living with other people in society, whether that society is a neighborhood, a town, a city, a state, a nation, or the entire world. The rules that make up law are actually legal duties that are imposed on people and that require them to act in a certain way. When people do not follow these rules, they violate the law. Through the courts, individuals injured by those who violate the law are provided with legal remedies, such as requiring the wrongdoer either to pay money damages go to prison, or in some cases both. Keep in mind that the object of any legal rule is justice, or fairness. Can we therefore say that when a court provides a remedy to an injured party because someone violated his or her rights this decision is fair? Theoretically, yes; in our practical world, however, the word fair is often challenged based on people's perception of fairness. Take the O.J. Simpson murder trial. As you may recall, Simpson, a national football hero, was acquitted by a jury of murdering his ex-wife and her friend in June 1994. How- ever, poll after poll taken after the trial revealed people's disagreement with this jury verdict. They said it was unfair. Although the legal process was followed in determining Simpson's not-guilty status, people's perception that the not-guilty verdict was unfair may have had merit. Thus, the saying "justice always prevails" may mean to many only that the process of bringing a court case to a legal con- clusion was followed, not that the outcome was necessarily fair. Although abso- lute justice is therefore unattainable in every case that is brought before a court, the legal process is the best rule that could be devised under the circumstances.

The Legitimate Functions of Law

LEARNING OBJECTIVE ~ Summarize the legitimate

functions of a legal system.

We concluded that if people are to live together peacefully, law must be an im- portant part of their lives. Be aware, however, that this need for law presents a dilemma. Every time a law is created, a person's freedom to act is in some way restricted; at the same time, trying to settle disputes without resorting to law will produce chaos. Given this dilemma, what functions can law legitimately serve without unduly restricting a person's freedom? There are four functions, as illus- trated in Figure 1.1:

Settlement of disputes Protection of the individual and society Protection of property Promotion of worthwhile social objectives

FIGURE 1.1 Legitimate Functions of Law

Settlement of Disputes People in a society do not all behave in the same manner, and sometimes it is hard to tell where one person's rights end and another's begin. There needs to be a peaceful way to settle disputes between individuals. Suppose that you start playing your stereo too loudly or have an all-night party on your patio with guests making a lot of noise, and these acts are disturbing to your neighbor. You feel that you have a right to do these things. Your neighbor doesn't feel the same way. The result could be that you fight it out with words or fists, or even guns. Your neighbor, instead, could call the police and file a complaint against you for disturbing the peace. According to law, as you may know, this is allowed because you violated the neighbor's right to peace and quiet. While calling the police may be distasteful to you, the police officer who arrives on the scene may settle the dispute between your neighbor and you, and if you insist that you were within your rights, the officer could exercise his or her right under the law to either ar- rest you or order you to appear in court at a later date.

Law thus serves to protect the rights of each individual and to regulate con- duct between persons in a society. Law provides stability, allowing people to develop their own interests without infringing on the rights of others.

Protection of the Individual and Society One of the major reasons for the development of law was to protect the individual. Freedom to live without fear-fear that someone will commit a crime against you, such as stealing from you or killing a family member-is so important that a perpetrator of crimes will be punished and also may be sued by their victims for money damages. Many laws that are designed to protect the individual also protect society by keeping our cities and towns safe places to live and work. For example, society needs protection from thieves, muggers, murderers, vandals, and others who violate all individuals' rights when they commit harmful acts. As another example, without orderly plans for the development of land, it would be possible for shopping malls, condominiums, parking lots, or hotels to crop up in the middle of residential areas.

Protection of Property Law protects property as well as people. Our society places much value on the importance of property and the need to protect it. Our laws protect property in many ways. Those who destroy or damage property may be punished or may

Development of Law

LEARNING OBJECTIVE ~ Describe the influences of Roman law and especially

the English common law on the development of law in

the United States.

common law: unwritten law based on local English customs

have to compensate the injured party. The government may not take private property for public use without just compensation. Governments may tax prop- erty but only if the tax is fair and reasonable. Those who own property may upon dying, pass it on to other persons, subject only to reasonable rules.

Promotion of Worthwhile Social Objectives Law is not limited to regulating conduct between individuals or between indi- viduals and their society. Law may also be used as a positive force to promote worthwhile social objectives. The Social Security system is a good example. The system was established by the Congress of the United States to aid the aged, the poor, and the disabled. Through a system of contributions and salary deduc- tions required by law, the government helps those who need some form of pub- lic assistance.

Promoting good health and educational opportunities is another example of using law to promote worthwhile objectives. Congress has enacted many laws establishing and financing medical centers and research facilities. Grants are given each year for extensive medical research, treatment programs, and immu- nization. Both federal and state governments assist education through legislation. Tax dollars help support many colleges, and many students receive government scholarships to study in the United States and in other countries. Many states help pay for the high cost of education by giving tax deductions for educational expenses.

Promoting commerce is also an important goal. Our society believes that law should not be limited to regulating competition in promoting trade. It should also be used to assist in other ways. One example is the use of tax dollars for research to improve trade and develop new products. Another example is the use of public funds to finance businesses and business expansion. By providing direct loans or insuring private loans, government enables many small businesses to get started and to expand as the need arises.

Although many societies and nations have contributed to the development of law, Roman law and English common law are the most important influences on law as we know it today.

Roman Law Prior to the Romans, most law was oral. Decisions were made by judges or juries but a written record of those decisions was not kept. Instead, the decisions were passed on by word of mouth from generation to generation. The Romans devel- oped the concept of written codes that everyone could know and understand. These codes, or laws, were to be so complete that they would guide almost every aspect of life. During the reign of the Emperor Justinian (A.D. 527-565), a great body of law was developed and written. It eventually became known as the Justinian Code. When this code was revised by Napoleon I of France in 1804, it became known as the Napoleonic Code. The Napoleonic Code is the basis of much of the law of Europe today as well as the laws of China, Japan, some South American countries, Mexico, and the state of Louisiana. Louisiana state law is based on the Roman law because the state was settled primarily by people of French descent.

Common Law The second great influence on the development of law was the English system of law. Developed in England following the Norman conquest of A.D. 1066, the English system of law is called common law. Common law refers to the body of legal decisions made by English court judges, under the authority of the

precedent: example or standard for deciding subsequent cases involving the same or similar facts

stare decisis: practice by wh ich judges follow precedents in previously decided cases

king, over a period of many years. Unlike the written Roman law, the common law in its early stages was oral. English judges traveled to various communities in their locality to hold court and try cases. They made legally binding decisions based on local customs and traditions but did not write down those decisions. As a result, common law is often referred to as the "unwritten law." Each case produced a new oral law that served as a precedent, an example or standard for deciding subsequent cases involving the same or similar facts. This practice of judges following the precedents established by previously decided cases evolved into a doctrine called stare decisis, which means "to stand by a decision which was previously decided." The doctrine generally demands that a prior decision be followed, but it can be overturned and a new rule established if there is a good reason to do so. For example, societal changes can determine that a prec- edent is no longer applicable, or a court may decide that a precedent is simply incorrect.

When Henry II became king in 1154, he institutionalized common law by organizing it into a unified body of law. He did this by incorporating and elevating local customs to the national level, thereby ending local enforcement of the unwritten customs dealing with criminal and civil matters. Laws were put in writing, arbitrary remedies (e.g., trial by having the accused snatch a stone from a hot fire) were eliminated, and the jury system was sworn on oath to decide criminal and civil cases rather than using an informal group of com- munity members. One of the first printed books containing important deci- sions of English court judges was Blackstone's Commentaries, published in several volumes from 1765 to 1769. Today, decided cases are printed in books called reporters.

The English common law system became the model for the legal system of the United States after its independence from England.

Sources of Law in the United States

LEARNING OBJECTIVE ~ Classify and explain the sources

of law in the United States.

constitutional law: law derived ·om the U.S. Constitution and the :onstitution of the individual states

Although much of our law originated in English common law, we also rely on other sources of law to meet the changing needs of our society. Our primary sources of law in the United States are constitutions, statutes, administrative reg- ulations, and court decisions (see Figure 1.2).

Constitutions A constitution is the fundamental written law of a state (e.g., the state in which you live) or nation (e.g., the United States). It defines the individual's rights and duties and describes the government's structure and functions, its powers and limitations, and the relationship between the government and individual citizens.

There are fifty-one constitutions in the United States: the federal or U.S. Constitution and one for each of the fifty states. Constitutional law is the law stated in these constitutions. Most state constitutions are modeled after the U.S. Constitution. The U.S. Constitution, the supreme law of the land, takes precedence over all state constitutions. No law, whether enacted by Congress or by a state legislature, may conflict with the basic principles of the U.S. Constitution. If it does, a court may declare the law invalid or "unconstitu- tional" and thus unenforceable. Each state has its own constitution, which is the supreme law within its boundaries. If a state or local government passes a law that conflicts with the state constitution, that law may also be declared invalid by a court of law.

Constitutional law evolves primarily from judicial interpretation of the meaning of the Constitution as issues arise. Because the Constitution is written in broad, general terms, interpretations are necessary to allow for unanticipated

statute: law passed by legislative bodies rather than by the courts

act: law passed by Congress

ordinance: law passed by local governments such as cities, towns, and villages


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decisions including court interpretations of federal and state statutes and

Sources of Law in the United States


Administrative Regulations

circumstances. For example, the Fourth Amendment to the Constitution protecL people from unreasonable searches; the term reasonable search, however, is nor spelled out. In a landmark case, the U.S. Supreme Court interpreted this amend- ment. The interpretation stated that if a lawful custodial arrest has taken place. a full search of the person is permitted and is considered a "reasonable" search under the amendment (United States v. Robinson, 414 U.S. 218).

Statutes Statutes, also called legislation, are laws that appear in specific written form. having been formally passed by legislative bodies rather than stated as opinion by judges in court cases. Legislative bodies exist at all levels of government. At the federal level, legislation passed by Congress is called acts. At the state level this same legislation passed by the legislatures of the fifty states is referred to as statutes. Legislation passed by local governments (cities, towns, and villages) is called ordinances (zoning laws, for example). In contrast to common law court cases, which are written as opinions of judges explaining court decisions and are called holdings, statutes are written in textbook form. Statute law is frequently referred to as the written law.

The modern emphasis is on statutory law, especially on its more specialized subfields, such as bankruptcy laws, workers' compensation laws, consumer pro- tection laws, marriage and divorce laws, security regulations, and laws dealing with the sale of goods. One reason that statutory law is emphasized is that legis- latures usually take the initiative in identifying and acting on issues that result from the numerous technological, social, and economic innovations in our society. The laws legislatures make can be sweeping and comprehensive and, if necessary, can be enacted rapidly. In contrast, the courts deal only with issues that arise in

case law: law arrive,d--at through court decisions

actual cases brought before them by individuals and businesses. The journey of a case through the courts is often slow, and the issues the case focuses on are generally narrow in scope. Changes in the law that result from such cases are usually small and are limited to a specific situation.

Congress has the power to pass laws that have national importance. Such ar- eas as national defense, commerce between the states, and postal regulations are all within the power of Congress to regulate. As stated earlier, these federal laws take precedence over any state laws. State and local governments may pass laws involving matters over which Congress does not exercise control. For example, state and local governments have enacted laws and regulations covering such matters as marriage and divorce, zoning, vehicle and traffic control, and taxation for local purposes. Just as state laws may not conflict with federal law, local laws may not conflict with state or federal law.

Court Decisions Although the modern emphasis is on statutory law, still a substantial portion of U.S. law is created through decisions that judges and juries hand down in court cases. This law is known as case law, a modern version of the common law of England. Consequently, common law doctrine and principles are still an important part of the system. In some court cases, no statute may exist governing the dispute. Or if a statute does exist, it could be interpreted in different ways because of the language used by our lawmakers. In such cases, federal and state courts must decide what the law is. The meaning is left in question until it becomes the subject of litigation. A court will then decide the matter and set forth in a written opinion the rule or principle on which its decision was based.

These court decisions produce precedents that have the force of law. Other courts will follow these precedents when they decide similar cases in the future. The advantage of the stare decisis concept (the practice of following previous decisions) is predictability; it enables people to act in a certain way, knowing that they can rely on established law. Judges very seldom overrule previous precedents because the risks of a new opinion being overturned by a higher court are substantially increased. Sometimes there is no existing precedent, as with emerging cases dealing with disputes in cyberspace (the Internet). Under these circumstances, a judge's written opinion, which ultimately becomes the decision in a case, must contain a solid legal argument justifying the decision. This decision may in turn become a standard precedent for judges to use in deciding later cases.

You can see that although legislatures are primarily responsible for passing laws, courts in effect pass laws by interpreting or modifying existing laws or by making decisions that create new precedents. These precedents are as effective as laws passed by the U.S. Congress or by state legislatures.

A classic example of case law is Robinson v. California, decided by the Supreme Court in 1962 (370 U.S. 660). Robinson's conviction by the Municipal Court of Los Angeles as a narcotic addict was based on a California statute mak- ing it a criminal offense (punishable by a jail sentence) for a person to "use, or be under the influence, or be addicted to the use of narcotics." A higher state court affirmed the lower court's decision. Upon appeal to the U.S. Supreme Court, the decision was reversed on the theory that being "addicted to the use of narcotics" was an illness. The court reasoned that a statute (law) that made a criminal offense (punishable by a jail sentence) of that or any other illness-such as insan- ity, leprosy, or venereal disease-is unconstitutional because it would be an infliction of cruel and unusual punishment and would thus violate the Eighth and Fourteenth Amendments to the Constitution. The significance of Robinson v. California is that it is now a precedent case: The high court's decision-namely, that narcotics addiction is no longer punishable as a crime-represents case law

administrative regulation: rule made by administrative agencies that has the same force and effect as statutes and court decisions

in the United States. It should be noted at this point that as the result oi .=: trial court case decided in 1997 (Korczak v. the United States, 124 F. :,_ Fed. Cir.), U.S. Supreme Court cases are valid as precedents regardless o: -· of the cases until overruled by the Court itself, by a constitutional ame;:;.C--=_ or by Congress.

The Internet has caused courts to expand the term precedent to inc.~ some cases) unpublished opinions. Unpublished opinions are now aYaL.: free legal databases to any person who is curious about the law or i- - legal help. Even attorneys frequent these databases. At first, courts did n-- unpublished opinions as precedents nor were attorneys allowed to refer : - - opinions at trial. In 2006, however, the U.S. Supreme Court allowed ar:u_ . to refer to unpublished federal judicial opinions in all federal courts b~ in 2007.

Administrative Regulations It is impossible for legislatures to make all the necessary rules or for cou.::: handle all of the cases. Consequently, a great deal of the regulation of indr als and businesses in the United States today is done by administrative age.:::..:r:._ at the federal , state, and local levels. These agencies have been delegate..: -· power to make rules called administrative regulations, which have the force and effect as statutes and court decisions. In addition to making these agencies can also take legal action against violators of their rules in the same way that courts do. Agencies often begin their legal action after ;.- conducting an investigation of individual's or organization's records and a-- documents , either through a subpoena or by going on-site by first obtaining search warrant.

The federal agencies are created by Congress. The Federal Trade Commi~ is an agency created by Congress to regulate commercial activities and pre'-e-- unfair trade practices. The Federal Communications Commission regulates vari forms of communication, including radio and television. Protecting the em·ir .. - - ment from abuse is the task assigned to the Environmental Protection Agency.

State administrative agencies are created by state legislatures. The Bureau -- Motor Vehicles, one such agency, develops rules and regulations for the opera- tion of motor vehicles within each state.

Local administrative agencies are created by gty councils or by town or Y!l- lage boards. A zoning board, one example of a local agency, regulates the heigh:. size, uses, and suitability for particular purposes of residential and commercia land and buildings.

Although administrative regulations have the same force and effect as stat- utes and court decisions, these rules can be challenged in the courts. A business or an individual may challenge them on the basis that they are unconstitutiona:. vague, or beyond the power granted to the agency.

Over the years, administrative agencies have grown rapidly. A major rea- son for this growth is that many laws needed to deal with …