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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.

Cengage Advantage Books


he Legal System in the United States d Its Constitutional Foundation


... he Role of the Judiciary in the United States

- u ucture of the U.S. Judiciary Tur isdiction ubject Matter Jurisdiction

Personal Jurisdiction 'urisdiction in Cyberspace

..,eState Court System -:-rial Courts of Limited Jurisdiction -mall Claims Court How to Make a Winning Case in Small

Claims Court Commercial Claims Court

rher Trial Courts of Limited Jurisdiction -rrial Courts of General Jurisdiction .._atermediate Appellate Courts and the Court

of Final Resort .Jrug Courts _ !ental Health Courts

e Federal Court System ~e Federal Court Structure Federal Trial Courts =.arermediate Courts of Appeal -:be U.S. Supreme Court

articipants in the Legal System -:be Role of the Attorney --:-" e Role of the Judge and the Jury

e Constitutional Framework of the U.S. Legal System

.=eparation of Powers - dicial Review __ -commodation of Interests - -igation

onstitutional Rights- The Bill of Rights 25


~ Suppose ', ~You're the


In this chapter, you will be introduced to the judicial branch of American

government, the courts. You will be given an overview of the courts, the

personnel who play primary roles in helping the courts to function prope

the types of cases that courts have the authority to decide. (It may surprise

that the U.S. Supreme Court will not hear every case that is presented for

consideration). The chapter concludes with some of the important

constitutional principles that have a significant effect on the U.S. legal syste~

and that sets this system apart from legal systems in other countries.

Facts Mason, a homeless person was charged with unlawfully entering Gormont's World of Entertainment situated in a large city. He entered after closing hours at around 2 A. M. without permission and stole several thousand dollars from vending machines, an open safe, and from several cash reg isters. He was taken into custody by the police and held for trial.

At Trial He appeared in court without funds and without an attorney and asked the court to appoint an attorney for him. His request was denied by the judge on the grounds that the state of Mississippi in which he lived provided attorneys only to indigent defendants charged with crimes that might result in the death penalty if they were found gui lty. Mason left to defend himself, was convicted and sentenced to prison. While in prison, he applied to the highest level court in his state (state supreme court) to have his case reviewed and overturned on the grounds that his constitutional rights had been violated. This request was denied. Mason then appealed to the U.S. Supreme Court. The U.S. Supreme Court accepted his case and ruled that his constitutional rights had indeed been violated.

Questions 1. Which of Mason's constitutional rights had been violated? 2. What document did Mason need to file with the Court to have his case tried

by the U.S. Supreme Court? 3. Was the U.S. Supreme Court required to take Mason's case?

The Role of the Judiciary in the United States ·- LEARNING OBJECTIVE~ Describe the role of the judiciary

in the United States.

In Chapter 1, it was pointed out that nonpeaceful means of settling disputes are not only unlawful, but could also create more trouble. Of course, two people en- gaged in a dispute could simply forget what happened and get on with their lives. Sometimes that is what happens. In other cases, what does a person do? One an- swer is to take the case to court. Remember, however, before a person can bring a lawsuit, the case to be presented must have merit; that is , (1) the case must be brought in good faith, and (2) the party bringing the case must have a factual basis for winning in court. Frivolous cases (cases with no merit) tie up an already overburdened legal system. Judges refer to frivolous cases as absurd. Take the case of the prison inmate who claimed his rights were violated because his cell mirror was too high to use while he shaved. Under federal law, fr ivolous litigation has consequences. One example is that the losing party must pay the prevailing party money for any damages suffered. Another federal law, aimed at attorneys, fines them for using frivolous arguments during any hearing or tr ial.

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"sdiction: power to hear and :::de a case

ding to sue: a person has = • mate issues giving him or her the ;al right to bring a lawsuit

- pel! ate court: court that hears ~als of lower court decisions

Under the system of government in the United States, the courts represent the judicial branch of the U.S. government. As individuals living in the United States, we are guided by the rule of law, the highest authority in our society, whether that society is a village, a town, a city, a state, or a nation (the entire country). No person or institution is above the law. While this may seem harsh, we in this country should feel comfortable and yes, safe, because law is subject to interpre- tation and its application does not necessarily have a guaranteed outcome. The courts are the testing ground for interpreting the rule of law and settling disputes through a fair and rational process- deciding cases that come before it and then rendering a decision. (The Constitution provides the framework for its decisions). This process allows a person to protect his or her interests but at the same time ensures that the results of a decided case also protects the common good, mean- ing the well-being of the individuals within the society where the case is being decided. Whatever the issue- civil or criminal liability of a wrongdoer, enforce- ability of a contract, or the resolution of a constitutional question-when the case is decided, the court will enforce the law by imposing punishment for a criminal violation, or in the case of a civil violation, by awarding damages to the injured party or granting relief in equity. Keep in mind that while U.S . courts are interpreting law, they are in many cases setting policy. They have, for example, decided important cases brought by special interest groups in such controversial areas as discrimination, abortion, and the environment.

Structure of the U.S. Judiciary The United States has two separate and distinct court systems: (1) the federal (national) court system established by the U.S. Constitution and the U.S. Congress and (2) the state and local court system established in each state under state law. With courts located throughout the country, principally in the larger cities, the federal court system uniformly follows the same rules and procedures. In con- trast, each state has its own court system with courts located in virtually every town and county. State courts handle over 95 percent of all cases such as traffic offenses, divorces, wills and estates, and buying and selling property because all these areas are governed primarily by state laws. Consequently, these are the courts with which citizens have the most contact. If there were no state or local courts, many cases could not be heard at all because the U.S. Constitution limits the cases that can be brought in federal courts. If you recall, O.J. Simpson's civil and criminal trials were both heard in California state courts. Although rules and procedures vary somewhat among the states, there are similarities between the two systems. Both systems have three levels of courts with different types of jurisdiction:

• trial courts, where cases start (lower courts) • intermediate courts called courts of appeals that review judicial decisions

and jury verdicts in the trial courts • courts of last resort, which hear further appeals and generally have final

authority in the cases they hear

Jurisdiction When a certain court case arises, jurisdiction will determine which of the many different kinds of courts operating at different levels will hear it. Jurisdiction is the legal authority of a court to hear and decide a case. Trial courts have origi- nal jurisdiction because they try cases for the first time. Keep in mind that to bring a lawsuit, a party must have standing to sue. This means that the plain- tiff (person bringing the suit) must have a good reason to do so (i.e., a personal interest in the outcome of the lawsuit, such as suffering harm from an assault or robbery).

The next level of courts above the trial courts is the appellate courts. These courts have appellate jurisdiction, or the authority to review cases that have

general jurisdiction: power of a court to hear almost any case brought before it

limited jurisdiction: power of a court to hear only certa in kinds of cases

already been tried in the lower courts and to make decisions about these - without holding a new trial. Appellate judges determine only whether err· law are made during a trial. They reach decisions by listening to the ora: a;-_ ments presented by the attorneys for the parties to the appeal, reading the ten information (briefs) presented by these attorneys, and reviewing the reco:~ the trial court proceedings. No new information such as additional facts or p:- is permitted. Appellate court judges may affirm the trial court decision, re,-e- it, or order a new trial. Further appeals in both federal and state courts are to the next level, identified in the above as courts of last resort.

At both the federal and state levels, there are civil and criminal courts. C courts handle cases involving disputes between individuals, between a pers and a business, or between businesses. Disputes are usually settled by an aw~ .. of money damages or a relief in equity to the "winning party." Criminal cou: hear cases between a governmental unit- such as the state or federal governme::;- (acting for society)- and a person or business accused of a crime. Crim=-- courts determine whether a crime has been committed and also set punishme-- for those who are found guilty of committing a crime (most criminal cases t:ti:e place in state courts). Finally, a few special courts at both the federal and sta:~ levels deal only with certain types of cases.

Subject Matter Jurisdiction No court can decide every kind of case. A case can be properly brought in a certain court only if the court has jurisdiction over the person and over the subject matter of the dispute. Jurisdiction over the subject matter means tha: the court can hear and decide only certain types of cases. Some courts han~ general (or unlimited) jurisdiction, the power to hear and decide almost an:· type of case brought before them; other courts have limited jurisdiction, the power to hear only certain cases limited by type (such as civil or criminal), by the amount of money involved, and by the geographic area. Some courts , fo r example, can handle cases involving civil money damage claims but only up ro a certain amount and only within city or county limits. Other courts can han- dle cases involving civil money damage claims of any amount within a wide geographic area. Still others deal only with specific disputes, such as those relating to juveniles.

Otero wished to sue Clawson for $100,000, claiming that a permanent injury resulted from a car accident due to Clawson's carelessness. Both parties reside in New York State, County of Monroe, Rochester, New York. This case lies within the jurisdiction of the New York Supreme Court Monroe County, which is a trial court in that state.

In this example, if Otero goes to the wrong court, proper jurisdiction will not exist, and she will not be able to obtain a valid hearing. Moreover, if the case is heard in a court without proper jurisdiction, the decision handed down will be unenforceable.

Personal Jurisdiction "Jurisdiction over the person" means that a court can hear and decide a case because it has authority over the parties in the case, generally in a certain geographic area. The party who brings the case into court automatically comes under the court's jurisdiction. The defending party is brought under the court's jurisdiction through a legal process that describes the nature of the complaint and names the person or legal authority requesting that the case be brought to court. For example, the issuance of a summons (described in Chapter 5) in a civil lawsuit brings the defending party under the jurisdiction of the court. Personal jurisdiction includes a person domiciled in a particular state and, according to

the U.S. Supreme Court, a nonresident temporarily present if the summons is served in that state.

Lloyd sued Schnell to recover a sum of money for a financial loss he suffered when Schnell backed out of a legal contract. Both parties live in the state of Nevada. Lloyd should file a lawsuit in the appropriate Nevada court and then issue a summons to Schnell so as to bring Schnell within the jurisdiction of that court.

In a criminal case, an arrest (described in Chapter 3) made by means of an arrest warrant issued by a judge brings a person accused of a crime (the defend- ing party) into court.

Jurisdiction in Cyberspace The term jurisdiction as described on pages 27 and 28 is a preelectronic age def- inition and generally refers to a court's power to hear a case and settle a dispute involving persons or property located within state boundaries but generally not beyond. This fundamental principle was established in 1877 by Pennoyer v. Neff, 95 U.S. 714. Since then, several cases have extended jurisdiction outside the boundaries of a particular state by enacting long-arm statutes based on political and commercial reality. There was pressure to provide citizens and businesses of a particular state with the ability to sue nonresidents in local course. For exam- ple, in 1945, the case of Washington v. International Shoe Co., 326 U.S. 310, established the "minimum contact" rule. In this case, the court held that a state may sue a nonresident corporation provided the corporation has regular and sys- tematic contacts within the state bringing the lawsuit and provided the exercise of jurisdiction does not violate the rules of due process and fair play. Several cases since International Shoe have invoked the minimum contact rule and allowed lawsuits involving people and businesses in other states. So the question arises: Does cyberspace require the formal creating of a separate jurisdiction? The answer is probably no because it has become clear from decided cases that a defendant does not have to be physically present in a particular locale for a per- son or business in one state to do business with a person or business in another state. However, for those situations in which U.S. laws are impossible to apply to the Internet without creating substantial limitations on the technology, cyber communities have been formed. Similar to an association of people, the cyber communities or organizations create and define laws applicable to their commu- nity and work with other communities to resolve issues when there are differ- ences through a process called computer-mediated communications.

eState Court System

LEARNING OBJECTIVE~ Outline the structure of the state

and local court systems found in most states in the

United States.

As noted earlier, each state, as well as the District of Columbia, has its own court system established by legislation and as well as a state's constitution. It is impor- tant to recognize that the names of the individual courts handling the same types of cases vary from state to state. Nevertheless, it is possible to make some general observations about the organization of state courts. Each state court system in- cludes (1) trial courts of limited jurisdiction, (2) trial courts of general jurisdic- tion, (3) intermediate appellate courts (but not in all states), and (4) an appellate court of final resort, which is often called the supreme court. The supreme court is analogous to the United States Supreme Court. Figure 2.1 shows a typical state court system. The vast majority of legal disputes in the United States are handled at the state court level. State courts have authority to decide nearly every type of case, subject only to the limitations of the U.S. Constitution, their own state con- stitutions, and state law. A state court decision generally is not binding on the courts of other states.

• A unit within each District Court but staffed with its own bankruptcy judges.

•• Has limited appellate jurisdiction from U.S. Bankruptcy Courts.

(limited appeals)



FIGURE 2.1 The Federal and State Court Systems

.. A case may be "removed" from a state trial court of general jurisdiction to the U.S. district court if the case originally could have been brought in federal court.

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small claims court: court that hears - 'lor civil cases involving small ~"Tlounts of money

Trial Courts of Limited Jurisdiction Trial courts of limited jurisdiction generally try traffic cases, as well as minor civil and criminal cases. These courts have such names as justice court, magis- trate's court, and municipal (city) court.

Small Claims Court A court of limited jurisdiction that is of special interest is the small claims court, sometimes called magistrate court or justice of the peace court. If you are in a seri- ous dispute with someone, you would not file in a small claims court. Small claims court is a local court established to provide a fast, informal, and inexpensive forum for resolving certain types of small disputes on civil matters. The average case is heard within thirty to ninety days after the complaint is filed. The actual hearing generally lasts one hour or less (sometimes only fifteen minutes), and there is no jury. It may even be possible to have a proceeding conducted after normal working hours. A criminal case cannot be settled in a small claims court. Small claims courts exist in all states and commonly hear cases involving violation of contract rights (e.g., loan repayment), negligence, nuisance, minor personal injuries (e.g., automobile accident), landlord-tenant disputes, breach of warranty, and property loss or damage claims. Keep in mind that, while small claims court proceedings are informal, the judge will be applying the same laws to your case as if your case were being tried in a more formal court. Only an individual 18 years of age or older can sue another person or a corporation in small claims court. If you are younger than eighteen, your parent or guardian may sue on your behalf. Court procedures are established by state law, and there are differences in the operating rules of small claims courts from state to state, including the maximum amount for which you can sue. The one aspect that appears to be the most varied from state to state is where to sue. It could be in the county where you live or in the county in which the defendant (person being sued) resides or works or has a place of business; or you can bring suit where the disputed activity took place (e.g., where a contract was signed or in a case arising from a personal injury, where the accident happened), or where a corporation does business. Nevertheless, how to prepare and present a case properly is similar in all states. The average case is heard within thirty to ninety days after the complaint is filed. A typical small claims court case might be a suit by a tenant against a landlord who for no good reason refuses to return the tenant's security deposit.

Levin, a tenant, rented an apartment from Hale, the landlord, for one year. Levin gave Hale a security deposit amounting to one month's rent. At the end of the one-year lease, Levin moved out, but Hale refused to return the security deposit, claiming tenant damage beyond normal wear and tear. Although Levin proved she had not caused the damage to the apartment, Hale still refused to return the security deposit. Levin sued Hale in small claims court to secure the return of the security deposit.

Although the tenant in this example had a valid claim, she might have been discouraged from pursuing it in another court where legal fees and court costs might have exceeded the amount of the security deposit. Small claims court was a convenient, inexpensive way to recover her legitimate claim. Some other disputes that are commonly brought in small claims court involve breach of contract and damages to property claimed to be caused by a person's negligent actions. For example, the computer repair person you hired carelessly caused your hard drive to crash and ruin your computer.

Advantages of Filing a Small Claims Court Claim Although the rules vary from state to state, and although the court's jurisdiction is limited in both subject matter and dollar amount, there are three distinct advantages to taking a case to small claims court. First, technical rules of evidence

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and procedure normally followed in a court trial are not strictly applicaL' Second, the parties may proceed without attorneys, although most states do - ~­ bar attorneys from small claims court. (It has been noted by the National Cen- for State Courts that people who represent themselves in small claims court just as often without attorneys.) Finally, a dispute that can be resolved only court action remains economically feasible because such action does not im·o· attorneys' fees.

Limitation on Amount of Your Law Suit The maximum amount for which a person may sue in small claims court varie-s by state and may move upward from time to time. The range in many states fa' '- between $2,500 and $25,000, with a concentration in the $5,000 and $10,0 range. Be sure to check your state's small claims court amount before you file.

If you are seeking an amount that exceeds the small claims court limit fm· your state, you may still bring your case to small claims court, but if you wi:: your case, you will be unable to claim any amount over the jurisdictional limit.

You signed an agreement with a contractor to add a room to your house that you intended to use as a workout room. The cost was $40,000, which you paid upon completion of the room. One month later, you discovered deficiencies amounting to $5,000. The contractor refused to correct these deficiencies and so you hired another contractor to do the work and sued the original contractor in small claims court for the money. The jurisdictional limit in your state for bringing a small claims action is $2,000. Consequently, if you win your case, you will be «out" $3,000, and you will not be able to return to court again and demand this amount. You need to decide before you take action whether it is more important to collect what you can in small claims court or sue in a higher court on the chance that you will recover the total $5,000, but only after deducting attorney's fees and higher court costs.

Filing a Complaint A small claim is fairly easy to file. The injured party (the claimant or plaintiff simply goes to the small claims court clerk's office and fills out a complaint form stating the amount of money in dispute and the reasons for suing. (In many juris- dictions, a complaint form is available online, and in some states you are even allowed to submit the form online.) You will be asked by the court clerk to pay a modest fee. After the claim is filed, the court notifies the defendant (the person against whom the action is being brought), usually by certified mail within thirty days. The claims notice tells the defendant the date, time, and place where the case will be heard, a brief statement of the reasons the plaintiff is suing, and the amount of money involved. Keep in mind that you file a claim only if you have decided that you have a good case. Ask yourself, "Did I suffer real monetary damage, and did the person I plan to sue cause that loss?" Don't worry that you cannot define the legal theory on which to bring your claim. The judge will do that. Just be able to state the facts clearly. To illustrate, consider the following example:

You took your $1,500 tailor-made JOSEPH suit to Martin's Laundry and Dry Cleaning. The suit, only three months old, was returned with holes in the jacket and pants. In your complaint you might start off by saying: «[took one tailor-made suit to Martin's Laundry and Dry Cleaning, and it was returned in a severely damaged condition (holes in front of jacket and on left pant leg-photos attached). JOSEPH placed cost of repairing the damaged material at $350.

Keep in mind that the purpose of your complaint form is not to present evi- dence (this you will do at the trial or hearing) but simply to inform the defendant that he or she is being sued.

Court Procedures A trial (hearing) date is usually set within four to six weeks of filing. At the trial, the plaintiff (claimant) and defendant each has a chance to tell his or her story to the judge (without a jury) and to present evidence and/or witnesses. Keep in mind that while small claims court proceedings are informal, the judge will be applying the same laws to your case as if your dispute were being tried in a more formal court. Consequently, you are not going to get just a "Yes, you won," or "No, you lost" decision. If you are the plaintiff, you will present your case first. Be pre- pared with appropriate evidence on your behalf, and be brief and to the point. The judge usually has a crowded calendar and other people may be waiting to have their case heard after your trial is over. In the dry cleaning case, you could present either the suit or a photograph (most likely approach) of the damage, a canceled check for the purchase of the suit, and the bill from Martin's Laundry and Dry Cleaning indicating that you paid to have the suit dry-cleaned.

If it is an accident case, you may ask an eyewitness to appear on your behalf, or if the case involved a breach of contract, you would bring a copy of the writ- ten contract, unless the contract was oral; in the latter case, a witness to the con- tract would be helpful to you. If an eyewitness cannot attend or does not wish to appear on your behalf at the hearing, he or she may prepare a letter containing the relevant information (some small claims courts will not accept letters or writ- ten statements from witnesses). After hearing both sides of the argument, the judge considers the evidence and renders a decision. The decision will usually be mailed to the parties within a few days of the hearing. It would be rare for the judge to announce his or her decision immediately after the trial. Once the judge's decision is reached, it is entered in the court record and becomes officially known as a judgment, and the loser, who now owes money, becomes a judgment debtor.

Appeal The rules governing appeals vary greatly from state to state, so check your state laws to determine if you do have the right of appeal. A few states allow no appeal; a few other states allow either party to appeal. The common approach (most states) allows only the loser to appeal. If you defaulted (didn't show up for the hearing), you cannot appeal. In many states, appeals can only be based on a legal error or mistake (i.e., the judge incorrectly applied the law). For example, a defendant appealed claiming that, according to the laws of her state, she was entitled to a larger amount of damages than she was granted in a decision by the small claims court judge. The appeals court would hear this case based on mistake. A few states allow an appeal on the facts in the case, that is, that the judge came to the wrong conclusion in deciding who won the case. An appeal must be filed promptly, usually from ten to thirty days after the decision was made by the judge hearing the original case.

Collecting Your Small Claims Award The judgment you win (if you do) simply means that you have the right to col- lect the amount of money you were seeking from the defendant. Don't think, however, that you can just demand the money and you will receive a check in the mail from the defendant. You may receive that check, but most likely you will need to take legal action to collect what is owed to you because the defen- dant stated that he or she cannot pay or will not pay. Also, if the defendant has appealed, you will need to wait for the outcome of the appeal. If there is no appeal, you may then begin the collection process immediately; the judge will not participate in the collection process. Collecting the money is in your hands. Keep in mind that your judgment is valid for many years (in most states between ten and twenty years). You could start by sending a polite letter asking for payment. (Don't in any way attempt to harass the defendant into paying in the letter or go to his or her residence and verbally threaten him or her. If you

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