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Business Law

Principles and Practices

Goldman, A., & Sigismond, W. (2014). Business Law: Principles and Practice_ Western Cengage Learning.

Cengage Advantage Books

PRINCIPLES AND PRACTICES

vernment Regulation ol Business

.)-iAPTER PREVIEW

e Need for Government Regulation

e Authority of Government to egulate Business

eas of Government Regulation -~venting Monopolies ai ntaining Fair Competition

- .:..xing Business .><> ulating Crucial Industries

- eu ul ating Securities egul ating Corporate Conduct -eserving the General Welfare and the

Environment

ow Government Regulations Are '1forced

_m itations on Agency Powers .:ensing and Liability of Professionals

4 81

CHAPTER

HIGHLIGHTS

rn IJ IN A BUSINESS SENSE

Government regulation of business has become a way of life in the Unrt&

States. This chapter discusses why government regulation is needed a,..

such regulation protects the rights of business owners as well as cons ' . ....-.:.

employees, and stockholders. Under the constitutional form of govern!T'e

the government must be supplied with the authority to regulate business -

authority comes from many sources, which are described in this chapter

There are many areas in which government seeks to regulate business. a

these areas are described in detail, with particular emphasis on the area

described as "Preserving the General Welfare and the Environment."

Regulations are meaningless unless they can be enforced. The chapter

concludes with a discussion of the ways in which government regulatiors =

enforced, and the agencies responsible for such enforcement.

Automobile sales were down in a certain city because of economic problems. The owner of one of the leading car dealerships set up a meeting with the owr=:: of all the other car dealerships to see what could be done about the problem . They decided to act as a group to promote the sale of cars by agreeing to set a car prices at a uniform level of 5 percent below the sticker price and advertise this in the local papers. Complaints were made that this was illegal price fix ing and restraint of trade.

Questions 1. Assuming that their actions did not violate any laws, was this an eth ica

practice? 2. What is wrong with businesses trying to promote sales and help potentia.-=

buyers using this type of sales pitch? 3. Would your answer be different if the dealerships had only decided to

cooperate in marketing but had not entered into a price agreement?

Other Ethics Questions for Discussion 1. How far should government go to restrict trade when the public might ber:=

from certain actions that might be considered restraints of trade? 2. How do you feel about the need for government restrictions on monopoly

power that results from great efficiencies and quality merchandise produce by a business?

The Need for Government Regulation

LEARNING OBJECTIVE c Summarize the need for

government regulation of business.

Businesses in the United States opera te on the private enterprise system means that private businesses compete in the marketplace and their succ determined by the qualit y and price of goods and services they offer. Fo: system to work, the rights of individual businesses must be protecre- guaranteed .

Government regulation is designed to accomplish this protection. Reg protects the rights of each business ow ner so that competition is mainta i~~ also protects the rights of consumers, employees, and in the case of corp ora stockholders .

e Authority of Government to Regulate Business

EARNING OBJECTIVE~ Describe the difference between

interstate and intrastate commerce.

ce power: power of a state to ect the welfare of its citizens

state commerce: business ity solely within one state

rstate commerce: business vity conducted in two or more

:;.es

The authority of government to regulate business is found in Article 1, Section 8, of the U.S. Constitution, known as the commerce clause. It is also derived from statutes passed by Congress or state legislatures. It may come from court decisions that inter- pret the statutes passed. It may also arise from regulations or decisions of adminis- trative agencies created to apply the statutes regulating business.

Because business affects the life of almost every person, both state and federal governments have exercised great powers to control and regulate it. Under the fed- eral system, state and local governments have a basic power to provide for the general welfare of the public, known as the police power. From police power comes the power to regulate business activity to promote the public interest. There are only two limitations on this power. The regulation must be needed, and it must be reasonable. In addition, state and local governments may regulate only the business activity conducted solely within that government's boundaries. Such business activity is known as intrastate commerce. Moreover, state and local governments may not regulate areas of business already regulated by the federal government.

If Congress passed a law prohibiting the employment of persons under 14 years of age, a state may not then pass a law prohibiting the employment of persons under 16 years of age. The congressional act has priority.

The federal government regulates business activity conducted in more than one state, known as interstate commerce. The power to regulate interstate com- merce comes from what is called the commerce clause of the U.S. Constitution: "Congress shall have the Power to regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes" (italics added). As a matter of practice and because of various court decisions, Congress has almost unlimited authority to control business. That control, however, must still be needed, must be reasonable, and must not violate anyone's constitutional rights.

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Select the best answer from those given . 1. The basic power of government to regulate business is called the:

(a) commerce power, (b) police power, (c) regulatory power, (d) public power .

2. Government regulation of business is designed to protect: (a) consumers, (b) employees, (c) stockholders, (d) all of these .

3. The power to regulate interstate commerce comes from: (a) the individual states, (b) the U.S. Constitution, (c) local governments, (d) the United Nations Charter.

reas of Government Regulation

LEARNING OBJECTIVE~ List the most important areas of

government regulation of business activity, and describe the

regulations under the Sherman Act, the Securities and Exchange Act, and the Sarbanes-Oxley Act.

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Both the federal and state governments (including local governments) regulate almost every aspect of business activity. The regulation we discuss in this chapter affects business itself, and its ultimate goal is the protection of the public by maintaining competition and free trade. The most important areas of regulation are preventing monopolies, maintaining fair competition, taxing business, regulating crucial indus- tries, regulating securities, and preserving the general welfare and environment.

Preventing Monopolies A monopoly is a condition in which competition is suppressed by act or agree- ment. If permitted to exist, a monopoly harms the public as well as individual

monopoly: limiting of competition by act or agreeme nt

antitrust laws: laws that prohibit monopolies

market allocation: agreement by co mpetitors not to compete in ce rtain ma rkets

businesses. Both the state and federal governments have enacted laws top:-~ monopolies. These laws are known as antitrust laws.

Most of the antitrust activity is at the federal level and is based on t he ~. man Act, passed by Congress in 1890. This law prohibits any monopolies o: acts that might lead to a monopoly. A violation of the acts is a criminal vio'- the penalty being a fine, imprisonment, or both. Federal courts can enj oin tions of the act and can impose triple damages for violations of it. The Cla Act, enacted in 1914, prohibits a merger of corporations in interstate comr::..:1 if it would tend to create a monopoly.

Not every monopoly is prohibited, only those that arise from unlaw- unreasonable acts.

Richards Trucking Corp. operated in three states. Because it was effie had good customer relations, and was cost conscious, it took over mo than 90 percent of the business from its competitors. This business resulted in a monopoly, but not one that was prohibited.

Maintaining Fair Competition Unfair competition hurts small businesses and results in higher prices for cons Many laws and regulations have been passed to prevent unfair competition or activity that might prevent the private enterprise system from functioning .

The Sherman Act prohibits any contract, combination, or conspiracy in resrr of trade. Its purpose is to prevent businesses from combining their efforts to - competition and increase their share of the market. One of the most corn;:;. practices that the act seeks to prevent is price fixing. Businesses often tr control the market by setting common prices for goods and services. Price fu is a violation of the Sherman Act, regardless of whether the prices set are fa -- unreasonable.

The act also prohibits an indirect form of price fixing called market allo ca In this situation, competitors divide a market based on geography, popula product type, or potential customers and agree not to compete with each oth those markets.

Ace Bicycle Co. and Zebra Bicycle Co. agree that Ace will have an exclusive right to sell bicycles in California, whereas Zebra will have similar exclusive rights to sell in Texas. This practice is illegal under t Sherman Act.

To show a violation of the Sherman Act, there must be proof of the im-c. ment of multiple parties and an agreement, express or implied, to restrai n trJ Not every restraint of trade is a violation, only an unreasonable one, dep enc on the purpose and the ability of competitors that challenge the restraint. T:- are some actions, called per se violations, that are such obvious violations - they are deemed automatic violations. They include three types of re stra horizontal, vertical, and group boycott. A horizontal restraint involves collus among competitors at the same level, for example, manufacturers. A ver: restraint involves collusion among firms at different levels, for example, m-- facturers and distributors. A group boycott is an agreement among compen- not to buy from a particular seller or sell to a particular buyer.

The act only prohibits action by more than one concern. A single fir m - not be held to violate the act.

Premium Jewelry Company's policy was to sell to certain retail stores only. This would not be a violation of the act because Premium acted alone.

There are certain exceptions to the coverage of the Sherman Act. They take- form of exempting certain businesses from application of the antitrust laws cause of certain policy considerations. Labor unions, agricultural organizari

g arrangement: agreement - een a buyer and a seller requiring = ouyer, as a conaW1on ot sa're, 'to

other products by the seller

el usive dealing arrangement: :·eement between a buyer and a = er requiring the buyer to refrain :'11 buying a similar product from a :"'1petitor

and professional baseball teams are all exempt. Professionals-such as doctors, lawyers, and accountants- used to be exempt from antitrust regulation, but these exemptions are being eroded by judicial decision and government regulations.

The Clayton Act also prohibits certain practices that might reduce competi- tion. Among these practices are price discrimination and mergers or acquisitions of another corporation's assets or stock that might create a monopoly or reduce competition. The act also seeks to prevent tying arrangements and exclusive dealing arrangements that might reduce competition. A tying arrangement is an agreement in which a seller of products requires the buyer to handle additional products of that company as a condition of the sa!e. An exdusive dealing arrangement is an agreement in which a seller of a particular product requires a buyer to agree not to purchase a similar product from a competitor.

The Robinson-Patman Act of 1936, an amendment to the Clayton Act, pro- hibits specific types of price discrimination, such as selling goods and services at prices designed to eliminate competition.

Adams owned a chain of department stores in several states. To attract customers and harm his competitors, he began to sell all furniture at cost. This practice is unlawful because it is an unreasonable act designed to eliminate competition. Smaller stores could not do the same thing and remain in business.

Other unfair methods of competition are prohibited by the Federal Trade Commission Act of 1914. The act established the Federal Trade Commission and gave it the responsibility to prevent "unfair methods of competition in com- merce, and unfair or deceptive acts or practices in commerce." One prohibited method is business defamation, such as spreading a damaging rumor about a competitor to reduce competition. Malicious competition, which involves acts done solely to eliminate a competitor, is also prohibited.

Government also maintains fair competition by making the public aware of prices of merchandise so that comparisons can be made among competing prod- ucts or businesses. Local governments often require labels or signs that are clearly marked to indicate the total and unit costs of various products. As long as the regulations are reasonable, they will be upheld.

Taxing Business Another important area of government regulation is taxation of businesses. Taxation involves every aspect of business and affects business decisions on every level.

One important tax is the income tax. Whether a business operates as a sole proprietorship, a partnership, or a corporation, a tax on income limits the amount the business may spend or may return in the form of profits. Many busi- ness decisions are based on ta x consequences.

Government also regulates by means of the sales tax. Although this tax is passed on to the consumer, its presence affects sales and therefore also affects the profits of the business producing or selling the item that is taxed. Similarly, pay- roll taxes also reduce profits and have an important effect on spending and other business decisions.

Regulating Crucial Industries Some industries are subject to unusual government regulation because their products and services are crucial to the public welfare. By necessity, these companies are allowed to operate as monopolies. Public utilities, such as elec - tric and gas companies, are one such example; it would be impractical to have three electric companies operating in the same city. In return for their status as monopolies, public utilities are regulated very closely at the federal and state levels. Areas of regulation include rate charges, profits, advertising, and environmental effects.

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Other industries, such as transportation and communication companies. - considered semimonopolies and are also subject to extensive governmental re= lation. Their services are crucial for our well-being, and at the same time , o limited number of them can operate in a given area at any one time. For econo and safety reasons, for example, only a certain number of flights can opera~= the same time in the same area. The radio wave spectrum is limited and - accommodate only a limited number of radio and television stations. s~ deregulation has taken place. Although the airline, motor carrier, and rai lr industries-which operate interstate- have been deregulated with regar· rates and routes, they are still subject to regulation in the areas of passe r:.=- safety, advertising, and prevention of monopoly practices.

Regulating Securities The securities industry is one of the most heavily regulated industries in :' United States. The need to protect the public is so great that both the orig=- issue of securities and their subsequent transfer are regulated at both state -- federal levels of government. State laws do help to protect buyers, but they~­ not as effective as federal legislation. State laws are not uniform, and fr au.: lent promoters can move from state to state to avoid compliance. To pre,-=- this sort of abuse and to achieve some degree of uniformity, many states ha adopted the Uniform Securities Act. This act requires full disclos ure - prospective purchasers of all relevant information regarding a security. It a requires securities salespersons to register and obtain a license, and it provi.- for injunctive relief and criminal penalties for those who engage in frau du!, sales of securities.

It is at the federal level, however, that the most effective regulation t place. The stock market crash in 1929 and the resulting depression emphasiz= the need for uniform securities regulation on a national basis. In response , Cc- gress enacted the Securities Act of 1933. The Securities Exchange Act of 19.? was passed to offer additional protection.

The 1933 act was designed to ensure that a prospective investor will rece the information she or he needs to make an informed decision on whether to , _ a specific security. The act also prohibits fraud and misrepresentation in the of securities. It covers only initial issues of securities; it does not cover subsequ~ trading.

The main purpose of the 1934 act is to protect the buyer after the ini issue of a security. It requires registration of a security prior to an offer - sell. It also requires annual reports containing all relevant information ab a company and its securities, including the sale of major assets, managem changes, and litigation by and against a company. The 1934 act also esra lished the Securities and Exchange Commission (SEC), the independent reg_ latory body charged with enforcing the provisions of both the 1933 an d -· 1934 acts . The SEC regulates the disclosure of facts regarding offerings securities, investigates securities fraud, and regulates the trade of secu ri on stock exchanges. Because information about securities can be sent a u- quickly to potential investor and investment personnel by e-mail, the Inte r;:;::- and faxes , the SEC has issued guidelines for the dissemination of informa by electronic means.

Investment companies, particularly mutual funds, are regulated by - Investment Company Act of 1940. This law provides for SEC oversight of inY ment company activities and requires registration of offerings.

Not all securities are regulated by these laws. It would be too cumbers and expensive to have small-volume issues subject to this type of regulation. addition, regulation is not necessary when the investors involved are extrem::- knowledgeable about the securities being issued. For this reason, there are number of situations in which the sale of certain securities is exempt fro m - provisions of the 1933 and 1934 acts . Some securities are exempt from the

trading: trading in securities eone having information not

- e to the public

based on who issues them, for example, securities issued by government organi- zations, banks, not-for-profit groups, and policies and annuities issued by insur- ance companies. Other securities are exempt because of their nature, including securities of corporations with limited assets, a limited number of stockholders, stockholders who all reside in the same state, and securities with a value below a certain amount.

The main purposes of government regulation are to provide full disclosure of information and to prevent fraud and misrepresentation. The SEC is responsible for setting standards for disclosure, investigating fraud, regulating the activities of brokers and dealers, and regulating the trading of securities. Regulation does not provide an eva luation of the securities themselves. It is up to the investor to decide whether it is worthwhile to buy a certain security.

In recent years, the SEC has been increasingly involved in regulating insider trading. Insider trading is trading in securities by those who, because of their position in a corporation, possess information not available to the public that may affect the value of the corporation's stock. The Securities Exchange Act of 1934, through Section lOB of the act and Rule lOb -5, makes liable those corporate officers, directors, stockholders, and others who use inside information for their own benefit when trading in the securities of their corporation. Under the act and subsequent legislation, those found to have traded using inside information may be assessed civil penalties, fined, and given jail terms . Rule lOb -5 applies to almost every type of security traded on any exchange, and it has even been extended to apply to outsiders (known as "tippees") who benefit from private information received from insiders, directly or indirectly. One theory for this rule states the outsider must know or be presumed to know that the person who gave him or her the information has breached some duty to the corporation, and therefore, the outsider has in effect participated in the breach. Another theory extend ing liabi lity to outsiders is that they should not benefit from information they have in effect stolen from the corporation. Whether a tippee can be held liable depends on what the tippee heard, who told the tippee, and whether the tippee knew that the tipper should not have passed the information along. Also, the law prohibits trad ing in "material nonpublic information." News about a merger or a potential bankruptcy would be clear-cut examples of such information. There are many gray areas, however.

At a restaurant, Jones told his friend that the stock of ABC Corp. would go up soon and his friend should buy it. This would be deemed mere rumor, and the friend's decision to buy stock would not be a violation of the law. The situation would be different if jones was the president of ABC and the friend knew it.

Under the 1934 act, officers, directors, and stockholders owning 10 percent or more of a corporation's securities must file reports with the SEC showing how much stock they own and what and when they have traded in those securities . Fail- ure to fi le such reports may result in the forfeiture of profits made from such trades.

Also, regardless of motivation or nonuse of insider information, any insider who purchases and sells, or sells and purchases, corporate stock within a six-month period may face the recapture by the corporation of any profits made by the insider on the transaction, regardless of whether or not the buying and selling were based on inside information.

In addition to the federal government, all states have laws regulating the sale of securities, known as blue sky laws. Like the federal laws, state laws also regu- late the actions of brokers and dealers and are designed to prevent fraud. Unlike federal legislation, state laws apply only to securities sold or offered for sale solely within a single state.

Private organizations also exert control over the securities industry. The ma - jor exchanges, such as the New York Stock Exchange and the American Stock Exchange, as well as the National Association of Securities Dealers, have enacted regulations to protect investors.

RYou t eac

Forge was having lunch in a restaurant one day when he saw that one of the c -= near him had dropped a sheet of paper on the floor. When he picked it up, he - that it contained a memo from the president of a major corporation indicating a-.::- major contract with the U.S . government . He brought 1,000 shares of that co m:::: and after news of the contract appeared in a local newspaper, he sold the stoc a huge profit. He was charged with violation of the insider-trading rules. Doez have a defense?

Questions 1. Suppose he has no connection with the company involved . Is he an inside

trader? 2. Suppose he is an employee of the company involved . Is he an inside trader? 3. Suppose he is married to the president of the company. Can he be cons ider•

an inside trader? 4. Suppose when he sold the stock he made no profit from the sale. Can he sti·· -

held liable for violation of the insider-trading rules?

Regulating Corporate Conduct As a result of a series of corporate scandals involving some major U.S. cor tions, Congress passed the Sarbanes-Oxley Act of 2002 to protect the public ~ stockholders from accounting errors and fraudulent practices. It set standard all boards of directors, management of public companies, and accounting fir:- lt also covers the independence of auditors, corporate governance, and fin an- disclosures . Three rules of the act deal with the destruction, alteration, or fa fication of records; how long audit records must be kept; and what record s n::- to be stored. The act covers issues such as auditor independence, corpor responsibility, enhanced public disclosure and the need to establish a pu company oversight board. The act requires certification of financial report - chief company officers, bans personal loans to any executive officer or direcr and requires the disclosure of compensation of and profits for chief execu officers and chief financial officers. It provides for disclosure of transacti involving management and principal stockholders, stronger internal contr disclosure of material changes in the financial condition of the company o- rapid and current basis, and requires the avoidance of a conflict of inter between officers and auditors, including a provision prohibiting accounting f from providing nonaudit services to companies . It imposes criminal and penalties for violations of securities laws and jail sentences and large fin e- - corporate executives who knowingly and willfully misstate financial stateme-- The act established the Public Company Accounting Oversight Board to set su dards fo r the audit of public companies.

Preserving the General Welfare and the Environment Based on the constitutional power given to Congress to provide for the gene- welfare, government has become increasingly involved in regulating busin~ The courts have interpreted the term general welfare in such a broad manner tl: almost any type of regulation is considered permissible. Regulation is consider::_ to be the price any business pays for the privilege of serving the public. It occ .. - at all levels of government, federal, state, and local.

One form of regulation is the licensing of certain businesses and professio;:; M ost states require licensing of automobile repair persons, real estate broke- attorneys, doctors , accountants, and so forth . The objective is to make sure r· only qualified persons serve the public in areas in which qualifications and co petence are important. Usually, a person must meet minimum educational sr.r dards, have a certain amount of experience, or a combination of both before s or he may obtain a license.

Another form of regulation controls the products a business may sell and the times it can sell them. Pharmacies, for example, may not sell certain products without a prescription. Other products, such as cigarettes and alcoholic bever- ages, may not be sold to minors. One of the most common regulations of this type is the prohibition against selling certain items on Sunday. These laws, known as Sunday laws, or blue laws, were passed to provide a day of rest in which business would be limited. Sunday laws vary from state to state but have been upheld by the courts as a proper exercise of a state's police powers. In ac - tual practice, they are gradually being repealed or ignored.

The need to protect the environment has affected every aspect of the opera- tions of many businesses. Regulations control where businesses may be located, how they may dispose of wastes, and what they may use for energy. A company may be prohibited from locating in an area if the noise from its machines will af- fect its neighbors or if disposing of its wastes will harm wildlife in the vicinity. Certain fuels may create a pollution nuisance as they are burned. All these fac- tors have an effect on the environment and are subject to government review and regulation.

Acme Music Company wanted to build a factory near an airport. Because the noise from the planes could seriously affect the hearing of Acme's employees, Acme could be denied permission to build in that area.

For centuries, common law provided many remedies to control harm to the environment. Suits for negligence or nuisance prevented pollution or provided damages payable by the offender. As the amount and types of pollution in- creased, however, statutes were needed to provide protection against all types of pollution.

Many states have enacted legislation dealing with zoning problems, noise and visual pollution, and waste disposal and recycling. On the federal level, Con- gress and the regulatory agencies have passed laws regulating air and water qual- ity, toxic -waste disposal , and radiation control.

Some of the most significant federal legislation includes the Federal Water Pollution Control Act, later changed to the Clean Water Act (to control of the discharge of polluted matter into the nation's navigable waterways); the Atomic Energy Act (to regulate and control radiation from nuclear faci lities); and the Clean Air Act (to regulate and limit air pollution). The National Environmental Policy Act of 1969 imposes environmental responsibilities on all federal agencies. It requires the preparation of an environmental impact statement that analyzes the impact on the environment of a governmental group's action.

Many federal agencies, such as the Nuclear Regulatory Agency (NRA) and the Food and Drug Administration (FDA), are responsible for protecting special aspects of the environment. The NRA, established in 1974, is an independent agency of the U.S. government. It oversees reactor safety and security, grants and renews licenses for reactors, and regulates the storage and disposal of spent radioactive materials . The Environmental Protection Agency (EPA), created in 1970, has the overall responsibility for protecting the environment and coordi- nating the environmental protection efforts of all federal agencies. Because of the importance of energy supplies and distribution in the U.S ., the Federal Energy Regulatory Commission (FERC) was established. An independent agency of the U.S. Department of Energy, it regulates the interstate transmission of natural gas , oil, and electricity, as well as regulates natural gas and hydroelectric proj- ects . It also reviews certain mergers and acquisitions and corporate transactions by electricity companies . Additional regulation, covering sales to consumers, is performed by state public utility commissions.

Visual pollution also affects the environment, and it is becoming a more important subject of government regulation. Federal, state, and local govern - ments regulate the size and location of commercial signs, particularly signs near state and federal highways and residential districts. Such regulations have

490

been upheld by the courts as long as they were reasonable and applied on a n discriminatory basis.

One of the major problems in this country is the large number of h az a:_ ous waste sites. These are expensive to study and clean up, and many pr~­ erty owners are unable to cure such a problem. In 1980, Congress pas sed- Comprehensive Environmental Response, Compensation, and Liabilit y _....__ more commonly called the Superfund . Under the act, the federal govern me has established a plan to identify hazardous sites, determine which s!- should be given priority for cleanup, and either get the property owner to ~ dertake the cleanup or contract for it at the owner's expense. A trust fun d ,<: Superfund, pays for the cleanup if the owner cannot. The fund is financ ed taxes on businesses with incomes over $2 million per year and by a t a x petroleum.

Other areas of government regulation include health and safety, consu- protection (Chapter 34), and employment practices (Chapter 23).

How Government Regulations Are Enforced ------------- .. - - LEARNING OBJECTIVE ~

Explain how compliance with government regu lations

may be enforced, and list the limitations on the power

of government agencies.

administrative agency: government body created to act in the public interest

Regulations are meaningless unless there is a way to enforce them. Business re _ ulation is considered so important that three different groups- administra agencies, courts, and the public- have the power to enforce compliance.

Administrative agencies are government bodies created by Congress or a ·~ _ islature to act in the public interest. They have legislative, executive, and judi- powers. In the legislative area, agencies make rules, set rates, and establish sr.: dards . Under their executive power, they enforce their own rules. In the judi- area, they determine whether their rules have been violated and impose pena: for any violations discovered. They have full power to have investigations ~ call witnesses.

Administrative agencies exist at all levels of government. Examples at the cal level are zoning boards, tax assessment review boards, and bridge and t authorities. At the state level are public utilities commissions, professional licex:: ing boards, and transportation authorities. At the federal level, administra agencies are part of larger government units. For example, the Occupati~­ Safety and Health Administration is part of the Department of Labor.

The most active and powerful agencies are the independent regulatory a5 _ cies created by Congress. These agencies have unusual power because they are dependent of Congress and do not have to account to anyone unless they exce their powers. Their decisions affect almost every aspect of business, ind ue - rates, health and safety standards, right to merge, territory of operations, c.. business practices. Examples of such agencies are the Federal Communicac Commission (FCC; television, radio, telephone); the Federal Reserve B-- (banks and money supply); and the SEC.

Regulatory agencies can enforce compliance with their regulations in nu ways. They may impose fines for violations of rules or get a court order to ;, such violations. They may revoke a business's license or refuse to renew its lie for failing to comply with the regulations .

TV station WHMC was required by its license from the FCC to broad· four hours of public-interest programming each week. IfWHMC fails provide this type of programming, the FCC could impose a fine or ref· to renew WHMC's license to broadcast.

The courts play an important role in enforcing compliance with regu la controlling business. Recall that the Sherman Act prohibits conspiracy in resrr_ of trade. A business that violated the act could be found guilty of committing a - era! crime, which is punishable by fines and imprisonment. The government

eble damages: punitive damages a arded for vio lation of some ;overnment reg ulations

to court and seek to have a fine imposed or to obtain an order preventing such violations (an injunction).

Members of the public who have been harmed by a violation of government regulations may enforce those regulations by suing the business that is responsi- ble. To make sure that the public is represented, the attorney general of a state may bring suit on behalf of its citizens for violation of regulations. In certain cases, the victim(s) may recover three times the amount of damages sustained . This amount is known as treble damages, a form of punitive damage s.

A railroad was permitted to charge only $0.06 per mile for transportation on its lines. It violated the regulation and charged $0.13 per mile. The attorney general of the state in which the railroad does business could sue the railroad on behalf of its citizens and seek treble damages for the excessive and unlawful rate charged by the railroad.

Limitations on Agency Powers Governmental agencies have extraordinary powers, but there are limits . Any per- son who believes that an agency has acted improperly or incorrectly in making a decision may sue in court for a review of that decision. In reviewing the action, the court will normally look at certain possible areas of agency error: (1) Did the agency violate due process? (2) Did the agency exceed its authority? and (3) Did the agency violate a state constitution or the U.S. Constitution?

Licensing and Liability of Professionals Professionals, such as doctors, lawyers, accountants, and architects , occupy a distinct position in society. Limited in number because of ex amination and li- censing requirements, they therefore enjoy something of a monopoly. To protect the public, all states require the licensing of professionals . In addition, most states re quire the licensing of other trade practitioners, including electricians, plumbers, real estate brokers, and stockbrokers. In some states, unlicensed per- sons or businesses may be fined. In other states, an unlicensed professional or businessperson may be unable to enforce an otherwise valid contract.

Most states, through statutes and judicial decisions, also protect the public by making professionals liable to their clients or customers for negligence and breach of contract.

Professionals may be held liable to clients for negligence in the performance of their services under the common law principles of negligence discussed in Chapter 4. These principles include the existence of a duty to act carefully, proof of a failure to act carefully, and proof that damage resulted from the negligence. A person damaged by improper or negligent services performed by a professional may sue for malpractice, the term for professional negligence.

Professionals may also be liable to clients for improper performance of services through breach of contract. Like parties to other types of contracts, professionals who fail to perform under the terms of the contract for services may be liable for damages for claims under that contract. Claims against pro - fessionals for breach of contract are subject to different standards of proof and time limitation periods than are those in a negligence suit . In most cases, those who sue professionals claim both negligence and breach of contract in their suits.

In addition to being subject to common law, professional conduct is governed by state statutes, judicial decisions, and codes of professional conduct. Profes- sional organizations, such as state bar associations, establish standards of conduct by which professional performance is evaluated. Violations of those standards may result in suspension or dismissal. Certain standards are also set by state and federal agencies. A violation of the standards is often proof of neg - ligence on the part of professionals in malpractice cases .

~~==============================~ ~ ~

Select the best answer from those given.

== ~ 1. Antitrust regulation at the federal level is based on the: (a) Sherman • ·· -

(b) Jackson Act, (c) Patman Act, (d) Reagan Act.

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2. The Federal Trade Commission Act of 1914 prohibits: (a) monopolies. (b) mergers, (c) price discrimination, (d) unfair competition.

00 3. Competitors who divide a market among themselves to lessen compe~ ·

are engaging in an illegal restraint known as: (a) a tying agreement,

~ (b) market allocation, (c) an exclusive dealing arrangement, (d) a mo---

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Key Points in Chapter • • • Government regulation of business is needed to maintain competition, which protects the rights of business own- ers, their employees, and their customers. Regulation is also needed to protect the rights of consumers, employ- ees, and stockholders .

Both the state and federal governments have the power to regulate business. A state's power is known as the police power and is concerned with intrastate (within one state) commerce. The federal government's power comes from the commerce clause of the U.S. Constitution.

There are certain industries, such as public utilities and transportation companies, whose services are so crucial to the public that they are subject to unusual government reg- ulation. In return, such businesses enjoy monopoly status. Areas of regulation include passenger safety, advertising, and prevention of monopoly practices.

The securities industry is one of the most heavily regu- lated industries in the United States. Although regulation occurs at both the state and federal levels, the most effective

regulation takes place at the federal level. The Securities of 1933 regulates the initial sale of securities; the Secu..- Exchange Act of 1934 regulates subsequent transi securities. Both acts are designed to prevent fraud and - representation and to protect potential buyers of sec Not all securities are subject to the provisions of the ~ ­ and 1934 acts.

Government has become increasingly involwc regulating business under the power given to Congr_ " provide for the general welfare. Such regulation occu;- alllevels of government and includes the licensing oi - tain businesses and professions, controlling what p. ucts a business may sell and when it may sell them. protecting the environment against pollution.

Government regulations may be enforced by a~ istrative agencies, the courts, and the public. The me-. of enforcement include injunctions, fines, revocat io- licenses to operate, and private lawsuits.

Important Le~al~~rm_s ____________________________________________ ___

administrative agency

antitrust laws

exclusive dealing arrangement

insider trading

interstate commerce

intrastate commerce

Questions and Problems for Discussion

market allocation

monopoly

police power

treble damages

tying arrangement

-- - ----------------------------- 1. Keystone Electric and Jansen Electric both served

the same city in different areas. T he City Council enacted a law requiring both companies to post their rates in letters to homeowners. Does it have the power to do this?

2. Allen Corporation, a jewelry manufacturer, advised its suppliers that it would purchase inventory only from one suppler. Was this a violation of the Sherman Act?

3. Two teams of the National Football League agrc __ to divide between them t he pool of potential players, to the detriment of the other teams. accused of violating the anti-trust laws, they claimed they were exempt from their provisionJ. this claim correct?

4. Frank was wa lking along a street and picked up discarded sheet of paper, a memo from an office- a public corporation describing a new produc t

about to be introduced. He purchased stock in the corporation and then sold it for a huge profit when the news of the new product came out. Can he be charged as an illegal insider trader?

- Explain what securities are exempt from regulation under the Securities and Exchange Acts. Explain why the Sarbanes-Oxley Act was enacted and what it provides.

- The City of Chicago issued bonds to finance its general operations. Must these bonds be registered under the Securities and Exchange Acts? The ABC Tool Corp. sold 10,000 shares of its stock to a private investor for $10 million. Must it register this stock with the SEC and provide the investor with information about the company and its stock?

9. Hokey and Company, an accounting firm, provided auditing services to Jones Pipe Company. One December, it provided every officer of the company with a free trip to Hawaii. Is this a violation of the Sarbanes-Oxley Act?

ases for Review

1. Naugles gave a ten-year restaurant franchise to Vylene. During the franchise term, Naugles built a new and competing restaurant nearby. The new restaurant featured lower prices and discount coupons, damaging Vylene's business and causing Vylene to file for bankruptcy protection. During the bankruptcy proceedings, Vylene argued that Naugles had no right to franchise another restaurant so close to Vylene's, even though the franchise agreement was silent regarding exclusive territories. Was Vylene's argument sound? (Vylene Enterprises, Inc. v. Naugles, Inc., 90 F.3d 1472)

2. Container Corporation and other container manufacturers agreed to exchange sales price information about certain products. The federal government brought an antitrust suit against the companies for violation of the Sherman Act based on evidence that exchanging this information had the effect of keeping prices stable. Would the exchange of this type of information be considered a violation of the antitrust laws? (United States of America v. Container Corporation of America, 89 S. Ct. 510)

3. Lockheed owned an airport serving carriers operating interstate. The city of Burbank passed a law banning jet aircraft from taking off and landing between certain hours. Lockheed sought an injunction, claiming that the law was unconstitutional on the grounds that the federal government has sole jurisdiction over flights in interstate commerce. Should Lockheed succeed? (City of Burbank v. Lockheed Air Terminal, Inc., 93 u.s. 1854)

. - 10. Copyrite Carbons sold carbon paper throughout

the United States. To increase its sales in one part of the country, it offered to sell carbon paper to local dealers at a rate lower than the rate charged to dealers in other parts of the country. May it do so?

11. Four companies manufacturing paint were concerned about new government regulations affecting their industry. They decided to join forces and form an association for the purpose of keeping track of and affecting new legislation. Would this association be an unlawful combination in restraint of trade?

12. The State of New York passed a law prohibiting the importation of liquor by private individuals. Does it have the authority to do this?

13. Magnus Corporation produced chemicals for the defense industries. Waste from the production was dumped into a nearby stream, causing severe pollution. What agency or agencies are responsible for handling this problem?

4. Mary Carter Paint Co. advertised that a buyer purchasing a can of its paint would get a similar can free. Actually, the price paid for the first can was higher than its normal retail price so that the second can was in effect not free. The FTC claimed that this was a violation of the Federal Trade Commission Act. Was this claim valid? (FTC v. Mary Carter Paint Co., 382 U.S. 46)

5. A Virginia county bar association established a schedule of minimum fees to be charged by lawyers within the county. The Goldfarbs interviewed several attorneys for legal services and were quoted the same fee . They sued the bar association, complaining that a minimum fee schedule was a violation of the Sherman Act. Is this claim correct? (Goldfarb v. Virginia State Bar et al., 95 S.Ct.2004)

6. Datagate repaired Hewlett-Packard (HP) computers, a service that HP also offered its customers. However, HP would only provide software support to those who used its hardware components. Datagate sued HP, arguing that this practice was an illegal tying arrangement. Is this argument correct? (Datagate Inc. v. Hewlett-Packard Co., 60 F.3d 1421)

7. David Findlay and Walstein Findlay were brothers who were in the art business together. They split up, and David opened and operated a store in New York for over twenty-five years under the name Findlay Galleries. Walstein, who had been in business in a different state, opened up a gallery next to his brother's store under the name Wally Findlay Galleries. David sued to enjoin him from

using the family name in the art gallery business. Should he succeed? (David B. Findlay, Inc . v. Findlay, 18 N.Y.2d 612)

8. Monroe County, New York, passed a local law requiring a sign on each fuel pump at a filling station showing the price, taxes, and octane rating. The law was passed to prevent fraudulent practices in the sale of gas. It also allowed one additional sign, but the sign could not exceed 18 inches by 18 inches. A gas station owner claimed that the portion of the law controlling the size of the sign was unconstitutional because it exceeded the police power of the municipality. Is the owner correct? (Stubbart v. County of Monroe, 58 A.D.2d 25)

9. Two competing publishers of bar review courses for the Georgia bar exam entered into an agreement in which one agreed not to compete in Georgia, and the other agreed not to compete outside the state of Georgia. As a result, the price to take the course in Georgia increased from $150 to $400. Law students who had contracted to take the Georgia course sued, claiming that the price increase was due to an agreement in violation of the Sherman Act. Are they correct? (Palmer v. BRG of Georgia, Inc., 498 U.S. 46)

10. Ford, Chrysler, and General Motors bought spark plugs for their cars from three or four independent

spark plug manufacturers. To gain an advanta=- Ford bought one of the manufacturers that ha~ percent of the market in the United States. T he United States brought suit against Ford, claim:;;. _ that this purchase would lessen competition a the independent manufacturers . Is the U.S. government right? (Ford Motor Co. v United States, 405 U.S. 562)

11. Continental had a franchise from GTE to sell~­ TVs. The franchise agreement stated that Continental could sell GTE's products only fro- the specific location described in the franchise agreement and nowhere else. When GTE tried : enforce the agreement, Continental claimed it an automatic (per se) violation of the Sherman _-. Is this claim correct? (Continental T.V. Inc. v. G- Sylvannia Inc ., 433 U.S . 36)

12. Khan leased a gas station from State Oil; the !e.- agreement required Khan to buy gasoline fr om State Oil. The agreement in effect set the price .r which Khan could sell gasoline to the public. Ir. lawsuit involving Khan's failure to make lease payments, Khan claimed that the price fixing arrangement was an automatic (per se) viol atio- the Sherman Act. Is Khan correct? (State Oil , .. Khan, 118 S.Ct. 275)

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