Business Law: Text and Cases

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Kenneth W. Clarkson University of Miami

Roger LeRoy Miller Institute for University Studies Arlington, Texas

Gaylord A. Jentz Herbert D. Kelleher Emeritus Professor in Business Law University of Texas at Austin

Frank B. Cross Herbert D. Kelleher Centennial Professor in Business Law University of Texas at Austin

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BUSINESS LAW, 11th Edition TEXT & CASES Legal, Ethical, Global, and E-Commerce Environments Kenneth W. Clarkson Roger LeRoy Miller Gaylord A. Jentz Frank B. Cross

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UNIT ONE

THE LEGAL ENVIRONMENT OF BUSINESS

Chapter Chapter Chapter Chapter Chapter

Introduction to Law and Legal Reasoning 2 Courts and Alternative Dispute Resolution 30 Court Procedures 53 Constitutional Authority to Regulate Business 77 Ethics and Business Decision Making 99

1 2 3 4 5

UNIT TWO

TORTS AND CRIMES

Chapter Chapter Chapter Chapter

Intentional Torts 122 Negligence and Strict Liability 144 Intellectual Property and Internet Law Criminal Law and Cyber Crime 184

6 7 8 9

121

U N I T T H R E E CONTRACTS AND E-CONTRACTS Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter

10 11 12 13 14 15 16 17 18 19

1

157

215

Nature and Terminology 216 Agreement 232 Consideration 250 Capacity and Legality 265 Mistakes, Fraud, and Voluntary Consent 286 The Statute of Frauds—Writing Requirement 303 Third Party Rights 321 Performance and Discharge 337 Breach of Contract and Remedies 353 E-Contracts and E-Signatures 370

UNIT FOUR

DOMESTIC AND INTERNATIONAL SALES AND LEASE CONTRACTS

Chapter Chapter Chapter Chapter

The Formation of Sales and Lease Contracts 392 Title, Risk, and Insurable Interest 421 Performance and Breach of Sales and Lease Contracts Warranties and Product Liability 458

20 21 22 23

UNIT FIVE

NEGOTIABLE INSTRUMENTS

Chapter Chapter Chapter Chapter

The Function and Creation of Negotiable Instruments Transferability and Holder in Due Course 504 Liability, Defenses, and Discharge 523 Checks and Banking in the Digital Age 544

24 25 26 27

391

437

485

UNIT SIX

CREDITORS’ RIGHTS AND BANKRUPTCY

Chapter 28 Chapter 29 Chapter 30

Creditors’ Rights and Remedies Secured Transactions 586 Bankruptcy Law 611

486

573

574

iii

iv

U N I T S E V E N AGENCY AND EMPLOYMENT Chapter Chapter Chapter Chapter

31 32 33 34

Agency Formation and Duties 638 Liability to Third Parties and Termination 653 Employment and Labor Law 673 Employment Discrimination 696

U N I T E I G H T BUSINESS ORGANIZATIONS Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter

637

35 36 37 38 39 40 41 42

723

Sole Proprietorships and Franchises 724 Partnerships and Limited Liability Partnerships 737 Limited Liability Companies and Special Business Forms 759 CORPORATIONS—Formation and Financing 773 CORPORATIONS—Directors, Officers, and Shareholders 796 CORPORATIONS—Merger, Consolidation, and Termination 819 CORPORATIONS—Securities Law and Corporate Governance 836 Law for Small Businesses 862

UNIT NINE

GOVERNMENT REGULATION

Chapter Chapter Chapter Chapter

Administrative Law 886 Consumer Law 905 Environmental Law 921 Antitrust Law 938

43 44 45 46

885

UNIT TEN

PROPERTY

Chapter 47 Chapter 48

Personal Property and Bailments 960 Real Property and Landlord-Tenant Relationships

UNIT ELEVEN

SPECIAL TOPICS

Chapter Chapter Chapter Chapter

Insurance 1008 Wills and Trusts 1027 Professional Liability and Accountability 1048 International Law in a Global Economy 1068

49 50 51 52

959 980

1007

APPENDICES A B C D E F G H I

How to Brief Cases and Analyze Case Problems A–1 The Constitution of the United States A–4 The Uniform Commercial Code A–12 The United Nations Convention on Contracts for the International Sale of Goods (Excerpts) A–176 The Uniform Partnership Act (Excerpts) A–180 The Revised Uniform Limited Partnership Act (Excerpts) A–190 The Revised Model Business Corporation Act (Excerpts) A–200 The Sarbanes-Oxley Act of 2002 (Excerpts and Explanatory Comments) A–210 Sample Answers for End-of-Chapter Questions with Sample Answer A–218

G L O S S A RY

G–1

TA B L E O F C A S E S INDEX

I–1

TC–1

Chapter 3 Court Procedures 53

The Legal Environment of Business 1 Chapter 1 Introduction to Law and Legal Reasoning

2

Schools of Jurisprudential Thought 2 Business Activities and the Legal Environment 4 Sources of American Law 6 The Common Law Tradition 7 The Common Law Today 13 Classifications of Law 14 How to Find Primary Sources of Law 15 How to Read and Understand Case Law 21 REVIEWING: INTRODUCTION TO LAW AND LEGAL REASONING 27 TERMS AND CONCEPTS 27 QUESTIONS AND CASE PROBLEMS 28 LAW ON THE WEB 29 LEGAL RESEARCH EXERCISES ON THE WEB 29

Chapter 2 Courts and Alternative Dispute Resolution 30 The Judiciary’s Role in American Government 30 Basic Judicial Requirements 31 C ASE 2.1 Mastondrea v. Occidental Hotels Management S.A. 32 The State and Federal Court Systems 37 Alternative Dispute Resolution 41 C ASE 2.2 Buckeye Check Cashing, Inc. v. Cardegna 44 E XTENDED C ASE 2.3 Morrison v. Circuit City Stores, Inc. 46 International Dispute Resolution 48 REVIEWING: COURTS AND ALTERNATIVE DISPUTE RESOLUTION 49 TERMS AND CONCEPTS 49 QUESTIONS AND CASE PROBLEMS 50 LAW ON THE WEB 52 LEGAL RESEARCH EXERCISES ON THE WEB 52

Procedural Rules 53 Pretrial Procedures 55 E XTENDED C ASE 3.1 Cruz v. Fagor America, Inc. 58 C ASE 3.2 Computer Task Group, Inc. v. Brotby 62 The Trial 66 C ASE 3.3 Novak v.Tucows, Inc. 68 Posttrial Motions 70 The Appeal 71 Enforcing the Judgment 72 REVIEWING: COURT PROCEDURES 73 TERMS AND CONCEPTS 73 QUESTIONS AND CASE PROBLEMS 74 SPECIAL CASE ANALYSIS: CRUZ V. FAGOR AMERICA, INC. 75 LAW ON THE WEB 76 LEGAL RESEARCH EXERCISES ON THE WEB 76

Chapter 4 Constitutional Authority to Regulate Business 77 The Constitutional Powers of Government 77 C ASE 4.1 Granholm v. Heald 80 Business and the Bill of Rights 83 C ASE 4.2 Bad Frog Brewery, Inc. v. New York State Liquor Authority 87 E XTENDED C ASE 4.3 Lott v. Levitt 88 Due Process and Equal Protection 92 Privacy Rights 94 REVIEWING: CONSTITUTIONAL AUTHORITY TO REGULATE BUSINESS 95 TERMS AND CONCEPTS 95 QUESTIONS AND CASE PROBLEMS 96 SPECIAL CASE ANALYSIS: LOTT V. LEVITT 97 LAW ON THE WEB 98 LEGAL RESEARCH EXERCISES ON THE WEB 98

Chapter 5 Ethics and Business Decision Making 99 Business Ethics 99 v

vi

E XTENDED C ASE 5.1

Baum v. Blue Moon Ventures, LLC 101 Approaches to Ethical Reasoning 103 C ASE 5.2 Fog Cutter Capital Group, Inc. v. Securities and Exchange Commission 104 How the Law Influences Business Ethics 106 C ASE 5.3 Guin v. Brazos Higher Education Service Corp. 109 Making Ethical Business Decisions 110 Business Ethics on a Global Level 111 REVIEWING: ETHICS AND BUSINESS DECISION MAKING 113 TERMS AND CONCEPTS 113 QUESTIONS AND CASE PROBLEMS 114 LAW ON THE WEB 116 LEGAL RESEARCH EXERCISES ON THE WEB 116 FOCUS ON ETHICS: ETHICS AND THE LEGAL ENVIRONMENT OF BUSINESS 117

Torts and Crimes 121 Chapter 6 Intentional Torts 122 The Basis of Tort Law 122 Intentional Torts against Persons 123 C ASE 6.1 Anderson v. Mergenhagen 128 Business Torts 131 Intentional Torts against Property 133 E XTENDED C ASE 6.2 Register.com, Inc. v. Verio, Inc. 134 Cyber Torts 136 C ASE 6.3 Fair Housing Council of San Fernando Valley v. Roommate.com, LLC 137 REVIEWING: INTENTIONAL TORTS 140 TERMS AND CONCEPTS 140 QUESTIONS AND CASE PROBLEMS 141 LAW ON THE WEB 143 LEGAL RESEARCH EXERCISES ON THE WEB 143

Chapter 7 Negligence and Strict Liability 144 Negligence 144 C ASE 7.1 Izquierdo v. Gyroscope, Inc. 145 C ASE 7.2 Palsgraf v. Long Island Railroad Co. 148 Defenses to Negligence 149 E XTENDED C ASE 7.3 Sutton v.Eastern New York Youth Soccer Association,Inc. 150 Special Negligence Doctrines and Statutes 152

Strict Liability 153 REVIEWING: NEGLIGENCE AND STRICT LIABILITY 154 TERMS AND CONCEPTS 154 QUESTIONS AND CASE PROBLEMS 155 SPECIAL CASE ANALYSIS: SUTTON V. EASTERN NEW YORK YOUTH SOCCER ASSOCIATION, INC. 156 LAW ON THE WEB 156 LEGAL RESEARCH EXERCISES ON THE WEB 156

Chapter 8 Intellectual Property and Internet Law 157 Trademarks and Related Property 157 C ASE 8.1 The Coca-Cola Co. v.The Koke Co. of America 158 C ASE 8.2 Menashe v.V Secret Catalogue, Inc. 161 Cyber Marks 164 Patents 167 E XTENDED C ASE 8.3 KSR International Co. v. Teleflex Inc. 168 Copyrights 171 Copyrights in Digital Information 172 C ASE 8.4 Sony BMG Music Entertainment v. Villarreal 176 Trade Secrets 178 International Protection for Intellectual Property 179 REVIEWING: INTELLECTUAL PROPERTY AND INTERNET LAW 180 TERMS AND CONCEPTS 180 QUESTIONS AND CASE PROBLEMS 181 LAW ON THE WEB 183 LEGAL RESEARCH EXERCISES ON THE WEB 183

Chapter 9 Criminal Law and Cyber Crime 184 Civil Law and Criminal Law 184 Classification of Crimes 185 Criminal Liability 186 Types of Crimes 188 C ASE 9.1 United States v. Lyons 190 Defenses to Criminal Liability 193 Criminal Procedures 198 E XTENDED C ASE 9.2 Fellers v. United States 198 C ASE 9.3 Miranda v.Arizona 200 Cyber Crime 204 REVIEWING: CRIMINAL LAW AND CYBER CRIME 207 TERMS AND CONCEPTS 207 QUESTIONS AND CASE PROBLEMS 208 LAW ON THE WEB 210 LEGAL RESEARCH EXERCISES ON THE WEB 210 FOCUS ON ETHICS: ETHICS AND TORTS AND CRIMES 211

vii

E XTENDED C ASE 12.3 Blackmon v. Iverson 255 Settlement of Claims 257 Exceptions to the Consideration Requirement 259 REVIEWING: CONSIDERATION 261 TERMS AND CONCEPTS 262 QUESTIONS AND CASE PROBLEMS 262 LAW ON THE WEB 264 LEGAL RESEARCH EXERCISES ON THE WEB 264

Contracts and E-Contracts 215 Chapter 10 Nature and Terminology 216 An Overview of Contract Law 216 Elements of a Contract 217 Types of Contracts 218 C ASE 10.1 Ardito v. City of Providence 219 C ASE 10.2 Gar y Porter Construction v. Fox Construction, Inc. 221 Quasi Contracts 224 Interpretation of Contracts 225 E XTENDED C ASE 10.3 Wagner v. Columbia Pictures Industries, Inc. 226 REVIEWING: NATURE AND TERMINOLOGY 228 TERMS AND CONCEPTS 229 QUESTIONS AND CASE PROBLEMS 229 SPECIAL CASE ANALYSIS: WAGNER V. COLUMBIA PICTURES INDUSTRIES, INC. 231 LAW ON THE WEB 231 LEGAL RESEARCH EXERCISES ON THE WEB 231

Chapter 13 Capacity and Legality 265 Contractual Capacity 265 E XTENDED C ASE 13.1 Yale Diagnostic Radiology v. Estate of Harun Fountain 267 Legality 271 C ASE 13.2 Stultz v. Safety and Compliance Management, Inc. 274 C ASE 13.3 Thibodeau v. Comcast Corp. 277 REVIEWING: CAPACITY AND LEGALITY 282 TERMS AND CONCEPTS 282 QUESTIONS AND CASE PROBLEMS 283 LAW ON THE WEB 285 LEGAL RESEARCH EXERCISES ON THE WEB 285

Chapter 14 Mistakes, Fraud, and Voluntary Consent 286

Chapter 11 Agreement 232 Requirements of the Offer 232 C ASE 11.1 Lucy v. Zehmer 233 C ASE 11.2 Trell v. American Association of the Advancement of Science 235 E XTENDED C ASE 11.3 Baer v. Chase 237 Termination of the Offer 239 Acceptance 242 Technology and Acceptance Rules 246 REVIEWING: AGREEMENT 246 TERMS AND CONCEPTS 246 QUESTIONS AND CASE PROBLEMS 247 LAW ON THE WEB 249 LEGAL RESEARCH EXERCISES ON THE WEB 249

Chapter 12 Consideration 250 Elements of Consideration 250 C ASE 12.1 Hamer v. Sidway 250 C ASE 12.2 Barfield v. Commerce Bank, N.A. Adequacy of Consideration 253 Agreements That Lack Consideration 254

Mistakes 286 E XTENDED C ASE 14.1

Roberts v. Centur y Contractors, Inc. 287 Fraudulent Misrepresentation 290 C ASE 14.2 Vokes v. Arthur Murray, Inc. 290 Undue Influence 295 Duress 296 Adhesion Contracts and Unconscionability 296 C ASE 14.3 Simpson v. MSA of Myrtle Beach, Inc. 297 REVIEWING: MISTAKES, FRAUD, AND VOLUNTARY CONSENT 299 TERMS AND CONCEPTS 300 QUESTIONS AND CASE PROBLEMS 300 LAW ON THE WEB 302 LEGAL RESEARCH EXERCISES ON THE WEB 302

Chapter 15 The Statute of Frauds— Writing Requirement 303 252

The Origins of the Statute of Frauds 303 Contracts That Fall within the Statute of Frauds 303 E XTENDED C ASE 15.1 Sawyer v. Mills 305

viii

C ASE 15.2 School-Link Technologies, Inc. v. Applied Resources, Inc. 309 Sufficiency of the Writing 310 The Parole Evidence Rule 312 C ASE 15.3 Yocca v. Pittsburgh Steelers Sports, Inc. 313 The Statute of Frauds in the International Context 316 REVIEWING: THE STATUTE OF FRAUDS—WRITING REQUIREMENT 317 TERMS AND CONCEPTS 318 QUESTIONS AND CASE PROBLEMS 318 LAW ON THE WEB 320 LEGAL RESEARCH EXERCISES ON THE WEB 320

Chapter 16 Third Party Rights 321 Assignments and Delegations 321 C ASE 16.1 Martha Graham School and Dance Foundation, Inc. v. Martha Graham Center of Contemporar y Dance, Inc. 323 Third Party Beneficiaries 328 E XTENDED C ASE 16.2 Midwestern Indemnity Co. v. Systems Builders, Inc. 329 C ASE 16.3 Revels v. Miss America Organization 331 REVIEWING: THIRD PARTY RIGHTS 333 TERMS AND CONCEPTS 333 QUESTIONS AND CASE PROBLEMS 334 LAW ON THE WEB 336 LEGAL RESEARCH EXERCISES ON THE WEB 336

Chapter 17 Performance and Discharge 337 Conditions 337 Discharge by Performance 338 E XTENDED C ASE 17.1 Jacob & Youngs v. Kent 339 C ASE 17.2 Shah v. Cover-It, Inc. 341 Discharge by Agreement 344 Discharge by Operation of Law 345 C ASE 17.3 Facto v. Pantagis 347 REVIEWING: PERFORMANCE AND DISCHARGE 349 TERMS AND CONCEPTS 350 QUESTIONS AND CASE PROBLEMS 350 LAW ON THE WEB 352 LEGAL RESEARCH EXERCISES ON THE WEB 352

Chapter 18 Breach of Contract and Remedies 353 Damages 353 C ASE 18.1 Hadley v. Baxendale 355 E XTENDED C ASE 18.2 Hanson v. Boeder 357 Rescission and Restitution 359 Specific Performance 360 C ASE 18.3 Stainbrook v. Low 360 Reformation 362 Recovery Based on Quasi Contract 362 Election of Remedies 363 Waiver of Breach 364 Contract Provisions Limiting Remedies 365 REVIEWING: BREACH OF CONTRACT AND REMEDIES 366 TERMS AND CONCEPTS 366 QUESTIONS AND CASE PROBLEMS 366 LAW ON THE WEB 369 LEGAL RESEARCH EXERCISES ON THE WEB 369

Chapter 19 E-Contracts and E-Signatures 370 Online Contract Formation 370 C ASE 19.1 Feldman v. Google, Inc. 371 C ASE 19.2 Mortgage Plus, Inc. v. DocMagic, Inc. 374 E-Signatures 376 E XTENDED C ASE 19.3 Amber Chemical, Inc. v. Reilly Industries, Inc. 378 The Uniform Electronic Transactions Act 381 REVIEWING: E-CONTRACTS AND E-SIGNATURES 383 TERMS AND CONCEPTS 383 QUESTIONS AND CASE PROBLEMS 384 LAW ON THE WEB 386 LEGAL RESEARCH EXERCISES ON THE WEB 386 FOCUS ON ETHICS: CONTRACT LAW AND THE APPLICATION OF ETHICS 387

Domestic and International Sales and Lease Contracts 391 Chapter 20 The Formation of Sales and Lease Contracts 392 The Uniform Commercial Code 392 The Scope of Article 2—The Sale of Goods 393

ix

C ASE 20.1 Hammer v. Thompson 396 The Scope of Article 2A—Leases 398 The Formation of Sales and Lease Contracts 398 C ASE 20.2 Sun Coast Merchandise Corp. v. Myron Corp. 402 E XTENDED C ASE 20.3 Jones v. Star Credit Corp. 408 Contracts for the International Sale of Goods 410 REVIEWING: THE FORMATION OF SALES AND LEASE CONTRACTS 413 TERMS AND CONCEPTS 413 QUESTIONS AND CASE PROBLEMS 414 LAW ON THE WEB 416 LEGAL RESEARCH EXERCISES ON THE WEB 416 Appendix to Chapter 20: An Example of a Contract for the International Sale of Coffee 417

Chapter 21 Title, Risk, and Insurable Interest 421 Identification 421 When Title Passes 422 C ASE 21.1 Empire Fire and Marine Insurance Co. v. Banc Auto, Inc. 423 C ASE 21.2 Lindholm v. Brant 425 Risk of Loss 427 E XTENDED C ASE 21.3 Spray-Tek, Inc. v. Robbins Motor Transportation, Inc. 428 Insurable Interest 433 REVIEWING: TITLE, RISK, AND INSURABLE INTEREST 434 TERMS AND CONCEPTS 434 QUESTIONS AND CASE PROBLEMS 434 SPECIAL CASE ANALYSIS: SPRAY-TEK, INC. V. ROBBINS MOTOR TRANSPORTATION, INC. 436 LAW ON THE WEB 436 LEGAL RESEARCH EXERCISES ON THE WEB 436

Chapter 22 Performance and Breach of Sales and Lease Contracts 437 Performance Obligations 437 Obligations of the Seller or Lessor 438 C ASE 22.1 Maple Farms, Inc. v. City School District of Elmira 441 Obligations of the Buyer or Lessee 443 Anticipatory Repudiation 443 Remedies of the Seller or Lessor 445 Remedies of the Buyer or Lessee 447 C ASE 22.2 Jauregui v. Bobb’s Piano Sales & Service, Inc. 448

E XTENDED C ASE 22.3 Fitl v. Strek 450 Additional Provisions Affecting Remedies 452 Dealing with International Contracts 452 REVIEWING: PERFORMANCE AND BREACH OF SALES AND LEASE CONTRACTS 454 TERMS AND CONCEPTS 455 QUESTIONS AND CASE PROBLEMS 455 LAW ON THE WEB 457 LEGAL RESEARCH EXERCISES ON THE WEB 457

Chapter 23 Warranties and Product Liability 458 Types of Warranties 458 C ASE 23.1 Shoop v. DaimlerChrysler Corp. 461 C ASE 23.2 Webster v. Blue Ship Tea Room, Inc. 463 Overlapping Warranties 465 Warranty Disclaimers and Limitations on Liability 467 Product Liability 468 Strict Product Liability 469 E XTENDED C ASE 23.3 Crosswhite v. Jumpking, Inc. 472 Defenses to Product Liability 475 REVIEWING: WARRANTIES AND PRODUCT LIABILITY 477 TERMS AND CONCEPTS 477 QUESTIONS AND CASE PROBLEMS 477 LAW ON THE WEB 480 LEGAL RESEARCH EXERCISES ON THE WEB 480 FOCUS ON ETHICS: DOMESTIC AND INTERNATIONAL SALES AND LEASE CONTRACTS 481

Negotiable Instruments 485 Chapter 24 The Function and Creation of Negotiable Instruments 486 Articles 3 and 4 of the UCC 486 Types of Negotiable Instruments 487 Requirements for Negotiability 490 E XTENDED C ASE 24.1 Gowin v. Granite Depot, LLC 494 C ASE 24.2 Foundation Property Investments, LLC v. CTP, LLC 496 Factors Not Affecting Negotiability 500

x

REVIEWING: THE FUNCTION AND CREATION OF NEGOTIABLE INSTRUMENTS 500 TERMS AND CONCEPTS 501 QUESTIONS AND CASE PROBLEMS 501 LAW ON THE WEB 503 LEGAL RESEARCH EXERCISES ON THE WEB 503

Chapter 25 Transferability and Holder in Due Course 504 Negotiation 504 Indorsements 505 Miscellaneous Indorsement Problems 508 E XTENDED C ASE 25.1 Hyatt Corp. v. Palm Beach National Bank 509 C ASE 25.2 Graves v. Johnson 511 Holder versus Holder in Due Course 512 Requirements for HDC Status 513 C ASE 25.3 Mid Wisconsin Bank v. Forsgard Trading, Inc. 514 Holder through an HDC 518 REVIEWING: TRANSFERABILITY AND HOLDER IN DUE COURSE 519 TERMS AND CONCEPTS 520 QUESTIONS AND CASE PROBLEMS 520 LAW ON THE WEB 522 LEGAL RESEARCH EXERCISES ON THE WEB 522

Chapter 26 Liability, Defenses, and Discharge 523 Signature Liability 523 Warranty Liability 530 C ASE 26.1 Wachovia Bank, N.A. v. Foster Bancshares, Inc. 532 Defenses 533 E XTENDED C ASE 26.2 Keesling v. T.E.K. Partners, LLC 535 Discharge 539 REVIEWING: LIABILITY, DEFENSES, AND DISCHARGE 540 TERMS AND CONCEPTS 541 QUESTIONS AND CASE PROBLEMS 541 LAW ON THE WEB 543 LEGAL RESEARCH EXERCISES ON THE WEB 543

Chapter 27 Checks and Banking in the Digital Age 544 Checks 544 The Bank-Customer Relationship 546 Honoring Checks 546 C ASE 27.1 Nesper v. Bank of America Accepting Deposits 554

549

C ASE 27.2 Bank One, N.A. v. Dunn 557 E XTENDED C ASE 27.3 NBT Bank, N.A. v. First National Community Bank 559 Electronic Fund Transfers 562 E-Money and Online Banking 563 REVIEWING: CHECKS AND BANKING IN THE DIGITAL AGE 566 TERMS AND CONCEPTS 567 QUESTIONS AND CASE PROBLEMS 567 SPECIAL CASE ANALYSIS: NBT BANK, N.A. V. FIRST NATIONAL COMMUNITY BANK 568 LAW ON THE WEB 569 LEGAL RESEARCH EXERCISES ON THE WEB 569 FOCUS ON ETHICS: NEGOTIABLE INSTRUMENTS 570

Creditors’ Rights and Bankruptcy 573 Chapter 28 Creditors’ Rights and Remedies 574 Laws Assisting Creditors 574 C ASE 28.1 Indiana Surgical Specialists v. Griffin 576 Suretyship and Guaranty 578 E XTENDED C ASE 28.2 JSV, Inc. v. Hene Meat Co., Inc. 580 Protection for Debtors 582 REVIEWING: CREDITORS’ RIGHTS AND REMEDIES 582 TERMS AND CONCEPTS 583 QUESTIONS AND CASE PROBLEMS 583 LAW ON THE WEB 585 LEGAL RESEARCH EXERCISES ON THE WEB 585

Chapter 29 Secured Transactions 586 The Terminology of Secured Transactions 586 Creating a Security Interest 587 Perfecting a Security Interest 588 E XTENDED C ASE 29.1 Corona Fruits & Veggies, Inc. v. Frozsun Foods, Inc. 592 The Scope of a Security Interest 595 Priorities 597 C ASE 29.2 Heartland Bank v. National City Bank 598 Rights and Duties of Debtors and Creditors 602 Default 602

xi

C ASE 29.3 Layne v. Bank One, Kentucky, N.A. 604 REVIEWING: SECURED TRANSACTIONS 607 TERMS AND CONCEPTS 608 QUESTIONS AND CASE PROBLEMS 608 SPECIAL CASE ANALYSIS: CORONA FRUITS & VEGGIES, INC. V. FROZSUN FOODS, INC. 609 LAW ON THE WEB 610 LEGAL RESEARCH EXERCISES ON THE WEB 610

Chapter 30 Bankruptcy Law 611 Bankruptcy Proceedings 611 Liquidation Proceedings 612 E XTENDED C ASE 30.1 Hebbring v. U.S. Trustee 614 C ASE 30.2 In re Mosley 621 Reorganizations 624 Bankruptcy Relief under Chapter 13 and Chapter 12 626 C ASE 30.3 In re Buis 626 REVIEWING: BANKRUPTCY LAW 631 TERMS AND CONCEPTS 631 QUESTIONS AND CASE PROBLEMS 631 LAW ON THE WEB 634 LEGAL RESEARCH EXERCISES ON THE WEB 634 FOCUS ON ETHICS: CREDITORS’ RIGHTS AND BANKRUPTCY 635

Agency and Employment 637 Chapter 31 Agency Formation and Duties 638 Agency Relationships 638 C ASE 31.1 Alberty-Vélez Corporación de Puerto Rico 640 Formation of the Agency Relationship 642 C ASE 31.2 Motorsport Marketing, Inc. v. Wiedmaier, Inc. 643 Duties of Agents and Principals 645 E XTENDED C ASE 31.3 Gossels v. Fleet National Bank 646 Rights and Remedies of Agents and Principals 648 REVIEWING: AGENCY FORMATION AND DUTIES 650 TERMS AND CONCEPTS 650 QUESTIONS AND CASE PROBLEMS 650

LAW ON THE WEB 652 LEGAL RESEARCH EXERCISES ON THE WEB 652

Chapter 32 Liability to Third Parties and Termination 653 Scope of Agent’s Authority 653 C ASE 32.1 Ermoian v. Desert Hospital 655 Liability for Contracts 657 Liability for Torts and Crimes 659 C ASE 32.2 In re Selheimer & Co. 660 E XTENDED C ASE 32.3 Galvao v. G. R. Robert Construction Co. 664 Termination of an Agency 666 REVIEWING: LIABILITY TO THIRD PARTIES AND TERMINATION 669 TERMS AND CONCEPTS 669 QUESTIONS AND CASE PROBLEMS 669 LAW ON THE WEB 672 LEGAL RESEARCH EXERCISES ON THE WEB 672

Chapter 33 Employment and Labor Law 673 Employment at Will 673 C ASE 33.1 Wendeln v. The Beatrice Manor, Inc. 675 Wage and Hour Laws 676 C ASE 33.2 Mims v. Starbucks Corp. 678 Labor Unions 681 Worker Health and Safety 683 Income Security, Pension, and Health Plans 685 Family and Medical Leave 687 E XTENDED C ASE 33.3 Nevada Department of Human Resources v. Hibbs 688 Employee Privacy Rights 689 Employment-Related Immigration Laws 692 REVIEWING: EMPLOYMENT AND LABOR LAW 692 TERMS AND CONCEPTS 693 QUESTIONS AND CASE PROBLEMS 693 LAW ON THE WEB 695 LEGAL RESEARCH EXERCISES ON THE WEB 695

Chapter 34 Employment Discrimination 696 Title VII of the Civil Rights Act of 1964 696 C ASE 34.1 Arbaugh v.Y & H Corp. 697 E XTENDED C ASE 34.2 Burlington Northern and Santa Fe Railway Co. v. White 703

xii

Discrimination Based on Age 705 C ASE 34.3 Cash Distributing Co. v. Neely 707 Discrimination Based on Disability 710 Defenses to Employment Discrimination 712 Affirmative Action 713 State Laws Prohibiting Discrimination 715 REVIEWING: EMPLOYMENT DISCRIMINATION 715 TERMS AND CONCEPTS 716 QUESTIONS AND CASE PROBLEMS 716 SPECIAL CASE ANALYSIS: BURLINGTON NORTHERN AND SANTA FE RAILWAY CO. V. WHITE 718 LAW ON THE WEB 718 LEGAL RESEARCH EXERCISES ON THE WEB 719 FOCUS ON ETHICS: AGENCY AND EMPLOYMENT 720

Business Organizations 723 Chapter 35 Sole Proprietorships and Franchises 724 Sole Proprietorships 724 C ASE 35.1 Garden City Boxing Club, Inc. v. Dominguez 725 Franchises 726 E XTENDED C ASE 35.2 Kerl v. Dennis Rasmussen, Inc. 729 Franchise Termination 731 C ASE 35.3 Chic Miller’s Chevrolet, Inc. v. General Motors Corp. 731 REVIEWING: SOLE PROPRIETORSHIPS AND FRANCHISES 733 TERMS AND CONCEPTS 733 QUESTIONS AND CASE PROBLEMS 734 LAW ON THE WEB 736 LEGAL RESEARCH EXERCISES ON THE WEB 736

Chapter 36 Partnerships and Limited Liability Partnerships 737 Basic Partnership Concepts 737 Partnership Formation 739 Partnership Operation 740 C ASE 36.1 Moren v. Jax Restaurant 744 Dissociation of a Partner 746 C ASE 36.2 Warnick v. Warnick 747 Partnership Termination 748 Limited Liability Partnerships 750

Limited Partnerships 751 E XTENDED C ASE 36.3 In re Dissolution of Midnight Star Enterprises, L.P. 753 REVIEWING: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS 755 TERMS AND CONCEPTS 756 QUESTIONS AND CASE PROBLEMS 756 LAW ON THE WEB 758 LEGAL RESEARCH EXERCISES ON THE WEB 758

Chapter 37 Limited Liability Companies and Special Business Forms 759 Limited Liability Companies 759 C ASE 37.1 McFarland v.Virginia Retirement Services of Chesterfield, L.L.C. 760 C ASE 37.2 Kuhn v. Tumminelli 763 Management of an LLC 764 Dissociation and Dissolution of an LLC 765 Special Business Forms 765 E XTENDED C ASE 37.3 SPW Associates, LLP v. Anderson 766 REVIEWING: LIMITED LIABILITY COMPANIES AND SPECIAL BUSINESS FORMS 768 TERMS AND CONCEPTS 769 QUESTIONS AND CASE PROBLEMS 769 LAW ON THE WEB 772 LEGAL RESEARCH EXERCISES ON THE WEB 772

Chapter 38 CORPORATIONS— Formation and Financing 773 The Nature and Classification of Corporations 773 C ASE 38.1 Commonwealth v. Angelo Todesca Corp. 775 E XTENDED C ASE 38.2 Salt Lake Tribune Publishing Co. v. AT&T Corp. 778 Corporate Formation 781 Defects in Formation and Corporate Status 785 Corporate Powers 786 Piercing the Corporate Veil 786 C ASE 38.3 In re Aqua Clear Technologies, Inc. 787 Corporate Financing 789 REVIEWING: CORPORATIONS— FORMATION AND FINANCING 792 TERMS AND CONCEPTS 792 QUESTIONS AND CASE PROBLEMS 793

xiii

LAW ON THE WEB 795 LEGAL RESEARCH EXERCISES ON THE WEB 795

Chapter 39 CORPORATIONS—Directors, Officers, and Shareholders 796 Roles of Directors and Officers 796 E XTENDED C ASE 39.1 Relational Investors, LLC v. Sovereign Bancorp, Inc. 797 Duties and Liabilities of Directors and Officers 801 C ASE 39.2 Guth v. Loft, Inc. 803 The Role of Shareholders 805 Rights of Shareholders 809 Liability of Shareholders 812 C ASE 39.3 Kaplan v. First Hartford Corp. 813 REVIEWING: CORPORATIONS—DIRECTORS, OFFICERS, AND SHAREHOLDERS 815 TERMS AND CONCEPTS 815 QUESTIONS AND CASE PROBLEMS 816 LAW ON THE WEB 818 LEGAL RESEARCH EXERCISES ON THE WEB 818

Chapter 40 CORPORATIONS—Merger, Consolidation, and Termination 819 Merger and Consolidation 819 C ASE 40.1 Rodriguez v. Tech Credit Union Corp. 820 Purchase of Assets 823 Purchase of Stock 824 Termination 827 E XTENDED C ASE 40.2 Parent v. Amity Autoworld, Ltd. 827 C ASE 40.3 Sartori v. S & S Trucking, Inc. 829 Major Business Forms Compared 830 REVIEWING: CORPORATIONS—MERGER, CONSOLIDATION, AND TERMINATION 833 TERMS AND CONCEPTS 833 QUESTIONS AND CASE PROBLEMS 833 LAW ON THE WEB 835 LEGAL RESEARCH EXERCISES ON THE WEB 835

Chapter 41 CORPORATIONS—Securities Law and Corporate Governance 836 The Securities and Exchange Commission 836 The Securities Act of 1933 837 The Securities Exchange Act of 1934 845

C ASE 41.1 SEC v. Texas Gulf Sulphur Co. 846 E XTENDED C ASE 41.2 Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit 847 C ASE 41.3 United States v. Berger 851 Corporate Governance 853 State Securities Laws 855 Online Securities Fraud 857 REVIEWING: CORPORATIONS—SECURITIES LAW AND CORPORATE GOVERNANCE 858 TERMS AND CONCEPTS 859 QUESTIONS AND CASE PROBLEMS 859 SPECIAL CASE ANALYSIS: MERRILL LYNCH, PIERCE, FENNER & SMITH, INC. V. DOBIT 860 LAW ON THE WEB 861 LEGAL RESEARCH EXERCISES ON THE WEB 861

Chapter 42 Law for Small Business 862 The Importance of Legal Counsel 862 Selecting an Appropriate Business Form 863 The Limited Liability Company 866 E XTENDED C ASE 42.1 Mixon v. Iberia Surgical, L.L.C. 867 Creating the Business Entity 868 Intellectual Property 869 Raising Financial Capital 871 C ASE 42.2 InfoSAGE, Inc. v. Mellon Ventures, L.P. 872 Buy-Sell Agreements and Key-Person Insurance 873 Contract Law and Small Businesses 874 C ASE 42.3 DBL Distributing, Inc. v. 1 Cache, L.L.C. 875 Employment Issues 876 REVIEWING: LAW FOR SMALL BUSINESS 878 TERMS AND CONCEPTS 878 QUESTIONS AND CASE PROBLEMS 879 LAW ON THE WEB 881 LEGAL RESEARCH EXERCISES ON THE WEB 881 FOCUS ON ETHICS: BUSINESS ORGANIZATIONS 882

Government Regulation 885 Chapter 43 Administrative Law 886

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The Practical Significance of Administrative Law 886 Agency Creation and Powers 887 The Administrative Procedure Act 888 E XTENDED C ASE 43.1 Fox Television Stations, Inc. v. Federal Communications Commission 888 C ASE 43.2 Hemp Industries Association v. Drug Enforcement Administration 892 Judicial Deference to Agency Decisions 894 C ASE 43.3 United States v. Mead Corporation 895 Agency Enforcement and Adjudication 896 Limitations on Agency Powers 898 Public Accountability 900 REVIEWING: ADMINISTRATIVE LAW 901 TERMS AND CONCEPTS 901 QUESTIONS AND CASE PROBLEMS 902 LAW ON THE WEB 904 LEGAL RESEARCH EXERCISES ON THE WEB 904

Chapter 44 Consumer Law 905 Deceptive Advertising 905 E XTENDED C ASE 44.1 Federal Trade Commission v.Verity International, Ltd. 907 Labeling and Packaging Laws 909 Sales 909 Credit Protection 910 C ASE 44.2 Saunders v. Equifax Information Services, L.L.C. 912 Consumer Health and Safety 914 C ASE 44.3 Abigail Alliance for Better Access to Developmental Drugs v. von Eschenbach 915 REVIEWING: CONSUMER LAW 917 TERMS AND CONCEPTS 918 QUESTIONS AND CASE PROBLEMS 918 LAW ON THE WEB 920 LEGAL RESEARCH EXERCISES ON THE WEB 920

Chapter 45 Environmental Law

921

Common Law Actions 921 Federal, State, and Local Regulation 922 Air Pollution 923 E XTENDED C ASE 45.1 Environmental Defense v. Duke Energy Corp. 926

Water Pollution 928 C ASE 45.2 S. D. Warren Co. v. Maine Board of Environmental Protection 928 Toxic Chemicals 931 C ASE 45.3 Bates v. Dow Agrosciences, LLC 932 Hazardous Wastes 933 REVIEWING: ENVIRONMENTAL LAW 934 TERMS AND CONCEPTS 935 QUESTIONS AND CASE PROBLEMS 935 LAW ON THE WEB 937 LEGAL RESEARCH EXERCISES ON THE WEB 937

Chapter 46 Antitrust Law 938 The Sherman Antitrust Act 938 Section 1 of the Sherman Act 939 C ASE 46.1 Continental T.V., Inc. v. GTE Sylvania, Inc. 941 E XTENDED C ASE 46.2 Leegin Creative Leather Products, Inc. v. PSKS, Inc. 942 Section 2 of the Sherman Act 944 The Clayton Act 946 C ASE 46.3 Illinois Tool Works, Inc. v. Independent Ink, Inc. 948 Enforcement of Antitrust Laws 950 Exemptions from Antitrust Law 951 U.S.Antitrust Laws in the Global Context 952 REVIEWING: ANTITRUST LAW 953 TERMS AND CONCEPTS 953 QUESTIONS AND CASE PROBLEMS 954 SPECIAL CASE ANALYSIS: LEEGIN CREATIVE LEATHER PRODUCTS, INC. V. PSKS, INC. 955 LAW ON THE WEB 956 LEGAL RESEARCH EXERCISES ON THE WEB 956 FOCUS ON ETHICS: GOVERNMENT REGULATION 957

Property 959 Chapter 47 Personal Property and Bailments 960 Personal Property versus Real Property 960 Fixtures 961 Acquiring Ownership of Personal Property 962 C ASE 47.1 In re Estate of Piper 963 Mislaid, Lost, and Abandoned Property 965

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E XTENDED C ASE 47.2

United States v. One Hundred Sixty-Five Thousand Five Hundred Eighty Dollars ($165,580) in U.S. Currency 967

Bailments 969 Ordinary Bailments 970 Special Types of Bailments 973 C ASE 47.3 Treiber & Straub, Inc. v. United Parcel Service, Inc. 974 REVIEWING: PERSONAL PROPERTY AND BAILMENTS 977 TERMS AND CONCEPTS 977 QUESTIONS AND CASE PROBLEMS 977 LAW ON THE WEB 979 LEGAL RESEARCH EXERCISES ON THE WEB 979

Chapter 48 Real Property and Landlord-Tenant Relationships 980 The Nature of Real Property 980 Ownership and Other Interests in Real Property 981 C ASE 48.1 Biglane v. Under the Hill Corp. 982 Transfer of Ownership 986 C ASE 48.2 Whitehead v. Humphrey 989 C ASE 48.3 Otwell v. Diversified Timber Services, Inc. 993 Limitations on the Rights of Property Owners 994 E XTENDED C ASE 48.4 Kelo v. City of New London, Connecticut 995 Landlord-Tenant Relationships 997 REVIEWING: REAL PROPERTY AND LANDLORD-TENANT RELATIONSHIPS 1000 TERMS AND CONCEPTS 1000 QUESTIONS AND CASE PROBLEMS 1001 SPECIAL CASE ANALYSIS: KELO V. CITY OF NEW LONDON, CONNECTICUT 1002 LAW ON THE WEB 1003 LEGAL RESEARCH EXERCISES ON THE WEB 1003 FOCUS ON ETHICS: PROPERTY 1004

Special Topics 1007 Chapter 49 Insurance 1008 Insurance Terminology and Concepts 1008

E XTENDED C ASE 49.1

Zurich American Insurance Co. v. AMB Industries, Inc. 1011 The Insurance Contract 1012 C ASE 49.2 Car y v. United of Omaha Life Insurance Co. 1015 C ASE 49.3 Woo v. Fireman’s Fund Insurance Co. 1017 Types of Insurance 1018 REVIEWING: INSURANCE 1023 TERMS AND CONCEPTS 1023 QUESTIONS AND CASE PROBLEMS 1023 LAW ON THE WEB 1026 LEGAL RESEARCH EXERCISES ON THE WEB 1026

Chapter 50 Wills and Trusts 1027 Wills 1027 C ASE 50.1 Shaw Family Archives, Ltd. v. CMG Worldwide, Inc. 1029 C ASE 50.2 In re Estate of Pallister 1032 Intestacy Laws 1035 Trusts 1037 E XTENDED C ASE 50.3 Cinquemani v. Lazio 1039 Other Estate-Planning Issues 1043 REVIEWING: WILLS AND TRUSTS 1044 TERMS AND CONCEPTS 1044 QUESTIONS AND CASE PROBLEMS 1045 LAW ON THE WEB 1047 LEGAL RESEARCH EXERCISES ON THE WEB 1047

Chapter 51 Professional Liability and Accountability 1048 Potential Liability to Clients 1048 E XTENDED C ASE 51.1 In re Disciplinar y Proceedings Against Inglimo 1050 Potential Liability to Third Parties 1052 C ASE 51.2 Reznor v. J. Artist Management, Inc. 1053 The Sarbanes-Oxley Act of 2002 1055 Potential Liability of Accountants under Securities Laws 1058 Potential Criminal Liability of Accountants 1061 Confidentiality and Privilege 1062 REVIEWING: PROFESSIONAL LIABILITY AND ACCOUNTABILITY 1063 TERMS AND CONCEPTS 1064 QUESTIONS AND CASE PROBLEMS 1064

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LAW ON THE WEB 1067 LEGAL RESEARCH EXERCISES ON THE WEB 1067

Appendix B The Constitution of the United States A–4

Chapter 52 International Law in a Global Economy 1068

Appendix C The Uniform Commercial Code A–12

International Law 1068 Doing Business Internationally 1071 Regulation of Specific Business Activities 1072 C ASE 52.1 Fuji Photo Film Co. v. International Trade Commission 1073 U.S. Laws in a Global Context 1076 C ASE 52.2 Carnero v. Boston Scientific Corp. 1076 E XTENDED 52.3 Khulumani v. Barclay National Bank, Ltd. 1078 REVIEWING: INTERNATIONAL LAW IN A GLOBAL ECONOMY 1080 TERMS AND CONCEPTS 1080 QUESTIONS AND CASE PROBLEMS 1080 SPECIAL CASE ANALYSIS: KHULUMANI V. BARCLAY NATIONAL BANK, LTD. 1082 LAW ON THE WEB 1082 LEGAL RESEARCH EXERCISES ON THE WEB 1082 FOCUS ON ETHICS: SPECIAL TOPICS 1083

Appendix D The United Nations Convention on Contracts for the International Sale of Goods (Excerpts) A–176 Appendix E The Uniform Partnership Act (Excerpts) A–180 Appendix F The Revised Uniform Limited Partnership Act (Excerpts) A–190 Appendix G The Revised Model Business Corporation Act (Excerpts) A–200 Appendix H The Sarbanes-Oxley Act of 2002 (Excerpts and Explanatory Comments) A–210 Appendix I Sample Answers for End-of-Chapter Questions with Sample Answer A–218 Glossary G–1

Appendices

Table of Cases TC–1

Appendix A How to Brief Cases and Analyze Case Problems A–1

Index I–1

xvii

1.1 Schools of Jurisdprudential Thought 1.2 Sources of American Law

4

8

36

2.2 Types of Courts

27.1 Honoring Checks

42

3.1 Pretrial Procedures

65

72 132

6.2 Intentional Torts against Property

136

194

11.1 Methods by Which an Offer Can Be Terminated 242 11.2 Effective Time of Acceptance 245 269

668

299

16.1 Assignments and Delegations

781

39.1 Roles of Directors and Officers 270

13.3 Contracts by Mentally Incompetent Persons 271

18.1 Equitable Remedies

32.1 Authority of an Agent to Bind the Principal and a Third Party 658 38.1 Classification of Corporations

13.2 Contracts by Intoxicated Persons

14.1 Voluntary Consent

30.1 Forms of Bankruptcy Relief Compared 630

32.2 Termination of an Agency

257

13.1 Contracts by Minors

29.2 Remedies of the Secured Party on the Debtor’s Default 606

31.1 Formation of the Agency Relationship 645

10.1 Types of Contracts 224

12.1 Consideration

578

29.1 Creating and Perfecting a Security Interest 596

6.1 Intentional Torts against Persons 9.1 Types of Crimes

554

28.1 Remedies Available to Creditors

3.2 Trial Procedures 70 3.3 Posttrial Options

529

26.2 Transfer Warranty Liability for Transferors Who Receive Consideration 531

1.3 The Common Law Tradition 13 2.1 Jurisdiction

26.1 Signature Liability

327

364

801

39.2 Duties and Liabilities of Directors and Officers 805 39.3 Role of Shareholders

813

40.1 Methods of Expanding Corporate Operations and Interests 826 47.1 Acquisition of Personal Property

966

20.1 The Formation of Sales and Lease Contracts 411

47.2 Mislaid, Lost, and Abandoned Property 968

21.1 Delivery without Movement of the Goods 431

47.3 Rights and Duties of the Bailee and the Bailor 976

21.2 Risk of Loss When a Sales or Lease Contract is Breached 433

48.1 Interests in Real Property

22.1 Performance of Sales and Lease Contracts 444

50.2 Trusts 1041

23.1 Types of Warranties

51.1 Common Law Liability of Accountants and Other Professionals 1056

466

24.1 Requirements for Negotiability

499

25.1 Types of Indorsements and Their Effect 509 25.2 Rules and Requirements for HDC Status 518

50.1 Wills

987

1036

51.2 Statutory Liability of Accountants and Other Professionals 1063

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1–1 Areas of the Law That May Affect Business Decision Making 5

15–3 Contracts Subject to the Statute of Frauds 311

1–2 Equitable Maxims

15–4 Parol Evidence Rule

9

317

1–3 Procedural Differences between an Action at Law and an Action in Equity 10

16–1 Assignment Relationships 16–2 Delegation Relationships

326

1–4 West’s National Reporter System— Regional/Federal 17

16–3 Third Party Beneficiaries

331

1–5 How to Read Citations

17–1 Contract Discharge

18

1–6 A Sample Court Case

2–1 The State and Federal Court Systems

37

2–2 Geographic Boundaries of the U.S. Courts of Appeals and U.S. District Courts 2–3 Basic Differences in the Traditional Forms of ADR 43 3–2 A Typical Complaint 3–4 Pretrial Motions

54

18–2 Remedies for Breach of Contract 19–1 A Click-On Agreement

19–2 The E-SIGN Act and the UETA

61

20–1 The 2003 Amendments to UCC Article 2: Selected Provisions 394

21–1 Contract Terms–Definitions

4–1 Protections Guaranteed by the Bill of Rights 83 5–1 The Intersection of What Is Legal and What Is Ethical 107 160

8–2 Existing Generic Top Level Domain Names 165

428

24–2 A Typical Time Draft 488 24–3 A Typical Trade Acceptance 24–4 A Typical Promissory Note

489 491

9–2 Civil (Tort) Lawsuit and Criminal Prosecution for the Same Act 186

25–1 A Blank Indorsement

9–3 Major Procedural Steps in a Criminal Case 203

25–3 A Qualified Indorsement

10–1 Classifications Based on Contract Formation 218 10–2 Enforceable, Voidable, Unenforceable, and Void Contracts 223 10–3 Rules of Contract Interpretation 225 13–2 Contract Legality 281 14–1 Mistakes of Fact

287

15–1 The One-Year Rule 15–2 Collateral Promises

304 307

453

24–1 Basic Types of Negotiable Instruments 487

24–5 A Typical Small Certificate of Deposit 491

279

395

22–1 A Letter-of-Credit Transaction

9–1 Key Differences between Civil Law and Criminal Law 185

13–1 Unconscionability

382

20–3 Major Differences between Contract Law and Sales Law 407

57

8–1 Forms of Intellectual Property

363

373

20–2 The Law Governing Contracts

56

3–3 A Typical Summons

349

18–1 Measurement of Damages—Breach of Construction Contracts 355

24

3–1 Stages in a Typical Lawsuit

322

505

25–2 A Special Indorsement

505 506

25–4 “For Deposit Only” and “For Collection Only” Indorsements 507 25–5 Trust (Agency) Indorsements 507 25–6 Converting an Order Instrument to a Bearer Instrument and Vice Versa 508 25–7 Taking for Value

514

26–1 Time for Proper Presentment 525 26–2 Defenses against Liability on Negotiable Instruments 534 27–1 A Cashier’s Check

545

27–2 An American Express Traveler’s Check 546

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27–3 A Stop-Payment Order

548

27–4 A Poorly Filled-Out Check

41–4 Comparison of Coverage, Application, and Liability under SEC Rule 10b-5 and Section 16(b) 850

553

27–5 The Traditional Check-Collection Process 556 28–1 Suretyship and Guaranty Parties

579

41–5 Some Key Provisions of the SarbanesOxley Act of 2002 Relating to Corporate Accountability 856

29–1 Secured Transactions—Concept and Terminology 587

42–1 Average Attorneys’ Fees for Selected Small-Business Transactions 863

29–2 Types of Collateral and Methods of Perfection 589

42–2 Venture Capital Issues

29–3 The Uniform Financing Statement

591

29–4 Priority of Claims to a Debtor’s Collateral 601 30–1 Collection and Distribution of Property in Most Voluntary Bankruptcies 620

873

43–1 Costs of Regulation to Businesses

887

43–2 Executive Departments and Important Subagencies 891 43–3 Selected Independent Regulatory Agencies 892

32–1 A Sample General Power of Attorney 654

43–4 The Process of Formal Administrative Adjudication 898

36–1 Terms Commonly Included in a Partnership Agreement 740

44–1 Selected Areas of Consumer Law Regulated by Statutes 905

36–2 A Comparison of General Partnerships and Limited Partnerships 752

45–1 Major Federal Environmental Statutes 923

38–1 Offshore Low-Tax Jurisdictions

47–1 Degree of Care Required of a Bailee

38–2 Articles of Incorporation 38–3 Types of Corporate Bonds

774

783

48–1 Steps Involved in the Sale of Real Estate 988

789

38–4 How Do Stocks and Bonds Differ? 38–5 Types of Stocks

790

790

821

40–3 The Terminology of Takeover Defenses 825 40–4 Major Forms of Business Compared

831

836

41–2 Exemptions under the 1933 Act

1020

50–1 Excerpts from the Will of Diana, Princess of Wales 1028

809

819

41–1 Basic Functions of the SEC

1009

49–3 Typical Fire Insurance Policies

39–2 Results of Cumulative Voting 40–2 Consolidation

49–1 Insurance Classifications

49–2 Insurance Contract Provisions and Clauses 1014

39–1 Directors’ Management Responsibilities 797 40–1 Merger

972

841

50–2 Per Stirpes Distribution

1037

50–3 Per Capita Distribution

1038

50–4 A Revocable Living Trust Arrangement 1039 51–1 Key Provisions of the Sarbanes-Oxley Act of 2002 Relating to Public Accounting Firms 1057

41–3 A Sample Restricted Stock Certificate 844

52–1 The Legal Systems of Selected Nations 1070

Chapter 5 Breach of Trust Issues Hit Major German Corporations 112

Chapter 24 The Negotiability of Checks in Other Nations 490

Chapter 19 International Use and Regulation of the Internet 380

Chapter 42 Moving Your Small Business Online: Seller Beware 865

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Chapter 1 How the Internet Is Expanding Precedent 22

Chapter 41 Moving Company Information to the Internet 838

Chapter 8 Search Engines versus Copyright Owners 174

Chapter 2 Implications of an Increasingly Private Justice System 38 Chapter 14 Internet Click Fraud

Chapter 51 An Auditor’s Duty to Correct Certified Opinions 1060

292

Chapter 3 E-Discovery and Cost-Shifting Chapter 9 Stand-Your-Ground Laws

66

196

Chapter 23 Removing Class-Action Lawsuits to the Federal Court 470

Chapter 33 Paying Overtime in the Virtual Workforce 678 Chapter 34 New Issues in Online Privacy and Employment Discrimination 706

Chapter 27 Using Digital Cash Facilitates Money Laundering 564

Chapter 4 Does State Regulation of Internet Prescription Transactions Violate the Dormant Commerce Clause? 84 Chapter 6 Tort Reform 124 Chapter 12 Promissory Estoppel and Employment Contracts 260

Chapter 13 Are Online Fantasy Sports Gambling? 274 Chapter 15 Prenuptial Agreements and Advice of Counsel 312 Chapter 39 A Shareholder Access Rule

808

Chapter 45 Should the EPA Take the Threat of Global Warming into Account? 924

The study of business law and, more generally, the legal environment of business has universal applicability.A student entering virtually any field of business must have at least a passing understanding of business law in order to function in the real world. Additionally, students preparing for a career in accounting, government and political science, economics,and even medicine can use much of the information they learn in a business law and legal environment course. In fact, every individual throughout his or her lifetime can benefit from a knowledge of contracts, real property law, landlord-tenant relationships, and other topics. Consequently, we have fashioned this text as a useful “tool for living” for all of your students (including those taking the CPA exam). For the Eleventh Edition,we have spent a great deal of effort making this book more contemporary, exciting,and visually appealing than ever before to encourage your students to learn the law. We have also designed many new features and special pedagogical devices that focus on the legal, ethical, global, and e-commerce environments, while addressing core curriculum requirements.

What Is New in the Eleventh Edition Instructors have come to rely on the coverage, accuracy, and applicability of Business Law. To make sure that our text engages your students’ interests, solidifies their understanding of the legal concepts presented, and provides the best teaching tools available,we now offer the following items either in the text or in conjunction with the text.

New Insight Features For the Eleventh Edition,we have created three special new Insight features—Insight into E-Commerce,

Insight into Ethics, and Insight into the Global Environment. These features, which appear in selected chapters, provide valuable insights into how the courts and the law are dealing with specific contemporary issues. Each of these features ends with a criticalthinking question that explores some cultural, environmental, political, social, or technological aspect of the issue.

1. Insight into E-Commerce—When the topic involves some new technology or how the Internet is affecting a particular area of law, we include an Insight into E-Commerce feature. For example, Chapter 1 contains an Insight into E-Commerce feature on How the Internet Is Expanding Precedent, Chapter 8 has a feature on Search Engines Versus Copyrights, and Chapter 41 includes a feature on Moving Company Information to the Internet. 2. Insight into Ethics—When the topic has ethical implications, we include an Insight into Ethics feature. For example, Chapter 2’s Insight into Ethics feature is entitled Implications of an Increasingly Private Justice System, Chapter 14’s feature addresses Internet Click Fraud, and Chapter 51’s feature covers An Auditor’s Duty to Correct Certified Opinions. 3. Insight into the Global Environment— Because business transactions today are increasingly global, we have also included a feature that discusses global implications or explains how foreign nations deal with a particular topic. For example, there is an Insight into the Global Environment feature in Chapter 5 titled Breach of Trust Issues Hit Major German Corporations, one in Chapter 19 on International Use and Regulation of the Internet,and one in Chapter 42 on Moving Your Small Business Online: Seller Beware.

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Two Critical-Thinking Questions at the End of Every Case Presented in This Text

Analysis questions and the questions in the Reviewing features, which are described next.

In every chapter of the Tenth Edition of West’s Business Law, we included one longer case excerpt followed by two case-ending questions designed to guide students’ analysis of the case and help build their legal reasoning skills.For the Eleventh Edition,we continue to offer one longer excerpt—now labeled an Extended Case—with two critical-thinking questions in every chapter. These extended cases may be used for casebriefing assignments and are also tied to the Special Case Analysis questions found in every unit of the text. Because of the popularity of the case-ending questions, for this edition, we’ve also included two questions for all cases. In addition to the What If the Facts Were Different? questions and Impact of This Case on Today’s Law sections that appeared in the Tenth Edition,we’ve devised an entirely new set of questions. These new Dimension questions focus on meeting aspects of your curriculum requirements, including:

New Special Case Analysis Questions

• The Ethical Dimension • The E-Commerce Dimension • The Global Dimension • The Legal Environment Dimension Suggested answers to all questions following cases can be found in both the Instructor’s Manual and the Answers Manual that accompany this text. (The full title of this manual is Answers to Questions and Case Problems and Alternate Problem Sets with Answers.)

Greater Emphasis on Critical Thinking and Legal Reasoning Today’s business leaders are often required to think “outside the box”when making business decisions.For this reason, we have added a number of criticalthinking elements for the Eleventh Edition that are designed to challenge students’ understanding of the materials beyond simple retention.Your students’ critical-thinking and legal reasoning skills will be increased as they work through the numerous pedagogical devices within the book. Almost every feature and every case presented in the text conclude with some type of critical-thinking question. These questions include For Critical Analysis,What If the Facts Were Different? and the Ethical, E-Commerce, Global, and Legal Environment Dimension questions discussed previously. They also include the new Special Case

Through the years, instructors have frequently requested that we teach their business law students how to analyze case law. We discuss the fundamental topic of how to read and understand case law in Chapter 1 and cover How to Brief Cases and Analyze Case Problems in Appendix A.For this edition,we have gone one step further: in selected chapters of the text, we provide a Special Case Analysis question that is based on the Extended Case excerpt in that chapter. The Special Case Analysis questions are part of the Questions and Case Problems that appear at the end of the chapter. We offer one of these special questions for every unit in the text to build students’ analytical skills. The Special Case Analysis questions test students’ ability to perform IRAC (Issue, Rule, Application, and Conclusion) case analysis. Students must identify the legal issue presented in the chapter’s extended case, understand the rule of law, determine how the rule applies to the facts of the case,and describe the court’s conclusion. Instructors can assign these questions as homework or can use them in class to elicit student participation and teach case analysis.

Reviewing Features in Every Chapter For the Eleventh Edition of Business Law, we have included a new and improved feature at the end of every chapter that helps solidify students’ understanding of the chapter materials. The feature appears just before the Terms and Concepts and is entitled Reviewing [chapter topic]. Each of these features presents a hypothetical scenario and then asks a series of questions that require students to identify the issues and apply the legal concepts discussed in the chapter. These features are designed to help students review the chapter topics in a simple and interesting way and see how the legal principles discussed in the chapter affect the world in which they live. An instructor can use these features as the basis for in-class discussion or encourage students to use them for self-study prior to completing homework assignments. Suggested answers to the questions posed in the Reviewing features can be found in both the Instructor’s Manual and the Answers Manual that accompany this text. The Reviewing features are also tied to a new set of questions for each chapter in the Web-based

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CengageNOW system, to be discussed next. Students can read through the scenario in the text and then answer the four Applications and Analysis questions online. By using the CengageNOW system, students will receive instant feedback on their answers to these questions, and instructors will obtain automatically graded assignments that enable them to assess students’ understanding of the materials.

Improved Content and Features on CengageNOW for Business Law: Interactive Assignment System For those instructors who want their students to learn how to identify and apply the legal principles they study in this text, we have created new content and improved the features of our Web-based product for this edition. The system provides interactive, automatically graded assignments for every chapter and unit in this text. For each of the fifty-two chapters, we have devised different categories of multiple-choice questions that stress different aspects of learning the chapter materials. By using the optional CengageNOW system, students can complete the assignments from any location via the Internet and can receive instant feedback on why their answers to questions were incorrect or correct (if the instructor wishes to allow feedback). Instructors can customize the system to meet their own specifications and can track students’ progress.

1. Chapter Review Questions—The first set of ten to fifteen questions reviews the basic concepts and principles discussed in the chapter. These questions often include questions based on the cases presented in the text.

2. Brief Hypotheticals—The next group of seven to ten questions emphasizes spotting the issue and identifying the rule of law that applies in the context of a short factual scenario.

3. Legal Reasoning—The third category includes five questions that require students to analyze the factual situation provided and apply the rules of law discussed in the chapter to arrive at an answer.

4. IRAC Case Analysis—The next set of four questions for each chapter requires students to perform all the basic elements of legal reasoning (identify the issue, determine the rule of law, apply the rule to the facts presented, and arrive at a conclusion). These questions are based on the Extended Case excerpts that appear in each chapter.

5. Application and Analysis—The final set of four questions for each chapter is new and is linked to the Reviewing features (discussed previously) that appear in every chapter of the text. The student is required to read through the hypothetical scenario, analyze the facts presented, identify the issues in dispute, and apply the rules discussed in the chapter to answer the questions.

6. Essay Questions—In addition to the multiplechoice questions available on CengageNOW, we now also provide essay questions that allow students to compose and submit essays online. Students’ essays are automatically recorded to the gradebook, which permits instructors to quickly and easily evaluate the essays and record grades.

7. Video

Questions—CengageNOW also now includes links to the Digital Video Library for Business Law so that students can access and view the video clips and answer questions related to the topics in the chapter.

8. Cumulative Questions for Each Unit—In addition to the questions relating to each chapter, the CengageNOW system provides a set of cumulative questions, entitled “Synthesizing Legal Concepts,” for each of the eleven units in the text.

9. Additional Advantages of CengageNOW— Instructors can utilize the system to upload their course syllabi, create and customize homework assignments, keep track of their students’ progress, communicate with their students about assignments and due dates, and create reports summarizing the data for an individual student or for the whole class.

Expanded Ethics Coverage and New Questions of Ethics in Every Chapter For the Eleventh Edition of Business Law, we have significantly revised and updated the chapter on ethics and business decision making (Chapter 5). The chapter now presents a more practical, realistic, case-study approach to business ethics and the dilemmas facing businesspersons today. The emphasis on ethics is reiterated in materials throughout the text,particularly the Focus on Ethics features that conclude every unit, the Insight into Ethics features, and the pedagogy that accompanies selected cases and features.We also discuss corporate governance issues as appropriate within the ethics chapter, the corporations chapters, and the Focus on Ethics feature that concludes Unit Eight on business organizations.

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For this edition,we have also added A Question of Ethics based on a case from 2006 or 2007 to every chapter of the text. These problems provide modern-day examples of the kinds of ethical issues faced by businesspersons and the ways courts typically resolve them.

More on the Sarbanes-Oxley Act of 2002 In a number of places in this text, we discuss the Sarbanes-Oxley Act of 2002 and the corporate scandals that led to the passage of that legislation. For example, Chapter 5 contains a section examining the requirements of the Sarbanes-Oxley Act relating to confidential reporting systems. In Chapter 41, we discuss this act in the context of securities law and present an exhibit (Exhibit 41–4) containing some of the key provisions of the act relating to corporate accountability with respect to securities transactions. Finally, in Chapter 51, we again look at provisions of the Sarbanes-Oxley Act as they relate to public accounting firms and accounting practices. Because the act is a topic of significant concern in today’s business climate, we also include excerpts and explanatory comments on the Sarbanes-Oxley Act of 2002 as Appendix H. Students and instructors alike will find it useful to have the provisions of the act immediately available for reference.

• Internet exercises for every chapter in the text (at least two per chapter). These exercises have been refocused to provide more practical information to business law students on topics covered in the chapters and to acquaint students with the legal resources that are available online.

• Interactive quizzes for every chapter in this text. • Glossary terms for every chapter in the text. • Flashcards that provide students with an optional study tool to review the key terms in every chapter.

• PowerPoint slides that have been revised for this edition.

• Legal reference materials including a “Statutes” page that offers links to the full text of selected statutes referenced in the text, a Spanish glossary, and links to other important legal resources available for free on the Web.

• Law on the Web features that provide links to the URLs that appear at the end of every chapter in the text.

• Link to CengageNOW for Business Law: Interactive Assignment System with different types of questions related to every chapter in the text and one set of cumulative questions for each unit in the text.

• Link to our Digital Video Library that offers a

Business Law on the Web For the Eleventh Edition of Business Law, we have redesigned and streamlined the text’s Web site so that users can easily locate the resources they seek. When you visit our Web site at academic.cengage. com/blaw/clarkson, you will find a broad array of teaching/learning resources, including the following:

• Relevant Web sites for all of the Emerging Trends features that are presented in this text.

• Sample answers to the Case Problem with Sample Answer, which appears in the Questions and Case Problems at the end of every chapter. This problem/answer set is designed to help your students learn how to answer case problems by acquainting them with model answers to selected problems. In addition, we offer the answers to the hypothetical Questions with Sample Answers on the Web site as well as in the text (Appendix I).

• Videos referenced in the new Video Questions (discussed shortly) that appear in selected chapters of this edition of Business Law.

compendium of more than sixty-five video scenarios and explanations.

• Online Legal Research Guide that offers complete yet brief guidance to using the Internet and evaluating information obtained from the Internet. As an online resource, it now includes hyperlinks to the Web sites discussed for click-through convenience.

• Court case updates that present summaries of new cases from various West legal publications, are continually updated, and are specifically keyed to chapters in this text.

A Comprehensive Digital Video Library For this edition of Business Law, we have included special Video Questions at the end of selected chapters. Each of these questions directs students to the text’s Web site (at academic.cengage.com/blaw/ clarkson) to view a video relevant to a topic covered in the chapter. This is followed by a series of ques-

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tions based on the video. The questions are again repeated on the Web site, when the student accesses the video. An access code for the videos can be packaged with each new copy of this textbook for no additional charge. If Digital Video Library access did not come packaged with the textbook, students can purchase it online at academic.cengage.com/ blaw/dvl. These videos can be used for homework assignments, discussion starters, or classroom demonstrations and are useful for generating student interest. Some of the videos are clips from actual movies, such as The Jerk and Bowfinger. By watching a video and answering the questions, students will gain an understanding of how the legal concepts they have studied in the chapter apply to the real-life situation portrayed in the video. Suggested answers for all of the Video Questions are given in both the Instructor’s Manual and the Answers Manual that accompany this text. The videos are part of our Digital Video Library, a compendium of more than sixty-five video scenarios and explanations.

Additional Special Features of This Text We have included in Business Law, Eleventh Edition, a number of pedagogical devices and special features, including those discussed here.

Emerging Trends Presented throughout this text are a number of features titled Emerging Trends. These features examine new developments in business law and the legal environment and their potential effect on businesspersons. Here are some examples of these features:

ture asks the student to identify her or his position on the issue. Some examples of these features are:

• Tort Reform (Chapter 6). • Are Online Fantasy Sports Gambling? (Chapter 13). • A Shareholder Access Rule (Chapter 39). • Should the EPA Take the Threat of Global Warming into Account? (Chapter 45).

Concept Summaries Whenever key areas of the law need additional emphasis, we provide a Concept Summary. These summaries have always been a popular pedagogical tool in this text. There are now more than fifty of these summaries, many of which have been modified to achieve greater clarity.

Exhibits When appropriate, we also illustrate important aspects of the law in graphic form in exhibits. In all, more than one hundred exhibits are featured in Business Law, Eleventh Edition. For this edition, we have added eight new exhibits, and we have modified existing exhibits to achieve better clarity. Some examples of the new exhibits are:

• Exhibit 2–3 Basic Differences in the Traditional Forms of ADR

• Exhibit 8–2 Existing Generic Top Level Domain Names

• Exhibit 26–2 Defenses against Liability on Negotiable Instruments

• Exhibit 38–1 Offshore Low-Tax Jurisdictions • Exhibit 39–1 Directors’Management Responsibilities • Exhibit 41–1 Basic Functions of the SEC

• E-Discovery and Cost-Shifting (Chapter 3). • Stand-Your-Ground Laws (Chapter 9).

An Effective Case Format

• Removing Class-Action Lawsuits to the Federal

For this edition, we have carefully selected recent cases that not only provide on-point illustrations of the legal principles discussed in the chapter but also are of high interest to students. In all, more than 70 percent of the cases in the Eleventh Edition are from 2006 or 2007. As mentioned, for this edition we have included one Extended Case per chapter that is presented entirely in the court’s language and does not include any paraphrased section on the case’s background and facts or the decision and remedy. The remaining cases in each chapter appear in our usual Business

Courts (Chapter 23).

• New Issues in Online Privacy and Employment Discrimination (Chapter 34).

Contemporary Legal Debates Contemporary Legal Debates features are also interspersed throughout this edition of Business Law. These features introduce the student to a controversial issue that is now being debated within the legal community. A Where Do You Stand? section concluding each fea-

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Law format, which now includes two case-ending questions for every case in this edition of the text.We also provide bracketed definitions for any terms in the opinion that might be difficult for students to understand.Cases may include one or more of the following sections, a few of which have already been described:

• Company Profiles—Certain cases include a profile describing the history of the company involved to give students an awareness of the context of the case before the court. Some profiles include the URL for the company’s Web site.

• What If the Facts Were Different?—One case in each chapter concludes with this special section.The student is asked to decide whether a specified change in the facts of the case would alter its outcome. Suggested answers to these questions are included in both the Instructor’s Manual and the Answers Manual that accompany this text.

• The Ethical [E-Commerce, Global, or Legal Environment] Dimension—As discussed previously, these special new questions ask students to explore different aspects of the issues of the case and help instructors meet core curriculum requirements for business law. Suggested answers to these questions are included in both the Instructor’s Manual and the Answers Manual that accompany this text.

• International Considerations—These sections let your students know how the particular issue before the court is treated in other countries.

• Impact of This Case on Today’s Law— Because many students are unclear about how some of the older cases presented in this text affect today’s court rulings,we include a special section at the end of landmark and classic cases that clarifies the relevance of the particular case to modern law.

options for questions in each category (true/false,multiple choice, essay).

Questions and Case Problems with Sample Answers In response to those instructors who would like students to have sample answers available for some of the questions and case problems, we have included two questions with sample answers in each chapter. The Question with Sample Answer is a hypothetical question for which students can access a sample answer in Appendix I at the end of the text. Every chapter also has one Case Problem with Sample Answer that is based on an actual case and answered on the text’s Web site (located at academic. cengage.com/blaw/clarkson). Students can compare the answers provided to their own answers to determine whether they have done a good job of responding to the question and to learn what should be included when answering the end-of-chapter questions and case problems.

The Most Complete Supplements Package Available Today This edition of Business Law is accompanied by a vast number of teaching and learning supplements. We have already mentioned the CengageNOW for Business Law: Interactive Assignment System and the supplemental resources available on the text’s Web site at academic.cengage.com/blaw/clarkson. In addition, there are numerous other supplements, including those listed below, that make up the complete teaching/learning package for the Eleventh Edition. For further information on the Business Law teaching/learning package, contact your local sales representative or visit the Business Law Web site.

Two Test Banks Available

Printed Supplements

To provide instructors with even greater flexibility in teaching, we offer two separate test banks, each with a complete set of questions for every chapter of Business Law, Eleventh Edition.These two test banks have been significantly revised and many new questions added. Those instructors who would like to alternate the tests they give their students each semester can now do so without having to create additional testing materials.In addition, instructors who would like to pick and choose from the questions offered have twice as many

• Instructor’s Manual—Includes case synopses, additional cases addressing the issue for selected cases, background information, teaching suggestions, and lecture enhancements, as well as suggested answers to all the case-ending and feature-ending questions, the questions in the Reviewing features at the end of each chapter, and additional materials on the Focus on Ethics sections at the end of each unit. (Also available on the Instructor’s Resource CD, or IRCD.)

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• Study Guide—Includes essay questions and sample CPA exam questions.

• Two comprehensive Test Banks—Test Bank 1 and Test Bank 2 each contain approximately 1,040 multiple-choice questions with answers, more than 1,040 true/false questions with answers, and two short essay questions per chapter (104 in each Test Bank). Additionally, there is one question for every Emerging Trends and Contemporary Legal Debates feature, and two multiple-choice questions for each Focus on Ethics section. (Also available on the IRCD.)

• Answers to Questions and Case Problems and Alternate Problem Sets with Answers— Provides answers to all the questions and case problems presented in the text, including the new Special Case Analysis questions, A Question of Ethics, and Video Questions, as well as suggested answers to all the case-ending questions, featureending questions, and the questions in the Reviewing features at the end of each chapter. (Also available on the IRCD.)

Software, Video, and Multimedia Supplements • Instructor’s Resource CD-ROM ( IRCD)—The IRCD includes the following supplements: Instructor’s Manual, Answers Manual, Test Bank 1 and Test Bank 2, Case-Problem Cases, Case Printouts, Lecture Outline System, PowerPoint slides, ExamView, Instructor’s Manual for the Drama of the Law video series, Handbook of Landmark Cases and Statutes in Business Law and the Legal Environment, Handbook on Critical Thinking and Writing in Business Law and the Legal Environment, and A Guide to Personal Law.

• ExamView Testing Software (also available on the IRCD).

• Lecture Outline System (also available on the IRCD).

• PowerPoint slides (also available on the IRCD). • WebTutor—Feature chat,discussion groups,testing, student progress tracking, and business law course materials.

• Case-Problem Cases (available only on the IRCD). • Transparencies (available only on the IRCD). • Westlaw®—Ten free hours for qualified adopters.

• Digital Video Library—Provides access to more than sixty-five videos, including the Drama of the Law videos and video clips from actual Hollywood movies. Access to our Digital Video Library is available in an optional package with each new text at no additional cost. If the Digital Video Library access did not come packaged with the textbook, your students can purchase it online at academic. cengage.com/blaw/dvl.

• Videos—Qualified adopters using this text have access to the entire library of videos in VHS format, a vast selection covering most business law issues. For more information about these videotapes, visit academic.cengage.com/blaw/vl.

For Users of the Tenth Edition First of all, we want to thank you for helping make Business Law the best-selling business law text in America today. Second,we want to make you aware of the numerous additions and changes that we have made in this edition—many in response to comments from reviewers. For example, we have added more examples and incorporated the latest United States Supreme Court decisions throughout the text as appropriate. We have substantially revised and reorganized the business organizations unit (Unit Eight), particularly the chapters on corporations (Chapter 38 through 40), which have been changed to be more in line with the reality of modern corporate law. We have simplified and streamlined the chapter on securities law (Chapter 41), and we have revised and reorganized the property chapters (Chapters 47 and 48).

Significantly Revised Chapters Every chapter of the Eleventh Edition has been revised as necessary to incorporate new developments in the law or to streamline the presentations. A number of new trends in business law are also addressed in the cases and special features of the Eleventh Edition. Other major changes and additions made for this edition include the following:

• Chapter 2 (Courts and Alternative Dispute Resolution)—To provide greater clarity on important foundational issues, many parts of this chapter were reworked, including the discussions of personal jurisdiction, Internet jurisdiction, standing to sue, and appellate review. A chart was added to illustrate the differences among various methods of alternative dispute resolution, and we present a

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2006 United States Supreme Court decision on arbitration clauses. In addition, the discussion of electronic filing systems and online dispute resolution was updated. An Insight into Ethics feature was added to discuss how the use of private judges is affecting the justice system.

• Chapter 3 (Court Procedures)—The section on electronic evidence and discovery issues has been updated to include the federal rules that took effect in 2006.

• Chapter 4 (Constitutional Authority to Regulate Business)—The chapter has been thoroughly revised and updated to incorporate recent United States Supreme Court decisions,such as the case on Internet wine shipments and the dormant commerce clause. New examples have been added throughout, and the materials reworked to focus on business context. The chapter includes discussions of the USA Patriot Act’s effect on constitutional rights and recent decisions on preemption, unprotected speech, freedom of religion, and privacy rights. A Contemporary Legal Debates feature addresses whether State Regulation of Internet Prescription Transactions Violates the Dormant Commerce Clause.

• Chapter 5 (Ethics and Business Decision Making)— This chapter has been significantly revised and now includes a new section that provides step-by-step guidance on making ethical business decisions. Several new cases were added, and an Insight into the Global Environment feature addresses ethical issues faced by German corporations.

• Chapter 6 (Intentional Torts)—A discussion of the compensatory and punitive damages available in tort actions was added, and a Contemporary Legal Debates feature addresses Tort Reform. Two cases from 2007 are included, one on the scope of an Internet service provider’s immunity for online defamation and the other on invasion of privacy. New subsections discuss trends in appropriation (right of publicity) claims and abusive or frivolous litigation.

• Chapter 8 (Intellectual Property and Internet Law)—The materials on intellectual property rights have been thoroughly revised and updated to reflect the most current laws and trends. Several recent United States Supreme Court cases are presented (the 2007 patent decision, KSR International Co. v. Teleflex, Inc., is the Extended Case, and the

2006 trademark decision in Menashe v. V Secret Catalogue, Inc. is also included). A subsection on counterfeit goods and a 2006 law addressing counterfeit goods has been added to the trademark section. The materials on domain names, cybersquatting,and licensing have been revamped. The section on patents was expanded and new examples were added. The discussion of filesharing was updated, and a 2007 case is presented in which Sony Corporation brought a successful suit for copyright infringement against an individual who had downloaded eight songs. The chapter also includes updated information on international treaties protecting intellectual property and an Insight into E-Commerce feature on Search Engines versus Copyright Owners.

• Chapter 9 (Criminal Law and Cyber Crime)—New materials on identity theft and criminal spamming laws were added, and the existing materials were streamlined to focus more on corporate criminal liability. An updated discussion of sentencing guidelines is included, and the discussion of defenses to criminal charges was revised. An Emerging Trends feature covers Stand-Your-Ground Laws (state laws allowing the use of deadly force in homes and vehicles to thwart violent crimes such as robbery, carjacking, and sexual assault).

• Chapters 10 through 19 (the Contracts unit)— Throughout this unit, we have added more examples to clarify and enhance our already impressive contract law coverage. We have also included more up-to-date information and new features on topics likely to generate student interest, such as the Contemporary Legal Debates feature entitled Are Online Fantasy Sports Gambling? (in Chapter 13) and the feature on Internet Click Fraud (in Chapter 14). We have changed the titles of Chapters 14 and 15 to clearly describe the contents of each chapter in plain English (for example, the title “Mistakes, Fraud, and Voluntary Consent” replaces the former title “Genuineness of Assent”). We have chosen cases, problems, and examples for this unit that garner student interest, such as the Mike Tyson example in Chapter 16, and have revised the text to improve clarity and reduce legalese.

• Chapters 20 through 23 (the unit on Domestic and International Sales and Lease Contracts)—We have streamlined and simplified our coverage of the Uniform Commercial Code.We have added numer-

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ous new examples throughout the unit to increase student comprehension. Because no state has adopted the 2003 amendments to Articles 2 and 2A, we eliminated references to these amendments throughout the chapters.

• Chapters 24 through 27 (the unit on Negotiable Instruments)—We have updated this unit throughout to accommodate the reality of digital banking and funds transfers. In Chapter 24, we added an Insight into the Global Environment feature exploring the negotiability of checks in other nations.We added a new Concept Summary in Chapter 25 and replaced the Concept Summary on defenses in Chapter 26 with a more visually appealing exhibit on the same topic. In Chapter 27, we revised the materials to incorporate the Check-Clearing in the 21st Century Act (Check 21 Act) and included an Emerging Trends feature discussing how Using Digital Cash Facilities Money Laundering.

• Chapters 28 through 30 (the unit on Creditors’ Rights and Bankruptcy)—This unit has been revised to be more up to date and comprehensible. Chapter 29 (Secured Transactions) was substantially reorganized to clarify the general rules of priority and the exceptions to those rules. The bankruptcy law chapter (Chapter 30) is based on law after the 2005 Reform Act and includes updated dollar amounts of various provisions of the Bankruptcy Code.

• Chapter 33 (Employment and Labor Law) and Chapter 34 (Employment Discrimination)—These two chapters covering employment law have been thoroughly updated to include discussions of legal issues facing employers today. Chapter 33 includes updated minimum wage figures and Social Security and Medicare percentages. It also discusses overtime rules and provides the most current information on unionization, strikes, and employment monitoring. Chapter 34 now includes the latest developments and United States Supreme Court decisions,such as a decision that applied Title VII of the Civil Rights Act of 1964 to an employer with fewer than fifteen employees and another that set the standard of proof for retaliation claims.The text discussion of burden of proof in unintentional discrimination cases has been revised and clarified.A feature examines New Issues in Online Privacy and Employment Discrimination.

• Chapters 35 through 42 (the Business Organizations unit)—This unit has been substantially reorganized

and updated to improve the flow and clarity, and provide more practical information and recent examples. In Chapter 35 (Sole Proprietorships and Franchises), we added a section on the Franchise Rule that includes the 2007 amendments to the rule. In Chapter 36 (Partnerships and Limited Liability Partnerships), we added several examples, reworked the section on fiduciary duties, and clarified the materials on dissociation. The most significant changes to the unit were made in the corporations chapters (Chapters 38 through 40). Chapter 38 now includes a more updated discussion of promotional activities, and the materials on incorporation procedures were completely revised to reflect current state laws. New sections were added on offshore low-tax jurisdictions, venture capital, and private equity financing. In Chapter 39, we added coverage of the landmark case Guth v. Loft (on the duty of loyalty), a new exhibit, and updated materials on Sarbanes-Oxley. We also added discussions of various committees of the board of directors, corporate sentencing guidelines, and proxies, including new e-proxy rules.The topic of shareholder voting concerning executive pay is discussed,and a Contemporary Legal Debates feature explores the possibility of A Shareholder Access Rule. Chapter 40 has been revised to include share exchanges, clarify successor liability, improve coverage of appraisal rights, and rework the material on tender offers. We include discussion of takeover defenses and directors’ fiduciary duties. The chapter on securities law (Chapter 41) was revamped to make this difficult topic more understandable to students. The chapter now includes a new exhibit and overview of the functions of the Securities and Exchange Commission and a practical explanation of the Howey test. We also provide a simplified list of contents of a registration statements and an updated discussion of the registration process that clarifies current rules on a free writing prospectus. The final chapter in this unit (Chapter 42 on Law for Small Businesses) has also been considerably revised to address practical considerations, such as choosing to do business as a limited liability company, protecting trademarks, and avoiding liability. It also includes a feature on what businesspersons should consider before moving their small business online.

• Chapter 43 (Administrative Law)—This chapter has been reworked to focus on the practical significance of administrative law for businesspersons. A

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new section was added on the Administrative Procedures Act,and another section addresses how the courts give Chevron deference to agency rules. Informal agency actions are covered, and a new subsection discusses the exhaustion doctrine.

ing, relevant product market, and relevant geographic market.

• Chapters 47 and 48 (the Property unit)—We reor-

• Chapter 45 (Environmental Law)—The materials on air pollution and the subsection on wetlands have been updated. All of the cases in the chapter are from the United States Supreme Court, and a Contemporary Legal Debates feature discusses the 2007 Supreme Court decision in Massachusetts v. Environmental Protection Agency relating to global warming.

• Chapter 46 (Antitrust Law)—We added new examples and coverage of leading cases throughout the chapter, particularly in the discussions of price fix-

ganized and reworked the materials in the two property chapters as reviewers requested. Chapter 47 now begins with a section discussing the differences between personal and real property, and why the law makes this distinction. The materials on forms of property ownership (such as fee simple and joint tenancy) were moved from the personal property chapter (Chapter 47 ) to the real property chapter (48). The coverage of bailments was updated and simplified. Chapter 48 also includes more information on real estate sales contracts, including listing agreements, escrow agreements, marketable title, title searches, and title insurance.

Acknowledgments for Previous Editions Since we began this project many years ago,a sizable number of business law professors and others have helped us in various phases of the undertaking.The following reviewers offered numerous constructive criticisms, comments, and suggestions during the preparation of all previous editions. Jeffrey E. Allen University of Miami

Heidi Boerstler University of Colorado at Denver

Thomas Crane University of Miami

Judith Anshin Sacramento City College

Lawrence J. Bradley University of Notre Dame

Kenneth S. Culott University of Texas at Austin

Thomas M. Apke California State University, Fullerton

Doug Brown Montana State University

Larry R. Curtis Iowa State University

Kristi K. Brown University of Texas at Austin

Richard Dalebout Brigham Young University

William Auslen San Francisco City College

William J. Burke University of Massachusetts, Lowell

William H. Daughtrey, Jr. Virginia Commonwealth University

Mary B. Bader Moorhead State University

Kenneth Burns University of Miami

Michele A. Dunkerley University of Texas at Austin

Frank Bagan County College of Morris

Daniel R. Cahoy Pennsylvania State University

O. E. Elmore Texas A&M University

John J. Balek Morton College, Illinois

Jeanne A. Calderon New York University

Michael G. Barth University of Phoenix

Joseph E. Cantrell DeAnza College, California

Robert J. Enders California State Polytechnic University, Pomona

David L. Baumer North Carolina State University

Donald Cantwell University of Texas at Arlington

Barbara E. Behr Bloomsburg University of Pennsylvania

Robert Chatov State University of New York, Buffalo

Robert B. Bennett, Jr. Butler University

Robert J. Cox Salt Lake Community College

Raymond August Washington State University

Michael Engber Ball State University David A. Escamilla University of Texas at Austin Frank S. Forbes University of Nebraska at Omaha Joe W. Fowler Oklahoma State University

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Woodrow J. Maxwell Hudson Valley Community College, New York

Stanley G. Freeman University of South Carolina

John P. Huggard North Carolina State University

Christ Gaetanos State University of New York, Fredonia

Terry Hutchins Pembroke State University, North Carolina

Chester S. Galloway Auburn University

Robert Jesperson University of Houston

Gail McCracken University of Michigan, Dearborn

Bob Garrett American River College, California

Bryce J. Jones Northeast Missouri State University

John W. McGee Southwest Texas State University

Gary L. Giese University of Colorado at Denver

Margaret Jones Southwest Missouri State College

Thomas Gossman Western Michigan University

Peter A. Karl III SUNY Institute of Technology at Utica

Patrick O. Gudridge University of Miami School of Law James M. Haine University of Wisconsin, Stevens Point Gerard Halpern University of Arkansas

Jack E. Karns East Carolina University Tamra Kempf University of Miami Judith Kenney University of Miami

Bruce E. May University of South Dakota

Cotton Meagher University of Nevada at Las Vegas Roger E. Meiners University of Texas at Arlington Gerald S. Meisel Bergen Community College, New Jersey Richard Mills Cypress College David Minars City University of New York, Brooklyn

Barbara Kincaid Southern Methodist University

Leo Moersen The George Washington University

JoAnn W. Hammer University of Texas at Austin

Carey Kirk University of Northern Iowa

Alan Moggio Illinois Central College

Charles Hartman Wright State University, Ohio

Nancy P. Klintworth University of Central Florida

Violet E. Molnar Riverside City College

Richard A. Hausler University of Miami School of Law

Kurtis P. Klumb University of Wisconsin at Milwaukee

James E. Moon Meyer, Johnson & Moon, Minneapolis

Harry E. Hicks Butler University, Indianapolis

Kathleen M. Knutson College of St. Catherine, St. Paul, Minnesota

Melinda Ann Mora University of Texas at Austin

Christopher L. Hamilton Golden West College, California

Janine S. Hiller Virginia Polytechnic Institute and State University

M. Alan Lawson Mt. San Antonio College

Rebecca L. Hillyer Chemeketa Community College

Susan Liebeler Loyola University

E. Clayton Hipp, Jr. Clemson University

Thomas E. Maher California State University, Fullerton

Anthony H. Holliday, Jr. Howard University Telford Hollman University of Northern Iowa June A. Horrigan California State University, Sacramento

Bob Morgan Eastern Michigan University Joan Ann Mrava Los Angeles Southwest College Dwight D. Murphey Wichita State University Daniel E. Murray University of Miami School of Law

Sal Marchionna Triton College, Illinois

Paula C. Murray University of Texas

Gene A. Marsh University of Alabama

Gregory J. Naples Marquette University

Karen Kay Matson University of Texas at Austin

George A. Nation III Lehigh University

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Caleb L. Nichols Western Connecticut State University

S. Alan Schlact Kennesaw State University, Georgia

John M. Norwood University of Arkansas

Lorne H. Seidman University of Nevada at Las Vegas

Michael J. O’Hara University of Nebraska at Omaha

Roscoe B. Shain Austin Peay University

Rick F. Orsinger College of DuPage, Illinois

Bennett D. Shulman Lansing Community College, Michigan

Daniel J. O’Shea Hillsborough Community College Thomas L. Palmer Northern Arizona University Charles M. Patten University of Wisconsin, Oshkosh Patricia Pattison Texas State University, San Marcos Peyton J. Paxson University of Texas at Austin

S. Jay Sklar Temple University Dana Blair Smith University of Texas at Austin Michael Smydra Oakland Community College– Royal Oak Arthur Southwick University of Michigan

Edwin Tucker University of Connecticut Gary Victor Eastern Michigan University William H. Volz Wayne State University David Vyncke Scott Community College, Iowa William H. Walker Indiana University–Purdue University, Fort Wayne Diana Walsh County College of Morris Robert J. Walter University of Texas at El Paso Gary Watson California State University, Los Angeles

Sylvia A. Spade University of Texas at Austin

John L. Weimer Nicholls State University, Louisiana

John A. Sparks Grove City College, Pennsylvania

Marshall Wilkerson University of Texas at Austin

Brenda Steuer North Harris College, Houston

Arthur D. Wolfe Michigan State University

Marvin H. Robertson Harding University

Craig Stilwell Michigan State University

Elizabeth A. Wolfe University of Texas at Austin

Gary K. Sambol Rutgers State University

Irwin Stotsky University of Miami School of Law

Daniel R. Wrentmore Santa Barbara City College

Ralph L. Quinones University of Wisconsin, Oshkosh Carol D. Rasnic Virginia Commonwealth University

Rudy Sandoval University of Texas, San Antonio Sidney S. Sappington York College of Pennsylvania Martha Sartoris North Hennepin Community College Barbara P. Scheller Temple University

Larry Strate University of Nevada at Las Vegas Raymond Mason Taylor North Carolina State University H. Allan Tolbert Central Texas College

Norman Gregory Young California State Polytechnic University, Pomona Ronald C. Young Kalamazoo Valley Community College, Michigan

Jesse C. Trentadue University of North Dakota

We would also like to give credit to the following reviewers for their useful input during development of the CengageNOW for Business Law: Interactive Assignment System. Nena Ellison Florida Atlantic University Jacqueline Hagerott Franklin University

Melanie Morris Raritan Valley Community College

William H. Volz Wayne State University

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Acknowledgments for the Eleventh Edition In preparing the Eleventh Edition of Business Law, we worked closely with the following reviewers, each of whom offered us valuable suggestions for how to improve the text: Maria Kathleen Boss California State University, Los Angeles Rita Cain University of Missouri– Kansas City Jeanne A. Calderon New York University Nanette C. Clinch San Jose State University

Larry R. Curtis Iowa State University Leslie E. Lenn St. Edwards University Barry S. Morinaka Baker College–Michigan S. Alan Schlact Kennesaw State University, Georgia

As in all past editions, we owe a debt of extreme gratitude to the numerous individuals who worked directly with us or at Cengage Learning. In particular, we wish to thank Rob Dewey for his helpful advice and guidance during all of the stages of this new edition.We extend our thanks to Jan Lamar, our longtime developmental editor, for her many useful suggestions and for her efforts in coordinating reviews and ensuring the timely and accurate publication of all supplemental materials. We are also indebted to Lisa Lysne for her support and excellent marketing advice,and to Brian Courter and Rob Ellington for their skills in managing the Web site. Our production manager and designer, Bill Stryker, made sure that we came out with an error-free,visually attractive Eleventh Edition. We appreciate his efforts more than he can ever imagine.We are also indebted to the staff at Parkwood Composition, our compositor. Their ability to generate the pages for this text quickly and accurately made it possible for us to meet our ambitious printing schedule. We especially wish to thank Katherine Marie Silsbee for her management of the entire project, as well as for the application of her superb research and editorial skills. We also wish to thank Lavina Leed Miller for her significant contributions to this project, and William Eric Hollowell, who co-authored the

Elisabeth Sperow California Polytechnic University, San Luis Obispo Charles R. B. Stowe Sam Houston State University Melanie Stallings Williams California State University– Northridge

Instructor’s Manual, the Study Guide, and the two Test Banks, for his excellent research efforts.We were fortunate enough to have the copyediting of Pat Lewis and the proofreading services of Lorretta Palagi and Beverly Peavler. We also thank Vickie Reierson and Roxanna Lee for their proofreading and other assistance,which helped to ensure an error-free text.Finally, we thank Suzanne Jasin of K & M Consulting for her many special efforts on this project. In addition, we would like to give special thanks to all of the individuals who were instrumental in developing and implementing the new CengageNOW for Business Law: Interactive Assignment System. These include Rob Dewey, Jan Lamar, Lisa Lysne, and Christine Wittmer at Cengage, and Katherine Marie Silsbee,Roger Meiners,Lavina Leed Miller,William Eric Hollowell, Kimberly Wallan, and Kristi Wiswell who helped develop the content for this unique Web-based product. Through the years,we have enjoyed an ongoing correspondence with many of you who have found points on which you wish to comment. We continue to welcome all comments and promise to respond promptly. By incorporating your ideas, we can continue to write a business law text that is best for you and best for your students.

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Welcome to the world of business law and the legal environment.You are about to embark on the study of one of the most important topics you should master in today’s changing world.A solid understanding of business law can, of course, help you if you are going into the world of business. If you decide on a career in accounting, economics, finance, political science, or history, understanding how the legal environment works is crucial. Moreover, in your role as a consumer, you will be faced with some legal issues throughout your lifetime—renting an apartment, buying a house, obtaining a mortgage, and leasing a car, to mention only a few.In your role as an employee (if you don’t go into business for yourself ), you will need to know what rights you have and what rights you don’t have. Even when you contemplate marriage, you will be faced with legal issues.

What You Will Find in This Text As you will see as you thumb through the pages in this text, we have tried to make your study of business law and the legal environment as efficient and enjoyable as possible.To this end,you will find the following aids:

1. Mastering Terminology—through key terms

2. 3.

4.

5.

that are boldfaced,listed at the end of each chapter, and explained fully in the Glossary at the end of the book. Understanding Concepts—through numerous Concept Summaries and exhibits. Observing the Law in the Context of the Real World—through a Reviewing feature at the end of every chapter. Seeing How Legal Issues Can Arise—through Video Questions based on Web-available short videos, many from actual Hollywood movies. Figuring Out How the Law Is Evolving— through a feature called Emerging Trends.

6. Determining Today’s Legal Controversies— through a feature called Contemporary Legal Debates. 7. Gaining Insights into How the Law Affects or Is Affected by Other Issues—through three new Insight features called Insight into E-Commerce, Insight into Ethics, and Insight into the Global Environment. The above list,of course,is representative only. You will understand much more of what the law is about as you read through the court cases presented in this book, including extended case excerpts, which will give you a feel for how the courts really decide cases,in the courts’ language.

Improving Your Ability to Perform Legal Reasoning and Analysis Although business law may seem to be a mass of facts, your goal in taking this course should also be an increased ability to use legal reasoning and analysis to figure out how legal situations will be resolved.To this end,you will find the following key learning features to assist you in mastering legal reasoning and analysis:

• Finding and Analyzing Case Law—In Chapter 1, you will find a section with this title that explains:

1. Legal citations. 2. The standard elements of a case. 3. The different types of opinions a court can issue. 4. How to read and understand cases. • Briefing a Case—In Appendix A, you will see how to brief and analyze case problems. This explanation teaches you how to break down the elements of a case and will improve your ability to answer the Case Problems in each chapter.

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• Questions with Sample Answers—At the end of

• Legal reference materials including a “Statutes”

each chapter, there is one hypothetical factual scenario that presents a legal question for which you can access a sample answer in Appendix I (and also on the text’s Web site).This allows you to practice and to see if you are answering the hypothetical problems correctly.

page that offers links to the full text of selected statutes referenced in the text, a Spanish glossary, and links to other important legal resources available for free on the Web.

• Case Problems with Sample Answers—Each chapter has a series of chapter-ending Case Problems. You can find an answer to one problem in each chapter on this book’s student companion Web site at academic.cengage.com/ blaw/clarkson. You can easily compare your answer to the court’s answer in the actual case.

• Internet exercises for every chapter in the text (at least two per chapter) that introduce you to how to research the law online.

• Relevant Web sites for additional research for Emerging Trends features as well as links to the URLs listed in the Law on the Web section at the end of each chapter.

• Online Legal Research Guide that offers com-

landmark classic case concludes with a short section that explains the relevance of older case law to the way courts reason today.

plete yet brief guidance to using the Internet and evaluating information obtained from the Internet. As an online resource, it now includes hyperlinks to the Web sites discussed for clickthrough convenience.

• What If the Facts Were Different?—This section,

• Court case updates for follow-up research on

• Impact of This Case on Today’s Law—Each

found at the end of selected cases, encourages you to think about how the outcome of a case might be different if the facts were altered.

• The Ethical [E-Commerce, Global, or Legal Environment] Dimension—Every case in this text concludes with two critical-thinking questions, which may include What If the Facts Were Different? questions, as discussed above. For this edition, we’ve included several new possibilities—(The Ethical Dimension, The E-Commerce Dimension, The Global Dimension, and The Legal Environment Dimension.) These questions ask you to explore the law in a variety of contexts to help you meet the specific curriculum requirements for business law students.

The Companion Student Web Site As already mentioned, the companion student Web site at academic.cengage.com/blaw/clarkson provides you with short videos on various legal topics and with sample answers to one case problem per chapter. In addition, you will find the following:

• Interactive quizzes for every chapter. • A glossary of terms for every chapter in the text. • Flashcards that provide an optional study tool for reviewing the key terms in every chapter.

• Appendix A: How to Brief and Analyze Case Problems that will help you analyze cases. This useful appendix for the book is also provided on the Web site and can be downloaded.

topics covered in the text.

• Link to CengageNOW for Business Law: Interactive Assignment System with different types of questions related to every chapter in the text and one set of cumulative questions for each unit in the text. (Available on an instructor’s request, see below.)

Interactive Assignments on the Web Some of you may have instructors who provide assignments using our world-class interactive Web-based system, called CengageNOW for Business Law: Interactive Assignment System. CengageNOW for Business Law: Interactive Assignment System allows you to improve your mastery of legal concepts and terminology,legal reasoning and analysis, and much more.Your instructor will give you further information if she or he decides to use this Web-based system. Of course, whether or not you are using the CengageNOW system,you will wish to consider purchasing the Study Guide, which can help you get a better grade in your course (see the inside cover for details). The law is all around you—and will be for the rest of your life.We hope that you begin your first course in business law and the legal environment with the same high degree of excitement that we, the authors, always have when we work on improving this text, now in its Eleventh Edition. Business Law has withstood the test of time—several million students before you have already used and benefited by it.

Dedication To John Meisenbach, You are truly one of the world’s good guys. Thanks for your friendship and your professionalism. R.L.M.

To my wife, Joann; my children, Kathy, Gary, Lori, and Rory; and my grandchildren, Erin, Megan, Eric, Emily, Michelle, Javier, Carmen, and Steve. G.A.J.

To my parents and sisters. F.B.C.

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ne of the important functions of law in any society is to provide stability, predictability, and continuity so that people can be sure of how to order their affairs. If any society is to survive, its citizens must be able to determine what is legally right and legally wrong. They must know what sanctions will be imposed on them if they commit wrongful acts. If they suffer harm as a result of others’ wrongful acts, they must know how they can seek redress. By setting forth the rights, obligations, and privileges of citizens, the law enables individuals to go about their business with confidence and a certain degree of predictability. The stability and predictability created by the law provide an essential framework for all civilized activities, including business activities. What do we mean when we speak of “the law”? Although this term has had, and will continue to have, different definitions, they are

all based on a general observation: at a minimum, law consists of enforceable rules governing relationships among individuals and between individuals and their society.These “enforceable rules” may consist of unwritten principles of behavior established by a nomadic tribe. They may be set forth in a law code, such as the Code of Hammurabi in ancient Babylon (c. 1780 B.C.E.) or the law code of one of today’s European nations. They may consist of written laws and court decisions created by modern legislative and judicial bodies, as in the United States. Regardless of how such rules are created, they all have one thing in common: they establish rights, duties, and privileges that are consistent with the values and beliefs of their society or its ruling group. Those who embark on a study of law will find that these broad statements leave unanswered

Schools of Jurisprudential Thought You may think that legal philosophy is far removed from the practical study of business law and the legal environment. In fact, it is not. As you will learn in the chapters of this text, how judges apply the law to spe2

some important questions concerning the nature of law. Part of the study of law, often referred to as jurisprudence, involves learning about different schools of jurisprudential thought and discovering how the approaches to law characteristic of each school can affect judicial decision making. We open this introductory chapter with an examination of that topic.We then look at an important question for any student reading this text: How does the legal environment affect business decision making? We next describe the basic sources of American law, the common law tradition, and some general classifications of law. We conclude the chapter with sections offering practical guidance on several topics, including how to find the sources of law discussed in this chapter (and referred to throughout the text) and how to read and understand court opinions.

cific disputes, including disputes relating to the business world, depends in part on their philosophical approaches to law. Clearly, judges are not free to decide cases solely on the basis of their personal philosophical views or on their opinions about the issues before the court. A judge’s function is not to make the laws—that is the function of the legislative branch of government—but

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to interpret and apply them. From a practical point of view, however, the courts play a significant role in defining what the law is.This is because laws enacted by legislative bodies tend to be expressed in general terms. Judges thus have some flexibility in interpreting and applying the law. It is because of this flexibility that different courts can, and often do, arrive at different conclusions in cases that involve nearly identical issues, facts, and applicable laws. This flexibility also means that each judge’s unique personality, legal philosophy, set of values,and intellectual attributes necessarily frame the judicial decision-making process to some extent. Over time several significant schools of legal, or jurisprudential, thought have evolved.We now look at some of them.

The Natural Law School An age-old question about the nature of law has to do with the finality of a nation’s laws, such as the laws of the United States at the present time.For example,what if a particular law is deemed to be a “bad”law by a substantial number of that nation’s citizens? Must a citizen obey the law if it goes against his or her conscience to do so? Is there a higher or universal law to which individuals can appeal? One who adheres to the natural law tradition would answer these questions in the affirmative. Natural law denotes a system of moral and ethical principles that are inherent in human nature and that people can discover through the use of their natural intelligence, or reason. The natural law tradition is one of the oldest and most significant schools of jurisprudence.It dates back to the days of the Greek philosopher Aristotle (384–322 B.C.E.), who distinguished between natural law and the laws governing a particular nation. According to Aristotle, natural law applies universally to all humankind. The notion that people have “natural rights” stems from the natural law tradition.Those who claim that a specific foreign government is depriving certain citizens of their human rights implicitly are appealing to a higher law that has universal applicability. The question of the universality of basic human rights also comes into play in the context of international business operations. Should rights extended to workers in the United States, such as the right to be free of discrimination in the workplace, be extended to workers employed by a U.S. firm doing business in another country that does not provide for such rights? This

question is rooted implicitly in a concept of universal rights that has its origins in the natural law tradition.

The Positivist School In contrast, positive law, or national law (the written law of a given society at a particular point in time), applies only to the citizens of that nation or society. Those who adhere to the positivist school believe that there can be no higher law than a nation’s positive law.According to the positivist school, there is no such thing as “natural rights.” Rather, human rights exist solely because of laws. If the laws are not enforced, anarchy will result. Thus, whether a law is “bad” or “good” is irrelevant. The law is the law and must be obeyed until it is changed—in an orderly manner through a legitimate lawmaking process. A judge with positivist leanings probably would be more inclined to defer to an existing law than would a judge who adheres to the natural law tradition.

The Historical School The historical school of legal thought emphasizes the evolutionary process of law by concentrating on the origin and history of the legal system. Thus, this school looks to the past to discover what the principles of contemporary law should be. The legal doctrines that have withstood the passage of time—those that have worked in the past—are deemed best suited for shaping present laws. Hence, law derives its legitimacy and authority from adhering to the standards that historical development has shown to be workable. Adherents of the historical school are more likely than those of other schools to strictly follow decisions made in past cases.

Legal Realism In the 1920s and 1930s, a number of jurists and scholars, known as legal realists, rebelled against the historical approach to law. Legal realism is based on the idea that law is just one of many institutions in society and that it is shaped by social forces and needs. The law is a human enterprise, and judges should take social and economic realities into account when deciding cases. Legal realists also believe that the law can never be applied with total uniformity. Given that judges are human beings with unique personalities, value systems, and intellects, different judges will obviously bring different reasoning processes to the same case.

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Legal realism strongly influenced the growth of what is sometimes called the sociological school of jurisprudence.This school views law as a tool for promoting justice in society. In the 1960s, for example, the justices of the United States Supreme Court played a leading role in the civil rights movement by upholding long-neglected laws calling for equal treatment for all Americans, including African Americans and other minorities. Generally, jurists who adhere to this philosophy of law are more likely to depart from past decisions than are those jurists who adhere to the other schools of legal thought.Concept Summary 1.1 reviews the schools of jurisprudential thought.

Business Activities and the Legal Environment As those entering the world of business will learn,laws and government regulations affect virtually all business activities—from hiring and firing decisions to workplace safety, the manufacturing and marketing of products,business financing,and more. To make good business decisions,a basic knowledge of the laws and

regulations governing these activities is beneficial—if not essential. Realize also that in today’s world a knowledge of “black-letter” law is not enough. Businesspersons are also pressured to make ethical decisions. Thus, the study of business law necessarily involves an ethical dimension.

Many Different Laws May Affect a Single Business Transaction As you will note, each chapter in this text covers a specific area of the law and shows how the legal rules in that area affect business activities. Though compartmentalizing the law in this fashion promotes conceptual clarity, it does not indicate the extent to which a number of different laws may apply to just one transaction. Consider an example. Suppose that you are the president of NetSys, Inc., a company that creates and maintains computer network systems for its clients, including business firms. NetSys also markets software for customers who require an internal computer network. One day, Hernandez, an operations officer for Southwest Distribution Corporation (SDC), contacts you by e-mail about a possible contract concerning SDC’s computer network. In deciding whether to enter

CONCEPT SUMMARY 1.1

Schools of Jurisprudential Thought School of Thought

Description

THE NATURAL LAW SCHOOL One of the oldest and most significant schools of legal thought.Those who believe in natural law hold that there is a universal law applicable to all human beings.This law is discoverable through reason and is of a higher order than positive (national) law.

THE POSITIVIST SCHOOL

A school of legal thought centered on the assumption that there is no law higher than the laws created by the government. Laws must be obeyed, even if they are unjust, to prevent anarchy.

THE HISTORICAL SCHOOL

A school of legal thought that stresses the evolutionary nature of law and that looks to doctrines that have withstood the passage of time for guidance in shaping present laws.

LEGAL REALISM

A school of legal thought, popular during the 1920s and 1930s, that left a lasting imprint on American jurisprudence. Legal realists generally advocated a less abstract and more realistic and pragmatic approach to the law, an approach that would take into account customary practices and the circumstances in which transactions take place. Legal realism strongly influenced the growth of the sociological school of jurisprudence, which views law as a tool for promoting social justice.

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into a contract with SDC, you should consider, among other things, the legal requirements for an enforceable contract. Are there different requirements for a contract for services and a contract for products? What are your options if SDC breaches (breaks, or fails to perform) the contract? The answers to these questions are part of contract law and sales law. Other questions might concern payment under the contract. How can you guarantee that NetSys will be paid? For example, if payment is made with a check that is returned for insufficient funds, what are your options? Answers to these questions can be found in the laws that relate to negotiable instruments (such as checks) and creditors’rights. Also,a dispute may occur over the rights to NetSys’s software, or there may be a question of liability if the software is defective. Questions may even be raised as to whether you and Hernandez had the authority to make the deal in the first place. A disagreement may arise from other circumstances, such as an accountant’s evaluation of the contract. Resolutions of these questions may be found in areas of the law that relate to intellectual property, e-commerce, torts, product liability, agency, business organizations, or professional liability. EXHIBIT 1–1

•

Finally, if any dispute cannot be resolved amicably, then the laws and the rules concerning courts and court procedures spell out the steps of a lawsuit. Exhibit 1–1 illustrates the various areas of law that may influence business decision making.

Ethics and Business Decision Making Merely knowing the areas of law that may affect a business decision is not sufficient in today’s business world. Businesspersons must also take ethics into account. As you will learn in Chapter 5, ethics is generally defined as the study of what constitutes right or wrong behavior. Today, business decision makers need to consider not just whether a decision is legal, but also whether it is ethical. Throughout this text, you will learn about the relationship between the law and ethics, as well as about some of the types of ethical questions that often arise in the business context. For example, the unit-ending Focus on Ethics features in this text are devoted solely to the exploration of ethical questions pertaining to selected topics treated within the unit. We have also added several new features for this edition that stress

Areas of the Law That May Affect Business Decision Making

Contracts

Courts and Court Procedures

Sales

Negotiable Instruments

Professional Liability Business Decision Making

Business Organizations

Creditors’ Rights

Intellectual Property

Agency

E- Commerce

Torts

Product Liability

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the importance of ethical considerations in today’s business climate. These include the new Ethical Dimension questions that conclude many of the cases presented in this text and the Insight into Ethics features that appear in selected chapters. We have also included A Question of Ethics case problems at the ends of the chapters to introduce you to the ethical aspects of specific cases involving real-life situations. Additionally, Chapter 5 offers a detailed look at the importance of ethical considerations in business decision making.

Sources of American Law There are numerous sources of American law. Primary sources of law,or sources that establish the law,include the following:

1. The U.S. Constitution and the constitutions of the various states.

2. Statutory law—including laws passed by Congress, state legislatures, or local governing bodies.

3. Regulations created by administrative agencies, such as the Food and Drug Administration.

4. Case law and common law doctrines. We describe each of these important sources of law in the following pages. Secondary sources of law are books and articles that summarize and clarify the primary sources of law. Examples include legal encyclopedias, treatises, articles in law reviews, and compilations of law, such as the Restatements of the Law (which will be discussed shortly).Courts often refer to secondary sources of law for guidance in interpreting and applying the primary sources of law discussed here.

Constitutional Law The federal government and the states have separate written constitutions that set forth the general organization, powers, and limits of their respective governments. Constitutional law is the law as expressed in these constitutions. According to Article VI of the U.S. Constitution, the Constitution is the supreme law of the land.As such, it is the basis of all law in the United States.A law in violation of the Constitution, if challenged, will be declared unconstitutional and will not be enforced,no matter what its source. Because of its importance in

the American legal system, we present the complete text of the U.S. Constitution in Appendix B. The Tenth Amendment to the U.S. Constitution reserves to the states all powers not granted to the federal government. Each state in the union has its own constitution. Unless it conflicts with the U.S. Constitution or a federal law, a state constitution is supreme within the state’s borders.

Statutory Law Laws enacted by legislative bodies at any level of government,such as the statutes passed by Congress or by state legislatures, make up the body of law generally referred to as statutory law. When a legislature passes a statute, that statute ultimately is included in the federal code of laws or the relevant state code of laws (these codes are discussed later in this chapter). Statutory law also includes local ordinances— statutes (laws, rules, or orders) passed by municipal or county governing units to govern matters not covered by federal or state law. Ordinances commonly have to do with city or county land use (zoning ordinances), building and safety codes, and other matters affecting the local community. A federal statute, of course, applies to all states. A state statute, in contrast, applies only within the state’s borders.State laws thus may vary from state to state.No federal statute may violate the U.S.Constitution,and no state statute or local ordinance may violate the U.S. Constitution or the relevant state constitution. Uniform Laws The differences among state laws were particularly notable in the 1800s,when conflicting state statutes frequently made trade and commerce among the states difficult.To counter these problems,in 1892 a group of legal scholars and lawyers formed the National Conference of Commissioners on Uniform State Laws (NCCUSL) to draft uniform laws, or model laws, for the states to consider adopting. The NCCUSL still exists today and continues to issue uniform laws. Each state has the option of adopting or rejecting a uniform law. Only if a state legislature adopts a uniform law does that law become part of the statutory law of that state. Note that a state legislature may adopt all or part of a uniform law as it is written, or the legislature may rewrite the law however the legislature wishes. Hence, even though many states may have adopted a uniform law, those states’ laws may not be entirely “uniform.” The earliest uniform law, the Uniform Negotiable Instruments Law, was completed by 1896 and adopted

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in every state by the early 1920s (although not all states used exactly the same wording). Over the following decades, other acts were drawn up in a similar manner. In all, more than two hundred uniform acts have been issued by the NCCUSL since its inception. The most ambitious uniform act of all, however, was the Uniform Commercial Code. The Uniform Commercial Code The Uniform Commercial Code (UCC), which was created through the joint efforts of the NCCUSL and the American Law Institute,1 was first issued in 1952. All fifty states,2 the District of Columbia, and the Virgin Islands have adopted the UCC. It facilitates commerce among the states by providing a uniform, yet flexible, set of rules governing commercial transactions. The UCC assures businesspersons that their contracts, if validly entered into, normally will be enforced. As you will read in later chapters, from time to time the NCCUSL revises the articles contained in the UCC and submits the revised versions to the states for adoption. During the 1990s, for example, four articles (Articles 3, 4, 5, and 9) were revised, and two new articles (Articles 2A and 4A) were added.Amendments to Article 1 were approved in 2001 and have now been adopted by a majority of the states. Because of its importance in the area of commercial law, we cite the UCC frequently in this text.We also present the UCC in Appendix C.

Administrative Law Another important source of American law is administrative law, which consists of the rules, orders, and decisions of administrative agencies. An administrative agency is a federal, state, or local government agency established to perform a specific function. Administrative law and procedures, which will be examined in detail in Chapter 43, constitute a dominant element in the regulatory environment of business. Rules issued by various administrative agencies now affect virtually every aspect of a business’s operations, including its capital structure and financing, its hiring and firing procedures, its relations with employees and unions, and the way it manufactures and markets its products.

1. This institute was formed in the 1920s and consists of practicing attorneys, legal scholars, and judges. 2. Louisiana has not adopted Articles 2 and 2A (covering contracts for the sale and lease of goods), however.

Federal Agencies At the national level,numerous

executive agencies exist within the cabinet departments of the executive branch. The Food and Drug Administration, for example, is an agency within the Department of Health and Human Services. Executive agencies are subject to the authority of the president, who has the power to appoint and remove officers of federal agencies. There are also major independent regulatory agencies at the federal level, such as the Federal Trade Commission,the Securities and Exchange Commission, and the Federal Communications Commission.The president’s power is less pronounced in regard to independent agencies,whose officers serve for fixed terms and cannot be removed without just cause. State and Local Agencies There are adminis-

trative agencies at the state and local levels as well. Commonly, a state agency (such as a state pollutioncontrol agency) is created as a parallel to a federal agency (such as the Environmental Protection Agency). Just as federal statutes take precedence over conflicting state statutes, so federal agency regulations take precedence over conflicting state regulations.

Case Law and Common Law Doctrines The rules of law announced in court decisions constitute another basic source of American law. These rules of law include interpretations of constitutional provisions, of statutes enacted by legislatures, and of regulations created by administrative agencies. Today, this body of judge-made law is referred to as case law. Case law—the doctrines and principles announced in cases—governs all areas not covered by statutory law or administrative law and is part of our common law tradition.We look at the origins and characteristics of the common law tradition in some detail in the pages that follow. See Concept Summary 1.2 on the next page for a review of the sources of American law.

The Common Law Tradition Because of our colonial heritage, much of American law is based on the English legal system, which originated in medieval England and continued to evolve in the following centuries. Knowledge of this system is necessary to understanding the American legal system today.

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CONCEPT SUMMARY 1.2

Sources of American Law Source

Description

CONSTITUTIONAL LAW

The law as expressed in the U.S. Constitution and the state constitutions.The U.S. Constitution is the supreme law of the land. State constitutions are supreme within state borders to the extent that they do not violate a clause of the U.S. Constitution or a federal law.

STATUTORY LAW

Laws (statutes and ordinances) created by federal, state, and local legislatures and governing bodies. None of these laws may violate the U.S. Constitution or the relevant state constitution. Uniform statutes, when adopted by a state, become statutory law in that state.

ADMINISTRATIVE LAW

The rules, orders, and decisions of federal, state, or local government administrative agencies.

CASE LAW AND COMMON LAW DOCTRINES

Judge-made law, including interpretations of constitutional provisions, of statutes enacted by legislatures, and of regulations created by administrative agencies.

Early English Courts The origins of the English legal system—and thus the U.S.legal system as well—date back to 1066,when the Normans conquered England.William the Conqueror and his successors began the process of unifying the country under their rule. One of the means they used to do this was the establishment of the king’s courts, or curiae regis. Before the Norman Conquest, disputes had been settled according to the local legal customs and traditions in various regions of the country. The king’s courts sought to establish a uniform set of customs for the country as a whole.What evolved in these courts was the beginning of the common law—a body of general rules that applied throughout the entire English realm. Eventually, the common law tradition became part of the heritage of all nations that were once British colonies, including the United States. Courts of Law and Remedies at Law The

early English king’s courts could grant only very limited kinds of remedies (the legal means to enforce a right or redress a wrong). If one person wronged another in some way, the king’s courts could award as compensation one or more of the following: (1) land, (2) items of value, or (3) money. The courts that awarded this compensation became known as courts of law, and the three remedies were called remedies at law. (Today, the remedy at law normally takes the form of monetary damages—an amount given to a

party whose legal interests have been injured.) Even though the system introduced uniformity in the settling of disputes, when a complaining party wanted a remedy other than economic compensation, the courts of law could do nothing, so “no remedy, no right.” Courts of Equity and Remedies in Equity

Equity is a branch of law, founded on what might be described as notions of justice and fair dealing, that seeks to supply a remedy when no adequate remedy at law is available.When individuals could not obtain an adequate remedy in a court of law, they petitioned the king for relief.Most of these petitions were decided by an adviser to the king, called a chancellor, who had the power to grant new and unique remedies. Eventually, formal chancery courts, or courts of equity, were established. The remedies granted by the equity courts became known as remedies in equity, or equitable remedies. These remedies include specific performance (ordering a party to perform an agreement as promised), an injunction (ordering a party to cease engaging in a specific activity or to undo some wrong or injury), and rescission (the cancellation of a contractual obligation). We discuss these and other equitable remedies in more detail at appropriate points in the chapters that follow, particularly in Chapter 18. As a general rule, today’s courts, like the early English courts, will not grant equitable remedies

9

unless the remedy at law—monetary damages—is inadequate.For example,suppose that you form a contract (a legally binding agreement—see Chapter 10) to purchase a parcel of land that you think will be just perfect for your future home. Further suppose that the seller breaches this agreement.You could sue the seller for the return of any deposits or down payment you might have made on the land, but this is not the remedy you really seek.What you want is to have the court order the seller to go through with the contract. In other words, you want the court to grant the equitable remedy of specific performance because monetary damages are inadequate in this situation. Equitable Maxims In fashioning appropriate

remedies, judges often were (and continue to be) guided by so-called equitable maxims—propositions or general statements of equitable rules. Exhibit 1–2 lists some important equitable maxims. The last maxim listed in that exhibit—“Equity aids the vigilant, not those who rest on their rights”—merits special attention. It has become known as the equitable doctrine of laches (a term derived from the Latin laxus, meaning “lax” or “negligent”), and it can be used as a defense. A defense is an argument raised by the defendant (the party being sued) indicating why the plaintiff (the suing party) should not obtain the remedy sought. (Note that in equity proceedings, the party bringing a lawsuit is called the petitioner, and the party being sued is referred to as the respondent.) The doctrine of laches arose to encourage people to bring lawsuits while the evidence was fresh. What constitutes a reasonable time, of course, varies according to the circumstances of the case.Time periods for different types of cases are now usually fixed by EXHIBIT 1–2

•

statutes of limitations. After the time allowed under a statute of limitations has expired,no action (lawsuit) can be brought, no matter how strong the case was originally.

Legal and Equitable Remedies Today The establishment of courts of equity in medieval England resulted in two distinct court systems: courts of law and courts of equity. The systems had different sets of judges and granted different types of remedies. During the nineteenth century, however, most states in the United States adopted rules of procedure that resulted in the combining of courts of law and equity. A party now may request both legal and equitable remedies in the same action, and the trial court judge may grant either or both forms of relief. The distinction between legal and equitable remedies remains relevant to students of business law, however, because these remedies differ. To seek the proper remedy for a wrong,one must know what remedies are available. Additionally, certain vestiges of the procedures used when there were separate courts of law and equity still exist. For example, a party has the right to demand a jury trial in an action at law, but not in an action in equity. Exhibit 1–3 on page 10 summarizes the procedural differences (applicable in most states) between an action at law and an action in equity.

The Doctrine of Stare Decisis One of the unique features of the common law is that it is judge-made law. The body of principles and doctrines that form the common law emerged over time as judges decided legal controversies.

Equitable Maxims

1. Whoever seeks equity must do equity. (Anyone who wishes to be treated fairly must treat others fairly.) 2. Where there is equal equity, the law must prevail. (The law will determine the outcome of a controversy in which the merits of both sides are equal.)

3. One seeking the aid of an equity court must come to the court with clean hands. (Plaintiffs must have acted fairly and honestly.)

4. Equity will not suffer a wrong to be without a remedy. (Equitable relief will be awarded when there is a right to relief and there is no adequate remedy at law.)

5. Equity regards substance rather than form. (Equity is more concerned with fairness and justice than with legal technicalities.)

6. Equity aids the vigilant, not those who rest on their rights. (Equity will not help those who neglect their rights for an unreasonable period of time.)

10

EXHIBIT 1–3

•

Procedural Differences between an Action at Law and an Action in Equity

Procedure

Action at Law

Initiation of lawsuit

By filing a complaint

By filing a petition

Parties

Plaintiff and defendant

Petitioner and respondent

Decision

By jury or judge

By judge (no jury)

Result

Judgment

Decree

Remedy

Monetary damages

Injunction, specific performance, or rescission

Case Precedents and Case Reporters

When possible, judges attempted to be consistent and to base their decisions on the principles suggested by earlier cases.They sought to decide similar cases in a similar way and considered new cases with care because they knew that their decisions would make new law. Each interpretation became part of the law on the subject and served as a legal precedent—that is, a decision that furnished an example or authority for deciding subsequent cases involving similar legal principles or facts. In the early years of the common law, there was no single place or publication where court opinions, or written decisions, could be found. By the early fourteenth century, portions of the most important decisions of each year were being gathered together and recorded in Year Books, which became useful references for lawyers and judges. In the sixteenth century, the Year Books were discontinued, and other forms of case publication became available. Today, cases are published, or “reported,” in volumes called reporters, or reports. We describe today’s case reporting system in detail later in this chapter. Stare Decisis and the Common Law Tradition The practice of deciding new cases with

reference to former decisions, or precedents, became a cornerstone of the English and American judicial systems. The practice formed a doctrine known as stare decisis 3 (a Latin phrase meaning “to stand on decided cases”). Under this doctrine, judges are obligated to follow the precedents established within their jurisdictions. The term jurisdiction refers to an area in which a court or courts have the power to apply the law—see 3. Pronounced ster-ay dih-si-ses.

Action in Equity

Chapter 2.Once a court has set forth a principle of law as being applicable to a certain set of facts, that court and courts of lower rank (within the same jurisdiction) must adhere to that principle and apply it in future cases involving similar fact patterns. Thus, stare decisis has two aspects: first, that decisions made by a higher court are binding on lower courts; and second, that a court should not overturn its own precedents unless there is a compelling reason to do so. The doctrine of stare decisis helps the courts to be more efficient because if other courts have carefully analyzed a similar case,their legal reasoning and opinions can serve as guides. Stare decisis also makes the law more stable and predictable. If the law on a given subject is well settled, someone bringing a case to court can usually rely on the court to make a decision based on what the law has been in the past. A Typical Scenario To illustrate how the doc-

trine of stare decisis works, consider an example. Suppose that the lower state courts in Georgia have reached conflicting conclusions on whether drivers are liable for accidents they cause while merging into freeway traffic. Some courts have held drivers liable even though the drivers looked and did not see any oncoming traffic and even though witnesses (passengers in their cars) testified to that effect. To settle the law on this issue, the Georgia Supreme Court decides to review a case involving this fact pattern. The court rules that,in such a situation,the driver who is merging into traffic is liable for any accidents caused by the driver’s failure to yield to freeway traffic—even if the driver looked carefully and did not see an approaching vehicle. The Georgia Supreme Court’s decision on this matter is a binding authority—a case precedent, statute, or other source of law that a court must follow when

11

deciding a case. In other words, the Georgia Supreme Court’s decision will influence the outcome of all future cases on this issue brought before the Georgia state courts. Similarly, a decision on a given question by the United States Supreme Court (the nation’s highest court), no matter how old, is binding on all courts. Departures from Precedent Although courts are obligated to follow precedents, sometimes a court will depart from the rule of precedent if it decides that the precedent should no longer be followed. If a court decides that a ruling precedent is simply incorrect or that technological or social changes have rendered the precedent inapplicable, the court might rule contrary to the precedent. Cases that overturn precedent often receive a great deal of publicity. Note that judges do have some flexibility in applying precedents. For example, a lower court may avoid applying a precedent set by a higher court in its jurisdiction by distinguishing the two cases based on their facts. When this happens, the lower court’s ruling stands unless it is appealed to a higher court and that court overturns the decision. When There Is No Precedent Occasionally, the courts must decide cases for which no precedents exist, called cases of first impression. For example, as you will read throughout this text, the extensive use of the Internet has presented many new and challenging issues for the courts to decide. In deciding cases of first impression, courts often look at persuasive authorities (precedents from other jurisdictions) for guidance. A court may also consider a number of factors, including legal principles and policies underlying previous court decisions or existing statutes, fairness, social values and customs, public policy (governmental policy based on widely held societal values), and data and concepts drawn from the social sciences. Which of these sources is chosen or receives the greatest emphasis depends on the nature of the case being considered and the particular judge or judges hearing the case.

Stare Decisis and Legal Reasoning Legal reasoning is the reasoning process used by judges in deciding what law applies to a given dispute and then applying that law to the specific facts or circumstances of the case. Through the use of legal reasoning, judges harmonize their decisions with those that have been made before, as the doctrine of stare decisis requires.

Students of business law and the legal environment also engage in legal reasoning. For example, you may be asked to provide answers for some of the case problems that appear at the end of every chapter in this text. Each problem describes the facts of a particular dispute and the legal question at issue. If you are assigned a case problem, you will be asked to determine how a court would answer that question, and why. In other words,you will need to give legal reasons for whatever conclusion you reach.4 We look here at the basic steps involved in legal reasoning and then describe some forms of reasoning commonly used by the courts in making their decisions. Basic Steps in Legal Reasoning At times,the

legal arguments set forth in court opinions are relatively simple and brief. At other times, the arguments are complex and lengthy. Regardless of the length of a legal argument, however, the basic steps of the legal reasoning process remain the same.These steps,which you also can follow when analyzing cases and case problems, form what is commonly referred to as the IRAC method of legal reasoning. IRAC is an acronym formed from the first letters of the following words: Issue, Rule, Application, and Conclusion. To apply the IRAC method, you would ask the following questions:

1. What are the key facts and issues? For example,suppose that a plaintiff comes before the court claiming assault (a wrongful and intentional action in which one person makes another fearful of immediate physical harm—part of a class of actions called torts).The plaintiff claims that the defendant threatened her while she was sleeping. Although the plaintiff was unaware that she was being threatened, her roommate heard the defendant make the threat. The legal issue, or question, raised by these facts is whether the defendant’s actions constitute the tort of assault, given that the plaintiff was not aware of those actions at the time they occurred. 2. What rules of law apply to the case? A rule of law may be a rule stated by the courts in previous decisions, a state or federal statute, or a state or federal administrative agency regulation. In our hypothetical case, the plaintiff alleges (claims) that the defendant committed a tort. Therefore, the applicable law is the common law of torts—specifically, tort law governing assault (see Chapter 6 for more

4. See Appendix A for further instructions on how to analyze case problems.

12

detail on intentional torts). Case precedents involving similar facts and issues thus would be relevant. Often, more than one rule of law will be applicable to a case. 3. How do the rules of law apply to the particular facts and circumstances of this case? This step is often the most difficult because each case presents a unique set of facts, circumstances, and parties. Although cases may be similar, no two cases are ever identical in all respects. Normally, judges (and lawyers and law students) try to find cases on point—previously decided cases that are as similar as possible to the one under consideration.(Because of the difficulty—and importance—of this step in the legal reasoning process, we discuss it in more detail in the next subsection.) 4. What conclusion should be drawn? This step normally presents few problems. Usually, the conclusion is evident if the previous three steps have been followed carefully. Forms of Legal Reasoning Judges use many

types of reasoning when following the third step of the legal reasoning process—applying the law to the facts of a particular case.Three common forms of reasoning are deductive reasoning, linear reasoning, and reasoning by analogy. Deductive Reasoning. Deductive reasoning is sometimes called syllogistic reasoning because it employs a syllogism—a logical relationship involving a major premise, a minor premise, and a conclusion. For example,consider the hypothetical case presented earlier,in which the plaintiff alleged that the defendant committed assault by threatening her while she was sleeping. The judge might point out that “under the common law of torts,an individual must be aware of a threat of danger for the threat to constitute assault” (major premise); “the plaintiff in this case was unaware of the threat at the time it occurred” (minor premise); and “therefore, the circumstances do not amount to an assault” (conclusion). Linear Reasoning. A second important form of legal reasoning that is commonly employed might be thought of as “linear” reasoning because it proceeds from one point to another, with the final point being the conclusion. An analogy will help make this form of reasoning clear. Imagine a knotted rope, with each knot tying together separate pieces of rope to form a tightly knotted length. As a whole, the rope represents

a linear progression of thought logically connecting various points, with the last point, or knot, representing the conclusion. For example, suppose that a tenant in an apartment building sues the landlord for damages for an injury resulting from an allegedly inadequately lit stairway. The court may engage in a reasoning process involving the following “pieces of rope”:

1. The landlord,who was on the premises the evening

2. 3.

4. 5.

the injury occurred, testifies that none of the other nine tenants who used the stairway that night complained about the lights. The fact that none of the tenants complained is the same as if they had said the lighting was sufficient. That there were no complaints does not prove that the lighting was sufficient but does prove that the landlord had no reason to believe that it was not. The landlord’s belief was reasonable because no one complained. Therefore, the landlord acted reasonably and was not negligent with respect to the lighting in the stairway.

From this reasoning, the court concludes that the tenant is not entitled to compensation on the basis of the stairway’s allegedly insufficient lighting. Reasoning by Analogy. Another important type of reasoning that judges use in deciding cases is reasoning by analogy. To reason by analogy is to compare the facts in the case at hand to the facts in other cases and, to the extent that the patterns are similar, to apply the same rule of law to the present case.To the extent that the facts are unique, or “distinguishable,” different rules may apply. For example, in case A, the court held that a driver who crossed a highway’s center line was negligent.Case B involves a driver who crosses the line to avoid hitting a child. In determining whether case A’s rule applies in case B,a judge would consider what the reasons were for the decision in A and whether B is sufficiently similar for those reasons to apply. If the judge holds that B’s driver is not liable, that judge must indicate why case A’s rule is not relevant to the facts presented in case B.

There Is No One “Right” Answer Many persons believe that there is one “right”answer to every legal question. In most situations involving a legal controversy, however, there is no single correct result. Good arguments can often be made to support either side of a legal controversy. Quite often, a case

13

does not involve a “good”person suing a “bad”person. In many cases,both parties have acted in good faith in some measure or in bad faith to some degree. Additionally, each judge has her or his own personal beliefs and philosophy, which shape, at least to some extent,the process of legal reasoning.This means that the outcome of a particular lawsuit before a court cannot be predicted with absolute certainty. In fact, in some cases, even though the weight of the law would seem to favor one party’s position, judges, through creative legal reasoning, have found ways to rule in favor of the other party in the interests of preventing injustice.Legal reasoning and other aspects of the common law tradition are reviewed in Concept Summary 1.3.

The Common Law Today Today, the common law derived from judicial decisions continues to be applied throughout the United States. Common law doctrines and principles govern

all areas not covered by statutory or administrative law. In a dispute concerning a particular employment practice, for example, if a statute regulates that practice,the statute will apply rather than the common law doctrine that applied prior to the enactment of the statute.

The Continuing Importance of the Common Law Because the body of statutory law has expanded greatly since the beginning of this nation, thus narrowing the applicability of common law doctrines,it might seem that the common law has dwindled in importance. This is not true, however. For one thing, even in areas governed by statutory law, there is a significant interplay between statutory law and the common law. For example, many statutes essentially codify existing common law rules, and regulations issued by various administrative agencies usually are based, at least in part, on common law principles. Additionally, the courts, in interpreting statutory law, often rely on the

CONCEPT SUMMARY 1.3

The Common Law Tradition Aspect ORIGINS OF THE COMMON

Description LAW

The American legal system is based on the common law tradition, which originated in medieval England. Following the conquest of England in 1066 by William the Conqueror, king’s courts were established throughout England, and the common law was developed in these courts.

LEGAL AND EQUITABLE REMEDIES

The distinction between remedies at law (money or items of value, such as land) and remedies in equity (including specific performance, injunction, and rescission of a contractual obligation) originated in the early English courts of law and courts of equity, respectively.

CASE PRECEDENTS AND THE DOCTRINE OF STARE DECISIS

In the king’s courts, judges attempted to make their decisions consistent with previous decisions, called precedents.This practice gave rise to the doctrine of stare decisis. This doctrine, which became a cornerstone of the common law tradition, obligates judges to abide by precedents established in their jurisdictions.

STARE DECISIS AND LEGAL REASONING

Legal reasoning refers to the reasoning process used by judges in applying the law to the facts and issues of specific cases. Legal reasoning involves becoming familiar with the key facts of a case, identifying the relevant legal rules, applying those rules to the facts, and drawing a conclusion. In applying the legal rules to the facts of a case, judges may use deductive reasoning, linear reasoning, or reasoning by analogy.

14

common law as a guide to what the legislators intended. Furthermore, how the courts interpret a particular statute determines how that statute will be applied. If you wanted to learn about the coverage and applicability of a particular statute, for example, you would necessarily have to locate the statute and study it.You would also need to see how the courts in your jurisdiction have interpreted and applied the statute. In other words, you would have to learn what precedents have been established in your jurisdiction with respect to that statute. Often, the applicability of a newly enacted statute does not become clear until a body of case law develops to clarify how, when, and to whom the statute applies.

Restatements of the Law The American Law Institute (ALI) has drafted and published compilations of the common law called Restatements of the Law, which generally summarize the common law rules followed by most states. There are Restatements of the Law in the areas of contracts, torts, agency, trusts, property, restitution, security, judgments, and conflict of laws. The Restatements, like other secondary sources of law, do not in themselves have the force of law,but they are an important source of legal analysis and opinion on which judges often rely in making their decisions. Many of the Restatements are now in their second, third, or fourth editions. We refer to the Restatements frequently in subsequent chapters of this text, indicating in parentheses the edition to which we are referring.For example,we refer to the second edition of the Restatement of the Law of Contracts as simply the Restatement (Second) of Contracts.

Classifications of Law The substantial body of the law may be broken down according to several classification systems. For example, one classification system divides law into substantive law and procedural law. Substantive law consists of all laws that define, describe, regulate, and create legal rights and obligations. Procedural law consists of all laws that delineate the methods of enforcing the rights established by substantive law. Other classification systems divide law into federal law and state law, private law (dealing with relationships between pri-

vate entities) and public law (addressing the relationship between persons and their governments), and national law and international law. Here we look at still another classification system, which divides law into civil law and criminal law, as well as at what is meant by the term cyberlaw.

Civil Law and Criminal Law Civil law spells out the rights and duties that exist between persons and between persons and their governments, as well as the relief available when a person’s rights are violated. Typically, in a civil case, a private party sues another private party (although the government can also sue a party for a civil law violation) to make that other party comply with a duty or pay for the damage caused by failure to comply with a duty.Much of the law that we discuss in this text is civil law. Contract law, for example, covered in Chapters 10 through 19,is civil law. The whole body of tort law (see Chapters 6 and 7) is also civil law. Criminal law, in contrast, is concerned with wrongs committed against the public as a whole. Criminal acts are defined and prohibited by local, state, or federal government statutes. Criminal defendants are thus prosecuted by public officials,such as a district attorney ( D.A.), on behalf of the state, not by their victims or other private parties.(See Chapter 9 for a further discussion of the distinction between civil law and criminal law.)

Cyberlaw As mentioned,the use of the Internet to conduct business transactions has led to new types of legal issues. In response, courts have had to adapt traditional laws to situations that are unique to our age. Additionally, legislatures have created laws to deal specifically with such issues. Frequently, people use the term cyberlaw to refer to the emerging body of law that governs transactions conducted via the Internet. Cyberlaw is not really a classification of law, nor is it a new type of law. Rather, it is an informal term used to describe traditional legal principles that have been modified and adapted to fit situations that are unique to the online world. Of course, in some areas new statutes have been enacted, at both the federal and state levels, to cover specific types of problems stemming from online communications. Throughout this book, you will read how the law in a given area is evolving to govern specific legal issues that arise in the online context.

15

How to Find Primary Sources of Law This text includes numerous citations to primary sources of law—federal and state statutes, the U.S. Constitution and state constitutions, regulations issued by administrative agencies, and court cases. (A citation is a reference to a publication in which a legal authority—such as a statute or a court decision or other source—can be found.) In this section, we explain how you can use citations to find primary sources of law. Note that in addition to the primary sources being published in sets of books as described next, most federal and state laws and case decisions are also available online.

Finding Statutory and Administrative Law When Congress passes laws, they are collected in a publication titled United States Statutes at Large. When state legislatures pass laws,they are collected in similar state publications. Most frequently, however, laws are referred to in their codified form—that is, the form in which they appear in the federal and state codes. In these codes, laws are compiled by subject. United States Code The United States Code (U.S.C.) arranges all existing federal laws by broad subject. Each of the fifty subjects is given a title and a title number. For example, laws relating to commerce and trade are collected in Title 15, “Commerce and Trade.” Titles are subdivided by sections. A citation to the U.S.C. includes both title and section numbers. Thus,a reference to “15 U.S.C. Section 1”means that the statute can be found in Section 1 of Title 15.(“Section” may also be designated by the symbol §, and “Sections,” by §§.) In addition to the print publication of the U.S.C., the federal government also provides a searchable online database of the United States Code at www.gpoaccess.gov/uscode/index.html. Commercial publications of federal laws and regulations are also available. For example, West Group publishes the United States Code Annotated ( U.S.C.A.). The U.S.C.A. contains the official text of the U.S.C., plus notes (annotations) on court decisions that interpret and apply specific sections of the statutes. The U.S.C.A. also includes additional research aids, such as cross-references to related statutes, historical notes, and library references. A

citation to the U.S.C.A. is similar to a citation to the U.S.C.:“15 U.S.C.A. Section 1.” State Codes State codes follow the U.S.C.pattern of arranging law by subject. They may be called codes, revisions,compilations,consolidations,general statutes, or statutes, depending on the preferences of the states. In some codes, subjects are designated by number. In others, they are designated by name. For example,“13 Pennsylvania Consolidated Statutes Section 1101” means that the statute can be found in Title 13, Section 1101, of the Pennsylvania code.“California Commercial Code Section 1101” means that the statute can be found under the subject heading “Commercial Code”of the California code in Section 1101. Abbreviations are often used.For example,“13 Pennsylvania Consolidated Statutes Section 1101”is abbreviated “13 Pa.C.S.§ 1101,” and “California Commercial Code Section 1101” is abbreviated “Cal. Com. Code § 1101.” Administrative Rules Rules and regulations adopted by federal administrative agencies are initially published in the Federal Register, a daily publication of the U.S. government. Later, they are incorporated into the Code of Federal Regulations (C.F.R.). Like the U.S.C., the C.F. R. is divided into fifty titles.Rules within each title are assigned section numbers. A full citation to the C.F.R. includes title and section numbers. For example, a reference to “17 C.F.R. Section 230.504” means that the rule can be found in Section 230.504 of Title 17.

Finding Case Law Before discussing the case reporting system, we need to look briefly at the court system (which will be discussed in detail in Chapter 2). There are two types of courts in the United States, federal courts and state courts.Both the federal and state court systems consist of several levels,or tiers,of courts.Trial courts, in which evidence is presented and testimony given, are on the bottom tier (which also includes lower courts that handle specialized issues). Decisions from a trial court can be appealed to a higher court,which commonly is an intermediate court of appeals, or an appellate court. Decisions from these intermediate courts of appeals may be appealed to an even higher court, such as a state supreme court or the United States Supreme Court. State Court Decisions Most state trial court

decisions are not published in books (except in New

16

York and a few other states, which publish selected trial court opinions). Decisions from state trial courts are typically filed in the office of the clerk of the court, where the decisions are available for public inspection. Written decisions of the appellate, or reviewing, courts,however,are published and distributed (both in print and via the Internet). As you will note,most of the state court cases presented in this book are from state appellate courts.The reported appellate decisions are published in volumes called reports or reporters,which are numbered consecutively. State appellate court decisions are found in the state reporters of that particular state. Official reports are volumes that are published by the state, whereas unofficial reports are privately published. Regional Reporters. State court opinions appear in regional units of the National Reporter System, published by West Group. Most lawyers and libraries have the West reporters because they report cases more quickly, and are distributed more widely, than the statepublished reporters. In fact, many states have eliminated their own reporters in favor of West’s National Reporter System.The National Reporter System divides the states into the following geographic areas: Atlantic (A. or A.2d), North Eastern (N.E. or N.E.2d), North Western (N.W.or N.W.2d),Pacific (P.,P.2d,or P.3d),South Eastern (S.E. or S.E.2d), South Western (S.W., S.W.2d, or S.W.3d),and Southern (So.or So.2d).(The 2d and 3d in the preceding abbreviations refer to Second Series and Third Series, respectively.) The states included in each of these regional divisions are indicated in Exhibit 1–4, which illustrates West’s National Reporter System. Case Citations. After appellate decisions have been published, they are normally referred to (cited) by the name of the case; the volume,name,and page number of the state’s official reporter (if different from West’s National Reporter System); the volume, name, and page number of the National Reporter; and the volume, name, and page number of any other selected reporter. (Citing a reporter by volume number, name, and page number, in that order, is common to all citations; often, as in this book, the year the decision was issued will be included in parentheses, just after the citations to reporters.) When more than one reporter is cited for the same case, each reference is called a parallel citation. Note that some states have adopted a “public domain citation system”that uses a somewhat different format for the citation. For example, in Wisconsin, a

Wisconsin Supreme Court decision might be designated “2008 WI 40,” meaning that the case was decided in the year 2008 by the Wisconsin Supreme Court and was the fortieth decision issued by that court during that year. Parallel citations to the Wisconsin Reports and West’s North Western Reporter are still included after the public domain citation. Consider the following case citation: Borelli v. H and H Contracting, Inc., 100 Conn.App. 680, 919 A.2d 500 (2007). We see that the opinion in this case can be found in Volume 100 of the official Connecticut Appellate Reports, on page 680.The parallel citation is to Volume 919 of the Atlantic Reporter, Second Series, page 500. In presenting appellate opinions in this text, in addition to the reporter, we give the name of the court hearing the case and the year of the court’s decision. Sample citations to state court decisions are explained in Exhibit 1–5 on pages 18–20. Federal Court Decisions Federal district (trial)

court decisions are published unofficially in West’s Federal Supplement (F.Supp. or F.Supp.2d), and opinions from the circuit courts of appeals (reviewing courts) are reported unofficially in West’s Federal Reporter (F., F.2d, or F.3d). Cases concerning federal bankruptcy law are published unofficially in West’s Bankruptcy Reporter (Bankr. or B.R.). The official edition of the United States Supreme Court decisions is the United States Reports (U.S.), which is published by the federal government. Unofficial editions of Supreme Court cases include West’s Supreme Court Reporter (S.Ct.) and the Lawyers’ Edition of the Supreme Court Reports (L.Ed. or L.Ed.2d). Sample citations for federal court decisions are also listed and explained in Exhibit 1–5. Unpublished Opinions Many court opinions that are not yet published or that are not intended for publication can be accessed through Westlaw® (abbreviated in citations as “WL”), an online legal database maintained by West Group.When no citation to a published reporter is available for cases cited in this text, we give the WL citation (see Exhibit 1–5 for an example). Can a court consider unpublished decisions as persuasive precedent? See this chapter’s Insight into E-Commerce feature on pages 22 and 23 for a discussion of this issue. Old Case Law On a few occasions, this text cites opinions from old, classic cases dating to the nineteenth century or earlier; some of these are from the

17

EXHIBIT 1–4

•

West’s National Reporter System—Regional/Federal Coverage Beginning 1885

Regional Reporters Atlantic Reporter (A. or A.2d) North Eastern Reporter (N.E. or N.E.2d) North Western Reporter (N.W. or N.W.2d)

1885 1879

Pacific Reporter (P., P.2d, or P.3d)

1883

South Eastern Reporter (S.E. or S.E.2d) South Western Reporter (S.W., S.W.2d, or S.W.3d) Southern Reporter (So. or So.2d)

1887 1886

Coverage Connecticut, Delaware, District of Columbia, Maine, Maryland, New Hampshire, New Jersey, Pennsylvania, Rhode Island, and Vermont. Illinois, Indiana, Massachusetts, New York, and Ohio. Iowa, Michigan, Minnesota, Nebraska, North Dakota, South Dakota, and Wisconsin. Alaska, Arizona, California, Colorado, Hawaii, Idaho, Kansas, Montana, Nevada, New Mexico, Oklahoma, Oregon, Utah, Washington, and Wyoming. Georgia, North Carolina, South Carolina, Virginia, and West Virginia. Arkansas, Kentucky, Missouri, Tennessee, and Texas.

1887

Alabama, Florida, Louisiana, and Mississippi.

Federal Reporters Federal Reporter (F., F.2d, or F.3d)

1880

Federal Supplement (F.Supp. or F.Supp.2d)

1932

Federal Rules Decisions (F.R.D.)

1939

Supreme Court Reporter (S.Ct.) Bankruptcy Reporter (Bankr.)

1882 1980

Military Justice Reporter (M.J.)

1978

U.S. Circuit Courts from 1880 to 1912; U.S. Commerce Court from 1911 to 1913; U.S. District Courts from 1880 to 1932; U.S. Court of Claims (now called U.S. Court of Federal Claims) from 1929 to 1932 and since 1960; U.S. Courts of Appeals since 1891; U.S. Court of Customs and Patent Appeals since 1929; U.S. Emergency Court of Appeals since 1943. U.S. Court of Claims from 1932 to 1960; U.S. District Courts since 1932; U.S. Customs Court since 1956. U.S. District Courts involving the Federal Rules of Civil Procedure since 1939 and Federal Rules of Criminal Procedure since 1946. United States Supreme Court since the October term of 1882. Bankruptcy decisions of U.S. Bankruptcy Courts, U.S. District Courts, U.S. Courts of Appeals, and the United States Supreme Court. U.S. Court of Military Appeals and Courts of Military Review for the Army, Navy, Air Force, and Coast Guard.

NATIONAL REPORTER SYSTEM MAP

WASH. MONTANA

VT.

N. DAK.

ME.

MINN. OREGON IDAHO

WIS.

S. DAK. WYOMING NEBR.

NEVADA

IOWA

PA. ILL.

UTAH CALIF.

N.Y. MICH.

IND.

COLORADO

OHIO W.VA.

KANSAS

MO.

N.H. MASS. R.I. CONN. N.J. DEL. MD.

VA.

KY. N. CAR.

ARIZONA

N. MEXICO

OKLA.

TENN. ARK.

S. CAR. MISS. ALA.

GA.

TEXAS LA. FLA.

ALASKA

HAWAII

Pacific North Western South Western North Eastern Atlantic South Eastern Southern

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EXHIBIT 1–5

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How to Read Citations STATE COURTS 273 Neb. 379, 730 N.W.2d 357 (2007)a N.W. is the abbreviation for West’s publication of state court decisions rendered in the North Western Reporter of the National Reporter System. 2d indicates that this case was included in the Second Series of that reporter. The number 730 refers to the volume number of the reporter; the number 357 refers to the page in that volume on which this case begins. Neb. is an abbreviation for Nebraska Reports, Nebraska’s official reports of the decisions of its highest court, the Nebraska Supreme Court.

146 Cal.App.4th 565, 52 Cal.Rptr.3d 908 (2007) Cal.Rptr. is the abbreviation for West’s unofficial reports—titled California Reporter— of the decisions of California courts.

8 N.Y.3d 422, 867 N.E.2d 381, 835 N.Y.S.2d 530 (2007) N.Y.S. is the abbreviation for West’s unofficial reports—titled New York Supplement—of the decisions of New York courts. N.Y. is the abbreviation for New York Reports, New York’s official reports of the decisions of its court of appeals. The New York Court of Appeals is the state’s highest court, analogous to other states’ supreme courts. In New York, a supreme court is a trial court.

284 Ga.App. 474, 644 S.E.2d 311 (2007) Ga.App. is the abbreviation for Georgia Appeals Reports, Georgia’s official reports of the decisions of its court of appeals.

FEDERAL COURTS ___ U.S. ___, 127 S.Ct. 1513, 167 L.Ed.2d 422 (2007) L.Ed. is an abbreviation for Lawyers’ Edition of the Supreme Court Reports, an unofficial edition of decisions of the United States Supreme Court. S.Ct. is the abbreviation for West’s unofficial reports—titled Supreme Court Reporter—of decisions of the United States Supreme Court. U.S. is the abbreviation for United States Reports, the official edition of the decisions of the United States Supreme Court.

a. The case names have been deleted from these citations to emphasize the publications. It should be kept in mind, however, that the name of a case is as important as the specific page numbers in the volumes in which it is found. If a citation is incorrect, the correct citation may be found in a publication’s index of case names. In addition to providing a check on errors in citations, the date of a case is important because the value of a recent case as an authority is likely to be greater than that of older cases.

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EXHIBIT 1–5

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How to Read Citations—Continued FEDERAL COURTS (Continued)

477 F.3d 908 (8th Cir. 2007) 8th Cir. is an abbreviation denoting that this case was decided in the U.S. Court of Appeals for the Eighth Circuit.

478 F.Supp.2d 496 (S.D.N.Y. 2007) S.D.N.Y. is an abbreviation indicating that the U.S. District Court for the Southern District of New York decided this case.

ENGLISH COURTS 9 Exch. 341, 156 Eng.Rep. 145 (1854) Eng.Rep. is an abbreviation for English Reports, Full Reprint, a series of reports containing selected decisions made in English courts between 1378 and 1865. Exch. is an abbreviation for English Exchequer Reports, which includes the original reports of cases decided in England’s Court of Exchequer.

STATUTORY AND OTHER CITATIONS 18 U.S.C. Section 1961(1)(A) U.S.C. denotes United States Code, the codification of United States Statutes at Large. The number 18 refers to the statute’s U.S.C. title number and 1961 to its section number within that title. The number 1 in parentheses refers to a subsection within the section, and the letter A in parentheses to a subdivision within the subsection.

UCC 2–206(1)(b) UCC is an abbreviation for Uniform Commercial Code. The first number 2 is a reference to an article of the UCC, and 206 to a section within that article. The number 1 in parentheses refers to a subsection within the section, and the letter b in parentheses to a subdivision within the subsection.

Restatement (Second) of Torts, Section 568 Restatement (Second) of Torts refers to the second edition of the American Law Institute’s Restatement of the Law of Torts. The number 568 refers to a specific section.

17 C.F.R. Section 230.505 C.F.R. is an abbreviation for Code of Federal Regulations, a compilation of federal administrative regulations. The number 17 designates the regulation’s title number, and 230.505 designates a specific section within that title.

EXHIBIT CONTINUES

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EXHIBIT 1–5

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How to Read Citations—Continued Westlaw® Citationsb

2007 WL 1660910 WL is an abbreviation for Westlaw. The number 2007 is the year of the document that can be found with this citation in the Westlaw database. The number 1660910 is a number assigned to a specific document. A higher number indicates that a document was added to the Westlaw database later in the year.

Uniform Resource Locators (URLs) http://www.westlaw.comc The suffix com is the top level domain (TLD) for this Web site. The TLD com is an abbreviation for “commercial,” which usually means that a for-profit entity hosts (maintains or supports) this Web site. westlaw is the host name—the part of the domain name selected by the organization that registered the name. In this case, West Group registered the name. This Internet site is the Westlaw database on the Web. www is an abbreviation for “World Wide Web.” The Web is a system of Internet servers that support documents formatted in HTML (hypertext markup language). HTML supports links to text, graphics, and audio and video files.

http://www.uscourts.gov This is “The Federal Judiciary Home Page.” The host is the Administrative Office of the U.S. Courts. The TLD gov is an abbreviation for “government.” This Web site includes information and links from, and about, the federal courts.

http://www.law.cornell.edu/index.html This part of a URL points to a Web page or file at a specific location within the host’s domain. This page is a menu with links to documents within the domain and to other Internet resources. This is the host name for a Web site that contains the Internet publications of the Legal Information Institute (LII), which is a part of Cornell Law School. The LII site includes a variety of legal materials and links to other legal resources on the Internet. The TLD edu is an abbreviation for “educational institution” (a school or a university).

http://www.ipl.org/div/news This part of the Web site points to a static news page at this Web site, which provides links to online newspapers from around the world. div is an abbreviation for “division,” which is the way that the Internet Public Library tags the content on its Web site as relating to a specific topic. ipl is an abbreviation for “Internet Public Library,” which is an online service that provides reference resources and links to other information services on the Web. The IPL is supported chiefly by the School of Information at the University of Michigan. The TLD org is an abbreviation for “organization” (normally nonprofit).

b. Many court decisions that are not yet published or that are not intended for publication can be accessed through Westlaw®, an online legal database. c. The basic form for a URL is “service://hostname/path.” The Internet service for all of the URLs in this text is http (hypertext transfer protocol). Because most Web browsers add this prefix automatically when a user enters a host name or a hostname/path, we have omitted the http:// from the URLs listed in this text.

21

English courts. The citations to these cases may not conform to the descriptions given above because the reporters in which they were published were often known by the names of the persons who compiled the reporters and have since been replaced.

How to Read and Understand Case Law The decisions made by the courts establish the boundaries of the law as it applies to virtually all business relationships. It thus is essential that businesspersons know how to read and understand case law. The cases that we present in this text have been condensed from the full text of the courts’ opinions and are presented in a special format. In approximately two-thirds of the cases,we have summarized the background and facts, as well as the court’s decision and remedy, in our own words and have included only selected portions of the court’s opinion (“in the language of the court”). In the remaining one-third of the cases, we have provided a longer excerpt from the court’s opinion without summarizing the background and facts or decision and remedy. For those who wish to review court cases as part of research projects or to gain additional legal information, the following sections will provide useful insights into how to read and understand case law.

Case Titles The title of a case, such as Adams v. Jones, indicates the names of the parties to the lawsuit. The v. in the case title stands for versus, which means “against.” In the trial court, Adams was the plaintiff—the person who filed the suit. Jones was the defendant. If the case is appealed, however, the appellate court will sometimes place the name of the party appealing the decision first, so the case may be called Jones v. Adams if Jones is appealing. Because some appellate courts retain the trial court order of names, it is often impossible to distinguish the plaintiff from the defendant in the title of a reported appellate court decision. You must carefully read the facts of each case to identify the parties. Otherwise, the discussion by the appellate court may be difficult to understand.

Terminology The following terms,phrases,and abbreviations are frequently encountered in court opinions and legal publications.Because it is important to understand what is meant by these terms, phrases, and abbreviations, we define and discuss them here. Parties to Lawsuits As mentioned previously,

the party initiating a lawsuit is referred to as the plaintiff or petitioner, depending on the nature of the action, and the party against whom a lawsuit is brought is the defendant or respondent. Lawsuits frequently involve more than one plaintiff and/or defendant.When a case is appealed from the original court or jurisdiction to another court or jurisdiction, the party appealing the case is called the appellant. The appellee is the party against whom the appeal is taken.(In some appellate courts,the party appealing a case is referred to as the petitioner, and the party against whom the suit is brought or appealed is called the respondent.) Judges and Justices The terms judge and justice are usually synonymous and represent two designations given to judges in various courts. All members of the United States Supreme Court, for example, are referred to as justices, and justice is the formal title often given to judges of appellate courts, although this is not always the case. In New York, a justice is a judge of the trial court (which is called the Supreme Court), and a member of the Court of Appeals (the state’s highest court) is called a judge. The term justice is commonly abbreviated to J., and justices, to JJ. A Supreme Court case might refer to Justice Alito as Alito, J., or to Chief Justice Roberts as Roberts, C.J. Decisions and Opinions Most decisions reached by reviewing, or appellate, courts are explained in written opinions. The opinion contains the court’s reasons for its decision,the rules of law that apply, and the judgment.

Unanimous, Concurring, and Dissenting Opinions. When all judges or justices unanimously agree on an opinion, the opinion is written for the entire court and can be deemed a unanimous opinion. When there is not a unanimous opinion, a majority opinion is written; the majority opinion outlines the

INSIGHT INTO E-COMMERCE

How the Internet Is Expanding Precedent The notion that courts should rely on precedents to decide the outcome of similar cases has long been a cornerstone of U.S. law. Nevertheless, the availability of “unpublished opinions” over the Internet is changing what the law considers to be precedent. An unpublished opinion is a decision made by an appellate court that is not intended for publication in a reporter (the bound books that contain court opinions).a Courts traditionally have not considered unpublished opinions to be “precedent,” binding or persuasive, and attorneys were often not allowed to refer to these decisions in their arguments.

unpublished. The number is equally high in some state court systems. California’s intermediate appellate courts, for example, publish only about 7 percent of their decisions. Even though certain decisions are not intended for publication, they are posted (“published”) almost immediately on online legal databases, such as Westlaw and Lexis. With the proliferation of free legal databases and court Web sites, the general public also has almost instant access to the unpublished decisions of most courts. This situation has caused a substantial amount of debate over whether unpublished opinions should be given the same precedential effect as published opinions.

An Increasing Number of Decisions Are Not Published in Case Reporters but Are Available Online

Should Unpublished Decisions Establish Precedent?

The number of court decisions not published in printed books has risen dramatically in recent years. By some estimates, nearly 80 percent of the decisions of the federal appellate courts are a. Recently decided cases that are not yet published are also sometimes called unpublished opinions, but because these decisions will eventually be printed in reporters, we do not include them here.

Prior to the Internet, one might have been able to justify not considering unpublished decisions to be precedent on the grounds of fairness. How could courts and lawyers be expected to consider the reasoning in unpublished decisions if they were not printed in the case reporters? Now that opinions are so readily available on the Web, however, this justification is no longer valid. Moreover, it now seems unfair not to consider these decisions as

view supported by the majority of the judges or justices deciding the case. If a judge agrees, or concurs, with the majority’s decision, but for different reasons, that judge may write a concurring opinion. A dissenting opinion presents the views of one or more judges who disagree with the majority’s decision. The dissenting opinion is important because it may form the basis of the arguments used years later in overruling the precedential majority opinion.

“in the bench,” generally all of the judges “sitting on the bench” of that court review the case.

Other Types of Opinions. Occasionally, a court issues a per curiam opinion. Per curiam is a Latin phrase meaning “of the court.” In per curiam opinions, there is no indication as to which judge or justice authored the opinion. This term may also be used for an announcement of a court’s disposition of a case that is not accompanied by a written opinion.Some of the cases presented in this text are en banc decisions. When an appellate court reviews a case en banc, which is a French term (derived from a Latin term) for

Background

22

A Sample Court Case To illustrate the elements in a court opinion, we present an annotated opinion in Exhibit 1–6 on pages 24–26. The opinion is from an actual case that the United States Supreme Court decided in 2007. of the Case At a schoolsanctioned and school-supervised event, a high school principal saw some of her students unfurl a banner conveying a message that she regarded as promoting illegal drug use. Consistent with school policy, which prohibited such messages at school events, the principal told the students to take down the banner. One student refused. The principal confiscated the banner and suspended the student. The student filed a suit in a federal district court against the principal and others,alleg-

precedent to some extent because they are so publicly accessible. Another argument against allowing unpublished decisions to be precedent concerns the quality of the legal reasoning set forth in these decisions. Staff attorneys and law clerks frequently write unpublished opinions so that judges can spend more time on the opinions intended for publication. Consequently, some claim that allowing unpublished decisions to establish precedent could result in bad precedents because the reasoning may not be up to par. If the decision is regarded merely as persuasive precedent, however, then judges who disagree with the reasoning are free to reject the conclusion.

The United States Supreme Court Changes Federal Rules on Unpublished Opinions after 2007 In spite of objections from several hundred judges and lawyers, the United States Supreme Court made history in 2006 when it announced that it would allow lawyers to refer to (cite) unpublished decisions in all federal courts. The new rule, Rule 32.1 of the Federal Rules of Appellate Procedure, states that federal courts may not prohibit or restrict the citation of federal judicial opinions that have been designated as “not for publication,” “non-precedential,” or “not precedent.” The rule

ing a violation of his rights under the U.S. Constitution. The court issued a judgment in the defendants’ favor. On the student’s appeal,the U.S.Court of Appeals for the Ninth Circuit reversed this judgment. The defendants appealed to the United States Supreme Court. Editorial Practice You will note that triple aster-

isks (* * *) and quadruple asterisks (* * * *) frequently appear in the opinion. The triple asterisks indicate that we have deleted a few words or sentences from the opinion for the sake of readability or brevity. Quadruple asterisks mean that an entire paragraph (or more) has been omitted.Additionally, when the opinion cites another case or legal source, the citation to the case or other source has been omitted to save space and to improve the flow of the text. These editorial practices are continued in the other court opinions presented in this book. In addition, whenever we present a court opinion that includes a term or phrase that may not be readily understand-

applies only to federal courts and only to unpublished opinions issued after January 1, 2007. It does not specify the effect that a court must give to one of its unpublished opinions or to an unpublished opinion from another court. Basically, the rule simply makes all the federal courts follow a uniform rule that allows attorneys to cite—and judges to consider as persuasive precedent—unpublished decisions beginning in 2007. The impact of this new rule remains to be seen. At present, the majority of states do not allow their state courts to consider the rulings in unpublished cases as persuasive precedent, and this rule does not affect the states. The Supreme Court’s decision, however, provides an example of how technology— the availability of unpublished opinions over the Internet—has affected the law. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ CRITICAL THINKING INSIGHT INTO THE SOCIAL ENVIRONMENT Now that the Supreme Court is allowing unpublished decisions to form persuasive precedent in federal courts, should state courts follow? Why or why not? ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

able, a bracketed definition or paraphrase has been added. Briefing Cases Knowing how to read and

understand court opinions and the legal reasoning used by the courts is an essential step in undertaking accurate legal research. A further step is “briefing,” or summarizing, the case. Legal researchers routinely brief cases by reducing the texts of the opinions to their essential elements. Generally, when you brief a case,you first summarize the background and facts of the case, as the authors have done for the cases presented within this text.You then indicate the issue (or issues) before the court.An important element in the case brief is, of course, the court’s decision on the issue and the legal reasoning used by the court in reaching that decision. Detailed instructions on how to brief a case are given in Appendix A, which also includes a briefed version of the sample court case presented in Exhibit 1–6. 23

24

EXHIBIT 1–6

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A Sample Court Case

MORSE v. FREDERICK This section contains the citation—the name of the case, the name of the court that heard the case, the year of the decision, and reporters in which the court’s opinion can be found. This line provides the name of the justice (or judge) who authored the Court’s opinion. The Court divides the opinion into four parts, headed by Roman numerals. The first part of the opinion summarizes the factual background of the case.

Supreme Court of the United States, 2007. ___ U.S. ___, 127 S.Ct. 2618, 168 L.Ed.2d 290. Chief Justice ROBERTS delivered the opinion of the Court. *

*

*

* I

On January 24, 2002, the Olympic Torch Relay passed through Juneau, Alaska, on its way to the winter games in Salt Lake City, Utah. The torchbearers were to proceed along a street in front of Juneau-Douglas High School ( JDHS) while school was in session. * * * Deborah Morse, the school principal, decided to permit staff and students to participate in the Torch Relay as an approved social event or class trip. Students were allowed to leave class to observe the relay from either side of the street. Teachers and administrative officials monitored the students’ actions. * * * As the torchbearers and camera crews passed by, [Joseph Frederick, a senior] and his friends unfurled a 14-foot banner bearing the phrase: “BONG HiTS 4 JESUS.” The large banner was easily readable by the students on the other side of the street. Principal Morse immediately crossed the street and demanded that the banner be taken down. Everyone but Frederick complied. Morse confiscated the banner and * * * suspended him for 10 days. * * *

A federal trial court in which a lawsuit is initiated. The First Amendment to the Constitution guarantees, among other freedoms, the right of free speech—to express one’s views without governmental restrictions. As this case illustrates, however, the right is not unlimited in all circumstances. A judgment that a court enters without beginning or continuing a trial. This judgment can be entered only if no facts are in dispute and the only question is how the law applies to the facts.

* * * [The] Juneau School District Board of Education upheld the suspension. * * * * Frederick then filed suit [in a federal district court against Morse and others] * * * , alleging that the school board and Morse had violated his * * * rights [under the First Amendment to the U.S. Constitution]. * * * The District Court granted summary judgment for the school board and Morse * * * .

25

EXHIBIT 1–6

•

A Sample Court Case—Continued [On Frederick’s appeal, the U.S. Court of Appeals for the]

A federal court that hears appeals from the federal district courts located within its geographical boundaries.

Ninth Circuit reversed. [The defendants appealed to the U.S. Supreme Court.] * * * *

The second major section of the opinion responds to the plaintiff’s first argument.

II At the outset, we reject Frederick’s argument that this is not a school speech case * * * . [W]e agree with the [Juneau] superintendent that Frederick cannot “stand in the midst of his fellow students, during school hours, at a school-sanctioned

The third major section of the opinion focuses on the interpretation of an important component of the facts in the case. Having or seeming to have a hidden or ambiguous meaning.

activity and claim he is not at school.” * * * III The message on Frederick’s banner is cryptic. * * * Frederick himself claimed “that the words were just nonsense meant to attract television cameras.” But Principal Morse thought the banner would be interpreted by those viewing it as promoting illegal drug use, and that interpretation is plainly a reasonable one. * * * *

To speak in favor, support, or recommend publicly. An order or command to influence others’ behavior.

* * * At least two interpretations of the words on the banner demonstrate that the sign advocated the use of illegal drugs. First, the phrase could be interpreted as an imperative: “[Take] bong hits * * * ”—a message equivalent * * * to “smoke marijuana” or “use an illegal drug.” Alternatively, the phrase could be viewed as celebrating drug use—“bong hits [are a good thing],” or “[we take] bong hits” * * * . * * * * * * * Frederick’s * * * explanation for the message * * * is a description of Frederick’s motive for displaying the banner; it is not an interpretation of what the banner says. * * *

The fourth major section of the opinion considers the chief issue in this case— whether a high school principal may curtail certain student speech at a school event. Here, the Court states the law and applies it to this issue.

* * * * IV The question thus becomes whether a principal may, consistent with the First Amendment, restrict student speech at a school event, when that speech is reasonably viewed as promoting illegal drug use. * * * * * * * EXHIBIT CONTINUES

26

EXHIBIT 1–6

•

A Sample Court Case—Continued

To make known, manifest, or clear; to announce clearly an opinion or resolution.

Congress has declared that part of a school’s job is educating students about the dangers of illegal drug use. It has provided billions of dollars to support state and local drug-prevention programs, and required that schools receiving federal funds under

To attest as being true or as represented.

the Safe and Drug-Free Schools and Communities Act of 1994 certify that their drug prevention programs convey a clear and consistent message that * * * the illegal use of drugs is wrong and harmful.

To effect, bring about, or cause to come into being.

Thousands of school boards throughout the country—including JDHS—have adopted policies aimed at effectuating this message. Those school boards know that peer pressure is perhaps the single most important factor leading schoolchildren to take drugs, and that students are more likely to use drugs when the norms in school appear to tolerate such behavior. Student speech celebrating illegal drug use at a school event, in the presence of school administrators and teachers, thus poses a particular challenge for school officials working to protect those entrusted to their care from the dangers of drug abuse. * * * * School principals have a difficult job, and a vitally important one. When Frederick suddenly and unexpectedly unfurled his banner, Morse had to decide to act—or not act—on the spot. It was reasonable for her to conclude that the banner promoted illegal drug use—in violation of established school policy—and that failing to act would send a powerful message to the students in her charge, including Frederick, about how serious the school was about the dangers of illegal drug use. The First Amendment does not require schools to tolerate at school events student expression that contributes to those dangers.

In the final paragraph of this excerpt of the opinion, the Court states its decision and gives its order to send the case back to the lower court.

The judgment of the United States Court of Appeals for the Ninth Circuit is reversed, and the case is remanded for further proceedings consistent with this opinion.

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Introduction to Law and Legal Reasoning Suppose the California legislature passes a law that severely restricts carbon dioxide emissions from automobiles in that state. A group of automobile manufacturers files suit against the state of California to prevent the enforcement of the law. The automakers claim that a federal law already sets fuel economy standards nationwide and that fuel economy standards are essentially the same as carbon dioxide emission standards. According to the automobile manufacturers, it is unfair to allow California to impose more stringent regulations than those set by the federal law. Using the information presented in the chapter, answer the following questions. 1. 2. 3. 4.

Who are the parties (the plaintiffs and the defendant) in this lawsuit? Are the plaintiffs seeking a legal remedy or an equitable remedy? Why? What is the primary source of the law that is at issue here? Where would you look to find the relevant California and federal laws?

court of law 8

petitioner 9

criminal law 14

plaintiff 9

cyberlaw 14

positive law 3

administrative agency 7

damages 8

positivist school 3

administrative law 7

defendant 9

precedent 10

allege 11

defense 9

procedural law 14

analogy 12

equitable maxims 9

public policy 11

appellant 21

executive agency 7

remedy 8

appellee 21

historical school 3

remedy at law 8

binding authority 10

remedy in equity 8

breach 5

independent regulatory agency 7

case law 7

jurisprudence 2

respondent 9

case on point 12

laches 9

sociological school 4

chancellor 8

law 2

stare decisis 10

citation 15

legal realism 3

statute of limitations 9

civil law 14

legal reasoning 11

statutory law 6

common law 8

natural law 3

substantive law 14

constitutional law 6

opinion 21

syllogism 12

court of equity 8

ordinance 6

uniform law 6

reporter 10

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1–1. How does statutory law come into existence? How does it differ from the common law? If statutory law conflicts with the common law, which law will govern? 1–2. QUESTION WITH SAMPLE ANSWER After World War II, which ended in 1945, an international tribunal of judges convened at Nuremberg,Germany. The judges convicted several Nazis of “crimes against humanity.” Assuming that the Nazi war criminals who were convicted had not disobeyed any law of their country and had merely been following their government’s (Hitler’s) orders, what law had they violated? Explain. • For a sample answer to Question 1–2, go to Appendix I at the end of this text.

1–3. Assume that you want to read the entire court opinion in the case of Menashe v.V Secret Catalogue, Inc., 409 F. Supp.2d 412 (S.D.N.Y. 2006). The case focuses on whether “SEXY LITTLE THINGS”is a suggestive or descriptive trademark and on which of the parties to the suit used the mark first in commerce. (Note that this case is presented in Chapter 8 of this text as Case 8.2.) Refer to the subsection entitled “Finding Case Law” in this chapter, and then explain specifically where you would find the court’s opinion. 1–4. This chapter discussed a number of sources of American law. Which source of law takes priority in the following situations, and why? (a) A federal statute conflicts with the U.S. Constitution. (b) A federal statute conflicts with a state constitutional provision. (c) A state statute conflicts with the common law of that state. (d) A state constitutional amendment conflicts with the U.S. Constitution.

1–5. In the text of this chapter,we stated that the doctrine of stare decisis“became a cornerstone of the English and American judicial systems.” What does stare decisis mean,and why has this doctrine been so fundamental to the development of our legal tradition? 1–6. What is the difference between a concurring opinion and a majority opinion? Between a concurring opinion and a dissenting opinion? Why do judges and justices write concurring and dissenting opinions, given that these opinions will not affect the outcome of the case at hand, which has already been decided by majority vote?

1–7. Courts can overturn precedents and thus change the common law. Should judges have the same authority to overrule statutory law? Explain.

1–8. “The judge’s role is not to make the law but to uphold and apply the law.” Do you agree or disagree with this statement? Discuss fully the reasons for your answer. 1–9. Assume that Arthur Rabe is suing Xavier Sanchez for breaching a contract in which Sanchez promised to sell Rabe a Van Gogh painting for $3 million. (a) In this lawsuit, who is the plaintiff and who is the defendant? (b) Suppose that Rabe wants Sanchez to perform the contract as promised. What remedy would Rabe seek from the court? (c) Now suppose that Rabe wants to cancel the contract because Sanchez fraudulently misrepresented the painting as an original Van Gogh when in fact it is a copy.What remedy would Rabe seek? (d) Will the remedy Rabe seeks in either situation be a remedy at law or a remedy in equity? What is the difference between legal and equitable remedies? (e) Suppose that the trial court finds in Rabe’s favor and grants one of these remedies. Sanchez then appeals the decision to a higher court. On appeal, which party will be the appellant (or petitioner),and which party will be the appellee (or respondent)?

1–10. A QUESTION OF ETHICS On July 5, 1884, Dudley, Stephens, and Brooks— “all able-bodied English seamen”—and a teenage English boy were cast adrift in a lifeboat following a storm at sea.They had no water with them in the boat, and all they had for sustenance were two one-pound tins of turnips.On July 24,Dudley proposed that one of the four in the lifeboat be sacrificed to save the others. Stephens agreed with Dudley, but Brooks refused to consent—and the boy was never asked for his opinion. On July 25, Dudley killed the boy, and the three men then fed on the boy’s body and blood.Four days later,a passing vessel rescued the men. They were taken to England and tried for the murder of the boy. If the men had not fed on the boy’s body, they would probably have died of starvation within the four-day period.The boy, who was in a much weaker condition, would likely have died before the rest. [Regina v. Dudley and Stephens, 14 Q.B.D. (Queen’s Bench Division, England) 273 (1884)] (a) The basic question in this case is whether the survivors should be subject to penalties under English criminal law,given the men’s unusual circumstances. Were the defendants’ actions necessary but unethical? Explain your reasoning. What ethical issues might be involved here? (b) Should judges ever have the power to look beyond the written “letter of the law” in making their decisions? Why or why not?

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Today, business law and legal environment professors and students can go online to access information on almost every topic covered in this text.A good point of departure for online legal research is the Web site for Business Law, Eleventh Edition, which can be found at academic.cengage.com/ blaw/clarkson.There you will find numerous materials relevant to this text and to business law generally, including links to various legal resources on the Web.Additionally, every chapter in this text ends with a Law on the Web feature that contains selected Web addresses. You can access many of the sources of law discussed in Chapter 1 at the FindLaw Web site, which is probably the most comprehensive source of free legal information on the Internet. Go to www.findlaw.com The Legal Information Institute (LII) at Cornell Law School, which offers extensive information about U.S. law, is also a good starting point for legal research.The URL for this site is www.law.cornell.edu The Library of Congress offers extensive links to state and federal government resources at www.loc.gov The Virtual Law Library Index, created and maintained by the Indiana University School of Law, provides an index of legal sources categorized by subject at www.law.indiana.edu/v-lib/index.html#libdoc

Legal Research Exercises on the Web Go to academic.cengage.com/blaw/clarkson, the Web site that accompanies this text. Select “Chapter 1” and click on “Internet Exercises.” There you will find the following Internet research exercises that you can perform to learn more about some of the important sources of law discussed in Chapter 1 and other useful legal sites on the Web. Internet Exercise 1–1: Legal Perspective Internet Sources of Law Internet Exercise 1–2: Management Perspective Online Assistance from Government Agencies Internet Exercise 1–3: Social Perspective The Case of the Speluncean Explorers

T

oday in the United States there are fifty-two court systems— one for each of the fifty states, one for the District of Columbia, and a federal system. Keep in mind that the federal courts are not superior to the state courts; they are simply an independent system of courts, which derives its authority from Article III, Section 2, of the U.S. Constitution. By the power given to it under Article I of the U.S. Constitution, Congress has extended the federal court system beyond the boundaries of the United States to U.S. territories such as Guam, Puerto Rico, and

the Virgin Islands.1 As we shall see, the United States Supreme Court is the final controlling voice over all of these fifty-two systems, at least when questions of federal law are involved. Every businessperson will likely face a lawsuit at some time in his or her career. Thus, anyone involved in business needs to have an understanding of the American court systems, as well as the various methods of dispute

resolution that can be pursued outside the courts. In this chapter, after examining the judiciary’s role in the American governmental system, we discuss some basic requirements that must be met before a party may bring a lawsuit before a particular court.We then look at the court systems of the United States in some detail.We conclude the chapter with an overview of some alternative methods of settling disputes, including online dispute 1. In Guam and the Virgin Islands, territorial courts serve as both federal courts and resolution. state courts; in Puerto Rico, they serve only as federal courts.

The Judiciary’s Role in American Government As you learned in Chapter 1,the body of American law includes the federal and state constitutions, statutes passed by legislative bodies,administrative law,and the case decisions and legal principles that form the common law. These laws would be meaningless, however, without the courts to interpret and apply them.This is the essential role of the judiciary—the courts—in the American governmental system: to interpret the laws and apply them to specific situations. As the branch of government entrusted with interpreting the laws,the judiciary can decide,among other things, whether the laws or actions of the other two branches are constitutional. The process for making such a determination is known as judicial review. The power of judicial review enables the judicial 30

branch to act as a check on the other two branches of government, in line with the system of checks and balances established by the U.S. Constitution.2 The power of judicial review is not mentioned in the Constitution (although many constitutional scholars conclude that the founders intended the judiciary to have this power). Rather, this power was explicitly established by the United States Supreme Court in 1803 by its decision in Marbury v. Madison,3 in which the Supreme Court stated, “It is emphatically the province and duty of the Judicial Department to say 2. In a broad sense, judicial review occurs whenever a court “reviews” a case or legal proceeding—as when an appellate court reviews a lower court’s decision.When referring to the judiciary’s role in American government, however, the term judicial review is used to indicate the power of the judiciary to decide whether the actions of the other two branches of government do or do not violate the U.S. Constitution. 3. 5 U.S. (1 Cranch) 137, 2 L.Ed. 60 (1803).

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what the law is. . . . If two laws conflict with each other,the courts must decide on the operation of each. . . . So if the law be in opposition to the Constitution . . . [t]he Court must determine which of these conflicting rules governs the case. This is the very essence of judicial duty.” Since the Marbury v. Madison decision, the power of judicial review has remained unchallenged.Today, this power is exercised by both federal and state courts.

Basic Judicial Requirements Before a lawsuit can be brought before a court,certain requirements must be met. These requirements relate to jurisdiction, venue, and standing to sue.We examine each of these important concepts here.

Jurisdiction In Latin,juris means “law,” and diction means “to speak.” Thus,“the power to speak the law” is the literal meaning of the term jurisdiction. Before any court can hear a case, it must have jurisdiction over the person (or company) against whom the suit is brought (the defendant) or over the property involved in the suit. The court must also have jurisdiction over the subject matter of the dispute. Jurisdiction over Persons or Property

Generally,a particular court can exercise in personam jurisdiction (personal jurisdiction) over any person or business that resides in a certain geographic area. A state trial court,for example,normally has jurisdictional authority over residents (including businesses) of a particular area of the state, such as a county or district. A state’s highest court (often called the state supreme court)4 has jurisdictional authority over all residents within the state. A court can also exercise jurisdiction over property that is located within its boundaries.This kind of jurisdiction is known as in rem jurisdiction, or “jurisdiction over the thing.” For example, suppose that a dispute arises over the ownership of a boat in dry dock in Fort Lauderdale, Florida. The boat is owned by an Ohio resident, over whom a Florida court normally

4. As will be discussed shortly, a state’s highest court is often referred to as the state supreme court, but there are exceptions. For example, in New York the supreme court is a trial court.

cannot exercise personal jurisdiction. The other party to the dispute is a resident of Nebraska. In this situation, a lawsuit concerning the boat could be brought in a Florida state court on the basis of the court’s in rem jurisdiction. Long Arm Statutes. Under the authority of a state long arm statute, a court can exercise personal jurisdiction over certain out-of-state defendants based on activities that took place within the state. Before a court can exercise jurisdiction over an out-of-state defendant under a long arm statute, though, it must be demonstrated that the defendant had sufficient contacts, or minimum contacts, with the state to justify the jurisdiction.5 Generally, this means that the defendant must have enough of a connection to the state for the judge to conclude that it is fair for the state to exercise power over the defendant. For example, if an out-ofstate defendant caused an automobile accident or sold defective goods within the state, a court will usually find that minimum contacts exist to exercise jurisdiction over that defendant. Similarly, a state may exercise personal jurisdiction over a nonresident defendant who is sued for breaching a contract that was formed within the state. Corporate Contacts. Because corporations are considered legal persons, courts use the same principles to determine whether it is fair to exercise jurisdiction over a corporation.6 A corporation normally is subject to personal jurisdiction in the state in which it is incorporated, has its principal office, and is doing business. Courts apply the minimum-contacts test to determine if they can exercise jurisdiction over out-ofstate corporations. The minimum-contacts requirement is usually met if the corporation advertises or sells its products within the state, or places its goods into the “stream of commerce” with the intent that the goods be sold in the state. For example, suppose that a business is incorporated under the laws of Maine but has a branch office and manufacturing plant in Georgia. The corporation also advertises and sells its products in Georgia.These activities would likely constitute sufficient contacts

5. The minimum-contacts standard was first established in International Shoe Co. v. State of Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945). 6. In the eyes of the law, corporations are “legal persons”—entities that can sue and be sued. See Chapter 38.

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with the state of Georgia to allow a Georgia court to exercise jurisdiction over the corporation. Some corporations,however,do not sell or advertise products or place any goods in the stream of com-

C A S E

merce. Determining what constitutes minimum contacts in these situations can be more difficult, as the following case—involving a resort hotel in Mexico and a hotel guest from New Jersey—illustrates.

2.1 Mastondrea v. Occidental Hotels Management S.A. Superior Court of New Jersey, Appellate Division, 2007. 391 N.J.Super. 261, 918 A.2d 27. lawlibrary.rutgers.edu/search.shtml a

•

Background and Facts Libgo Travel, Inc., in Ramsey, New Jersey, with Allegro Resorts Management Corporation (ARMC), a marketing agency in Miami, Florida, placed an ad in the Newark Star Ledger, a newspaper in Newark, New Jersey, to tout vacation packages for accommodations at the Royal Hideaway Playacar, an all-inclusive resort hotel in Quintana Roo, Mexico. ARMC is part of Occidental Hotels Management, B.V., a Netherlands corporation that owns the hotel with Occidental Hoteles Management S.A., a Spanish company. In response to the ad, Amanda Mastondrea, a New Jersey resident, bought one of the packages through Liberty Travel, a chain of travel agencies in the eastern United States that Libgo owns and operates. On June 16, 2003, at the resort, Mastondrea slipped and fell on a wet staircase, breaking her ankle. She filed a suit in a New Jersey state court against the hotel, its owners, and others, alleging negligence. The defendants asked the court to dismiss the suit on the ground that it did not have personal jurisdiction over them. The court ruled in part that it had jurisdiction over the hotel. The hotel appealed this ruling to a state intermediate appellate court. IN THE LANGUAGE OF THE COURT

PAYNE, J.A.D. [Judge, Appellate Division]

* * * * It is unquestionably true that the Hotel has no direct presence in New Jersey.* * * [T]he Hotel’s operations are located in Quintana Roo, Mexico.The Hotel is not registered, licensed or otherwise authorized to do business in New Jersey.It has no registered agent in this state for service of process, and it pays no state taxes. The Hotel maintains no business address here, it has never owned property or maintained any bank accounts in this state, and it has no employees in New Jersey. However, * * * “Tour Operator Agreements” between the Hotel and Libgo * * * provide that the Hotel will allot a specific number of rooms at its resort to Libgo at agreed-upon rates.Libgo, as “tour operator,” is then authorized by the Hotel to book those rooms on behalf of Libgo’s customers. Pursuant to the contract, Libgo is required to provide the Hotel with weekly sales reports listing the number of rooms booked by Libgo and the rates at which those rooms were booked. It must also confirm all reservations in a writing sent to the Hotel. Courts have generally sustained the exercise of personal jurisdiction over a defendant who, as a party to a contract, has had some connection with the forum state [the state in which the lawsuit is filed] or who should have anticipated that his conduct would have significant effects in that state. Here,the Hotel entered into a contract with a New Jersey entity,Libgo,which agreed to solicit business for the Hotel and derived a profit from that solicitation through sales of vacation packages. Although Libgo’s business extends beyond New Jersey and throughout much of the East Coast, at least part of its customer base resides in this state. Likewise, as a result of this contract, the Hotel purposefully and successfully sought vacationers from New Jersey, and it derived a profit from them.Therefore, the Hotel should have reasonably anticipated that its conduct would have significant effects in New Jersey. [Emphasis added.] * * * * a. In the “SEARCH THE N.J. COURTS DECISIONS” section, type “Mastondrea” in the box, and click on “Search!” In the result, click on the case name to access the opinion.Rutgers University Law School in Camden,New Jersey,maintains this Web site.

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CASE 2.1 CONTINUED

* * * [A]dditional evidence of purposeful acts in New Jersey exists that fairly can be attributed to the Hotel and that are causally connected to plaintiff’s decision to purchase the Hotel’s vacation package * * * , [including] an ongoing, but undefined, relationship between the Hotel and * * * ARMC * * * . ARMC is a marketing organization that solicits business in the United States for the “Occidental Hotels & Resorts,” a group of which the defendant Hotel is a part. ARMC does not have any direct contact with any of the potential customers of the various hotels that it promotes, and it does not itself sell travel or vacation packages. However, [ARMC] * * * works closely with Libgo in developing marketing strategies for the Occidental Hotels & Resorts in the New Jersey area pursuant to cooperative marketing agreements between ARMC and Libgo. * * * * * * * [T]he defendant Hotel was featured,singly,[in 2003] in advertisements in the Newark Star Ledger on four occasions, including one in January * * * , prior to plaintiff’s decision to book a vacation there. We are satisfied * * * that * * * ARMC was operating [on behalf] of the Hotel when ARMC entered into cooperative marketing agreements with Libgo, and that ARMC’s extensive contacts with Libgo in New Jersey regarding the marketing plan, together with the New Jersey fruits of that plan, can be attributed to the Hotel for jurisdictional purposes. We are further persuaded that the targeted advertising conducted pursuant to the cooperative marketing agreement on behalf of the Hotel provided the minimum contacts necessary to support * * * jurisdiction in this case. [Emphasis added.]

• Decision and Remedy The state intermediate appellate court affirmed the lower court’s rul-

ing. The appellate court concluded that the hotel had contacts with New Jersey, consisting of a tour operator contract and marketing activities through ARMC and Libgo, during the relevant time period and that, in response to the marketing, Mastondrea booked a vacation at the hotel. “[T]his evidence was sufficient to support the assertion of . . . personal jurisdiction over the Hotel in this State.”

•

What If the Facts Were Different? If Mastondrea had not seen Libgo and Allegro’s ad, but had bought a Royal Hideaway vacation package on the recommendation of a Liberty Travel agent, is it likely that the result in this case would have been different? Why or why not?

• The Global Dimension What do the circumstances and the holding in this case suggest to a business firm that actively attempts to attract customers in a variety of jurisdictions?

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Jurisdiction over Subject Matter Subjectmatter jurisdiction refers to the limitations on the types of cases a court can hear. Certain courts are empowered to hear certain kinds of disputes.

General and Limited Jurisdiction. In both the federal and the state court systems, there are courts of general (unlimited) jurisdiction and courts of limited jurisdiction. A court of general jurisdiction can decide cases involving a broad array of issues.An example of a court of general jurisdiction is a state trial court or a federal district court. An example of a state court of limited jurisdiction is a probate court.Probate courts are state courts that handle only matters relating to the transfer of a person’s assets and obligations after that person’s death, including issues relating to the custody and guardianship of children.An example of a federal court of limited subject-matter jurisdiction is a bank-

ruptcy court. Bankruptcy courts handle only bankruptcy proceedings, which are governed by federal bankruptcy law (discussed in Chapter 30). A court’s jurisdiction over subject matter is usually defined in the statute or constitution creating the court.In both the federal and the state court systems,a court’s subject-matter jurisdiction can be limited not only by the subject of the lawsuit but also by the sum in controversy, whether the case is a felony (a more serious type of crime) or a misdemeanor (a less serious type of crime),or whether the proceeding is a trial or an appeal. Original and Appellate Jurisdiction. A court’s subject-matter jurisdiction is also frequently limited to hearing cases at a particular stage of the dispute. Courts in which lawsuits begin, trials take place, and evidence is presented are referred to as courts of

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original jurisdiction. Courts having original jurisdiction are courts of the first instance, or trial courts. In the federal court system, the district courts are trial courts. In the various state court systems, the trial courts are known by different names, as will be discussed shortly. Courts having appellate jurisdiction act as reviewing courts,or appellate courts.In general,cases can be brought before appellate courts only on appeal from an order or a judgment of a trial court or other lower court.In other words,the distinction between courts of original jurisdiction and courts of appellate jurisdiction normally lies in whether the case is being heard for the first time. Jurisdiction

of

the

Federal

in controversy must exceed $75,000. For purposes of diversity jurisdiction, a corporation is a citizen of both the state in which it is incorporated and the state in which its principal place of business is located.A case involving diversity of citizenship can be filed in the appropriate federal district court. If the case starts in a state court, it can sometimes be transferred, or “removed,” to a federal court. A large percentage of the cases filed in federal courts each year are based on diversity of citizenship. As noted, a federal court will apply federal law in cases involving federal questions. In a case based on diversity of citizenship, in contrast, a federal court will apply the relevant state law (which is often the law of the state in which the court sits).

Courts

Because the federal government is a government of limited powers, the jurisdiction of the federal courts is limited. Federal courts have subject-matter jurisdiction in two situations. Federal Questions. Article III of the U.S.Constitution establishes the boundaries of federal judicial power. Section 2 of Article III states that “[t]he judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority.” In effect, this clause means that whenever a plaintiff’s cause of action is based, at least in part, on the U.S. Constitution, a treaty, or a federal law, a federal question arises. Any lawsuit involving a federal question comes under the judicial authority of the federal courts and can originate in a federal court. People who claim that their constitutional rights have been violated, for example, can begin their suits in a federal court. Note that in a case based on a federal question, a federal court will apply federal law. Diversity of Citizenship. Federal district courts can also exercise original jurisdiction over cases involving diversity of citizenship. This term applies whenever a federal court has jurisdiction over a case that does not involve a question of federal law. The most common type of diversity jurisdiction has two requirements:7 (1) the plaintiff and defendant must be residents of different states, and (2) the dollar amount 7. Diversity jurisdiction also exists in cases between (1) a foreign country and citizens of a state or of different states and (2) citizens of a state and citizens or subjects of a foreign country.These bases for diversity jurisdiction are less commonly used.

Exclusive versus Concurrent Jurisdiction

When both federal and state courts have the power to hear a case, as is true in suits involving diversity of citizenship, concurrent jurisdiction exists. When cases can be tried only in federal courts or only in state courts, exclusive jurisdiction exists. Federal courts have exclusive jurisdiction in cases involving federal crimes, bankruptcy, and most patent and copyright claims; in suits against the United States; and in some areas of admiralty law (law governing transportation on the seas and ocean waters). State courts also have exclusive jurisdiction over certain subjects—for example, divorce and adoption. When concurrent jurisdiction exists, a party may choose to bring a suit in either a federal court or a state court.

Jurisdiction in Cyberspace The Internet’s capacity to bypass political and geographic boundaries undercuts the traditional basis on which courts assert personal jurisdiction. This basis includes a party’s contacts with a court’s geographic jurisdiction. As already discussed, for a court to compel a defendant to come before it, there must be at least minimum contacts—the presence of a salesperson within the state, for example. Are there sufficient minimum contacts if the only connection to a jurisdiction is an ad on a Web site originating from a remote location? The “Sliding-Scale” Standard Gradually, the

courts are developing a standard—called a “slidingscale” standard—for determining when the exercise of personal jurisdiction over an out-of-state Internetbased defendant is proper. In developing this standard, the courts have identified three types of Internet

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business contacts: (1) substantial business conducted over the Internet (with contracts and sales, for example); (2) some interactivity through a Web site; and (3) passive advertising. Jurisdiction is proper for the first category, is improper for the third, and may or may not be appropriate for the second.8 An Internet communication is typically considered passive if people have to voluntarily access it to read the message and active if it is sent to specific individuals. In certain situations, even a single contact can satisfy the minimum-contacts requirement. In one case, for example, a Texas resident, Connie Davis, sent an unsolicited e-mail message to numerous Mississippi residents advertising a pornographic Web site. Davis falsified the “from”header in the e-mail so that Internet Doorway appeared to be the sender. Internet Doorway filed a lawsuit against Davis in Mississippi, claiming that its reputation and goodwill in the community had been harmed.The federal court in Mississippi held that Davis’s single e-mail to Mississippi residents satisfied the minimum-contacts requirement for jurisdiction. The court concluded that Davis, by sending the e-mail solicitation, should reasonably have expected that she could be “haled into court in a distant jurisdiction to answer for the ramifications.”9

displaying Nazi memorabilia and offering them for sale via its Web site. The French court asserted jurisdiction over Yahoo on the ground that the materials on the company’s U.S.-based servers could be viewed on a Web site accessible in France.The French court ordered Yahoo to eliminate all Internet access in France to the Nazi memorabilia offered for sale through its online auctions. Yahoo then took the case to a federal district court in the United States, claiming that the French court’s order violated the First Amendment to the U.S. Constitution. Although the federal district court ruled in favor of Yahoo, the U.S. Court of Appeals for the Ninth Circuit reversed. According to the appellate court, U.S. courts lacked personal jurisdiction over the French groups involved.10 The Yahoo case represents the first time a U.S. court was asked to decide whether to honor a foreign judgment involving business conducted over the Internet. The federal appeals court’s ruling leaves open the possibility that Yahoo, and anyone else who posts anything on the Internet, could be held answerable to the laws of any country in which the message might be received. Concept Summary 2.1 on the next page reviews the various types of jurisdiction, including jurisdiction in cyberspace.

International

Venue

Jurisdictional

Issues

Because the Internet is international in scope, international jurisdictional issues have understandingly come to the fore.The world’s courts seem to be developing a standard that echoes the requirement of “minimum contacts” applied by the U.S. courts. Most courts are indicating that minimum contacts—doing business within the jurisdiction, for example—are enough to exercise jurisdiction over a defendant.The effect of this standard is that a business firm may have to comply with the laws in any jurisdiction in which it actively targets customers for its products. To understand some of the problems created by Internet commerce, consider a French court’s judgment against the U.S.-based Internet company Yahoo!, Inc. Yahoo operates an online auction site on which Nazi memorabilia have been offered for sale. In France,the display of any objects depicting symbols of Nazi ideology is illegal and leads to both criminal and civil liability. The International League against Racism and Anti-Semitism filed a suit in Paris against Yahoo for

Jurisdiction has to do with whether a court has authority to hear a case involving specific persons, property, or subject matter. Venue11 is concerned with the most appropriate location for a trial. For example, two state courts (or two federal courts) may have the authority to exercise jurisdiction over a case,but it may be more appropriate or convenient to hear the case in one court than in the other. Basically, the concept of venue reflects the policy that a court trying a suit should be in the geographic neighborhood (usually the county) where the incident leading to the lawsuit occurred or where the parties involved in the lawsuit reside.Venue in a civil case typically is where the defendant resides, whereas venue in a criminal case is normally where the crime occurred. Pretrial publicity or other factors, though, may require a change of venue to another community, especially in criminal cases in which the defendant’s right to a fair and impartial jury has been impaired.

8. For a leading case on this issue, see Zippo Manufacturing Co. v. Zippo Dot Com, Inc., 952 F.Supp. 1119 (W.D.Pa. 1997). 9. Internet Doorway, Inc. v. Parks, 138 F.Supp.2d 773 (S.D.Miss. 2001).

10. Yahoo! Inc. v. La Ligue Contre le Racisme et l’Antisemitisme, 379 F.3d 1120 (9th Cir.2004),cert.denied,__ U.S.__,126 S.Ct.2332, 164 L.Ed.2d 841 (2006). 11. Pronounced ven-yoo.

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CONCEPT SUMMARY 2.1

Jurisdiction Type of Jurisdiction

Description

PERSONAL

Exists when a defendant is located within the territorial boundaries within which a court has the right and power to decide cases. Jurisdiction may be exercised over out-of-state defendants under state long arm statutes. Courts have jurisdiction over corporate defendants that do business within the state, as well as corporations that advertise, sell, or place goods into the stream of commerce in the state.

PROPERTY

Exists when the property that is subject to a lawsuit is located within the territorial boundaries within which a court has the right and power to decide cases.

SUBJECT MATTER

Limits the court’s jurisdictional authority to particular types of cases. 1. Limited jurisdiction—Exists when a court is limited to a specific subject matter, such as probate or divorce. 2. General jurisdiction—Exists when a court can hear cases involving a broad array of issues.

ORIGINAL

Exists with courts that have the authority to hear a case for the first time (trial courts).

APPELLATE

Exists with courts of appeal and review. Generally, appellate courts do not have original jurisdiction.

FEDERAL

1. Federal questions—When the plaintiff’s cause of action is based at least in part on the U.S. Constitution, a treaty, or a federal law, a federal court can exercise jurisdiction. 2. Diversity of citizenship—In cases between citizens of different states when the amount in controversy exceeds $75,000 (or in cases between a foreign country and citizens of a state or of different states and in cases between citizens of a state and citizens or subjects of a foreign country), a federal court can exercise jurisdiction.

CONCURRENT EXCLUSIVE JURISDICTION IN CYBERSPACE

Exists when both federal and state courts have authority to hear the same case. Exists when only state courts or only federal courts have authority to hear a case. Because the Internet does not have physical boundaries, traditional jurisdictional concepts have been difficult to apply in cases involving activities conducted via the Web. Gradually, the courts are developing standards to use in determining when jurisdiction over a Web site owner or operator in another state is proper.A significant legal challenge with respect to cyberspace transactions has to do with resolving jurisdictional disputes in the international context.

Standing to Sue In order to bring a lawsuit before a court, a party must have standing to sue, or a sufficient “stake” in a matter to justify seeking relief through the court system. In other words, to have standing, a party must have a legally protected and tangible interest at stake in the litigation.The party bringing the lawsuit must have suf-

fered a harm or been threatened with a harm by the action about which she or he has complained. At times, a person can have standing to sue on behalf of another person. For example, suppose that a child suffers serious injuries as a result of a defectively manufactured toy. Because the child is a minor, another person, such as a parent or a legal guardian, can bring a lawsuit on the child’s behalf.

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Standing to sue also requires that the controversy at issue be a justiciable12 controversy—a controversy that is real and substantial, as opposed to hypothetical or academic. For example, to entice DaimlerChrysler Corporation to build a $1.2 billion Jeep assembly plant in the area, the city of Toledo, Ohio, gave the company a ten-year local property tax exemption as well as a state franchise tax credit. Toledo taxpayers filed a lawsuit in state court, claiming that the tax breaks violated the commerce clause in the U.S. Constitution.The taxpayers alleged that the tax exemption and credit injured them because they would have to pay higher taxes to cover the shortfall in tax revenues. In 2006, the United States Supreme Court ruled that the taxpayers lacked standing to sue over the incentive program because their alleged injury was “conjectural or hypothetical”—that is, there was no justiciable controversy.13

The State and Federal Court Systems As mentioned earlier in this chapter, each state has its own court system.Additionally,there is a system of federal courts. Although no two state court systems are 12. Pronounced jus-tish-a-bul. 13. DaimlerChrysler v.Cuno, __ U.S.__,126 S.Ct.1854,164 L.Ed.2d 589 (2006).

EXHIBIT 2–1

exactly the same, the right-hand side of Exhibit 2–1 illustrates the basic organizational framework characteristic of the court systems in many states.The exhibit also shows how the federal court system is structured. We turn now to an examination of these court systems, beginning with the state courts. (See this chapter’s Insight into Ethics feature on pages 38–39 for a discussion of the impact that the use of private judges and out-of-court settlements is having on the nation’s court systems and our notions of justice.)

State Court Systems Typically,a state court system includes several levels,or tiers, of courts.As indicated in Exhibit 2–1, state courts may include (1) local trial courts of limited jurisdiction, (2) state trial courts of general jurisdiction, (3) state courts of appeals (intermediate appellate courts), and (4) the state’s highest court (often called the state supreme court). Generally, any person who is a party to a lawsuit has the opportunity to plead the case before a trial court and then, if he or she loses, before at least one level of appellate court.Finally,if the case involves a federal statute or federal constitutional issue, the decision of a state supreme court on that issue may be further appealed to the United States Supreme Court. The states use various methods to select judges for their courts. Usually, voters elect judges, but in some states judges are appointed. For example, in Iowa, the governor appoints judges, and then the general population decides whether to confirm their appointment

• The State and Federal Court Systems Supreme Court of the United States

Highest State Courts

U.S. Courts of Appeals

Federal Administrative Agencies

U.S. District Courts

Specialized U.S. Courts • Bankruptcy Courts • Court of Federal Claims • Court of International Trade • Tax Court

State Courts of Appeals

State Trial Courts of General Jurisdiction Local Trial Courts of Limited Jurisdiction

State Administrative Agencies

INSIGHT INTO ETHICS

Implications of an Increasingly Private Justice System Downtown Houston boasts a relatively new courthouse with thirty-nine courtrooms, but more and more often, many of those courtrooms often stand empty. Has litigation in Texas slowed down? Indeed, it has not—the courtrooms are empty because fewer civil lawsuits are going to trial. A similar situation is occurring in the federal courts. In the northern district of Florida, for example, the four federal judges presided over only a dozen civil trials in 2007. In 1984, more than 12,000 civil trials were heard in our federal courts. Today, only about 3,500 federal civil trials take place annually. University of Wisconsin law professor Mark Galanter has labeled this trend the “vanishing trial.” Two developments in particular are contributing to the disappearance of civil trials—arbitration and private judges.

Arbitration Is One Cause Since the 1980s, corporations have been eschewing the public court system and taking cases to arbitration instead. Every day millions of Americans sign arbitration agreements, often unknowingly committing themselves to allow private arbitrators to solve their disputes with employers and the corporations with which they do business, such as cell phone service providers.

in the next general election.The states usually specify the number of years that judges will serve. In contrast, as you will read shortly, judges in the federal court system are appointed by the president of the United States and, if they are confirmed by the Senate, hold office for life—unless they engage in blatantly illegal conduct. Trial Courts Trial courts are exactly what their name implies—courts in which trials are held and testimony is taken. State trial courts have either general or limited jurisdiction. Trial courts that have general jurisdiction as to subject matter may be called county, district, superior, or circuit courts.14 State trial courts of general jurisdiction have jurisdiction over a wide variety of subjects, including both civil disputes and criminal prosecutions. In some states, trial courts of general jurisdiction may hear appeals from courts of limited jurisdiction. 14. The name in Ohio and Pennsylvania is Court of Common Pleas; the name in New York is Supreme Court,Trial Division.

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This trend raises some troublesome ethical issues, however. For one thing, arbitration agreements may force consumers to travel long distances to participate in these private forums. Perhaps more disturbing is that the supposedly neutral arbitrators may actually be captive to the industries they serve. Arbitrators are paid handsomely and typically would like to serve again. Thus, they may be reluctant to rule against a company that is involved in a dispute. After all, the company may well need arbitrators to resolve a subsequent dispute, whereas the other party—a consumer or employee—is unlikely to need the arbitrators again.

Private Judges Are Another Cause Another reason for the decline in the number of civil trials in our public courts is the growing use of private judges. A private judge, who is usually a retired judge, has the power to conduct trials and grant legal resolutions of disputes. Private judges increasingly are being used to resolve commercial disputes, as well as divorces and custody battles, for two reasons. One reason is that a case can be heard by a private judge much sooner than it would be heard in a public court. The other reason is that proceedings before a private judge can be kept secret.

Courts of limited jurisdiction as to subject matter are often called special inferior trial courts or minor judiciary courts.Small claims courts are inferior trial courts that hear only civil cases involving claims of less than a certain amount, such as $5,000 (the amount varies from state to state). Suits brought in small claims courts are generally conducted informally,and lawyers are not required (in a few states, lawyers are not even allowed). Decisions of small claims courts and municipal courts may sometimes be appealed to a state trial court of general jurisdiction. Other courts of limited jurisdiction include domestic relations courts, which handle primarily divorce actions and child-custody disputes; local municipal courts, which mainly deal with traffic cases; and probate courts, as mentioned earlier. Appellate, or Reviewing, Courts Every state has at least one court of appeals (appellate court, or reviewing court),which may be an intermediate appellate court or the state’s highest court. About threefourths of the states have intermediate appellate

In Ohio, for example, a state statute allows the parties to any civil action to have their dispute tried by a retired judge of their choosing who will make a decision in the matter.a Recently, though, private judging came under criticism in that state because private judges were conducting jury trials in county courtrooms at taxpayers’ expense. A public judge, Nancy Margaret Russo, refused to give up jurisdiction over one case on the ground that private judges are not authorized to conduct jury trials. The Ohio Supreme Court agreed. As the state’s highest court noted, private judging raises significant publicpolicy issues that the legislature needs to consider.b One issue is that private judges charge relatively large fees. This means that litigants who are willing and able to pay the extra cost can have their case heard by a private judge long before they would be able to set a trial date in a regular court. Is it fair that those who cannot afford private judges should have to wait longer for justice? Similarly, is it ethical to allow parties to pay extra for secret proceedings before a private judge and thereby avoid the public scrutiny of a regular trial? Some even suggest that the use of private judges is leading to two different systems of justice. a. See Ohio Revised Code Section 2701.10. b. State ex rel. Russo v. McDonnell, 110 Ohio St.3d 144, 852 N.E.2d 145 (2006). (The term ex rel. is Latin for ex relatione. This phrase refers to an action brought on behalf of the state, by the attorney general, at the instigation of an individual who has a private interest in the matter.)

courts. Generally, courts of appeals do not conduct new trials, in which evidence is submitted to the court and witnesses are examined.Rather,an appellate court panel of three or more judges reviews the record of the case on appeal, which includes a transcript of the trial proceedings, and then determines whether the trial court committed an error. Usually, appellate courts focus on questions of law, not questions of fact. A question of fact deals with what really happened in regard to the dispute being tried—such as whether a party actually burned a flag. A question of law concerns the application or interpretation of the law—such as whether flag-burning is a form of speech protected by the First Amendment to the Constitution. Only a judge, not a jury, can rule on questions of law. Appellate courts normally defer to the trial court’s findings on questions of fact because the trial court judge and jury were in a better position to evaluate testimony—by directly observing witnesses’ gestures, demeanor, and other nonverbal behavior during the trial. At the appellate level, the judges review the written transcript of the trial, which

A Threat to the Common Law System? The decline in the number of civil trials may also be leading to the erosion of this country’s common law system. As discussed in Chapter 1, courts are obligated to consider precedents—the decisions rendered in previous cases with similar facts and issues—when deciding the outcome of a dispute. If fewer disputes go to trial because they are arbitrated or heard by a private judge, then they will never become part of the body of cases and appeals that form the case law on that subject. With fewer precedents on which to draw, individuals and businesses will have less information about what constitutes appropriate business behavior in today’s world. Furthermore, private dispute resolution does not allow our case law to keep up with new issues related to areas such as biotechnology and the online world. Thus, the long-term effects of the decline of public justice could be a weakening of the common law itself. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ CRITICAL THINKING

INSIGHT INTO THE SOCIAL ENVIRONMENT If wealthier individuals increasingly use private judges, how will our justice system be affected in the long run? ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

does not include these nonverbal elements. Thus, an appellate court will not tamper with a trial court’s finding of fact unless it is clearly erroneous (contrary to the evidence presented at trial) or when there is no evidence to support the finding. Highest State Courts The highest appellate

court in a state is usually called the supreme court but may be designated by some other name. For example, in both New York and Maryland,the highest state court is called the Court of Appeals. In Maine and Massachusetts, the highest court is labeled the Supreme Judicial Court. In West Virginia, the highest state court is the Supreme Court of Appeals. The decisions of each state’s highest court on all questions of state law are final. Only when issues of federal law are involved can the United States Supreme Court overrule a decision made by a state’s highest court. For example, suppose that a city ordinance prohibits citizens from engaging in door-to-door advocacy without first registering with the mayor’s office and receiving a permit. Further suppose that a 39

40

religious group sues the city, arguing that the law violates the freedoms of speech and religion guaranteed by the First Amendment. If the state supreme court upholds the law, the group could appeal the decision to the United States Supreme Court—because a constitutional (federal) issue is involved.

done. In the entire history of the United States, only seven federal judges have been removed from office through impeachment proceedings. U.S. District Courts At the federal level, the

equivalent of a state trial court of general jurisdiction is the district court. U.S. district courts have original jurisdiction in federal matters, and federal cases typically originate in district courts.There are other federal courts with original, but special (or limited), jurisdiction, such as the federal bankruptcy courts and others shown earlier in Exhibit 2–1. There is at least one federal district court in every state. The number of judicial districts can vary over time, primarily owing to population changes and corresponding changes in caseloads. Currently, there are ninety-four federal judicial districts. Exhibit 2–2 shows the boundaries of the U.S. district courts, as well as the U.S. courts of appeals (discussed next).

The Federal Court System The federal court system is basically a three-tiered model consisting of (1) U.S. district courts (trial courts of general jurisdiction) and various courts of limited jurisdiction, (2) U.S. courts of appeals (intermediate courts of appeals), and (3) the United States Supreme Court. Unlike state court judges, who are usually elected, federal court judges—including the justices of the Supreme Court—are appointed by the president of the United States, subject to confirmation by the U.S. Senate.Article III of the Constitution states that federal judges “hold their offices during good Behaviour.” In effect, this means that federal judges have lifetime appointments. Although they can be impeached (removed from office) for misconduct, this is rarely EXHIBIT 2–2

•

U.S. Courts of Appeals In the federal court system, there are thirteen U.S. courts of appeals—referred to as U.S.circuit courts of appeals.Twelve of the federal courts of appeals (including the Court of Appeals for

Geographic Boundaries of the U.S. Courts of Appeals and U.S. District Courts Puerto Rico

E

W

1

Maine

1

Vermont

Washington Michigan Montana

No. Dakota

Minnesota

7

Oregon

W

So. Dakota

Idaho

8

Wyoming

Iowa

9

Nebraska

N E

Nevada Utah

San Francisco

N

N

S

Colorado

Kansas

W

S

S

E

W

N

9 W

Guam

E

Alaska

M E

9

Hawaii

9

Source: Administrative Office of the United States Courts.

S

W

E

M

So. Carolina

N

N

M

Washington, D.C. Richmond

12 D.C.

Circuit

Washington, D.C.

Circuit

Washington, D.C.

S

Mississippi Florida

Legend

M

Circuit boundaries

New Orleans

S Louisiana

Virgin Islands

13 Federal

Atlanta

Georgia

M

4

3

N

S W

E

No. Carolina

Alabama

S

Texas

Kentucky

M

11 N

Virginia

W

E

5

Northern Mariana Islands

W

Arkansas

Oklahoma

New Mexico

S

New York

Pennsylvania New Jersey Philadelphia

E

W. Va.

Tennessee

N

W

Arizona

Cincinnati

Massachusetts Rhode Island Connecticut

Delaware Maryland District of Columbia

N

Ohio

E W

E C

S

Indiana

S

St. Louis

E

W

N

N

C

Denver

M

6

Chicago

Illinois

10

3

Michigan

Missouri

California

S

W

E

Boston

N

W

E

Wisconsin

New Hampshire

2

New York

W

State boundaries District boundaries

41

the D.C. Circuit) hear appeals from the federal district courts located within their respective judicial circuits, or geographic boundaries (shown in Exhibit 2–2).15 The Court of Appeals for the Thirteenth Circuit, called the Federal Circuit, has national appellate jurisdiction over certain types of cases, such as those involving patent law and those in which the U.S.government is a defendant. The decisions of a circuit court of appeals are binding on all courts within the circuit court’s jurisdiction and are final in most cases, but appeal to the United States Supreme Court is possible. United States Supreme Court At the highest level in the three-tiered federal court system is the United States Supreme Court. According to the language of Article III of the U.S.Constitution,there is only one national Supreme Court. All other courts in the federal system are considered “inferior.” Congress is empowered to create other inferior courts as it deems necessary. The inferior courts that Congress has created include the second tier in our model—the U.S.circuit courts of appeals—as well as the district courts and the various federal courts of limited, or specialized, jurisdiction. The United States Supreme Court consists of nine justices. Although the Supreme Court has original, or trial, jurisdiction in rare instances (set forth in Article III, Sections 1 and 2), most of its work is as an appeals court. The Supreme Court can review any case decided by any of the federal courts of appeals, and it also has appellate authority over cases involving federal questions that have been decided in the state courts. The Supreme Court is the final arbiter of the Constitution and federal law.

Appeals to the Supreme Court. To bring a case before the Supreme Court, a party requests the Court to issue a writ of certiorari.16 A writ of certiorari is an order issued by the Supreme Court to a lower court requiring the latter to send it the record of the case for review. The Court will not issue a writ unless at least four of the nine justices approve of it.This is called the rule of four. Whether the Court will issue a writ of certiorari is entirely within its discretion,and most petitions for writs are denied. (Thousands of cases are filed with the Supreme Court each year, yet it hears,on 15. Historically, judges were required to “ride the circuit” and hear appeals in different courts around the country,which is how the name “circuit court” came about. 16. Pronounced sur-shee-uh-rah-ree.

average, fewer than one hundred of these cases.17 ) A denial is not a decision on the merits of a case, nor does it indicate agreement with the lower court’s opinion. Also, denial of the writ has no value as a precedent. Denial simply means that the lower court’s decision remains the law in that jurisdiction. Petitions Granted by the Court. Typically, the Court grants petitions in cases that raise important constitutional questions or when the lower courts have issued conflicting decisions on a significant issue.The justices,however,never explain their reasons for hearing certain cases and not others, so it is difficult to predict which type of case the Court might select. (See Concept Summary 2.2 on the following page to review the various types of courts in the federal and state court systems.)

Alternative Dispute Resolution Litigation—the process of resolving a dispute through the court system—is expensive and time consuming. Litigating even the simplest complaint is costly, and because of the backlog of cases pending in many courts, several years may pass before a case is actually tried. For these and other reasons, more and more businesspersons are turning to alternative dispute resolution (ADR) as a means of settling their disputes. The great advantage of ADR is its flexibility. Methods of ADR range from the parties sitting down together and attempting to work out their differences to multinational corporations agreeing to resolve a dispute through a formal hearing before a panel of experts. Normally, the parties themselves can control how the dispute will be settled, what procedures will be used, whether a neutral third party will be present or make a decision, and whether that decision will be legally binding or nonbinding. ADR also offers more privacy than court proceedings and allows disputes to be resolved relatively quickly.

17. From the mid-1950s through the early 1990s, the Supreme Court reviewed more cases per year than it has since then.In the Court’s 1982–1983 term, for example, the Court issued written opinions in 151 cases. In contrast, during the Court’s 2006–2007 term, the Court issued written opinions in only 75 cases.

42

CONCEPT SUMMARY 2.2

Types of Courts Court

Description

TRIAL COURTS

Trial courts are courts of original jurisdiction in which actions are initiated. 1. State courts—Courts of general jurisdiction can hear any case that has not been specifically designated for another court; courts of limited jurisdiction include, among others, domestic relations courts, probate courts, municipal courts, and small claims courts. 2. Federal courts—The federal district court is the equivalent of the state trial court. Federal courts of limited jurisdiction include the bankruptcy courts and others shown in Exhibit 2–1 on page 37.

INTERMEDIATE APPELLATE COURTS

Courts of appeals are reviewing courts; generally, appellate courts do not have original jurisdiction.About three-fourths of the states have intermediate appellate courts; in the federal court system, the U.S. circuit courts of appeals are the intermediate appellate courts.

SUPREME COURT

The highest state court is that state’s supreme court, although it may be called by some other name.Appeal from state supreme courts to the United States Supreme Court is possible only if a federal question is involved.The United States Supreme Court is the highest court in the federal court system and the final arbiter of the Constitution and federal law.

Today, more than 90 percent of civil lawsuits are settled before trial using some form of ADR. Indeed, most states either require or encourage parties to undertake ADR prior to trial. Many federal courts have instituted ADR programs as well. In the following pages, we examine the basic forms of ADR.

Negotiation The simplest form of ADR is negotiation, a process in which the parties attempt to settle their dispute informally, with or without attorneys to represent them. Attorneys frequently advise their clients to negotiate a settlement voluntarily before they proceed to trial. In some courts, pretrial negotiation is mandatory before parties can proceed to trial. Parties may even try to negotiate a settlement during a trial or after the trial but before an appeal.Negotiation traditionally involves just the parties themselves and (typically) their attorneys. The attorneys, though, are advocates—they are obligated to put their clients’ interests first.

Mediation In mediation, a neutral third party acts as a mediator and works with both sides in the dispute to facilitate a resolution. The mediator normally talks with the par-

ties separately as well as jointly, emphasizes points of agreement, and helps the parties to evaluate their options. Although the mediator may propose a solution (called a mediator’s proposal), he or she does not make a decision resolving the matter. The mediator, who need not be a lawyer, usually charges a fee for his or her services (which can be split between the parties). States that require parties to undergo ADR before trial often offer mediation as one of the ADR options or (as in Florida) the only option. One of the biggest advantages of mediation is that it is not as adversarial in nature as litigation. In mediation, the mediator takes an active role and attempts to bring the parties together so that they can come to a mutually satisfactory resolution. The mediation process tends to reduce the antagonism between the disputants, allowing them to resume their former relationship while minimizing hostility. For this reason, mediation is often the preferred form of ADR for disputes involving business partners, employers and employees, or other parties involved in long-term relationships. Today, characteristics of mediation are being combined with those of arbitration (to be discussed next). In binding mediation, for example, the parties agree that if they cannot resolve the dispute, the mediator

43

can make a legally binding decision on the issue. In mediation-arbitration, or “med-arb,” the parties first attempt to settle their dispute through mediation. If no settlement is reached, the dispute will be arbitrated.

Arbitration A more formal method of ADR is arbitration, in which an arbitrator (a neutral third party or a panel of experts) hears a dispute and imposes a resolution on the parties. Arbitration differs from other forms of ADR in that the third party hearing the dispute makes a decision for the parties. Exhibit 2–3 outlines the basic differences among the three traditional forms of ADR. Usually, the parties in arbitration agree that the third party’s decision will be legally binding, although the parties can also agree to nonbinding arbitration. (Additionally, arbitration that is mandated by the courts often is not binding on the parties.) In nonbinding arbitration, the parties can go forward with a lawsuit if they do not agree with the arbitrator’s decision. The Arbitration Process In some respects, formal arbitration resembles a trial, although usually the procedural rules are much less restrictive than those governing litigation. In a typical arbitration, the parties present opening arguments and ask for specific remedies. Evidence is then presented, and witnesses may be called and examined by both sides.The arbitrator then renders a decision, called an award.

EXHIBIT 2–3

Type of ADR

•

An arbitrator’s award is usually the final word on the matter.Although the parties may appeal an arbitrator’s decision, a court’s review of the decision will be much more restricted in scope than an appellate court’s review of a trial court’s decision. The general view is that because the parties were free to frame the issues and set the powers of the arbitrator at the outset, they cannot complain about the results.The award will be set aside only if the arbitrator’s conduct or “bad faith” substantially prejudiced the rights of one of the parties, if the award violates an established public policy, or if the arbitrator exceeded her or his powers (by arbitrating issues that the parties did not agree to submit to arbitration). Arbitration Clauses and Statutes Virtually any commercial matter can be submitted to arbitration. Frequently, parties include an arbitration clause in a contract (a written agreement—see Chapter 10) specifying that any dispute arising under the contract will be resolved through arbitration rather than through the court system.Parties can also agree to arbitrate a dispute after it arises. Most states have statutes (often based in part on the Uniform Arbitration Act of 1955) under which arbitration clauses will be enforced, and some state statutes compel arbitration of certain types of disputes,such as those involving public employees.At the federal level, the Federal Arbitration Act (FAA), enacted in 1925, enforces arbitration clauses in contracts involving

Basic Differences in the Traditional Forms of ADR

Description

Neutral Third Party Present

Who Decides the Resolution

Negotiation

Parties meet informally with or without their attorneys and attempt to agree on a resolution.

No

The parties themselves reach a resolution.

Mediation

A neutral third party meets with the parties and emphasizes points of agreement to bring them toward resolution of their dispute.

Yes

The parties, but the mediator may suggest or propose a resolution.

Arbitration

The parties present their arguments and evidence before an arbitrator at a hearing, and the arbitrator renders a decision resolving the parties’ dispute.

Yes

The arbitrator imposes a resolution on the parties that may be either binding or nonbinding.

44

maritime activity and interstate commerce.Because of the breadth of the commerce clause (see Chapter 4), arbitration agreements involving transactions only slightly connected to the flow of interstate commerce may fall under the FAA.

C A S E

The question in the following case was whether a court or an arbitrator should consider a claim that an entire contract, including its arbitration clause, is rendered void by the alleged illegality of a separate provision in the contract.

2.2 Buckeye Check Cashing, Inc. v. Cardegna Supreme Court of the United States, 2006. 546 U.S. 440, 126 S.Ct. 1204, 163 L.Ed.2d 1038. www.law.cornell.edu/supct/index.html a

• Background and Facts Buckeye Check Cashing, Inc., cashes personal checks for consumers

in Florida. Buckeye agrees to delay submitting a check for payment in exchange for a consumer’s payment of a “finance charge.” For each transaction, the consumer signs a “Deferred Deposit and Disclosure Agreement,” which states, “By signing this Agreement, you agree that i[f] a dispute of any kind arises out of this Agreement * * * th[e]n either you or we or third-parties involved can choose to have that dispute resolved by binding arbitration.” John Cardegna and others filed a suit in a Florida state court against Buckeye, alleging that the “finance charge” represented an illegally high interest rate in violation of Florida state laws, rendering the agreement “criminal on its face.” Buckeye filed a motion to compel arbitration. The court denied the motion. On Buckeye’s appeal, a state intermediate appellate court reversed this denial, but on the plaintiffs’ appeal, the Florida Supreme Court reversed the lower appellate court’s decision. Buckeye appealed to the United States Supreme Court. IN THE LANGUAGE OF THE COURT

Justice SCALIA delivered the opinion of the Court.

* * * * * * * Section 2 [of the Federal Arbitration Act (FAA)] embodies the national policy favoring arbitration and places arbitration agreements on equal footing with all other contracts: A written provision in * * * a contract * * * to settle by arbitration a controversy thereafter arising out of such contract * * * shall be valid,irrevocable,and enforceable,save upon such grounds as exist at law or in equity for the revocation of any contract.

* * * The crux of the [respondents’] complaint is that the contract as a whole (including its arbitration provision) is rendered invalid by the * * * finance charge. * * * * * * * [Our holdings in previous cases] answer the question presented here by establishing three propositions. First, as a matter of substantive federal arbitration law, an arbitration provision is severable [capable of being legally separated] from the remainder of the contract. Second, unless the challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance. Third,this arbitration law applies in state as well as federal courts. * * * Applying [those holdings] to this case, we conclude that because respondents challenge the Agreement,but not specifically its arbitration provisions,those provisions are enforceable apart from the remainder of the contract. The challenge should therefore be considered by an arbitrator, not a court. [Emphasis added.] * * * * * * * Since,respondents argue,the only arbitration agreements to which [Section] 2 applies are those involving a “contract,” and since an agreement void ab initio [from the beginning] under state law is not a “contract,” there is no “written provision” in or “controversy arising out of” a “contract,” to which [Section] 2 can apply.* * * We do not read “contract”so narrowly. The word a. In the “Supreme Court Collection” menu at the top of the page, click on “Search.” When that page opens, in the “Search for:” box, type “Buckeye Check,” choose “All decisions” in the accompanying list, and click on “Search.” In the result, scroll to the name of the case and click on the appropriate link to access the opinion.

45

CASE 2.2 CONTINUED

appears four times in [Section] 2.Its last appearance is in the final clause,which allows a challenge to an arbitration provision “upon such grounds as exist at law or in equity for the revocation of any contract.” There can be no doubt that “contract” as used this last time must include contracts that later prove to be void. Otherwise, the grounds for revocation would be limited to those that rendered a contract voidable—which would mean (implausibly) that an arbitration agreement could be challenged as voidable but not as void. Because the sentence’s final use of “contract” so obviously includes putative [alleged] contracts,we will not read the same word earlier in the same sentence to have a more narrow meaning.

•

Decision and Remedy The United States Supreme Court reversed the judgment of the Florida Supreme Court and remanded the case for further proceedings. The United States Supreme Court ruled that a challenge to the validity of a contract as a whole, and not specifically to an arbitration clause contained in the contract, must be resolved by an arbitrator.

• The Ethical Dimension Does the holding in this case permit a court to enforce an arbi-

tration agreement in a contract that the arbitrator later finds to be void? Is this fair? Why or why not?

• The Legal Environment Dimension As indicated in the parties’ arguments and the

Court’s reasoning in this case, into what categories can contracts be classified with respect to their enforceability?

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Arbitrability When a dispute arises as to whether the parties to a contract with an arbitration clause have agreed to submit a particular matter to arbitration, one party may file suit to compel arbitration. The court before which the suit is brought will not decide the basic controversy but must decide the issue of arbitrability—that is, whether the matter is one that must be resolved through arbitration. If the court finds that the subject matter in controversy is covered by the agreement to arbitrate, then a party may be compelled to arbitrate the dispute. Even when a claim involves a violation of a statute passed to protect a certain class of people,a court may determine that the parties must nonetheless abide by their agreement to arbitrate the dispute. Usually, a court will allow the claim to be arbitrated if the court, in interpreting the statute, can find no legislative intent to the contrary. No party, however, will be ordered to submit a particular dispute to arbitration unless the court is convinced that the party has consented to do so.18 Additionally, the courts will not compel arbitration if it is clear that the prescribed arbitration rules and

years has concerned mandatory arbitration clauses in employment contracts. Many claim that employees’ rights are not sufficiently protected when they are forced, as a condition of being hired, to agree to arbitrate all disputes and thus waive their rights under statutes specifically designed to protect employees. The United States Supreme Court, however, has held that mandatory arbitration clauses in employment contracts are generally enforceable.20 Compulsory arbitration agreements often spell out the rules for a mandatory proceeding. For example, an agreement may address in detail the amount and payment of filing fees and other expenses. Some courts have overturned provisions in employment-related agreements that require the parties to split the costs when an individual worker lacks the ability to pay. The court in the following case took this reasoning a step further.

18. See, for example, Wright v. Universal Maritime Service Corp., 525 U.S. 70, 119 S.Ct. 391, 142 L.Ed.2d 361 (1998).

19. Hooters of America,Inc.v.Phillips, 173 F.3d 933 (4th Cir.1999). 20. For a landmark decision on this issue, see Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991).

procedures are inherently unfair to one of the parties.19 Mandatory Arbitration in the Employment Context A significant question in the last several

46

EXTENDED

C A S E 2.3

Morrison v. Circuit City Stores, Inc. United States Court of Appeals, Sixth Circuit, 2003. 317 F.3d 646. www.ca6.uscourts.gov/internet/index.htm a

KAREN NELSON MOORE, Circuit Judge.

* * * * * * * Plaintiff-Appellant Morrison, an African-American female with a bachelor’s degree in engineering from the U.S. Air Force Academy and a master’s degree in administration from Central Michigan University, submitted an application for a managerial position at a Circuit City store in Cincinnati, Ohio. As part of the application process, Morrison was required to sign a * * * “Dispute Resolution Agreement.” This document contained an arbitration clause that required resolution of all disputes or controversies arising out of employment with Circuit City in an arbitral forum. * * * Circuit City would not consider any application for employment unless the arbitration agreement was signed * * * . * * * * Pursuant to [the agreement] each party is required to pay one-half of the costs of arbitration following the issuance of an arbitration award * * * . In addition, * * * if an employee is able to pay her share of the arbitration costs within [ninety days], her costs (not including attorney fees) are then limited to the greater of either five hundred dollars or three percent of her most recent annual compensation. * * * * * * * Morrison began her employment at Circuit City on or about December 1, 1995. Two years later, on December 12, 1997, she was terminated. Morrison alleges that her termination was the result of race and sex discrimination.b She filed this lawsuit * * * in Ohio state court, alleging federal and state claims of race and sex discrimination * * * .Circuit City removed the case to federal court and then moved to compel arbitration and to dismiss Morrison’s claims. The district court granted Circuit City’s motion * * * . * * * Morrison’s appeal followed. * * * * We hold that potential litigants must be given an opportunity, prior to arbitration on the merits, to demonstrate that the potential costs of arbitration are great enough to deter them and similarly situated individuals from seeking to vindicate [assert] their federal statutory rights in the arbitral forum. * * * Thus,in order to protect the statutory rights at issue,the reviewing court must look to more than just the interests and conduct of a particular plaintiff.* * * [A] court considering whether a cost-splitting provision is enforceable should consider similarly situated potential litigants, for whom costs will loom as a larger concern, because it is, in large part, their presence in the system that will deter discriminatory practices. [Emphasis added.] For this reason, if the reviewing court finds that the cost-splitting provision would deter a substantial number of similarly situated potential litigants, it should refuse to enforce the cost-splitting provision in order to serve the underlying functions of the federal statute. * * * [Emphasis added.] * * * * This analysis will yield different results in different cases. It will find, in many cases, that highlevel managerial employees and others with substantial means can afford the costs of arbitration, thus making cost-splitting provisions in such cases enforceable. In the case of other employees, however, this standard will render cost-splitting provisions unenforceable in many, if not most, cases. * * * Circuit City argues that Morrison could have avoided having to pay half of the cost of the arbitration * * * if she could have arranged to pay the greater of $500 or 3 percent of her

a. This is a page within the Web site of the U.S. Court of Appeals for the Sixth Circuit. In the left-hand column, click on “Opinions Search.” In the “Short Title contains” box, type “Morrison,” and click “Submit Query.” In the “Opinion” box corresponding to the name of the case, click on the number to access the opinion. b. Employment discrimination will be discussed in detail in Chapter 34.

47

CASE 2.3 CONTINUED

annual salary (in this case, 3 percent of $54,060, or $1,622) within ninety days of the arbitrator’s award. * * * In the abstract,this sum may not appear prohibitive,but it must be considered from the vantage point of the potential litigant in a case such as this. Recently terminated, the potential litigant must continue to pay for housing, utilities, transportation, food, and the other necessities of life in contemporary society despite losing her primary, and