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Business Law

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Comprehensive Volume

ANDERSON’S BUSINESS LAW

And The Legal Environment 22e

DAVID P. TWOMEY Professor of Law

Carroll School of Management Boston College

Member of the Massachusetts and Florida Bars

MARIANNE MOODY JENNINGS Professor Emeritus of Legal and Ethical Studies

W.P. Carey School of Business Arizona State University

Member of the Arizona Bar ©

Sa m pl e N am

e, iS to ck

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This is an electronic version of the print textbook. Due to electronic rights restrictions, some third party content may be suppressed. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it. For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest.

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CONNECT for

SUCCESS For today’s – and tomorrow’s – business leaders, a solid

understanding of the legal environment of business is

crucial. Students must be equipped with the knowledge of

basic legal concepts and the skills to apply these concepts

to real-world examples in order to succeed in business.

Anderson’s Business Law and the Legal Environment,

a time-tested market leading textbook, continues the

tradition of providing crystal clear explanations of the

law, student-friendly examples, and vivid illustrations.

Perhaps the most exciting innovation to the new edition

is not what students learn but how they learn – the

cutting-edge 22nd edition continues with its proven

features and approaches for teaching and learning that are

integrated into every facet of the text and package.

CONNECT for LEARNING

SUCCESS The learning system introduced in the 21st Edition of Anderson’s Business Law

and the Legal Environment, proved to be an effective tool for students to make the

connection to what they are reading, what they are doing in class, and—ultimately—

what they will do in the real world as business managers and leaders. This new tool is

continued and refined for the 22nd edition.

Chapters open with a self-guided outline—helping students focus on key concepts.

Chapter content continues to provide just the right amount of detail, presented in

terminology students can grasp and relate to. As a learning and study tool, key

examples are highlighted in green throughout each chapter—spotlighting the

connection between chapter concepts and real-world experiences for students.

The self-guided outlines help students

focus on the key concepts presented in

the chapter.

Examples are emphasized in every paragraph with green highlights – spotlighting the connection between legal concepts and real-world experiences for students.

learningoutcomes After studying this chapter, you should be able to

LO.1 Define business ethics

LO.2 Discuss why ethics are important in business

LO.3 Describe how to recognize and resolve ethical dilemmas

A. What Is Business Ethics?

1. THE LAW AS THE STANDARD FOR BUSINESS ETHICS

2. THE NOTION OF UNIVERSAL STANDARDS FOR BUSINESS ETHICS

3. ETHICAL THEORIES AND STANDARDS

4. THE BUSINESS STAKEHOLDER STANDARD OF BEHAVIOR

B. Why Is Business Ethics Important?

5. THE IMPORTANCE OF TRUST

6. BUSINESS ETHICS AND FINANCIAL PERFORMANCE

7. THE IMPORTANCE OF A GOOD REPUTATION

8. BUSINESS ETHICS AND BUSINESS REGULATION: PUBLIC POLICY, LAW, AND ETHICS

C. How to Recognize and Resolve Ethical Dilemmas

9. CATEGORIES OF ETHICAL BEHAVIOR

10. RESOLVING ETHICAL DILEMMAS

CHAPTER 3 Business Ethics, Social Forces, and the Law

ImportanImportant?t?

5.55.5.5.5. THETHETHETHETHEHE IMPORTANCEIMPORTANCEIMPORTANCEIMPORTANCEIMPORTANCEMPORTANC OFOFOFOFOF TRUSTTRUSTTRUSTRUSTRUSTUST

10. RESOLVING ETHICAL DILEMMAS

2. The Notion of Universal Standards for Business Ethics Another view of ethics holds that standards exist universally and cannot be changed or modified by law. In many cases, universal standards stem from religious beliefs. In some countries today, the standards for business are still determined by religious tenets. Natural law imposes higher standards of behavior than those required by positive law and they must be followed even if those higher standards run contrary to codified law. For Example, in the early nineteenth century when slavery was legally permissible in the United States, a positive law standard supported slavery. However, slavery violates the natural law principle of individual freedom and would be unethical. Civil disobedience is the remedy natural law proponents use to change positive law.

Former Supreme Court Justice Sandra Day O’Connor, who was second in her class at Stanford Law School (the late Chief Justice William Rehnquist was first), was offered a job as a receptionist for a law firm while her male classmates were hired as attorneys. At that time, no law prohibited discrimination against women, so law f h l l d d h l f

natural law– a system of principles to guide human conduct independent of, and sometimes contrary to, enacted law and discovered by man’s rational intelligence.

civil disobedience– the term used when natural law proponents violate positive law.

38 Part 1 The Legal and Social Environment of Business

Maximizing student success, the Make the Connection section found at the end of each chapter begins with a revised and more thorough chapter summary recapping key chapter topics. Action-oriented Learning Outcomes direct students to utilize the existing text pedagogy by serving as a direct reference point for selected For Example callouts, case summaries, and feature boxes. A list of Key Terms gives students further opportunity to check their understanding of commonly-used business law terminology. The Questions and Case Problems offer students additional opportunities for students to connect legal concepts to real-world issues. And the CPA Questions provide excellent review for the CPA Exam.

Make the Connection helps students understand and retain legal concepts by explaining them in the context of real-world examples. The result: Students are better prepared to have success in class—and in their careers as business leaders.

End-of-chapter material has been thoroughly revised and expanded! The cases, new “Thinging Things Through” examples, new ethics examples, and new “Sports and Entertainment Law” sections offer students up-to-date examples that help them understand the chapter concepts and laws covered.

MAKE THE CONNECTION

SUMMARY

Business ethics is the application of values and standards to business conduct and decisions. These values originate in various sources from positive (codified) law to natural law to ethical theories and standards and on to stakeholder values. Business ethics is important because trust is a critical component of good business relationships and free enterprise. A business with values will enjoy the additional competitive advantage of a good reputation and, over the long term, better earnings. When businesses make decisions that violate basic ethical standards, they set into motion social forces and cause the area of abuse to be regulated, resulting in additional costs and

restrictions for business. Voluntary value choices by businesses position them for a competitive advantage.

The categories of ethical values in business are truthfulness and integrity, promise keeping, loyalty and avoiding conflicts of interest, fairness, doing no harm, and maintaining confidentiality.

Resolution of ethical dilemmas is possible through the use of various models that require a businessperson to examine the impact of a decision before it is made. These models include stakeholder analysis, the Blanchard and Peale test, the front-page- of-the-newspaper test, and the Laura Nash model.

LEARNING OUTCOMES

After studying this chapter, you should be able to clearly explain:

A. What Is Business Ethics? LO.1 Define business ethics

See the discussion of the definition, balancing the goal of profits with the values of individuals and society, on p. 41–42.

B. Why Is Business Ethics Important? LO.2 Discuss why ethics are important in

business See “The Importance of Trust” on p. 42. See “Business Ethics and Financial Performance” on p. 43. See “The Importance of a Good Reputation” on p. 44.

The Family Man (2000) (PG-13)

Nicolas Cage plays a Wall Street billionaire who is suddenly given a suburban life in New Jersey with all of its family life and financial constraints. He is forced to examine who he really is and what is important.

LawFlix Continued

54 Part 1 The Legal and Social Environment of Business

CONNECT for TEACHING

SUCCESS Instructor resources also integrate the text’s Make the Connection learning system.

The Instructor’s Manual includes a thorough explanation of the system as well as

tips for implementation. Expanded PowerPoint® presentations incorporate Learning

Outcomes into every chapter, enabling instructors to talk through examples step

by step in class. In addition, the Test Bank includes questions from the Learning

Outcomes sections.

Instructor’s Manual: This manual provides instructor

insights, chapter outlines, and teaching strategies for each chapter. Chapter overviews

and transparency integration notes ease lecture preparation.

Discussion points are provided for the textbook’s “Thinking

Things Through” and “Ethics & the Law” vignettes. Also included

are answers to CPA questions.

Test Bank: Thousands of true/false, multiple-choice, and case questions are available.

Power Point: PowerPoint® slides are available to help instructors enhance their lectures.

CREATE the PERFECT

LEARNING SOLUTION Digital Solutions that Prepare and Engage Students MINDTAP MindTap is a new personal learning experience that combines all your digital assets—readings, multimedia, activities, and assessments—into a singular learning path to improve student outcomes. MindTap offers complimentary web-apps known as MindApps. MindApps range from ReadSpeaker (which reads the text out-loud to students), to Kaltura (allowing you to insert your own video and audio into your curriculum) to ConnectYard (allowing you to create digital “yards” through social media—all without “friending” your students). CengageNOW is an app within MindTap. www.cengage.com/mindtap Instant Access Code ISBN: 9781285513102

CENGAGENOW CengageNOW is a powerful course management tool that provides control and customization to optimize the student learning experience and produce desired outcomes. CengageNOW includes:

• Interactive eBook

• Auto-Graded Homework with the following consistent question types:

• Chapter Review

• Brief Hypotheticals/Business Case Scenarios

• Legal Reasoning

• IRAC (Issue, Rule, Application, Conclusion) Case Analysis

• Synthesizing/Exam Strategy

• Application & Analysis/Business Wisdom

• Video Questions

• Personalized Study Plan with Multimedia Study Tools and videos

• Test Bank • Course Management Tools • Reporting & Assessment Options

Instant Access Code ISBN: 9781285194189

COURSEMATE CourseMate with Engagement Tracker: CourseMate brings course concepts to life with interactive learning tools and an eBook. CourseMate now includes the KnowNOW! Blog, the most current solution for the most convenient online news and classroom application. KnowNOW! brings news into your course with discipline-specific online pages and applications. www.cengage.com/coursemate Instant Access Code ISBN: 9781285194127

BRING BUSINESS LAW TO LIFE! Business Law Digital Video Library: This dynamic video library features more that ninety video clips that spark class discussion and clarify core legal principles. The library is organized into four series: Legal Conflicts in Business (includes specific modern business and e-commerce scenarios); Ask the Instructor (presents straightforward explanations of concepts for student review); Drama of the Law (features classic business scenarios that spark classroom participation); and Real World Legal (explores conflicts that arise in a variety of business environments). Access for students is free when bundled with a new textbook, or it can be purchased at www.cengagebrain.com. Instant Access Code ISBN: 9781285186658

Unique Services for You and Your Students CENGAGE LEARNING CUSTOM SOLUTIONS Cengage Learning Custom Solutions can provide your students exactly what they need to succeed—remove extra coverage you normally skip, replace chapters with coverage that better matches your approach, supplement your text with additional cases or readings from our legal, business ethics, or our new “pop culture” case collections, and include your own material to create a complete and efficient course resource. With a customized product your students are paying for “exactly what they need” and receive a greater value for their dollar.

SAVE YOUR STUDENTS TIME AND MONEY! Tell them about CengageBrain.com to access Cengage Learning content and empower them to choose the format and savings that suits them best . . . and a better chance to succeed in your class. On CengageBrain.com students will be able to save up to 60% on their course materials through our full spectrum of options. Students will have the option to rent their textbooks, purchase print textbooks, e-textbooks, or individual e-chapters and audio books all for substantial savings over average retail prices. CengageBrain.com also includes access to Cengage Learning’s broad range of homework and study tools, and features a selection of free content. www.cengage.com/custom/

brief contents

Preface xxxi Acknowledgements xxxix About the Authors xlii

PART 1 THE LEGAL AND SOCIAL ENVIRONMENT OF BUSINESS 1 1 The Nature and Sources of Law 3 2 The Court System and Dispute Resolution 15 3 Business Ethics, Social Forces, and the Law 36 4 The Constitution as the Foundation of the Legal

Environment 59 5 Government Regulation of Competition and Prices 78 6 Administrative Agencies 92 7 The Legal Environment of International Trade 112 8 Crimes 141 9 Torts 170

10 Intellectual Property Rights and the Internet 193 11 Cyberlaw 222

PART 2 CONTRACTS 241 12 Nature and Classes of Contracts: Contracting on the

Internet 243 13 Formation of Contracts: Offer and Acceptance 260 14 Capacity and Genuine Assent 282 15 Consideration 304 16 Legality and Public Policy 320 17 Writing, Electronic Forms, and Interpretation of

Contracts 338 18 Third Persons and Contracts 361 19 Discharge of Contracts 378 20 Breach of Contract and Remedies 399

PART 3 SALES AND LEASES OF GOODS 419 21 Personal Property and Bailments 421 22 Legal Aspects of Supply Chain Management 443 23 Nature and Form of Sales 466 24 Title and Risk of Loss 493 25 Product Liability: Warranties and Torts 515 26 Obligations and Performance 538 27 Remedies for Breach of Sales Contracts 557

PART 4 NEGOTIABLE INSTRUMENTS 579 28 Kinds of Instruments, Parties, and Negotiability 581

29 Transfers of Negotiable Instruments and Warranties of Parties 600

30 Liability of the Parties under Negotiable Instruments 621 31 Checks and Funds Transfers 640

PART 5 DEBTOR-CREDITOR RELATIONSHIPS 669 32 Nature of the Debtor-Creditor Relationship 671 33 Consumer Protection 689 34 Secured Transactions in Personal Property 715 35 Bankruptcy 746 36 Insurance 773

PART 6 AGENCY AND EMPLOYMENT 797 37 Agency 799 38 Third Persons in Agency 823 39 Regulation of Employment 846 40 Equal Employment Opportunity Law 885

PART 7 BUSINESS ORGANIZATIONS 913 41 Types of Business Organizations 915 42 Partnerships 933 43 LPs, LLCs, and LLPs 961 44 Corporation Formation 978 45 Shareholder Rights in Corporations 1000 46 Securities Regulation 1026 47 Accountants’ Liability and Malpractice 1054 48 Management of Corporations 1077

PART 8 REAL PROPERTY AND ESTATES 1101 49 Real Property 1103 50 Environmental Law and Land Use Controls 1129 51 Leases 1150 52 Decedents’ Estates and Trusts 1169

APPENDICES

1 How to Find the Law A-1 2 The Constitution of the United States A-4 3 Uniform Commercial Code A-15

GLOSSARY G-1

CASE INDEX CI-1

SUBJECT INDEX SI-1

contents Preface xxxi Acknowledgements xxxix About the Authors xlii

PART 1

THE LEGAL AND SOCIAL ENVIRONMENT OF BUSINESS

CHAPTER 1 THE NATURE AND SOURCES OF LAW 3

A. Nature of Law and Legal Rights 4 1. Legal Rights 4 2. Individual Rights 4 3. The Right of Privacy 4 CASE SUMMARY 5

4. Privacy and Technology 6 Ethics & the Law 6

E-Commerce & Cyberlaw 7

B. Sources of Law 7 5. Constitutional Law 7 6. Statutory Law 8 7. Administrative Law 8 8. Private Law 8 9. Case Law, Statutory Interpretation, and Precedent 8 10. Other Forms of Law: Treaties and Executive

Orders 9 11. Uniform State Laws 9 C. Classifications of Law 10 12. Substantive Law vs. Procedural Law 10 13. Criminal Law vs. Civil Law 10 Sports & Entertainment Law 10

14. Law vs. Equity 11 LawFlix 11

CHAPTER 2 THE COURT SYSTEM AND DISPUTE RESOLUTION 15

A. The Court System 16 1. The Types of Courts 16 CASE SUMMARY 17

2. The Federal Court System 18 3. State Court Systems 20 B. Court Procedure 22

4. Participants in the Court System 22 5. Which Law Applies—Conflicts of Law 22 6. Initial Steps in a Lawsuit 23 7. The Trial 24 Thinking Things Through 25

Ethics & the Law 27

8. Posttrial Procedures 27 C. Alternative Dispute Resolution (ADR) 27 9. Arbitration 27 10. Mediation 29 11. MedArb 29 12. Reference to a Third Person 29 E-Commerce & Cyberlaw 30

13. Association Tribunals 30 14. Summary Jury Trial 30 15. Rent-A-Judge 30 16. Minitrial 31 17. Judicial Triage 31 18. Contract Provisions 31 LawFlix 31

CHAPTER 3 BUSINESS ETHICS, SOCIAL FORCES, AND THE LAW 36

A. What Is Business Ethics? 37 1. The Law as the Standard for Business Ethics 37 2. The Notion of Universal Standards for Business

Ethics 38 3. Ethical Theories and Standards 38 Thinking Things Through 40

4. The Business Stakeholder Standard of Behavior 41 Ethics & the Law 42

B. Why Is Business Ethics Important? 42 5. The Importance of Trust 42 6. Business Ethics and Financial Performance 43 Ethics & the Law 44

7. The Importance of a Good Reputation 44 8. Business Ethics and Business Regulation: Public

Policy, Law, and Ethics 44 Ethics & the Law 46

C. How to Recognize and Resolve Ethical Dilemmas 48 9. Categories of Ethical Behavior 48 Ethics & the Law 49

Sports & Entertainment Law 50

10. Resolving Ethical Dilemmas 50

xii

E-Commerce & Cyberlaw 51

Ethics & the Law 52

LawFlix 53

CHAPTER 4 THE CONSTITUTION AS THE FOUNDATION OF THE LEGAL ENVIRONMENT 59

A. The U.S. Constitution and the Federal System 60 1. What a Constitution Is 60 2. The Branches of Government 60 B. The U.S. Constitution and the States 60 3. Delegated and Shared Powers 60 4. Other Powers 61 5. Federal Supremacy 62 CASE SUMMARY 62

C. Interpreting and Amending the Constitution 63 6. Conflicting Theories 63 7. Amending the Constitution 63 8. The Living Constitution 64 D. Federal Powers 65 9. The Power to Regulate Commerce 65 CASE SUMMARY 66

CASE SUMMARY 67

10. The Financial Powers 68 CASE SUMMARY 68

E. Constitutional Limitations on Government 69 11. Due Process 69 E-Commerce & Cyberlaw 70

12. Equal Protection of the Law 70 13. Privileges and Immunities 71 14. Protection of the Person 71 15. The Bill of Rights and Businesses as Persons 72 CASE SUMMARY 72

Thinking Things Through 73

LawFlix 73

CHAPTER 5 GOVERNMENT REGULATION OF COMPETITION AND PRICES 78

A. Power to Regulate Business 79 1. Regulation, Free Enterprise, and Deregulation 79 2. Regulation of Unfair Competition 79 B. Regulation of Horizontal Markets and Competitors 79 3. Regulation of Prices 79 4. Prevention of Monopolies and Combinations 80 Ethics & the Law 81

5. Boycotts and Refusals to Deal 81 6. Mergers among Competitors 82

E-Commerce & Cyberlaw 82

C. Regulation of the Supply Chain and Vertical Trade Restraints 83

7. Price Discrimination 83 CASE SUMMARY 83

8. Exclusive Dealings and Territories 84 9. Real Price Maintenance 84 CASE SUMMARY 85

CASE SUMMARY 85

10. Tying 86 11. Mergers along the Supply Chain 86 Sports & Entertainment Law 86

D. Remedies for Anticompetitive Behavior 87 12. Criminal Penalties 87 13. Civil Remedies 87 LawFlix 88

CHAPTER 6 ADMINISTRATIVE AGENCIES 92

A. Nature of the Administrative Agency 93 1. Purpose of Administrative Agencies 93 2. Uniqueness of Administrative Agencies 93 3. Open Operation of Administrative Agencies 94 B. Legislative Power of the Agency 95 4. Agency’s Regulations as Law 95 CASE SUMMARY 96

5. Agency Adoption of Regulations 97 E-Commerce & Cyberlaw 97

CASE SUMMARY 98

C. Executive Power of the Agency 99 6. Enforcement or Execution of the Law 100 Ethics & the Law 100

7. Constitutional Limitations on Administrative Investigation 100

D. Judicial Power of the Agency 101 8. The Agency as a Specialized Court 101 9. Punishment and Enforcement Powers of Agencies 102 10. Exhaustion of Administrative Remedies 103 11. Appeal from Administrative Action and Finality of

Administrative Determination 103 CASE SUMMARY 104

CASE SUMMARY 105

12. Liability of the Agency 106 LawFlix 107

CHAPTER 7 THE LEGAL ENVIRONMENT OF INTERNATIONAL TRADE 112

A. General Principles 113 1. The Legal Background 113

Contents xiii

2. International Trade Organizations, Conferences, and Treaties 115

CASE SUMMARY 116

CASE SUMMARY 118

3. Forms of Business Organizations 119 CASE SUMMARY 121

B. Governmental Regulation 121 4. Export Regulations 121 5. Protection of Intellectual Property Rights 123 CASE SUMMARY 124

6. Antitrust 126 7. Securities and Tax Fraud Regulation in an

International Environment 128 CASE SUMMARY 129

8. Barriers to Trade 130 CASE SUMMARY 130

9. Relief Mechanisms for Economic Injury Caused by Foreign Trade 131

CASE SUMMARY 132

10. Expropriation 133 11. The Foreign Corrupt Practices Act 134 CASE SUMMARY 134

Ethics & the Law 135

LawFlix 135

CHAPTER 8 CRIMES 141

A. General Principles 142 1. Nature and Classification of Crimes 142 2. Basis of Criminal Liability 142 3. Responsibility for Criminal Acts 142 CASE SUMMARY 143

CASE SUMMARY 144

Thinking Things Through 148

4. Indemnification of Crime Victims 148 B. White-Collar Crimes 149 5. Conspiracies 149 6. Crimes Related to Production, Competition, and

Marketing 149 7. Money Laundering 149 8. Racketeering 150 9. Bribery 151 10. Commercial Bribery 151 11. Extortion and Blackmail 151 12. Corrupt Influence 152 13. Counterfeiting 152 Ethics & the Law 153

14. Forgery 153 15. Perjury 153 16. False Claims and Pretenses 153

17. Bad Checks 154 18. Credit Card Crimes 154 19. Embezzlement 155 20. Obstruction of Justice: Sarbanes-Oxley

(SOX) 155 21. Corporate Fraud: SOX 155 Sports & Entertainment Law 156

22. The Common Law Crimes 156 C. Criminal Law and the Computer 157 23. What Is a Computer Crime? 157 24. The Computer as Victim 158 25. Unauthorized Use of Computers 158 26. Computer Raiding 158 27. Diverted Delivery by Computer 159 E-Commerce & Cyberlaw 159

28. Economic Espionage by Computer 160 29. Electronic Fund Transfer Crimes 160 Ethics & the Law 160

30. Circumventing Copyright Protection Devices Via Computer 160

31. Spamming 161 D. Criminal Procedure Rights for Businesses 161 32. Fourth Amendment Rights for Businesses 161 CASE SUMMARY 162

33. Fifth Amendment Self-Incrimination Rights for Businesses 163

CASE SUMMARY 163

34. Due Process Rights for Businesses 164 CASE SUMMARY 165

LawFlix 165

CHAPTER 9 TORTS 170

A. General Principles 171 1. What Is a Tort? 171 2. Tort and Crime Distinguished 171 3. Types of Torts 171 B. Intentional Torts 173 4. Assault 173 5. Battery 173 CASE SUMMARY 173

6. False Imprisonment 173 CASE SUMMARY 174

7. Intentional Infliction of Emotional Distress 174 8. Invasion of Privacy 175 CASE SUMMARY 175

CASE SUMMARY 176

9. Defamation 177 CASE SUMMARY 177

10. Product Disparagement 179

xiv Contents

11. Wrongful Interference with Contracts 179 12. Trespass 180 C. Negligence 180 13. Elements of Negligence 181 CASE SUMMARY 182

14. Defenses to Negligence 183 CASE SUMMARY 184

Sports & Entertainment Law 186

D. Strict Liability 186 Thinking Things Through 186

15. What Is Strict Liability? 187 16. Imposing Strict Liability 187 LawFlix 188

CHAPTER 10 INTELLECTUAL PROPERTY RIGHTS AND THE INTERNET 193

A. Trademarks and Service Marks 194 1. Introduction 194 2. International Registration 195 3. Registrable Marks 195 CASE SUMMARY 196

4. Remedies for Improper Use of Marks 197 5. Abandonment of Exclusive Right to Mark 197 6. Trade Dress Protection 197 7. Limited Lanham Act Protection of Product

Design 198 8. Prevention of Dilution of Famous Marks 199 9. Internet Domain Names and Trademark Rights 199 E-Commerce & Cyberlaw 200

B. Copyrights 201 10. Duration of Copyright 201 11. Copyright Notice 202 12. What Is Copyrightable? 202 13. Copyright Ownership and the Internet 202 14. Rights of Copyright Holders 203 15. Limitation on Exclusive Character

of Copyright 203 CASE SUMMARY 204

16. Secondary Liability for Infringement 205 Ethics & the Law 205

17. Digital Millennium Copyright Act 206 C. Patents 206 18. Types, Duration, and Notice 206 19. Patentability 207 CASE SUMMARY 209

20. Patentable Business Methods 209 CASE SUMMARY 209

21. Infringement 210 CASE SUMMARY 211

D. Secret Business Information 212 22. Trade Secrets 212 23. Loss of Protection 212 24. Defensive Measures 213 25. Criminal Sanctions 213 E. Protection of Computer Software and Mask Works 213 26. Copyright Protection of Computer Programs 213 27. Patent Protection of Programs 214 28. Trade Secrets 214 29. Restrictive Licensing 214 30. Semiconductor Chip Protection 215 LawFlix 216

CHAPTER 11 CYBERLAW 222

A. Types of Legal Issues in Cyberspace 223 1. What Is Cyberlaw? 223 2. What Are the Issues in Cyberlaw? 223 B. Employment Issues in Cyberspace 223 3. Employers Are Accountable for Employee Electronic

Content 223 4. Employer Monitoring: What’s Legal 224 CASE SUMMARY 225

5. Employer Screening of Applicants 225 Ethics & the Law 226

CASE SUMMARY 226

6. Employers’ Right of Access to Employee E-Mails and Internet Use 227

CASE SUMMARY 228

E-Commerce & Cyberlaw 229

C. User Issues in Cyberspace 230 7. Use of User Information 230 8. Identifying Users: Screen Names, Privacy, and Freedom

of Speech 230 CASE SUMMARY 231

9. The Cloud and Privacy 232 10. Cookies and Privacy 232 11. Statutory Protections for Privacy

in Cyberspace 232 D. Appropriation and Other Forms of Unfair Competition in

Cyberspace 233 12. Appropriation Online 233 13. Unfair Methods of Competition in Cyberspace 233 Ethics & the Law 234

E. Contract Issues in Cyberspace 234 14. Formation of Contracts in Cyberspace 234 15. Misrepresentation and Fraud in Cyberspace 235 Thinking Things Through 235

16. Tax Issues on Contracts in Cyberspace 236 LawFlix 236

Contents xv

PART 2

CONTRACTS

CHAPTER 12 NATURE AND CLASSES OF CONTRACTS: CONTRACTING ON THE INTERNET 243

A. Nature of Contracts 244 1. Definition of a Contract 244 2. Elements of a Contract 244 3. Subject Matter of Contracts 244 4. Parties to a Contract 244 5. How a Contract Arises 245 6. Intent to Make a Binding Agreement 246 7. Freedom of Contract 246 B. Classes of Contracts 246 8. Formal and Informal Contracts 246 9. Express and Implied Contracts 246 10. Valid and Voidable Contracts and Void

Agreements 247 11. Executed and Executory Contracts 247 12. Bilateral and Unilateral Contracts 248 CASE SUMMARY 248

13. Quasi Contracts 249 CASE SUMMARY 251

CASE SUMMARY 252

Thinking Things Through 253

C. Contracting on the Internet 254 LawFlix 255

CHAPTER 13 FORMATION OF CONTRACTS: OFFER AND ACCEPTANCE 260

A. Requirements of an Offer 261 1. Contractual Intention 261 CASE SUMMARY 261

2. Definiteness 263 CASE SUMMARY 263

CASE SUMMARY 264

Thinking Things Through 264

CASE SUMMARY 267

3. Communication of Offer to Offeree 268 B. Termination of Offer 268 4. Revocation of Offer by Offeror 268 5. Counteroffer by Offeree 269 6. Rejection of Offer by Offeree 270 7. Lapse of Time 270 8. Death or Disability of Either Party 270 9. Subsequent Illegality 271 C. Acceptance of Offer 271 10. What Constitutes an Acceptance? 271

11. Privilege of Offeree 271 12. Effect of Acceptance 271 13. Nature of Acceptance 271 14. Who May Accept? 272 CASE SUMMARY 272

15. Manner and Time of Acceptance 272 16. Communication of Acceptance 273 E-Commerce & Cyberlaw 274

CASE SUMMARY 275

17. Auction Sales 276 LawFlix 277

CHAPTER 14 CAPACITY AND GENUINE ASSENT 282

A. Contractual Capacity 283 1. Contractual Capacity Defined 283 CASE SUMMARY 283

2. Minors 284 CASE SUMMARY 286

3. Mentally Incompetent Persons 287 CASE SUMMARY 288

4. Intoxicated Persons 288 B. Mistake 289 5. Unilateral Mistake 289 CASE SUMMARY 289

6. Mutual Mistake 290 7. Mistake in the Transcription or Printing of the

Contract: Reformation 290 C. Deception 291 8. Intentional Misrepresentation 291 9. Fraud 291 CASE SUMMARY 293

10. Negligent Misrepresentation 294 11. Nondisclosure 295 CASE SUMMARY 295

D. Pressure 296 12. Undue Influence 296 CASE SUMMARY 297

13. Duress 297 LawFlix 298

CHAPTER 15 CONSIDERATION 304

A. General Principles 305 1. Consideration Defined and Explained 305 2. Gifts 305 CASE SUMMARY 306

CASE SUMMARY 306

3. Adequacy of Consideration 307

xvi Contents

CASE SUMMARY 307

4. Forbearance as Consideration 308 5. Illusory Promises 308 B. Special Situations 309 6. Preexisting Legal Obligation 309 CASE SUMMARY 310

CASE SUMMARY 311

7. Past Consideration 312 8. Moral Obligation 312 Ethics & the Law 313

C. Exceptions to the Laws of Consideration 313 9. Exceptions to Consideration 313 CASE SUMMARY 314

LawFlix 315

CHAPTER 16 LEGALITY AND PUBLIC POLICY 320

A. General Principles 321 1. Effect of Illegality 321 CASE SUMMARY 321

2. Exceptions to Effect of Illegality 322 3. Partial Illegality 322 4. Crimes and Civil Wrongs 322 5. Good Faith and Fairness 322 6. Unconscionable Clauses 323 B. Agreements Affecting Public Welfare 325 7. Agreements Contrary to Public Policy 325 8. Gambling, Wagers, and Lotteries 325 CASE SUMMARY 325

C. Regulation of Business 326 9. Effect of Violation 326 10. Statutory Regulation of Contracts 326 11. Licensed Callings or Dealings 327 CASE SUMMARY 327

12. Contracts in Restraint of Trade 328 13. Agreements Not to Compete 328 Thinking Things Through 329

Ethics & the Law 330

CASE SUMMARY 330

14. Usurious Agreements 331 Thinking Things Through 331

CASE SUMMARY 332

LawFlix 332

CHAPTER 17 WRITING, ELECTRONIC FORMS, AND INTERPRETATION OF CONTRACTS 338

A. Statute of Frauds 339 1. Validity of Oral Contracts 339

2. Contracts That Must be Evidenced by a Writing 340

CASE SUMMARY 340

CASE SUMMARY 343

3. Note or Memorandum 345 E-Commerce & Cyberlaw 346

4. Effect of Noncompliance 348 B. Parol Evidence Rule 348 5. Exclusion of Parol Evidence 348 6. When the Parol Evidence Rule Does

Not Apply 349 CASE SUMMARY 350

C. Rules of Construction and Interpretation 350 7. Intention of the Parties 350 CASE SUMMARY 351

8. Whole Contract 352 CASE SUMMARY 352

9. Contradictory and Ambiguous Terms 353 CASE SUMMARY 353

10. Implied Terms 354 11. Conduct and Custom 355 12. Avoidance of Hardship 355 LawFlix 356

CHAPTER 18 THIRD PERSONS AND CONTRACTS 361

A. Third-Party Beneficiary Contracts 362 1. Definition 362 CASE SUMMARY 363

2. Modification or Termination of Intended Third-Party Beneficiary Contract 363

3. Limitations on Intended Third-Party Beneficiary 364

4. Incidental Beneficiaries 364 CASE SUMMARY 364

B. Assignments 365 5. Definitions 365 6. Form of Assignment 366 7. Notice of Assignment 366 CASE SUMMARY 366

8. Assignment of Right to Money 367 9. Nonassignable Rights 368 10. Rights of Assignee 369 11. Continuing Liability of Assignor 370 12. Liability of Assignee 370 CASE SUMMARY 371

13. Warranties of Assignor 371 14. Delegation of Duties 371 CASE SUMMARY 372

CASE SUMMARY 373

LawFlix 374

Contents xvii

CHAPTER 19 DISCHARGE OF CONTRACTS 378

A. Conditions Relating to Performance 379 1. Classifications of Conditions 379 CASE SUMMARY 379

Sports & Entertainment Law 380

B. Discharge by Performance 381 2. Normal Discharge of Contracts 381 3. Nature of Performance 381 CASE SUMMARY 382

4. Time of Performance 382 5. Adequacy of Performance 383 C. Discharge by Action of Parties 386 6. Discharge by Unilateral Action 386 7. Discharge by Agreement 387 CASE SUMMARY 387

D. Discharge by External Causes 388 8. Discharge by Impossibility 388 9. Developing Doctrines 389 CASE SUMMARY 390

CASE SUMMARY 391

10. Temporary Impossibility 392 11. Discharge by Operation of Law 393 LawFlix 394

CHAPTER 20 BREACH OF CONTRACT AND REMEDIES 399

A. What Constitutes a Breach of Contract? 400 1. Definition of Breach 400 2. Anticipatory Breach 400 CASE SUMMARY 400

B. Waiver of Breach 401 3. Cure of Breach by Waiver 402 4. Existence and Scope of Waiver 402 CASE SUMMARY 402

5. Reservation of Rights 403 C. Remedies for Breach of Contract 403 6. Remedies Upon Anticipatory Repudiation 404 7. Remedies in General and the Measure of Damages 404 8. Monetary Damages 405 CASE SUMMARY 406

9. Rescission 407 10. Action for Specific Performance 408 11. Action for an Injunction 408 12. Reformation of Contract by a Court 409 CASE SUMMARY 409

D. Contract Provisions Affecting Remedies and Damages 410

13. Limitation of Remedies 410 14. Liquidated Damages 410

CASE SUMMARY 410

15. Attorneys’ Fees 411 16. Limitation of Liability Clauses 412 CASE SUMMARY 413

LawFlix 413

PART 3

SALES AND LEASES OF GOODS

CHAPTER 21 PERSONAL PROPERTY AND BAILMENTS 421

A. Personal Property 422 1. Personal Property in Context 422 2. Title to Personal Property 422 3. Gifts 423 CASE SUMMARY 424

CASE SUMMARY 425

CASE SUMMARY 427

4. Finding of Lost Property 427 5. Occupation of Personal Property 428 CASE SUMMARY 429

CASE SUMMARY 429

6. Escheat 430 CASE SUMMARY 430

7. Multiple Ownership of Personal Property 431 CASE SUMMARY 432

8. Community Property 433 B. Bailments 433 9. Definition 433 10. Elements of Bailment 433 11. Nature of the Parties’ Interests 434 12. Classification of Ordinary Bailments 435 13. Renting of Space Distinguished 435 14. Duties and Rights of the Bailee 436 15. Breach of Duty of Care: Burden of Proof 436 CASE SUMMARY 437

16. Liability for Defects in Bailed Property 437 17. Contract Modification of Liability 437 LawFlix 438

CHAPTER 22 LEGAL ASPECTS OF SUPPLY CHAIN MANAGEMENT 443

A. Warehouses 444 1. Definitions 444 2. Rights and Duties of Warehouses 444 3. Warehouse Receipts 445 4. Rights of Holders of Warehouse Receipts 445

xviii Contents

5. Field Warehousing 448 6. Limitation of Liability of Warehouses 448 B. Common Carriers 449 7. Definitions 449 CASE SUMMARY 449

8. Bills of Lading 450 CASE SUMMARY 451

9. Rights of Common Carrier 451 10. Duties of Common Carrier 452 11. Liabilities of Common Carrier 452 CASE SUMMARY 452

CASE SUMMARY 454

CASE SUMMARY 455

CASE SUMMARY 456

C. Factors and Consignments 456 12. Definitions 456 13. Effect of Factor Transaction 457 D. Hotelkeepers 457 14. Definitions 457 15. Duration of Guest Relationship 458 16. Hotelkeeper’s Liability for Guest’s Property 458 CASE SUMMARY 459

17. Hotelkeeper’s Lien 459 18. Boarders or Lodgers 460 LawFlix 460

CHAPTER 23 NATURE AND FORM OF SALES 466

A. Nature of Sales 467 1. Subject Matter of Sales 467 2. Sale Distinguished from Other Transactions 468 CASE SUMMARY 469

3. Formation of Sales Contracts 470 Ethics & the Law 471

CASE SUMMARY 474

4. Terms in the Formed Contract 476 5. Bulk Transfers 478 B. Form of Sales Contract 478 6. Amount 479 7. Nature of the Writing Required 479 CASE SUMMARY 480

CASE SUMMARY 481

8. Effect of Noncompliance 481 9. Exceptions to Requirement of a Writing 482 Thinking Things Through 483

10. Noncode Requirements 483 11. Bill of Sale 483 C. Uniform Law for International Sales 483 12. Scope of the CISG 484 D. Leases of Goods 484 13. Types of Leases 484

14. Form of Lease Contract 485 15. Warranties 485 E-Commerce & Cyberlaw 486

16. Default 486 LawFlix 486

CHAPTER 24 TITLE AND RISK OF LOSS 493

A. Identifying Types of Potential Problems and Transactions 494

1. Damage to Goods 494 2. Creditors’ Claims 494 3. Insurance 495 B. Determining Rights: Identification of Goods 495 4. Existing Goods 495 5. Future Goods 495 6. Fungible Goods 496 7. Effect of Identification 496 C. Determining Rights: Passage of Title 496 8. Passage of Title Using Documents of Title 496 9. Passage of Title in Nonshipment Contracts 497 10. Passage of Title in Warehouse Arrangements 497 11. Passage of Title in Bailments and Other Forms of

Possession 497 CASE SUMMARY 498

Thinking Things Through 500

Ethics & the Law 500

12. Delivery and Shipment Terms 500 13. Passage of Title in Shipment Contracts 502 D. Determining Rights: Risk of Loss 503 CASE SUMMARY 503

14. Risk of Loss in Nonshipment Contracts 504 15. Risk of Loss in Shipment Contracts 504 E-Commerce & Cyberlaw 504

16. Damage to or Destruction of Goods 505 CASE SUMMARY 505

17. Effect of Seller’s Breach in Risk of Loss 506 E. Determining Rights: Special Situations 506 18. Returnable Goods Transactions 506 19. Consignments and Factors 508 20. Self-Service Stores 508 21. Auction Sales 509 LawFlix 509

CHAPTER 25 PRODUCT LIABILITY: WARRANTIES AND TORTS 515

A. General Principles 516 1. Theories of Liability 516 2. Nature of Harm 516 3. Who Is Liable in Product Liability 517

Contents xix

B. Express Warranties 518 4. Definition of Express Warranty 518 5. Form of Express Warranty 518 6. Seller’s Opinion or Statement of Value 519 7. Warranty of Conformity to Description, Sample, or

Model 519 8. Federal Regulation of Express Warranties 519 9. Effect of Breach of Express Warranty 520 CASE SUMMARY 521

C. Implied Warranties 521 10. Definition of Implied Warranty 522 11. Implied Warranties of Sellers 522 12. Additional Implied Warranties of Merchant

Sellers 523 E-Commerce & Cyberlaw 523

CASE SUMMARY 524

13. Implied Warranties in Particular Sales 524 CASE SUMMARY 525

14. Necessity of Defect 526 15. Warranties in the International Sale of Goods 526 Thinking Things Through 526

D. Disclaimer of Warranties 526 16. Validity of Disclaimer 527 17. Particular Language for Disclaimers 527 18. Exclusion of Warranties by Examination of

Goods 527 19. Post-sale Disclaimer 527 E. Other Theories of Product Liability 528 20. Negligence 529 21. Fraud 529 22. Strict Tort Liability 529 CASE SUMMARY 529

23. Cumulative Theories of Liability 530 CASE SUMMARY 531

Ethics & the Law 531

LawFlix 532

CHAPTER 26 OBLIGATIONS AND PERFORMANCE 538

A. General Principles 539 1. Obligation of Good Faith 539 2. Time Requirements of Obligations 539 3. Repudiation of the Contract 540 4. Adequate Assurance of Performance 540 CASE SUMMARY 541

B. Duties of the Parties 541 5. Seller’s Duty to Deliver 542 6. Buyer’s Duty upon Receipt of Goods 542 7. Buyer’s Duty to Accept Goods 543 CASE SUMMARY 544

E-Commerce & Cyberlaw 546

CASE SUMMARY 547

Thinking Things Through 547

Ethics & the Law 548

8. Buyer’s Duty to Pay 548 CASE SUMMARY 548

9. When Duties Are Excused 549 CASE SUMMARY 549

CHAPTER 27 REMEDIES FOR BREACH OF SALES CONTRACTS 557

A. Statute of Limitations 558 1. Time Limits for Suits under the UCC 558 2. Time Limits for Other Suits 558 B. Remedies of the Seller 558 3. Seller’s Lien 559 4. Seller’s Remedy of Stopping Shipment 559 5. Resale by Seller 559 6. Cancellation by Seller 559 7. Seller’s Action for Damages under the Market Price

Formula 559 8. Seller’s Action for Lost Profits 560 9. Other Types of Damages 560 10. Seller’s Action for the Purchase Price 561 11. Seller’s Nonsale Remedies 561 C. Remedies of the Buyer 562 12. Rejection of Improper Tender 562 13. Revocation of Acceptance 562 14. Buyer’s Action for Damages for Nondelivery—

Market Price Recovery 562 15. Buyer’s Action for Damages for Nondelivery—

Cover Price Recovery 562 CASE SUMMARY 563

16. Other Types of Damages 564 Thinking Things Through 564

17. Action for Breach of Warranty 565 CASE SUMMARY 565

18. Cancellation by Buyer 567 CASE SUMMARY 567

19. Buyer’s Resale of Goods 568 20. Action for Specific Performance 568 21. Nonsale Remedies of the Buyer 568 D. Contract Provisions on Remedies 569 22. Limitation of Damages 569 CASE SUMMARY 570

23. Down Payments and Deposits 571 24. Limitation of Remedies 571 25. Waiver of Defenses 571 Thinking Things Through 571

Ethics & the Law 571

26. Preservation of Defenses 572

xx Contents

E. Remedies in the International Sale of Goods 572 27. Remedies of the Seller 572 E-Commerce & Cyberlaw 572

28. Remedies of the Buyer 573

PART 4

NEGOTIABLE INSTRUMENTS

CHAPTER 28 KINDS OF INSTRUMENTS, PARTIES, AND NEGOTIABILITY 581

A. Types of Negotiable Instruments and Parties 582 1. Definition 582 2. Kinds of Instruments 583 3. Parties to Instruments 584 B. Negotiability 585 4. Definition of Negotiability 585 E-Commerce & Cyberlaw 586

5. Requirements of Negotiability 586 CASE SUMMARY 588

Thinking Things Through 588

CASE SUMMARY 590

Ethics & the Law 591

CASE SUMMARY 592

CASE SUMMARY 593

6. Factors Not Affecting Negotiability 593 7. Ambiguous Language 594 8. Statute of Limitations 594

CHAPTER 29 TRANSFERS OF NEGOTIABLE INSTRUMENTS AND WARRANTIES OF PARTIES 600

A. Transfer of Negotiable Instruments 601 1. Effect of Transfer 601 2. Definition of Negotiation 601 3. How Negotiation Occurs: The Order or Bearer

Character of an Instrument 601 B. How Negotiation Occurs: Bearer Instruments 602 CASE SUMMARY 602

Ethics & the Law 603

C. How Negotiation Occurs: Order Instruments 603 CASE SUMMARY 603

4. Blank Indorsement 604 5. Special Indorsement 604 E-Commerce & Cyberlaw 605

6. Qualified Indorsement 606 7. Restrictive Indorsement 606 8. Correction of Name by Indorsement 607 9. Bank Indorsement 607 10. Multiple Payees and Indorsements 608

11. Agent or Officer Indorsement 608 CASE SUMMARY 608

Thinking Things Through 609

12. Missing Indorsement 610 D. Problems in Negotiation of Instruments 610 13. Forged and Unauthorized Indorsements 610 14. Quasi Forgeries: The Impostor Rule 610 CASE SUMMARY 611

CASE SUMMARY 612

15. Effect of Incapacity or Misconduct on Negotiation 613

16. Lost Instruments 613 E. Warranties in Negotiation 613 17. Warranties of Unqualified Indorser 613 18. Warranties of Other Parties 614

CHAPTER 30 LIABILITY OF THE PARTIES UNDER NEGOTIABLE INSTRUMENTS 621

A. Parties to Negotiable Instruments: Rights and Liabilities 622 1. Types of Parties 622 2. Ordinary Holders and Assignees 622 3. The Holder-in-Due-Course Protections 622 CASE SUMMARY 625

CASE SUMMARY 626

Ethics & the Law 627

B. Defenses to Payment of a Negotiable Instrument 627 4. Classification of Defenses 628 5. Defenses against Assignee or Ordinary Holder 628 6. Limited Defenses Not Available against a Holder in

Due Course 628 7. Universal Defenses Available against All Holders 629 8. Denial of Holder-in-Due-Course Protection 631 C. Liability Issues: How Payment Rights Arise and Defenses Are

Used 632 9. The Roles of Parties and Liability 632 10. Attaching Liability of the Primary Parties:

Presentment 632 11. Dishonor and Notice of Dishonor 633 E-Commerce & Cyberlaw 633

Thinking Things Through 634

LawFlix 634

CHAPTER 31 CHECKS AND FUNDS TRANSFERS 640

A. Checks 641 1. Nature of a Check 641 2. Certified Checks 643 CASE SUMMARY 644

E-Commerce & Cyberlaw 645

3. Presentment for Obtaining Payment on a Check 645

Contents xxi

4. Dishonor of a Check 646 Ethics & the Law 647

5. The Customer-Bank Relationship 647 CASE SUMMARY 648

6. Stopping Payment of a Check 649 7. Wrongful Dishonor of a Check 649 8. Agency Status of Collecting Bank 650 9. Bank’s Duty of Care 650 CASE SUMMARY 651

B. Liability of a Bank 652 10. Premature Payment of a Postdated Check 652 11. Payment Over a Stop Payment Order 652 CASE SUMMARY 652

12. Payment on a Forged Signature of Drawer 653 13. Payment on a Forged or Missing Indorsement 653 14. Alteration of a Check 654 15. Unauthorized Collection of a Check 654 16. Time Limitations 654 CASE SUMMARY 656

Thinking Things Through 656

C. Consumer Funds Transfers 657 17. Electronic Funds Transfer Act 657 18. Types of Electronic Funds Transfer Systems 657 19. Consumer Liability 658 D. Funds Transfers 658 20. What Law Governs? 658 21. Characteristics of Funds Transfers 659 22. Pattern of Funds Transfers 659 23. Scope of UCC Article 4A 659 24. Definitions 659 25. Manner of Transmitting Payment Order 660 26. Regulation by Agreement and Funds Transfer System

Rules 660 27. Reimbursement of the Bank 660 28. Error in Funds Transfer 661 29. Liability for Loss 661 LawFlix 662

PART 5

DEBTOR-CREDITOR RELATIONSHIPS

CHAPTER 32 NATURE OF THE DEBTOR-CREDITOR RELATIONSHIP 671

A. Creation of the Credit Relationship 672 B. Suretyship and Guaranty 672 1. Definitions 672 2. Indemnity Contract Distinguished 673 3. Creation of the Relationship 673

CASE SUMMARY 674

4. Rights of Sureties 674 CASE SUMMARY 675

5. Defenses of Sureties 675 Thinking Things Through 676

C. Letters of Credit 678 6. Definition 678 CASE SUMMARY 680

7. Parties 681 8. Duration 682 9. Form 682 Ethics & the Law 682

10. Duty of Issuer 683 11. Reimbursement of Issuer 683

CHAPTER 33 CONSUMER PROTECTION 689

A. General Principles 690 1. Expansion of Consumer Protection 690 2. Who Is a Consumer? 691 3. Who Is Liable under Consumer Protection

Statutes? 691 4. When Is There Liability under Consumer Protection

Statutes? 691 CASE SUMMARY 692

5. What Remedies Do Consumers Have? 693 6. What Are the Civil and Criminal Penalties under

Consumer Protection Statutes? 695 B. Areas of Consumer Protection 695 7. Advertising 695 CASE SUMMARY 697

Thinking Things Through 697

8. Labeling 698 9. Selling Methods 698 Sports & Entertainment Law 698

E-Commerce & Cyberlaw 699

10. The Consumer Contract 700 11. Credit Disclosures 701 12. Credit Cards 702 E-Commerce & Cyberlaw 702

13. Gift Cards 704 14. Payments 704 15. Preservation of Consumer Defenses 705 16. Product Safety 705 17. Credit, Collection, and Billing Methods 705 CASE SUMMARY 706

Ethics & the Law 707

18. Protection of Credit Standing and Reputation 708 CASE SUMMARY 709

19. Other Consumer Protections 710

xxii Contents

CHAPTER 34 SECURED TRANSACTIONS IN PERSONAL PROPERTY 715

A. Creation of Secured Transactions 716 1. Definitions 716 2. Creation of a Security Interest 717 3. Purchase Money Security Interest 718 4. The Nature and Classification of Collateral 718 CASE SUMMARY 720

B. Perfection of Secured Transactions 720 5. Perfection by Creditor’s Possession 721 6. Perfection for Consumer Goods 721 7. Perfection for Health Care Insurance

Receivables 721 8. Automatic Perfection 721 CASE SUMMARY 722

9. Temporary Perfection 722 10. Perfection by Control 723 11. Perfection for Motor Vehicles 723 12. Perfection by Filing a Financing Statement 723 CASE SUMMARY 725

13. Loss of Perfection 726 E-Commerce & Cyberlaw 727

C. Rights of Parties Before Default 728 14. Statement of Account 728 15. Termination Statements 728 16. Correction Statements 728 D. Priorities 729 17. Unsecured Party versus Unsecured Party 729 18. Secured Party versus Unsecured Party 729 19. Secured Party versus Secured Party 729 20. Perfected Secured Party versus Secured Party 729 CASE SUMMARY 730

21. Perfected Secured Party versus Perfected Secured Party 730

22. Secured Party versus Buyer of Collateral from Debtor 731

CASE SUMMARY 732

CASE SUMMARY 734

E. Rights of Parties after Default 736 23. Creditor’s Possession and Disposition

of Collateral 736 CASE SUMMARY 737

Thinking Things Through 737

Ethics & the Law 738

24. Creditor’s Retention of Collateral 738 25. Debtor’s Right of Redemption 738 26. Disposition of Collateral 739 27. Postdisposition Accounting 739 LawFlix 739

CHAPTER 35 BANKRUPTCY 746

A. Bankruptcy Law 747 1. The Federal Law 747 2. Types of Bankruptcy Proceedings 747 Ethics & the Law 748

B. How Bankruptcy Is Declared 748 3. Declaration of Voluntary Bankruptcy 749 CASE SUMMARY 750

Thinking Things Through 751

4. Declaration of Involuntary Bankruptcy 751 5. Automatic Stay 753 6. If the Creditors Are Wrong: Rights of Debtor in an

Involuntary Bankruptcy 753 C. Administration of the Bankruptcy Estate 753 7. The Order of Relief 753 Sports & Entertainment Law 754

8. List of Creditors 754 9. Trustee in Bankruptcy 754 10. The Bankrupt’s Estate 755 11. Voidable Preferences 756 CASE SUMMARY 757

12. Proof of Claim 758 13. Priority of Claims 758 D. Debtor’s Duties and Exemptions 760 14. Debtor’s Duties 760 15. Debtor’s Exemptions 760 CASE SUMMARY 761

16. Debtor’s Protection against Discrimination 762 E. Discharge in Bankruptcy 762 17. Denial of Discharge 762 Ethics & the Law 762

CASE SUMMARY 763

F. Reorganization Plans under Chapter 11 764 18. Contents of the Plan 765 19. Confirmation of the Plan 765 G. Payment Plans Under Chapter 13 765 20. Contents of the Plan 766 21. Confirmation of the Plan 766 22. Discharge of the Debtor 766

CHAPTER 36 INSURANCE 773

A. The Insurance Contract 774 1. The Parties 774 2. Insurable Interest 774 CASE SUMMARY 775

CASE SUMMARY 776

3. The Contract 776

Contents xxiii

E-Commerce & Cyberlaw 777

4. Antilapse and Cancellation Statutes and Provisions 777

5. Modification of Contract 777 6. Interpretation of Contract 778 7. Burden of Proof 778 8. Insurer Bad Faith 779 CASE SUMMARY 779

9. Time Limitations on Insured 780 10. Subrogation of Insurer 780 B. Kinds of Insurance 781 11. Business Liability Insurance 781 Ethics & the Law 782

CASE SUMMARY 782

12. Marine Insurance 784 CASE SUMMARY 784

13. Fire and Homeowners Insurance 785 CASE SUMMARY 785

14. Automobile Insurance 786 CASE SUMMARY 787

15. Life Insurance 787 CASE SUMMARY 789

LawFlix 790

PART 6

AGENCY AND EMPLOYMENT

CHAPTER 37 AGENCY 799

A. Nature of the Agency Relationship 800 1. Definitions and Distinctions 800 CASE SUMMARY 801

2. Classification of Agents 802 3. Agency Coupled with an Interest 803 B. Creating the Agency 803 4. Authorization by Appointment 803 5. Authorization by Conduct 803 CASE SUMMARY 803

6. Agency by Ratification 804 7. Proving the Agency Relationship 806 C. Agent’s Authority 806 8. Scope of Agent’s Authority 806 CASE SUMMARY 807

9. Effect of Proper Exercise of Authority 807 10. Duty to Ascertain Extent of Agent’s

Authority 807 11. Limitations on Agent’s Authority 808 CASE SUMMARY 809

D. Duties and Liabilities of Principal and Agent 809 12. Duties and Liabilities of Agent during Agency 809 CASE SUMMARY 810

13. Duties and Liabilities of Agent after Termination of Agency 811

14. Duties and Liabilities of Principal to Agent 812 E. Termination of Agency 813 15. Termination by Act of Parties 813 16. Termination by Operation of Law 813 CASE SUMMARY 813

17. Disability of the Principal under the UDPAA 814 CASE SUMMARY 814

18. Termination of Agency Coupled with an Interest 815

19. Protection of Agent from Termination of Authority 815

20. Effect of Termination of Authority 815

CHAPTER 38 THIRD PERSONS IN AGENCY 823

A. Liability of Agent to Third Person 824 1. Action of Authorized Agent of Disclosed

Principal 824 2. Unauthorized Action 824 CASE SUMMARY 825

3. Disclosure of Principal 825 CASE SUMMARY 826

4. Assumption of Liability 826 CASE SUMMARY 827

5. Execution of Contract 827 CASE SUMMARY 827

6. Torts and Crimes 828 CASE SUMMARY 828

B. Liability of Principal to Third Person 829 7. Agent’s Contracts 829 Ethics & the Law 829

8. Payment to Agent 830 CASE SUMMARY 830

CASE SUMMARY 831

9. Agent’s Statements 831 10. Agent’s Knowledge 832 C. Liability of Principal for Torts and Crimes

of Agent 832 11. Vicarious Liability for Torts and Crimes 832 CASE SUMMARY 834

Thinking Things Through 834

12. Negligent Hiring and Retention of Employees 835

CASE SUMMARY 836

13. Negligent Supervision and Training 836

xxiv Contents

14. Agent’s Crimes 837 15. Owner’s Liability for Acts of an Independent

Contractor 838 CASE SUMMARY 838

16. Enforcement of Claim by Third Person 839 D. Transactions with Sales Personnel 839 17. Soliciting and Contracting Agents 839

CHAPTER 39 REGULATION OF EMPLOYMENT 846

A. The Employment Relationship 847 1. Characteristics of Relationship 847 2. Creation of Employment Relationship 847 3. Duration and Termination of Employment

Contract 847 CASE SUMMARY 848

CASE SUMMARY 849

4. Whistle Blower Protection under the Sarbanes-Oxley and Dodd-Frank Acts 851

5. Duties of the Employee 852 6. Rights of the Employee 853 CASE SUMMARY 854

B. Labor Relations Laws 855 7. The National Labor Relations Act 855 8. National Labor Relations Board 856 9. Election Conduct 856 10. Union Activity on Private Property 858 CASE SUMMARY 858

11. 10a. Social Media and Section 7: Protected Activity for Union and Nonunion Workers 858

11. Firing Employees for Union Activity 859 CASE SUMMARY 860

12. Duty of Employer to Bargain Collectively 861 CASE SUMMARY 861

13. Right to Work 861 14. Strike and Picketing Activity 862 CASE SUMMARY 862

15. Regulation of Internal Union Affairs 863 C. Pension Plans and Federal Regulation 863 16. ERISA 863 CASE SUMMARY 864

D. Unemployment Benefits, Family Leaves, and Social Security 866

17. Unemployment Compensation 866 CASE SUMMARY 866

18. Family and Medical Leaves of Absence 867 19. Leaves for Military Service under USERRA 868 CASE SUMMARY 868

20. Social Security 870 E. Employees’ Health and Safety 870

21. Standards 870 22. Employer Duties 870 23. Enforcement 871 Thinking Things Through 871

24. State “Right-to-Know” Legislation 872 F. Compensation for Employees’ Injuries 872 25. Common Law Status of Employer 872 26. Statutory Changes 873 CASE SUMMARY 873

G. Employee Privacy 874 27. Source of Privacy Rights 874 28. Monitoring Employee Telephone Conversations 875 29. E-Mail Monitoring 875 30. Property Searches 876 31. Drug and Alcohol Testing 877 H. Employer-Related Immigration Laws 877 32. Employer Liability 877 33. Employer Verification and Special Hiring

Programs 877

CHAPTER 40 EQUAL EMPLOYMENT OPPORTUNITY LAW 885

A. Title VII of the Civil Rights Act of 1964, as Amended 886

1. Theories of Discrimination 886 CASE SUMMARY 887

2. The Equal Employment Opportunity Commission 888

B. Protected Classes and Exceptions 890 3. Race and Color 891 4. Religion 891 5. Sex 892 6. Sexual Harassment 893 7. Protection against Retaliation 895 CASE SUMMARY 896

Thinking Things Through 897

8. National Origin 897 CASE SUMMARY 898

9. Title VII Exceptions 898 CASE SUMMARY 898

10. Affirmative Action and Reverse Discrimination 900

C. Other Equal Employment Opportunity (EEO) Laws 901 11. Equal Pay 901 CASE SUMMARY 901

12. Age Discrimination 902 CASE SUMMARY 902

13. Discrimination against Persons with Disabilities 903 D. Extraterritorial Employment 906 LawFlix 906

Contents xxv

PART 7

BUSINESS ORGANIZATIONS

CHAPTER 41 TYPES OF BUSINESS ORGANIZATIONS 915

A. Principal Forms of Business Organizations 916 1. Individual Proprietorships 916 2. Partnerships, LLPs, and LLCs 916 3. Corporations 917 B. Specialized Forms of Organizations 917 4. Joint Ventures 917 CASE SUMMARY 918

5. Unincorporated Associations 919 CASE SUMMARY 919

6. Cooperatives 920 C. The Franchise Business Format 920 7. Definition and Types of Franchises 921 CASE SUMMARY 921

8. The Franchise Agreement 922 9. Special Protections under Federal Laws 923 CASE SUMMARY 923

10. Disclosure 924 11. Vicarious Liability Claims against Franchisors 925 CASE SUMMARY 925

Thinking Things Through 926

12. Franchises and Employee Misclassifications 927 LawFlix 927

CHAPTER 42 PARTNERSHIPS 933

A. Nature and Creation 934 1. Definition 935 CASE SUMMARY 935

2. Characteristics of a Partnership 935 3. Rights of Partners 935 4. Partnership Agreement 936 5. Determining the Existence of a Partnership 936 CASE SUMMARY 937

CASE SUMMARY 939

6. Partners as to Third Persons 939 7. Partnership Property 940 8. Tenancy in Partnership 940 9. Assignment of a Partner’s Interest 941 B. Authority of Partners 941 10. Authority of Majority of Partners 941 CASE SUMMARY 941

11. Express Authority of Individual Partners 942 12. Customary Authority of Individual Partners 942 CASE SUMMARY 942

13. Limitations on Authority 943

14. Prohibited Transactions 943 CASE SUMMARY 944

C. Duties, Rights, and Liabilities of Partners 945 15. Duties of Partners 945 16. Rights of Partners as Owners 946 17. Liability of Partners and Partnership 947 CASE SUMMARY 948

18. Enforcement and Satisfaction of Creditors’ Claims 949

D. Dissolution and Termination 949 19. Effect of Dissolution 949 20. Dissolution by Act of the Parties 950 21. Dissolution by Operation of Law 950 22. Dissolution by Decree of Court 950 CASE SUMMARY 951

23. Dissociation under the RUPA 952 24. Notice of Dissolution 953 CASE SUMMARY 953

25. Winding up Partnership Affairs 954 26. Distribution of Assets 954 CASE SUMMARY 954

27. Continuation of Partnership Business 955

CHAPTER 43 LPs, LLCs, and LLPs 961

A. The Arrival of Partnership Limited Liability 962 B. Limited Partnership 962 1. Formation of Limited Partnerships 962 2. Characteristics of Limited Partnerships 963 CASE SUMMARY 964

C. Limited Liability Companies 965 3. Characteristics of LLCs 965 CASE SUMMARY 967

CASE SUMMARY 968

CASE SUMMARY 969

CASE SUMMARY 971

4. LLCs and Other Entities 971 D. Limited Liability Partnerships 972 5. Extent of Limited Liability 972 CASE SUMMARY 972

6. Registration and Usage 973 Ethics & the Law 973

CHAPTER 44 CORPORATION FORMATION 978

A. Nature and Classes 979 1. The Corporation as a Person 979 CASE SUMMARY 979

2. Classifications of Corporations 980 3. Corporations and Governments 981

xxvi Contents

B. Corporate Powers 982 4. Particular Powers 982 5. Ultra Vires Acts 984 C. Creation and Termination of the Corporation 985 6. Promoters 985 CASE SUMMARY 985

7. Incorporation 986 8. Application for Incorporation 986 9. The Certificate of Incorporation 986 10. Proper and Defective Incorporation 987 CASE SUMMARY 988

11. Insolvency, Bankruptcy, and Reorganization 988 12. Forfeiture of Charter 988 13. Judicial Dissolution 989 D. Consolidations, Mergers, and Conglomerates 989 14. Definitions 990 CASE SUMMARY 990

15. Legality 992 16. Liability of Successor Corporations 992 CASE SUMMARY 992

CASE SUMMARY 994

LawFlix 994

CHAPTER 45 SHAREHOLDER RIGHTS IN CORPORATIONS 1000

A. Corporate Stocks and Bonds 1001 1. Nature of Stock 1001 2. Certificates of Stock and Uncertificated

Shares 1002 3. Kinds of Stock 1002 4. Characteristics of Bonds 1003 5. Terms and Control 1003 B. Acquisition of Shares 1003 6. Nature of Acquisition 1003 7. Statute of Frauds 1004 8. Subscription 1004 9. Transfer of Shares 1004 CASE SUMMARY 1005

10. Mechanics of Transfer 1006 11. Effect of Transfer 1006 CASE SUMMARY 1007

12. Lost, Destroyed, and Stolen Share Certificates 1008

C. Rights of Shareholders 1008 13. Ownership Rights 1008 CASE SUMMARY 1008

14. Right to Vote 1009 15. Preemptive Offer of Shares 1010 16. Inspection of Books 1010 CASE SUMMARY 1011

17. Dividends 1012 18. Capital Distribution 1013 19. Shareholders’ Actions 1013 CASE SUMMARY 1014

CASE SUMMARY 1015

D. Liability of Shareholders 1015 20. Limited Liability 1016 21. Ignoring the Corporate Entity 1016 CASE SUMMARY 1016

22. Other Exceptions to Limited Liability 1018 CASE SUMMARY 1019

23. The Professional Corporation 1019 LawFlix 1020

CHAPTER 46 SECURITIES REGULATION 1026

A. State Regulation 1027 1. State Blue Sky Laws 1027 2. National Securities Markets Improvement Act 1027 B. Federal Regulation 1027 3. Federal Laws Regulating the Securities Industry 1028 E-Commerce & Cyberlaw 1029

4. Definition of Security 1029 CASE SUMMARY 1030

5. Securities Act of 1933 1030 Thinking Things Through 1031

6. Securities Exchange Act of 1934 1034 CASE SUMMARY 1037

CASE SUMMARY 1037

7. Trading on Insider Information 1041 CASE SUMMARY 1042

CASE SUMMARY 1043

8. Disclosure of Ownership and Short-Swing Profits 1044

9. Tender Offers 1044 10. Regulation of Accountants and Attorneys

by the SEC 1045 E-Commerce & Cyberlaw 1045

C. Industry Self-Regulation 1046 11. Arbitration of Securities Disputes 1046 CASE SUMMARY 1047

LawFlix 1047

CHAPTER 47 ACCOUNTANTS’ LIABILITY AND MALPRACTICE 1054

A. General Principles of Accountants’ Liability 1055 1. What Constitutes Malpractice? 1055 CASE SUMMARY 1056

2. Choice of Remedy 1057

Contents xxvii

3. The Environment of Accountants’ Malpractice Liability 1057

4. Limitation of Liability 1058 B. Accountants’ Liability to Third Parties: Beyond Privity 1058 5. Status of the Accountant 1059 6. Conflicting Theories of Accountants’ Third-Party

Liability 1059 CASE SUMMARY 1059

CASE SUMMARY 1062

Thinking Things Through 1064

7. Nonliability Parties 1064 8. Defenses to Accountants’ Liability: Contributory and

Comparative Negligence of the Client or Third Party 1065

9. Accountants’ Fraud Malpractice Liability to Third Parties 1065

CASE SUMMARY 1067

C. Sarbanes-Oxley Auditor and Accounting-Related Provisions 1068

10. Auditor Independence 1068 Ethics & the Law 1069

11. Audit Committees 1070 E-Commerce & Cyberlaw 1070

12. Records Retention 1071 13. Dodd-Frank and Accountants as Whistleblowers 1071 LawFlix 1071

CHAPTER 48 MANAGEMENT OF CORPORATIONS 1077

A. Shareholders 1078 1. Extent of Management Control by Shareholders 1078 2. Meetings of Shareholders 1078 3. Action without Meeting 1079 B. Directors 1079 4. Qualifications 1079 5. Powers of Directors 1079 CASE SUMMARY 1080

6. Conflict of Interest 1080 7. Meetings of Directors 1082 8. Liability of Directors 1082 CASE SUMMARY 1083

CASE SUMMARY 1084

Thinking Things Through 1085

C. Officers, Agents, and Employees 1086 9. Powers of Officers 1087 10. Liability Relating to Fiduciary Duties 1088 CASE SUMMARY 1088

CASE SUMMARY 1090

11. Agents and Employees 1090 D. Liability 1091 12. Liability of Management to Third Persons 1091

13. Criminal Liability 1091 Ethics & the Law 1092

14. Indemnification of Officers, Directors, Employees, and Agents 1093

15. Liability for Corporate Debts 1094 16. Protection of Shareholders 1094 17. Civil Liability of the Corporation 1094 LawFlix 1094

PART 8

REAL PROPERTY AND ESTATES

CHAPTER 49 REAL PROPERTY 1103

A. Nature of Real Property 1104 1. Land 1104 2. Easements 1104 CASE SUMMARY 1105

3. Profits 1105 4. Licenses 1106 5. Liens 1106 6. Fixtures 1106 Thinking Things Through 1106

Sports & Entertainment Law 1107

CASE SUMMARY 1108

B. Nature and Form of Real Property Ownership 1109 7. Fee Simple Estate 1109 8. Life Estate 1110 9. Future Interests 1110 C. Liability to Third Persons for Condition of Real

Property 1110 10. Common Law Rule 1110 CASE SUMMARY 1111

D. Co-Ownership of Real Property 1112 11. Multiple Ownership 1112 12. Condominiums 1112 E. Transfer of Real Property by Deed 1113 13. Definitions 1113 14. Classification of Deeds 1113 15. Execution of Deeds 1113 16. Delivery and Acceptance of Deeds 1115 17. Recording of Deeds 1115 18. Additional Protection of Buyers 1116 CASE SUMMARY 1116

19. Grantor’s Warranties 1117 20. Grantee’s Covenants 1117 F. Other Methods of Transferring Real Property 1117 21. Eminent Domain 1118 CASE SUMMARY 1118

xxviii Contents

Thinking Things Through 1119

Ethics & the Law 1119

22. Adverse Possession 1119 G. Mortgages 1120 23. Characteristics of a Mortgage 1120 24. Property Subject to Mortgage 1120 25. Form of Mortgage 1120 26. Creative Forms of Financing 1120 27. Recording or Filing of Mortgage 1121 E-Commerce & Cyberlaw 1121

28. Responsibilities of the Parties 1121 29. Transfer of Interest 1122 30. Rights of Mortgagee after Default 1122 31. Rights of Mortgagor After Default 1123

CHAPTER 50 ENVIRONMENTAL LAW AND LAND USE CONTROLS 1129

A. Statutory Environmental Law 1130 1. Air Pollution Regulation 1130 2. Water Pollution Regulation 1131 3. Solid Waste Disposal Regulation 1132 CASE SUMMARY 1133

4. Environmental Quality Regulation 1135 Thinking Things Through 1136

5. Other Environmental Regulations 1136 CASE SUMMARY 1136

6. State Environmental Regulation 1137 B. Enforcement of Environmental Laws 1137 Ethics & the Law 1138

7. Parties Responsible for Enforcement 1138 8. Criminal Penalties 1138 9. Civil Remedies 1138 10. Private Remedies: Nuisance 1139 CASE SUMMARY 1140

E-Commerce & Cyberlaw 1141

11. Private Remedies: Due Diligence 1142 C. Land Use Controls 1142 12. Restrictive Covenants in Private Contracts 1142 13. Public Zoning 1143 Sports & Entertainment Law 1143

CASE SUMMARY 1144

LawFlix 1145

CHAPTER 51 LEASES 1150

A. Creation and Termination 1151 1. Definition and Nature 1151 2. Creation of the Lease Relationship 1151 3. Classification of Tenancies 1152

4. Termination of Lease 1152 5. Notice of Termination 1153 6. Renewal of Lease 1153 B. Rights and Duties of Parties 1154 7. Possession 1154 8. Use of Premises 1155 9. Rent 1155 10. Repairs and Condition of Premises 1156 Thinking Things Through 1156

CASE SUMMARY 1157

11. Improvements 1158 12. Taxes and Assessments 1159 13. Tenant’s Deposit 1159 14. Protection from Retaliation 1159 15. Remedies of Landlord 1159 C. Liability for Injury on Premises 1160 16. Landlord’s Liability to Tenant 1160 Sports & Entertainment Law 1161

CASE SUMMARY 1161

17. Landlord’s Liability to Third Persons 1162 18. Tenant’s Liability to Third Persons 1162 D. Transfer of Rights 1163 19. Tenant’s Assignment of Lease and

Sublease 1163 LawFlix 1164

CHAPTER 52 DECEDENTS’ ESTATES AND TRUSTS 1169

A. Wills 1170 1. Definitions 1170 2. Parties to Will 1170 CASE SUMMARY 1171

3. Testamentary Intent 1172 4. Form 1172 E-Commerce & Cyberlaw 1173

5. Modification of Will 1173 6. Revocation of Will 1173 CASE SUMMARY 1174

7. Election to Take against the Will 1174 8. Disinheritance 1175 9. Special Types of Wills 1175 Sports & Entertainment Law 1175

B. Administration of Decedents’ Estates 1176 10. Definitions 1177 11. Probate of Will 1177 12. Will Contest 1177 CASE SUMMARY 1178

Ethics & the Law 1178

13. When Administration Is Not Necessary 1179 14. Appointment of Personal Representative 1179

Contents xxix

15. Proof of Claims against the Estate 1179 16. Construction of a Will 1179 17. Testate Distribution of an Estate 1179 Thinking Things Through 1179

18. Intestate Distribution of an Estate 1180 CASE SUMMARY 1182

C. Trusts 1183 19. Definitions 1183 20. Creation of Trusts 1183 21. Nature of Beneficiary’s Interest 1184 22. Powers of Trustee 1184 23. Duties of Trustee 1184 24. Remedies for Breach of Trust 1185

25. Termination of Trust 1185 LawFlix 1186

APPENDICES

1. How to Find the Law A-1 2. The Constitution of the United States A-4 3. Uniform Commercial Code A-15

GLOSSARY G–1

CASE INDEX CI–1

SUBJECT INDEX SI–1

xxx Contents

preface

Regardless of the day of the week, newspapers and magazines constantly carry stories about law and business together. Raj Rajaratnam of the now-defunct Galleon Hedge Fund was convicted of insider trading even as his former employees entered guilty pleas and a Goldman Sachs director was convicted of passing inside information along to Raj. The U.S. Supreme Court issued a landmark constitutional decision when it held that the Commerce Clause did not permit Congress to require citizens to purchase health insurance, but yet upheld the law that imposed that requirement. Mortgage foreclosures hit record levels as questions about who owned the promissory notes arose as courts tried to determine who could actually start the foreclosure proceedings. MF Global collapsed into bankruptcy because employees violated one of Wall Street’s critical regulations that prohibits the use of client funds for hedging. The problem of cyberbullying resulted in cases, new laws, and company policies on employee use of social media. Those who did business with Bernie Madoff, and their auditors, faced questions regarding their liability to those who lost money in the failed Madoff firm.

Here in the United States and around the world fascinating legal questions arose and all of those questions affected businesses. What damages is Qantas airlines entitled to when it must ground its entire Airbus 380 fleet because the manufacturer has found a defect that affects safety? Did Goldman Sachs intentionally misrepresent the risk on mortgage-based obligations? If so, are they criminally liable? And who is responsible for crimes committed by companies? As major corporations have continued to experience significant criminal, legal, and ethical difficulties since the last edition in 2009, we can see how important it is for business managers to understand the law and the foundations of ethics. When a manager has a void in knowledge on law and ethics, running a company can be tricky business. Employers are learning the complexities of access to employee e-mails and text messages, and lenders are learning the importance of complete and accurate paperwork when they create a mortgage.

When an entrepreneur is struggling with the decision of whether to incorporate or create an LLC, or the shareholders of Disney are grappling with issues about their rights when their CEO makes a bad decision, the law is there. No business or manager can hope to succeed without an understanding of the laws and legal environment of business. Students in business must be prepared with both knowledge of the law and the skill of applying it in the business setting. We learn principles and application through interaction with examples and by working our way through dilemmas, issues, and problems. This 22nd edition of Anderson’s Business Law and the Legal Environment continues its emphasis on the student’s learning process while still providing a detailed and rigorous case approach.

xxxi

FEATURES OF THE TEXT The features of this text make the business and law connection easily understood and offer students clarity for grasping the often challenging complexities of law. The features are summarized in the following sections, which offer an overview of this edition.

Learning Outcomes Students will better see and understand the relationship between legal concepts and their application in real-life situations by using the new chapter Learning Outcomes. These are also featured at the end of each chapter – along with the Summary and new Key Terms list – in the all-encompassing “Make the Connection” section. The Learning Outcomes also encourage students to utilize the existing text pedagogy by serving as a direct reference point for selected For Example call-outs, case summaries, and feature boxes.

Sports and Entertainment Law Using pop culture, this feature teaches students about law and ethics in a way that is sure to engage them. How does a court handle the fact that Leona Helmsley left a large portion of her estate to her dog? The bankruptcies of celebrities and sports figures provide some insight into what poor money management can do to substantial assets. And what about football fans’ rights to transfer their season tickets to others? Can the team prohibit the transfer of those tickets as a license restriction? What are their rights? What are the rights of the teams and stadium owners? Students have the chance to explore the law through these examples of sports figures’ and entertainers’ brushes with the law.

Clarity The writing style has been evolving and, once again, we have changed those passages that fell victim to the passive voice. The writing is clear and lively. The examples are student-friendly, and the discussions of law are grounded in the book’s strong connection to business. The principles of law are taught in the language and examples of business. Students can relate to the examples, which provide memorable illustrations of complex but critical legal concepts. Several chapters, including the chapter that covers antitrust, have been substantially reorganized and rewritten.

CPA Helps As always, the text provides coverage for all the legal topics covered on the CPA exam. Several topics have been eliminated from the content for the CPA exam as of October 2009. However, the exam lags behind the content change, so the eliminated topics may continue to appear on the exam for six to 18 months. Below is the new business law/regulatory content for the CPA exam. The topics of property, bailments, insurance, and estates will be eliminated going forward with more emphasis on federal regulation, including in the areas of antitrust and employment law.

xxxii Preface

Business Law (17%–21%)

A. Agency

1. Formation and termination

2. Authority of agents and principals

3. Duties and liabilities of agents and principals

B. Contracts

1. Formation

2. Performance

3. Third-party assignments

4. Discharge, breach, and remedies

C. Uniform Commercial Code

1. Sales contracts

2. Negotiable instruments

3. Secured transactions

4. Documents of title and title transfer

D. Debtor-Creditor Relationships

1. Rights, duties, and liabilities of debtors, creditors, and guarantors

2. Bankruptcy and insolvency

E. Government Regulation of Business

1. Federal securities regulation

2. Other federal laws and regulations (antitrust, copyright, patents, money laundering, labor, employment, and ERISA)

F. Business Structure (Selection of a Business Entity)

1. Advantages, disadvantages, implications, and constraints

2. Formation, operation, and termination

3. Financial structure, capitalization, profit and loss allocation, and distributions

4. Rights, duties, legal obligations, and authority of owners and management

Business organizations, now a substantial portion of the exam, remain a focus of eight chapters with up-to-date coverage of Sarbanes-Oxley and Dodd-Frank and their impact on business forms and disclosures. This edition continues to feature sample CPA exam questions at the end of those chapters that include legal areas covered on the exam. Answers for the odd-numbered CPA exam questions in each of the appropriate chapters are given in the Instructor’s Manual along with explanations for the answers. This edition of the book also continues to use a CPA highlight icon to alert students to those areas that are particularly critical in preparing for the law portion of the CPA exam.

Preface xxxiii

Innovative Chapters Restructured and updated for this edition, the Cyberlaw chapter (chapter 11) provides students with a look at how the Internet and new technology have resulted in new interpretations of existing laws as well as new laws that govern the unique commerce issues involving these tools. Bloggers and Tweeters beware, for the law has caught up with you. The chapter provides a nice introductory tool for instructors who want to show how much the law affects this new generation of Internet-savvy students.

Case Summaries Specially selected case summaries appear in abundance and are still at the core of this text. Most chapters include three to five case summaries, many of them with 2012 decision dates. Landmark decisions also appear. To highlight the charm and induce the student’s recall of the principles of the cases, a one-line title appears above each case. These can be a humorous introduction, a play on words, or a simple memorable description of the parties or facts of the case. The one-line introduction is intriguing for students and makes the strong cases even more memorable.

e-Commerce and Cyberlaw This feature covers e-mail privacy, Internet taxes, identity theft, contract formation on the Internet, e-commerce employment rules, electronic signatures, and more. Chapter 26 includes a new cyberlaw feature on returns and revocation of acceptance for online sellers and buyers.

Chapter 8, the criminal law chapter, includes great detail on the new and evolving computer crimes. Chapter 34 covers fraudulent title issues on Craigslist and the rights of the parties.

Thinking Things Through This feature is designed to help students apply the law they have learned from the chapter and cases to a hypothetical or another case that varies slightly from the examples in the reading. With these problems built into this feature the reading, students have the chance to really think through what they have just read and studied with regard to the law presented in that chapter. This feature can be used to promote classroom discussion or as an assignment for analysis. For example, in Chapter 25, students can walk through an example on a customer biting into an undeveloped peanut in a Goo Goo candy bar and whether there is liability on the part of the manufacturer. Do people expect to bite into undeveloped peanuts in a candy bar? What is the test for product liability when a natural item in food results in harm?

Major Regulatory Reforms: Dodd-Frank, the Consumer Financial Protection Bureau Businesses continue to be dramatically affected not only by laws at the federal level, but also by complex and intricate new federal regulatory schemes. Dodd-Frank affects everything from corporate governance to consumer rights in financing. This

xxxiv Preface

dramatic piece of legislation and the new Consumer Financial Protection Bureau with its expansive authority, enjoy coverage throughout this edition.

Ethical Focus In addition to Chapter 3, which is devoted exclusively to the current issues in business ethics, each chapter continues to provide students with an ethical dilemma related to that particular area of law. The Ethics & the Law feature presents problems in each area of law. Students will be able to analyze ethical issues and problems that are very real and very challenging for anyone in business—for example, the issues involved in the state of Ohio’s release of Joe the Plumber’s divorce and child custody records after he asked then-presidential candidate Barack Obama a question about his views, Claremont-McKenna’s inflation of SAT scores to ensure its outstanding ranking among the best colleges, and Wi-Fi Piggybacking.

Critical Thinking The American Assembly of Collegiate Schools of Business (AACSB) mandate on critical thinking is addressed by this text. The Thinking Things Through feature asks students to analyze a problem that requires application of the law and examination of slight changes in factual patterns from examples in the text and the cases. For example, in the negotiable instruments chapters, students can look at a sample instrument in one problem and apply the requirements for negotiability to determine whether the instrument is indeed negotiable. In the Ethics & the Law feature, students must connect ethical thought with law and public policy and walk through the logic of application and results. End-of-chapter problems are, for the most part, real cases that summarize fact patterns and ask the students to find the applicable laws in the chapter and determine applicability and results. The fact patterns in the chapter problems are detailed and realistic and offer students the chance to test their mastery of the chapter concepts.

For Additional Help in Teaching and Learning For more detailed information about any of the following ancillaries, contact your local South-Western sales representative or visit the Anderson’s Business Law and the Legal Environment Web site at www.CengageBrain.com.

INSTRUCTOR’S RESOURCE CD (IRCD) (ISBN: 0324834306). The IRCD contains the Instructor’s Manual in Microsoft® Word files as well as the ExamView® testing software files, Microsoft® Word test bank files, and PowerPoint® lecture slides.

INSTRUCTOR’S MANUAL. The Instructor’s Manual is prepared by Marianne Jennings, one of the textbook authors. It provides instructor insights, chapter outlines, and teaching strategies for each chapter. Discussion points are provided for Thinking Things Through, Ethics & the Law vignettes and for each case referenced in the new Learning Outcomes. Also included are answers to CPA questions. Download the Instructor Manual at www.CengageBrain.com or access it from the IRCD.

EXAMVIEW® TESTING SOFTWARE—COMPUTERIZED TESTING SOFTWARE. This testing software contains all of the questions in the printed test bank. This program is an easy-to-use test creation software compatible with Microsoft® Windows. Instructors can add or

Preface xxxv

edit questions, instructions, and answers; and they can select questions by previewing them on the screen, selecting them randomly, or selecting them by number. Instructors can also create and administer quizzes online, whether over the Internet, a local area network (LAN), or a wide-area network (WAN). The ExamView® testing software is only available on the IRCD.

TEST BANK. The Test Bank includes thousands of true/false, multiple-choice, and case questions. The test bank is only available on the IRCD or textbook companion Web site (www.CengageBrain.com).

MICROSOFT® POWERPOINT® LECTURE REVIEW SLIDES. PowerPoint® slides are available for use by instructors for enhancing their lectures. Download these slides at www .CengageBrain.com or access them on the IRCD.

MINDTAP. MindTap is a new personal learning experience that combines all your digital assets—readings, multimedia, activities, and assessments—into a singular learning path to improve student outcomes. MindTap offers complimentary web- apps known as MindApps. MindApps range from ReadSpeaker (which reads the text out-loud to students), to Kaltura (allowing you to insert your own video and audio into your curriculum) to ConnectYard (allowing you to create digital “yards” through social media—all without “friending” your students). CengageNOW is an app within MindTap. www.cengage.com/mindtap Instant Access Code ISBN: 9781285513102

CENGAGENOW. CengageNOW is a powerful course management tool that provides control and customization to optimize the student learning experience and produce desired outcomes. CengageNOW includes:

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