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ElEvEnth Edition

Marianne Moody Jennings Arizona State University

Australia • Brazil • Mexico • Singapore • United Kingdom • United States

its lEgal, Ethical, and global EnvironmEnt


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Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

© 2018, 2015 Cengage Learning®

ALL RIGHTS RESERVED. No part of this work covered by the copyright herein may be reproduced or distributed in any form or by any means, except as permitted by U.S. copyright law, without the prior written permission of the copyright owner.

Library of Congress Control Number: 2016948642

ISBN: 978-1-337-10357-2

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Business: Its Legal, Ethical, and Global Environment , 11e Marianne Moody Jennings

Vice President, General Manager, Social Science & Qualitative Business: Erin Joyner

Product Director: Jason Fremder

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Printed in Canada Print Number: 01 Print Year: 2016

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Part 1 1 Business: Its Legal, Ethical, and Judicial Environment 1

1 Introduction to Law 2

2 Business Ethics and Social Responsibility 24

3 The Judicial System 72

4 Managing Disputes: Alternative Dispute Resolution and Litigation Strategies 102

Part 2 139 Business: Its Regulatory Environment 139

5 Business and the Constitution 140

6 Administrative Law 178

7 International Law 218

8 Business Crime 248

9 Business Torts 294

10 Environmental Regulation and Sustainability 328

Part 3 363 Business Sales, Contracts, and Competition 363

11 Contracts and Sales: Introduction and Formation 366

12 Contracts and Sales: Performance, Remedies, and Collection 410

13 Product Advertising and Liability 448

14 Business Competition: Antitrust 486

15 Business and Intellectual Property Law 520

Part 4 553 Business Management and Governance 553

16 Management of Employee Conduct: Agency 554

17 Governance and Structure: Forms of Doing Business 592

18 Governance and Regulation: Securities Law 634

19 Management of Employee Welfare 680

20 Management: Employment Discrimination 728

Appendices A-1 A The United States Constitution A-1 B The Foreign Corrupt Practices Act (Excerpts) A-12 C The Uniform Commercial Code (Excerpts)* A-15 D Dodd-Frank (Wall Street Reform and Consumer

Financial Protection Act) Key Provisions A-20 E The Securities Act of 1933 and the Securities Exchange

Act of 1934 (Excerpts) A-23 F Sarbanes-Oxley Key Provisions (Excerpts) A-28 G The Copyright Act (as Amended) (Excerpts) A-31 H Title VII and the Civil Rights Act (Employment

Provisions) (Excerpts) A-34 I The Americans with Disabilities Act (Excerpts) A-37

Glossary G-1 Table of Cases T-1 Table of Products, People, and Companies T-11 Index I-1

Brief Contents


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Preface xv About the Author xxvi Acknowledgments xxviii

1 Introduction to Law 2

1-1 Definition of Law 3

1-2 Classifications of Law 3 1-2a Public versus Private Law 3 1-2b Criminal versus Civil Law 4 1-2c Substantive versus Procedural Law 4 1-2d Common versus Statutory Law 4 1-2e Law versus Equity 5

1-3 Purposes of Law 6 1-3a Keeping Order 6 1-3b Influencing Conduct 6 1-3c Honoring Expectations 6 1-3d Promoting Equality 6 1-3e Law as the Great Compromiser 7

1-4 Characteristics of Law 7 1-4a Flexibility 7 1-4b Consistency 7 1-4c Pervasiveness 7

1-5 The Theory of Law: Jurisprudence 12 1-5a The Theory of Law: Positive Law 12 1-5b The Theory of Law: Natural Law 12 1-5c The Theory of Law: The Protection of

Individuals and Relationships 12 1-5d The Theory of Law: The Social Contract 12

1-6 Sources of Law 13 1-6a Constitutional Law 13

1-6b Statutory Law at the Federal Level 14 1-6c Statutory Law at the State Level 15 1-6d Local Laws of Cities, Counties, and

Townships 16 1-6e Private Laws 16 1-6f Court Decisions 16

1-7 Introduction to International Law 17 1-7a Custom 17 1-7b Treaties 18 1-7c Private Law in International

Transactions 18 1-7d International Organizations 18 1-7e The Doctrines of International Law 18 1-7f Trade Law and Policies 18 1-7g Uniform International Laws 19 1-7h The European Union 19

Summary 20

Questions and Problems 21

2 Business Ethics and Social Responsibility 24

2-1 What Is Ethics? 26 2-1a “It’s Just Not Right!” 26 2-1b Normative Standards: How We Behave to

Keep Order 26 2-1c Line-Cutting and Ethics 27

Part 1 Business: Its Legal, Ethical, and Judicial Environment 1

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Contents v

2-2 What Is Business Ethics? 28 2-2a Ethical Standards: Positive Law and Ethics 29 2-2b Ethical Standards: Natural Law and Ethics 31 2-2c Ethical Standards: Moral Relativism and Ethics 31 2-2d Ethical Standards: Religion and Ethics 31

2-3 What Are the Categories of Ethical Dilemmas? 31 2-3a Taking Things That Don’t Belong to You 31 2-3b Saying Things You Know Are Not True 32 2-3c Giving or Allowing False Impressions 32 2-3d Buying Influence or Engaging in Conflict of

Interest 33 2-3e Hiding or Divulging Information 34 2-3f Taking Unfair Advantage 34 2-3g Committing Acts of Personal Decadence 35 2-3h Perpetrating Interpersonal Abuse 35 2-3i Permitting Organizational Abuse 35 2-3j Violating Rules 36 2-3k Condoning Unethical Actions 36 2-3l Balancing Ethical Dilemmas 36

2-4 Resolution of Business Ethical Dilemmas 37 2-4a Blanchard and Peale 37 2-4b The Front-Page-of-the-Newspaper Test 38 2-4c Laura Nash and Perspective 38 2-4d The Wall Street Journal Model 39 2-4e Other Models 39

2-5 Why We Fail to Reach Good Decisions in Ethical Dilemmas 39 2-5a “Everybody Else Does It” 39 2-5b “If We Don’t Do It, Someone Else Will” 39 2-5c “That’s the Way It Has Always Been Done” 40 2-5d “We’ll Wait until the Lawyers Tell Us It’s

Wrong” 40 2-5e “It Doesn’t Really Hurt Anyone” 41 2-5f “The System Is Unfair” 41 2-5g “I Was Just Following Orders” 41 2-5h “You Think This Is Bad, You Should

Have Seen . . .” 42 2-5i “It’s a Gray Area” 42

2-6 Social Responsibility: Another Layer of Business Ethics 43 2-6a Ethical Postures for Social Responsibility 43

2-7 Why Business Ethics? 45 2-7a Personal Accountability and Comfort: Business

Ethics for Personal Reasons 45

2-8 Importance of Ethics in Business Success and the Costs of Unethical Conduct 51 2-8a Ethics as a Strategy 53 2-8b The Value of a Good Reputation 55 2-8c Leadership’s Role in Ethical Choices 56

2-9 Creation of an Ethical Culture in Business 58 2-9a The Tone at the Top and an Ethical Culture 58 2-9b Dodd-Frank, Sarbanes-Oxley, Sentencing, and

an Ethical Culture 58 2-9c Reporting Lines: An Anonymous Ethics Line

for an Ethical Culture 59 2-9d Developing an Ethics Stance 59 2-9e Being Careful about Pressure and Signals 61

2-10 Ethical Issues in International Business 61

Summary 68

Questions and Problems 69

3 The Judicial System 72

3-1 Types of Courts 73 3-1a Trial Courts 73 3-1b Appellate Courts 73

3-2 How Courts Make Decisions 73 3-2a The Process of Judicial Review 73 3-2b The Doctrine of Stare Decisis 75

3-3 Parties in the Judicial System (Civil Cases) 77 3-3a Plaintiffs 77 3-3b Defendants 77 3-3c Lawyers 77 3-3d Judges 79 3-3e Name Changes on Appeal 79

3-4 The Concept of Jurisdiction 79

3-5 Subject Matter Jurisdiction of Courts: The Authority over Content 80 3-5a The Federal Court System 80 3-5b The State Court Systems 86 3-5c Judicial Opinions 88 3-5d Venue 88

3-6 In Personam Jurisdiction of Courts: The Authority over Persons 90 3-6a Ownership of Property within the State 90 3-6b Volunteer Jurisdiction 90 3-6c Presence in the State 90 3-6d Internet Companies and Long-Arm

Jurisdiction 94

3-7 The International Courts 95 3-7a Jurisdictional Issues in International Law 96 3-7b Conflicts of Law in International Disputes 96

Summary 98

Questions and Problems 99

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vi Contents

4 Managing Disputes: Alternative Dispute Resolution and Litigation Strategies 102

4-1 What Is Alternative Dispute Resolution? 103

4-2 Types of Alternative Dispute Resolution 103 4-2a Arbitration 103 4-2b Arbitration Procedures 106 4-2c Mediation 108 4-2d Medarb 108 4-2e The Minitrial 108 4-2f Rent-a-Judge 109 4-2g Summary Jury Trials 109 4-2h Early Neutral Evaluation 109 4-2i Peer Review 110

4-3 Resolution of International Disputes 110

4-4 Litigation versus ADR: The Issues and Costs 111 4-4a Speed and Cost 111 4-4b Protection of Privacy 111 4-4c Creative Remedies 111 4-4d Judge and Jury Unknowns 112 4-4e Absence of Technicalities 113

4-5 When You Are in Litigation 113 4-5a How Does a Lawsuit Start? 113 4-5b The Complaint (Petition) 115 4-5c The Summons 117 4-5d The Answer 119 4-5e Seeking Timely Resolution of the Case 119 4-5f How a Lawsuit Progresses: Discovery 121 4-5g Resolution of a Lawsuit: The Trial 125

4-6 Issues in International Litigation 131

Summary 134

Questions and Problems 134

5 Business and the Constitution 140

5-1 The U.S. Constitution 141 5-1a An Overview of the U.S. Constitution 141 5-1b Articles I, II, and III—the Framework for

Separation of Powers 141 5-1c Other Articles 142 5-1d The Bill of Rights 143

5-2 The Role of Judicial Review and the Constitution 143

5-3 Constitutional Limitations of Economic Regulations 143 5-3a The Commerce Clause 143 5-3b Constitutional Standards for Taxation of

Business 149

5-4 State versus Federal Regulation of Business— Constitutional Conflicts: Preemption and the Supremacy Clause 152

5-5 Application of the Bill of Rights to Business 156 5-5a Commercial Speech and the First Amendment 156 5-5b First Amendment Protection for Advertising 156 5-5c First Amendment Rights and Profits from

Sensationalism 158 5-5d First Amendment Rights and Corporate Political

Speech 159 5-5e Eminent Domain: The Takings Clause 164 5-5f Procedural Due Process 169 5-5g Substantive Due Process 170 5-5h Equal Protection Rights for Business 171

5-6 The Role of Constitutions in International Law 171

Summary 173

Questions and Problems 173

Part 2 Business: Its Regulatory Environment 139

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Contents vii

6 Administrative Law 178

6-1 What Are Administrative Agencies? 179

6-2 Roles of Administrative Agencies 180 6-2a Specialization 180 6-2b Protection for Small Business 182 6-2c Faster Relief 182 6-2d Due Process 182 6-2e Social Goals 183

6-3 Laws Governing Administrative Agencies 183 6-3a Administrative Procedures Act 183 6-3b Freedom of Information Act 183 6-3c Federal Privacy Act 184 6-3d Government in the Sunshine Act 185 6-3e Federal Register Act 186

6-4 The Functions of Administrative Agencies and Business Interaction 186 6-4a Providing Input When Agencies Are

Promulgating Regulations 186 6-4b Formal Rulemaking 186 6-4c Proactive Business Strategies in Regulation 204 6-4d Informal Rulemaking 204

6-5 Business Rights in Agency Enforcement Action 205 6-5a Licensing and Inspections 205 6-5b Prosecution of Businesses 207 6-5c Beginning Enforcement Steps 207 6-5d Consent Decrees 207 6-5e Hearings 207 6-5f Administrative Law of Appeals 209

6-6 The Role of Administrative Agencies in the International Market 210

Summary 212

Questions and Problems 213

7 International Law 218

7-1 Sources of International Law 219 7-1a International Law Systems 219 7-1b Nonstatutory Sources of International Law 220 7-1c Statutory Sources of International Law 221 7-1d Treaties, Trade Organizations, and Controls

on International Trade 222

7-2 Trust, Corruption, Trade, and Economics 227 7-2a Foreign Corrupt Practices Act (FCPA) 227

7-3 Resolution of International Disputes 232

7-4 Principles of International Law 232 7-4a Act of State Doctrine 232 7-4b Sovereign Immunity 232 7-4c Protections for U.S. Property and Investment

Abroad 235 7-4d Repatriation 237 7-4e Forum Non Conveniens, or “You Have the Wrong

Court” 237 7-4f Conflicts of Law 237

7-5 Protections in International Competition 238 7-5a The International Marketplace and Monetary

Issues: The Disclosure Role of Banks 238 7-5b Antitrust Laws in the International

Marketplace 240 7-5c Protections for Intellectual Property 242 7-5d Criminal Law Protections 242

Summary 244

Questions and Problems 244

8 Business Crime 248

8-1 What Is Business Crime? The Crimes within a Corporation 249 8-1a Financial Fraud: Employees Manipulating

Earnings Numbers 249 8-1b Marketing Missteps: Sales Zeal and

Crimes 250 8-1c Friendly Fire: Employee Theft 250

8-2 What Is Business Crime? The Crimes against a Corporation 252

8-3 Who Is Liable for Business Crime? 253

8-4 Federal Laws Targeting Officers and Directors for Criminal Accountability 254 8-4a White-Collar Crime’s Origins and History 254 8-4b Sarbanes–Oxley (SOX) 255 8-4c Honest Services Fraud 256 8-4d Financial Services Crimes and Reforms 256 8-4e Other Business Crimes and White-Collar

Liability 257

8-5 The Penalties for Business Crime 257 8-5a New Penalties and New Processes 257 8-5b Corporate Integrity Agreements (CIAs) 257

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viii Contents

8-5c Criminal Indictments of Corporations on Common Law Crimes 259

8-5d Shame Punishment 259 8-5e New and Higher Penalties for Corporate

Crime 262 8-5f Corporate Sentencing Guidelines: An Ounce of

Prevention Means a Reduced Sentence 262 8-5g Corporate Board Criminal Responsibility 263

8-6 Elements of Business Crime 265 8-6a Mens Rea, Scienter, or Criminal Intent 265 8-6b Mens Rea, Conscious Avoidance, and Corporate

Officers 267 8-6c Actus Reus 268

8-7 Examples of Business Crimes 268 8-7a Theft and Embezzlement 268 8-7b Obstruction of Justice 268 8-7c Computer Crime 269 8-7d Internet Crime 271 8-7e Criminal Fraud 274 8-7f Commercial Bribery 274 8-7g Racketeer Influenced and Corrupt

Organizations (RICO) Act 275 8-7h Business Crime and the USA Patriot Act 277 8-7i Additional Federal Crimes 279 8-7j State Crimes 279

8-8 Procedural Rights for Business Criminals 279 8-8a Fourth Amendment Rights for Businesses 279 8-8b Exceptions to the Warrant Requirement 281 8-8c Fifth Amendment Rights for Businesses 283

8-9 Business Crime and International Business 287

Summary 289

Questions and Problems 290

9 Business Torts 294

9-1 What Is a Tort? Roots of Law and Commerce 295 9-1a Tort Versus Crime 295 9-1b Types of Torts 295

9-2 The Intentional Torts 296 9-2a Defamation 296 9-2b Contract Interference 304 9-2c False Imprisonment 304 9-2d Intentional Infliction of Emotional Distress 305 9-2e Invasion of Privacy 305

9-3 Negligence 308 9-3a Element One: The Duty 308 9-3b Element Two: Breach of Duty 311 9-3c Element Three: Causation 314 9-3d Element Four: Proximate Cause 315 9-3e Element Five: Damages 319 9-3f Defenses to Negligence 319

9-4 New Verdicts on Tort Reform 321 9-4a Strict Liability 322

Summary 323

Questions and Problems 324

10 Environmental Regulation and Sustainability 328

10-1 Common Law Remedies and the Environment 329 10-1a Nuisances 329 10-1b NIMBYs and Nuisances 329

10-2 Statutory Environmental Laws: Air Pollution Regulation 332 10-2a Early Legislation 333 10-2b 1970 Amendments to the Clean Air Act:

New Standards 333 10-2c 1977 and 1990 Amendments 333 10-2d New Forms of Control: EPA Expansion

Through Administrative Procedures 333 10-2e New Forms of Control: EPA and Climate

Change, Nee Global Warming 334 10-2f New Forms of Control: EPA and Small

Businesses 335 10-2g New Forms of Control: EPA and Economic

Forces 336

10-3 Statutory Environmental Law: Water Pollution Regulation 336 10-3a Early Legislation 336 10-3b Present Legislation 336 10-3c Other Water Legislation 337

10-4 Statutory Environmental Law: Solid Waste Disposal Regulation 338 10-4a Early Regulation 338 10-4b CERCLA and the Superfund 339 10-4c New Developments Under CERCLA 343 10-4d CERCLA and Brownfields 344

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Contents ix

10-5 Statutory Law: Environmental Quality Regulation 345

10-6 Statutory Law: Other Federal Environmental Regulations 347 10-6a Surface Mining 347 10-6b The Fracking Issue 347 10-6c Noise Control 347 10-6d Pesticide Control 347 10-6e OSHA 347 10-6f Asbestos 347 10-6g Endangered Species 348 10-6h State Environmental Laws 351

10-7 Enforcement of Environmental Laws 352 10-7a Parties Responsible for Enforcement 352 10-7b Criminal Sanctions and Penalties for

Violations 352 10-7c Group Suits: The Effect of Environmentalists 356

10-8 International Environmental Issues 356 10-8a The EU and Environmentalism 356 10-8b ISO 14000 356 10-8c LEED Certification 357

Summary 359

Questions and Problems 359

11 Contracts and Sales: Introduction and Formation 366

11-1 What Is a Contract? 367

11-2 Sources of Contract Law 367 11-2a Common Law 368 11-2b The Uniform Commercial Code 368

11-3 Types of Contracts 372 11-3a Bilateral Versus Unilateral Contracts 372 11-3b Express Versus Implied Contracts

(Quasi Contracts) 372 11-3c Void and Voidable Contracts 374 11-3d Unenforceable Contracts 374 11-3e Executed Versus Executory Contracts 374

11-4 Consumer Credit Contracts 375 11-4a Discrimination in Credit Contracts 375 11-4b Subprime or Predatory Lending 376 11-4c Credit Disclosures 377 11-4d Controlling Credit Card Contracts 377

11-5 Formation of Contracts 378 11-5a Offer 378 11-5b Acceptance: The Offeree’s Response 390 11-5c E-Commerce and Contract Formation 391

11-5d Consideration 394 11-5e Contract Form: When a Record Is Required 395 11-5f Writing and E-Commerce: The Uniform

Electronic Transactions Act 398

11-6 Issues in Formation of International Contracts 402 11-6a CISG—UCC for the World 402 11-6b The Payment Issues in International

Contracts 403 11-6c Risk in International Contract Performance:

Force Majeure 405

Summary 406

Questions and Problems 407

12 Contracts and Sales: Performance, Remedies, and Collection 410

12-1 Defenses in Contract Formation 411 12-1a Capacity 411 12-1b Misrepresentation 414 12-1c Fraud or Fraudulent Misrepresentation 415 12-1d Consumer Credit Contracts and Rescission

Rights 417

Part 3 Business Sales, Contracts, and Competition 363

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x Contents

12-1e Subprime Lending Representations and Disclosures 419

12-1f Duress 419 12-1g Undue Influence 419 12-1h Illegality and Public Policy 420

12-2 Contract Performance 426 12-2a When Performance Is Due 426 12-2b Standards for Performance 428 12-2c E-Commerce: Payment Performance Has

Changed 429 12-2d When Performance Is Excused 429 12-2e Finding a Way to End Obligations Under the

Contract 433

12-3 Nonperformance and Nonpayment—The Collection Remedies 433 12-3a Making Sure the Billing Is Accurate 433 12-3b Collection—Fair Standards for Obtaining

Payment 434 12-3c Suits for Enforcement of Debts 437 12-3d The End of the Line on Enforcement of Debts:

Bankruptcy 437 12-3e Is There a Cost to Breaching a Contract:

Creditor Reports on Nonpaying Debtors 438

12-4 Contract Remedies for Nonperformance 441

12-5 Third-Party Rights in Contracts 442

12-6 International Issues in Contract Performance 443 12-6a Assuring Payment 443 12-6b Assuring Performance: International

Peculiarities 443

Summary 444

Questions and Problems 445

13 Product Advertising and Liability 448

13-1 Development of Product Liability 449

13-2 Advertising as a Contract Basis for Product Liability 449 13-2a Express Warranties 449 13-2b Federal Regulation of Warranties and

Advertising 453

13-2c Content Control and Accuracy 453 13-2d FTC Control of Performance Claims 454 13-2e FTC Control of Celebrity

Endorsements 456 13-2f FTC Control of Bait and Switch 458 13-2g FTC Control of Product Comparisons 458 13-2h FTC Remedies 460 13-2i Ad Regulation by the FDA and Other Federal

Agencies 460 13-2j Professional Ads 460

13-3 Contract Product Liability Theories: Implied Warranties 460 13-3a The Implied Warranty of

Merchantability 461 13-3b The Implied Warranty of Fitness for a

Particular Purpose 464 13-3c Eliminating Warranty Liability by

Disclaimers 464 13-3d Privity Standards for UCC Recovery 466

13-4 Strict Tort Liability: Product Liability Under Section 402A 466 13-4a The Requirement of Unreasonably Dangerous

Defective Condition 467 13-4b Reaching the Buyer in the Same

Condition 471 13-4c The Requirement of a Seller Engaged in a

Business 473 13-4d Negligence: A Second Tort for Product

Liability 473 13-4e Privity Issues in Tort Theories of Product

Liability 473

13-5 Defenses to Product Liability Torts 474 13-5a Misuse or Abnormal Use of a

Product 474 13-5b Contributory Negligence 475 13-5c Assumption of Risk 475

13-6 Product Liability Reform 478

13-7 Federal Standards for Product Liability 478 13-7a Consumer Product Safety

Commission 478

13-8 International Issues in Product Liability 479

Summary 481

Questions and Problems 481

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Contents xi

14 Business Competition: Antitrust 486

14-1 What Interferes with Competition? Covenants Not to Compete 487

14-2 What Interferes with Competition? An Overview of the Federal Statutory Scheme on Restraint of Trade 491 14-2a What Types of Activities Do the Federal Laws

Regulate? 492

14-3 Horizontal Restraints of Trade 493 14-3a Monopolization 493 14-3b Price-Fixing 496 14-3c Divvying Up the Markets 501 14-3d Group Boycotts and Refusals to Deal 502 14-3e Free Speech and Anticompetitive Behavior 502 14-3f Subtle Anticompetitive Behavior: Interlocking

Directorates 503 14-3g Merging Competitors and the Effect on

Competition 503

14-4 Vertical Trade Restraints 503 14-4a Resale Price Maintenance 504 14-4b Monopsony 508 14-4c Sole Outlets and Exclusive Distributorships 508 14-4d Customer and Territorial Restrictions 509 14-4e Tying Arrangements 509 14-4f Price Discrimination 511 14-4g Vertical Mergers 513

14-5 What Are the Penalties and Remedies for Anticompetitive Behavior? 513 14-5a Criminal Penalties 513 14-5b Equitable Remedies 514 14-5c Private Actions for Damages 514

14-6 Antitrust Issues in International Competition 514

Summary 516

Questions and Problems 516

15 Business and Intellectual Property Law 520

15-1 What Can a Business Own? Intangible Property Rights 521

15-2 Patents 521 15-2a The Types and Length of Patents 522 15-2b What You Can Patent: Patentability 522 15-2c The Patent Process 523 15-2d What a Patent Does 523 15-2e The Remedies for Patent Infringement 524

15-3 Copyrights 525 15-3a What Is a Copyright and What Does It

Protect? 525 15-3b The Rights of Copyright Holders Against

Third-Party Infringers 526 15-3c How Long Does a Copyright Run? 528 15-3d Rights of a Copyright Holder 529

15-4 Trademarks 533 15-4a What Are Trademarks? 533 15-4b What Are the Legal Protections for

Trademarks? 534 15-4c Enforcing Trademarks and the Risk of

Going Generic 534 15-4d Trade Names 535 15-4e What Are the Rights When a Trademark or

Trade Name Is Misused? 535 15-4f Trade Dress 538 15-4g Cyber Infringement 538

15-5 Trade Secrets 540 15-5a What are Trade Secrets? 540 15-5b How are Trade Secrets Protected? 541 15-5c Criminal Penalties for Theft of Trade

Secrets 541

15-6 International Intellectual Property Issues 542 15-6a Patent Protection 542 15-6b Trademark Protection 542 15-6c Copyrights in International

Business 543 15-6d Differing International Standards 543

15-7 Enforcing Business Property Rights 544 15-7a Product Disparagement 544 15-7b Palming Off 545 15-7c Misappropriation 545

Summary 548

Questions and Problems 548

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xii Contents

16 Management of Employee Conduct: Agency 554

16-1 Names and Roles: Agency Terminology 555 16-1a Agency 555 16-1b Principals 555 16-1c Agents 556 16-1d Employers and Employees: Master–Servant

Relationships 556 161e Independent Contractors 556 16-1f Agency Law 556

16-2 Creation of the Agency Relationship 557 16-2a Express Authority 557 16-2b The Record 557 16-2c Capacity 557 16-2d Implied Authority 558 16-2e Apparent Authority 559 16-2f Ratification 561

16-3 The Principal–Agent Relationship 562 16-3a The Agent’s Rights and Responsibilities 562 16-3b The Principal’s Rights and

Responsibilities 569

16-4 Liability of Principals for Agents’ Conduct: The Relationship with Third Parties 570

16-4a Contract Liability 570 16-4b Liability of Principals for Agents’ Torts 572

16-5 Termination of the Agency Relationship 577

16-6 Termination of Agents under Employment at Will 577

16-6a The Implied Contract 578 16-6b The Public Policy Exception 580 16-6c Handling Employee Termination

Disputes 584

16-7 Agency Relationships in International Law 585

Summary 588

Questions and Problems 588

17 Governance and Structure: Forms of Doing Business 592

17-1 Sole Proprietorships 593 17-1a Formation 593 17-1b Sources of Funding 593 17-1c Liability 593 17-1d Tax Consequences 594 17-1e Management and Control 594 17-1f Transferability of Interest 594

17-2 Partnerships 594 17-2a Formation 594 17-2b Sources of Funding 599 17-2c Partner Liability 600 17-2d Tax Consequences in Partnerships 601 17-2e Management and Control 601 17-2f Transferability of Interests 603 17-2g Dissolution and Termination of the

Partnership 603

17-3 Limited Partnerships 604 17-3a Formation 604 17-3b Sources of Funding 605 17-3c Liability 605 17-3d Tax Consequences 606 17-3e Management and Control 606 17-3f Transferability of Interests 606 17-3g Dissolution and Termination of a Limited

Partnership 607

17-4 Corporations 607 17-4a Types of Corporations 607 17-4b The Law of Corporations 608 17-4c Formation 608 17-4d Capital and Sources of Corporate Funds 610 17-4e Liability Issues 611 17-4f Corporate Tax Consequences 613 17-4g Corporate Management and Control:

Directors and Officers 614

Part 4 Business Management and Governance 553

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Contents xiii

17-4h Corporate Management and Control: Shareholders 621

17-4i The Dissolution of a Corporation 624

17-5 Limited Liability Companies 625 17-5a Formation 625 17-5b Sources of Funding 625 17-5c Liability 625 17-5d Tax Consequences 627 17-5e Management and Control 627 17-5f Transferability of Interest 627 17-5g Dissolution and Termination 628

17-6 Limited Liability Partnerships 628 17-6a Formation 629 17-6b Sources of Funding 629 17-6c Liability 629 17-6d Tax Consequences 629 17-6e Management and Control 629 17-6f Transferability 629 17-6g Dissolution and Termination 629

17-7 International Issues in Business Structure 629

Summary 630

Questions and Problems 631

18 Governance and Regulation: Securities Law 634

18-1 History of Securities Law 635

18-2 Primary Offering Regulation: The 1933 Securities Act 635 18-2a What Is a Security? 635 18-2b Regulating Primary Offerings:

Registration 636 18-2c Regulating Primary Offerings:

Exemptions 637 18-2d What Must Be Filed: Documents and

Information for Registration 642 18-2e Violations of the 1933 Act 643

18-3 The Securities Exchange Act of 1934 654 18-3a Securities Registration 654 18-3b Emerging Growth Companies (EGCs) and

1934 Act Exemption 654 18-3c Periodic Filing Under the 1934 Act:

Those Alphabet Reports 654 18-3d The 1934 Act Antifraud Provision: 10(b) 655 18-3e Insider Trading and Short-Swing Profits 665 18-3f Regulating Voting Information 666

18-3g Shareholder Rights in Takeovers, Mergers, and Consolidations 668

18-4 State Securities Laws 671

18-5 International Issues in Securities Laws 673

Summary 675

Questions and Problems 676

19 Management of Employee Welfare 680

19-1 Wage and Hours Protection 681 19-1a The Fair Labor Standards Act 681 19-1b The Equal Pay Act of 1963 688

19-2 Workplace Safety 688 19-2a The Occupational Safety and Health Act 688 19-2b OSHA Responsibilities 688 19-2c Employee Impairment and Testing Issues 690

19-3 Employee Pensions, Retirement, and Social Security 690 19-3a Social Security 690 19-3b Private Retirement Plans 692 19-3c Unemployment Compensation 693

19-4 Workers’ Compensation Laws 695 19-4a Employee Injuries 695 19-4b Causation and Worker’s Compensation 696 19-4c Fault Is Immaterial 696 19-4d Employees versus Independent

Contractors 696 19-4e Benefits 696 19-4f Forfeiture of the Right of Suit 697 19-4g Third-Party Suits 697 19-4h Administrative Agency 697 19-4i Insurance 697 19-4j Problems in Workers’ Compensation

Systems 699

19-5 Statutory Protections of Employees Through Labor Unions 700 19-5a The Norris–LaGuardia Act of 1932 700 19-5b The Wagner Act 700 19-5c The Taft–Hartley Act: The Labor-Management

Relations Act of 1947 700 19-5d The Landrum–Griffin Act: The Labor-

Management Reporting and Disclosure Act of 1959 700

19-5e Union Organizing Efforts and Social Media 701

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xiv Contents

19-5f Employers Are Accountable for Employee Electronic Content 701

19-5g Employer Monitoring: What is Legal? 701 19-5h Employers’ Right of Access to

Employee E-Mails 704 19-5I E-Mail and NLRA Issues 705 19-5j The Unionization Process 706 19-5k Union Contract Negotiations 710 19-5l Protected Concerted Activities 711 19-5m Unfair Employee Practices 711 19-5n Employer Rights 712 19-5o Right-to-Work Laws 712 19-5p Economic Weapons of Employers 713

19-6 International Issues in Labor 715 19-6a Immigration Laws 715 19-6b Working Conditions and International Labor

Law 718 19-6c Sample International Standards 718 19-6d The Risks of International Suppliers 719 19-6e New Trends in Managing International Wage

and Safety Standards 720

Summary 722

Questions and Problems 724

20 Management: Employment Discrimination 728

20-1 History of Employment Discrimination Law 729

20-2 Employment Discrimination: Title VII of the Civil Rights Act 731 20-2a Application of Title VII 731 20-2b Employment Procedures Covered 731

20-3 Theories of Discrimination Under Title VII 731 20-3a Disparate Treatment 731 20-3b Disparate Impact 734 20-3c Pattern or Practice of Discrimination 737

20-4 Specific Applications of Title VII 738 20-4a Sex Discrimination 738 20-4b Religious Discrimination 746 20-4c Racial Discrimination 749

20-5 Antidiscrimination Laws and Affirmative Action 749 20-5a What Is Affirmative Action? 750 20-5b Who Is Required to Have Affirmative Action

Programs? 750 20-5c Affirmative Action Backlash: The Theory of

Reverse Discrimination 750

20-6 The Defenses to a Title VII Charge 751 20-6a Bona Fide Occupational Qualification 751 20-6b Seniority or Merit Systems 752 20-6c Aptitude and Other Tests 752 20-6d Misconduct 752

20-7 Enforcement of Title VII 755 20-7a Steps in an EEOC Case 755 20-7b Remedies Available Under Title VII 756

20-8 Other Antidiscrimination Laws 756 20-8a Age Discrimination in Employment Act

of 1967 756 20-8b Equal Pay Act of 1963 758 20-8c Communicable Diseases in the

Workplace 758 20-8d Rehabilitation Act of 1973 759 20-8e Americans with Disabilities Act 759 20-8f The Family and Medical Leave Act 760

20-9 The Global Workforce 761

Summary 764

Questions and Problems 764

Appendices A-1

A The United States Constitution A-1

B The Foreign Corrupt Practices Act (Excerpts) A-12

C The Uniform Commercial Code (Excerpts)* A-15

D Dodd-Frank (Wall Street Reform and Consumer Financial Protection Act) Key Provisions A-20

E The Securities Act of 1933 and the Securities Exchange Act of 1934 (Excerpts) A-23

F Sarbanes-Oxley Key Provisions (Excerpts) A-28

G The Copyright Act (as Amended) (Excerpts) A-31

H Title VII and the Civil Rights Act (Employment Provisions) (Excerpts) A-34

I The Americans with Disabilities Act (Excerpts) A-37

Glossary G-1 Table of Cases T-1 Table of Products, People, and Companies T-11 Index I-1

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A Different World, but the Same Issues The seventh edition of this book was published amidst the fallout from the legal, ethical, and, too often, financial collapses of Enron, WorldCom, Adelphia, Health- South, Parmalat, Arthur Andersen, Kmart, and others. With Sarbanes–Oxley on the books and new regulatory demands on corporations, we thought perhaps we had turned the corner. But the eighth edition was published as Wall Street and the economy were reeling from the fallout of a subprime mortgage market operating under regulatory radar without a great deal of disclosure on portfolio risk. When the ninth edition was published, the SEC had just settled a civil suit it brought against Goldman Sachs for allegedly selling securities to clients it was betting against as a short-seller in a scheme that saw its profits reach double-digit billions. Goldman paid a fine of $550 million. In late 2009, Goldman’s CEO, Lloyd Blank- fein, uttered the same words that Jeffrey Skilling did in 2000: “We are doing God’s work.” At press time of the tenth edition, there were questions about the fairness of the scrutiny of taxpayers by an administrative agency, the Internal Revenue Service, and the Justice Department’s tapping of phones of news corporations. Book publishers signed antitrust consent decrees for agreeing to fix prices in order to compete with Amazon. A factory in Bangladesh, that produced clothing for U.S. retailers, collapsed, killing over 600 employees, a collapse that was caused by noncompliance with safety and code standards. Now, as this 11th edition is pub- lished the EPA has tightened regulations so much that two major coal companies have gone out of business. The Veterans Administration is trying to recover from a program that was designed to reduce queue times for patients but resulted in patients dying. A pharmaceutical company raised its prices on one prescription drug by 5,000%, and Apple has a monitor because it was found guilty of being the master mind behind publishers fixing prices on their electronic books. The raisin farmers had a major victory in the U.S. Supreme Court that will change forever government price and supplies controls on raisin. And insider trading remains in the news, for both convictions and the reversals of those convictions as courts sort through the question, “When exactly does insider trading occur?”

The patterns of business behavior that push the envelope of law and ethics continue. Two of the leaders in the New York legislature were convicted on cor- ruption charges, companies from Embrauer to GlaxoSmithKline, and even FIFA faced charges and investigations under the Foreign Corrupt Practices Act. Charges against FedEx for alleged shipping of controlled substances were dismissed because there was no proof that anyone knew what was in the packages. Blue Bell ice cream was shut down for four months because of the presence of listeria in its plants. The FCC was deluged with comments on a proposed rule that would have allowed cell phone use on airplanes. In response to the outcry from flight atten- dants, passengers, and pilots, the FCC did not promulgate the rule. The issues of law and ethics are still at the forefront of business, sports, and government. It has become a tall order just to keep up with all the events!

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These companies and organizations and their employees and executives certainly could have benefited from understanding and keeping at the fore- front of their decision processes the basics of law and ethics! The legal and eth- ical environments of business are center stage. Several editions ago, Congress made massive regulatory reform a reality with the passage of the Sarbanes– Oxley legislation on corporate governance, accounting regulation, and crim- inal penalties. But the SEC missed some large market schemes, so Congress passed Dodd-Frank with new directives to the SEC on financial reports, dis- closures, and primary offerings. The continuing reliance on new credit mecha- nisms resulted in a central agency, the Consumer Protection Bureau, handling all forms of consumer credit. Business is even more international, and changes, such as Brexit (Great Britain’s decision to withdraw from the EU), mean more changes in trade, regulation, and tariffs. FCPA cases have expanded and there is increasing cooperation among countries to address money-laundering schemes and the problems of world leaders hiding funds in accounts around the world.

The world and business continue to change and grow, but law and ethics have retained their role and importance. In fact, now more than ever, we need to understand the legal and ethical issues that affect our businesses and our lives. The knowledge base and even the questions in law and ethics remain the same, but the underlying facts have changed. For example, we still debate the social responsibility role of business. Now we raise that issue in the context of whether companies should use inversions, or reverse acquisitions, by foreign companies to reduce their effective tax rates. We continue to delve into the pros and cons of sending production to other countries. We still have the question of when a contract is formed, but now we face that question with “point and click” technology rather than faxes and letters. We continue to be concerned about our privacy as consumers, but now we wonder who really has access to our Facebook page. We still wonder about the extent of copyright law. The file-sharing programs have never quite gone away and the film industry now litigates the downloading of copyrighted films. The world is different, but law and ethics form the constant framework into which we fit the issues of the day. In the materials that follow, you have the chance to understand the marvelous stability of this framework and the ease with which you can apply it to this very different world. Be sure to look for descriptions of the new structure as well as the continuing features in the book, such as the “Consider” tutorials, the ethics issues, and the Business Strategy application exercises.

Building the Bridge: Applying Legal and Ethical Reasoning to Business Analysis I gave my students a midterm exam—a review of Netflix and its various business issues, including the cost of rights, issues in film production, and problems with obtaining subscriptions. These students are in the second year of their master’s degree studies. They have been trained in economics, marketing, management, and finance. But as they completed their analysis of this fast-growing darling of the stock market, they had an epiphany. A company can get the finance issues right, have the right brand appeal and great offerings, and even yield terrific subscription sales. However, it can all fall apart over the legal issues. What if the estimates on subscriptions released with earnings reports are overly optimistic?

xvi Preface

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What if something goes wrong in shooting one of their original production films? Does insurance cover them? Who pays the costs of a late finish on those promised films? What about international copyrights? What happens when copyright hold- ers do not want their films licensed internationally? They are very capable busi- ness students. However, they did not realize until this midterm exam how much of business turns on anticipating the legal issues and getting them resolved cor- rectly. And they also realized that all of our discussions of ethics and social respon- sibility had a role in doing business. TANSTAAFL—“there ain’t no such thing as a free lunch” when it comes to international business. There are costs associated with tapping into a seemingly boundless market of subscribers. And those costs come from legal issues, which, if handled poorly, can affect a company’s value and tarnish its brand name.

Why couldn’t these students see the interconnection and critical roles of law and ethics in business until this case for their midterm? It was not for lack of expo- sure to the law. I taught my course “by the book,” so to speak. Students could recite the components of a valid contract, rattle off the requirements for bankruptcy, and recall from memory the antitrust statutes. Yet, I was coming to realize, this rote knowledge was not enough. One of my best former students, who had gone on to medical school, came to me perplexed about her office lease. She said that the complex in which she wanted to open her practice had a “no advertising” policy. In fact, she said that when she toured the premises with a leasing agent, the leasing agent turned to her and said, “You’re not one of those doctors who advertises, are you? Because if you are, we can’t lease to you. We have a policy against it.” One of my best students, who knew the antitrust statutes well, could not apply them to her everyday business. Worse, perhaps, she could not recognize when to apply these statutes: She did not see the antitrust implications of the agent’s statements nor the problems with the physicians in the complex taking such an approach to screening tenants.

I have reached the conclusion that there have always been shortcomings in the standard approach to teaching business students law and ethics. Students were not ignorant of the law; rather, they simply lacked the necessary skills to recognize legal and ethical issues and to apply their knowledge of law and ethics to business decision making. As instructors, we were not integrating legal and ethical reason- ing with business analysis. My conclusion led me to develop my own materials for classroom use and eventually led to the publication of the first edition of this book. Now in its eleventh edition, Business: Its Legal, Ethical, and Global Environment brings to the classroom the most integrated approach to learning law and ethics available in the market today. Throughout every chapter and in every feature, stu- dents and instructors are continually reminded of how various legal and ethical principles apply in business contexts. For all areas of law and ethics, this book answers the question: How does this concept affect a business? This book builds a bridge for the student between knowledge of law and ethics and application of both in business. My 39 years of teaching law and ethics finally brought this realization: Business ethics is not easily grasped nor practiced in business because we depersonalize ethical issues. If we just allow the company or organization to make the decision, our ethics are not in question; the companies’ are. The ethical issues in the book require students to bring ethical issues into their lives, their cir- cumstances, their world. This feature also forces them to answer this question in a wide variety of contexts: “If it were you, and you were faced with the dilemma and required to make a decision, what would you do?”

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Strengthening the Bridge: New Content, Business Applications, and Learning Aids For the eleventh edition, Business: Its Legal, Ethical, and Global Environment has undergone further refinement. New content has been added, outdated content has been removed, new business applications have been integrated into every chapter, and the learning aids have been modified and refocused to help students under- stand and apply legal and ethical concepts.

New Content

The eleventh edition of Business: Its Legal, Ethical, and Global Environment continues to meet its goal of helping students with their understanding of how law and ethics apply to the business world. The organizational structure, based on feedback from those who use the text, has been changed. The four parts remain, but there is a new mix of topics and chapters in those four parts. Part 1 offers the student an overview of the legal, ethical, and judicial environments of business. Part 2 covers the regu- latory environments of business, including environmental regulation and sustain- ability. Part 3 covers all aspects of sales, contracts, and competition. Part 4 covers business management and corporate governance, and this newly restructured sec- tion covers all issues related to employees, boards, agents, and how to keep all of these groups coordinated while taking legal and ethical actions. Cyber law is now integrated into every chapter so that it can be covered in contracts (formation), employment (right of employee privacy in e-mails), and criminal law (everything from industrial espionage to spamming).


Business Ethics and Social Responsibility (Chapter 2) offers new examples and insights on the application of ethics to business decision making. Chapter 2 is chock full of the examples the last two years have netted—including GM’s engine switch guilty plea and VW’s use of emissions defeating software. A new biogra- phy focuses on Captain Sullenberger who landed an airplane safely in a river and offers his perspectives on how we know the right thing to do in moments of pres- sure. Ethics coverage is also integrated throughout all chapters.

Business Applications Biography

Each chapter contains a biography. Biographies provide students with business history through the study of individuals and companies involved with the area of law and ethics covered in the chapter. For example, Chapter 1 has a biography on Uber, the company that shook up the world of cab transportation. Chapter 4 has a new biography on a legal battle between a small business and its production of parts for another company’s tabletop game including the tools used in that litigation, and the pro bono work of lawyers in helping a small business in Games Workshop v. Chapterhouse. Chapter 19 provides the story of the death of an orca whale trainer at Sea World and the resulting investigations and backlash that Sea World experienced. Chapter 15 gives a biography of Mattel and its Bratz dolls and its long intellectual property battle over who had the idea for the dolls.

xviii Preface

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For the Manager’s Desk

Each chapter also contains at least one “For the Manager’s Desk” feature. These readings provide students the opportunity to see how business interrelates with ethics and law. The readings feature topics tackled by publications such as Wall Street Journal, Harvard Business Review, Corporate Finance Review, and the American Business Law Journal. This feature offers the latest best practices as well as data from academic studies and insights from that research. For example, the Chapter 8 “For the Manager’s Desk” discusses who ends up going to prison for business crimes and how long their sentences last. Chapter 19’s feature deals with the recent series of cases brought by interns for lack of pay and excessive hours as well as the Department of Labor’s proposed responses. Chapter 13 discusses how to manage celebrity tweets when they are your spokesperson, i.e., what can Kim Kardashian tweet about an anti-nausea drug she was using during her pregnancy that will not run afoul of FDA restrictions? Chapter 15’s Manager’s Desk discusses the prob- lems with a trademark or trade name that is offensive.

Learning Aids . . . and the Law

Each chapter contains a popular feature to further integrate law and ethics with the other “silos” of business. The “. . . and the Law” feature puts law and ethics in the context of economics, human resources, public policy, strategy, finance, and other areas to illustrate the ways knowledge of the where and how for the fit of law and eth- ics can help make better managers and better decisions. For example, Chapter 20’s “HR and the Law” discusses the dangers and conflicts office romances produce and how managers can deal with those issues. Chapter 1 includes a discussion of the FIFA corruption scandal how the issues were investigated and the problems involved in an NGO. Chapter 8’s “Strategy and the Law” takes a look at what corporations charged with a crime should do and the options for pleas available with the Justice Department. Chapter 14’s “Social Responsibility and the Law” discusses the possible anticompetitive effects of organizations such as Common Code for the Coffee Community and the Bioplastic Feedstock Alliance. These features apply the principles from business disciplines to understand more fully the depth and breadth of management issues.

Case Headlines

Every court case has a case headline that summarizes what issues are involved in the case. Chapter 7 has a new case on the actions of the Russian tax authorities involving Yukos, an international oil company, and the resulting impact in the mar- ket and has this title, “When Putin Affects the Value of Oil Stock.” In Chapter 8, a new case on criminal intent, whether the owner of a salvage yard was aware of his contamination of water, has this intriguing case title, “Mordechay’s Sump Pump and Mens Rea. In Chapter 6, the case Hornbeck Offshore Services, L.L.C. et al. v Salazar deals with an issue of whether agency action was arbitrary and capricious in issu- ing a moratorium on offshore drilling, and the case title is “Drilling Down to the Facts Supporting a Rule.” The vivid one-line description and colorful facts of the case, a common thread throughout the case choices in the text, help students inter- nalize the rules and lessons about not destroying evidence for a potential lawsuit.

Preface xix

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Chapter Openings and the “Consider. . . “ Feature

Chapters begin with an opening problem, titled “Consider. . .”, which presents a legal dilemma relevant to the chapter’s discussion and similar to those business managers need to handle. These are revisited and answered in the body of the chapter. For example, Chapter 6 has a new chapter opening “Consider. . . “on a proposed regulation on the use of cell phones on airplanes and then walks that issue through the full regulatory process. In addition to this Consider problem opening, each chapter also has quotes, data, humor, or insights to pique reader interest about the chapter topics.

Chapter Summary

Each chapter concludes with a summary that reinforces the major concepts of the chapter. Each summary is constructed around the key questions introduced at the start of the chapter and key terms presented throughout the chapter.

Business Strategy Applications

Each chapter has a business strategy connection designed to help students understand where law and ethics fit in developing effective business strat- egies. For example, in Chapter 13 there is a new business strategy on the problems with highway guard rails and the litigation brought about by a competitor who reported changes in the guard rail design that had not been cleared with the federal government. Chapter 5 has a strategy feature that dis- cusses who gives money in politics, how much, and why. Chapter 8’s strategy feature discusses the components of an effective compliance program. The Chapter 12 strategy deals with how restaurants are coping with no-shows in their reservations and their contract rights when someone makes a reserva- tion but never shows up.

Organization and Features: A Structure to Guide Students to Reasoning and Analysis The classic features have been updated and strengthened. The organization has been retained to continue to meet student needs in the classroom.


The four parts in the book serve to organize the materials around four basic areas: (1) understanding the legal environment, (2) understanding the regulatory envi- ronment, (3) dealing with sales, contracts and competition, and (4) management and governance. Every chapter integrates international and ethical topics.

Part 1 In four chapters, Part 1 offers an introduction to law, an introduction to business ethics and the judicial system, and a discussion of litigation and alternative dispute resolution. Part 1 provides students with a foundation in law and ethics as well as legal and ethical reasoning, necessary for the areas of law in the chapters that follow. By being brief (four chapters), Part 1 offers instructors an early and logical break for exams.

xx Preface

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Part 2 In six chapters, Part 2 covers the regulatory environment of business, including the following topics: constitutional law, administrative and international law, busi- ness crimes and business torts, and environmental regulation. At the completion of Parts 1 and 2, students have a grasp of the legal system, ethical boundaries, and the laws that affect business operational decisions.

Part 3 The five chapters in Part 3 present students with the legal and ethical issues sur- rounding contracts, sales, and competition. Part 3 includes the following topics: contract formation and performance (including coverage of consumer issues); product liability; intellectual property; trade restraints; and business competition and antitrust. From the negotiation of price to the collection of accounts, this seg- ment of the book covers all aspects of selling business products and services. This section is structured so that the contracts discussion precedes the complexities of property and competition.

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