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21e S T A N D A R D V O L U M E

ANDERSON’S BUSINESS LAW

And The Legal Environment

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21e S T A N D A R D V O L U M E

ANDERSON’S BUSINESS LAW

And The Legal Environment

DAVID P. TWOMEY Professor of Law

Carroll School of Management Boston College

Member of the Massachusetts and Florida Bars

MARIANNE MOODY JENNINGS Professor of Legal and Ethical Studies

W.P. Carey School of Business Arizona State University

Member of the Arizona Bar

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Anderson’s Business Law and The Legal Environment, 21e David P. Twomey, Marianne Moody Jennings

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

understanding of the legal environment of business is

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Legal Environment, helps students make the connection to what they are reading, what

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

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Maximizing student success, the new Make the Connection section found at the end of each chapter begins with a revised and more thorough chapter summary recapping key chapter topics. New 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 off er students additional opportunities for students to connect legal concepts to real-world issues. And the CPA Questions provide excellent review for the CPA Exam.

In addition to textbook material, the Student Study Guide also integrates the Make the Connection methodology, including Chapter Outlines and questions related to Learning Outcomes.

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.

NEW! End-of-chapter material has been thoroughly revised and expanded! New “Make the Connection” sections help students better understand — and connect — the relationship between legal concepts and how these concepts apply to real-life situations.

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brief contents

Preface xxix Acknowledgments xxxvi About the Authors xxxix

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 39 4 The Constitution as the Foundation of the Legal

Environment 66 5 Government Regulation of Competition and

Prices 87 6 Administrative Agencies 104 7 The Legal Environment of International Trade 126 8 Crimes 155 9 Torts 187

10 Intellectual Property Rights and the Internet 211 11 Cyberlaw 242

PART 2 CONTRACTS 265 12 Nature and Classes of Contracts: Contracting on

the Internet 267 13 Formation of Contracts: Offer and Acceptance 284 14 Capacity and Genuine Assent 307 15 Consideration 331 16 Legality and Public Policy 347 17 Writing, Electronic Forms, and Interpretation of

Contracts 367 18 Third Persons and Contracts 392 19 Discharge of Contracts 410 20 Breach of Contract and Remedies 433

PART 3 SALES AND LEASES OF GOODS 455 21 Personal Property and Bailments 457 22 Legal Aspects of Supply Chain Management 479 23 Nature and Form of Sales 503 24 Title and Risk of Loss 531

25 Product Liability: Warranties and Torts 555 26 Obligations and Performance 580 27 Remedies for Breach of Sales Contracts 598

PART 4 NEGOTIABLE INSTRUMENTS 619 28 Kinds of Instruments, Parties, and

Negotiability 621 29 Transfers of Negotiable Instruments and

Warranties of Parties 641 30 Liability of the Parties Under Negotiable

Instruments 665 31 Checks and Funds Transfers 686

PART 5 DEBTOR-CREDITOR RELATIONSHIPS 715 32 Nature of the Debtor-Creditor Relationship 717 33 Consumer Protection 736 34 Secured Transactions in Personal Property 763 35 Bankruptcy 793 36 Insurance 821

PART 6 AGENCY AND EMPLOYMENT 847 37 Agency 849 38 Third Persons in Agency 874 39 Regulation of Employment 896 40 Equal Employment Opportunity Law 934

APPENDICES

1 How to Find the Law A–1 2 The Constitution of the United States A–4 3 Uniform Commercial Code A–14

GLOSSARY G–1

CASE INDEX CI –1

SUBJECT INDEX SI –1

xi

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contents

Preface xxix Acknowledgments xxxvi About the Authors xxxix

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 C. Uniform State Laws 9 D. Classifications of Law 9 SPORTS & ENTERTAINMENT LAW 10

LAW FLIX 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 21 B. Court Procedure 22 4. Participants in the Court System 22 5. Which Law Applies—Conflicts of Law 23 6. Initial Steps in a Lawsuit 23 7. The Trial 25 ETHICS & THE LAW 27

THINKING THINGS THROUGH 27

8. Posttrial Procedures 28

C. Alternative Dispute Resolution 28 9. Arbitration 29 10. Mediation 30 11. MedArb 30 12. Reference To a Third Person 31 13. Association Tribunals 31 14. Summary Jury Trial 31 15. Rent-A-Judge 31 E-COMMERCE & CYBERLAW 32

16. Minitrial 32 17. Judicial Triage 32 18. Contract Provisions 33 19. Disposition of Complaints and

Ombudsmen 33 LAW FLIX 33

CHAPTER 3 BUSINESS ETHICS, SOCIAL FORCES, AND THE LAW 39

A. What is Business Ethics? 40 1. The Law as the Standard for Business Ethics 40 2. The Notion of Universal Standards for Business

Ethics 41 3. The Standard of Situational Business Ethics or Moral

Relativism 41 THINKING THINGS THROUGH 42

4. The Business Stakeholder Standard of Behavior 42 ETHICS & THE LAW 44

B. Why is Business Ethics Important? 44 5. The Importance of Trust 44 6. Business Ethics and Financial Performance 45 ETHICS & THE LAW 46

7. The Importance of A Good Reputation 46 8. Business Ethics and Business Regulation: Public

Policy, Law, and Ethics 46 ETHICS & THE LAW 48

C. How to Recognize and Resolve Ethical Dilemmas 51

9. Categories of Ethical Behavior 51 ETHICS & THE LAW 52

SPORTS & ENTERTAINMENT LAW 53

E-COMMERCE & CYBERLAW 55

xiii

10. Resolving Ethical Dilemmas 55 ETHICS & THE LAW 57

LAW FLIX 58

CHAPTER 4 THE CONSTITUTION AS THE FOUNDATION OF THE LEGAL ENVIRONMENT 66

A. The U.S. Constitution and the Federal System 67 1. What a Constitution is 67 2. The Branches of Government 67 B. The U.S. Constitution and the States 67 3. Delegated and Shared Powers 68 4. Other Powers 68 5. Federal Supremacy 69 CASE SUMMARY 69

C. Interpreting and Amending the Constitution 70 6. Conflicting Theories 70 7. Amending the Constitution 71 8. The Living Constitution 71 D. Federal Powers 72 9. The Power to Regulate Commerce 72 CASE SUMMARY 73, 74

10. The Financial Powers 75 CASE SUMMARY 76

E. Constitutional Limitations on Government 76 11. Due Process 76 12. Equal Protection of the Law 77 E-COMMERCE & CYBERLAW 77

13. Privileges and Immunities 78 14. Protection of the Person 78 15. The Bill of Rights and Businesses as Persons 79 CASE SUMMARY 80

THINKING THINGS THROUGH 80

LAW FLIX 81

CHAPTER 5 GOVERNMENT REGULATION OF COMPETITION AND PRICES 87

A. Power to Regulate Business 88 1. Regulation, Free Enterprise, and Deregulation 88 2. Regulation of Production, Distribution, and

Financing 88 3. Regulation of Unfair Competition 89 B. Regulation of Markets and Competition 89 4. Regulation of Prices 89 CASE SUMMARY 90, 91

5. Prevention of Monopolies and Combinations 92 ETHICS & THE LAW 93

CASE SUMMARY 94

SPORTS & ENTERTAINMENT LAW 95

E-COMMERCE & CYBERLAW 96

C. Power to Protect Business 97 6. Remedies for Anticompetitive Behavior 97 LAW FLIX 98

CHAPTER 6 ADMINISTRATIVE AGENCIES 104

A. Nature of the Administrative Agency 105 1. Purpose of Administrative Agencies 105 2. Uniqueness of Administrative Agencies 105 3. Open Operation of Administrative Agencies 106 B. Legislative Power of the Agency 107 4. Agency’s Regulations as Law 107 5. Agency Adoption of Regulations 108 ETHICS & THE LAW 109

CASE SUMMARY 110, 111

E-COMMERCE & CYBERLAW 112

C. Executive Power of the Agency 112 6. Enforcement or Execution of the Law 112 7. Constitutional Limitations on Administrative

Investigation 112 D. Judicial Power of the Agency 114 8. The Agency as a Specialized Court 114 9. Punishment and Enforcement Powers

of Agencies 116 10. Exhaustion of Administrative Remedies 116 11. Appeal from Administrative Action and Finality

of Administrative Determination 116 CASE SUMMARY 118, 119

12. Liability of the Agency 120 LAW FLIX 120

CHAPTER 7 THE LEGAL ENVIRONMENT OF INTERNATIONAL TRADE 126

A. General Principles 127 1. The Legal Background 127 2. International Trade Organizations, Conferences,

and Treaties 129 CASE SUMMARY 131

3. Forms of Business Organizations 132 CASE SUMMARY 134

B. Governmental Regulation 134 4. Export Regulations 134 5. Protection of Intellectual Property Rights 136

xiv Contents

CASE SUMMARY 137

6. Antitrust 137 7. Securities and Tax Fraud Regulation in an

International Environment 140 CASE SUMMARY 141, 142

8. Barriers to Trade 142 CASE SUMMARY 143

9. Relief Mechanisms for Economic Injury Caused by Foreign Trade 143

CASE SUMMARY 144

10. Expropriation 146 11. The Foreign Corrupt Practices Act 146 ETHICS & THE LAW 147

CASE SUMMARY 148

LAW FLIX 148

CHAPTER 8 CRIMES 155

A. General Principles 156 1. Nature and Classification of Crimes 156 2. Basis of Criminal Liability 156 CASE SUMMARY 157, 158

3. Responsibility for Criminal Acts 156 THINKING THINGS THROUGH 162

4. Indemnification of Crime Victims 162 B. White-Collar Crimes 163 5. Conspiracies 163 6. Crimes Related to Production, Competition,

and Marketing 164 7. Money Laundering 164 8. Racketeering 165 9. Bribery 166 10. Commercial Bribery 166 11. Extortion and Blackmail 166 12. Corrupt Influence 166 ETHICS & THE LAW 167

13. Counterfeiting 167 14. Forgery 168 15. Perjury 168 16. False Claims and Pretenses 168 17. Bad Checks 169 18. Credit Card Crimes 169 19. Embezzlement 170 20. Obstruction of Justice: Sarbanes-Oxley 170 21. Corporate Fraud: Sarbanes-Oxley 171 SPORTS & ENTERTAINMENT LAW 171

22. The Common Law Crimes 172 C. Criminal Law and the Computer 173

23. What is a Computer Crime? 173 24. The Computer as Victim 173 25. Unauthorized Use of Computers 174 26. Computer Raiding 174 27. Diverted Delivery by Computer 174 E-COMMERCE & CYBERLAW 175

28. Economic Espionage by Computer 175 29. Electronic Fund Transfer Crimes 175 ETHICS & THE LAW 176

30. Circumventing Copyright Protection Devices Via Computer 176

31. Spamming 177 D. Criminal Procedure Rights for Businesses 177 32. Fourth Amendment Rights for Businesses 177 CASE SUMMARY 178

33. Fifth Amendment Self-Incrimination Rights for Businesses 179

CASE SUMMARY 179

34. Due Process Rights for Businesses 180 CASE SUMMARY 180

LAW FLIX 181

CHAPTER 9 TORTS 187

A. General Principles 188 1. What is a Tort? 188 2. Tort and Crime Distinguished 188 3. Types of Torts 189 B. Intentional Torts 189 4. Assault 189 5. Battery 190 CASE SUMMARY 190

6. False Imprisonment 190 CASE SUMMARY 191

7. Intentional Infliction of Emotional Distress 192 8. Invasion of Privacy 192 CASE SUMMARY 193

9. Defamation 193 CASE SUMMARY 194, 195

10. Product Disparagement 196 11. Wrongful Interference with Contracts 196 12. Trespass 196 C. Negligence 197 13. Elements of Negligence 197 CASE SUMMARY 199

14. Defenses to Negligence 200 CASE SUMMARY 200

SPORTS & ENTERTAINMENT LAW 202

Contents xv

D. Strict Liability 203 THINKING THINGS THROUGH 203

15. What is Strict Liability? 204 16. Imposing Strict Liability 204 LAW FLIX 205

CHAPTER 10 INTELLECTUAL PROPERTY RIGHTS AND THE INTERNET 211

A. Trademarks and Service Marks 212 1. Introduction 212 2. International Registration 213 3. Registrable Marks 213 CASE SUMMARY 214

4. Remedies for Improper Use of Marks 215 CASE SUMMARY 215

5. Abandonment of Exclusive Right to Mark 216 6. Trade Dress Protection 216 7. Limited Lanham Act Protection of Product

Design 217 8. Prevention of Dilution of Famous Marks 218 9. Internet Domain Names and Trademark

Rights 218 E-COMMERCE & CYBERLAW 219

B. Copyrights 220 10. Duration of Copyright 221 11. Copyright Notice 221 12. What is Copyrightable? 221 13. Copyright Ownership and the Internet 222 14. Rights of Copyright Holders 222 15. Limitation on Exclusive Character

of Copyright 223 CASE SUMMARY 223

16. Secondary Liability for Infringement 224 ETHICS & THE LAW 224

17. Digital Millennium Copyright Act 225 C. Patents 225 18. Types, Duration, and Notice 225 19. Patentability 226 CASE SUMMARY 227

20. Patentable Business Methods 227 CASE SUMMARY 228

21. Infringement 229 CASE SUMMARY 229

D. Secret Business Information 230 22. Trade Secrets 230 23. Loss of Protection 231 24. Defensive Measures 231 25. Criminal Sanctions 231

E. Protection of Computer Software and Mask Works 232 26. Copyright Protection of Computer Programs 232 27. Patent Protection of Programs 233 28. Trade Secrets 233 29. Restrictive Licensing 233 30. Semiconductor Chip Protection 233 LAW FLIX 235

CHAPTER 11 CYBERLAW 242

A. Introduction to Cyberlaw 243 1. What is Cyberlaw? 243 2. What are the Issues in Cyberlaw? 243 B. Tort Issues in Cyberspace 244 3. Employer/Employee Privacy Issues in Cyberlaw 244 CASE SUMMARY 247

4. Web User Information and Privacy 247 E-COMMERCE & CYBERLAW 248

CASE SUMMARY 249

5. Appropriation in Cyberspace 250 6. Defamation in Cyberspace 250 ETHICS & THE LAW 251

C. Contract Issues in Cyberspace 252 7. Formation of Contracts in Cyberspace 252 8. Misrepresentation and Fraud in Cyberspace 252 D. Intellectual Property Issues in Cyberspace 253 E. Criminal Law Issues in Cyberspace 254 9. Nature and Types of Cyberspace Crimes 254 10. Criminal Procedure and Rights in Cyberspace 255 THINKING THINGS THROUGH 256

CASE SUMMARY 256

F. Constitutional Restraints and Protections in Cyberspace 257

11. First Amendment Rights in Cyberspace 257 12. Commerce Clause Issues in Cyberspace 258 13. Due Process Issues in Cyberspace 258 G. Securities Law Issues in Cyberspace 258 LAW FLIX 259

PART 2

CONTRACTS

CHAPTER 12 NATURE AND CLASSES OF CONTRACTS: CONTRACTING ON THE INTERNET 267

A. Nature of Contracts 268 1. Definition of a Contract 268

xvi Contents

2. Elements of a Contract 268 3. Subject Matter of Contracts 268 4. Parties to a Contract 268 5. How a Contract Arises 269 6. Intent to Make a Binding Agreement 269 7. Freedom of Contract 270 B. Classes of Contracts 270 8. Formal and Informal Contracts 270 9. Express and Implied Contracts 270 10. Valid and Voidable Contracts and Void

Agreements 271 11. Executed and Executory Contracts 272 12. Bilateral and Unilateral Contracts 272 CASE SUMMARY 273

13. Quasi Contracts 273 CASE SUMMARY 275, 276

THINKING THINGS THROUGH 277

C. Contracting on the Internet 278 LAW FLIX 279

CHAPTER 13 FORMATION OF CONTRACTS: OFFER AND ACCEPTANCE 284

A. Requirements of an Offer 285 1. Contractual Intention 285 2. Definiteness 286 CASE SUMMARY 286, 287

THINKING THINGS THROUGH 288

CASE SUMMARY 290

3. Communication of Offer to Offeree 291 B. Termination of Offer 291 4. Revocation of Offer by Offeror 292 5. Counteroffer by Offeree 293 6. Rejection of Offer by Offeree 293 7. Lapse of Time 293 8. Death or Disability of Either Party 294 9. Subsequent Illegality 294 C. Acceptance of Offer 294 10. What Constitutes an Acceptance? 294 11. Privilege of Offeree 294 12. Effect of Acceptance 295 13. Nature of Acceptance 295 14. Who May Accept? 295 CASE SUMMARY 296

15. Manner and Time of Acceptance 296 E-COMMERCE & CYBERLAW 297

16. Communication of Acceptance 298 CASE SUMMARY 298, 299

17. Auction Sales 300 LAW FLIX 301

CHAPTER 14 CAPACITY AND GENUINE ASSENT 307

A. Contractual Capacity 308 1. Contractual Capacity Defined 308 CASE SUMMARY 308

2. Minors 309 CASE SUMMARY 311

3. Mentally Incompetent Persons 312 CASE SUMMARY 313

4. Intoxicated Persons 313 ETHICS & THE LAW 314

B. Mistake 314 5. Unilateral Mistake 314 CASE SUMMARY 315

6. Mutual Mistake 315 7. Mistake in the Transcription or Printing of the

Contract: Reformation 316 C. Deception 317 8. Intentional Misrepresentation 317 9. Fraud 317 CASE SUMMARY 318

10. Negligent Misrepresentation 320 11. Nondisclosure 320 CASE SUMMARY 320

D. Pressure 322 12. Undue Influence 322 CASE SUMMARY 322

13. Duress 323 LAW FLIX 324

CHAPTER 15 CONSIDERATION 331

A. General Principles 332 1. Consideration Defined and Explained 332 2. Gifts 332 CASE SUMMARY 333

3. Adequacy of Consideration 333 CASE SUMMARY 333, 334

4. Forbearance as Consideration 334 5. Illusory Promises 335 B. Special Situations 336 6. Preexisting Legal Obligation 336 CASE SUMMARY 337

7. Past Consideration 338 8. Moral Obligation 339

Contents xvii

ETHICS & THE LAW 339

C. Exceptions to the Laws of Consideration 340 9. Exceptions to Consideration 340 CASE SUMMARY 341

LAW FLIX 342

CHAPTER 16 LEGALITY AND PUBLIC POLICY 347

A. General Principles 348 1. Effect of Illegality 348 CASE SUMMARY 348

2. Exceptions to Effect of Illegality 349 3. Partial Illegality 349 4. Crimes and Civil Wrongs 349 5. Good Faith and Fairness 350 6. Unconscionable Clauses 350 CASE SUMMARY 352

B. Agreements Affecting Public Welfare 352 7. Agreements Contrary to Public Policy 353 CASE SUMMARY 353

8. Gambling, Wagers, and Lotteries 353 C. Regulation of Business 354 9. Effect of Violation 354 10. Statutory Regulation of Contracts 354 11. Licensed Callings or Dealings 354 CASE SUMMARY 355

12. Contracts in Restraint of Trade 355 13. Agreements Not to Compete 355 THINKING THINGS THROUGH 357

ETHICS & THE LAW 358

14. Usurious Agreements 358 THINKING THINGS THROUGH 359

CASE SUMMARY 359

LAW FLIX 360

CHAPTER 17 WRITING, ELECTRONIC FORMS, AND INTERPRETATION OF CONTRACTS 367

A. Statute of Frauds 368 1. Validity of Oral Contracts 368 2. Contracts that Must be Evidenced by a Writing 369 CASE SUMMARY 372

3. Note or Memorandum 374 E-COMMERCE & CYBERLAW 375

4. Effect of Noncompliance 377 CASE SUMMARY 377

B. Parol Evidence Rule 378 5. Exclusion of Parol Evidence 378

CASE SUMMARY 378

6. When the Parol Evidence Rule Does Not Apply 379 CASE SUMMARY 380

C. Rules of Construction and Interpretation 381 7. Intention of the Parties 381 CASE SUMMARY 382

8. Whole Contract 382 9. Contradictory and Ambiguous Terms 382 CASE SUMMARY 383

10. Implied Terms 384 11. Conduct and Custom 385 12. Avoidance of Hardship 385 CASE SUMMARY 386

LAW FLIX 386

CHAPTER 18 THIRD PERSONS AND CONTRACTS 392

A. Third-Party Beneficiary Contracts 393 1. Definition 393 CASE SUMMARY 394

2. Modification or Termination of Intended Third-Party Beneficiary Contract 394

3. Limitations on Intended Third-Party Beneficiary 395

4. Incidental Beneficiaries 395 CASE SUMMARY 396

B. Assignments 396 5. Definitions 396 6. Form of Assignment 397 7. Notice of Assignment 397 CASE SUMMARY 398

8. Assignment of Right to Money 399 9. Nonassignable Rights 399 10. Rights of Assignee 401 11. Continuing Liability of Assignor 401 12. Liability of Assignee 402 CASE SUMMARY 402

13. Warranties of Assignor 403 14. Delegation of Duties 403 CASE SUMMARY 404

LAW FLIX 405

CHAPTER 19 DISCHARGE OF CONTRACTS 410

A. Conditions Relating to Performance 411 1. Classifications of Conditions 411 CASE SUMMARY 411

SPORTS & ENTERTAINMENT LAW 412

xviii Contents

B. Discharge by Performance 413 2. Normal Discharge of Contracts 413 3. Nature of Performance 413 CASE SUMMARY 414

4. Time of Performance 414 5. Adequacy of Performance 415 CASE SUMMARY 417

C. Discharge by Action of Parties 418 6. Discharge by Unilateral Action 418 7. Discharge by Agreement 419 CASE SUMMARY 420

D. Discharge by External Causes 420 8. Discharge by Impossibility 420 9. Developing Doctrines 422 CASE SUMMARY 422, 423, 424

10. Temporary Impossibility 425 11. Discharge by Operation of Law 426 LAW FLIX 427

CHAPTER 20 BREACH OF CONTRACT AND REMEDIES 433

A. What Constitutes a Breach of Contract? 434 1. Definition of Breach 434 2. Anticipatory Breach 434 CASE SUMMARY 434

SPORTS & ENTERTAINMENT LAW 435

B. Waiver of Breach 436 3. Cure of Breach by Waiver 436 4. Existence and Scope of Waiver 436 CASE SUMMARY 436

5. Reservation of Rights 438 C. Remedies for Breach of Contract 438 6. Remedies Upon Anticipatory Repudiation 438 7. Remedies in General and the Measure of

Damages 438 8. Monetary Damages 440 CASE SUMMARY 440

9. Rescission 442 10. Action for Specific Performance 442 11. Action for an Injunction 443 12. Reformation of Contract by a Court 443 CASE SUMMARY 444

D. Contract Provisions Affecting Remedies and Damages 444

13. Limitation of Remedies 444 14. Liquidated Damages 444 CASE SUMMARY 445, 446

15. Attorneys’ Fees 446 16. Limitation of Liability Clauses 447 LAW FLIX 448

PART 3

SALES AND LEASES OF GOODS

CHAPTER 21 PERSONAL PROPERTY AND BAILMENTS 457

A. Personal Property 458 1. Personal Property in Context 458 2. Title to Personal Property 458 3. Gifts 458 CASE SUMMARY 460, 461, 462

4. Finding of Lost Property 463 5. Occupation of Personal Property 464 CASE SUMMARY 464, 465

6. Escheat 466 CASE SUMMARY 466

7. Multiple Ownership of Personal Property 466 CASE SUMMARY 467

8. Community Property 468 B. Bailments 469 9. Definition 469 10. Elements of Bailment 469 11. Nature of the Parties’ Interests 470 12. Classification of Ordinary Bailments 470 13. Renting of Space Distinguished 471 14. Duties and Rights of the Bailee 471 15. Breach of Duty of Care: Burden of Proof 472 CASE SUMMARY 472

16. Liability for Defects in Bailed Property 473 17. Contract Modification of Liability 473 LAW FLIX 474

CHAPTER 22 LEGAL ASPECTS OF SUPPLY CHAIN MANAGEMENT 479

A. Warehouses 480 1. Definitions 480 2. Rights and Duties of Warehouses 480 3. Warehouse Receipts 481 4. Rights of Holders of Warehouse Receipts 481 5. Field Warehousing 483

Contents xix

6. Limitation of Liability of Warehouses 485 B. Common Carriers 485 7. Definitions 485 CASE SUMMARY 486

8. Bills of Lading 487 CASE SUMMARY 488

9. Rights of Common Carrier 488 10. Duties of Common Carrier 488 11. Liabilities of Common Carrier 489 CASE SUMMARY 489, 490, 491

C. Factors and Consignments 493 12. Definitions 493 13. Effect of Factor Transaction 493 D. Hotelkeepers 494 14. Definitions 494 15. Duration of Guest Relationship 494 16. Hotelkeeper’s Liability for Guest’s Property 495 CASE SUMMARY 495

17. Hotelkeeper’s Lien 496 18. Boarders or Lodgers 496 LAW FLIX 496

CHAPTER 23 NATURE AND FORM OF SALES 503

A. Nature of Sales 504 1. Subject Matter of Sales 504 2. Sale Distinguished from Other

Transactions 505 CASE SUMMARY 506

3. Formation of Sales Contracts 507 ETHICS & THE LAW 508

4. Terms in the Formed Contract 512 5. Bulk Transfers 515 B. Form of Sales Contract 515 6. Amount 515 7. Nature of the Writing Required 515 CASE SUMMARY 516, 517

8. Effect of Noncompliance 518 9. Exceptions to Requirement of a Writing 518 10. Noncode Requirements 519 THINKING THINGS THROUGH 520

11. Bill of Sale 520 C. Uniform Law for International Sales 520 12. Scope of the CISG 521 D. Leases of Goods 521 13. Types of Leases 521 14. Form of Lease Contract 522 15. Warranties 522

16. Default 522 E-COMMERCE & CYBERLAW 523

LAW FLIX 523

CHAPTER 24 TITLE AND RISK OF LOSS 531

A. Identifying Types of Potential Problems and Transactions 532

1. Damage to Goods 532 2. Creditors’ Claims 532 3. Insurance 533 B. Determining Rights: Identification of Goods 533 4. Existing Goods 533 5. Future Goods 533 6. Fungible Goods 534 7. Effect of Identification 534 C. Determining Rights: Passage of Title 534 8. Passage of Title Using Documents of Title 535 9. Passage of Title in Nonshipment Contracts 535 10. Passage of Title in Warehouse Arrangements 535 11. Passage of Title in Bailments and Other Forms of

Possession 536 CASE SUMMARY 537

THINKING THINGS THROUGH 538

ETHICS & THE LAW 538

12. Delivery and Shipment Terms 539 13. Passage of Title in Shipment Contracts 540 D. Determining Rights: Risk of Loss 541 CASE SUMMARY 542

E-COMMERCE & CYBERLAW 543

14. Risk of Loss in Nonshipment Contracts 542 15. Risk of Loss in Shipment Contracts 542 16. Damage to or Destruction of Goods 543 17. Effect of Seller’s Breach in Risk of Loss 544 CASE SUMMARY 545

E. Determining Rights: Special Situations 545 18. Returnable Goods Transactions 545 19. Consignments and Factors 547 20. Self-Service Stores 547 21. Auction Sales 548 LAW FLIX 548

CHAPTER 25 PRODUCT LIABILITY: WARRANTIES AND TORTS 555

A. General Principles 556 1. Theories of Liability 556

xx Contents

2. Nature of Harm 556 3. Who is Liable in Product Liability 557 B. Express Warranties 558 4. Definition of Express Warranty 558 5. Form of Express Warranty 558 6. Seller’s Opinion or Statement of Value 559 7. Warranty of Conformity to Description, Sample,

or Model 559 8. Federal Regulation of Express Warranties 559 9. Effect of Breach of Express Warranty 560 CASE SUMMARY 561

C. Implied Warranties 561 10. Definition of Implied Warranty 562 11. Implied Warranties of Sellers 562 CASE SUMMARY 563

12. Additional Implied Warranties of Merchant Sellers 563

E-COMMERCE & CYBERLAW 564

13. Implied Warranties in Particular Sales 564 CASE SUMMARY 565

14. Necessity of Defect 566 THINKING THINGS THROUGH 566

15. Warranties in the International Sale of Goods 566 D. Disclaimer of Warranties 567 16. Validity of Disclaimer 567 17. Particular Language for Disclaimers 567 18. Exclusion of Warranties by Examination

of Goods 568 19. Postsale Disclaimer 568 E. Other Theories of Product Liability 568 20. Negligence 568 21. Fraud 568 22. Strict Tort Liability 568 23. Cumulative Theories of Liability 570 CASE SUMMARY 570

ETHICS & THE LAW 571

LAW FLIX 571

CHAPTER 26 OBLIGATIONS AND PERFORMANCE 580

A. General Principles 581 1. Obligation of Good Faith 581 2. Time Requirements of Obligations 581 3. Repudiation of the Contract 582 4. Adequate Assurance of Performance 582 B. Duties of the Parties 583 5. Seller’s Duty to Deliver 583 CASE SUMMARY 583

6. Buyer’s Duty Upon Receipt of Goods 584 7. Buyer’s Duty to Accept Goods 585 CASE SUMMARY 586

E-COMMERCE & CYBERLAW 587

CASE SUMMARY 588

8. Buyer’s Duty to Pay 588 THINKING THINGS THROUGH 589

ETHICS & THE LAW 589

9. When Duties are Excused 590 CASE SUMMARY 590

CHAPTER 27 REMEDIES FOR BREACH OF SALES CONTRACTS 598

A. Statute of Limitations 599 1. Time Limits for Suits Under the UCC 599 2. Time Limits for Other Suits 599 B. Remedies of the Seller 599 3. Seller’s Lien 600 4. Seller’s Remedy of Stopping Shipment 600 5. Resale by Seller 600 6. Cancellation by Seller 600 7. Seller’s Action for Damages Under the Market

Price Formula 601 8. Seller’s Action for Lost Profits 601 9. Other Types of Damages 602 10. Seller’s Action for the Purchase Price 602 11. Seller’s Nonsale Remedies 602 THINKING THINGS THROUGH 602

C. Remedies of the Buyer 603 12. Rejection of Improper Tender 603 13. Revocation of Acceptance 603 14. Buyer’s Action for Damages for Nondelivery—

Market Price Recovery 604 15. Buyer’s Action for Damages for Nondelivery—

Cover Price Recovery 604 16. Other Types of Damages 604 17. Action for Breach of Warranty 604 CASE SUMMARY 605

18. Cancellation by Buyer 605 CASE SUMMARY 606

19. Buyer’s Resale of Goods 606 20. Action for Specific Performance 607 21. Nonsale Remedies of the Buyer 608 D. Contract Provisions on Remedies 608 22. Limitation of Damages 608 CASE SUMMARY 608

23. Down Payments and Deposits 609

Contents xxi

24. Limitation of Remedies 609 25. Waiver of Defenses 610 THINKING THINGS THROUGH 610

ETHICS & THE LAW 610

26. Preservation of Defenses 611 E. Remedies in the International Sale of Goods 611 27. Remedies of the Seller 611 E-COMMERCE & CYBERLAW 611

28. Remedies of the Buyer 612

PART 4

NEGOTIABLE INSTRUMENTS

CHAPTER 28 KINDS OF INSTRUMENTS, PARTIES, AND NEGOTIABILITY 621

A. Types of Negotiable Instruments and Parties 622

1. Definition 622 2. Kinds of Instruments 623 3. Parties To Instruments 624 B. Negotiability 625 4. Definition of Negotiability 625 E-COMMERCE & CYBERLAW 626

5. Requirements of Negotiability 626 CASE SUMMARY 628

THINKING THINGS THROUGH 629

CASE SUMMARY 631

ETHICS & THE LAW 632

CASE SUMMARY 632

6. Factors Not Affecting Negotiability 633 CASE SUMMARY 633

7. Ambiguous Language 634 8. Statute of Limitations 634

CHAPTER 29 TRANSFERS OF NEGOTIABLE INSTRUMENTS AND WARRANTIES OF PARTIES 641

A. Transfer of Negotiable Instruments 642 1. Effect of Transfer 642 2. Definition of Negotiation 642 3. How Negotiation Occurs: The Order or Bearer

Character of an Instrument 642 B. How Negotiation Occurs: Bearer Instruments 643

CASE SUMMARY 643

C. How Negotiation Occurs: Order Instruments 644 CASE SUMMARY 644

4. Blank Indorsement 645 E-COMMERCE & CYBERLAW 645

5. Special Indorsement 646 6. Qualified Indorsement 646 7. Restrictive Indorsement 647 CASE SUMMARY 648

8. Correction of Name by Indorsement 648 9. Bank Indorsement 649 10. Multiple Payees and Indorsements 649 11. Agent or Officer Indorsement 650 CASE SUMMARY 650

THINKING THINGS THROUGH 651

ETHICS & THE LAW 651

12. Missing Indorsement 652 D. Problems in Negotiation of Instruments 652 13. Forged and Unauthorized Indorsements 652 14. Quasi Forgeries: The Impostor Rule 652 15. Effect of Incapacity or Misconduct

on Negotiation 654 16. Lost Instruments 654 CASE SUMMARY 654

E. Warranties in Negotiation 655 17. Warranties of Unqualified Indorser 655 18. Warranties of Other Parties 656

CHAPTER 30 LIABILITY OF THE PARTIES UNDER NEGOTIABLE INSTRUMENTS 665

A. Parties to Negotiable Instruments: Rights and Liabilities 666

1. Types of Parties 666 2. Ordinary Holders and Assignees 666 3. The Holder-in-Due-Course Protections 667 CASE SUMMARY 669, 670

ETHICS & THE LAW 672

B. Defenses to Payment of a Negotiable Instrument 672 4. Classification of Defenses 672 5. Defenses Against Assignee or Ordinary Holder 672 6. Limited Defenses not Available Against a Holder

in Due Course 672 7. Universal Defenses Available Against All

Holders 673 8. Denial of Holder-in-Due-Course Protection 675 THINKING THINGS THROUGH 677

xxii Contents

C. Liability Issues: How Payment Rights Arise and Defenses are Used 677

9. The Roles of Parties and Liability 677 10. Attaching Liability of the Primary Parties:

Presentment 678 11. Dishonor and Notice of Dishonor 678 E-COMMERCE & CYBERLAW 679

CHAPTER 31 CHECKS AND FUNDS TRANSFERS 686

A. Checks 687 1. Nature of a Check 687 E-COMMERCE & CYBERLAW 689

2. Certified Checks 690 3. Presentment for Obtaining Payment on a Check 690 THINKING THINGS THROUGH 691

4. Dishonor of a Check 692 5. The Customer-Bank Relationship 693 6. Stopping Payment of a Check 694 CASE SUMMARY 694

7. Wrongful Dishonor of a Check 695 8. Agency Status of Collecting Bank 695 9. Bank’s Duty of Care 696 B. Liability of a Bank 696 10. Premature Payment of a Postdated Check 696 11. Payment Over a Stop Payment Order 697 12. Payment on a Forged Signature of Drawer 697 CASE SUMMARY 697

13. Payment on a Forged or Missing Indorsement 698

14. Alteration of a Check 698 15. Unauthorized Collection of a Check 699 CASE SUMMARY 699

ETHICS & THE LAW 700

16. Time Limitations 700 CASE SUMMARY 702

C. Consumer Funds Transfers 702 17. Electronic Funds Transfer Act 703 18. Types of Electronic Funds Transfer Systems 703 19. Consumer Liability 704 D. Funds Transfers 704 20. What Law Governs? 704 21. Characteristics of Funds Transfers 704 22. Pattern of Funds Transfers 704 23. Scope of UCC Article 4A 705 24. Definitions 705 25. Manner of Transmitting Payment Order 706

26. Regulation by Agreement and Funds Transfer System Rules 706

27. Reimbursement of the Bank 706 28. Error in Funds Transfer 706 29. Liability for Loss 707 LAW FLIX 707

PART 5

DEBTOR-CREDITOR RELATIONSHIPS

CHAPTER 32 NATURE OF THE DEBTOR-CREDITOR RELATIONSHIP 717

A. Creation of the Credit Relationship 718 B. Suretyship and Guaranty 718 1. Definitions 718 2. Indemnity Contract Distinguished 719 3. Creation of the Relationship 719 4. Rights of Sureties 719 CASE SUMMARY 720

5. Defenses of Sureties 721 THINKING THINGS THROUGH 721

CASE SUMMARY 723

C. Letters of Credit 724 6. Definition 724 ETHICS & THE LAW 726

7. Parties 727 CASE SUMMARY 727

8. Duration 728 9. Form 728 10. Duty of Issuer 728 11. Reimbursement of Issuer 728

CHAPTER 33 CONSUMER PROTECTION 736

A. General Principles 737 1. Expansion of Consumer Protection 737 2. Who is a Consumer? 738 3. Who is Liable Under Consumer Protection

Statutes? 738 4. When is There Liability Under Consumer Protection

Statutes? 738 CASE SUMMARY 739

5. What Remedies do Consumers Have? 740 6. What are the Civil and Criminal Penalties Under

Consumer Protection Statutes? 741

Contents xxiii

B. Areas of Consumer Protection 742 7. Advertising 742 CASE SUMMARY 743

SPORTS & ENTERTAINMENT LAW 744

8. Labeling 744 THINKING THINGS THROUGH 744

E-COMMERCE & CYBERLAW 745

9. Selling Methods 745 10. The Consumer Contract 746 11. Credit Disclosures 748 E-COMMERCE & CYBERLAW 749

12. Credit Cards 749 13. Gift Cards 751 14. Payments 751 15. Preservation of Consumer Defenses 751 16. Product Safety 752 17. Credit, Collection, and Billing Methods 752 CASE SUMMARY 753

ETHICS & THE LAW 754

18. Protection of Credit Standing and Reputation 755 CASE SUMMARY 756

19. Other Consumer Protections 757

CHAPTER 34 SECURED TRANSACTIONS IN PERSONAL PROPERTY 763

A. Creation of Secured Transactions 764 1. Definitions 764 2. Creation of a Security Interest 765 3. Purchase Money Security Interest 766 4. The Nature and Classification of Collateral 766 CASE SUMMARY 768

B. Perfection of Secured Transactions 769 5. Perfection by Creditor’s Possession 769 6. Perfection for Consumer Goods 769 7. Perfection for Health Care Insurance Receivables 769 8. Automatic Perfection 770 9. Temporary Perfection 770 10. Perfection by Control 770 11. Perfection for Motor Vehicles 770 12. Perfection by Filing a Financing Statement 771 CASE SUMMARY 773

E-COMMERCE & CYBERLAW 774

13. Loss of Perfection 775 C. Rights of Parties Before Default 775 14. Statement of Account 775 15. Termination Statements 776

16. Correction Statements 776 D. Priorities 776 17. Unsecured Party Versus Unsecured Party 776 18. Secured Party Versus Unsecured Party 776 19. Secured Party Versus Secured Party 777 20. Perfected Secured Party Versus Secured Party 777 CASE SUMMARY 777

21. Perfected Secured Party Versus Perfected Secured Party 778

22. Secured Party Versus Buyer of Collateral from Debtor 779

CASE SUMMARY 779

E. Rights of Parties After Default 781 23. Creditor’s Possession and Disposition of

Collateral 782 CASE SUMMARY 782

24. Creditor’s Retention of Collateral 782 THINKING THINGS THROUGH 783

ETHICS & THE LAW 784

25. Debtor’s Right of Redemption 784 26. Disposition of Collateral 784 27. Postdisposition Accounting 784 LAW FLIX 785

CHAPTER 35 BANKRUPTCY 793

A. Bankruptcy Law 794 1. The Federal Law 794 2. Types of Bankruptcy Proceedings 794 ETHICS & THE LAW 795

B. How Bankruptcy is Declared 796 3. Declaration of Voluntary Bankruptcy 796 ETHICS & THE LAW 797

4. Declaration of Involuntary Bankruptcy 798 CASE SUMMARY 798

SPORTS & ENTERTAINMENT LAW 799

THINKING THINGS THROUGH 800

5. Automatic Stay 801 6. If the Creditors are Wrong: Rights of Debtor

in an Involuntary Bankruptcy 802 C. Administration of the Bankruptcy Estate 802 7. The Order of Relief 802 8. List of Creditors 802 9. Trustee in Bankruptcy 802 10. The Bankrupt’s Estate 803 11. Voidable Preferences 804 12. Proof of Claim 805

xxiv Contents

13. Priority of Claims 805 D. Debtor’s Duties and Exemptions 807 14. Debtor’s Duties 807 15. Debtor’s Exemptions 807 16. Debtor’s Protection Against

Discrimination 808 E. Discharge in Bankruptcy 808 17. Denial of Discharge 808 ETHICS & THE LAW 809

F. Reorganization Plans Under Chapter 810 18. Contents of the Plan 811 CASE SUMMARY 811

19. Confirmation of the Plan 812 G. Payment Plans Under Chapter 13 812 20. Contents of the Plan 812 21. Confirmation of the Plan 812 22. Discharge of the Debtor 812

CHAPTER 36 INSURANCE 821

A. The Insurance Contract 822 1. The Parties 822 2. Insurable Interest 822 CASE SUMMARY 823, 824

3. The Contract 824 4. Antilapse and Cancellation Statutes and

Provisions 825 E-COMMERCE & CYBERLAW 826

5. Modification of Contract 826 6. Interpretation of Contract 826 7. Burden of Proof 827 8. Insurer Bad Faith 827 9. Time Limitations on Insured 828 10. Subrogation of Insurer 829 ETHICS & THE LAW 830

B. Kinds of Insurance 830 11. Business Liability Insurance 831 CASE SUMMARY 831

12. Marine Insurance 832 CASE SUMMARY 832

13. Fire and Homeowners Insurance 833 CASE SUMMARY 834

14. Automobile Insurance 835 CASE SUMMARY 836

15. Life Insurance 836 CASE SUMMARY 838

LAW FLIX 839

PART 6

AGENCY AND EMPLOYMENT

CHAPTER 37 AGENCY 849

A. Nature of the Agency Relationship 850 1. Definitions and Distinctions 850 CASE SUMMARY 852

2. Classification of Agents 852 3. Agency Coupled with an Interest 853 B. Creating the Agency 853 4. Authorization by Appointment 853 5. Authorization by Conduct 853 CASE SUMMARY 854

6. Agency by Ratification 854 7. Proving the Agency Relationship 856 C. Agent’s Authority 856 8. Scope of Agent’s Authority 856 CASE SUMMARY 857

9. Effect of Proper Exercise of Authority 857 10. Duty to Ascertain Extent of Agent’s Authority 857 11. Limitations on Agent’s Authority 858 CASE SUMMARY 859

D. Duties and Liabilities of Principal and Agent 859 12. Duties and Liabilities of Agent during Agency 859 CASE SUMMARY 860

13. Duties and Liabilities of Agent after Termination of Agency 862

14. Duties and Liabilities of Principal to Agent 862 E. Termination of Agency 863 15. Termination by Act of Parties 863 16. Termination by Operation of Law 863 CASE SUMMARY 863

17. Disability of the Principal Under the UDPAA 864 CASE SUMMARY 864

18. Termination of Agency Coupled with an Interest 865 19. Protection of Agent from Termination

of Authority 865 20. Effect of Termination of Authority 865

CHAPTER 38 THIRD PERSONS IN AGENCY 874

A. Liability of Agent to Third Person 875 1. Action of Authorized Agent of Disclosed

Principal 875 2. Unauthorized Action 875

Contents xxv

CASE SUMMARY 875

3. Disclosure of Principal 876 CASE SUMMARY 877

4. Assumption of Liability 877 5. Execution of Contract 878 CASE SUMMARY 878

6. Torts and Crimes 879 CASE SUMMARY 879

B. Liability of Principal to Third Person 879 ETHICS & THE LAW 880

7. Agent’s Contracts 880 8. Payment to Agent 881 CASE SUMMARY 881

9. Agent’s Statements 882 10. Agent’s Knowledge 882 C. Liability of Principal for Torts and Crimes of Agent 882 11. Vicarious Liability for Torts and Crimes 882 CASE SUMMARY 884

12. Negligent Hiring and Retention of Employees 885 CASE SUMMARY 886

13. Negligent Supervision and Training 886 14. Agent’s Crimes 887 15. Owner’s Liability for Acts of an Independent

Contractor 887 CASE SUMMARY 888

16. Enforcement of Claim by Third Person 889 D. Transactions with Sales Personnel 889 17. Soliciting and Contracting Agents 889

CHAPTER 39 REGULATION OF EMPLOYMENT 896

A. The Employment Relationship 897 1. Characteristics of Relationship 897 2. Creation of Employment Relationship 897 3. Duration and Termination of Employment

Contract 898 CASE SUMMARY 898, 900

4. WhistleBlower Protection Under the Sarbanes-Oxley Act 901

5. Duties of the Employee 902 6. Rights of the Employee 903 CASE SUMMARY 903

B. Labor Relations Laws 905 7. The National Labor Relations Act 905 8. National Labor Relations Board 907 9. Election Conduct 907 10. Union Activity on Private Property 907

CASE SUMMARY 908

11. Firing Employees for Union Activity 908 CASE SUMMARY 909

12. Duty of Employer to Bargain Collectively 910 CASE SUMMARY 910

13. Right to Work 910 14. Strike and Picketing Activity 911 CASE SUMMARY 911

15. Regulation of Internal Union Affairs 912 C. Pension Plans and Federal Regulation 912 16. Erisa 912 CASE SUMMARY 913

D. Unemployment Benefits, Family Leaves, and Social Security 915

17. Unemployment Compensation 915 CASE SUMMARY 915

18. Family and Medical Leaves of Absence 916 19. Leaves for Military Service Under Userra 917 20. Social Security 918 E. Employees’ Health and Safety 918 21. Standards 919 22. Employer Duties 919 23. Enforcement 919 THINKING THINGS THROUGH 920

24. State “Right-To-Know” Legislation 921 F. Compensation for Employees’ Injuries 921 25. Common Law Status of Employer 921 26. Statutory Changes 921 CASE SUMMARY 922

G. Employee Privacy 923 27. Source of Privacy Rights 923 28. Monitoring Employee Telephone

Conversations 923 29. E-Mail Monitoring 924 30. Property Searches 924 31. Drug and Alcohol Testing 925 H. Employer-Related Immigration Laws 926 32. Employer Liability 926 33. Employer Verification and Special Hiring

Programs 926

CHAPTER 40 EQUAL EMPLOYMENT OPPORTUNITY LAW 934

A. Title VII of the Civil Rights Act of 1964, as Amended 935

1. Theories of Discrimination 935

xxvi Contents

CASE SUMMARY 936

2. The Equal Employment Opportunity Commission 937

B. Protected Classes and Exceptions 938 3. Race and Color 938 4. Religion 938 5. Sex 940 6. Sexual Harassment 941 7. Protection Against Retaliation 944 CASE SUMMARY 944

8. National Origin 945 CASE SUMMARY 945

9. Title VII Exceptions 945 CASE SUMMARY 946

10. Affirmative Action and Reverse Discrimination 947

C. Other Equal Employment Opportunity (EEO) Laws 948

11. Equal Pay 948 12. Age Discrimination 949 CASE SUMMARY 949

13. Discrimination against Persons with Disabilities 950

D. Extraterritorial Employment 953 LAW FLIX 954

APPENDICES 1. How to Find the Law A–1 2. The Constitution of the United States A–4 3. Uniform Commercial Code A–14

GLOSSARY G–1

CASE INDEX CI –1

SUBJECT INDEX SI –1

Contents xxvii

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preface

Regardless of the day of the week, newspapers and magazines constantly carry stories about law and business together. Galleon Hedge Fund has been accused of being at the center of an insider trading ring that had netted 14 arrests by late 2009. BP, the international energy company, paid a $50 million fine to the EPA for a burst pipeline and the damage to Alaska, an accident that followed years of warning about corrosion in BP pipes near Prudhoe Bay, Alaska. Fannie Mae, the federal mortgage company, was forced in 2005 to remove its CEO and make an $11 billion restatement on its financials after auditors uncovered earnings manipulation. By 2008, Fannie Mae, reeling from heavy losses in the mortgage-backed debt instrument market, had to be taken over by the federal government in an effort to avoid financial market collapses. And all of these events are years after we saw the financial collapses of Enron, WorldCom, HealthSouth, and the passage of extensive legal and governance reforms.

Why, we even lost Martha Stewart to a five-month prison sentence for her lies to prosecutors about how she managed to sell her shares of ImClone stock just before the company announced some problems with its new key drug. Martha Stewart has done much for our homes and cooking, but her case can teach us much about obstruction of justice, regulatory consent decrees, jury voir dire and selection, appellate courts, and reversible error. Martha Stewart’s legal difficulties presented a richness of legal issues each step of the way. What happened when she sold those shares? Did she indeed violate the law? Was it insider trading? What are the shareholders’ rights? What about the creditors?

And there are so many other companies, here in the United States and around the world. Did Lehman Brothers, Bear Stearns, and Merrill Lynch company officers 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 major criminal, legal, and ethical difficulties since 2007, 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. Microsoft

Corporation learned the intricacies of federal antitrust laws while its charges of monopolization were tried in federal court. Wall Street bond analysts learned that internal e-mails are discoverable and admissible as evidence. And when those e-mails to co-workers and friends are inconsistent with public statements those analysts made about companies and the value of their stocks, there is more than embarrassment. The analysts’ companies learned through nearly one billion dollars in fines that lesson about e-mails and the law.

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

xxix

principles and application through interaction with examples and by working our way through dilemmas, issues, and problems. This 21st edition of Anderson’s Business Law and the Legal Environment enhances the learning process while still providing a detailed and rigorous case approach.

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 Your 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 featured at the end of each chapter – along with the Summary and new Key Terms list – in an 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. Michael Phelps lost endorsement contracts after a YouTube posting surfaced in which he was shown to be using a bong. Can contracts be terminated because of public behavior? Who won’t learn what obstruction of justice is if they learn it through Martha Stewart’s conduct? Was Heath Ledger’s will, one that was drawn up and executed before he had a child, still valid? Does his child inherit from his estate or does the will control? And what about baseball fans who lease space on rooftops to watch baseball games in stadiums across the way? And all without paying? 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.

LawFlix At the end of most chapters you can find a reference to a Hollywood film, one that could be used to study and understand the concepts presented in the chapter. For example, what better film for understanding insurance law than Billy Wilder’s Double Indemnity? And you can find a clip on insurable interest in the Digital Video Library (www.cengage.com/blaw/dvl). Or you can assign the students the enviable task of watching the movie and determining the insurance law issues. Or, for contract formation you can watch another clip from Midnight Run and witness the great Robert DeNiro playing a bounty hunter who is trying to negotiate a binding contract with a bailbondsman. There is offer, counteroffer, statute of frauds, and good fun all in a short clip to get the students involved and thinking.

xxx Preface

www.cengage.com/blaw/dvl
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.

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.

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, moneylaundering, labor, employment, and ERISA)

Preface xxxi

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 its 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. This edition still contains the questions for the topics that will be eliminated because of the transition period between content adoption and exam adaptation. 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.

Innovative Chapters 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 spammers beware, for the law has caught up with you. The chapter has been shortened because so much of the cyberlaw material is now mainstream in other topic areas. But, 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 2009 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 11 on Cyberlaw explains how e-commerce affects contracts, sales, copyrights, privacy, and even torts. Chapter 8, the criminal law chapter, includes great detail on the new and evolving computer crimes. Chapter 10, the intellectual

xxxii Preface

property chapter, features a section on Protection of Computer Software and Mask Works, covering copyright and patent protection of computer programs, restrictive licensing, semiconductor chip protection, and more.

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 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 8, students can walk through an example that finds an employee simply following orders of an employer when that employee has concerns about the conduct. When does criminal liability apply to employees? Employers? To companies? This example walks the students through criminal culpability of business.

Major Regulatory Reforms: USA Patriot Act, Sarbanes-Oxley, and the ADA Amendments Act Businesses continue to be dramatically affected not only by laws at the federal level, but also by complex and intricate new federal regulatory schemes. Sarbanes-Oxley affects everything from corporate governance to the Federal Sentencing Guidelines to accountants’ liability. The USA Patriot Act has an impact on searches, funds transfers, and issues of citizenship for employers. These dramatic pieces of legislation enjoy coverage throughout this edition. The ADA Amendments Act of 2008 effectively overturned two U.S. Supreme Court decisions, restoring the original congressional intent of providing broad protection for individuals who face discrimination on the basis of disability.

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 Lil Wayne using one of the Rolling Stones’ songs to make a rap song, AIG executives and their bonuses following the company’s government bail-out, and Wi-Fi piggybacking.

Weekly Updates Users of this text have the opportunity to catch up on new cases, business events, and changing laws and regulations with the weekly updates prepared by co-author Marianne Jennings. These updates carry information on law and business practice, which is often just days old and allows students to stay up-to-date. Instructors can

Preface xxxiii

use the cases, examples, and questions from the weekly updates for quizzes, class discussion, or exam questions. The weekly updates provide a never-ending resource for new and enhancing materials for lectures, discussions, assignments, and group work. Available to instructors and students, the weekly updates on the law are at www.cengage.com/blaw/twomey.

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.cengage.com/blaw/twomey.

STUDENT STUDY GUIDE (ISBN: 0324829787). Students may purchase a study guide that includes chapter outlines, general rules, study hints, and review and application exercises. Solutions to all study guide case problems are also included.

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.cengage.com/blaw/twomey 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 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

xxxiv Preface

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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.cengage.com/blaw/twomey).

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

BUSINESS LAW DIGITAL VIDEO LIBRARY. This dynamic online video library features more than 60 video clips that spark class discussion and clarify core legal principles. The library, recently updated with new videos, is organized into five series including classic business and modern business and e-commerce scenarios, straightforward lecture-style explanations of concepts for student review, and clips from many popular films. Access for students is free when bundled with a new textbook or can be purchased for an additional charge. For more information about the Digital Video Library, visit: www.cengage.com/blaw/dvl.

CENGAGE LEARNING CUSTOM SOLUTIONS. Whether you need print, digital, or hybrid course materials, Cengage Learning Custom Solutions can help you create your perfect learning solution. Draw from Cengage Learning’s extensive library of texts and collections, add or create your own original work, and create customized media and technology to match your learning and course objectives. Our editorial team will work with you through each step, allowing you to concentrate on the most important thing—your students. Learn more about all our services at www.cengage.com/custom.

CENGAGE LEARNING’S GLOBAL ECONOMIC WATCH. Make the current global economic downturn a teachable moment with Cengage Learning’s Global Economic Watch— a powerful online portal that brings these pivotal current events into the classroom. The Watch includes:

● A content-rich blog of breaking news, expert analysis and commentary—updated multiple times daily—plus links to many other blogs

● A powerful real-time database of hundreds of relevant and vetted journal, newspaper, and periodical articles, videos, and podcasts—updated four times every day

● A thorough overview and timeline of events leading up to the global economic crisis

● Discussion and testing content, PowerPoint slides on key topics, sample syllabi, and other teaching resources

● Social Networking tools: Instructor and student forums encourage students

For more information on how you can access this resource, please visit www.cengage.com/thewatch.

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acknowledgments

The development and revision of a textbook represents teamwork in its highest form. We thank the innumerable instructors, students, attorneys, and managers who have added to the quality of this textbook through its many editions. In particular, we thank the following reviewers who provided their honest and valuable commentary to this text:

Robert A. Arnold Thomas More College

Weldon M. Blake, JD Bethune-Cookman University

Bob Blinderman WTAMU and Amarillo College

Norman Bradshaw Alvin Community College

Thomas L. Brooks, Jr. Purdue University

Myra Bruegger Southeastern Community College

Barry Bunn Valencia Community College

Jarrod Y. Burch, JD Saint Leo University and American Intercontinental University

Deborah Carter Coahoma Community College

Shoshana Dennis San Diego City College

Andrea Foster John Tyler Community College

Leslie L. Francis CUNY-York College

Kimberly Goudy Central Ohio Technical College

Patrick J. Griffin, CPA, LL.M, JD Lewis University

Francis A. Hatstat, MBA, JD Bellevue College

David Lewis Jordan Emmanuel College

Virginia Edgerton Law, JD Saint Leo University

Paolo Longo, Jr. Valencia Community College

Linda McCarley Bevill State Community College

Derek Mosley Meridian Community College

Michael Murphy Langston University - Tulsa

Jeffrey D. Penley, JD Catawba Valley Community College

Simone I. Rosenberg Valencia Community College – East Campus

Joseph A. Spadaro Naugatuck Valley Community College

Darrell H. Thompson Mountain View College

Cathy Trecek Iowa Western Community College

Thomas K. Ware Johnson State College

Lisa Wilhite Bevill State Community College

xxxvi

We also thank the instructors who have reviewed previous editions of this text:

Dean Alexander Miami-Dade Community College

Robert A. Arnold Thomas More College

John T. Ballantine University of Colorado

Todd Barnet Pace University

Marie F. Benjamin Valencia Community College

Kenneth V. Bevan Valencia Community College

Robert Boeke Delta College

Greg Cermigiano Widener University

David A. Clough Naugatuck Valley Community College

Anne Cohen University of Massachusetts

Thomas S. Collins Loras College

Lawrence J. Danks Camden County College

Darrell Dies Illinois State University

De Vee E. Dykstra University of South Dakota

Adam Epstein University of Tennessee

Phillip Evans Kutztown University of Pennsylvania

Deborah Lynn Bundy Ferry Marquette University

Darrel Ford University of Central Oklahoma

Edward J. Gac University of Colorado

Teresa R. Gillespie Northwest University

David Grigg Pfeiffer University

Ronald Groeber Ball State University

Heidi Helgren Delta College

Florence Elliot Howard Stephen F. Austin University

Richard Hurley Francis Marion University

Lawrence A. Joel Bergen Community College

Michael A. Katz Delaware State University

Thomas E. Knothe Viterbo University

Ruth Kraft Audrey Cohen College

Claire La Roche Longwood College

Susan D. Looney Mohave Community College

Roy J. Millender, Jr. Westmont College

Steven Murray Community College of Rhode Island

Ann Olazábal University of Miami

Neal Orkin Drexel University

Ronald Picker St. Mary’s of the Woods College

Francis Polk Ocean County College

Robert Prentice University of Texas at Austin

Linda Reppert Marymount University

Richard J. Riley Samford University

Acknowledgments xxxvii

Gary Sambol Rutgers University School of Business

Samuel L. Schrager University of Connecticut

Lester Smith Eastern New Mexico University

Michael Sugameli Oakland University

Cathy L. Taylor Park University and Webster University

Mike Teel Samford University

Bob Vicars Bluefield State University

James Welch Kentucky Wesleyan College

We extend our thanks to our families for their support and patience as we work our long hours to ensure that each edition is better than the last.

xxxviii Acknowledgments

about the authors

Professor David Twomey has been a member of the Business Law Department in the Carroll School of Management at Boston College since 1968. As department chair for over a decade, and four term chairman of the school’s Education Policy Committee, he served as a spokesperson for a strong legal and ethical component in both the undergraduate and graduate curriculum. The author of some thirty two editions of textbooks on labor, employment and business law topics, the 14th edition of his Labor & Employment Law book was published in 2009. His articles have appeared in journals such as Best’s Review, The American Business Law Journal, The Massachusetts Law Quarterly, The Florida Bar Journal and The Business Law Review. His most recent work entitled “The Employee Free Choice Act: Congress, Where Do We Go From Here?” was published as the lead article in the Labor Law Journal (2009).

He has served as arbitrator in over two thousand labor-management disputes throughout the country. His service includes appointments by Presidents Ronald Reagan, George H. W. Bush, William J. Clinton, and George W. Bush to eight Presidential Emergency Boards, whose recommendations served as a basis for the resolution of major disputes in the rail and airline industries.

After service in the U.S. Marine Corps, he graduated from Boston College, earned his M.B.A. at the University of Massachusetts, Amherst and a J.D. degree at Boston College Law School. He is a member of the Massachusetts and Florida Bars; and a member of the National Academy of Arbitrators.

Professor Marianne M. Jennings has been a member of the Department of Manage- ment in the W.P. Carey School of Business at Arizona State University and a professor of legal and ethical studies in business there since 1977. She served as director of the Joan and David Lincoln Center for Applied Ethics from 1995-1999. She has done consulting work for law firms, businesses and professional groups including AES, AICPA, Anderson Windows, Boeing, Dial Corporation, Edward Jones, Mattel, Motorola, CFA Institute, Southern California Edison, the Institute of Internal Auditors, AIMR, DuPont, Blue Cross Blue Shield, Motorola, Hy-Vee Foods, IBM, Bell Helicopter, Amgen, Raytheon, and VIAD. The sixth edition of her textbook, Case Studies in Business Ethics, and the eighth edition of her textbook, Business: lts Legal, Ethical and Global Environment, were released in January 2008. The ninth edition of her book, Real Estate Law, will be published in 2010. Her book, A Business Tale: A Story of Ethics, Choices, Success, and a Very Large Rabbit, a fable about business ethics, was chosen by Library Journal in 2004 as its business book of the year. Her book on long-term success, Building a Business Through Good Times and Bad: Lessons from Fifteen Companies, Each With a Century of Dividends, was published in October 2002 and has been used by Booz Allen Hamilton for its work on business longevity. Her most recent book, The Seven Signs of Ethical Collapse, was published by St. Martin’s Press in July 2006.

Her work has appeared in the Wall Street Journal, the Chicago Tribune, the New York Times, Washington Post, and the Reader’s Digest. She has been a commentator on business issues on All Things Considered for National Public Radio.

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Part1 THE LEGAL AND

SOCIAL ENVIRONMENT OF BUSINESS

1 The Nature and Sources of Law

2 The Court System and Dispute Resolution

3 Business Ethics, Social Forces, and the Law

4 The Constitution as the Foundation of the Legal Environment

5 Government Regulation of Competition and Prices

6 Administrative Agencies

7 The Legal Environment of International Trade

8 Crimes

9 Torts

10 Intellectual Property Rights and the Internet

11 Cyberlaw

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Chapter 1

THE NATURE AND SOURCES OF LAW

A. Nature of Law and Legal Rights

1. LEGAL RIGHTS

2. INDIVIDUAL RIGHTS

3. THE RIGHT OF PRIVACY

4. PRIVACY AND TECHNOLOGY

B. Sources of Law

C. Uniform State Laws

D. Classifications of Law

W hy have law? If you have ever been stuck in a traffic jam or jostledin a crowd leaving a stadium, you have observed the need for orderto keep those involved moving in an efficient and safe manner. The interruptions and damages from Internet viruses demonstrate the need for rules

and order in this era of new technology. When our interactions are not orderly,

whether at our concerts or through our e-mail, all of us and our rights are affected. The

order or pattern of rules that society uses to govern the conduct of individuals and

their relationships is called law. Law keeps society running smoothly and efficiently.

A. NATURE OF LAW AND LEGAL RIGHTS Law consists of the body of principles that govern conduct and that can be enforced in courts or by administrative agencies. The law could also be described as a collection or bundle of rights.

1. Legal Rights A right is a legal capacity to require another person to perform or refrain from performing an act. Our rights flow from the U.S. Constitution, state constitutions, federal and state statutes, and ordinances at the local levels, including cities, counties, and boroughs. Within these sources of rights are also duties. A duty is an obligation of law imposed on a person to perform or refrain from performing a certain act.

Duties and rights coexist. No right exists in one person without a corresponding duty resting on some other person or persons. For example, if the terms of a lease provide that the premises will remain in a condition of good repair so that the tenant can live there comfortably, the landlord has a corresponding duty to provide a dwelling that has hot and cold running water.

2. Individual Rights The U.S. Constitution gives individuals certain rights. Those rights include the right to freedom of speech, the right to due process or the right to have a hearing before any freedom is taken away, and the right to vote. There are also duties that accompany individual rights, such as the duty to speak in a way that does not cause harm to others. For example, individuals are free to express their opinions about the government or its officials, but they would not be permitted to yell “Fire!” in a crowded theater and cause unnecessary harm to others. The rights given in the U.S. Constitution are rights that cannot be taken away or violated by any statutes, ordinances, or court decisions. These rights provide a framework for the structure of government and other laws.

3. The Right of Privacy One very important individual legal right is the right of privacy, which has two components. The first is the right to be secure against unreasonable searches and seizures by the government. The Fourth Amendment of the U.S. Constitution

law– the order or pattern of rules that society establishes to govern the conduct of individuals and the relationships among them.

right– legal capacity to require another person to perform or refrain from an action.

duty–an obligation of law imposed on a person to perform or refrain from performing a certain act.

4 Part 1 The Legal and Social Environment of Business

guarantees this portion of the right of privacy. A police officer, for example, may not search your home unless the officer has a reasonable suspicion (which is generally established through a warrant) that your home contains evidence of a crime, such as illegal drugs. If your home or business is searched unlawfully, any items obtained during that unlawful search could be excluded as evidence in a criminal trial because of the Fourth Amendment’s exclusionary rule. For Example, in the murder trial of O.J. Simpson, Judge Lance Ito excluded some of the evidence the police had obtained from inside Mr. Simpson’s Ford Bronco, which was parked on the street outside his home. Judge Ito ruled that the officers should have first obtained a warrant for the locked vehicle, which was not going to be taken anywhere because Mr. Simpson was out of town at that time.

When Warrants Are Involved, No Brief Photographs

FACTS: In the early morning hours of April 16, 1992, a special team of Deputy U.S. Marshals and police officers executed warrants that had been issued against Dominic Wilson, who was wanted for robbery, theft, and assault and who had a “use caution” warning posted on law enforcement files and records. The team was accompanied by a reporter and a photographer from the Washington Post, who had been invited by the marshals to accompany them as

part of a Marshals Service ride-along policy. The officers, with media representatives in tow, entered the dwelling noted in the warrant at

6:45 A.M. The home they entered and that was on the arrest warrant actually belonged to Dominic’s parents, Charles and Geraldine Wilson. Charles and Geraldine were still in bed. When they heard the officers enter the home, Charles Wilson, dressed only in a pair of briefs, ran into the living room to investigate. He angrily cursed the officers. Geraldine Wilson then entered the living room to investigate, wearing only a nightgown. She observed her husband being restrained by the armed officers. Dominic Wilson was not in the house, and the officers left. However, the Washington Post photographer had already taken numerous pictures of the confrontation between the police and Charles Wilson. The Washington Post never published its photographs of the incident.

The Wilsons filed suit against the officers for invasion of their privacy and violation of their Fourth Amendment rights. The district court found that the officers could be held liable. The Court of Appeals reversed and found that the officers had immunity. The U.S. Supreme Court granted certiorari because of several conflicting circuit decisions on the issue of cameras and reporters being present during arrests and warrant executions.

DECISION: The Court held that although there were reasons for having the reporters and cameras present, such as public relations, safety for officers, and assistance, those reasons were not sufficient enough to disregard the Fourth Amendment rights of the homeowners. Citing “a man’s home is his castle,” the Court noted the longstanding history of protecting individuals in their homes. The Court held that having reporters and photographers along in the execution of a warrant is a violation of the Fourth Amendment rights of the parties being searched. Officers can be subject to some liability for their failure to honor privacy protections. [Wilson v Layne, 526 US 603 (1999)]1

1 Police officers who record the arrest of a DUI suspect have not violated the suspect’s privacy, State v Morris, 214 P 3d 883 (UT App 2009).

right of privacy– the right to be free from unreasonable intrusion by others.

Chapter 1 The Nature and Sources of Law 5

A second aspect of the right of privacy protects individuals against intrusions by others. Your private life is not subject to public scrutiny when you are a private citizen. This right is provided in many state constitutions and exists through interpretation at the federal level in the landmark case of Roe v Wade,2 in which the U.S. Supreme Court established a right of privacy that gives women the right to choose whether to have an abortion.

These two components of the right to privacy have many interpretations. These interpretations are often found in statutes that afford privacy rights with respect to certain types of conduct. For Example, a federal statute provides a right of privacy to bank customers that prevents their banks from giving out information about their accounts except to law enforcement agencies conducting investigations. Some laws protect the rights of students. For Example, the Family Educational Rights and Privacy Act of 1974 (FERPA, also known as the Buckley Amendment) prevents colleges and universities from disclosing students’ grades to third parties without the students’ permission. From your credit information to your Social Security number, you have great privacy protections.

4. Privacy and Technology Technology creates new situations that may require the application of new rules of law. Technology has changed the way we interact with each other, and new rules of law have developed to protect our rights. Today, business is conducted by computers, wire transfers of funds, e-mail, electronic data interchange (EDI) order

Googling Job Applicants

A recent survey shows a new component in the background searches performed by potential employers of job applicants:

● 61 percent of professional service firms, including accounting, consulting, engineering, and law firms, do Google searches on their job candidates.

● Fifty percent of professional services hired by employers to do background checks use Google.

One employer commented that a Google search is so simple that it would be irresponsible not to conduct

such a search. Experts tell college students to remember that what may seem to be something noncontroversial in your youth can later come back to haunt you when you begin your professional career. Their advice is to watch what you put in MySpace, Facebook, and all other Internet sites. Dis-

cuss privacy rights and whether there is any legal issue when information is posted voluntarily on the Internet. Is there an ethical issue with these types of searches?

Source: Sandhya Bathija , “Have a Profile on MySpace? Better Keep It Clean,” National Law Journal, June 4, 2007, 10.

2 410 US 113 (1973).

6 Part 1 The Legal and Social Environment of Business

placements, and the Internet. We still expect that our communication is private. However, technology also affords others the ability to eavesdrop on conversations and intercept electronic messages. The law has stepped in to reestablish that the right of privacy still exists even in these technologically nonprivate circumstances. Some laws now make it a crime and a breach of privacy to engage in such interceptions of communications.3 (See Chapter 11)

B. SOURCES OF LAW Several layers of law are enacted at different levels of government to provide the framework for business and personal rights and duties. At the base of this framework of laws is constitutional law. Constitutional law is the branch of law that is based on the constitution for a particular level of government. A constitution is a

Employers, E-mail, and Privacy

Scott Kennedy, a computer system admin- istrator for Qualcomm Corporation in San Diego, California, discovered that some- body had obtained unauthorized access (or “hacked into,” in popular parlance) the company’s computer network. Kennedy contacted the Federal Bureau of Investiga- tion (FBI). Working together, Kennedy and the FBI were able to trace the intrusion to a computer on the University of Wisconsin at Madison network. They contacted Jeffrey Savoy, the University of Wisconsin computer network investigator, who found evidence that someone using a computer on the university network was in fact hacking into the Qualcomm system and that the user had gained unauthorized access to the university’s system as well. Savoy traced the source of intrusion to a computer located in university housing, the room of Jerome Heckenkamp, a computer science graduate student at the university. Savoy knew that Heckenkamp had been terminated from his job at the university computer help desk two years earlier for similar unauthorized activity.

While Heckenkamp was online and logged into the university’s system, Savoy, along with detectives, went to Heckenkamp’s room. The door was ajar, and nobody was in the room. Savoy entered the room and disconnected the network cord that attached the computer

to the network. In order to be sure that the computer he had disconnected from the network was the computer that had gained unauthorized access to the university server, Savoy wanted to run some commands on the computer. Detectives located Heckenkamp, explained the situation, and asked for Heckenkamp’s password, which Heckenkamp voluntarily provided. Savoy then ran tests on the computer and copied the hard drive without a warrant. When Heckenkamp was charged with several federal computer crimes, he challenged the university’s access to his account and Savoy’s steps that night, including the copy of the hard drive, as a breach of his privacy. Was Heckenkamp correct? Was his privacy breached?