Business law cases and answers

Business Law Assignment

FIFTH EDITION

ESSENTIALS of BUSINESS LAW

Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States

Jeffrey F. Beatty Boston University

Susan S. Samuelson Boston UniversityPet

er P ea

rs o n /S to ck b yt e/ G et ty

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Essentials of Business Law, Fifth Edition Jeffrey F. Beatty, Susan S. Samuelson

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ISBN-13: 978-1-285-42700-3

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Printed in the United States of America 1 2 3 4 5 6 7 17 16 15 14 13

C o p y r i g h t 2 0 1 3 C e n g a g e L e a r n i n g . A l l R i g h t s R e s e r v e d . M a y n o t b e c o p i e d , s c a n n e d , o r d u p l i c a t e d , i n w h o l e o r i n p a r t . D u e t o e l e c t r o n i c r i g h t s , s o m e t h i r d p a r t y c o n t e n t m a y b e s u p p r e s s e d f r o m t h e e B o o k a n d / o r e C h a p t e r ( s ) . E d i t o r i a l r e v i e w h a s d e e m e d t h a t a n y s u p p r e s s e d c o n t e n t d o e s n o t m a t e r i a l l y a f f e c t t h e o v e r a l l l e a r n i n g e x p e r i e n c e . C e n g a g e L e a r n i n g r e s e r v e s t h e r i g h t t o r e m o v e a d d i t i o n a l c o n t e n t a t a n y t i m e i f s u b s e q u e n t r i g h t s r e s t r i c t i o n s r e q u i r e i t .

WCN: 02-200-206

CONTENTS: OVERV IEW

Preface xix

UNIT 1 The Legal Environment 1 1 Introduction to Law 2 2 Ethics and Corporate Social Responsibility 23 3 Dispute Resolution 51 4 Common Law, Statutory Law, and

Administrative Law 83 5 Constitutional Law 109 6 Torts and Product Liability 134 7 Crime 164 8 International Law 190

UNIT 2 Contracts 213 9 Introduction to Contracts 214 10 Agreement 234 11 Consideration 256 12 Legality 276 13 Capacity and Consent 295 14 Written Contracts 316 15 Third Parties 337 16 Performance and Discharge 356 17 Remedies 377 18 Practical Contracts 400

UNIT 3 Commercial Transactions 423 19 Introduction to Sales 424 20 Ownership, Risk, and Warranties 450

21 Performance and Remedies 477 22 Negotiable Instruments 501 23 Secured Transactions 528 24 Bankruptcy 562 25 Agency Law 587

UNIT 4 Employment, Business Organizations and Property 615 26 Employment and Labor Law 616 27 Employment Discrimination 644 28 Starting a Business: LLCs and

Other Options 673 29 Corporations 699 30 Government Regulation: Securities and

Antitrust 732 31 Consumer Protection 754 32 Cyberlaw 782 33 Intellectual Property 805 34 Real and Personal Property 832

Appendix A The Constitution of the United States A1

Appendix B Uniform Commercial Code (Selected Provisions) B1

Glossary G1

Table of Cases T1

Index I1

iii

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CONTENTS

Preface xix

UNIT 1 The Legal Environment 1

Chapter 1 Introduction to Law 2 1-1 The Role of Law in Society 3

1-1a Power 3 1-1b Importance 3 1-1c Fascination 3

1-2 Origins of Our Law 4 1-2a English Roots 4 Case Summary: The Oculist’s Case (1329) 5 1-2b Law in the United States 6

1-3 Sources of Contemporary Law 6 1-3a United States Constitution 7 1-3b Statutes 9 1-3c Common Law 9 1-3d Court Orders 10 1-3e Administrative Law 10 1-3f Treaties 10

1-4 Classifications 10 1-4a Criminal and Civil Law 10 1-4b Law and Morality 11

1-5 Jurisprudence 11 1-5a Legal Positivism 11 1-5b Natural Law 12 1-5c Legal Realism 12

1-6 Working with the Book’s Features 13 1-6a Analyzing a Case 13 Case Summary: Kuehn v. Pub Zone 13 1-6b Devil’s Advocate 15 1-6c Exam Strategy 16 1-6d You Be the Judge 16 You Be the Judge: Soldano v. O’Daniels 17

Chapter Conclusion 17 Exam Review 18 Multiple-Choice Questions 19 Essay Questions 20 Discussion Questions 21

Chapter 2 Ethics and Corporate Social Responsibility 23

2-1 Introduction 24 2-2 The Role of Business in Society 26

2-3 Why Be Ethical? 27 2-3a Society as a Whole Benefits from Ethical Behavior 27

2-3b People Feel Better When They Behave Ethically 27

2-3c Unethical Behavior Can Be Very Costly 28 2-4 Theories of Ethics 28

2-4a Utilitarian Ethics 29 2-4b Deontological Ethics 29 2-4c Rawlsian Justice 30 2-4d Front Page Test 30

2-5 Ethics Traps 31 2-5a Money 31 2-5b Rationalization 32 2-5c Conformity 33 2-5d Following Orders 33 2-5e Euphemisms 34 2-5f Lost in a Crowd 34 2-5g Blind Spots 35 2-5h Avoiding Ethics Traps 35

2-6 Lying: A Special Case 36 2-7 Applying the Principles 37

2-7a Personal Ethics in the Workplace 37 2-7b The Organization’s Responsibility to Society 38

2-7c The Organization’s Responsibility to Its Employees 39

2-7d An Organization’s Responsibility to Its Customers 40

2-7e Organization’s Responsibility to Overseas Contract Workers 41

2-8 When the Going Gets Tough 42 2-8a Loyalty 42 2-8b Exit 43 2-8c Voice 43

2-9 Corporate Social Responsibility (CSR) 43

Chapter Conclusion 44 Exam Review 44 Multiple-Choice Questions 46 Essay Questions 47 Discussion Questions 48

Chapter 3 Dispute Resolution 51 3-1 Three Fundamental Areas of Law 52

3-1a Litigation versus Alternative Dispute Resolution 52

v

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3-2 Court Systems 52 3-2a State Courts 52 Landmark Case: International Shoe Co. v. State of Washington 55

3-2b Federal Courts 56 3-3 Litigation 60

3-3a Pleadings 60 Case Summary: Stinton v. Robin’s Wood, Inc. 65 Case Summary: Jones v. Clinton 67

3-4 Trial 69 3-4a Adversary System 69 3-4b Right to Jury Trial 69 3-4c Voir Dire 69 Case Summary: Pereda v. Parajon 70 3-4d Opening Statements 71 3-4e Burden of Proof 71 3-4f Plaintiff ’s Case 71 3-4g Rules of Evidence 72 3-4h Motion for Directed Verdict 72 3-4i Defendant’s Case 73 3-4j Closing Arguments 73 3-4k Jury Instructions 73 3-4l Verdict 73 3-4m Motions after the Verdict 74

3-5 Appeals 74 3-5a Appeals Court Options 74

3-6 Alternative Dispute Resolution 75 3-6a Negotiation 75 3-6b Mediation 76 3-6c Arbitration 76

Chapter Conclusion 77 Exam Review 78 Multiple-Choice Questions 80 Essay Questions 81 Discussion Questions 82

Chapter 4 Common Law, Statutory Law, and Administrative Law 83

4-1 Common Law 84 4-1a Stare Decisis 84 4-1b Bystander Cases 84 Case Summary: Tarasoff v. Regents of the University of California 85

4-2 Statutory Law 87 4-2a Bills 87 4-2b Discrimination: Congress and the Courts 88 4-2c Debate 89 4-2d Statutory Interpretation 91 Landmark Case: Griggs v. Duke Power Co. 92

4-2e Changing Times 93 4-2f Voters’ Role 93 4-2g Congressional Override 93

4-3 Administrative Law 95 4-3a Background 95 4-3b Classification of Agencies 96

4-4 Power of Agencies 96 4-4a Rulemaking 96 4-4b Investigation 98 Landmark Case: United States v. Biswell 99 4-4c Adjudication 99

4-5 Limits on Agency Power 100 4-5a Statutory Control 100 4-5b Political Control 100 4-5c Judicial Review 100 Case Summary: Federal Communications Commission v. Fox Television Stations, Inc. 101

4-5d Informational Control and the Public 102

Chapter Conclusion 103 Exam Review 104 Multiple-Choice Questions 106 Essay Questions 107 Discussion Questions 108

Chapter 5 Constitutional Law 109 5-1 Government Power 110

5-1a One in a Million 110 5-2 Overview 110

5-2a Separation of Powers 111 5-2b Individual Rights 111

5-3 Power Granted 111 5-3a Congressional Power 111 5-3b Executive Power 115 5-3c Judicial Power 115 Case Summary: Kennedy v. Louisiana 116

5-4 Protected Rights 117 5-4a Incorporation 118 5-4b First Amendment: Free Speech 118 Case Summary: Texas v. Johnson 119 Case Summary: Citizens United v. Federal Election Commission 120

Case Summary: Salib v. City of Mesa 121 5-4c Fifth Amendment: Due Process and the Takings Clause 122

Case Summary: Kelo v. City of New London, Connecticut 125

5-4d Fourteenth Amendment: Equal Protection Clause 126

vi CONTENTS

Copyr igh t 2013 Cengage Lea rn ing . A l l R igh t s Rese rved . May no t be cop ied , s canned , o r dup l i ca t ed , i n who le o r i n pa r t . Due to e l ec t ron i c r i gh t s , some th i rd pa r ty con ten t may be suppre s sed f rom the eBook and /o r eChap te r ( s ) . Ed i to r i a l r ev i ew has deemed tha t any suppre s sed con ten t does no t ma te r i a l l y a ff ec t t he ove ra l l l e a rn ing expe r i ence . Cengage Lea rn ing r e se rves t he r i gh t t o r emove add i t i ona l con ten t a t any t ime i f subsequen t r i gh t s r e s t r i c t i ons r equ i r e i t .

Chapter Conclusion 129 Exam Review 129 Multiple-Choice Questions 131 Essay Questions 132 Discussion Questions 133

Chapter 6 Torts and Product Liability 134 6-1 Intentional Torts 136

6-1a Defamation 136 6-1b False Imprisonment 139 6-1c Intentional Infliction of Emotional Distress 139

Case Summary: Jane Doe and Nancy Roe v. Lynn Mills 140

6-1d Additional Intentional Torts 140 6-2 Damages 140

6-2a Compensatory Damages 140 6-2b Punitive Damages 142 Landmark Case: State Farm v. Campbell 143

6-3 Business Torts 144 6-3a Tortious Interference with Business Relations 144

6-3b Privacy and Publicity 145 6-4 Negligence 146

6-4a Duty of Due Care 146 Case Summary: Hernandez v. Arizona Board of Regents 147

6-4b Breach of Duty 149 6-4c Causation 149 6-4d Damages 151

6-5 Defenses 152 6-5a Contributory and Comparative Negligence 152

6-5b Assumption of the Risk 153 Case Summary: Truong v. Nguyen 154

6-6 Strict Liability 154 6-6a Ultrahazardous Activity 155 6-6b Product Liability 155

Chapter Conclusion 157 Exam Review 157 Multiple-Choice Questions 160 Essay Questions 161 Discussion Questions 162

Chapter 7 Crime 164 7-1 The Differences between a Civil and Criminal

Case 165 7-1a Prosecution 165

7-1b Burden of Proof 166 7-1c Right to a Jury 166 7-1d Felony/Misdemeanor 166

7-2 Criminal Procedure 166 7-2a Conduct Outlawed 166 7-2b State of Mind 167 7-2c Gathering Evidence: The Fourth Amendment 167

You Be the Judge: Ohio v. Smith 169 7-2d The Case Begins 171 Landmark Case: Miranda v. Arizona 172 7-2e Right to a Lawyer 173 7-2f After Arrest 173 Case Summary: Ewing v. California 174

7-3 Crimes that Harm Business 176 7-3a Larceny 176 7-3b Fraud 176 Case Summary: Skilling v. United States 177 7-3c Arson 179 7-3d Embezzlement 179

7-4 Crimes Committed by Business 179 Case Summary: Commonwealth v. Angelo Todesca Corp. 179

7-4a Selected Crimes Committed by Business 180

7-4b Punishing a Corporation 183

Chapter Conclusion 184 Exam Review 184 Multiple-Choice Questions 186 Essay Questions 187 Discussion Questions 188

Chapter 8 International Law 190 8-1 Trade Regulation: The Big Picture 191

8-1a Export Controls 191 8-1b Import Controls 192 You Be the Judge: Totes-Isotoner Co. v. United States 192

8-1c Treaties 193 Case Summary: United States—Import Prohibition of Certain Shrimp and Shrimp Products 194

8-2 International Sales Agreements 197 8-2a The Sales Contract 197 Case Summary: Centrifugal Casting Machine Co., Inc. v. American Bank & Trust Co. 200

8-3 International Trade Issues 201 8-3a Repatriation of Profits 201

CONTENTS vii

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8-3b Expropriation 201 8-3c Foreign Corrupt Practices Act 202 Case Summary: United States v. King 203 8-3d Extraterritoriality 205 You Be the Judge: Carnero v. Boston Scientific Corporation 205

Chapter Conclusion 206 Exam Review 207 Multiple-Choice Questions 209 Essay Questions 210 Discussion Questions 211

UNIT 2 Contracts 213

Chapter 9 Introduction to Contracts 214 9-1 Contracts 215

9-1a Elements of a Contract 215 9-1b Other Important Issues 215 9-1c All Shapes and Sizes 216 9-1d Contracts Defined 216 9-1e Development of Contract Law 217 Case Summary: Davis v. Mason 217

9-2 Types of Contracts 218 9-2a Bilateral and Unilateral Contracts 218 9-2b Executory and Executed Contracts 219 9-2c Valid, Unenforceable, Voidable, and Void Agreements 219

Case Summary: Mr. W Fireworks, Inc. v. Ozuna 220

9-2d Express and Implied Contracts 220 You Be the Judge: DeMasse v. ITT Corporation 221

9-2e Promissory Estoppel and Quasi- Contracts 222

Case Summary: Norton v. Hoyt 223 9-3 Sources of Contract Law 225

9-3a Common Law 225 9-3b Uniform Commercial Code 225 Case Summary: Fallsview Glatt Kosher Caterers, Inc. v. Rosenfeld 226

Chapter Conclusion 227 Exam Review 227 Multiple-Choice Questions 230 Essay Questions 231 Discussion Questions 233

Chapter 10 Agreement 234 10-1 Meeting of the Minds 235 10-2 Offer 236

10-2a Statements That Usually Do Not Amount to Offers 236

Landmark Case: Carlill v. Carbolic Smoke Ball Company 238

10-2b Problems with Definiteness 239 Case Summary: Baer v. Chase 240 10-2c The UCC and Open Terms 241 10-2d Termination of Offers 242 Case Summary: Nadel v. Tom Cat Bakery 242

10-3 Acceptance 244 10-3a Mirror Image Rule 244 10-3b UCC and the Battle of Forms 245 10-3c Clickwraps and Shrinkwraps 247 Case Summary: Specht v. Netscape Communications Corporation 247

10-3d Communication of Acceptance 249 Case Summary: Soldau v. Organon, Inc. 250

Chapter Conclusion 250 Exam Review 250 Multiple-Choice Questions 253 Essay Questions 254 Discussion Questions 255

Chapter 11 Consideration 256 11-1 What Is Consideration? 257

11-1a What Is Value? 257 Landmark Case: Hamer v. Sidway 258 You Be the Judge: Kim v. Son 259 11-1b Adequacy of Consideration 259 11-1c Illusory Promises 260

11-2 Applications of Consideration 261 11-2a The UCC: Consideration in Requirements and Output Contracts 261

11-2b Preexisting Duty 262 YouBe the Judge:CitizensTrustBankv.White 263

11-3 Settlement of Debts 265 11-3a Liquidated Debt 265 11-3b Unliquidated Debt: Accord and Satisfaction 265

Case Summary: Henches v. Taylor 266 11-4 Consideration: Trends 267

11-4a Employment Agreements 267 Case Summary: Snider Bolt & Screw v. Quality Screw & Nut 268

11-4b Promissory Estoppel and “Moral Consideration” 268

viii CONTENTS

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Chapter Conclusion 269 Exam Review 269 Multiple-Choice Questions 272 Essay Questions 273 Discussion Questions 274

Chapter 12 Legality 276 12-1 Contracts That Violate a Statute 277

12-1a Wagers 277 12-1b Insurance 278 12-1c Licensing Statutes 278 Case Summary: Authentic Home Improvements v. Mayo 279

12-1d Usury 279 Case Summary: American Express Travel Related Services Company, Inc. v. Assih 280

12-2 Contracts That Violate Public Policy 281 12-2a Restraint of Trade: Noncompete Agreements 281

Case Summary: King v. Head Start Family Hair Salons, Inc. 281

12-2b The Legality of Noncompetition Clauses (Noncompetes) 283

12-2c Exculpatory Clauses 284 You Be the Judge: Ransburg v. Richards 285 12-2d Unconscionable Contracts 287 Case Summary: Worldwide Insurance v. Klopp 288

Chapter Conclusion 289 Exam Review 289 Multiple-Choice Questions 291 Essay Questions 292 Discussion Questions 294

Chapter 13 Capacity and Consent 295 13-1 Capacity 296

13-1a Minors 296 13-1b Mentally Impaired Persons 298 Landmark Case: Babcock v. Engel 299

13-2 Reality of Consent 300 13-2a Fraud 300 Case Summary: Hess v. Chase Manhattan Bank, USA, N.A. 304

13-2b Mistake 305 Case Summary: Donovan v. RRL Corporation 306

13-2c Duress 307 You Be the Judge: In Re RLS Legal Solutions, LLC 308

13-2d Undue Influence 309 Case Summary: Sepulveda v. Aviles 310

Chapter Conclusion 310 Exam Review 311 Multiple-Choice Questions 313 Essay Questions 314 Discussion Questions 315

Chapter 14 Written Contracts 316 Landmark Case: The Lessee of Richardson v. Campbell 317

14-1 Common Law Statute of Frauds: Contracts That Must Be in Writing 319

14-1a Agreements for an Interest in Land 319 14-1b Agreements That Cannot Be Performed within One Year 321

You Be the Judge: Sawyer v. Mills 321 14-1c Promise to Pay the Debt of Another 322 14-1d Promise Made by an Executor of an Estate 323

14-1e Promise Made in Consideration of Marriage 323

14-2 The Common Law Statute of Frauds: What the Writing Must Contain 323

14-2a Signature 324 14-2b Reasonable Certainty 324 14-2c Electronic Contracts and Signatures 326

14-3 The UCC’s Statute of Frauds 326 14-3a UCC §2-201(1)—The Basic Rule 326 14-3b UCC §2-201(2)—The Merchants’ Exception 327

Case Summary: Seton Co. v. Lear Corp. 328 14-3c UCC §2-201(3)—Special Circumstances 328

14-4 Parol Evidence 329 Case Summary: Mayo v. North Carolina State University 330

14-4a Exception: An Incomplete orAmbiguous Contract 331

14-4b Fraud, Misrepresentation, or Duress 331

Chapter Conclusion 331 Exam Review 332 Multiple-Choice Questions 334 Essay Questions 335 Discussion Questions 336

CONTENTS ix

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Chapter 15 Third Parties 337 15-1 Third Party Beneficiary 338

15-1a Intended Beneficiaries 338 Case Summary: Schauer v. Mandarin Gems of California, Inc. 339

15-1b Incidental Beneficiaries 340 Case Summary: Unite Here Local 30 v. California Department of Parks and Recreation 340

15-2 Assignment and Delegation 341 15-2a Assignment 341 Case Summary: Tenet HealthSystem Surgical, L.L.C. v. Jefferson Parish Hospital Service District No. 1 343

You Be the Judge: Wells Fargo Bank Minnesota v. BrooksAmerica Mortgage Corporation 346

15-2b Delegation of Duties 347 Case Summary: Rosenberg v. Son, Inc. 349

Chapter Conclusion 350 Exam Review 350 Multiple-Choice Questions 352 Essay Questions 353 Discussion Questions 355

Chapter 16 Performance and Discharge 356 16-1 Conditions 358

16-1a How Conditions Are Created 358 16-1b Types of Conditions 359 Case Summary: American Electronic Components, Inc. v. Agere Systems, Inc. 359

You Be The Judge: Anderson v. Country Life Insurance Co. 361

16-2 Performance 362 16-2a Strict Performance and Substantial Performance 363

16-2b Personal Satisfaction Contracts 364 16-2c Good Faith 365 Case Summary: Brunswick Hills Racquet Club Inc. v. Route 18 Shopping Center Associates 365

16-2d Time of the Essence Clauses 367 16-3 Breach 367

16-3a Material Breach 367 Case Summary: O’Brien v. Ohio State University 368

16-3b Anticipatory Breach 368 16-3c Statute of Limitations 369

16-4 Impossibility 369 16-4a True Impossibility 369 16-4b Commercial Impracticability and Frustration of Purpose 370

Chapter Conclusion 371 Exam Review 371 Multiple-Choice Questions 373 Essay Questions 374 Discussion Questions 376

Chapter 17 Remedies 377 17-1 Breaching a Contract 378

17-1a Identifying the “Interest” to Be Protected 378

17-2 Expectation Interest 379 Landmark Case: Hawkins v. McGee 379 17-2a Direct Damages 381 17-2b Consequential Damages 381 Case Summary: Hadley v. Baxendale 381 You Be the Judge: Bi-Economy Market, Inc. v. Harleysville Ins. Co. of New York 382

17-2c Incidental Damages 383 17-2d The UCC and Damages 383

17-3 Reliance Interest 385 17-3a Promissory Estoppel 386 Case Summary: Toscano v. Greene Music 386

17-4 Restitution Interest 387 17-4a Restitution in Cases of a Voidable Contract 388

Case Summary: Putnam Construction & Realty Co. v. Byrd 388

17-4b Restitution in Cases of a Quasi-Contract 389

17-5 Other Remedies 389 17-5a Specific Performance 389 17-5b Injunction 390 Case Summary: Milicic v. Basketball Marketing Company, Inc. 391

17-5c Reformation 392 17-6 Special Issues 392

17-6a Mitigation of Damages 392 17-6b Nominal Damages 392 17-6c Liquidated Damages 392

Chapter Conclusion 394 Exam Review 394 Multiple-Choice Questions 396 Essay Questions 397 Discussion Questions 399

x CONTENTS

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Chapter 18 Practical Contracts 400 18-1 The Lawyer 401

18-1a Lawyers and Clients 402 18-1b Hiring a Lawyer 402

18-2 The Contract 403 18-2a Who Drafts It? 403 18-2b How to Read a Contract 403 18-2c Mistakes 403 You Be the Judge: Quake Construction, Inc. v. American Airlines, Inc. 404

Case Summary: Cipriano v. Patrons Mutual Insurance Company of Connecticut 406

You Be the Judge: Heritage Technologies v. Phibro-Tech 408

18-2d The Structure of a Contract 409 Case Summary: Lemond Cycling, Inc. v. PTI Holding, Inc. 413

Chapter Conclusion 418 Exam Review 419 Multiple-Choice Questions 421 Essay Questions 421 Discussion Questions 422

UNIT 3 Commercial Transactions 423

Chapter 19 Introduction to Sales 424 19-1 Development of Commercial Law 425

19-1a Harold and Maude, Revisited 427 19-1b This Unit and This Chapter 427

19-2 UCC Basics 428 19-2a Code’s Purpose 428 19-2b Scope of Article 2 428 19-2c Mixed Contracts 429 19-2d Merchants 429 19-2e Good Faith and Unconscionability 429

19-3 Contract Formation 430 19-3a Formation Basics: §2-204 430 Case Summary: Jannusch v. Naffziger 431 19-3b Statute of Frauds 431 Case Summary: Delta Star, Inc. v. Michael’s Carpet World 433

19-3c Added Terms: §2-207 433 Case Summary: Superior Boiler Works, Inc. v. R. J. Sanders, Inc. 436

19-3d Open Terms: §§2-305 and 2-306 437

Case Summary: Mathis v. Exxon Corporation 438

You Be the Judge: Lohman v. Wagner 440 19-3e Modification 441

Chapter Conclusion 444 Exam Review 444 Multiple-Choice Questions 447 Essay Questions 448 Discussion Questions 449

Chapter 20 Ownership, Risk, and Warranties 450

20-1 Legal Interest 451 20-2 Identification, Title, and Insurable Interest 452

20-2a Existence and Identification 452 20-2b Passing of Title 453 20-2c Insurable Interest 454 Case Summary: Valley Forge Insurance Co. v. Great American Insurance Co. 455

20-3 Imperfect Title 455 20-3a Bona Fide Purchaser 455 Case Summary: Bakalar v. Vavra 457 20-3b Entrustment 457

20-4 Risk of Loss 458 20-4a Shipping Terms 459 20-4b When the Parties Fail to Allocate the Risk 459

Case Summary: Harmon v. Dunn 463 20-5 Warranties 463 20-6 Express Warranties 464

20-6a Affirmation of Fact or Promise 464 20-6b Description of Goods 464 20-6c Sample or Model 465 20-6d Basis of Bargain 465

20-7 Implied Warranties 465 20-7a Implied Warranty of Merchantability 465 CaseSummary:Goodmanv.WencoFoods, Inc. 466 20-7b Implied Warranty of Fitness for a Particular Purpose 467

20-7c Warranty of Title 467 20-8 Disclaimers and Defenses 468

20-8a Disclaimers 468 20-8b Remedy Limitations 469 20-8c Privity 470 Case Summary: Reed v. City of Chicago 471 20-8d Buyer’s Misuse 472

CONTENTS xi

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Chapter Conclusion 472 Exam Review 472 Multiple-Choice Questions 473 Essay Questions 474 Discussion Questions 476

Chapter 21 Performance and Remedies 477 21-1 Obligation on All Parties: Good Faith 478 21-2 Seller’s Rights and Obligations 478

21-2a Perfect Tender Rule 479 21-2b Restrictions on the Perfect Tender Rule 479

Case Summary: Zion Temple First Pentecostal Church of Cincinnati, Ohio, Inc. v. Brighter Day Bookstore & Gifts & Murphy Cap & Gown Co. 481

You Be the Judge: United Aluminum Corporation v. Linde, Inc. 483

21-3 Buyer’s Rights and Obligations 485 21-3a Inspection and Acceptance 485 Case Summary: Lile v. Kiesel 486

21-4 Seller’s Remedies 487 21-4a Stop Delivery 487 21-4b Identify Goods to the Contract 487 21-4c Resale 487 21-4d Damages for Non-Acceptance 488 21-4e Action for the Price 489

21-5 Buyer’s Remedies 489 21-5a Incidental Damages and Consequential Damages 490

Case Summary: Smith v. Penbridge Associates, Inc. 490

21-5b Specific Performance 491 21-5c Cover 491 Case Summary: Hessler v. Crystal Lake Chrysler-Plymouth, Inc. 492

21-5d Non-Delivery 493 21-5e Acceptance of Non-Conforming Goods 493 21-5f Liquidated Damages 493

Chapter Conclusion 494 Exam Review 494 Multiple-Choice Questions 498 Essay Questions 499 Discussion Questions 500

Chapter 22 Negotiable Instruments 501 22-1 Commercial Paper 502 22-2 Types of Negotiable Instruments 502

22-3 The Fundamental “Rule” of Commercial Paper 503

22-3a Negotiable 503 You Be the Judge: Blasco v. Money Services Center 506

22-3b Negotiated 506 22-3c Holder in Due Course 507 Case Summary: Buckeye Check Cashing, Inc. v. Camp 508

22-3d Defenses against a Holder in Due Course 509

22-3e Consumer Exception 510 Case Summary: Antuna v. Nescor, Inc. 510

22-4 Liability for Negotiable Instruments 511 22-4a Primary versus Secondary Liability 511

22-5 Signature Liability 511 22-5a Maker 511 22-5b Drawer 511 22-5c Drawee 512 22-5d Indorser 513 22-5e Accommodation Party 513

22-6 Warranty Liability 514 22-6a Basic Rules of Warranty Liability 514 22-6b Transfer Warranties 515 You Be the Judge: Quimby v. Bank of America 516

22-6c Comparison of Signature Liability and Transfer Warranties 517

22-6d Presentment Warranties 517 22-7 Other Liability Rules 518

22-7a Conversion Liability 518 22-7b Impostor Rule 519 22-7c Fictitious Payee Rule 519 22-7d Employee Indorsement Rule 519 22-7e Negligence 520

Chapter Conclusion 521 Exam Review 521 Multiple-Choice Questions 525 Essay Questions 526 Discussion Questions 527

Chapter 23 Secured Transactions 528 23-1 Article 9: Terms and Scope 529

23-1a Article 9 Vocabulary 529 23-1b Scope of Article 9 530

23-2 Attachment of a Security Interest 532 23-2a Agreement 533 23-2b Control and Possession 533

xii CONTENTS

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Case Summary: In Re CFLC, Inc. 534 23-2c Value 535 23-2d Debtor Rights in the Collateral 535 23-2e Attachment to Future Property 535

23-3 Perfection 536 23-3a Nothing Less than Perfection 536 23-3b Perfection by Filing 536 Case Summary: Corona Fruits & Veggies, Inc. v. Frozsun Foods, Inc. 538

23-3c Perfection by Possession or Control 540 Case Summary: Layne v. Bank One 541 23-3d Perfection of Consumer Goods 542 23-3e Perfection of Movable Collateral and Fixtures 544

23-4 Protection of Buyers 545 23-4a Buyers in Ordinary Course of Business 546 You Be the Judge: Conseco Finance Servicing Corp. v. Lee 547

23-4b Buyers of Consumer Goods 547 23-4c Buyers of Chattel Paper, Instruments, and Documents 548

23-4d Liens 549 23-5 Priorities Among Creditors 550

23-5a Filing versus Control or Possession 551 23-5b Priority Involving a Purchase Money Security Interest 552

Case Summary: In Re Roser 553 23-6 Default and Termination 553

23-6a Default 553 23-6b Termination 556

Chapter Conclusion 556 Exam Review 556 Multiple-Choice Questions 559 Essay Questions 560 Discussion Questions 561

Chapter 24 Bankruptcy 562 24-1 Overview of the Bankruptcy Code 563

24-1a Rehabilitation 563 24-1b Liquidation 564 24-1c Chapter Description 564 24-1d Goals 564

24-2 Chapter 7 Liquidation 564 24-2a Filing a Petition 565 24-2b Trustee 566 24-2c Creditors 566 24-2d Automatic Stay 567 Case Summary: Jackson v. Holiday Furniture 567 24-2e Bankruptcy Estate 568

24-2f Payment of Claims 570 24-2g Discharge 572 Case Summary: In Re Stern 573 Case Summary: In Re Grisham 575

24-3 Chapter 11 Reorganization 576 24-3a Debtor in Possession 576 24-3b Creditors’ Committee 576 24-3c Plan of Reorganization 577 24-3d Confirmation of the Plan 577 Case Summary: In Re Fox 577 24-3e Discharge 578 24-3f Small-Business Bankruptcy 579

24-4 Chapter 13 Consumer Reorganizations 579 You Be the Judge: Marrama v. Citizens Bank of Massachusetts 579

24-4a Beginning a Chapter 13 Case 580 24-4b Plan of Payment 580 24-4c Discharge 581

Chapter Conclusion 581 Exam Review 582 Multiple-Choice Questions 583 Essay Questions 584 Discussion Questions 585

Chapter 25 Agency Law 587 25-1 Creating an Agency Relationship 588

25-1a Consent 588 25-1b Control 589 25-1c Fiduciary Relationship 589 25-1d Elements Not Required for an Agency Relationship 589

25-2 Duties of Agents to Principals 590 25-2a Duty of Loyalty 590 Case Summary: Otsuka v. Polo Ralph Lauren Corporation 590

Case Summary: Abkco Music, Inc. v. Harrisongs Music, Ltd. 591

25-2b Other Duties of an Agent 593 25-2c Principal’s Remedies When the Agent Breaches a Duty 594

25-3 Duties of Principals to Agents 595 25-3a Duty to Cooperate 596

25-4 Terminating an Agency Relationship 596 25-4a Termination by Agent or Principal 596 25-4b Principal or Agent Can No Longer Perform Required Duties 597

25-4c Change in Circumstances 598 25-4d Effect of Termination 598

25-5 Liability 599

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25-6 Principal’s Liability for Contracts 599 25-6a Authority 599 25-6b Ratification 600 25-6c Subagents 601

25-7 Agent’s Liability for Contracts 601 25-7a Fully Disclosed Principal 601 25-7b Unidentified Principal 602 25-7c Undisclosed Principal 602 25-7d Unauthorized Agent 603

25-8 Principal’s Liability for Torts 604 25-8a Employee 604 25-8b Scope of Employment 605 You Be the Judge: Zankel v. United States of America 606

25-8c Intentional Torts 607 Case Summary: Doe v. Liberatore 607 25-8d Physical or Nonphysical Harm 608

25-9 Agent’s Liability for Torts 609

Chapter Conclusion 609 Exam Review 609 Multiple-Choice Questions 612 Essay Questions 613 Discussion Questions 614

UNIT 4 Employment, Business Organizations and Property 615

Chapter 26 Employment and Labor Law 616 26-1 Introduction 617 26-2 Employment Security 618

26-2a Family and Medical Leave Act 618 Case Summary: Peterson v. Exide Technologies 618

26-2b Health Insurance 619 26-2c Common Law Protections 619 Case Summary: Kozloski v. American Tissue Services Foundation 621

26-2d Whistleblowing 624 26-3 Privacy in the Workplace 626

26-3a Lifestyle Laws 626 You Be the Judge: Rodrigues v. Scotts Lawnservice 627

26-4 Workplace Safety 630 26-5 Financial Protection 630

26-5a Fair Labor Standards Act: Minimum Wage, Overtime, and Child Labor 631

26-5b Workers’ Compensation 631 26-5c Social Security 631 26-5d Pension Benefits 632

26-6 Labor Law and Collective Bargaining 632 26-6a Key Pro-Union Statutes 632 26-6b Labor Unions Today 633 26-6c Organizing a Union 633 26-6d Collective Bargaining 635 Landmark Case: NLRB v. Truitt Manufacturing Co. 636

26-6e Concerted Action 636

Chapter Conclusion 638 Exam Review 638 Multiple-Choice Questions 641 Essay Questions 642 Discussion Questions 643

Chapter 27 Employment Discrimination 644 27-1 Introduction 645 27-2 The United States Constitution 646 27-3 Civil Rights Act of 1866 646 27-4 Title VII of the Civil Rights Act of 1964 646

27-4a Prohibited Activities 646 You Be the Judge: Jespersen v. Harrah’s 647 Landmark Case: Griggs v. Duke Power Co. 648 Case Summary: Teresa Harris v. Forklift Systems, Inc. 650

27-4b Religion 652 27-4c Sex 652 27-4d Family Responsibility Discrimination 653 27-4e Sexual Orientation 653 27-4f Gender Identity 653 27-4g Defenses to Charges of Discrimination 654

27-5 Equal Pay Act of 1963 656 27-6 Pregnancy Discrimination Act 656 27-7 Age Discrimination in Employment Act 656

27-7a Disparate Treatment 657 Case Summary: Reid v. Google, Inc. 657 27-7b Disparate Impact 658 27-7c Hostile Work Environment 658 27-7d Bona Fide Occupational Qualification 659

27-8 Discrimination on the Basis of Disability 659 27-8a The Rehabilitation Act of 1973 659 27-8b Americans with Disabilities Act 660 Case Summary: Allen v. SouthCrest Hospital 660

27-9 Genetic Information Nondiscrimination Act 664 27-10 Enforcement 664

27-10a Constitutional Claims 664

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27-10b The Civil Rights Act of 1866 664 27-10c The Rehabilitation Act of 1973 664 27-10d Other Statutory Claims 664

Chapter Conclusion 666 Exam Review 666 Multiple-Choice Questions 669 Essay Questions 671 Discussion Questions 671

Chapter 28 Starting a Business: LLCs and Other Options 673

28-1 Sole Proprietorships 674 28-2 Corporations 675

28-2a Corporations in General 675 28-2b S Corporations 677 28-2c Close Corporations 678

28-3 Limited Liability Companies 679 You Be the Judge: Ridgaway v. Silk 680 Case Summary: Wyoming.com, LLC v. Lieberman 681

Case Summary: BLD Products, Ltd. v. Technical Plastics of Oregon, LLC 682

Case Summary: Tzolis v. Wolff 683 28-4 Socially Conscious Organizations 685 28-5 General Partnerships 685

Case Summary: Marsh v. Gentry 687 28-6 Limited Liability Partnerships 688 28-7 Limited Partnerships and Limited Liability

Limited Partnerships 689 28-8 Professional Corporations 690 28-9 Joint Ventures 691

28-10 Franchises 691 Case Summary: National Franchisee Association v. Burger King Corporation 693

Chapter Conclusion 693 Exam Review 694 Multiple-Choice Questions 695 Essay Questions 696 Discussion Questions 697

Chapter 29 Corporations 699 29-1 Promoter’s Liability 700 29-2 Incorporation Process 700

29-2a Where to Incorporate? 700 29-2b The Charter 701

29-3 After Incorporation 704 29-3a Directors and Officers 704

29-3b Bylaws 705 29-3c Issuing Debt 705

29-4 Death of the Corporation 705 29-4a Piercing the Corporate Veil 706 Case Summary: Brooks v. Becker 706 29-4b Termination 707

29-5 The Role of Corporate Management 707 29-6 The Business Judgment Rule 708

29-6a Duty of Loyalty 709 29-6b Corporate Opportunity 709 Case Summary: Anderson v. Bellino 710 29-6c Duty of Care 712

29-7 The Role of Shareholders 713 29-7a Rights of Shareholders 714 Case Summary: Brehm v. Eisner 722 You Be the Judge: eBay Domestic Holdings, Inc. v. Newmark 723

29-8 Enforcing Shareholder Rights 724 29-8a Derivative Lawsuits 724 29-8b Direct Lawsuits 725

Chapter Conclusion 725 Exam Review 725 Multiple-Choice Questions 728 Essay Questions 729 Discussion Questions 730

Chapter 30 Government Regulation: Securities and Antitrust 732

30-1 Securities Laws 733 30-1a What Is a Security? 733 30-1b Securities Act of 1933 733 30-1c Securities Exchange Act of 1934 735 Case Summary: Matrixx Initiatives, Inc. v. Siracusano 736

30-1d Short-Swing Trading—Section 16 737 30-1e Insider Trading 737 Case Summary: Securities and Exchange Commission v. Steffes 739

30-1f Blue Sky Laws 740 30-2 Antitrust Law 740

30-2a The Sherman Act 741 Landmark Case: United States v. Trenton Potteries Company 741

Case Summary: Leegin Creative Leather Products, Inc. v. PSKS, Inc. 742

30-2b The Clayton Act 745 Landmark Case: United States v. Waste Management, Inc. 745

30-2c The Robinson-Patman Act 747

CONTENTS xv

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Chapter Conclusion 748 Exam Review 748 Multiple-Choice Questions 751 Essay Questions 752 Discussion Questions 752

Chapter 31 Consumer Protection 754 31-1 Introduction 755

31-1a Federal Trade Commission 755 31-1b Consumer Financial Protection Bureau 756

31-2 Sales 756 31-2a Deceptive Acts or Practices 756 Case Summary: Federal Trade Commission v. Direct Marketing Concepts, Inc. 756

31-2b Unfair Practices 757 31-2c Additional Sales Rules 758

31-3 Consumer Credit 759 31-3a Truth in Lending Act—General Provisions 760

31-3b Home Loans 761 31-3c Credit Cards 763 Case Summary: Gray v. American Express Co. 766

31-3d Debit Cards 766 31-3e Credit Reports 767 31-3f Debt Collection 769 You Be the Judge: Brown v. Card Service Center 770

31-3g Equal Credit Opportunity Act 771 Case Summary: Treadway v. Gateway Chevrolet Oldsmobile Inc. 771

31-3h Consumer Leasing Act 772 31-4 Magnuson-Moss Warranty Act 773 31-5 Consumer Product Safety 774

Chapter Conclusion 774 Exam Review 774 Multiple-Choice Questions 778 Essay Questions 779 Discussion Questions 781

Chapter 32 Cyberlaw 782 32-1 Privacy 784

32-1a Tracking Tools 784 32-1b Regulation of Online Privacy 785 You Be the Judge: Juzwiak v. John/Jane Doe 786 Case Summary: United States of America v. Angevine 787

Case Summary: United States of America v. Warshak 788

You Be the Judge: Scott v. Beth Israel Medical Center Inc. 791

32-2 Spam 792 32-3 Internet Service Providers and Web Hosts:

Communications Decency Act of 1996 793 Case Summary: Carafano v. Metrosplash .com, Inc. 794

32-4 Crime on the Internet 795 32-4a Hacking 795 32-4b Fraud 797

Chapter Conclusion 799 Exam Review 800 Multiple-Choice Questions 802 Essay Questions 803 Discussion Questions 804

Chapter 33 Intellectual Property 805 33-1 Introduction 806 33-2 Patents 806

33-2a Types of Patents 806 33-2b Requirements for a Patent 808 33-2c Patent Application and Issuance 809

33-3 Copyrights 812 Case Summary: Lapine v. Seinfeld 813 33-3a Copyright Term 813 33-3b Infringement 813 33-3c First Sale Doctrine 814 33-3d Fair Use 814 33-3e Digital Music and Movies 815 Case Summary: Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd. 816

33-3f International Copyright Treaties 818 33-4 Trademarks 818

33-4a Types of Marks 819 33-4b Ownership and Registration 819 33-4c Valid Trademarks 819 33-4d Infringement 821 You Be the Judge: Network Automation, Inc. v. Advanced Systems Concepts, Inc. 822

33-4e Federal Trademark Dilution Act of 1995 823 33-4f Domain Names 823 33-4g International Trademark Treaties 824

33-5 Trade Secrets 825 Case Summary: Pollack v. Skinsmart Dermatology and Aesthetic Center P.C. 826

xvi CONTENTS

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Chapter Conclusion 827 Exam Review 827 Multiple-Choice Questions 828 Essay Questions 829 Discussion Questions 831

Chapter 34 Real and Personal Property 832 34-1 Nature of Real Property 833

Case Summary: Freeman v. Barrs 833 34-2 Estates in Real Property 834

34-2a Concurrent Estates 834 Case Summary: Jackson v. Estate of Green 835

34-3 Nonpossessory Interests 837 34-3a Easements 837 34-3b Profit 837 34-3c License 837 34-3d Mortgage 838

34-4 Land Use Regulation 838 34-4a Nuisance Law 838 34-4b Zoning 839 34-4c Eminent Domain 839

34-5 Landlord-Tenant Law 840 34-5a Three Legal Areas Combined 840 34-5b Lease 840

34-6 Types of Tenancy 840 34-6a Tenancy for Years 841 34-6b Periodic Tenancy 841 34-6c Tenancy at Will 841 34-6d Tenancy at Sufferance 841

34-7 Landlord’s Duties 841 34-7a Duty to Deliver Possession 841 34-7b Quiet Enjoyment 842 34-7c Duty to Maintain Premises 842 Case Summary: Mishkin v. Young 844

34-8 Tenant’s Duties 845 34-8a Duty to Pay Rent 845

34-8b Duty to Use Premises for Proper Purpose 846

34-8c Duty Not to Damage Premises 846 34-8d Duty Not to Disturb Other Tenants 846

34-9 Injuries 847 34-9a Tenant’s Liability 847 34-9b Landlord’s Liability 847

34-10 Personal Property 848 34-11 Gifts 848

34-11a Intention to Transfer Ownership 848 34-11b Delivery 849 34-11c Inter Vivos Gifts and Gifts Causa Mortis 849

34-11d Acceptance 850 You Be the Judge: Albinger v. Harris 850

34-12 Bailment 852 34-12a Control 852 34-12b Rights of the Bailee 852 34-12c Duties of the Bailee 853 You Be the Judge: Johnson v. Weedman 854 34-12d Rights and Duties of the Bailor 854

Chapter Conclusion 854 Exam Review 855 Multiple-Choice Questions 857 Essay Questions 858 Discussion Questions 860

Appendix A The Constitution of the United States A1

Appendix B Uniform Commercial Code (Selected Provisions) B1

Glossary G1

Table of Cases T1

Index I1

CONTENTS xvii

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Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

PREFACE

Looking for more examples for class? Do you want the latest develop- ments? Visit our blog at bizlawupdate.com or our Facebook page at Beatty Business Law. To be notified when we post updates, follow us on Twitter @bizlawupdate.

NOTE FROM THE AUTHORS New to This Edition

A NEW CHAPTER: PRACTICAL CONTRACTS In this textbook, as well as other business law texts, contracts chapters focus on the theory of contract law. And that theory is important. But our students tell us that theory, by itself, is not enough. They need to know how these abstract rules operate in practice. They want to understand the structure and content of a standard agreement. They have questions such as:

• Do I need a written agreement?

• What do these legal terms really mean?

• Are any important provisions missing?

• What happens if a term is unclear?

• Do I need to hire a lawyer? How can I use a lawyer most effectively?

We answer all these questions in Chapter 18, “Practical Contracts,” which is new to this edition. As an illustration throughout the chapter, we use a real-life contract between a movie studio and an actor.

A NEW CHAPTER: EMPLOYMENT DISCRIMINATION We have heard from faculty and students alike that employment law plays an increasingly important role in the life of a businessperson. At the same time, fewer and fewer workers belong to labor unions. Therefore, we have rewritten the labor law and employment law chapters from the previous edition. Instead of one chapter on labor law and one on employ- ment law, we now have a new Chapter 26, “Employment and Labor Law,” which covers both common law employment issues and labor law. In addition, Chapter 27, “Employment Discrimination,” focuses solely on employment discrimination and includes, among other things, an expanded discussion of disparate impact cases, which have become increasingly common and important.

NEW MATERIAL: ETHICS CHAPTER The Ethics chapter has been completely revised and is full of up-to-date examples, all either from the news or true stories provided by executives. The section on the Theories of Ethics has been enhanced and now includes, among others, John Rawls’ theory of justice. This chapter also includes a discussion of the latest research on the ethics traps that prevent us from doing what we know to be right. Students are asked to develop their own list of Life

xix

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Principles that they can use to make ethical decisions and avoid ethics traps. The chapter also discusses the options that employees face when confronted with unethical behavior in the workplace. And, finally, the chapter concludes with a discussion of Corporate Social Responsibility—should companies practice it and, if so, how should they evaluate success?

LANDMARK CASES As a general rule, we want our cases to be as current as possible, reporting on the world as it is now. However, sometimes students can benefit from reading vintage cases that are still good law and provide a deep understanding of how and why the law has developed as it has. Thus, for example, we have added a discussion about the famous Supreme Court case Miranda v. Arizona. Reading this case provides students with a much better understanding of why the Supreme Court created Miranda rights, and this context helps students follow the recent Supreme Court rulings on Miranda. Other landmark cases include Hawkins v. McGee (the case of the hairy hand), and Griggs v. Duke Power Co.

REORGANIZED AND REVISED MATERIAL In response to requests from faculty, product liability is now covered in Chapter 6, “Torts and Product Liability.” It seems that most people like to teach these two subjects together. The discussion of warranties is now found in the chapter on ownership and risk.

The new CPA exam no longer includes questions about banks and their customers, and much of that material (such as how long it takes checks to clear) is not very relevant to our students. Therefore we have deleted the chapter on Banks and Their Customers, and combined the remaining material on Negotiable Instruments into one chapter, which now covers how to create a negotiable instrument and liability.

The chapter on Securities Regulation has been expanded to include coverage of antitrust law, under the title, “Government Regulation.” As the Justice Department increases its oversight of mergers and with price-fixing violations increasingly common, it is more important than ever for students to understand the basics of antitrust law.

In response to faculty requests, we have added a chapter on Consumer Protection. This material is critical for all of us—everyone from the experienced executive to the young adult with increasing financial responsibilities.

END OF CHAPTER MATERIAL To facilitate class discussion and student learning, we have overhauled the study questions at the end of the chapters. They are now divided into three parts:

1. Multiple-choice questions. Because many instructors use this format in their tests, it seemed appropriate to provide practice questions. The answers to these multiple- choice questions are available to students online at www.cengagebrain.com.

2. Essay questions. Students can use these as study questions, and professors can also assign them as written homework problems.

3. Discussion questions. Instructors can use these questions to enhance class discussion. If assigned in advance, students will have a chance to think about the answers before class. This approach is similar to business cases, which often provide discussion questions in advance.

OTHER NEW MATERIAL We have, of course, added substantial new material, with a particular focus on the Internet and social media. Chapter 26, “Employment and Labor Law,” includes a section on social media. Chapter 29, “Corporations,” uses Facebook as an example of how to organize a corporation. There are also new cases involving eBay and craigslist. In addition,

xx PREFACE

Copyr igh t 2013 Cengage Lea rn ing . A l l R igh t s Rese rved . May no t be cop i ed , s canned , o r dup l i ca t ed , i n who le o r i n pa r t . Due t o e l ec t ron i c r i gh t s , some th i rd pa r ty con t en t may be supp re s sed f rom the eBook and /o r eChap te r ( s ) . Ed i to r i a l r ev i ew has deemed tha t any supp re s sed con t en t does no t ma te r i a l l y a ff ec t t he ove ra l l l e a rn ing expe r i ence . Cengage Lea rn ing r e se rves t he r i gh t t o r emove add i t i ona l con t en t a t any t ime i f subsequen t r i gh t s r e s t r i c t i ons r equ i r e i t .

Chapter 28, “Starting a Business: LLCs and Other Options,” includes a new section about socially conscious organizations.

STAYING CURRENT: OUR BLOG, FACEBOOK, AND TWITTER To find out about new developments in business law, visit our blog at Bizlawupdate.com or our Facebook page at Beatty Business Law. If you follow us on Twitter @bizlawupdate, you will receive a notification automatically whenever we post to the blog.

The Beatty/Samuelson Difference When we began work on the first edition of this textbook, our publisher warned us that our undertaking was risky because there were already so many law texts. Despite these warnings, we were convinced that there was a market for an Essentials book that was different from all the others. Our goal was to capture the passion and excitement—the sheer enjoyment—of the law. Business law is notoriously complex, and as authors we are obsessed with accuracy. Yet this intriguing subject also abounds with human conflict and hard-earned wisdom, forces that can make a law book sparkle.

Now, as this fifth edition goes to press, we look back over the intervening years and are touched by the many unsolicited comments from students, such as these posted on Amazon:

• “Glad I purchased this. It really helps put the law into perspective and allows me as a leader to make intelligent decisions. Thanks.”

• “I enjoyed learning business law and was happy my college wanted this book. THUMBS UP!”

We think of the students who have emailed us to say, “In terms of clarity, comprehen- siveness, and vividness of style, I think it’s probably the best textbook I’ve ever used in any subject,” and “I had no idea business law could be so interesting.” Or the professor who said, “With your book, we have great class discussions.” Comments such as these never cease to thrill us and to make us grateful that we persisted in writing an Essentials text like no other—a book that is precise and authoritative, yet a pleasure to read.

Comprehensive Staying comprehensive means staying current. This fifth edition contains over 25 new cases. Almost all were reported within the last two or three years. We never include a new court opinion merely because it is recent, but the law evolves continually, and our willingness to toss out old cases and add important new ones ensures that this book—and its readers—remain on the frontier of legal developments.

Look, for example, at the important field of corporate governance. All texts cover par value, and so do we. Yet a future executive is far likelier to face conflicts over Sarbanes-Oxley (SOX), executive compensation, and shareholder proposals. We present a clear path through this thicket of new issues. In Chapter 29, for example, read the section about the election and removal of directors. Typically, students (even those who are high-level executives) have a basic misconception about the process of removing a director from office. They think that it is easy. Once they understand the complexity of this process, their whole view of corporate governance—and compensation—changes. We want tomorrow’s business leaders to anticipate the challenges that await them and then use their knowledge to avert problems.

Strong Narrative The law is full of great stories, and we use them. Your students and ours should come to class excited. Look at Chapter 3, “Dispute Resolution.” No tedious list of next steps in litigation, this chapter teaches the subject by tracking a double-indemnity lawsuit. An executive is dead. Did he drown accidentally, obligating the insurance company to pay? Or did the businessman commit suicide, voiding the policy? The student follows the action from the discovery of the body, through each step of the lawsuit, to the final appeal.

PREFACE xxi

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Students read stories and remember them. Strong narratives provide a rich context for the remarkable quantity of legal material presented. When students care about the material they are reading, they persevere. We have been delighted to find that they also arrive in class eager to question, discuss, and learn more about issues.

Precise The great joy of using English accurately is the power it gives us to attack and dissect difficult issues, rendering them comprehensible to any lay reader. This text takes on the most complex legal topics of the day, yet it is appropriate for all college and graduate-level students. Accessible prose goes hand in hand with legal precision. We take great pride in walking our readers through the most serpentine mazes this tough subject can offer.

As we explore this extraordinary discipline, we lure readers along with quirky anecdotes and colorful diagrams. (Notice that the chart on page 713 clarifies the complex rules of the duty of care in the business judgment rule.) However, before the trip is over, we insist that students:

• Gauge policy and political considerations,

• Grapple with legal and social history,

• Spot the nexus between disparate doctrines, and

• Confront tough moral choices.

Authoritative We insist, as you do, on a law book that is indisputably accurate. A professor must teach with assurance, confident that every paragraph is the result of exhaustive research and meticulous presentation. Dozens of tough-minded people spent thousands of hours reviewing this book, and we are delighted with the stamp of approval we have received from trial and appellate judges, working attorneys, scholars, and teachers.

We reject the cloudy definitions and fuzzy explanations that can invade judicial opinions and legal scholarship. To highlight the most important rules, we use bold print, and then follow with vivacious examples written in clear, forceful English. (See, for example, the discussion of factual cause on page 149.) We cheerfully venture into con- tentious areas, relying on very recent appellate decisions. Can a creditor pierce the veil of an LLC? What are the rights of an LLC member in the absence of an operating agreement? (See pages 679–684.) Where there is doubt about the current (or future) status of a doctrine, we say so. In areas of particularly heated debate, we footnote our work: we want you to have absolute trust in this book.

A Book for Students We have written this book as if we were speaking directly to our students. We provide black letter law, but we also explain concepts in terms that hook students. Over the years, we have learned how much more successfully we can teach when our students are intrigued. No matter what kind of a show we put on in class, they are only learning when they want to learn.

Every chapter begins with a story, either fictional or real, to illustrate the issues in the chapter and provide context. Chapter 32, “Cyberlaw,” begins with the true story of a college student who discovers nude pictures of himself online. These photos had been taken in the locker room without his knowledge. What privacy rights do any of us have? Does the Internet jeopardize them? Students want to know—right away.

Many of our students were not yet born when Bill Clinton was elected president. They come to college with varying levels of preparation; many now arrive from other countries. We have found that to teach business law most effectively, we must provide its context. Chapter 26, on employment law, provides the historical setting for the employment-at-will doctrine. Chapter 33, on intellectual property, explains the difference between intellectual and other types of property.

At the same time, we enjoy offering “nuts-and-bolts” information that grabs students. For example, in Chapter 31, “Consumer Protection,” we offer advice about how students can obtain a free credit report (page 768).

xxii PREFACE

Copyr igh t 2013 Cengage Lea rn ing . A l l R igh t s Rese rved . May no t be cop i ed , s canned , o r dup l i ca t ed , i n who le o r i n pa r t . Due t o e l ec t ron i c r i gh t s , some th i rd pa r ty con t en t may be supp re s sed f rom the eBook and /o r eChap te r ( s ) . Ed i to r i a l r ev i ew has deemed tha t any supp re s sed con t en t does no t ma te r i a l l y a ff ec t t he ove ra l l l e a rn ing expe r i ence . Cengage Lea rn ing r e se rves t he r i gh t t o r emove add i t i ona l con t en t a t any t ime i f subsequen t r i gh t s r e s t r i c t i ons r equ i r e i t .

Students respond enthusiastically to this approach. One professor asked a student to compare our book with the one that the class was then using. This was the student’s reaction: “I really enjoy reading the [Beatty & Samuelson] textbook and I have decided that I will give you this memo ASAP, but I am keeping the book until Wednesday so that I may continue reading. Thanks! :-).”

Along with other professors, we have used this text in courses for undergraduates, MBAs, and Executive MBAs, with the students ranging in age from 18 to 55. The book works, as some unsolicited comments indicate:

• An undergraduate wrote, “This is the best textbook I have had in college, on any subject.”

• A business law professor stated that the “clarity of presentation is superlative. I have never seen the complexity of contract law made this readable.”

• An MBA student commented, “I think the textbook is great. The book is relevant, easy to understand, and interesting.”

• A state supreme court justice wrote that the book is “a valuable blend of rich scholarship and easy readability. Students and professors should rejoice with this publication.”

• A Fortune 500 vice president, enrolled in an Executive MBA program, commented, “I really liked the chapters. They were crisp, organized and current. The information was easy to understand and enjoyable.”

• An undergraduate wrote, “The textbook is awesome. A lot of the time I read more than what is assigned—I just don’t want to stop.”

Humor Throughout the text, we use humor—judiciously—to lighten and enlighten. Not surprisingly, students have applauded—but is it appropriate? How dare we employ levity in this venerable discipline? We offer humor because we take the law seriously. We revere the law for its ancient traditions; its dazzling intricacy; its relentless, though imperfect, attempt to give order and decency to our world. Because we are confident of our respect for the law, we are not afraid to employ some levity. Leaden prose masquerading as legal scholarship does no honor to the field.

Humor also helps retention. Research shows that the funnier or more bizarre the example, the longer students will remember it. Students are more likely to remember a contract problem described in a fanciful setting, and from that setting recall the underlying principle. By contrast, one widget is hard to distinguish from another.

Features We chose the features for our book with great care. Each one supports an essential pedagogical goal. Here are some of those goals and the matching feature.

EXAM STRATEGY GOAL: To help students learn more effectively and to prepare for exams. In preparing this fifth edition, we asked ourselves: What do students want? The short answer is—a good grade in the course. How many times a semester does a student ask you, “What can I do to study for the exam?” We are happy to help them study and earn a good grade because that means they are learning.

About six times per chapter, we stop the action and give students a two-minute quiz. In the body of the text, again in the end-of-chapter review, and also in the Instructor’s Manual, we present a typical exam question. Here lies the innovation: We guide the

PREFACE xxiii

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

student in analyzing the issue. We teach the reader—over and over—how to approach a question: To start with the overarching principle, examine the fine point raised in the question, apply the analysis that courts use, and deduce the right answer. This skill is second nature to lawyers, but not to students. Without practice, too many students panic, jumping at a convenient answer and leaving aside the tools that they have spent the course acquiring. Let’s change that. Students tell us that they love the Exam Strategy feature.

YOU BE THE JUDGE GOAL: Get students to think independently. When reading case opinions, students tend to accept the court’s “answer.” Judges, of course, try to reach decisions that appear indisputable, when in reality they may be controversial—or wrong. From time to time we want students to think through the problem and reach their own answer. Almost every chapter contains a You Be the Judge feature, providing the facts of the case and conflicting appellate arguments. The court’s decision, however, appears only in the Instructor’s Manual. Because students do not know the result, class discussions are more complex and lively.

ETHICS GOAL: Make ethics real.We ask ethical questions about cases, legal issues, and commercial practices. Is it fair for one party to void a contract by arguing, months after the fact, that there was no consideration? What is a manager’s ethical obligation when asked to provide a reference for a former employee? What is wrong with bribery? We believe that asking the questions and encouraging discussion reminds students that ethics is an essential element of justice and of a satisfying life.

CASES GOAL: Bring Case Law Alive. Each case begins with a summary of the facts followed by a statement of both the issue and the decision. Next comes a summary of the court’s opinion. We have written this summary ourselves to make the judges’ reasoning accessible to all readers while retaining the court’s focus and the decision’s impact. We cite cases using a modified bluebook form. In the principal cases in each chapter, we provide the state or federal citation, the regional citation, and the LEXIS or Westlaw citation. We also give students a brief description of the court. Because many of our cases are so recent, some will have only a regional reporter and a LEXIS or Westlaw citation.

EXAM REVIEW GOAL: Help students to remember and practice! At the end of every chapter, we provide a list of review points and several additional Exam Strategy exercises in a Question/Strategy/ Result format. We also challenge the students with 15 or more problems—Multiple-Choice, Essay Questions, and Discussion Questions. The questions include the following:

• You Be the Judge Writing Problem. The students are given appellate arguments on both sides of the question and must prepare a written opinion.

• Ethics. This question highlights the ethical issues of a dispute and calls upon the student to formulate a specific, reasoned response.

• CPA Questions. Where relevant, practice tests include questions from previous CPA exams administered by the American Institute of Certified Public Accountants.

Answers to all the Multiple-Choice questions are available to students online through www.cengagebrain.com.

xxiv PREFACE

Copyr igh t 2013 Cengage Lea rn ing . A l l R igh t s Rese rved . May no t be cop i ed , s canned , o r dup l i ca t ed , i n who le o r i n pa r t . Due t o e l ec t ron i c r i gh t s , some th i rd pa r ty con t en t may be supp re s sed f rom the eBook and /o r eChap te r ( s ) . Ed i to r i a l r ev i ew has deemed tha t any supp re s sed con t en t does no t ma te r i a l l y a ff ec t t he ove ra l l l e a rn ing expe r i ence . Cengage Lea rn ing r e se rves t he r i gh t t o r emove add i t i ona l con t en t a t any t ime i f subsequen t r i gh t s r e s t r i c t i ons r equ i r e i t .

TEACHING MATERIALS For more information about any of these ancillaries, contact your Cengage Learning/ SouthWestern Legal Studies Sales Representative for more details, or visit the Beatty & Samuelson Essentials, fifth edition web page, accessed through www.cengagebrain.com.

Instructor’s Manual Available through cengagebrain.com, this manual includes answers to the You Be the Judge cases and also to the questions at the end of each chapter. In addition, the Instructors’ Manual provides additional cases to use as the basis of class discussion as well as other pedagogical features.

PowerPoint Lecture Review Slides PowerPoint slides are available for instructors to use with their lectures, and can be accessed through cengagebrain.com.

Test Bank The test bank offers hundreds of essay, short-answer, and multiple-choice problems. Editable files of the test bank are available at cengagebrain.com, and the test bank is also available through the Cognero Testing Software.

Cognero Testing Software—Computerized Testing Software This online testing system contains all of the questions in the test bank. Instructors can add or edit questions, instructions, and answers; and select questions by previewing them on the screen, selecting them randomly, or selecting them by number. Instructors can also create and administer quizzes online.

CengageNOW This robust, online course management system gives you more control in less time and delivers better student outcomes—NOW. CengageNOW for Essentials 5e includes six homework types that align with the six levels of Bloom’s taxonomy: Knowledge: Chapter Review; Comprehension: Business Law Scenarios; Application: Legal Reasoning; Analysis: IRAC; Synthesis: Exam Strategy; and Evaluation: Business Wisdom. With all these elements used together, CengageNOW will ensure that students develop the higher-level thinking skills they need to reach an advanced understanding of the material.

Business Law CourseMate Cengage Learning’s Business Law CourseMate brings course concepts to life with interactive learning, study, and exam preparation tools— including an e-book—that supports the printed textbook. Designed to address a variety of learning styles, students will have access to flashcards, Learning Objectives, and the Key Terms for quick reviews. A set of auto-gradable, interactive quizzes will allow students to instantly gauge their comprehension of the material. For instructors, all quiz scores and student activity are mapped within Engagement Tracker, a set of intuitive student performance analytical tools that help identify at-risk students. An interactive blog helps connect book concepts to real-world situations happening now.

Business Law Digital Video Library This dynamic online video library features over 90 video clips that spark class discussion and clarify core legal principles. The library is organized into six series:

• Legal Conflicts in Business includes specific modern business and e-commerce scenarios.

• Ask the Instructor contains straightforward explanations of concepts for student review.

• Drama of the Law features classic business scenarios that spark classroom participation.

PREFACE xxv

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

• Real World Legal takes students out of the classroom and into real-life situations, encouraging them to consider the legal aspects of decision making in the business world.

• Business Ethics in Action challenges students to examine ethical dilemmas in the world of business.

Access to the Business Law Digital Video Library is available as an optional package with each new student text at no additional charge. Students with used books can purchase access to the video clips online. For more information about the Business Law Digital Video Library, visit www.cengagebrain.com.

A Handbook of Basic Law Terms, Blacks Law Dictionary Series This paperback dictionary, prepared by the editor of the popular Black’s Law Dictionary, can be packaged for a small additional cost with any new South-Western Legal Studies in Business text.

Student Guide to the SOX This brief overview for business students explains SOX, what is required of whom, and how it might affect students in their business lives. Available as an optional package with the text.

Interaction with the Author This is my standard: Every professor who adopts this book must have a superior experience. I am available to help in any way I can. Adopters of this text often call me or email me to ask questions, obtain a syllabus, offer suggestions, share pedagogical concerns, or inquire about ancillaries. One of the pleasures of working on this project has been this link to so many colleagues around the country. I value those connections, am eager to respond, and would be happy to hear from you.

Susan S. Samuelson Phone: (617) 353-2033

Email: ssamuels@bu.edu

ACKNOWLEDGMENTS We appreciate the thoughtful insights of the reviewers for this fifth edition: Randall Berens Ohio University-Lancaster

Machiavelli Chao University of California, Irvine

Raven Davenport Houston Community College System

Terry L. Dimmick Lakeshore Technical College

Craig Dokken Hamline University

Philip Ettman Westfield State University

Sheryl Fitzpatrick North Iowa Area Community College

Janet L. Grange Chicago State University

John Gray Faulkner University

Jack Green MiraCosta College

Anne-Marie Hakstian Salem State University

Nancy Johnson Mt. San Jacinto Community College

Sandra Leigh King Sullivan University

xxvi PREFACE

Copyr igh t 2013 Cengage Lea rn ing . A l l R igh t s Rese rved . May no t be cop i ed , s canned , o r dup l i ca t ed , i n who le o r i n pa r t . Due t o e l ec t ron i c r i gh t s , some th i rd pa r ty con t en t may be supp re s sed f rom the eBook and /o r eChap te r ( s ) . Ed i to r i a l r ev i ew has deemed tha t any supp re s sed con t en t does no t ma te r i a l l y a ff ec t t he ove ra l l l e a rn ing expe r i ence . Cengage Lea rn ing r e se rves t he r i gh t t o r emove add i t i ona l con t en t a t any t ime i f subsequen t r i gh t s r e s t r i c t i ons r equ i r e i t .

Ken Knox Eastern Gateway Community College

Joni Koegel Cazenovia College

Greg Lauer North Iowa Area Community College

Donald Letourneau Pacific University

Magdalena Lorenz State University of New York College of Oneonta

Bill Mills East Texas Baptist University

Jack Neveaux Saint Mary’s University of Minnesota

Brad Reid Lipscomb University

Alan Rosenbloom Baruch College

Tom Severance MiraCosta College

Frank Wetterau Delaware Technical Community College

Kim Wong Central New Mexico Community College

Bruce Zucker California State University, Northridge

And we are continually grateful to the following reviewers who gave such helpful comments on the first four editions of this book:

Manzoor Ahmad Compton Educational Center, El Camino College

Steven J. Arsenault College of Charleston

Lois Beier Kent State University

Martha Broderick University of Maine

Amy Chataginer Mississippi Gulf Coast Community College

Burke Christensen Eastern Kentucky University

Linda Christiansen Indiana University Southeast

Michael Costello University of Missouri, St. Louis

G. Howard Doty Nashville State Technical Community College

Teri Elkins University of Houston

Lizbeth G. Ellis New Mexico State University

Paul Fiorelli Xavier University

Suzanne M. Gradisher University of Akron

Gary Greene Manatee Community College

Wendy Hind Doane College

Elizabeth Grimm-Howell University of Missouri—St. Louis

Richard Guarino California State University, Sacramento

Stephen Hearn Louisiana Tech University

Timothy Jackson School of Business, California Baptist University

William C. Kostner Doane College

Ronald B. Kowalczyk Elgin Community College

Colleen Arnott Less Johnson & Wales University

Maurice J. McCann Southern Illinois University Carbondale

PREFACE xxvii

Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Russ Meade Gardner-Webb University

Michael Monhollon Hardin-Simmons University

Carol Nielsen Bemidji State University

Margaret A. Parker Owens Community College

Barbara Redman Gainesville State College

Bruce L. Rockwood Bloomsburg University

Rebecca Rutz Mississippi Gulf Coast Community College—Jackson County Campus

Rachel Spooner Boston University School of Management

Cheryl Staley Lake Land College

Paulette L. Stenzel Michigan State University

Kenneth Ray Taurman, Jr. Indiana University Southeast

Daphyne Saunders Thomas James Madison University

Glen M. Vogel Hofstra University

Deborah Walsh Middlesex Community College

ABOUT THE AUTHORS Jeffrey F. Beatty was an associate professor of business law at the Boston University School of Management. After receiving his B.A. from Sarah Lawrence and his J.D. from Boston University, he practiced with the Greater Boston Legal Services representing indigent clients. At Boston University, he won the Metcalf Cup and Prize, the university’s highest teaching award. Professor Beatty also wrote plays and television scripts that were performed in Boston, London, and Amsterdam.

Susan S. Samuelson is a professor of business law at Boston University’s School of Management. After earning her undergraduate and law degrees at Harvard University, Professor Samuelson practiced with the firm of Choate, Hall, and Stewart. She has written many articles on legal issues for scholarly and popular journals, including the American Business Law Journal, Ohio State Law Journal, Boston University Law Review, Harvard Journal on Legislation, National Law Journal, Sloan Management Review, Better Homes and Gardens, and Boston Magazine. At Boston University, she won the Broderick Prize for excellence in teaching. For 12 years, Professor Samuelson was the faculty director of the Boston Uni- versity Executive MBA program.

xxviii PREFACE

Copyr igh t 2013 Cengage Lea rn ing . A l l R igh t s Rese rved . May no t be cop i ed , s canned , o r dup l i ca t ed , i n who le o r i n pa r t . Due t o e l ec t ron i c r i gh t s , some th i rd pa r ty con t en t may be supp re s sed f rom the eBook and /o r eChap te r ( s ) . Ed i to r i a l r ev i ew has deemed tha t any supp re s sed con t en t does no t ma te r i a l l y a ff ec t t he ove ra l l l e a rn ing expe r i ence . Cengage Lea rn ing r e se rves t he r i gh t t o r emove add i t i ona l con t en t a t any t ime i f subsequen t r i gh t s r e s t r i c t i ons r equ i r e i t .

UNIT1

The Legal Environment

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CHAPTER1 INTRODUCTION TO LAW The Pagans were a motorcycle gang with a repu- tation for violence. Two of its rougher members, Rhino and Backdraft, entered a tavern called the Pub Zone, shoving their way past the bouncer. The pair wore gang insignia, in violation of the bar’s rules. For a while, all was quiet, as the two sipped drinks at the bar. Then they followed an innocent patron toward the men’s room, and things happened fast.

“Wait a moment,” you may be thinking. “Are we reading a chapter on business law or one about biker crimes in a roadside tavern?” Both.

Law is powerful, essential, and fascinating. We hope this book will persuade you of all three ideas. Law can also be surprising. Later in the chapter we will return to the Pub Zone (with armed guards) and follow Rhino and Backdraft to the back of the pub. Yes, the pair engaged in street crime, which is hardly a focus of this text. However, their criminal acts will enable us to explore one of the law’s basic principles, negligence. Should a pub owner pay money damages to the victim of gang violence? The owner herself did nothing aggressive. Should she have prevented the harm? Does her failure to stop the assault make her liable?

We place great demands on our courts, asking them to make our large, complex, and sometimes violent society into a safer, fairer, more orderly place. The Pub Zone case is a good example of how judges reason their way through the convoluted issues involved. What began as a gang incident ends up as a matter of commercial liability. We will traipse after Rhino and Backdraft because they have a lesson to teach anyone who enters the world of business.

For a while, all was quiet, as the two sipped drinks at the bar. Then they followed an innocent

patron toward the men’s room…

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1-1 THE ROLE OF LAW IN SOCIETY 1-1a Power The strong reach of the law touches nearly everything we do, especially at work. Consider a mid-level manager at Sublime Corp., which manufactures and distributes video games.

During the course of a day’s work, she might negotiate a deal with a game developer (contract law). Before signing any deals, she might research whether similar games already exist, which might diminish her ability to market the proposed new game (intellectual property law). One of her subordinates might complain about being harassed by a coworker (employment law). Another worker may complain about being required to work long hours (administrative law). And she may consider investing her own money in her company’s stock, but she may wonder whether she will get into trouble if she invests based on inside information (securities law).

It is not only as a corporate manager that you will confront the law. As a voter, investor, juror, entrepreneur, and community member, you will influence and be affected by the law. Whenever you take a stance about a legal issue, whether in the corporate office, in the voting booth, or as part of local community groups, you help to create the fabric of our nation. Your views are vital. This book will offer you knowledge and ideas from which to form and continually reassess your legal opinions and values.

1-1b Importance Law is also essential. Every society of which we have any historical record has had some system of laws. For example, consider the Visigoths, a nomadic European people who overran much of present-day France and Spain during the fifth and sixth centuries C.E. Their code admirably required judges to be “quick of perception, clear in judgment, and lenient in the infliction of penalties.” It detailed dozens of crimes.

Our legal system is largely based upon the English model, but many societies contributed ideas. The Iroquois Native Americans, for example, played a role in the creation of our own government. Five major nations made up the Iroquois group: the Mohawk, Cayuga, Oneida, Onondaga, and Seneca. Each nation governed its own domestic issues. But each nation also elected “sachems” to a League of the Iroquois. The league had authority over any matters that were common to all, such as relations with outsiders. Thus, by the fifteenth century, the Iroquois had solved the problem of federalism: how to have two levels of government, each with specified powers. Their system impressed Benjamin Franklin and others and influenced the drafting of our Constitution, with its powers divided between state and federal governments.1

1-1c Fascination In 1835, the young French aristocrat Alexis de Tocqueville traveled through the United States, observing the newly democratic people and the qualities that made them unique. One of the things that struck de Tocqueville most forcefully was the American tendency to file suit: “Scarcely any political question arises in the United States that is not resolved, sooner or later, into a judicial question.”2 De Tocqueville got it right: For better or worse, we do expect courts to solve many problems.

Not only do Americans litigate—they watch each other do it. Every television season offers at least one new courtroom drama to a national audience breathless for more cross-examination. Almost all of the states permit live television coverage of real trials. One of the most heavily viewed events in the history of courtroom television was the 1995

1Jack Weatherford, Indian Givers (New York: Fawcett Columbine, 1988), pp. 133–150. 2Alexis de Tocqueville, Democracy in America (1835), Vol. 1, Ch. 16.

CHAPTER 1 Introduction to Law 3

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murder trial of former football star O.J. Simpson: 150 million viewers tuned in. In most nations, coverage of judicial proceedings is not allowed.3

The law is a big part of our lives, and it is wise to know something about it. Within a few weeks, you will probably find yourself following legal events in the news with keener interest and deeper understanding. In this chapter, we develop the background for our study. We look at where law comes from: its history and its present-day institutions. In the section on jurisprudence, we examine different theories about what “law” really means. And finally we see how courts—and students—analyze a case.

1-2 ORIGINS OF OUR LAW It would be nice if we could look up “the law” in one book, memorize it, and then apply it. But the law is not that simple, and cannot be that simple, because it reflects the complexity of contemporary life. In truth, there is no such thing as “the law.” Principles and rules of law actually come from many different sources. Why is this so? In part because we inherited a complex structure of laws from England.

Additionally, ours is a nation born in revolution and created, in large part, to protect the rights of its people from the government. The Founding Fathers created a national government but insisted that the individual states maintain control in many areas. As a result, each state has its own government with exclusive power over many important areas of our lives. To top it off, the Founders guaranteed many rights to the people alone, ordering national and state govern- ments to keep clear. This has worked, but it has caused a multilayered system, with 50 state governments and one federal government all creating and enforcing law.

1-2a English Roots England in the tenth century was a rustic agricultural community with a tiny population and very little law or order. Vikings invaded repeatedly, terrorizing the Anglo-Saxon peoples. Criminals were hard to catch in the heavily forested, sparsely settled nation. The king used a primitive legal system to maintain a tenuous control over his people.

England was divided into shires, and daily administration was carried out by a “shire reeve,” later called a sheriff. The shire reeve collected taxes and did what he could to keep peace, apprehending criminals and acting as mediator between feuding families. Two or three times a year, a shire court met; lower courts met more frequently. Today, this method of resolving disputes lives on as mediation, which we will discuss in Chapter 3.

Because there were so few officers to keep the peace, Anglo-Saxon society created an interesting method of ensuring public order. Every freeman belonged to a group of 10 freemen known as a “tithing,” headed by a “tithingman.” If anyone injured a person outside his tithing or interfered with the king’s property, all 10 men of the tithing could be forced to pay. Today, we still use this idea of collective responsibility in business partnerships. All partners are personally responsible for the debts of the partnership. They could potentially lose their homes and all assets because of the irresponsible conduct of one partner. That liability has helped create new forms of business organization, including limited liability companies.

When cases did come before an Anglo-Saxon court, the parties would often be represented by a clergyman, by a nobleman, or by themselves. There were few professional lawyers. Each party produced “oath helpers,” usually 12, who would swear that one version of events was correct. The Anglo-Saxon oath helpers were forerunners of our modern jury of 12 persons.

3Regardless of whether we allow cameras, it is an undeniable benefit of the electronic age that we can obtain information quickly. From time to time, we will mention websites of interest. Some of these are for nonprofit groups, while others are commercial sites. We do not endorse or advocate on behalf of any group or company; we simply wish to alert you to what is available.

4 U N I T 1 The Legal Environment

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In 1066, the Normans conquered England. William the Conqueror made a claim never before made in England: that he owned all of the land. The king then granted sections of his lands to his favorite noblemen, as his tenants in chief, creating the system of feudalism. These tenants in chief then granted parts of their land to tenants in demesne, who actually occupied a particular estate. Each tenant in demesne owed fidelity to his lord (hence, “landlord”). So what? Just this: land became the most valuable commodity in all of England, and our law still reflects that. One thousand years later, American law still regards land as special. The Statute of Frauds, which we study in the section on contracts, demands that contracts for the sale or lease of property be in writing. And landlord-tenant law, vital to students andmany others, still reflects its ancient roots. Some of a landlord’s rights are based on the 1,000-year-old tradition that land is uniquely valuable.

In 1250, Henry de Bracton (d. 1268) wrote a legal treatise that still influences us. De Legibus et Consuetudinibus Angliae (On the Laws and Customs of England), written in Latin, summarized many of the legal rulings in cases since the Norman Conquest. De Bracton was teaching judges to rule based on previous cases. He was helping to establish the idea of precedent. The doctrine of precedent, which developed gradually over centuries, requires that judges decide current cases based on previous rulings. This vital principle is the heart of American common law. Precedent ensures predictability. Suppose a 17-year-old student promises to lease an apartment from a landlord, but then changes her mind. The landlord sues to enforce the lease. The student claims that she cannot be held to the agreement because she is a minor. The judge will look for precedent, that is, older cases dealing with the same issue, and hewill findmany holding that a contract generallymay not be enforced against a minor. That precedent is binding on this case, and the student wins. The accumulation of precedent, based on case after case, makes up the common law.

In the end, today’s society is dramatically different from that of medieval English society. But interestingly, legal disputes from hundreds of years ago are often quite recog- nizable today. Some things have changed but others never do.

Here is an actual case from more than six centuries ago, in the court’s own language. The plaintiff claims that he asked the defendant to heal his eye with “herbs and other medicines.” He says the defendant did it so badly that he blinded the plaintiff in that eye.

THE OCULIST’S CASE (1329) LI MS. Hale 137 (1), fo. 150, Nottingham4

C A S E S U M M A R Y

Attorney Launde [for defendant]: Sir, you plainly see how [the plaintiff claims] that he had submitted himself to [the defendant’s] medicines and his care; and after that he can assign no trespass in his person, inasmuch as he sub- mitted himself to his care: but this action, if he has any, sounds naturally in breach of covenant. We demand [that the case be dismissed].

Excerpts from Judge Denum’s Decision: I saw aNew- castle man arraigned before my fellow justice and me for the death of a man. I asked the reason for the indictment, and it

was said that he had slain a man under his care, who died within four days afterwards. And because I saw that he was a [doctor] and that he had not done the thing feloniously but [accidentally] I ordered him to be discharged. And suppose a blacksmith, who is a man of skill, injures your horse with a nail, whereby you lose your horse: you shall never have recovery against him. No more shall you here.

Afterwards the plaintiff did not wish to pursue his case any more.

Common law Judge-made law.

4J. Baker and S. Milsom, Sources of English Legal History (London: Butterworth & Co., 1986).

Precedent The tendency to decide current cases based on previous rulings.

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This case from 1329 is an ancient medical malpractice action. Attorney Launde does not deny that his client blinded the plaintiff. He claims that the plaintiff has brought the wrong kind of lawsuit. Launde argues that the plaintiff should have brought a case of “covenant”; that is, a lawsuit about a contract.

Judge Denum decides the case on a different principle. He gives judgment to the defendant because the plaintiff voluntarily sought medical care. He implies that the defendant would lose only if he had attacked the plaintiff. As we will see when we study negligence law, this case might have a different outcome today. Note also the informality of the judge’s ruling. He rather casually mentions that he came across a related case once before and that he would stand by that outcome. The idea of precedent is just beginning to take hold.

1-2b Law in the United States The colonists brought with them a basic knowledge of English law, some of which they were content to adopt as their own. Other parts, such as religious restrictions, were abhorrent to them. Many settlers had made the dangerous trip to America precisely to escape persecution, and they were not interested in recreating their difficulties in a new land. Finally, some laws were simply irrelevant or unworkable in a world that was socially and geographically so different. American law ever since has been a blend of the ancient principles of English common law and a zeal and determination for change.

During the nineteenth century, the United States changed from a weak, rural nation into one of vast size and potential power. Cities grew, factories appeared, and sweeping movements of social migration changed the population. Changing conditions raised new legal questions. Did workers have a right to form industrial unions? To what extent should a manufacturer be liable if its product injured someone? Could a state government invalidate an employment contract that required 16-hour workdays? Should one company be permitted to dominate an entire industry?

In the twentieth century, the rate of social and technological change increased, creating new legal puzzles. Were some products, such as automobiles, so inherently dangerous that the seller should be responsible for injuries even if no mistakes were made in manufacturing? Who should clean up toxic waste if the company that had caused the pollution no longer existed? If a consumer signed a contract with a billion-dollar corporation, should the agreement be enforced even if the consumer never understood it? New and startling questions arise with great regularity. Before we can begin to examine the answers, we need to understand the sources of con- temporary law.

1-3 SOURCES OF CONTEMPORARY LAW Throughout the text, we will examine countless legal ideas. But binding rules come from many different places. This section describes the significant categories of laws in the United States.

6 U N I T 1 The Legal Environment

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1-3a United States Constitution America’s greatest legal achievement was the writing of the United States Constitution in 1787. It is the supreme law of the land.5 Any law that conflicts with it is void. This federal Constitution does three basic things. First, it establishes the national government of the United States, with its three branches. Second, it creates a system of checks and balances among the branches. And third, the Constitution guarantees many basic rights to the American people.

BRANCHES OF GOVERNMENT The Founding Fathers sought a division of government power. They did not want all power centralized in a king or in anyone else. And so, the Constitution divides legal authority into three pieces: legislative, executive, and judicial power.

Legislative power gives the ability to create new laws. In Article I, the Constitution gives this power to the Congress, which is comprised of two chambers—a Senate and a House of Representatives. Voters in all 50 states elect representatives who go to Washington, D.C., to serve in the Congress and debate new legal ideas.

The House of Representatives has 435 voting members. A state’s voting power is based on its population. Large states (Texas, California, and Florida) send dozens of representa- tives to the House. Some small states (Wyoming, North Dakota, and Delaware) send only one. The Senate has 100 voting members—two from each state.

Executive power is the authority to enforce laws. Article II of the Constitution establishes the President as commander in chief of the armed forces and the head of the executive branch of the federal government.

Judicial power gives the right to interpret laws and determine their validity. Article III places the Supreme Court at the head of the judicial branch of the federal government. Interpretive power is often underrated, but it is often every bit as important as the ability to create laws in the first place. For instance, the Supreme Court ruled that privacy provisions of the Constitution protect a woman’s right to abortion, although neither the word “privacy” nor “abortion” appears in the text of the Constitution.6

At times, courts void laws altogether. For example, in 1995, the Supreme Court ruled that the Gun-Free School Zones Act of 1990 was unconstitutional because Congress did not have the authority to pass such a law.7

CHECKS AND BALANCES Sidney Crosby might score 300 goals per season if checking were not allowed in the National Hockey League. But because opponents are allowed to hit Crosby and the rest of his teammates on the Penguins, he is held to a much more reasonable 50 goals per year.

Political checks work in much the same way. They allow one branch of the government to trip up another.

The authors of the Constitution were not content merely to divide government power three ways. They also wanted to give each part of the government some power over the other two branches. Many people complain about “gridlock” in Washington, but the government is slow and sluggish by design. The Founding Fathers wanted to create a system that, without broad agreement, would tend towards inaction.

The President can veto Congressional legislation. Congress can impeach the President. The Supreme Court can void laws passed by Congress. The President appoints judges to

5The Constitution took effect in 1788, when 9 of 13 colonies ratified it. Two more colonies ratified it that year, and the last of the 13 did so in 1789, after the government was already in operation. The complete text of the Constitution appears in Appendix A. 6Roe v. Wade, 410 U.S. 113 (1973). 7United States v. Alfonso Lopez, Jr., 514 U.S. 549 (1995).

CHAPTER 1 Introduction to Law 7

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Sources of Law

Legislative Branch

Executive Branch

Judicial Branch

State Legislature • passes statutes on state law

• creates state agencies

Governor

• proposes statutes • signs or vetoes statutes • oversees state agencies

State Courts • create state common law • interpret statutes • review constitutionality of statutes and other acts

50 State Governments

State Constitution • establishes the state government • guarantees the rights of state residents

One Federal Government

United States Constitution • establishes limited federal government • protects states’ power • guarantees liberty of citizens

Administrative Agencies oversee day-to-day application of law in dozens of commercial and other areas

Legislative Branch

Executive Branch

Judicial Branch

Congress

• passes statutes • ratifies treaties • creates administrative agencies

President

• proposes statutes • signs or vetoes statutes • oversees administrative agencies

Federal Courts • interpret statutes • create (limited) federal common law • review the constitutionality of statutes and other legal acts

Administrative Agencies oversee day-to-day application of law in dozens of commercial and other areas

Federal Form of Government. Principles and rules of law come from many sources. The government in Washington creates and enforces law throughout the nation. But 50 state governments exercise great power in local affairs. And citizens enjoy constitutional protection from both state and federal government. The Founding Fathers wanted this balance of power and rights, but the overlapping authority creates legal complexity.

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8 U N I T 1 The Legal Environment

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the federal courts, including the Supreme Court, but these nominees do not serve unless approved by the Senate. Congress (with help from the 50 states) can override the Supreme Court by amending the Constitution. The President and the Congress influence the Supreme Court by controlling who is placed on the court in the first place.

Many of these checks and balances will be examined in more detail later in this book, starting in Chapter 4.

FUNDAMENTAL RIGHTS The Constitution also grants many of our most basic liberties. For the most part, they are found in the amendments to the Constitution. The First Amendment guarantees the rights of free speech, free press, and the free exercise of religion. The Fourth, Fifth, and Sixth Amendments protect the rights of any person accused of a crime. Other amendments ensure that the government treats all people equally and that it pays for any property it takes from a citizen.

By creating a limited government of three branches and guaranteeing basic liberties to all citizens, the Constitution became one of the most important documents ever written.

1-3b Statutes The second important source of law is statutory law. The Constitution gave to the United States Congress the power to pass laws on various subjects. These laws are called statutes, and they can cover absolutely any topic, so long as they do not violate the Constitution.

Almost all statutes are created by the same method. An idea for a new law—on taxes, health care, texting while driving, or any other topic, big or small—is first proposed in the Congress. This idea is called a bill. The House and Senate then independently vote on the bill. To pass Congress, the bill must win a simple majority vote in each of these chambers.

If Congress passes a bill, it goes to the White House for the President’s approval. If the President signs it, a new statute is created. It is no longer a mere idea; it is the law of the land. If the President refuses to approve, or vetoes a bill, it does not become a statute unless Congress overrides the veto. To do that, both the House and the Senate must approve the bill by a two-thirds majority. If this happens, it becomes a statute without the President’s signature.

1-3c Common Law Binding legal ideas often come from the courts. Judges generally follow precedent. When courts decide a case, they tend to apply the legal rules that other courts have used in similar cases.

The principle that precedent is binding on later cases is called stare decisis, which means “let the decision stand.” Stare decisis makes the law predictable, and this in turn enables businesses and private citizens to plan intelligently.

It is important to note that precedent is binding only on lower courts. For example, if the Supreme Court decided a case in one way in 1965, it is under no obligation to follow precedent if the same issue arises in 2015.

Sometimes, this ability to change is quite beneficial. In 1896, the Supreme Court decided (unbelievably) that segregation—separating people by race in schools, hotels, public transportation, and other public services—was legal under certain conditions.8 In 1954, on the exact same issue, the court changed its mind.9

In other circumstances, it is more difficult to see the value in breaking with an established rule.

8Plessy v. Ferguson, 163 U.S. 537 (1896). 9Brown v. Board of Education of Topeka, 347 U.S. 483 (1954).

Statute A law created by a legislative body.

CHAPTER 1 Introduction to Law 9

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1-3d Court Orders Judges have the authority to issue court orders that place binding obligations on specific people or companies. An injunction, for example, is a court order to stop doing something. A judge might order a stalker to stay more than 500 yards away from an ex-lover. Lindsay Lohan might be ordered to stop drinking and enter rehab. Courts have the authority to imprison or fine those who violate their orders.

1-3e Administrative Law In a society as large and diverse as ours, the executive and legislative branches of govern- ment cannot oversee all aspects of commerce. Congress passes statutes about air safety, but United States senators do not stand around air traffic towers, serving coffee to keep every- one awake. The executive branch establishes rules concerning how foreign nationals enter the United States, but Presidents are reluctant to sit on the dock of the bay, watching the ships come in. Administrative agencies do this day-to-day work.

Most government agencies are created by Congress. Familiar examples are the Environmental Protection Agency (EPA), the Securities and Exchange Commis- sion (SEC), and the Internal Revenue Service (IRS), whose feelings are hurt if it does not hear from you every April 15. Agencies have the power to create laws called regulations.

1-3f Treaties The Constitution authorizes the President to make treaties with foreign nations. These agreements must then be ratified by the United States Senate by a two-thirds vote. When they are ratified, they are as binding upon all citi- zens as any federal statute. In 1994, the Senate ratified the

North American Free Trade Agreement (NAFTA) with Mexico and Canada. NAFTA was controversial then and remains so today—but it is the law of the land.

1-4 CLASSIFICATIONS We have seen where law comes from. Now we need to classify the various types of laws. First, we will distinguish between criminal and civil law. Then, we will take a look at the intersection between law and morality.

1-4a Criminal and Civil Law It is a crime to embezzle money from a bank, to steal a car, to sell cocaine. Criminal law concerns behavior so threatening that society outlaws it altogether. Most criminal laws are statutes, passed by Congress or a state legislature. The government itself prosecutes the wrongdoer, regardless of what the bank President or car owner wants. A district attorney, paid by the government, brings the case to court. The injured party, for example the owner of the stolen car, is not in charge of the case, although she may appear as a witness. The government will seek to punish the defendant with a prison sentence, a fine, or both. If there is a fine, the money goes to the state, not to the injured party.

Civil law is different, and most of this book is about civil law. The civil law regulates the rights and duties between parties. Tracy agrees in writing to lease you a 30,000-square-foot store in her shopping mall. She now has a legal duty to make the space available. But then

United States senators do not stand around air traffic towers,

serving coffee to keep everyone awake.

Criminal law Criminal law prohibits certain behavior.

Civil law Civil law regulates the rights and duties between parties.

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another tenant offers her more money, and she refuses to let you move in. Tracy has violated her duty, but she has not committed a crime. The government will not prosecute the case. It is up to you to file a civil lawsuit. Your case will be based on the common law of contract. You will also seek equitable relief, namely, an injunction ordering Tracy not to lease to anyone else. You should win the suit, and you will get your injunction and some money damages. But Tracy will not go to jail.

Some conduct involves both civil and criminal law. Suppose Tracy is so upset over losing the court case that she becomes drunk and causes a serious car accident. She has committed the crime of driving while intoxicated, and the state will prosecute. Tracy may be fined or imprisoned. She has also committed negligence, and the injured party will file a lawsuit against her, seeking money. We will again see civil and criminal law joined together in the Pub Zone case, later in the chapter.

1-4b Law and Morality Law is different from morality, yet the two are obviously linked. There are many instances when the law duplicates what all of us would regard as a moral position. It is negligent to drive too fast in a school zone, and few would dispute the moral value of seeking to limit harm to students. And the same holds with contract law: If the owner of land agrees in writing to sell property to a buyer at a stated price, both the buyer and the seller must go through with the deal, and the legal outcome matches our moral expectations.

On the other hand, we have had laws that we now clearly regard as immoral. At the turn of the century, a factory owner could typically fire a worker for any reason at all—including, for example, his religious or political views. It is immoral to fire a worker because she is Jewish—and today the law prohibits it.

Finally, there are legal issues where the morality is less clear. You are walking down a country lane and notice a three-year-old child playing with matches near a barn filled with hay. Are you obligated to intervene? No, says the law, though many think that is preposter- ous. (See Chapter 4, on common law, for more about this topic.) A company buys property and then discovers, buried under the ground, toxic waste that will cost $300,000 to clean up. The original owner has gone bankrupt. Should the new owner be forced to pay for the cleanup? If the new owner fails to pay for the job, who will?

Chapter 2 will further examine the bond between law and morality.

1-5 JURISPRUDENCE We have had a glimpse of legal history and a summary of the present-day sources of American law. But what is law? That question is the basis of a field known as jurisprudence. What is the real nature of law? Can there be such a thing as an “illegal” law?

1-5a Legal Positivism This philosophy can be simply stated: Law is what the sovereign says it is. The sovereign is the recognized political power whom citizens obey, so in the United States, both state and federal governments are sovereign. A legal positivist holds that whatever the sovereign declares to be the law is the law, whether it is right or wrong.

The primary criticism of legal positivism is that it seems to leave no room for questions of morality. A law permitting a factory owner to fire a worker because she is Catholic is surely different from a law prohibiting arson. Do citizens in a democracy have a duty to consider such differences? Consider the following example.

Most states allow citizens to pass laws directly at the ballot box, a process called voter referendum. California voters often do this, and during the 1990s, they passed one of the

Sovereign The recognized political power, whom citizens obey.

Jurisprudence The philosophy of law.

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state’s most controversial laws. Proposition 187 was designed to curb illegal immigration into the state by eliminating social spending for undocumented aliens. Citizens debated the measure fiercely but passed it by a large margin. One section of the new law forbade public schools from educating illegal immigrants. The law obligated a principal to inquire into the immigration status of all children enrolled in the school and to report undocumented students to immigration authorities. Several San Diego school principals rejected the new rules, stating that they would neither inquire into immigration status nor report undocu- mented aliens. Their statements produced a heated response. Some San Diego residents castigated the school officials as lawbreakers, claiming that:

• A school officer who knowingly disobeyed a law was setting a terrible example for students, who would assume they were free to do the same;

• The principals were advocating permanent residence and a free education for anyone able to evade our immigration laws; and

• The officials were scorning grass-roots democracy by disregarding a law passed by popular referendum.

Others applauded the principals’ position, asserting that:

• The referendum’s rules would transform school officials from educators into border police, forcing them to cross-examine young children and their parents;

• The new law was foolish because it punished innocent children for violations committed by their parents; and

• Our nation has long respected civil disobedience based on humanitarian ideals, and these officials were providing moral leadership to the whole community.

Ultimately, no one had to decide whether to obey Proposition 187. A federal court ruled that only Congress had the power to regulate immigration and that California’s attempt was unconstitutional and void. The debate over immigration reform—and ethics—did not end, however. It continues to be a thorny issue.

1-5b Natural Law St. Thomas Aquinas (1225–1274) answered the legal positivists even before they had spoken. In his Summa Theologica, he argued that an unjust law is no law at all and need not be obeyed. It is not enough that a sovereign makes a command. The law must have a moral basis.

Where do we find the moral basis that would justify a law? Aquinas says that “good is that which all things seek after.” Therefore, the fundamental rule of all laws is that “good is to be done and promoted, and evil is to be avoided.”This sounds appealing, but also vague. Exactly which laws promote good and which do not? Is it better to have a huge corporation dominate a market or many smaller companies competing? Did the huge company get that way by being better than its competitors? If Wal-Mart moves into a rural area, establishes a mammoth store, and sells inexpensive products, is that “good”? Yes, if you are a consumer who cares only about prices. No, if you are the owner of aMain Street store driven into bankruptcy.Maybe, if you are a resident who values small-town life but wants lower prices.

1-5c Legal Realism Legal realists take a very different tack. They claim it does not matter what is written as law. What counts is who enforces that law and by what process. All of us are biased by issues such as income, education, family background, race, religion, and many other factors. These personal characteristics, they say, determine which contracts will be enforced and which ignored, why some criminals receive harsh sentences while others get off lightly, and so on.

12 U N I T 1 The Legal Environment

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Judge Jones hears a multimillion dollar lawsuit involving an airplane crash. Was the airline negligent? The law is the same everywhere, but legal realists say that Jones’s background will determine the outcome. If she spent 20 years representing insurance companies, she will tend to favor the airline. If her law practice consisted of helping the “little guy,” she will favor the plaintiff.

Other legal realists argue, more aggressively, that those in power use the machinery of the law to perpetuate their control. The outcome of a given case will be determined by the needs of those withmoney and political clout. A court puts “window dressing” on a decision, they say, so that society thinks there are principles behind the law. A problem with legal realism, however, is its denial that any lawmaker can overcome personal bias. Yet clearly some do act unselfishly.

SUMMARY OF JURISPRUDENCE

Legal Positivism Law is what the sovereign says.

Natural Law An unjust law is no law at all.

Legal Realism Who enforces the law counts more than what is in writing.

No one school of jurisprudence is likely to seem perfect. We urge you to keep the different theories in mind as you read cases in the book.

1-6 WORKING WITH THE BOOK’S FEATURES In this section, we introduce a few of the book’s features and discuss how you can use them effectively. We will start with cases.

1-6a Analyzing a Case A law case is the decision a court has made in a civil lawsuit or criminal prosecution. Cases are the heart of the law and an important part of this book. Reading them effectively takes practice. This chapter’s opening scenario is based on a real case. Who can be held liable for the assault? Let’s see.

KUEHN V. PUB ZONE 364 N.J. Super. 301, 835 A.2d 692

Superior Court of New Jersey, Appellate Division, 2003

C A S E S U M M A R Y

Facts: Maria Kerkoulas owned the Pub Zone bar. She knew that several motorcycle gangs frequented the tavern. From her own experience tending bar, and con- versations with city police, she knew that some of the gangs, including the Pagans, were dangerous and prone

to attack customers for no reason. Kerkoulas posted a sign prohibiting any motorcycle gangs from entering the bar while wearing “colors,” that is, insignia of their gangs. She believed that gangs without their colors were less prone to violence, and experience proved her right.

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ANALYSIS Let’s take it from the top. The case is called Kuehn v. Pub Zone. Karl Kuehn is the plaintiff, the person who is suing. The Pub Zone is being sued, and is called the defendant. In this example, the plaintiff’s name happens to appear first, but that is not always true. When a defendant loses a trial and files an appeal, some courts reverse the names of the parties.

The next line gives the legal citation, which indicates where to find the case in a law library. We explain in the footnote how to locate a case if you plan to do research.10

The Facts section provides a background to the lawsuit, written by the authors of this text. The court’s own explanation of the facts is often many pages long, and may involve complex matters irrelevant to the subject covered in this book, so we relate only what is necessary. This section will usually include some mention of what happened at the

Rhino, Backdraft, and several other Pagans, all wear- ing colors, pushed their way past the tavern’s bouncer and approached the bar. Although Kerkoulas saw their colors, she allowed them to stay for one drink. They later moved towards the back of the pub, and Kerkoulas believed they were departing. In fact, they followed a customer named Karl Kuehn to the men’s room where, without any provocation, they savagely beat him. Kuehn was knocked unconscious and suffered brain hemorrhaging, disc hernia- tion, and numerous fractures of facial bones. He was forced to undergo various surgeries, including eye reconstruction.

Although the government prosecuted Rhino and Back- draft for their vicious assault, our case does not concern that prosecution. Kuehn sued the Pub Zone, and that is the case we will read. The jury awarded him $300,000 in damages. However, the trial court judge overruled the jury’s verdict. He granted a judgment for the Pub Zone, meaning that the tavern owed nothing. The judge ruled that the pub’s owner could not have foreseen the attack on Kuehn, and had no duty to protect him from an outlawmotorcycle gang. Kuehn appealed, and the appeals court’s decision follows.

Issue: Did the Pub Zone have a duty to protect Kuehn from the Pagans’ attack?

Decision: Yes, the Pub Zone had a duty to protect Kuehn. The decision is reversed, and the jury’s verdict is reinstated.

Reasoning: Whether a duty exists depends on the fore- seeability of the harm, its potential severity, and the defendant’s ability to prevent the injury. A court should also evaluate society’s interest in the dispute.

A business owner generally has no duty to protect a customer from acts of a third party unless experience suggests that there is danger. However, if the owner could in fact foresee injury, she is obligated to take reasonable safety precautions.

Kerkoulas knew that the Pagans engaged in random violence. She realized that when gang members entered the pub, they endangered her customers. That is why she prohibited bikers from wearing their colors—a reasonable rule. Regrettably, the pub failed to enforce the rule. Pagans were allowed to enter wearing their colors, and the pub did not call the police. The pub’s behavior was unreasonable and it is liable to Kuehn.

Plaintiff The party who is suing.

Defendant The party being sued.

10If you want to do legal research, you need to know where to find particular legal decisions. A case citation guides you to the correct volume(s). The full citation of our case is Kuehn v. Pub Zone, 364 N. J. Super. 301, 835 A. 2d 692. The string of numbers identifies two different books in which you can find the full text of this decision. The first citation is to “N. J. Super,” which means the official court reporter of the state of New Jersey. New Jersey, like most states, reports its law cases in a series of numbered volumes. This case appears in volume 364 of the New Jersey Superior Court reporters. If you go to a law library and find that book, you can then turn to page 301 and—voilà!—you have the case. The decision is also reported in another set of volumes, called the regional reporters. This series of law reports is grouped by geographic region. New Jersey is included in the Atlantic region, so our case appears in reporters dedicated to that region. The “A” stands for Atlantic. After a series of reporters reaches volume 999, a second set begins. Our case appears in volume 835 of the second set of the Atlantic reporters (“A. 2d”), at page 692. In addition, cases are now available online, and your professor or librarian can show you how to find them electronically.

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trial court. Lawsuits always begin in a trial court. The losing party often appeals to a court of appeals, and it is usually an appeals court decision that we are reading. The trial judge ruled in favor of Pub Zone, but later, in the decision we are reading, Kuehn wins.

The Issue section is very important. It tells you what the court had to decide—and also why you are reading the case. In giving its decision, a court may digress. If you keep in mind the issue and relate the court’s discussion to it, you will not get lost.

The Decision is the court’s answer to the issue posed. A court’s decision is often referred to as its holding. The court rules that the Pub Zone did have a duty to Kuehn. The appellate court reverses the trial court’s decision, meaning that it declares the trial judge’s ruling wrong and void. The appellate judges also reinstate the jury verdict. The appellate court could have remanded the case if the judges had wished, meaning to send it back down to the lower court for a new trial. If the appeals court had agreed with the trial court’s decision, the judges would have affirmed the lower court’s ruling, meaning to uphold it.

The Reasoning section explains why the court reached its decision. The actual written decision may be three paragraphs or 75 pages. Some judges offer us lucid prose, while others seem intent on torturing the reader. Judges frequently digress and often discuss matters that are irrelevant to the issue on which this text is focusing. For those reasons, we have taken the court’s explanation and recast it in our own words. If you are curious about the full opinion, you can always look it up.

Let us examine the reasoning. The court begins with a set of guidelines concerning a business owner’s duty. Whether a defendant has such a duty depends on the foreseeability and severity of the harm, whether the business person could have prevented it, and society’s interest. The court emphasizes that a bar owner is not an ensurer of its patrons’ safety. Not every assault in a pub results in the defendant’s liability. The judges are emphasizing that courts do not reach decisions arbitrarily. They attempt to make thoughtful choices, consistent with earlier rulings, which make good sense for the general public.

Having laid out the ground rules, the court describes the key facts, from this case, that it will use to decide whether the Pub Zone had a duty to Kuehn. The judges note that the bar’s owner knew that gang members were dangerous. The rule against wearing colors made sense. When Pagans entered wearing their insignia, the pub had a duty to protect its patrons. The pub’s owner was still not obligated to guarantee the safety of its patrons, but she had to do a reasonable job of reacting to the foreseeable danger. All Kerkoulas reasonably had to do was enforce the pub’s no-colors rule and telephone the police if gang members refused to obey it. When she failed to take those steps, she violated her duty to Kuehn and became liable. The court reversed the trial judge’s decision and reinstated the jury’s verdict.

1-6b Devil’s Advocate Each chapter has several cases. After some of them, a “Devil’s Advocate” feature offers you a contrasting view of the legal issue. This is not part of the case but is instead a suggestion of another perspective on the problem discussed. The authors take no position for or against the court’s decision, but merely want you to consider an alternate view, and decide which analysis of the law makes more sense to you—that of the court or the Devil’s Advocate. Is the following view persuasive?

Devil’s Advocate A court should not force small businesses to guarantee their customers’ safety. Two or three violent men,

whether motorcycle gang members or frustrated professors, could enter a grocery store or clothing retailer at anytime and mindlessly attack innocent visitors. Random attacks are just that—random, unforeseeable. No merchant should be required to anticipate them. Send the criminals to jail, but do not place the burden on honest businesspeople.

CHAPTER 1 Introduction to Law 15

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1-6c Exam Strategy This feature gives you practice analyzing cases the way lawyers do—and the way you must on tests. Law exams are different from most others because you must determine the issue from the facts provided. Too frequently, students faced with a law exam forget that the questions relate to the issues in the text and those discussed in class. Understandably, students new to law may focus on the wrong information in the problem or rely on material learned elsewhere. Exam Strategies teach you to figure out exactly what issue is at stake, and then analyze it in a logical, consistent manner. Here is an example, relating to the element of “duty,” which the court discussed in the Pub Zone case.

EXAM Strategy

The Big Red Traveling (BRT) Carnival is in town. Tony arrives at 8:00 p.m., parks in the lot—and is robbed at gunpoint by a man who beats him and escapes with his money. There are several police officers on the carnival grounds, but no officer is in the parking lot at the time of the robbery. Tony sues, claiming that brighter lighting and more police in the lot would have prevented the robbery. There has never before been any violent crime—robbery, beating, or otherwise—at any BRT carnival. BRT claims it had no duty to protect Tony from this harm. Who is likely to win?

Strategy: Begin by isolating the legal issue. What are the parties disputing? They are debating whether BRT had a duty to protect Tony from an armed robbery, committed by a stranger. Now ask yourself: How do courts decide whether a business has a duty to prevent this kind of harm? The Pub Zone case provides our answer. A business owner is not an ensurer of the visitor’s safety. The owner generally has no duty to protect a customer from the criminal act of a third party, unless the owner knows the harm is occurring or could foresee it is about to happen. (In the Pub Zone case, the business owner knew of the gang’s violent history, and could have foreseen the assault.) Now apply that rule to the facts of this case.

Result: There has never been a violent attack of any kind at a BRT carnival. BRT cannot foresee this robbery, and has no duty to protect against it. The carnival wins.

1-6d You Be the Judge Many cases involve difficult decisions for juries and judges. Often both parties have legitimate, opposing arguments. Most chapters in this book will have a feature called “You Be the Judge,” in which we present the facts of a case but not the court’s holding.

We offer you two opposing arguments based on the kinds of claims the lawyers made in court. We leave it up to you to debate and decide which position is stronger or to add your own arguments to those given.

The following case is another negligence lawsuit, with issues that overlap those of the Pub Zone case. This time the court confronts a fight that resulted in a death. The victim’s distraught family sued the owner of a bar, claiming that one of his employees was partly responsible for the death. Once again, the defendant asked the court to dismiss the case, claiming that he owed no duty to protect the victim—the same argument made by the Pub Zone.

But there is a difference here—this time the defendant owned the bar across the street, not the one where the fight took place. Could he be held legally responsible for the death? You be the judge.

16 U N I T 1 The Legal Environment

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Chapter Conclusion We depend upon the law to give us a stable nation and economy, a fair society, a safe place to live and work. These worthy goals have occupied ancient kings and twenty-first-century lawmakers alike. But while law is a vital tool for crafting the society we want, there are no easy answers about how to create it. In a democracy, we all participate in the crafting. Legal rules control us, yet we create them. A working knowledge of the law can help build a successful career—and a solid democracy.

You Be the Judge

Facts: In the days before cell phones, a fight broke out at Happy Jack’s Saloon. A good Samaritan ran across the street to the Circle Inn, whereheaskedthebartender to let him use the telephone to call the police. The bartender refused.

Back at Happy Jack’s Saloon, the fight escalated, and a man shot and killed Soldano’s father. Soldano sued the owner of the Circle Inn for negligence. He argued the bartender violated a legal duty when he refused to hand over the inn’s telephone, and that, as the employer of the bar- tender, O’Daniels was partially liable for his father’s death.

The lower court dismissed the case, citing the princi- ple that generally, a person does not have a legal respon- sibility to help another unless he created the dangerous situation in the first place. Soldano appealed. You Be the Judge: Did the bartender have a duty to allow the use of the Circle Inn’s telephone? Argument for the Defendant: Your honors, my client did not act wrongfully. He did nothing to create the danger. The fight was not even on his property. We sympathize with the plaintiff, but it is the shooter, and perhaps the bar where the fight took place, who are responsible for his father’s death. Our client was not involved. Liability can be stretched only so far.

The court would place a great burden on the citi- zens of California by going against precedent. The Circle Inn is Mr. O’Daniel’s private property. If the court imposes potential liability on him in this case, would citizens be forced to open the doors of their homes whenever a stranger claims an emergency?

Criminals would delight in their newfound ability to gain access to busi- nesses and residences by simply demanding to use a phone to “call the police.”

The law has developed sensibly. People are left to decide for themselves whether to help in a dangerous situation. They are not legally required to place them- selves in harm’s way. Argument for the Plaintiff: Your honors, the Circle Inn’s bartender had both a moral and a legal duty to allow the use of his establishment’s telephone. The Circle Inn may be privately owned, but it is a business open to the public. Anyone in the world is invited to stop by and order a drink or a meal. The good Samaritan had every right to be there.

We do not argue that the bartender had an obligation to break up the fight or endanger himself in any way. We simply argue he had a responsibility to stand aside and allow a free call on his restaurant’s telephone. Any “bur- den” on him or on the Circle Inn was incredibly slight. The potential benefits were enormous. The trial court made a mistake in concluding that a person never has a duty to help another. Such an interpretation makes for poor public policy.

There is no need to radically change the . Residences can be excluded from this ruling. People need not be required to allow strangers into their homes. This court can simply determine that businesses have a legal duty to allow the placement of emergency calls during normal business hours.

SOLDANO V. O’DANIELS 141 Cal. App. 3d 443

Court of Appeal of California, 5th Appellate District,1983

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EXAM REVIEW

1. THE FEDERAL SYSTEM Our federal system of government means that law comes from a national government in Washington, D.C., and from 50 state governments. (pp. 7–9)

2. LEGAL HISTORY The history of law foreshadows many current legal issues, including mediation, partnership liability, the jury system, the role of witnesses, the special value placed on land, and the idea of precedent. (pp. 4–5)

3. PRIMARY SOURCES OF LAW The primary sources of contemporary law are:

• United States Constitution and state constitutions;

• Statutes, which are drafted by legislatures;

• Common law, which is the body of cases decided by judges, as they follow earlier cases, known as precedent;

• Court orders, which place obligations on specific people or companies;

• Administrative law, the rules and decisions made by federal and state administrative agencies; and

• Treaties, agreements between the United States and foreign nations. (pp. 6–10).

Question: The stock market crash of 1929 and the Great Depression that followed were caused in part because so many investors blindly put their money into stocks they knew nothing about. During the 1920s, it was often impossible for an investor to find out what a corporation was planning to do with its money, who was running the corporation, and many other vital things. Congress responded by passing the Securities Act of 1933, which required a corporation to divulge more information about itself before it could seek money for a new stock issue. What kind of law did Congress create?

Strategy: What is the question seeking? The question asks you which type of law Congress created when it passed the 1933 Securities Act. What are the primary kinds of law? Administrative law consists of rules passed by agencies. Congress is not a federal agency. Common law is the body of cases decided by judges. Congress is not a judge. Statutes are laws passed by legislatures. Congress is a legislature. (See the “Result” at the end of this section.)

4. CRIMINAL LAW Criminal law concerns behavior so threatening to society that it is outlawed altogether. Civil law deals with duties and disputes between parties, not with outlawed behavior. (pp. 10–11)

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Question: Bill and Diane are hiking in the woods. Diane walks down a hill to fetch fresh water. Bill meets a stranger, who introduces herself as Katrina. Bill sells a kilo of cocaine to Katrina, who then flashes a badge and mentions how much she enjoys her job at the Drug Enforcement Agency. Diane, heading back to camp with the water, meets Freddy, a motorist whose car has overheated. Freddy is late for a meeting where he expects to make a $30 million profit; he’s desperate for water for his car. He promises to pay Diane $500 tomorrow if she will give him the pail of water, which she does. The next day, Bill is in jail and Freddy refuses to pay for Diane’s water. Explain the criminal law/civil law distinction and what it means to Bill and Diane. Who will do what to whom, with what results?

Strategy: You are asked to distinguish between criminal and civil law. What is the difference? The criminal law concerns behavior that threatens society and is therefore outlawed. The government prosecutes the defendant. Civil law deals with the rights and duties between parties. One party files a suit against the other. Apply those different standards to these facts. (See the “Result” at the end of this section.)

5. JURISPRUDENCE Jurisprudence is concerned with the basic nature of law. Three theories of jurisprudence are

1. Legal positivism: The law is what the sovereign says it is. 2. Natural law: An unjust law is no law at all. 3. Legal realism: Who enforces the law is more important than what the law says.

(pp. 11–13)

3. Result: The Securities Act of 1933 is a statute.

4. Result: The government will prosecute Bill for dealing in drugs. If convicted, he will go to prison. The government will take no interest in Diane’s dispute. However, if she chooses, she may sue Freddy for $500, the amount he promised her for the water. In that civil lawsuit, a court will decide whether Freddy must pay what he promised; however, even if Freddy loses, he will not go to jail.

MULTIPLE-CHOICE QUESTIONS 1. The United States Constitution is among the finest legal accomplishments in the

history of the world. Which of the following influenced Benjamin Franklin, Thomas Jefferson, and the rest of the Founding Fathers?

(a) English common law principles (b) the Iroquois’s system of federalism (c) Both (a) and (b) (d) None of the above

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2. Which of the following parts of the modern legal system are “borrowed” from medieval England?

(a) Jury trials (b) Special rules for selling land (c) Following precedent (d) All of the above

3. Union organizers at a hospital wanted to distribute leaflets to potential union members, but hospital rules prohibited leafleting in areas of patient care, hallways, cafeterias, and any areas open to the public. The National Labor Relations Board, a government agency, ruled that these restrictions violated the law and ordered the hospital to permit the activities in the cafeteria and coffee shop. What kind of law was it creating?

(a) A statute (b) Common law (c) A constitutional amendment (d) Administrative regulation

4. If the Congress creates a new statute with the President’s support, it must pass the idea by a___majority vote in the House and the Senate. If the President vetoes a proposed statute and the Congress wishes to pass it without his support, the idea must pass by a___majority vote in the House and Senate.

(a) simple; simple (b) simple; two-thirds (c) simple; three-fourths (d) two-thirds; three-fourths

5. What part of the Constitution addresses the most basic liberties? (a) Article I (b) Article II (c) Article III (d) Amendments

ESSAY QUESTIONS 1. Burglar Bob breaks into Vince Victim’s house. Bob steals a flat-screen television

and laptop and does a significant amount of damage to the property before he leaves. Fortunately, Vince has a state-of-the-art security system. It captures excellent images of Bob, who is soon caught by police. Assume that two legal actions follow, one civil and one criminal. Who will be responsible for bringing the civil case? What will be the outcome if the jury believes that Bob burgled Vince’s house? Who will be responsible for bringing the criminal case? What will be the outcome if the jury believes that Bob burgled Vince’s house?

20 U N I T 1 The Legal Environment

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2. As “The Oculist’s Case” indicates, the medical profession has faced a large number of lawsuits for centuries. In Texas, a law provides that, so long as a doctor was not reckless and did not intentionally harm a patient, recovery for “pain and suffering” is limited to $750,000. In many other states, no such limit exists. If a patient will suffer a lifetime of pain after a botched operation, for example, he might recover millions in compensation. Which rule seems more sensible to you—the “Texas” rule or the alternative?

3. YOU BE THE JUDGE WRITING PROBLEM Should trials be televised? Here are a few arguments on both sides of the issue. You be the judge. Arguments against live television coverage: We have tried this experiment and it has failed. Trials fall into two categories: those that create great public interest and those that do not. No one watches dull trials, so we do not need to broadcast them. The few that are interesting have all become circuses. Judges and lawyers have shown that they cannot resist the temptation to play to the camera. Trials are supposed to be about justice, not entertainment. If a citizen seriously wants to follow a case, she can do it by reading the daily newspaper. Arguments for live television coverage: It is true that some televised trials have been unseemly affairs, but that is the fault of the presiding judges, not the media. Indeed, one of the virtues of television coverage is that millions of people now understand that we have a lot of incompetent people running our courtrooms. The proper response is to train judges to run a tight trial by prohibiting grandstanding by lawyers. Access to accurate information is the foundation on which a democracy is built, and we must not eliminate a source of valuable data just because some judges are ill-trained or otherwise incompetent.

4. Leslie Bergh and his two brothers, Milton and Raymond, formed a partnership to help build a fancy saloon and dance hall in Evanston, Wyoming. Later, Leslie met with his friend and drinking buddy, John Mills, and tricked Mills into investing in the saloon. Leslie did not tell Mills that no one else was investing cash or that the entire enterprise was already bankrupt. Mills mortgaged his home, invested $150,000 in the saloon—and lost every penny of it. Mills sued all three partners for fraud. Milton and Raymond defended on the grounds that they did not commit the fraud; only Leslie did. The defendants lost. Was that fair? By holding them liable, what general idea did the court rely on? What Anglo-Saxon legal custom did the ruling resemble?

5. Kuehn v. Pub Zone and Soldano v. O’Daniels both involve attacks in a bar. Should they have the same result? If so, in which way—in favor of the injured plaintiffs or owner- defendants? If not, why should they have different outcomes? What are the key facts that lead you to believe as you do?

DISCUSSION QUESTIONS 1. Do you believe that there are toomany lawsuits in the

United States? If so, do you place more blame for the problem on lawyers or on individuals who go to court? Is there anything that would help the problem, or will we always have large numbers of lawsuits?

2. In the 1980s, the Supreme Court ruled that it is legal for protesters to burn the American flag.

This activity counts as free speech under the Constitution. If the Court hears a new flag-burning case in this decade, should it consider changing its ruling, or should it follow precedent? Is following past precedent something that seems sensible to you: always, usually, sometimes, rarely, or never?

CHAPTER 1 Introduction to Law 21

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3. When should a business be held legally responsible for customer safety? Consider the following statements, and consider the degree to which you agree or disagree:

• A business should keep customers safe from its own employees.

• A business should keep customers safe from other customers.

• A business should keep customers safe from themselves. (Example: an intoxicated customer who can no longer walk straight.)

• A business should keep people outside its own establishment safe if it is reasonable to do so.

4. In his most famous novel, The Red and the Black, the French author Stendhal (1783–1842) wrote: “There is no such thing as ‘natural law’: this expression is nothing but old nonsense. Prior to laws, what is natural is only the strength of the lion,

or the need of the creature suffering from hunger or cold, in short, need.” What do you think? Does legal positivism or legal realism seem more sensible to you?

5. At the time of this writing, voters are particularly disgruntled. A good many people seem to be disgusted with government. For this question, we intentionally avoid distinguishing between Democrats and Republicans, and we intentionally do not name any particular President. Consider the following statements, and consider the degree to which you agree or disagree:

• I believe that members of Congress usually try to do the right thing for America.

• I believe that Presidents usually try to do the right thing for America.

• I believe that Supreme Court justices usually try to do the right thing for America.

22 U N I T 1 The Legal Environment

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CHAPTER2 ETHICS AND CORPORATE SOCIAL RESPONSIBILITY Eating is one of life’s most fundamental needs and greatest pleasures. Yet all around the world many people go to bed hungry. Food companies have

played an important role in reducing hunger by producing vast quantities of food cheaply. Somuch food, so cheaply that, in America, one in three adults and one in five children are obese. Some critics argue that food companies bear responsibility for this overeating because theymake their products too alluring. Many processed food products are calorie bombs of fat (which is linked to heart disease), sugar (leading to diabetes), and salt (causing high blood pressure). What obligation do food producers and restaurants have to their customers? After all, no one is forcing anyone to eat. Do any of the following examples cross the line into unethical behavior?

1. Increasing Addiction. Food with high levels of fat, sugar, and salt not only taste better, they are also more addictive to consumers. Food processors hire neuroscientists who

perform MRIs on consumers to gauge the precise level of fat, sugar, and salt that will create the most powerful cravings, the so-called bliss point. To take one example, in some Prego tomato sauces, sugar is the second most important ingredient after tomatoes. Did you know you were getting a large dose of sugar with your pasta?

2. Increasing Quantity. Food companies also work hard to create new categories of products that increase the number of times a day that people eat and the amount of calories in each session. For example, they have

created a new category of food that is meant to be more than a snack but less than a meal, such as Hot Pockets. But some versions of this product have more than 700 calories, which

Food with high levels of fat, sugar and salt not

only taste better, they are also more addictive to

consumers.

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would be a lot for lunch, never mind for just a snack. And candy companies carefully package their products to encourage consumers to nibble all day. For example, when Hershey’s learned that the wrappers on a Reese’s Peanut Butter Cup act as a deterrent to nonstop eating, the company created Reese’s minis, which are unwrapped candies in a resealable bag. Feel free to chow down!

Food executives argue that they are just providing what consumers want.

3. Increasing Calories. Uno Chicago Grill serves a macaroni and cheese dish that, by itself, provides more than two-thirds of the calories that a moderately active man should eat in one day, and almost three times the amount of saturated fat. But this dish is at least food. Dunkin Donuts offers a Frozen Caramel Coffee Coolatta with more than one- third the calories that a male should have in a day and 50 percent more saturated fat. Of course, these items are even worse choices for women and children. Should restaurants serve items such as these? If they do, what disclosure should they make?

4. Targeting Children. Kraft Food developed Lunchables, packaged food designed for children to take to school. The first version contained bologna, cheese, crackers, and candy—all of which delivered unhealthy levels of fat, sugar, and salt. The company lured children by advertising on Saturday morning cartoons.

5. Targeting the Poor. Traditionally, Coca Cola focused its marketing efforts on low-income areas in the United States. It then took this effort overseas, selling Coke in the slums of Brazil. One of its strategies is to provide small bottles that cost only 20 cents. Said Jeffrey Dunn, the former president and chief operating officer for Coca Cola in North and South America, “These people need a lot of things, but they don’t need a Coke. I almost threw up.”1 When Dunn tried to develop more healthful strategies for Coke, he was fired.

2-1 INTRODUCTION This text, for the most part, covers legal ideas. The law dictates how a person must behave. This chapter examines ethics, or how people should behave. Any choice that affects people or animals is an ethics decision. This chapter will explore ethical dilemmas that commonly arise in workplaces, and present tools for making decisions when the law does not require or prohibit any particular choice.

Ethics decision Any choice that affects people or animals.

Ethics How people should behave.

1Michael Moss, “The Extraordinary Science of Addictive Junk Food,” New York Times, February 20, 2013.

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If a person is intent on lying, cheating, and stealing his way through a career, then he is unlikely to be dissuaded by anything in this or any other course. But for the large majority of people who want to do the right thing, it is useful to study new ways of approaching difficult problems.

Laws represent society’s view of basic ethical rules. And most people agree that certain activities such as murder, assault, and fraud are wrong. However, laws may permit behavior that some feel is wrong, and it may criminalize acts that some feel are right. For example, assisted suicide is legal in a few states. Some people believe that it is wrong under all circumstances, while others think that it is the right thing to do for someone suffering horribly from a terminal illness. Likewise, many people feel that it is ethical to record videos of farm animals being mistreated, although some states now prohibit secret videotaping on farms.

In this chapter, the usual legal cases are replaced by Ethics Cases with discussion questions. The goal of these scenarios is to generate classroom debates on right and wrong. It is important for everyone to hear a variety of different points of view. In your career, you will work with and manage diverse groups of people, so it is good to have insight into how different people perceive ethical issues.

We also hope that hearing these various points of view will help you develop your own Life Principles. These principles are the rules by which you live your life. As we will see, research shows that people who think about the right rules for living are less likely to do wrong. Developing your own Life Principles, based on your values, may be the most important outcome of reading this chapter and studying ethics.

How do you go about preparing a list of Life Principles? Think first of important categories. A list of Life Principles should include your rules on:

• Lying

• Stealing

• Cheating

• Applying the same or different standards at home and at work

• Your responsibility as a bystander when you see other people doing wrong

Specific is better than general. Many people say, for example, that they will maintain a healthy work life balance, but such a vow is not as effective as promising to set aside certain specific times each week for family activities. Many religions honor the Sabbath for this reason. Another common Life Principle is: “I will always put my family first.” But what does that mean? That you are willing to engage in unethical behavior at work to make sure that you keep your job? Increase your income by cheating everyone you can? Or live your life so that you serve as a good example?

Some Life Principles focus not so much on right versus wrong but rather serve as a general guide for living a happier, more engaged life: I will keep promises, forgive those who harm me, say I’m sorry, appreciate my blessings every day, understand the other person’s point of view, try to say “yes” when asked for a favor.

Remember that, no matter what you say, every ethics decision you make illustrates your actual Life Principles. For example, one MBA student told the story of how his boss had ordered him to cheat on his expense report. The company did not require any receipts for meals that cost less than $25. He and his fellow salespeople ate at fast food restaurants where it was almost impossible to spend $25. Everyone else was reporting a lot of $24 meals while he was submitting bills for $12. His boss told him he was making everyone else look bad and he needed to increase the amounts he claimed. What is your Life Principle in this case? Understand that if you cheat in this situation, your Life Principle is effectively: I am willing to cheat if it involves small sums or I am willing to cheat if I am unlikely to get caught. An alternative would be: I won’t cheat even if my boss tells me to—I’ll look for another job instead.

CHAPTER 2 Ethics and Corporate Social Responsibility 25

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It is important to think through your Life Principles now, so that you will be prepared when facing ethical dilemmas in the future.

In this chapter, we will present eight topics:

1. The Role of Business in Society

2. Why Be Ethical?

3. Theories of Ethics

4. Ethics Traps

5. Lying

6. Applying the Principles

7. When the Going Gets Tough (responding to unethical behavior)

8. Corporate Social Responsibility

2-2 THE ROLE OF BUSINESS IN SOCIETY Nobel Prize-winning economist Milton Friedman is famous for arguing that a corporate manager’s primary responsibility is to the owners of the organization, that is, to shareholders. Unless the owners explicitly provide otherwise, managers should make the company as profitable as possible while also complying with the law.2

Others have argued that corporations should instead consider all company stakeholders, not just the shareholders. Stakeholders include employees, customers, and the communities and countries in which a company operates. This choice can create an obligation to such broad categories as “society” or “the environment.” For example, after the shooting in Newtown, Connecticut, in which 20 first-graders and 6 educators were murdered, General Electric Co. stopped lending money to shops that sell guns. GE headquarters are near Newtown. Many of its employees lived in the area, and some had children in the Sandy Hook Elementary School where the shooting took place. In this case, GE was putting its employees ahead of its investors.

Every executive will treat employees well if she believes that doing so leads to increased profits. All executives are in favor of giving money to charity if the donation improves the company’s image and thereby increases profits enough to pay for itself. But such win-win cases are not ethical dilemmas. In a true dilemma, a company considers an action that would not increase shareholder returns in any certain or measureable way but would benefit other stakeholders. Neither side is obviously right in the sense that everyone agrees or that the law requires one particular outcome.

As we will see in this chapter, managers face many choices in which the most profitable option is not the most ethical choice. For example, Michael Mudd, a former executive vice president of global corporate affairs for Kraft Foods, had this to say about his fellow executives:

In so many other ways, these are good people. But, little by little, they strayed from the honorable business of feeding people appropriately to the deplorable mission of “increasing shareholder value” by enticing people to consume more and more high-margin, low-nutrition branded products.3

2He also mentions that managers should comply with “ethical custom” but never explains what that means. Milton Friedman, New York Times Magazine, September 13, 1970. 3Michael Moss, “How to Force Ethics on the Food Industry,” New York Times, March 16, 2013.

26 U N I T 1 The Legal Environment

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Of course, when profitability increases and, with it, a company’s stock price, managers also benefit because their compensation is often tied to corporate results, either explicitly or through ownership of stock and options. Thus, managers who say that they are just acting in the best interest of shareholders are also conveniently benefiting themselves. That connection creates an incentive to ignore stakeholders.

Conversely, doing the right thing will sometimes lead to a loss of profits or even one’s job. For example, Hugh Aaron worked for a company that sold plastic materials.4 One of the firm’s major clients hired a new purchasing agent who refused to buy any product unless he was provided with expensive gifts, paid vacations, and sex. When Aaron refused to comply with these requests, the man bought from someone else. And that was that— the two companies never did business again. Aaron did not regret his choice—he believed that his employees’ self-respect was as important as profits. But if your only concern is maximizing your company’s profitability in the short run, you will find yourself in a position of making unethical choices.

2-3 WHY BE ETHICAL? An ethical decision may not be the most profitable, but it does generate a range of benefits for employees, companies, and society.

2-3a Society as a Whole Benefits from Ethical Behavior John Akers, the former chairman of IBM, argues that without ethical behavior, a society cannot be economically competitive. He puts it this way:

Ethics and competitiveness are inseparable. We compete as a society. No society anywhere will compete very long or successfully with people stabbing each other in the back; with people trying to steal from each other; with everything requiring notarized confirmation because you can’t trust the other fellow; with every little squabble ending in litigation; and with government writing reams of regulatory legislation, tying business hand and foot to keep it honest. That is a recipe not only for headaches in running a company, but for a nation to become wasteful, inefficient, and noncompetitive. There is no escaping this fact: the greater the measure of mutual trust and confidence in the ethics of a society, the greater its economic strength.5

In short, ethical behavior builds trust, which is important in all of our relationships. It is the ingredient that allows us to live and work together happily.

2-3b People Feel Better When They Behave Ethically Every businessperson has many opportunities to be dishonest. But each of us must ask ourselves: What kind of person do we want to be? In what kind of world do we want to live? You might think about how you would like people who know you to describe you to others.

Managers want to feel good about themselves and the decisions they have made; they want to sleep well at night. Their decisions—to lay off employees, install safety devices in

4Virtually all of the examples in this chapter are true events involving real people. Only first names are used if the person prefers privacy. Full names are used when the individual has consented or the events are a matter of public record. 5David Grier, “Confronting Ethical Dilemmas,” unpublished manuscript of remarks at the Royal Bank of Canada, September 19, 1989.

CHAPTER 2 Ethics and Corporate Social Responsibility 27

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cars, burn a cleaner fuel—affect people’s lives. And their unethical decisions are painful to remember.

To take an example, an executive, whom we will call “Hank,” told a story that still haunts him. His boss had refused to pay his tuition for an MBA program so Hank went over his head and asked Sam, an executive several levels higher. Sam interceded immediately and person- ally approved the tuition reimbursement. He then took Hank under his wing, checking with him regularly to find out how the program and his work were going. Naturally, Hank felt grateful and indebted. Then one day, some other higher ups told him that they were planning a coup against Sam. They were trying to get him fired in a complete blindside. They offered Hank a big promotion in return for his help. All went according to plan and Sam was fired. When Sam found out about Hank’s betrayal, he called to tell the younger man exactly what he thought of his character. Hank said that he will carry that phone call and his guilt forever. And because he was so untrustworthy, he finds it hard to trust others.

2-3c Unethical Behavior Can Be Very Costly Unethical behavior is a risky business strategy—it can harm not only the bad actors but entire industries and even countries. For example, when VIPshop recently offered its shares publicly in the United States, they plummeted in price. This was the first Chinese company to go public in the United States in nine months, since a series of accounting frauds in other Chinese companies had caused billions of dollars in losses. Although VIPshop had done nothing wrong, investors were skeptical of all Chinese companies.

Although unethical decisions may increase short-term profits, they can create a lot of long- term harm. Johnson & Johnson (J&J) manufactured a new artificial hip that had more metal parts than the old version. In theory, the hip would last longer and thereby let the patient avoid difficult replacement surgery. But the theory turned out to be wrong. The two parts ground together, releasing microscopic bits of metal that not only failed quickly but also irreparably damaged the patient’s bone and tissue. Even when Johnson & Johnson (J&J) had data from an English surgeon revealing these problems, it denied and stonewalled while continuing to sell the product. J&J now faces over 10,000 lawsuits. The company has not only taken a $3 billion charge in its financial statements to cover legal and medical costs, it finds its reputation sullied.

What is the cost of a lost reputation?Research indicates that consumers are willing to paymore for a product that they believe to be ethically produced. Andmuch less if they believe it was made using shoddy ethical practices.6 Unethical behavior can also cause other, subtler damage. In one survey, a majority of those questioned said that they had witnessed unethical behavior in their workplace and that this behavior had reduced productivity, job stability, and profits. Unethical behavior in an organization creates a cynical, resentful, and unproductive workforce.

Although there is no guarantee that ethical behavior pays in the short or long run, there is evidence that the ethical company is more likely to win financially. Ethical companies tend to have a better reputation, more creative employees, and higher returns than those that engage in wrongdoing.7

But ifwe decide thatwewant to behave ethically, howdoweknowwhat ethical behavior is?

2-4 THEORIES OF ETHICS When making ethical decisions, people sometimes focus on the reason for the decision— they want to do what is right. Thus, if they think it is wrong to lie, then they will tell the truth no matter what the consequence. Other times, people think about the outcome

6Remi Trudel and June Cotte, “Does it Pay to Be Good,” Sloan Management Review, January 8, 2009. 7For sources, see “Ethics: A Basic Framework,” Harvard Business School case 9-307-059.

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of their actions. They will do whatever it takes to achieve the right result, no matter what. This choice—between doing right and getting the right result—has been the subject of much philosophical debate.

2-4a Utilitarian Ethics In 1863, Englishman John Stuart Mill wrote Utilitarianism. To Mill, a correct decision was one that would maximize overall happiness and minimize overall pain, thereby producing the greatest net benefit. As he put it, his goal was to produce the greatest good for the greatest number of people. Risk management and cost-benefit analyses are examples of utilitarian business practices.

Suppose that an automobile manufacturer could add a device to its cars that would reduce air pollution. As a result, the incidence of strokes and lung cancer would decline dramatically, saving society hundreds of millions of dollars over the life of the cars. But by charging a higher price to cover the cost of the device, the company would sell fewer cars and shareholders would earn lower returns. A utilitarian would argue that, despite the decline in profits, the company should install the device.

Consider this example that a student told us:

During college, I used drugs—some cocaine, but mostly prescription painkillers. Things got pretty bad. At one point, I would wait outside emergency rooms hoping to buy drugs from people who were leaving. But that was three years ago. I went into rehab and have been clean ever since. I don’t even drink. I’ve applied for a job, but the application asks if I have ever used drugs illegally. I am afraid that if I tell the truth, I will never get a job. What should I say on the application?

A utilitarian would ask: What harm will be caused if she tells the truth? She will be less likely to get that job, or maybe any job—a large and immediate harm. What if she lies? She might argue that no harm would result because she is now clean, and her past drug addiction will not have an adverse impact on her new employer.

There are many critics of utilitarian thought. Some argue that it is very difficult to measure utility accurately, at least in the way that one would measure distance or the passage of time. The car company does not really know how many lives will be saved or how much its profits might decline if the device is installed. It is also difficult to predict benefit and harm accurately. The recovered drug addict may relapse, or her employer may find out about her lie.

A focus on outcome can justify some really terrible behavior. Among other things, it can be used to legitimize torture. After the 9/11 terrorist attacks, Americans debated the acceptability of torture. Is it ethical to torture a terrorist with the hope of obtaining the details of an upcoming attack?

Or suppose that wealthy old Ebenezer has several chronic illnesses that cause him great suffering and prevent him from doing any of the activities that once gave meaning to his life. Also, he is such a nasty piece of work that everyone who knows him hates him. If he were to die, all his heirs would benefit tremendously from the money that they inherited from him, including a disabled grandchild who then could afford medical care that would improve his life dramatically. Would it be ethical to kill Ebenezer?

2-4b Deontological Ethics The word deontological comes from the Greek word for obligation. Proponents of deontological ethics believe that utilitarians have it all wrong and that the results of a decision are not as important as the reason for which it is made. To a deontological thinker, the ends do not justify the means. Rather, it is important to do the right thing, no matter the result.

The best-known proponent of the deontological model was the eighteenth-century German philosopher Immanuel Kant. He believed in what he called the categorical imperative. He argued that you should not do something unless you would be willing to have everyone else do it, too. Applying this idea, he concluded that one should always tell

Deontological From the Greek word for obligation. The duty to do the right thing, regardless of the result.

Kant’s categorical imperative An act is only ethical if it would be acceptable for everyone to do the same thing.

CHAPTER 2 Ethics and Corporate Social Responsibility 29

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the truth because if everyone lied, the world would become an awful place. Thus, Kant would say that the drug user should tell the truth on job applications, even if that meant she could not find work. The truth should be told, no matter the outcome.

Kant also believed that human beings possess a unique dignity and that no decision that treats people as commodities could be considered just, even if the decision tended to maximize overall happiness, or profit, or any other quantifiable measure. Thus, Kant would argue against killing Ebenezer, no matter how unpleasant the man was.

Although many people disagree with some of Kant’s specific ideas, most people do acknowledge that a utilitarian approach is incomplete, and that winning in the end does not automatically make a decision right.

2-4c Rawlsian Justice How did you manage to get into college or graduate school? Presumably due to some combination of talent, hard work, and support from family and friends. Imagine that you had been born into different circumstances—say, a country where the literacy rate is only 25 percent and almost all of the population lives in desperate poverty. Would you be reading this book now? Most likely not. People are born with wildly different talents into very different circumstances, all of which dramatically affect their outcomes.

John Rawls (1921–2002) was an American philosopher who referred to these circum- stances into which we are born as life prospects. In his view, hard work certainly matters, but so does luck. Rawls argued that we should think about what rules for society we would propose if we faced a “veil of ignorance.” In other words, suppose that there is going to be a lottery tomorrow that would determine all our attributes. We could be a winner, ending up a hugely talented, healthy person in a loving family, or we could be the most miserable person on the face of the earth.

What type of society would we establish now, if we did not know whether we would be one of life’s winners or losers? First, we would design some form of a democratic system that provided equal liberty to all and important rights such as freedom of speech and religion. Second, we would apply the difference principle. Under this principle we would not plan a system in which everyone received an equal income because society is better off if people have an incentive to work hard. But we would reward the type of work that provides the most benefit to the community as a whole. We might decide, for example, to pay doctors more than baseball players. But maybe not all doctors—perhaps just the ones who research cancer cures or provide care for the poor, not cosmetic surgeons operating on the affluent. Rawls argues that everyone should have the opportunity to earn great wealth so long as the tax system provides enough revenue to provide decent health, education, and welfare for all. In thinking about ethical decisions, it is worth remembering that many of us have been winners in life’s lottery and that the unlucky are deserving of our compassion.

2-4d Front Page Test There you are, trying to decide what to do in a difficult situation. How would you feel if your actions were going to be reported on the Huffington Post, your Facebook page, the front page of a national newspaper or would be tweeted to all of your followers? Would that help you decide what to do? Would such exposure have caused Hank to tell Sam about the planned coup? Make the Johnson & Johnson executives manage their hip implant differently?

The Front Page test is not completely foolproof—there are times you might want to do something private for legitimate reasons. You might, for example, think that having an abortion is completely ethical, but still not want everyone to know. Or, if you live in a state that prohibits the videotaping of mistreated farm animals, you would not want everyone to know that you had done so, even if you thought it the right thing to do.

Difference principle Rawls’ suggestion that society should reward behavior that provides the most benefit to the community as a whole.

Life prospects The opportunities one has at birth, based on one’s natural attributes and initial place in society.

“Veil of ignorance” The rules for society that we would propose if we did not know how lucky we would be in life's lottery.

30 U N I T 1 The Legal Environment

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^ Ethics Case: Lincoln at War ^ In 1865, toward the end of the American civil war, President Abraham Lincoln had to choose between two rival goals: an immediate end to a devastating, bloody war or a change to the Constitution that would make slavery illegal. If he ended the war immediately, the Southern states would return to the Union and then be eligible to vote on the anti-slavery amendment. They would have enough votes to defeat it. He ultimately decided to delay peace with the South, a decision that cost thousands of lives.

To obtain the votes he needed, Lincoln did whatever it took. He figured out how to win over each individual Congressman, appealing to one man’s sense of idealism, another’s greed. He made threats and promises, handed out jobs and cash. And, in the end, he succeeded in ending the barbarous practice of slavery.8

QUESTIONS

• What would Mill, Kant, and Rawls have said about Lincoln’s actions?

• What would have been the result if Lincoln had applied the Front Page test?

• Lincoln risked people’s lives for his principles and made decisions that affected millions. Can you think of a similar scenario in a business context?

2-5 ETHICS TRAPS Very few people wake up one morning and think, “Today I’ll do something unethical.” Then why do so many unethical things happen? Sometimes our brains trick us into believing wrong is right. It is important to understand the ethics traps that create great temptation to do what we know to be wrong or fail to do what we know to be right.

2-5a Money Money is a powerful lure because most people believe that they would be happier if only they had more. But that is not necessarily true. Good health, companionship, and enjoyable leisure activities all contribute more to happiness than money does. And, regardless of income, 85 percent of Americans feel happy on a day-to-day basis anyway.

Money can, of course, provide some protection against the inevitable bumps in the road of life. Being hungry is no fun. If you lose your winter coat, you will be happier if you can replace it. It is easier to maintain friendships if you can afford to go out together occasion- ally. So money can contribute to happiness, but research indicates that this impact disap- pears when household income exceeds $75,000. Above that level, income seems to have no impact on day-to-day happiness. Indeed, there is some evidence that higher income levels actually reduce the ability to appreciate small pleasures. Interestingly, too, people who come into a windfall are happier if they spend it on others or save it rather than blowing it in a spree.9

Money is also a way of keeping score. If my company pays me more, that must mean I am a better employee. So although an increase in income above $75,000 does not affect

8The Steven Spielberg movie Lincoln illustrates this process. 9Elizabeth Dunn and Michael Norton, “Don’t Indulge, Be Happy,” New York Times, July 8, 2012; and Daniel Kahneman and Angus Deaton, “High Income Improves Evaluation of Life but not Emotional Well-Being,” Proceedings of the National Academy of Sciences of the United States of America, August 4, 2010.

CHAPTER 2 Ethics and Corporate Social Responsibility 31

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day-to-day happiness, higher pay can make people feel more satisfied with their lives. They consider themselves more successful and feel that their life is going better.

In short, the relationship between money and happiness is complicated. Above a certain level, more money does not make for more day-to-day happiness. Higher pay can increase general satisfaction with life but when people work so hard or so dishonestly that their health, friendships, and leisure activities suffer, it has the reverse effect.

2-5b Rationalization A recent study found that more creative people tend to be less ethical. The reason? They are better at rationalizing their bad behavior. Virtually any foul deed can be rationalized. Some common rationalizations:

• If I don’t do it, someone else will.

• I deserve this because…

• They had it coming.

• I am not harming a person—it is just a big company.

• This is someone else’s responsibility.

For example, Dan Ariely has found in his ground-breaking research that almost every- one is willing to cheat, just a little. That is because we want to maximize results (and enhance our belief in how smart we are) but we also want to think of ourselves as being honest. If we cheat—just a little—then we can tell ourselves that it does not really count. Ariely did an experiment in which people were asked to solve math problems and he paid them for each correct answer. When participants knew that he was going to check their results, they averaged four correct answers. But when they were allowed to self-report the number they got correct, suddenly people averaged six correct answers.10 You can imagine how they might have rationalized that behavior—“I was close on this one. I normally would have gotten that one right. Today was an off day for me.” Surprisingly, when the partici- pants were paid a lot for each correct answer ($10 as opposed to $0.50), they cheated less. Presumably, they would have felt worse about themselves if they stole a lot of money rather than a little.

To take a real example, the gift shop at the Kennedy Center for the Performing Arts in Washington, D.C., was mostly run by elderly volunteers. The shop had revenues of $400,000 a year, but someone was stealing $150,000 of that. It turned out there was not one thief. Instead, dozens of volunteers were each stealing a little bit, which added up. These people felt good about themselves for being volunteers so they thought that stealing a little was fine.11

Rationalization allows us to expect less of ourselves than we do other people. When we do something wrong, we are creative at explaining why it did not really count. For example, participants in a study were put in the position of deciding whether they or someone else got an easy assignment. When asked in the abstract what would be a fair method for assigning tasks, everyone said that the computer should make the assignments randomly. But when another group of people was actually given the authority to decide, three quarters ignored the computer option and just assigned themselves the easy jobs. And then they rated themselves high on a fairness scale.12 In making a decision that affects you, it is important to remember that you are unlikely to be objective.

10Dan Ariely, “Why We Lie,” Wall Street Journal, May 26, 2012. 11David Brooks, “The Moral Diet,” New York Times, June 7, 2012. 12John Tierney, “Deep Down, We Can’t Fool Even Ourselves,” New York Times, July 1, 2008.

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2-5c Conformity Warren Buffett has been quoted as saying, “The five most dangerous words in business may be: ‘Everybody else is doing it.’ ” Humans are social animals who are often willing to follow the leader, even to a place where they do not really want to go. If all the salespeople in a company cheat on their expense accounts, a new hire is much more likely to view this behavior as acceptable.

^ Ethics Case: Diamonds in the Rough ^ When Orlanda graduated from college, she got a job as a software engineer in Silicon Valley. After two years working in technical support, one of her customers offered her a job at his company. It turned out that her new firm was in shambles but, after months of killer hours, she managed to get the company on a better path. One of her biggest accomplishments was to help a major supplier solve its technical problems so that its product would work reliably. On her birthday, her contact at the supplier (who was a friend of her boss) gave her a diamond watch. Her company had no policy on accepting gifts, so she kept it. Afterwards, she realized that she was spending evenmore time working on this supplier’s issues. But, she said to herself, this was good for her company, too. Also, no one at her company had high ethical standards anyway.

Some months later, the same supplier offered to buy her a diamond necklace if she would make his company a preferred supplier. He said the necklace would look just like the one he had given her boss.

QUESTIONS 1. What ethics traps is Orlanda facing?

2. Is there anything wrong with accepting these gifts?

2-5d Following Orders When someone in authority issues orders, even to do some- thing clearly wrong, it is very tempting to comply. Fear of punishment, the belief in authority figures, and the ability to rationalize all play a role. In a true story (with the facts dis- guised), Amanda worked at a private school that was struggling to pay its bills. As a result, it kept the lights turned off in the hallways. On a particularly cloudy day, a visitor tripped and fell in one of these darkened passages. When he sued, the princi- pal told Amanda to lie on the witness stand and say that the lights had been on. The school’s lawyer reinforced this advice. Amanda did as she was told. When asked why, she said, “I figured it must be the right thing to do if the lawyer said so. Also, if I hadn’t lied, the principal would have fired me, and I might not have been able to get another job in teaching.”

It seems likely that you will be faced many times with the dilemma of a boss who orders you to do something wrong. Executives have told us that they have been ordered to:

• Misrepresent data in a presentation to the board (so the boss could take on a project that was not as profitable as it should have been)

• Avoid hiring certain ethnic groups or pregnant women

• “Smooth” numbers, that is, report sales that had not, actually, taken place yet

• Support the boss’ position, even if it was clearly wrong

“File sharing” sounds friendly and helpful—it has a very different ring than “stealing intellectual property,” which is what

it really is.

CHAPTER 2 Ethics and Corporate Social Responsibility 33

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Be aware, too, that setting goals for your subordinates carries risks. Especially if the goals are too narrowly focused. A law firm partner once said, “If we tell associates they have to bill 2,000 hours a year, they will bill 2,000 hours. Whether they will work 2,000 hours is another matter.” Research supports this view. Participants in an experiment were more likely to cheat if they had been assigned specific goals, whether or not they were actually being paid for meeting the targets.13

As you might expect, employees who work for firms with a culture of blind obedience are twice as likely to report having seen unethical behavior as are workers at companies with a more collaborative environment.14

2-5e Euphemisms To “smooth earnings” sounds a lot better than to “cook the books” or “commit fraud.” And “file sharing” sounds friendly and helpful—it has a very different ring from “stealing intellectual property,” which is what it really is. In making ethical decisions, it is important to use accurate terminology. Anything else is just a variation on rationalization.

2-5f Lost in a Crowd After being struck by a car, a two-year-old child lies at the side of the road as people walk and ride by. No one stops to help, and the child dies. On a busy street, a man picks up a seven-year-old girl and carries her away while she screams, “You’re not my dad—someone help me!” No one responds. The first incident was real; the second one was a test staged by a news station. It took hours and many repetitions before anyone tried to prevent the abduction.

When in a group, people are less likely to take responsibility, because they assume (hope?) that someone else will. They tend to check the reactions of others, and if everyone else seems calm, they assume that all is right. Bystanders are much more likely to react if they are alone and have to form an independent judgment.

Thus, in a business, if everyone is cheating on their expense accounts, smoothing earnings, or sexually harassing the staff, it is tempting to go with the flow rather than protest the wrongdoing. In the example about food companies that began this chapter, one former executive says that producers shrug off responsibility for obesity in America by pointing to all the “other” causes: a car culture; too much screen time; less outdoor play; fewer women at home to cook. And, Americans spend half of their food money outside the home anyway.

^ Ethics Case: Train Spotting ^ Wesley Autrey was standing on a train platform with his two young daughters and a man he did not know. Suddenly, this man had a seizure, causing him to fall on the tracks. Autrey could hear a train approaching so he knew he had only seconds to act. Leaping on to the track, he pulled the man between the rails and lay on top of him to protect him from the train. The train engineer tried to stop, but five cars passed over the two men. Both were unharmed.

Some years later in New York City, a homeless man pushed Ki-Suck Han onto subway tracks, in view of many people. No one reacted, except a photographer who took photos as Han was killed by a train.

13Alina Tugend, “Experts’ Advice to the Goal-Oriented: Don’t Overdo It,” New York Times, October 5, 2012. 14 “The view from the top and bottom,” The Economist, September 24, 2011.

34 U N I T 1 The Legal Environment

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QUESTIONS

• Why was Autrey more likely to act than the crowds watching Han?

• What are your ethical obligations to respond when someone needs help? Or you observe wrongdoing?

• Imagine that, at your work, you know that someone is: � Lying on an expense account � Wrongly booking sales that have not yet occurred � Sexually harassing staff members

What is your ethical obligation? What would you do, under what circumstances?

2-5g Blind Spots As Bob Dylan memorably sang, “How many times can a man turn his head and pretend that he just doesn’t see?” The answer is: a whole lot. For example, Bernard Madoff will long be remembered for running one of the biggest frauds ever through his brokerage house. One of the mysteries yet unresolved is: Who else knew what was going on? His brother, Peter, was second in command at his brother’s firm. He admitted that he had committed many crimes, including income tax evasion and filing false documents with regulators. But he has always insisted that he had no idea his brother was committing fraud.

And then there is the case of Barry Bonds, one of the greatest baseball players ever. Although he quickly gained tremendous weight and muscle mass that was consistent with the illegal use of steroids, neither his team nor baseball executives took any action against him until the federal government began an investigation. (To see the change in Bonds’ physique, google “steroids, Barry Bonds.”)

Or a partner in a law firm was consistently billing 2,000+ hours a year. Yet he seemed to have time to attend his children’s school functions in the middle of the day and was rarely in the office early or late. Firm executives were shocked to discover that he had been over- billing clients.15

2-5h Avoiding Ethics Traps As we see from these ethics traps, circumstances affect our decision making. You are, for example, more likely to act if alone rather than in a crowd.

Being in a hurry also makes a difference. A group of students at Princeton Theological Seminary (i.e., people in training to be ministers) were told to go to a location across campus to give a talk. On their walk over, they encountered a man lying in distress in a doorway. Only one-tenth of those participants who had been told they were late for their talk stopped to help the ill man while almost two-thirds of those who thought they had plenty of time did stop.16

The topic of the talk also mattered. Those who were speaking on the Parable of the Good Samaritan (in which a man offers aid to an injured person from a different clan) were twice as likely to provide help than those who were giving a talk on careers for seminarians.

15For more on this topic, see Max Bazerman and Ann Tenbrunsel, Blind Spots: Why We Fail to Do What’s Right and What to Do about It (Princeton, NJ: Princeton University Press). 16John M. Darley and Daniel C. Batson, “From Jerusalem to Jericho”: A study of situational and dispositional variables in helping behavior,” Journal of Personality and Social Psychology 27, no.1 (July 1973): 100–108.

CHAPTER 2 Ethics and Corporate Social Responsibility 35

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Two thoughts about how to avoid ethics traps:

1. Do not trust your first instinct. Being in a hurry, or in a crowd, being able to rationalize easily, using euphemisms, doing what every else does, receiving an order, being dazzled by money; these can all lead you to make a quick and wrong decision. Test your initial reaction by asking whether you have fallen into any of these traps.

2. Remember your Life Principles. In his research, Ariely found that participants were less likely to cheat if they were reminded of their school honor code or the Ten Commandments (the fundamental rules of both the Christian and Jewish religions). This result was true even if the participants were atheists.

2-6 LYING: A SPECIAL CASE We are taught from an early age to tell the truth. Yet research shows that we tell between one and two lies a day.17 Is honesty the best policy? The consequences of lying can be severe: students are suspended, employees are fired, and witnesses are convicted of perjury. Sometimes the problems are subtler but still significant: a loss of trust or of opportunities.

When is lying acceptable? If poker players bluff their way through lousy hands, we consider them skilled because that is an accepted part of the game. What about white lies to make others feel better: I love your lasagna. You’re not going bald. No, that sweater doesn’t make you look fat. When Victoria McGrath suffered a terrible wound to her leg in the Boston Marathon bombing, Tyler Dodd comforted her at the scene by telling her that he had recovered from a shrapnel wound in Afghanistan. His story was not true—he had never been in combat or Afghanistan. McGrath was grateful to him for his lie because it gave her strength and hope. Was he right or wrong? What are your rules on lying?

Kant felt that any lie violated his principle of the categorical imperative. Because the world would be intolerable if everyone lied all the time, no one should lie ever. He gave the example of the murderer who knocks on your door and asks, “Where’s Lukas?” You know Lukas is cowering just inside, but you might be tempted to lie and send the murderer off in the opposite direction. Kant preferred that you tell what is now called a Kantian Evasion or a palter. That is, you would make a truthful statement that is nonetheless misleading. So, you might say, truthfully, “I saw Lukas in the park just an hour ago.” And off the murderer would go.

Is a Kantian Evasion really more ethical than a lie? For example, when a candidate for the presidency, Bill Clinton was asked if he had ever smoked marijuana. He answered that he “never broke the laws of my state or of the United States.” Later, it was revealed that he had used marijuana while a student in England. So, although technically correct, his statement was misleading. Was that really better than lying about marijuana use?

What are your Life Principles on this issue? There may indeed be good reasons to lie but what are they? Would it be right to say that you would only lie to benefit other people? Lukas hiding from the murderer? Children who believe in Santa Claus? It is useful to analyze this issue now rather than to rationalize later.

What about in business? Does the presence of competition make a difference? When do the ends justify the means?

Kantian evasion or palter A truthful statement that is nonetheless misleading.

17Bella M. DePaulo, Deborah A. Kashy, Susan E. Kirkendol, and Melissa M. Wyer, “Lying in Everyday Life,” Journal of Personality and Social Psychology 70, no. 5, (1996): 979–995.

36 U N I T 1 The Legal Environment

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^ Ethics Case: Truth (?) in Borrowing ^ Rob is in the business of buying dental practices. He finds solo practitioners, buys their assets, signs them to a long-term contract and then improves their management and billing processes so effectively that both he and the dentists are better off.

Rob has just found a great opportunity with a lot of potential profit. There is only one problem. The bank will not give him a loan to buy the practice without checking the dentist’s financial record. Her credit rating is fine, but it turns out that she filed for bank- ruptcy twenty years ago. That event no longer appears on her credit rating, but the bank asked about bankruptcies on the form it required her to sign. She is perfectly willing to lie. Rob refused to turn in the form with a lie. But when the bank learned about the bankruptcy, it denied his loan even though her bankruptcy in no way affects his ability to pay the loan. And the incident is ancient history—the dentist’s current finances are strong. Four other banks also refused to make the loan.

Rob is feeling pretty frustrated. He figures the return on this deal would be 20 percent. Everyone would benefit—the dentist would earn more, her patients would have better technology, he could afford a house in a better school district, and the bank would make a profit. There is one more bank he could try.

QUESTIONS 1. Should Rob file loan documents with the bank, knowing the dentist has lied?

2. Who would be harmed by this lie?

3. What if Rob pays back the loan without incident, as he knew he would? Was what he did wrong? Do the ends justify the means?

4. What is your Life Principle about telling lies? When is making a misrepresentation acceptable? To protect someone’s life or physical safety? To protect a job? To protect another person’s feelings? To gain an advantage? When others are doing the same?

5. Do you have the same rule when lying to protect yourself, as opposed to others?

2-7 APPLYING THE PRINCIPLES Having thought about ethical principles and traps, let’s now practice applying them to situations that are similar to those that you are likely to face in your life. Be aware that some of these ethical dilemmas illustrate the tradeoff between shareholders and stake- holders. Note also that sometimes the right decision will be obvious, but difficult to do because of the risk or expense. Other times, the right answer is unclear, because someone will be harmed no matter what choice you make. In both of these situations, it is important to recognize explicitly the forces that push or pull you when making a decision. Unless you are aware of these forces, you cannot make a truly informed decision.

2-7a Personal Ethics in the Workplace Should you behave in the workplace the way you do at home, or do you have a separate set of ethics for each part of your life? What if your employees behave badly outside of work— should that affect their employment? Consider the following case.

CHAPTER 2 Ethics and Corporate Social Responsibility 37

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^ Ethics Case: No Sheen on Sheen ^ Charlie Sheen, who starred in the hit CBS television show Two and a Half Men, admitted to using large quantities of cocaine. He was hospitalized with drug overdoses and had been charged with both misdemeanor and felony drug offenses, which led to probation several times. When asked about entering rehab, he said that only losers go to recovery programs and he could cure himself with his mind. He openly spent tens of thousands of dollars on prostitutes. His second wife filed a restraining order against him, alleging that he had pushed her down the stairs and threatened to kill her. He was also charged with a felony for threatening his third wife. She claimed that he held a knife to her throat and said, “You better be in fear. If you tell anybody, I’ll kill you.” Then there was the widely reported incident in the Plaza Hotel in New York City in which the police escorted him to the hospital after he trashed his room and threatened the prostitute whom he had hired—all while his ex-wife and children slept in a room across the hall. Five months later, the police removed his twin sons from his house after their mother obtained a restraining order. On a radio show, Sheen made anti-Semitic comments about his boss, called him a clown and a charlatan, and said that he “violently hated him.” This boss was the most successful producer of comedy shows in the business.

QUESTIONS 1. If CBS fired Sheen from his television show, the network would lose tens of millions

of dollars. At what point, if any, should CBS have fired him? If not for this, then for what?

2. Would you fire a warehouse worker who behaved this way? How much revenue does an employee have to bring in to be able to buy his way out of bad behavior?

3. What would you say to someone who argues that the goal at work is to make as much money as possible, but at home it is to be a kind and honorable human being?

4. What would Kant and Mill say is the right thing to do in this case? What result under the Front Page Test?

5. What ethics traps did Sheen’s bosses face in this situation?

6. What is your Life Principle? What behavior are you willing to tolerate in the interest of profitability?

2-7b The Organization’s Responsibility to Society Many products can potentially cause harm to customers or employees. Does it matter if the customers and employees willingly accept exposure to these products? What constitutes informed agreement? What is the company’s responsibility to those who are unwittingly harmed by its products?

^ Ethics Case: Breathing the Fumes ^ Every other year, the National Institutes of Health publish the “Report on Carcinogens,” which lists products that cause cancer. Among those in the most recent report was formal- dehyde, found in furniture, cosmetics, building products, carpets, and fabric softeners. Unless we take heroic efforts to avoid this chemical, we are all exposed to it when inside. Indeed, almost all homes have formaldehyde levels that exceed government safety rules. In an effort to shoot the messenger, the American Chemistry Council, which is an industry