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Business Law Final Exams

S M I T H & R O B E R S O N ’ S

Business Law S E V E N T E E N T H E D I T I O N

R I C H A R D A . M A N N Professor of Business Law

The University of North Carolina at Chapel Hill Member of the North Carolina Bar

B A R R Y S . R O B E R T S Professor of Business Law

The University of North Carolina at Chapel Hill Member of the North Carolina and Pennsylvania Bars

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

Smith & Roberson’s Business Law, Seventeenth Edition Richard A. Mann and Barry S. Roberts

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Print Number: 01 Print Year: 2016

About the Authors

Richard A. Mann received a B.S. in mathematics from the University of North Carolina at Chapel Hill and a J.D. from Yale Law School. He is professor emeritus of business law at the Kenan-Flagler School of Business, University of North Carolina at Chapel Hill, and is past president of the Southeastern Regional Business Law Association. He is a member of Who’s Who in America, Who’s Who in American Law, and the North Carolina Bar.

Professor Mann has written extensively on a number of legal topics, including bankruptcy, sales, secured transac- tions, real property, insurance law, and business associa- tions. He has received the American Business Law Journal’s award both for the best article and for the best comment and has served as a reviewer and staff editor for the publica- tion. Professor Mann is a coauthor of Business Law and the Regulation of Business (Twelfth Edition), Essentials of Business Law and the Legal Environment (Twelfth Edition), and Contemporary Business Law.

Barry S. Roberts received a B.S. in business administration from Pennsylvania State University, a J.D. from the Uni- versity of Pennsylvania, and an LL.M. from Harvard Law School. He served as a judicial clerk for the Pennsylvania Supreme Court prior to practicing law in Pittsburgh. Barry Roberts is professor of business law at the Kenan-Flagler School of Business, University of North Carolina at Chapel Hill, and is a member of Who’s Who in American Law and the North Carolina and Pennsylvania Bars.

Professor Roberts has written numerous articles on such topics as antitrust, products liability, constitutional law, banking law, employment law, and business asso- ciations. He has been a reviewer and staff editor for the American Business Law Journal. He is coauthor of Business Law and the Regulation of Business (Twelfth Edition), Essentials of Business Law and the Legal Envi- ronment (Twelfth Edition), and Contemporary Business Law.

i i i

Contents in Brief

Preface xiv

Table of Cases xviii

Table of Illustrations xxii

P A R T 1

The Legal Environment of Business 1 1 Introduction to Law 2 2 Business Ethics and the Social Responsibility

of Business 14 3 Civil Dispute Resolution 42 4 Constitutional Law 67 5 Administrative Law 90 6 Criminal Law 107 7 Intentional Torts 126 8 Negligence and Strict Liability 147

P A R T 2

Contracts 171 9 Introduction to Contracts 172 10 Mutual Assent 189 11 Conduct Invalidating Assent 211 12 Consideration 231 13 Illegal Bargains 250 14 Contractual Capacity 269 15 Contracts in Writing 284 16 Third Parties to Contracts 309 17 Performance, Breach, and Discharge 327 18 Contract Remedies 345

P A R T 3

Agency 365 19 Relationship of Principal and Agent 366 20 Relationship with Third Parties 389

P A R T 4

Sales 415 21 Introduction to Sales and Leases 416 22 Performance 438 23 Transfer of Title and Risk of Loss 459 24 Products Liability: Warranties and Strict

Liability in Tort 477 25 Sales Remedies 504

P A R T 5

Negotiable Instruments 529 26 Form and Content 530 27 Transfer and Holder in Due Course 546 28 Liability of Parties 577 29 Bank Deposits, Collections, and Funds

Transfers 597

P A R T 6

Unincorporated Business Associations 619 30 Formation and Internal Relations of

General Partnerships 620 31 Operation and Dissolution of General

Partnerships 644 32 Limited Partnerships and Limited Liability

Companies 671

P A R T 7

Corporations 697 33 Nature, Formation, and Powers 698 34 Financial Structure 722 35 Management Structure 745 36 Fundamental Changes 776

P A R T 8

Debtor and Creditor Relations 795 37 Secured Transactions and Suretyship 796 38 Bankruptcy 829

P A R T 9

Regulation of Business 859 39 Protection of Intellectual Property 860 40 Antitrust 882 41 Consumer Protection 905 42 Employment Law 931 43 Securities Regulation 964 44 Accountants’ Legal Liability 1001 45 Environmental Law 1015 46 International Business Law 1034

P A R T 1 0

Property 1051 47 Introduction to Property, Property

Insurance, Bailments, and Documents of Title 1052

48 Interests in Real Property 1079 49 Transfer and Control of Real Property 1099 50 Trusts and Decedents’ Estates 1116

Appendices A-1 A The Constitution of the United States

of America A-2 B Uniform Commercial Code

(Selected Provisions) B-1 C Dictionary of Legal Terms C-1

Index I-1

CONTENTS IN BRIEF v

Contents

Preface xiv

Table of Cases xviii

Table of Illustrations xxii

P A R T 1

The Legal Environment of Business 1

1 Introduction to Law 2 Nature of Law 2 Classification of Law 4 Sources of Law 5 Legal Analysis 9 Chapter Summary 11 Cases 12

2 Business Ethics and the Social Responsibility of Business 14 Law Versus Ethics 15 Ethical Theories 15 Ethical Standards in Business 18 Ethical Responsibilities of Business 19 Corporate Governance 20 Chapter Summary 23 Cases 24 Questions 24 Business Ethics Cases 26

3 Civil Dispute Resolution 42 The Court System 42 The Federal Courts 42 State Courts 44 Jurisdiction 45 Subject Matter Jurisdiction 45 Jurisdiction Over the Parties 47 Civil Dispute Resolution 49 Civil Procedure 50

Alternative Dispute Resolution 53 Chapter Summary 56 Cases 58 Questions 63 Case Problems 64 Taking Sides 66

4 Constitutional Law 67 Basic Principles of Constitutional Law 68 Powers of Government 69 Limitations on Government 72 Chapter Summary 77 Cases 78 Questions 86 Case Problems 87 Taking Sides 89

5 Administrative Law 90 Operation of Administrative Agencies 91 Limits on Administrative Agencies 94 Chapter Summary 96 Cases 97 Case Problems 103 Taking Sides 106

6 Criminal Law 107 Nature of Crimes 107 White-Collar Crime 110 Crimes Against Business 111 Defenses to Crimes 114 Criminal Procedure 115 Chapter Summary 117 Cases 118 Questions 123 Case Problems 124 Taking Sides 125

CONTENTS vii

7 Intentional Torts 126 Intent 127 Harm to the Person 128 Harm to the Right of Dignity 130 Harm to Property 132 Harm to Economic Interests 133 Defenses to Intentional Torts 134 Chapter Summary 136 Cases 137 Questions 143 Case Problems 144 Taking Sides 146

8 Negligence and Strict Liability 147 Negligence 148 Breach of Duty of Care 148 Factual Cause 153 Scope of Liability (Proximate Cause) 153 Harm 154 Defenses to Negligence 155 Strict Liability 156 Activities Giving Rise to Strict Liability 157 Defenses to Strict Liability 158 Chapter Summary 158 Cases 160 Questions 167 Case Problems 168 Taking Sides 170

P A R T 2

Contracts 171

9 Introduction to Contracts 172 Development of the Law of Contracts 172 Definition of a Contract 174 Requirements of a Contract 174 Classification of Contracts 175 Promissory Estoppel 178 Quasi Contracts or Restitution 178 Chapter Summary 179 Cases 180 Questions 186 Case Problems 186 Taking Sides 188

10 Mutual Assent 189 Offer 189 Essentials of an Offer 190 Duration of Offers 192

Acceptance of Offer 195 Communication of Acceptance 196 Variant Acceptances 197 Chapter Summary 199 Cases 200 Questions 206 Case Problems 208 Taking Sides 210

11 Conduct Invalidating Assent 211 Duress 211 Undue Influence 212 Fraud 212 Nonfraudulent Misrepresentation 215 Mistake 216 Chapter Summary 218 Cases 219 Questions 226 Case Problems 227 Taking Sides 230

12 Consideration 231 Legal Sufficiency 231 Bargained-For Exchange 236 Contracts without Consideration 237 Chapter Summary 240 Cases 241 Questions 246 Case Problems 248 Taking Sides 249

13 Illegal Bargains 250 Violations of Statutes 250 Violations of Public Policy 252 Effect of Illegality 254 Chapter Summary 255 Cases 256 Questions 264 Case Problems 265 Taking Sides 267

14 Contractual Capacity 269 Minors 269 Incompetent Persons 272 Intoxicated Persons 272 Chapter Summary 273 Cases 273 Questions 279 Case Problems 281 Taking Sides 283

15 Contracts in Writing 284 Statute of Frauds 284 Contracts within the Statute of Frauds 285 Compliance with the Statute of Frauds 290 Effect of Noncompliance 291 Parol Evidence Rule 292 The Rule 292 Situations to Which the Rule Does Not Apply 292 Supplemental Evidence 293 Interpretation of Contracts 293 Chapter Summary 295 Cases 297 Questions 304 Case Problems 305 Taking Sides 308

16 Third Parties to Contracts 309 Assignment of Rights 309 Delegation of Duties 313 Third-Party Beneficiary Contracts 314 Chapter Summary 316 Cases 318 Questions 323 Case Problems 324 Taking Sides 326

17 Performance, Breach, and Discharge 327 Conditions 327 Discharge by Performance 329 Discharge by Breach 329 Discharge by Agreement of the Parties 331 Discharge by Operation of Law 332 Chapter Summary 334 Cases 336 Questions 340 Case Problems 342 Taking Sides 344

18 Contract Remedies 345 Interests Protected by Contract Remedies 345 Monetary Damages 345 Remedies in Equity 349 Restitution 350 Limitations on Remedies 352 Remedies for Misrepresentation 353 Chapter Summary 354 Cases 355

Questions 361 Case Problems 362 Taking Sides 363

P A R T 3

Agency 365

19 Relationship of Principal and Agent 366 Nature of Agency 366 Creation of Agency 368 Duties of Agent to Principal 369 Duties of Principal to Agent 372 Termination of Agency 374 Chapter Summary 376 Cases 378 Questions 385 Case Problems 386 Taking Sides 388

20 Relationship with Third Parties 389 Relationship of Principal and Third Persons 389 Contract Liability of Principal 389 Tort Liability of Principal 396 Criminal Liability of Principal 398 Relationship of Agent and Third Persons 399 Contract Liability of Agent 399 Tort of Liability of Agent 401 Rights of Agent Against Third Person 401 Chapter Summary 401 Cases 403 Questions 410 Case Problems 411 Taking Sides 413

P A R T 4

Sales 415

21 Introduction to Sales and Leases 416 Nature of Sales and Leases 417 Definitions 417 Fundamental Principles of Article 2 and Article 2A 418 Formation of Sales and Lease Contracts 421 Manifestation of Mutual Assent 421 Consideration 424 Form of the Contract 425 Chapter Summary 427 Cases 428

CON TEN TSv i i i

Questions 434 Case Problems 435 Taking Sides 437

22 Performance 438 Performance by the Seller 438 Performance by the Buyer 443 Obligations of Both Parties 445 Chapter Summary 448 Cases 449 Questions 454 Case Problems 455 Taking Sides 458

23 Transfer of Title and Risk of Loss 459 Transfer of Title 459 Risk of Loss 463 Sales of Goods in Bulk 466 Chapter Summary 468 Cases 469 Questions 473 Case Problems 475 Taking Sides 476

24 Products Liability: Warranties and Strict Liability in Tort 477 Warranties 477 Types of Warranties 478 Obstacles to Warranty Actions 480 Strict Liability in Tort 483 Requirements of Strict Liability 484 Obstacles to Recovery 486 Restatement of Torts (Third): Products Liability 487 Chapter Summary 489 Cases 491 Questions 498 Case Problems 500 Taking Sides 503

25 Sales Remedies 504 Remedies of the Seller 504 Remedies of the Buyer 509 Contractual Provisions Affecting Remedies 513 Chapter Summary 515 Cases 517 Questions 523 Case Problems 525 Taking Sides 527

P A R T 5

Negotiable Instruments 529

26 Form and Content 530 Negotiability 531 Types of Negotiable Instruments 532 Formal Requirements of Negotiable Instruments 534 Chapter Summary 539 Cases 540 Questions 543 Case Problems 544 Taking Sides 545

27 Transfer and Holder in Due Course 546 Transfer 546 Negotiation 546 Indorsements 549 Holder in Due Course 553 Requirements of a Holder in Due Course 553 Holder in Due Course Status 557 The Preferred Position of a Holder in Due Course 557 Limitations Upon Holder in Due Course Rights 560 Chapter Summary 563 Cases 565 Questions 572 Case Problems 574 Taking Sides 576

28 Liability of Parties 577 Contractual Liability 577 Signature 578 Liability of Primary Parties 579 Liability of Secondary Parties 579 Termination of Liability 583 Liability Based on Warranty 583 Warranties on Transfer 583 Warranties on Presentment 584 Chapter Summary 587 Cases 588 Questions 594 Case Problems 596 Taking Sides 596

29 Bank Deposits, Collections, and Funds Transfers 597 Bank Deposits and Collections 597 Collection of Items 598 Relationship between Payor Bank and its Customer 601

CONTENTS ix

Electronic Fund Transfer 604 Types of Electronic Funds Transfers 604 Consumer Funds Transfers 605 Wholesale Funds Transfers 606 Chapter Summary 609 Cases 610 Questions 614 Case Problems 616 Taking Sides 617

P A R T 6

Unincorporated Business Associations 619

30 Formation and Internal Relations of General Partnerships 620 Choosing a Business Association 620 Factors Affecting the Choice 621 Forms of Business Associations 622 Formation of General Partnerships 624 Nature of Partnership 624 Formation of a Partnership 625 Relationships Among Partners 628 Duties Among Partners 629 Rights Among Partners 630 Chapter Summary 634 Cases 636 Questions 641 Case Problems 642 Taking Sides 643

31 Operation and Dissolution of General Partnerships 644 Relationship of Partnership and Partners with Third Parties 644 Contracts of Partnership 644 Torts and Crimes of Partnership 647 Notice to a Partner 648 Liability of Incoming Partner 648 Dissociation and Dissolution of General Partnerships under the RUPA 648 Dissociation 648 Dissolution 649 Dissociation Without Dissolution 651 Dissolution of General Partnerships under the UPA 653 Dissolution 654 Winding Up 654

Continuation After Dissolution 655 Chapter Summary 655 Cases 658 Questions 666 Case Problems 668 Taking Sides 670

32 Limited Partnerships and Limited Liability Companies 671 Limited Partnerships 671 Limited Liability Companies 676 Other Types of Unincorporated Business Associations 682 Chapter Summary 683 Cases 686 Questions 693 Case Problems 695 Taking Sides 696

P A R T 7

Corporations 697

33 Nature, Formation, and Powers 698 Nature of Corporations 699 Corporate Attributes 699 Classification of Corporations 700 Formation of a Corporation 702 Organizing the Corporation 702 Formalities of Incorporation 704 Recognition or Disregard of Corporateness 705 Defective Incorporation 706 Piercing the Corporate Veil 707 Corporate Powers 708 Sources of Corporate Powers 708 Ultra Vires Acts 709 Liability for Torts and Crimes 709 Chapter Summary 709 Cases 712 Questions 717 Case Problems 718 Taking Sides 721

34 Financial Structure 722 Debt Securities 723 Authority to Issue Debt Securities 723 Types of Debt Securities 723 Equity Securities 724 Issuance of Shares 724 Classes of Shares 727

CON TEN TSx

Dividends and Other Distributions 728 Types of Dividends and Other Distributions 729 Legal Restrictions on Dividends and Other Distributions 730 Declaration and Payment of Distributions 733 Liability for Improper Dividends and Distributions 733 Chapter Summary 734 Cases 736 Questions 741 Case Problems 743 Taking Sides 744

35 Management Structure 745 Corporate Governance 745 Role of Shareholders 748 Voting Rights of Shareholders 748 Enforcement Rights of Shareholders 751 Role of Directors and Officers 753 Function of the Board of Directors 753 Election and Tenure of Directors 755 Exercise of Directors’ Functions 755 Officers 757 Duties of Directors and Officers 757 Chapter Summary 761 Cases 763 Questions 772 Case Problems 774 Taking Sides 775

36 Fundamental Changes 776 Charter Amendments 776 Combinations 777 Dissolution 781 Chapter Summary 783 Cases 784 Questions 790 Case Problems 791 Taking Sides 793

P A R T 8

Debtor and Creditor Relations 795

37 Secured Transactions and Suretyship 796 Secured Transactions in Personal Property 796 Essentials of Secured Transactions 797 Classification of Collateral 797 Attachment 799 Perfection 801

Priorities among Competing Interests 804 Default 808 Suretyship 810 Nature and Formation 810 Duties of Surety 812 Rights of Surety 813 Defenses of Surety and Principal Debtor 813 Chapter Summary 816 Cases 819 Questions 824 Case Problems 826 Taking Sides 828

38 Bankruptcy 829 Federal Bankruptcy Law 829 Case Administration—Chapter 3 830 Creditors, the Debtor, and the Estate—Chapter 5 832 Liquidation—Chapter 7 837 Reorganization—Chapter 11 841 Adjustment of Debts of Individuals—Chapter 13 843 Creditors’ Rights and Debtor’s Relief Outside of Bankruptcy 845 Creditors’ Rights 845 Debtor’s Relief 846 Chapter Summary 847 Cases 849 Questions 855 Case Problems 856 Taking Sides 858

P A R T 9

Regulation of Business 859

39 Protection of Intellectual Property 860 Trade Secrets 860 Trade Symbols 862 Trade Names 865 Copyrights 865 Patents 868 Chapter Summary 870 Cases 871 Questions 878 Case Problems 879 Taking Sides 881

40 Antitrust 882 Sherman Act 882 Clayton Act 887 Robinson-Patman Act 890

CONTENTS xi

Federal Trade Commission Act 891 Chapter Summary 892 Cases 893 Questions 901 Case Problems 902 Taking Sides 904

41 Consumer Protection 905 State and Federal Consumer Protection Agencies 905 Consumer Purchases 909 Consumer Credit Transactions 912 Creditors’ Remedies 917 Chapter Summary 918 Cases 920 Questions 927 Case Problems 928 Taking Sides 930

42 Employment Law 931 Labor Law 931 Employment Discrimination Law 933 Employee Protection 939 Chapter Summary 942 Cases 944 Questions 958 Case Problems 959 Taking Sides 963

43 Securities Regulation 964 Securities Act of 1933 965 Definition of a Security 966 Registration of Securities 966 Exempt Securities 968 Exempt Transactions for Issuers 969 Exempt Transactions for Nonissuers 973 Liability 975 Securities Exchange Act of 1934 976 Disclosure 977 Liability 982 Chapter Summary 987 Cases 989 Questions 998 Case Problems 999 Taking Sides 1000

44 Accountants’ Legal Liability 1001 Common Law 1001 Federal Securities Law 1004

Chapter Summary 1007 Cases 1008 Questions 1012 Case Problems 1013 Taking Sides 1014

45 Environmental Law 1015 Common Law Actions for Environmental Damage 1015 Nuisance 1015 Trespass to Land 1016 Strict Liability for Abnormally Dangerous Activities 1016 Problems Common to Private Causes of Action 1016 Federal Regulation of the Environment 1016 The National Environmental Policy Act 1017 The Clean Air Act 1018 The Clean Water Act 1020 Hazardous Substances 1022 International Protection of the Ozone Layer 1024 Chapter Summary 1026 Cases 1028 Questions 1031 Case Problems 1032 Taking Sides 1033

46 International Business Law 1034 The International Environment 1034 Jurisdiction Over Actions of Foreign Governments 1036 Transacting Business Abroad 1037 Forms of Multinational Enterprises 1042 Chapter Summary 1043 Cases 1044 Questions 1047 Case Problems 1048 Taking Sides 1050

P A R T 1 0

Property 1051

47 Introduction to Property, Property Insurance, Bailments, and Documents of Title 1052 Introduction to Property and Personal Property 1052 Kinds of Property 1053 Transfer of Title to Personal Property 1054 Property Insurance 1056 Fire and Property Insurance 1056

CON TEN TSx i i

Nature of Insurance Contracts 1057 Bailments and Documents of Title 1059 Bailments 1059 Documents of Title 1062 Chapter Summary 1065 Cases 1068 Questions 1073 Case Problems 1076 Taking Sides 1077

48 Interests in Real Property 1079 Freehold Estates 1079 Leasehold Estates 1081 Concurrent Ownership 1085 Nonpossessory Interests 1087 Chapter Summary 1090 Cases 1091 Questions 1096 Case Problems 1097 Taking Sides 1098

49 Transfer and Control of Real Property 1099 Transfer of Real Property 1099 Contract of Sale 1099 Deeds 1101 Secured Transactions 1102 Adverse Possession 1104 Public and Private Controls 1104 Zoning 1104 Eminent Domain 1105

Private Restrictions Upon Land Use 1106 Chapter Summary 1107 Cases 1109 Questions 1113 Case Problems 1114 Taking Sides 1115

50 Trusts and Decedents’ Estates 1116 Trusts 1116 Types of Trusts 1116 Creation of Trusts 1118 Decedents’ Estates 1120 Wills 1120 Intestate Succession 1123 Administration of Estates 1124 Chapter Summary 1125 Cases 1126 Questions 1132 Case Problems 1133 Taking Sides 1134

Appendices A-1 Appendix A: The Constitution of the United States of America A-2

Appendix B: Uniform Commercial Code (Selected Provisions) B-1

Appendix C: Dictionary of Legal Terms C-1

Index I-1

CONTENTS xiii

Preface

The format of the Seventeenth Edition follows the tra-dition established by prior editions, in that chapterscontain narrative text, illustrations, cases consisting of selected court decisions, chapter summaries, and end-of- chapter questions and case problems.

Topical Coverage

This text is designed for use in business law and legal environment of business courses generally offered in univer- sities, colleges, schools of business and commerce, commu- nity colleges, and junior colleges. By reason of the text’s broad and deep coverage, instructors may readily adapt this text to specially designed courses in business law or the legal environment of business by assigning and emphasizing dif- ferent combinations of chapters.

Furthermore, this text covers the following parts of the CPA Exam: (1) the business law area and the legal duties and responsibilities of accountants area of the Regulation Section and (2) the corporate governance area of the Busi- ness Environment and Concepts Section.

Emphasis has been placed upon the regulatory environ- ment of business law: the first eight chapters introduce the legal environment of business, and Part 9 (Chapters 39 through 46) addresses government regulation of business.

Up-to-Date

The constitutional law chapter (Chapter 4) discusses recent U.S. Supreme Court decisions in cases challenging the constitutionality of (1) a Federal statute restricting how much money an individual donor may contribute in total to all candidates or committees during a political cycle, (2) Michigan’s constitutional amendment banning affirma- tive action in admissions to the State’s public universities, and (3) States’ refusal to license a marriage between two people of the same sex and to recognize a marriage between two people of the same sex when their marriage was lawfully licensed and performed out of state. The Administrative Law chapter (Chapter 5) discusses the recent U.S. Supreme Court

case making the Patient Protection and Affordable Care Act’s tax credits available in those States that have a Federal Exchange. The new Restatement (Third) of Torts: Liability for Economic Harm is covered in Chapters 7, 8, 11, 18, and 44. The new Restatement (Third) of Restitution and Unjust Enrichment is covered in Chapters 9, 11, 13, 14, 15, 17, 18, 19, and 50. Coverage of limited liability companies has been updated and expanded in Chapter 32. Coverage of benefit corporations has been added in Chapter 33. Coverage of suretyship in Chapter 37 has been updated and expanded. The Intellectual Property chapter (Chapter 39) includes the new Defend Trades Secrets Act of 2016 and the 2016 amend- ments to the Economic Espionage Act of 1996. The Consumer Protection chapter (Chapter 41) covers the FCC’s net-neutrality rule. The Employment Law chapter (Chapter 42) covers the Genetic Information Nondiscrimination Act and the U.S. Supreme Court case holding that in disparate-treatment claims, an employer may not make an applicant’s religious practice a factor in employment decisions. The chapter on Securities Reg- ulation (Chapter 43) covers the U.S. Securities and Exchange Commission’s new Regulation A and Regulation Crowdfunding exemptions. The Environmental Law chapter (Chapter 45) includes coverage of the EPA’s regulation of greenhouse gases and the 2016 amendments to the Toxic Substances Control Act. The International Business Law chapter (Chapter 46) covers the United Nations Convention on the Law of the Sea (UNCLOS).

Readability of Narrative Text

To make the text as readable as possible, all unnecessary “legalese” has been omitted, and necessary legal terms have been printed in boldface and clearly defined, explained, and illustrated. Each chapter is carefully organized with sufficient levels of subordination to enhance the accessibility of the material. The text is enriched by numerous illustrative hypo- thetical and case examples, which help students relate the material to real-life experiences. The end-of-chapter cases are cross-referenced in the text, as are related topics covered in other chapters.

xiv

PREFACE xv

Chapter Objectives

Each chapter begins with a list of learning objectives for students.

Applying the Law

The Applying the Law feature provides a systematic legal anal- ysis of a realistic situation that focuses on a specific concept presented in the chapter. It consists of (1) the facts of a hypo- thetical case, (2) an identification of the broad legal issue pre- sented by those facts, (3) a statement of the applicable rule, (4) the application of the rule to the facts, and (5) a legal con- clusion in the case. The Applying the Law feature appears in fourteen chapters. We wish to acknowledge and thank Profes- sor Ann Olaz�abal, University of Miami, for her contribution in preparing this feature.

Practical Advice

Each chapter has a number of statements that illustrate how legal concepts covered in the chapter can be applied to com- mon business situations.

Case Treatment

All the cases have been edited carefully to preserve the actual language of the court and to show the essential facts of the case, the issue or issues involved, the decision of the court, and the reason for its decision. We have retained the landmark cases from the prior edition. In addition, we have incorporated twenty-seven recent cases, including the following U.S. Supreme Court cases: DIRECTV, Inc. v. Imburgia; Perez v. Mortgage Bankers Ass’n.; Omnicare, Inc. v. Laborers District Council Con- struction Industry Pension Fund; Husky International Electron- ics, Inc., v. Ritz; Harris v. Viegelahn; Young v. United Parcel Service, Inc.; Environmental Protection Agency v. EME Homer City Generation, L. P; and OBB Personenverkehr Ag v. Sachs.

Illustrations

We have used more than 210 classroom-tested figures, dia- grams, charts, tables, and chapter summaries. The figures and diagrams help students conceptualize the many abstract concepts in the law; the charts and tables not only summa- rize prior discussions but also help to illustrate relationships among legal rules. Moreover, each chapter has a summary in the form of an annotated outline of the entire chapter, including key terms.

End-of-Chapter Questions and Case Problems

Classroom-proven questions and case problems appear at the end of chapters to test the student’s understanding of

major concepts. Almost all of the chapters include one or more new questions and/or case problems. We have used the questions (based on hypothetical situations) and the case problems (taken from reported court decisions) in our own classrooms and consider them excellent stimulants to class- room discussion. Students, in turn, have found the questions and case problems helpful in enabling them to apply the basic rules of law to factual situations.

Taking Sides

Each chapter—except for Chapters 1 and 2—has an end-of- chapter feature that requires students to apply critical-think- ing skills to a case-based fact situation. Students are asked to identify the relevant legal rules and develop arguments for both parties to the dispute. In addition, students are asked to explain how they think a court would resolve the dispute.

Appendices

The appendices include the Constitution of the United States (Appendix A), the Uniform Commercial Code (Appendix B), and a comprehensive Dictionary of Legal Terms (Appendix C).

Pedagogical Benefits

Classroom use and study of this book should provide students with the following benefits and skills:

1. Perception and appreciation of the scope, extent, and im- portance of the law.

2. Basic knowledge of the fundamental concepts, principles, and rules of law that apply to business transactions.

3. Knowledge of the function and operation of courts and government administrative agencies.

4. Ability to recognize the potential legal problems which may arise in a doubtful or complicated situation and the necessity of consulting a lawyer and obtaining competent professional legal advice.

5. Development of analytical skills and reasoning power.

Additional Course Tools

MINDTAP

New for Smith and Roberson’s Business Law, 17th edition, MindTap is a personalized teaching experience with relevant assignments that guide students to analyze, apply, and improve thinking, allowing instructors to measure skills and outcomes with ease. Teaching becomes personalized through a pre-built Learning Path designed with key student objectives and the instructor syllabus in mind. Applicable

PREF ACExv i

reading, multimedia, and activities within the learning path intuitively guide students up the levels of learning to (1) Pre- pare, (2) Engage, (3) Apply, and (4) Analyze business law content. These activities are organized in a logical progres- sion to help elevate learning, promote critical-thinking skills and produce better outcomes.

This customizable online course gives instructors the ability to add their own content in the Learning Path as well as modify authoritative Cengage Learning content and learning tools using apps that integrate seamlessly with Learning Management Sys- tems (LMS). Analytics and reports provide a snapshot of class progress, time in course, engagement, and completion rates.

INSTRUCTOR RESOURCES

Instructors can access these resources by going to login.cen- gage.com, logging in with a faculty account username and password, and searching by ISBN 9781337094757.

• Instructor’s Manual The Instructor’s Manual, prepared by Richard A. Mann, Barry S. Roberts, and Beth D. Woods, contains opening ethics questions, suggested activities, and research projects; chapter outlines; teaching notes; answers to the Questions and Case Problems; briefs to cases; and suggested case questions for students.

• PowerPointVR Slides These slides clarify course content and guide student note-taking during lectures.

• Test Bank The Test Bank contains thousands of true/false, multiple-choice, and essay questions. The questions vary in level of difficulty and meet a full range of tagging require- ments so that instructors can tailor their testing to meet their specific needs.

• Cognero Cengage Learning Testing Powered by Cognero is a flexible, online system that allows you to

• author, edit, and manage test bank content from multiple Cengage Learning solutions

• create multiple test versions in an instant

• deliver tests from your LMS, your classroom, or wherever you want

Start right away! Cengage Learning Testing Powered by Cognero works on any operating system or browser.

• No special installs or downloads needed

• Create tests from school, home, the coffee shop— anywhere with Internet access

What will you find?

• Simplicity at every step. A desktop-inspired interface features drop-down menus and familiar, intuitive tools that take you through content creation and management with ease.

• Full-featured test generator. Create ideal assessments with your choice of fifteen question types (including true/false, multiple choice, opinion scale/Likert, and essay). Multi- language support, an equation editor, and unlimited meta- data help ensure your tests are complete and compliant.

• Cross-compatible capability. Import and export content into other systems.

Acknowledgments

We are grateful to those who provided us with comments for previous editions of the book: Miriam R. Albert, Fordham University; Mark Altieri, Cleveland State University; Wm. Dennis Ames, Indiana University of Pennsylvania; Albert Anderson, Mount Aloysius College; Albert Andrews, Jr., Uni- versity of Minnesota; Michael Balsamo, SUNY–Old Westbury; Denise A. Bartles, Missouri Western State College; Lois Yoder Beier, Kent State University; Monika Lovewell Bellows, SUNY–Canton; Robert Bing, William Paterson College; Joell Bjorke, Winona State University; William N. Bockanic, John Carroll University; Andrea Boggio, Bryant University; Donald Boren, Bowling Green State University; Joyce Boland- DeVito, Esq., St. John’s University; Joe Boucher, University of Wisconsin–Madison; L. Brooks, Nichols College; Nicolaus Bruns, Jr., Lake Forest Graduate School of Management; Mark A. Buchanan, Boise State University; Deborah Lynn Bundy, Marquette University; Michael Burg, University of St. Thomas; Debra Burke, Western Carolina University; Thomas J. Canavan, Long Island University–C. W. Post Campus; Regina W. Cannon, University of Georgia; Donald Cantwell, University of Texas–Arlington; John P. Carnasiotis, University of Missouri; Albert L. Carter, Jr., University of the District of Columbia; Thomas D. Cavenagh, North Central College; Jennifer Chapman, Georgia Gwinnett College; Jeff Charles, Bowling Green State University; John Cirace, CUNY– Lehman College; Richard R. Clark, University of the District of Columbia; Arlen Coyle, University of Mississippi; Mitchell F. Crusto, Washington University–St. Louis; Richard Daleb- out, Brigham Young University; Arthur S. Davis, Long Island University; John Davis, Ashland Community & Technical College; Kenneth R. Davis, Fordham School of Business; William Day, Cleveland State University; Alex DeVience, Jr., DePaul University; Craig Disbrow, Plymouth State College, New Hampshire; Robert H. Doud, Adelphi University; William G. Elliott, Saginaw Valley State University; Edward Eramus, State University of New York–Brockport; Kurt Erickson, South West Michigan College; Jay Ersling, Uni- versity of St. Thomas, Minnesota; Robert Evans, Rockford College; Alfred E. Fabian, Ivy Tech Community College; J. Royce Fichtner, Drake University; Thomas Fitzpatrick, Assump- tion College; Joe W. Fowler, Oklahoma State University– Stillwater; Karla H. Fox, University of Connecticut; Stanley

PREFACE xvii

Fuchs, Fordham University; Samuel B. Garber, DePaul University; Nathan T. Garrett, Esq., North Carolina Central University; Michael J. Garrison, North Dakota State Univer- sity; Daniel Gillespie, DePaul University; Dr. Roy Girasa, Pace University; Marvin Gordon, Loyola Chicago University; Sue Gragiano, Bowling Green State University; James Granito, Youngstown State University; John Gray, Faulkner University; Sally Terry Green, Texas Southern University; Dale A. Grossman, Cornell University; Donald Haley, Cleveland State University; Marc Hall, Auburn University Montgomery; Brian Hanlon, North Central College; Dr. Ivan Harber, Indian River State College; James V. Harrison, St. Peter’s State College; Lori K. Harris-Ransom, Caldwell College; Edward J. Hartman, St. Ambrose University; Frances J. Hill, University of Wisconsin–Whitewater; Telford F. Hollman, University of Northern Iowa–Cedar Falls; Georgia L. Holmes, Mankato State University; James Holzinger, Muhlenberg College; Norman Hope, Tabor College; Sarah H. Hudwig, Mary Baldwin College; Velma Jesser, Lane Commu- nity College; Theresa Johnson, Cleveland State University; Marilee Jones-Confield, California State University–Long Beach; Al Joyner, Eastern Illinois University; Mary C. Keifer, Ohio University; Randall Kilbourne, Northwestern State University; Barbara Kirkpatrick, Virginia Intermont College; Edward M. Kissling, Ocean County College, New Jersey; Robert Klepa, UCLA Extension; Louise Knight, Bucknell University; William J. Koval, Jr., Notre Dame College; Duane R. Lambert, California State University–Hayward; Joseph F. Lenius, Northeastern Illinois University; Andrew Liput, Felician College; Avi Liveson, Hunter College; Romain Lorentz, University of St. Thomas; Sarah H. Ludwig, Mary Baldwin College; Richard Luke, Ricks College; Tanya M. Marcum, Bradley University; Pat Maroney, Florida State University; Sharon Martin, Empire State College–Brooklyn Unit; Bruce Marx, SUNY–Old Westbury; Michael A. Mass, American University; Cheryl Massingale, University of Tennessee–Knoxville; Greg K. McCann, Stetson University; Bruce McClain, Cleveland State University; Ann L. McClure, Fort Hays State University; James McGee, College of West- chester; Charles R. McGuire, Illinois State University; Herbert McLaughlin, Bryant College; James Molloy, University of Wisconsin–Whitewater; Sebrena R. Moten, Troy University; Donald Nelson, University of Denver; Carol L. Nielsen, Bemidji State University; Christopher J. Nyhus, University of Mary; L. K. O’Drudy, Jr., University of Virginia; Ann Morales Olazabal, University of Miami; David Oliveiri, University of Rochester; Richard Paxton, San Diego Community College; Gail P. Petravick, Bradley University; Jim Pingel, Everest University–Brandon; Jonathan Politi, Columbus College of

Art & Design; James L. Porter, University of New Mexico; Lisa Rackley, Rich Mountain Community College; Elinor Rahm, Central Missouri State University; Samuel H. Ramsay, Jr., Bryant College; Decateur Reed, Boise State University; Richard E. Regan, St. John Fisher College; Roger Reinsch, Emporia State University; L. Reppert, Marymount University; Caroline Rider, Marist College; Roland W. Riggs, Marietta College; George Roe, University of Illinois–Chicago; Stanford Rosenberg, La Roche College; Alan Ross, University of California–Berkeley; Mark Rossi, Briar Cliff University; Tim Rueth, Marquette University; Stuart Schafer, University of Mississippi; Eric D Schwartz, LaRoche College; Donald H. Shoop, North Dakota State University; Carol Wahle Smith, Central Florida Community College; Peter Smithfield, Argyle Academy; Michael J. Sovansky, Saginaw Valley State Uni- versity; Janis Stamm, Edinboro University of Pennsylvania; Beverly E. Stanis, Oakton Community College; James Staruck, DePaul University; Al Stauber, Florida State University; David Steele, University of Wisconsin–Eau Claire; Lowell E. Stockstill, Wittenberg University; Peter Strohm, Georgian Court College; Al Talarczyk, Edgewood College; James D. Taylor, Claremont McKenna College; Kevin M. Teeven, Bradley University; Robert J. Tepper, University of New Mexico; Dale B. Thompson, University of St. Thomas; Leonard Tripodi, St. Joseph’s College; Alix Valenti, Univer- sity of Houston–Clear Lake; Karen Vitori, Schoolcraft Col- lege; Nancy A. Wainwright, Eastern Washington University; Charles H. Walker, University of Mississippi; Michael G. Walsh, Villanova University; Daniel Warner, Western Wash- ington University; Peter M. Wasemiller, Fresno Pacific Col- lege; David Webster, University of South Florida–Tampa; Scott A. White, University of Wisconsin; E. Marshall Wick, Gallaudet University; John G. Williams, Northwestern State University; Amy Wilson, Zane State College; Wells J. Wright, University of Minnesota; Rizvana Zameeruddin, University of Wisconsin–Parkside; and James B. Zimarowski, University of Notre Dame.

We express our thanks and deep appreciation to Debra Corvey for administrative assistance. For their support we extend our thanks to Karlene Fogelin Knebel and Joanne Erwick Roberts. And we are grateful to Vicky True-Baker, Amanda White, and Rebecca von Gillern of South-Western for their invaluable assistance and cooperation in connection with the preparation of this text.

This text is dedicated to our children Lilli-Marie Knebel Mann, Justin Erwick Roberts, and Matthew Charles Roberts.

Richard A. Mann Barry S. Roberts

Table of Cases

Cases in italic are the principal cases included at the ends of the chapters. Reference numbers are to pages.

Abrams v. United States, 73 A.E. Robinson Oil Co., Inc. v. County Forest Products,

Inc., 409 Alcoa Concrete & Masonry v. Stalker Bros., 256 Aldana v. Colonial Palms Plaza, Inc., 318 Alexander v. Fedex Ground Package System, Inc., 378 Alpert v. 28 Williams St. Corp., 784 Alzado v. Blinder, Robinson & Co., Inc., 686 American Manufacturing Mutual Insurance Company v.

Tison Hog Market, Inc., 823 American Needle, Inc. v. National Football League, 893 American Tobacco Co. v. United States, 884 Anderson v. McOskar Enterprises, Inc., 260 Any Kind Checks Cashed, Inc. v. Talcott, 569 Apodaca v. Oregon, 117 Arrowhead School District No. 75, Park County,

Montana, v. Klyap, 357 Aspen Skiing Co. v. Aspen Highlands Skiing

Corp, 887 Association For Molecular Pathology v. Myriad Genetics,

Inc., 876 AT&T Mobility LLC v. Concepcion, 55, 62 Austin v. Michigan Chamber of Commerce, 73

Bagley V. Mt. Bachelor, Inc., 261 Beam v. Stewart, 770 Bear’s Adm’x v. Bear, 277 Beatty v. Guggenheim Exploration Co., 1118 Beckman v. Dunn, 130 Belden Inc. v. American Electronic Components, Inc., 491 Berardi v. Meadowbrook Mall Company, 219 Berg v. Traylor, 273 Bigelow-Sanford, Inc. v. Gunny Corp., 518 Bily v. Arthur Young & Co., 1009 Border State Bank of Greenbush v. Bagley Livestock

Exchange, Inc., 819 Borton v. Forest Hills Country Club, 1095

Bouton v. Byers, 183 Brehm v. Eisner, 768 Brentwood Academy v. Tennessee Secondary School

Athletic Association, 80 Brown v. Board of Education of Topeka, 76, 85 Brown v. Entertainment Merchants Association, 83 Brown v. Jones, 10 Broz v. Cellular Information Systems, Inc., 771 Burlington Industries, Inc. v. Ellerth, 946, 952 Burlington N. & S. F. R. Co. v. White, 944 Burningham v. Westgate Resorts, Ltd., 225

Cappo v. Suda, 1111 Carson v. Here’s Johnny Portable Toilets, Inc., 142 Carter v. Tokai Financial Services, Inc., 428 Catalano, Inc. v. Target Sales, Inc., 885 Catamount Slate Products, Inc. v. Sheldon, 200 Central Hudson Gas and Electric Corp. v. Public Service

Commission, 74 Chapa v. Traciers & Associates, 822 Chevron [USA Inc. v. Natural Resources Defense

Council, Inc.], 98 Chicago Board of Trade v. United States, 883 Christy v. Pilkinton, 332 Citizens United v. Federal Election Commission, 73 Coastal Leasing Corporation v. T-Bar S Corporation, 522 Cohen v. Kipnes, 596 Commerce & Industry Insurance Company v. Bayer

Corporation, 432 Commonwealth v. Brown., 10 Conklin Farm v. Doris Leibowitz, 659 Connes v. Molalla Transport System, Inc., 407 Consolidated Edison Co. v. NLRB, 95 Conway v. Cutler Group, Inc., 1109 Cooke v. Fresh Express Foods Corporation, Inc., 788 Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. v.

Bailey, 542

xvii i

Coopers & Lybrand v. Fox, 713 Copperwald Corp. v. Independence Tube Corp., 884 County of Washington v. Gunther, 936 Cox Enterprises, Inc. v. Pension Benefit Guaranty

Corporation, 738 Credit Alliance Corp. v. Arthur Andersen & Co., 1002

Dahan v. Weiss, 301 Dartmouth College v. Woodward, 698 Davis v. Watson Brothers Plumbing, Inc., 591 Denney v. Reppert, 242 Department of Revenue of Kentucky v. Davis, 81 Detroit Lions, Inc. v. Argovitz, 382 D.I Felsenthal Co. v. Northern Assurance Co., 707 Diamond, Commissioner of Patents and Trademarks v.

Chakrabarty, 868 Diamond v. Chakrabarty, 878 Dilorenzo v. Valve and Primer Corporation, 245 Directv, Inc. v. Imburgia, 62 Discover Bank v. Superior Court, 62 Dixon, Laukitis And Downing v. Busey Bank, 610 Dj Coleman, Inc. v. Nufarm Americas, Inc., 430 Dodge v. Ford Motor Co., 733, 739 Donahue v. Rodd Electrotype Co., Inc., 766 Donald R. Hessler v. Crystal Lake Chrysler-Plymouth,

Inc., 453 Dr. Miles Medical Co. v. John D. Park & Sons Co.,

895, 896 Drake Mfg. Co., Inc. v. Polyflow, Inc., 712

Eastman Kodak Co. v. Image Technical Services, Inc., 897

Eastwood v. Superior Court, 141 Ed Nowogroski Insurance, Inc. v. Rucker, 871 Edgington v. Fitzmaurice, 214 EEOC v. Abercrombie & Fitch Stores, Inc., 935 Elderkin v. Gaster, 1109 Enea v. the Superior Court of Monterey County, 640 Environmental Protection Agency v. Eme Homer City

Generation, L. P., 1028 Ernst & Ernst v. Hochfelder, 997, 998, 1010 Escott v. BarChris Const. Corp., 1011 Estate of Countryman v. Farmers Coop. Ass’n, 690

Faragher v. Boca Raton, 946 Faragher v. City of Boca Raton, 950 FCC v. Fox Television Stations, Inc., 101, 103 Federal Ins. Co. v. Winters, 320 Federal Trade Commission v. Ruberoid Co., 9, 90 Ferrell v. Mikula, 138 First National Bank v. Bellotti, 73 First State Bank of Sinai v. Hyland, 279 Fisher v. University of Texas at Austin, 77

Fletcher v. Rylands, 166 Fox v. Mountain West Electric, Inc., 180 Frank B. Hall & Co., Inc. v. Buck, 140 Freeman v. Quicken Loans, Inc., 923 F.T.C. v. Motion Picture Advertising Service Co., 891 F.T.C. v. Procter & Gamble Co., 888 FTC v. Wyndham Worldwide Corp., 920 Furlong v. Alpha Chi Omega Sorority, 450

Gaddy v. Douglass, 383 Galler v. Galler, 701, 751 Geier v. American Honda Motor Co., 79 Georg v. Metro Fixtures Contractors, Inc., 567 Greene v. Boddie-Noell Enterprises, Inc., 497 Greenman v. Yuba Power Products, Inc., 495 Griggs v. Duke Power Co., 949 Gross v. FBL Financial Services, Inc., 937

Hadfield v. Gilchrist, 1071 Hadley v. Baxendale, 348 Halla Nursery, Inc. v. Baumann-Furrie & Co., 1002 Hamilton v. Lanning, 853 Harris v. Looney, 714 Harris v. Viegelahn, 852 Harry Berenter, Inc. v. Berman, 257 Heinrich v. Titus-Will Sales, Inc., 469 Heritage Bank v. Bruha, 540 Herron v. Barnard, 1068 Hochster v. De La Tour, 330, 337 Hoffmann-La Roche Ltd v. Empagran S.A., 883, 1040 Home Rentals Corp. v. Curtis, 1091 Hospital Corporation of America v. Ftc, 899 Household Credit Services, Inc. v. Pfennig, 922 Hun v. Cary, 758 Husky International Electronics, Inc., v. Ritz, 849

Ianelli v. Powers, 1085 Illinois v. Gates, 116 In Re L.B. Trucking, Inc., 492 In Re Magness, 318 In Re the Score Board, Inc., 275 In the Matter of 1545 Ocean Ave., Llc, 692 In the Matter of the Estate of Rowe, 1128 Inter-Tel Technologies, Inc. v. Linn Station Properties,

LLC, 715

Jackson v. Metropolitan Edison Co., 69 Jasdip Properties SC, LLC v. Estate of Richardson, 185 Jasper v. H. Nizam, Inc., 956 Jenkins v. Eckerd Corporation, 302 Jerman v. Carlisle, Mcnellie, Rini, Kramer & Ulrich

LPA, 925 Johnson v. Transportation Agency, 935

TABL E OF CASES xix

Jones v. Brown, 10 Jones v. Star Credit Corp, 419 J.W. Hampton Co. v. United States, 71

Kalas v. Cook, 300 Keeney v. Keeney, 1126 Kelo v. City of New London, 1110 Kelso v. Bayer Corporation, 496 Kenco Homes, Inc. v. Williams, 517 Kentucky Bankers Ass’n et al. v. Cassady, 243 Kimbrell’S of Sanford, Inc. v. KPS, Inc., 821 King v. Burwell, 91 King v. Verifone Holdings, Inc., 763 Klein v. Pyrodyne Corporation, 165

Landreth Timber Co. v. Landreth, 966 Lawrence v. Fox, 315 Leegin Creative Leather Products, Inc. v. PSKS, Inc.,

885, 895 Lefkowitz v. Great Minneapolis Surplus Store, Inc., 9,

191, 202 Leibling, P.C. v. Mellon Psfs (Nj) National Association,

611 Light v. Centel Cellular Co. of Texas, 241 Local 53 of International Association of Heat and Frost

Insulators and Asbestos Workers v. Vogler, 935 Logan v. Zimmerman Brush Co., 75 Louisiana v. Hamed, 122 Love v. Hardee’s Food Systems, Inc., 161

Mackay v. Four Rivers Packing Co., 299 Madison Square Garden Corp., Ill. v. Carnera, 360 Marbury v. Madison, 68 Mark Line Industries, Inc. v. Murillo Modular Group,

Ltd., 588 Maroun v. Wyreless Systems, Inc., 223 Marsh v. Alabama, 69 Martin v. Melland’s Inc., 472 Massachusetts v. Environmental Protection Agency, 1020 Matrixx Initiatives, Inc. v. Siracusano, 993 Mayo Foundation For Medical Education And Research

v. United States, 97 McCulloch v. Maryland, 68 McCutcheon v. Federal Election Commission, 74 McDonnell Douglas Corp. v. Green, 934 McDowell Welding & Pipefitting, Inc. v. United States

Gypsum Co., 338 McLaurin v. Oklahoma State Regents, 86 Meinhard v. Salmon, 629 Merritt v. Craig, 355 Messing v. Bank of America, N.A., 590 Metropolitan Life Insurance Company v. Rjr Nabisco,

Inc., 736

Midwest Hatchery v. Doorenbos Poultry, 519 Miller v. Mcdonald’S Corporation, 380 Mims v. Arrow Financial Services, LLC, 58 Mirvish v. Mott, 1070 Monsanto Co. v. Spray-Rite Service Corporation, 884 Montana Food, LLC v. Todosijevic, 689 Moore v. Kitsmiller, 164 Morrison v. National Australia Bank Ltd., 1040, 1046 Motor Vehicle Mfrs. Assn. of United States, Inc. v. State

Farm Mut. Automobile Ins. Co., 102 Motschenbacher v. R.J. Reynolds Tobacco Co., 142 Mountain Peaks Financial Services, Inc. v. Roth-Steffen, 319 Murphy v. Bdo Seidman, Llp, 1008

National Business Services, Inc. v. Wright, 253 National Federation of Independent Business v. Sebelius,

70, 71 Nationsbank of Virginia, N.A. v. Barnes, 541 Neugebauer v. Neugebauer, 221 New England Rock Services, Inc. v. Empire Paving, Inc., 243 New York Times Co. v. Sullivan, 74 Northern Corp. v. Chugach Electrical Association, 339 Northern Pacific Railway Co. v. United States, 883

Obb Personenverkehr AG v. Sachs, 1044 Obergefell v. Hodges, 75, 76 Omnicare, Inc. v. Laborers District Council Construction

Industry Pension Fund, 990 O’Neil v. Crane Co., 495 Orr v. Orr, 77 Osprey L.L.C. v. Kelly-Moore Paint Co., Inc., 203

Palsgraf v. Long Island Railroad Co., 163 Palumbo v. Nikirk, 167 Paralyzed Veterans of Am. v. D.C. Arena L. P., 99 Parents Involved in Community Schools v. Seattle

School District No. 1, 76 Parker v. Twentieth Century-Fox Corp., 61 Parlato v. Equitable Life Assurance Society of the United

States, 405 Payroll Advance, Inc. v. Yates, 258 People v. Farell, 118 Perez v. Mortgage Bankers Ass’n., 99 Philip Morris USA v. Williams, 137 Pike v. Bruce Church, Inc., 82 Pittsley v. Houser, 182, 429 Plessy v. Ferguson, 85, 86 Prestenbach v. Collins, 358 Prine v. Blanton, 1129 Providence & Worcester Co. v. Baker, 748

Radlax Gateway Hotel, LLC v. Amalgamated Bank, 851 Raffles v. Wichelhaus, 218

TABL E OF CASESxx

Raytheon Co. v. Hernandez, 934, 935 Re Keytronics, 636 Reed v. King, 224 Reed v. Reed, 77 Ricci v. Destefano, 949 RNR Investments Limited Partnership v. Peoples First

Community Bank, 658 Robertson v. Jacobs Cattle Co., 661 Robinson v. Durham, 469 Rosewood Care Center, Inc. v. Caterpillar, Inc., 297 Ryan v. Friesenhahn, 10, 12 Rylands v. Fletcher, 166

Sackett v. Environmental Protection Agency, 100 Saudi Arabia v. Nelson, 1045 Schmerber v. California, 117 Schoenberger v. Chicago Transit Authority, 403 Schreiber v. Burlington Northern, Inc., 997 Schuette v. BAMN, 77 SEC v. Edwards, 989 SEC v. W. J. Howey Co., 990 Securities and Exchange Commission v. W.J.

Howey Co., 966 S.G. Borello & Sons, Inc. v. Department of Industrial

Relations, 379 Shawnee Telecom Resources, Inc. v. Brown, 786 Shelley v. Kraemer, 69 Sherrod v. Kidd, 204 Silvestri v. Optus Software, Inc., 336 Skidmore v. Swift & Co., 92 Smith v. Van Gorkom, 759 Soldano v. O’Daniels, 160 South Dakota v. Dole, 71 South Florida Water Management District v. Miccosukee

Tribe of Indians, 1029 State of Qatar v. First American Bank of Virginia, 566 State of South Dakota v. Morse, 120 State v. Jones, 10 State v. Rivers, 121 Steinberg v. Chicago Medical School, 182 Stine v. Stewart, 321 Stone v. Mississippi, 73 Strougo v. Bassini, 764 Supap Kirtsaeng v. John Wiley & Sons, Inc., 875 Sweatt v. Painter, 85, 86

Telex Corp. v. IBM, 887 Texaco, Inc. v. Pennzoil, Co., 134 Texas Department of Housing and Community

Affairs v. Inclusive Communities Project, 935 The Hyatt Corporation v. Palm Beach National

Bank, 565 Thomas v. Lloyd, 638 Thor Properties v.Willspring Holdings LLC, 205 Transatlantic Financing Corp. v. United States, 340 Travelers Indemnity Co. v. Stedman, 592 Triffin v. Cigna Insurance, 571 Tucker v. Hayford, 1092

Ultramares Corporation v. Touche, 1002 Union Planters Bank, National Association v. Rogers,

612 United States v. O’Hagan, 986, 995 United States v. Socony-Vacuum Oil Co., 885 United States v. Windsor, 75, 76 United Travel Service, Inc. v. Weber, 253 U.S. v. Virginia, 77 Utility Air Regulatory Group v. EPA, 1020

Vance v. Ball State University, 946 Vanegas v. American Energy Services, 241

Waddell v. L.V.R.V. Inc., 451 Wal-Mart Stores, Inc. v. Samara Brothers, Inc., 873 Wards Cove Packing Co. v. Antonio, 935 Warnick v. Warnick, 663 Weeks v. United States, 116 Whatley v. Estate of McDougal, 1130 White v. Samsung Electronics America, Inc., 141 White v. Winchester Land Development Corp, 716 Williamson v. Mazda Motor of America, Inc., 78 Wilson v. Scampoli, 449 Windows, Inc. v. Jordan Panel Systems Corp., 471 Womco, Inc. v. Navistar International Corporation,

494 Wood v. Pavlin, 1094 World-Wide Volkswagen Corp. v. Woodson, 59 Wyler v. Feuer, 688

Young v. United Parcel Service, Inc., 953

Zelnick v. Adams, 276

TABL E OF CASES xxi

Table of Illustrations

1-1 Law and Morals 4 1-2 Classification of Law 4 1-3 Comparison of Civil and Criminal Law 5 1-4 Hierarchy of Law 6

2-1 Kohlberg’s Stages of Moral Development 19 2-2 The Stakeholder Model 22 2-3 Pharmakon Employment 27 2-4 Pharmakon Affirmative Action Program 27 2-5 Mykon R&D Expenditures 29 2-6 Global Summary of the AIDS Epidemic 31 2-7 Regional Statistics for HIV and AIDS

End of 2014 31 2-8 Stock Price of Vulcan, Inc. 40 2-9 Average Daily Volume of Vulcan, Inc.,

Stock for Week 40 2-10 Purchases of Vulcan Stock by Selected

Executives 41

3-1 Federal Judicial System 43 3-2 Circuit Courts of the United States 44 3-3 State Court System 45 3-4 Federal and State Jurisdiction 47 3-5 Subject Matter Jurisdiction 47 3-6 Stare Decisis in the Dual Court System 48 3-7 Jurisdiction 49 3-8 Stages in Civil Procedure 54 3-9 Comparison of Court Adjudication,

Arbitration, and Mediation/Conciliation 55

4-1 Separation of Powers: Checks and Balances 69

4-2 Powers of Government 72 4-3 Limitations on Government 73

5-1 Administrative Rulemaking 93 5-2 Limits on Administrative Agencies 94

6-1 Degrees of Mental Fault 108 6-2 Constitutional Protection for the Criminal

Defendant 115

7-1 Intent 128 7-2 Privacy 131 7-3 Intentional Torts 135

8-1 Negligence and Negligence Per Se 150 8-2 Defenses to a Negligence Action 156

9-1 Law Governing Contracts 174 9-2 Contractual and Noncontractual Promises 175 9-3 Validity of Agreements 176 9-4 Contracts, Promissory Estoppel, and

Quasi Contracts (Restitution) 178

10-1 Duration of Revocable Offers 196 10-2 Mutual Assent 198 10-3 Offer and Acceptance 198

11-1 Misrepresentation 216

12-1 Consideration in Unilateral and Bilateral Contracts 233

12-2 Modification of a Preexisting Contract 235 12-3 Consideration 239

14-1 Incapacity: Minors, Nonadjudicated Incompetents, and Intoxicated Persons 273

15-1 The Statute of Frauds 289 15-2 Parol Evidence Rule 294

17-1 Discharge of Contracts 334

18-1 Contract Remedies 351

19-1 Duties of Principal and Agent 372

20-1 Contract Liability of Disclosed Principal 391 20-2 Contract Liability of Unidentified Principal 392 20-3 Contract Liability of Undisclosed Principal 393 20-4 Tort Liability 396

21-1 Law of Sales and Leases 417 21-2 Selected Rules Applicable to Merchants 420 21-3 Battle of the Forms 424

xxii

21-4 Contract Law Compared with UCC Law of Sales and Leases 426

22-1 Tender of Performance by the Seller 441 22-2 Performance by the Buyer 446

23-1 Passage of Title in Absence of Agreement by Parties 461

23-2 Void Title 462 23-3 Voidable Title 462 23-4 Entrusting of Goods to a Merchant 463 23-5 Passage of Risk of Loss in Absence

of Breach 467

24-1 Warranties 482 24-2 Product Liability 488

25-1 Remedies of the Seller 509 25-2 Remedies of the Buyer 514

26-1 Use of Negotiable Instruments 531 26-2 Order to Pay: Draft or Check 532 26-3 Draft 533 26-4 Check 533 26-5 Promise to Pay: Promissory Note or

Certificate of Deposit 534 26-6 Note 534 26-7 Certificate of Deposit 535

27-1 Bearer Paper 547 27-2 Negotiation of Bearer and Order Paper 547 27-3 Stolen Order Paper 548 27-4 Indorsements 551 27-5 Placement of Indorsement 552 27-6 Rights of Transferees 554 27-7 Effects of Alterations 560 27-8 Alteration 561 27-9 Availability of Defenses Against Holders

and Holders in Due Course 562 27-10 Rights of Holder in Due Course under

the Federal Trade Commission Rule 562

28-1 Contractual Liability 582 28-2 Liability on Transfer 585 28-3 Liability Based on Warranty 586

29-1 Bank Collections 598 29-2 Parties to a Funds Transfer 608 29-3 Credit Transaction 608

30-1 General Partnership, Limited Partnership, Limited Liability Company, and Corporation 621

30-2 Tests for Existence of a Partnership 626 30-3 Partnership Property Compared with

Partner’s Interest 632

31-1 Contract Liability 645 31-2 Tort Liability 647 31-3 Dissociation and Dissolution under RUPA 653

32-1 Comparison of General and Limited Partners 676

32-2 Comparison of Member-Managed and Manager-Managed LLCs 680

32-3 Liability Limitations in LLPs 682

33-1 Promoter’s Preincorporation Contracts Made in the Corporation’s Name 703

33-2 Comparison of Charter and Bylaws 705

34-1 Issuance of Shares 726 34-2 Debt and Equity Securities 729 34-3 Key Concepts in Legal Restrictions upon

Distributions 731 34-4 Liability for Improper Distributions 734

35-1 Management Structure of Corporations: The Statutory Model 747

35-2 Management Structure of Typical Closely Held Corporation 747

35-3 Management Structure of Typical Publicly Held Corporation 747

35-4 Concentrations of Voting Power 750 35-5 Shareholder Suits 752

36-1 Fundamental Changes under Pre-1999 RMBCA 782

37-1 Fundamental Rights of Secured Party and Debtor 797

37-2 Requisites for Enforceability of Security Interests 802

37-3 Methods of Perfecting Security Interests 805 37-4 Priorities 809 37-5 Suretyship Relationship 811 37-6 Assumption of Mortgage 812 37-7 Defenses of Surety and Principal Debtor 814

38-1 Collection and Distribution of the Debtor’s Estate 839

38-2 Comparison of Bankruptcy Proceedings 845

39-1 Intellectual Property 870

40-1 Restraints of Trade under the Sherman Act 886 40-2 Meeting Competition Defense 891

41-1 Magnuson-Moss Warranty Act 911 41-2 Consumer Rescission Rights 912

42-1 Unfair Labor Practices 933 42-2 Charges Filed with the EEOC from 2008

to 2015 934 42-3 Federal Employment Discrimination Laws 938

TABL E OF ILLUSTRATIO NS xxiii

43-1 Registration and Exemptions under the 1933 Act 969

43-2 Exempt Transactions for Issuers under the 1933 Act 974

43-3 Registration and Liability Provisions of the 1933 Act 977

43-4 Applicability of the 1934 Act 978 43-5 Disclosure under the 1934 Act 979 43-6 Parties Forbidden to Trade on Inside

Information 984 43-7 Civil Liability under the 1933 and 1934 Acts 986

44-1 Accountants’ Liability to Third Parties for Negligent Misrepresentation 1003

44-2 Accountants’ Liability under Federal Securities Law 1006

45-1 Major Federal Environmental Statutes 1025

47-1 Kinds of Property 1054 47-2 Duties in a Bailment 1061

48-1 Freehold Estates 1081 48-2 Assignment Compared with Sublease 1083 48-3 Rights of Concurrent Owners 1086

49-1 Fundamental Rights of Mortgagor and Mortgagee 1103

49-2 Eminent Domain 1106

50-1 Trusts 1117 50-2 Allocation of Principal and Income 1119 50-3 Per Stirpes and Per Capita 1124

TAB LE OF ILLU STRATION Sxx i v

P A R T

The Legal Environment of

Business

CH 1 INTRODUCTION TO LAW

CH 2 BUSINESS ETHICS AND THE SOCIAL RESPONSIBILITY OF BUSINESS

CH 3 CIVIL DISPUTE RESOLUTION

CH 4 CONSTITUTIONAL LAW

CH 5 ADMINISTRATIVE LAW

CH 6 CRIMINAL LAW

CH 7 INTENTIONAL TORTS

CH 8 NEGLIGENCE AND STRICT LIABILITY

CHAPTER 1

Introduction to Law

CHAPTER OUTCOMES

After reading and studying this chapter, you should be able to:

• Identify and describe the basic functions of law.

• Distinguish between (1) law and justice and (2) law and morals.

• Distinguish between (1) substantive and procedural law, (2) public and private law, and (3) civil and criminal law.

• Identify and describe the sources of law.

• Explain the principle of stare decisis.

Law concerns the relations of individuals with oneanother as such relations affect the social and eco-nomic order. It is both the product of civilization and the means by which civilization is maintained. As such, law reflects the social, economic, political, religious, and moral philosophy of society. The laws of the United States influ- ence the lives of every U.S. citizen. At the same time, the laws of each State influence the lives of its citizens and the lives of many noncitizens as well. The rights and duties of all individuals, as well as the safety and security of all people and their property, depend upon the law.

The law is pervasive. It interacts with and influences the political, economic, and social systems of every civilized society. It permits, forbids, or regulates practically every human activity and affects all persons either directly or indi- rectly. Law is, in part, prohibitory: certain acts must not be committed. For example, one must not steal; one must not murder. Law is also partly mandatory: certain acts must be done or be done in a prescribed way. Taxes must be paid; corporations must make and file certain reports with State or Federal authorities; traffic must keep to the right. Finally, law is permissive: individuals may choose to perform or not to perform certain acts. Thus, one may or may not enter into a contract; one may or may not dispose of one’s estate by will.

Because the areas of law are so highly interrelated, an individual who intends to study the several branches of law known collectively as business law should first consider the nature, classification, and sources of law as a whole. This enables the student not only to understand any given branch

of law better but also to understand its relation to other areas of law.

1-1 Nature of Law The law has evolved slowly, and it will continue to change. It is not a pure science based upon unchanging and univer- sal truths. Rather, it results from a continuous effort to bal- ance, through a workable set of rules, the individual and group rights of a society.

1-1a DEFINITION OF LAW A fundamental but difficult question regarding law is this: what is it? Numerous philosophers and jurists (legal schol- ars) have attempted to define it. American jurists and Supreme Court Justices Oliver Wendell Holmes and Benjamin Cardozo defined law as predictions of the way that a court will decide specific legal questions. William Blackstone, an English jurist, on the other hand, defined law as “a rule of civil conduct prescribed by the supreme power in a state, commanding what is right, and prohibiting what is wrong.” Similarly, Austin, a nineteenth-century English jurist, defined law as a general command that a state or sov- ereign makes to those who are subject to its authority by laying down a course of action enforced by judicial or administrative tribunals.

Because of its great complexity, many legal scholars have attempted to explain the law by outlining its essential char- acteristics. Roscoe Pound, a distinguished American jurist

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and former dean of the Harvard Law School, described law as having multiple meanings:

First, we may mean the legal order, that is, the regime of ordering human activities and relations through sys- tematic application of the force of politically organized society, or through social pressure in such a society backed by such force. We use the term “law” in this sense when we speak of “respect for law” or for the “end of law.”

Second, we may mean the aggregate of laws or legal precepts; the body of authoritative grounds of judicial and administrative action established in such a society. We may mean the body of received and established materials on which judicial and adminis- trative determinations proceed. We use the term in this sense when we speak of “systems of law” or of “justice according to law.”

Third, we may mean what Mr. Justice Cardozo has happily styled “the judicial process.” We may mean the process of determining controversies, whether as it actually takes place, or as the public, the jurists, and the practitioners in the courts hold it ought to take place.

1-1b FUNCTIONS OF LAW At a general level, the primary function of law is to maintain stability in the social, political, and economic system while simultaneously permitting change. The law accomplishes this basic function by performing a number of specific functions, among them dispute resolution, protection of property, and preservation of the state.

Disputes, which inevitably arise in a society as complex and interdependent as ours, may involve criminal matters, such as theft, or noncriminal matters, such as an automobile accident. Because disputes threaten the stability of society, the law has established an elaborate and evolving set of rules to resolve them. In addition, the legal system has instituted societal remedies, usually administered by the courts, in place of private remedies such as revenge.

The recognition of private ownership of property is fun- damental to our economic system, based as it is upon the exchange of goods and services among privately held units of consumption. Therefore, a second crucial function of law is to protect the owner’s use of property and to facilitate volun- tary agreements (called contracts) regarding exchanges of property and services. Accordingly, a significant portion of law, as well as this text, involves property and its disposition, including the law of property, contracts, sales, commercial paper, and business associations.

A third essential function of the law is preservation of the state. In our system, law ensures that changes in leadership and the political structure are brought about by political actions such as elections, legislation, and referenda, rather than by revolution, sedition, and rebellion.

1-1c LEGAL SANCTIONS A primary function of the legal system is to make sure that legal rules are enforced. Sanctions are the means by which the law enforces the decisions of the courts. Without sanc- tions, laws would be ineffectual and unenforceable.

An example of a sanction in a civil (noncriminal) case is the seizure and sale of the property of a debtor who fails to pay a court-ordered obligation, called a judgment. Moreover, under certain circumstances, a court may enforce its order by finding an offender in contempt and sentencing him to jail until he obeys the court’s order. In criminal cases, the principal sanctions are the imposition of a fine, imprison- ment, and capital punishment.

1-1d LAW AND MORALS Although moral and ethical concepts greatly influence the law, morals and law are not the same. They may be consid- ered as two intersecting circles, as shown in Figure 1-1. The area common to both circles includes the vast body of ideas that are both moral and legal. For instance, “Thou shall not kill” and “Thou shall not steal” are both moral precepts and legal constraints.

On the other hand, the part of the legal circle that does not intersect the morality circle includes many rules of law that are completely unrelated to morals, such as the rules stating that you must drive on the right side of the road and that you must register before you can vote. Likewise, the por- tion of the morality circle which does not intersect the legal circle includes moral precepts not enforced by law, such as the moral principle that you should not silently stand by and watch a blind man walk off a cliff or that you should provide food to a starving child.

u SEE FIGURE 1-1: Law and Morals

1-1e LAW AND JUSTICE Law and justice represent separate and distinct concepts. Without law, however, there can be no justice. Although jus- tice has at least as many definitions as law does, justice may be defined as fair, equitable, and impartial treatment of the competing interests and desires of individuals and groups with due regard for the common good.

CHAPTER 1 I NTR ODUCT IO N TO LA W 3

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On the other hand, law is no guarantee of justice. Some of history’s most monstrous acts have been committed pursuant to “law.” Examples include the actions of Nazi Germany during the 1930s and 1940s and the actions of the South African government under apartheid from 1948 until 1994. Totalitarian societies often have shaped formal legal systems around the atrocities they have sanctioned.

1-2 Classification of Law Because the subject is vast, classifying the law into categories is helpful. Though a number of classifications are possible, the most useful categories are (1) substantive and procedural, (2) public and private, and (3) civil and criminal.

Basic to understanding these classifications are the terms right and duty. A right is the capacity of a person, with the aid of the law, to require another person or persons to per- form, or to refrain from performing, a certain act. Thus, if Alice sells and delivers goods to Bob for the agreed price of $500 payable at a certain date, Alice has the capability, with the aid of the courts, of enforcing the payment by Bob of the $500. A duty is the obligation the law imposes upon a person to perform, or to refrain from performing, a certain act. Duty and right are correlatives: no right can rest upon one person without a corresponding duty resting upon some other person or, in some cases, upon all other persons.

u SEE FIGURE 1-2: Classification of Law

F IGURE 1-1 Law and Morals

F IGURE 1-2 Classification of Law

PART 1 THE L EGAL ENVIRO NMENT OF B USINESS4

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1-2a SUBSTANTIVE AND PROCEDURAL LAW Substantive law creates, defines, and regulates legal rights and duties. Thus, the rules of contract law that determine when a binding contract is formed are rules of substantive law. This book is principally concerned with substantive law. On the other hand, procedural law establishes the rules for enforcing those rights that exist by reason of substantive law. Thus, procedural law defines the method by which one may obtain a remedy in court.

1-2b PUBLIC AND PRIVATE LAW Public law is the branch of substantive law that deals with the government’s rights and powers in its political or sover- eign capacity and in its relation to individuals or groups. Public law consists of constitutional, administrative, and criminal law. Private law is that part of substantive law gov- erning individuals and legal entities (such as corporations) in their relations with one another. Business law is primarily private law.

1-2c CIVIL AND CRIMINAL LAW The civil law defines duties the violation of which constitutes a wrong against the party injured by the violation. In con- trast, the criminal law establishes duties the violation of which is a wrong against the whole community. Civil law is a part of private law, whereas criminal law is a part of public law. (The term civil law should be distinguished from the concept of a civil law system, which is discussed later in this chapter.) In a civil action the injured party sues to recover compensation for the damage and injury he has sustained as a result of the defendant’s wrongful conduct. The party bringing a civil action (the plaintiff) has the burden of proof, which he must sustain by a preponderance (greater weight) of the evidence. Whereas the purpose of criminal law is to pun- ish the wrongdoer, the purpose of civil law is to compensate

the injured party. The principal forms of relief the civil law provides are a judgment for money damages and a decree ordering the defendant to perform a specified act or to desist from specified conduct.

A crime is any act or omission that public law prohibits in the interest of protecting the public and that the government makes punishable in a judicial proceeding brought (prosecuted) by it. The government must prove criminal guilt beyond a reasonable doubt, which is a significantly higher burden of proof than that required in a civil action. The government prohibits and punishes crimes upon the ground of public policy, which may include the safeguarding of the government itself, human life, or private property. Additional purposes of criminal law include deterrence and rehabilitation.

u SEE FIGURE 1-3: Comparison of Civil and Criminal Law

1-3 Sources of Law

The sources of law in the U.S. legal system are the Federal and State constitutions, Federal treaties, interstate compacts, Federal and State statutes and executive orders, the ordinances of countless local municipal governments, the rules and regulations of Federal and State administrative agencies, and an ever-increasing volume of reported Federal and State court decisions.

The supreme law of the land is the U.S. Constitution. The Constitution provides that Federal statutes and treaties shall be the supreme law of the land. Federal legislation and treaties are, therefore, paramount to State constitutions and statutes. Federal legislation is of great significance as a source of law. Other Federal actions having the force of law are executive orders of the President and rules and regulations of Federal administrative officials, agencies, and commissions. The Federal courts also con- tribute considerably to the body of law in the United States.

F IGURE 1-3 Comparison of Civil and Criminal Law Civil Law Criminal Law

Commencement of Action Aggrieved individual (plaintiff) sues State or Federal government prosecutes

Purpose Compensation Punishment Deterrence Deterrence

Rehabilitation Preservation of peace

Burden of Proof Preponderance of the evidence Beyond a reasonable doubt

Principal Sanctions Monetary damages Capital punishment Equitable remedies Imprisonment

Fines

CHAPTER 1 I NTR ODUCT IO N TO LA W 5

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The same pattern exists in every State. The paramount law of each State is contained in its written constitution. (Although a State constitution cannot deprive citizens of Federal constitutional rights, it can guarantee rights beyond those provided in the U.S. Constitution.) State constitutions tend to be more specific than the U.S. Constitution and, gen- erally, have been amended more frequently. Subordinate to the State constitution are the statutes that the State’s legisla- ture enacts and the case law that its judiciary develops. Like- wise, State administrative agencies issue rules and regulations having the force of law, as do executive orders promulgated by the governors of most States. In addition, cities, towns, and villages have limited legislative powers within their respective municipal areas to pass ordinances and resolutions.

u SEE FIGURE 1-4: Hierarchy of Law

1-3a CONSTITUTIONAL LAW A constitution—the fundamental law of a particular level of government—establishes the governmental structure and allocates power among the levels of government, thereby defining political relationships. One of the fundamental principles on which our government is founded is that of separation of powers. As detailed in the U.S. Constitution, this means that the government consists of three distinct and independent branches: the Federal judiciary, the Congress, and the executive branch.

A constitution also restricts the powers of government and specifies the rights and liberties of the people. For example, the Constitution of the United States not only specifically states what rights and authority are vested in the national government but also specifically enumerates certain rights and liberties of the people. Moreover, the Ninth

F IGURE 1-4 Hierarchy of Law

PART 1 THE L EGAL ENVIRO NMENT OF B USINESS6

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Amendment to the U.S. Constitution makes it clear that this enumeration of rights does not in any way deny or limit other rights that the people retain.

All other law in the United States is subordinate to the Federal Constitution. No law, Federal or State, is valid if it violates the Federal Constitution. Under the principle of judicial review, the Supreme Court of the United States determines the constitutionality of all laws.

1-3b JUDICIAL LAW The U.S. legal system is a common law system, first devel- oped in England. It relies heavily on the judiciary as a source of law and on the adversary system for the adjudication of disputes. In an adversary system, the parties, not the court, must initiate and conduct litigation. This approach is based upon the belief that the truth is more likely to emerge from the investigation and presentation of evidence by two opposing parties, both motivated by self-interest, than from judicial investigation motivated only by official duty. Other English-speaking countries, including England, Canada, and Australia, also use the common law system.

In distinct contrast to the common law system are civil law systems, which are based on Roman law. Civil law systems depend on comprehensive legislative enactments (called codes) and an inquisitorial method of adjudication. In the inquisitorial system, the judiciary initiates litigation, investigates pertinent facts, and conducts the presentation of evidence. The civil law system prevails in most of Europe, Scotland, the State of Louisiana, the province of Quebec, Latin America, and parts of Africa and Asia.

COMMON LAW The courts in common law systems have developed a body of law, known as “case law,” “judge-made law,” or “common law,” that serves as precedent for determining later controversies. In this sense, common law is distinguished from other sources of law such as legislation and administrative rulings.

To evolve steadily and predictably, the common law has developed by application of stare decisis (to stand by the decisions). Under the principle of stare decisis, courts, in deciding cases, adhere to and rely on rules of law that they or superior courts announced and applied in prior decisions involving similar cases. Judicial decisions thus have two uses: (1) to determine with finality the case currently being decided and (2) to indicate how the courts will decide similar cases in the future. Stare decisis does not, however, preclude courts from correcting erroneous decisions or from choosing among conflicting precedents. Thus, the doctrine allows sufficient flexibility for the common law to change.

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