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Chapter 9: Business Torts Synopsis

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ElEvEnth Edition

Marianne Moody Jennings Arizona State University

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

its lEgal, Ethical, and global EnvironmEnt

Business

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

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

1 Introduction to Law 2

2 Business Ethics and Social Responsibility 24

3 The Judicial System 72

4 Managing Disputes: Alternative Dispute Resolution and Litigation Strategies 102

Part 2 139 Business: Its Regulatory Environment 139

5 Business and the Constitution 140

6 Administrative Law 178

7 International Law 218

8 Business Crime 248

9 Business Torts 294

10 Environmental Regulation and Sustainability 328

Part 3 363 Business Sales, Contracts, and Competition 363

11 Contracts and Sales: Introduction and Formation 366

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

13 Product Advertising and Liability 448

14 Business Competition: Antitrust 486

15 Business and Intellectual Property Law 520

Part 4 553 Business Management and Governance 553

16 Management of Employee Conduct: Agency 554

17 Governance and Structure: Forms of Doing Business 592

18 Governance and Regulation: Securities Law 634

19 Management of Employee Welfare 680

20 Management: Employment Discrimination 728

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

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

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

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

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

Brief Contents

iii

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iv

Contents

Preface xv About the Author xxvi Acknowledgments xxviii

1 Introduction to Law 2

1-1 Definition of Law 3

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

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

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

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

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

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

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

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

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

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

Summary 20

Questions and Problems 21

2 Business Ethics and Social Responsibility 24

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

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

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

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Contents v

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

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

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

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

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

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

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

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

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

Ethics for Personal Reasons 45

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

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

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

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

2-10 Ethical Issues in International Business 61

Summary 68

Questions and Problems 69

3 The Judicial System 72

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

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

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

3-4 The Concept of Jurisdiction 79

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

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

Jurisdiction 94

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

Summary 98

Questions and Problems 99

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vi Contents

4 Managing Disputes: Alternative Dispute Resolution and Litigation Strategies 102

4-1 What Is Alternative Dispute Resolution? 103

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

4-3 Resolution of International Disputes 110

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

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

4-6 Issues in International Litigation 131

Summary 134

Questions and Problems 134

5 Business and the Constitution 140

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

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

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

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

Business 149

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

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

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

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

5-6 The Role of Constitutions in International Law 171

Summary 173

Questions and Problems 173

Part 2 Business: Its Regulatory Environment 139

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Contents vii

6 Administrative Law 178

6-1 What Are Administrative Agencies? 179

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

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

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

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

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

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

Summary 212

Questions and Problems 213

7 International Law 218

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

on International Trade 222

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

7-3 Resolution of International Disputes 232

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

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

Court” 237 7-4f Conflicts of Law 237

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

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

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

Summary 244

Questions and Problems 244

8 Business Crime 248

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

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

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

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

8-3 Who Is Liable for Business Crime? 253

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

Liability 257

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

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viii Contents

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

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

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

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

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

Officers 267 8-6c Actus Reus 268

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

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

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

8-9 Business Crime and International Business 287

Summary 289

Questions and Problems 290

9 Business Torts 294

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

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

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

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

Summary 323

Questions and Problems 324

10 Environmental Regulation and Sustainability 328

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

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

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

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

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

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

Forces 336

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

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

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Contents ix

10-5 Statutory Law: Environmental Quality Regulation 345

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

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

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

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

Summary 359

Questions and Problems 359

11 Contracts and Sales: Introduction and Formation 366

11-1 What Is a Contract? 367

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

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

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

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

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

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

Electronic Transactions Act 398

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

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

Force Majeure 405

Summary 406

Questions and Problems 407

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

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

Rights 417

Part 3 Business Sales, Contracts, and Competition 363

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x Contents

12-1e Subprime Lending Representations and Disclosures 419

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

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

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

Contract 433

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

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

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

Creditor Reports on Nonpaying Debtors 438

12-4 Contract Remedies for Nonperformance 441

12-5 Third-Party Rights in Contracts 442

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

Peculiarities 443

Summary 444

Questions and Problems 445

13 Product Advertising and Liability 448

13-1 Development of Product Liability 449

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

Advertising 453

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

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

Agencies 460 13-2j Professional Ads 460

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

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

Particular Purpose 464 13-3c Eliminating Warranty Liability by

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

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

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

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

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

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

Liability 473

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

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

13-6 Product Liability Reform 478

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

Commission 478

13-8 International Issues in Product Liability 479

Summary 481

Questions and Problems 481

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Contents xi

14 Business Competition: Antitrust 486

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

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

Regulate? 492

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

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

Competition 503

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

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

14-6 Antitrust Issues in International Competition 514

Summary 516

Questions and Problems 516

15 Business and Intellectual Property Law 520

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

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

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

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

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

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

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

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

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

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

Secrets 541

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

Business 543 15-6d Differing International Standards 543

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

Summary 548

Questions and Problems 548

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xii Contents

16 Management of Employee Conduct: Agency 554

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

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

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

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

Responsibilities 569

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

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

16-5 Termination of the Agency Relationship 577

16-6 Termination of Agents under Employment at Will 577

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

Disputes 584

16-7 Agency Relationships in International Law 585

Summary 588

Questions and Problems 588

17 Governance and Structure: Forms of Doing Business 592

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

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

Partnership 603

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

Partnership 607

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

Directors and Officers 614

Part 4 Business Management and Governance 553

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Contents xiii

17-4h Corporate Management and Control: Shareholders 621

17-4i The Dissolution of a Corporation 624

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

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

17-7 International Issues in Business Structure 629

Summary 630

Questions and Problems 631

18 Governance and Regulation: Securities Law 634

18-1 History of Securities Law 635

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

Registration 636 18-2c Regulating Primary Offerings: