Mother and daughter jewelers breaches its lease

Chapter Assignment

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Chapter One

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

Roger LeRoy Miller Institute for University Studies

Arlington, Texas

William Eric Hollowell Institute for University Studies

Arlington, Texas

and Member of Florida State Bar

Minnesota State Bar

United States Supreme Court Bar

Business Law T e x T & e x e r c i s e s

N i N T H e d i T i o N

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Business Law TexT & exercises NiNth EditioN Roger LeRoy Miller William Eric Hollowell

Senior Vice President, Higher Ed Product, Content,  and Market Development: Erin Joyner

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iii

U N i T 1

The Law and Our Legal System 1 Chapter 1 Introduction to the Law 2

Chapter 2 Ethics in Business 13

Chapter 3 The Courts and Our Legal System 27

Chapter 4 Constitutional Law 43

Chapter 5 Business Torts 57

Chapter 6 Intellectual Property 69

Chapter 7 Business Crimes 83

U N i T 2

Contracts 97 Chapter 8 Introduction to Contracts 98

Chapter 9 Offer and Acceptance 109

Chapter 10 Consideration 121

Chapter 11 Capacity 131

Chapter 12 The Legality of Agreements 143

Chapter 13 Voluntary Consent 155

Chapter 14 Contracts That Must Be in Writing 165

Chapter 15 Third Party Rights 179

Chapter 16 Termination and Remedies 191

U N i T 3

Sales and Leases 205 Chapter 17 Introduction to Sales

and Lease Contracts 206

Chapter 18 Title and Risk of Loss 219

Chapter 19 Performance and Breach 233

Chapter 20 Warranties and Product Liability 247

Chapter 21 Consumer Protection 261

U N i T 4

Negotiable Instruments 275 Chapter 22 The Essentials of Negotiability 276

Chapter 23 Negotiable Instruments: Transfer and Liability 291

Chapter 24 Banking in the Digital Age 305

U N i T 5

Agency and Employment 321 Chapter 25 Agency Relationships 322

Chapter 26 Employment, Immigration, and Labor Law 337

Chapter 27 Employment Discrimination 351

U N i T 6

Business Organizations 365 Chapter 28 Types of Business Organizations 366

Chapter 29 Formation and Ownership of a Corporation 381

Chapter 30 Management of a Corporation 397

Chapter 31 Combining and Dissolving Corporations 407

U N i T 7

Credit and Risk 417 Chapter 32 Security Interests and Creditors’ Remedies 418

Chapter 33 Mortgages 433

Chapter 34 Bankruptcy 443

Chapter 35 Insurance 455

Contents in Brief

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iv

U N i T 8

Property 467 Chapter 36 Personal Property 468

Chapter 37 Bailments 479

Chapter 38 Real Property 489

Chapter 39 Landlord and Tenant Law 501

Chapter 40 Wills and Trusts 511

U N i T 9

Special Topics 523 Chapter 41 Administrative Law 524

Chapter 42 Antitrust Law 537

Chapter 43 International and Space Law 549

A p p e N d i x

A Answers to the Issue Spotters A–1

Glossary G–1

Table of Cases TC–1

Index I–1

C O N T E N T S I N B R I E F

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v

U N i T 1

The Law and Our Legal System 1

c H A p T e r 1

Introduction to the Law 2 What Is Law? 2 Business Activities and the Legal Environment 2

Highlighting the Point 3 Sources of American Law 3

Real Case 4

Highlighting the Point 6 Civil Law versus Criminal Law 7 National Law around the World 7 International Law 7

Linking Business Law to Your Career: Consulting an Expert for Advice 8

Chapter 1—Work Set 11

c H A p T e r 2

Ethics in Business 13 The Importance of Business Ethics 13 Setting the Right Ethical Tone 14

Real Case 15

Highlighting the Point 15 The Sarbanes-Oxley Act 16 Business Ethics and the Law 16

Highlighting the Point 17 Approaches to Ethical Reasoning 17

Highlighting the Point 19 Business Ethics and Social Media 20

Highlighting the Point 20 Business Ethics on a Global Level 20

Highlighting the Point 21

Linking Business Law to Your Career: Managing a Company’s Reputation 22

Chapter 2—Work Set 25

c H A p T e r 3

The Courts and Our Legal System 27 Jurisdiction 27 The State Court System 28 The Federal Court System 29 The State Court Case Process 31

Highlighting the Point 32

Real Case 34 Alternative Dispute Resolution 36

Chapter 3—Work Set 41

c H A p T e r 4

Constitutional Law 43 The Constitutional Powers of Government 43

Highlighting the Point 45 Business and the Bill of Rights 45

Highlighting the Point 47

Real Case 48 Due Process and Equal Protection 48 Privacy Rights 50

Linking Business Law to Your Career: Pretexting and Marketing 51

Chapter 4—Work Set 55

c H A p T e r 5

Business Torts 57 The Basis of Tort Law 57 Intentional Torts against Persons 57

Real Case 59 Intentional Torts against Property 60

Highlighting the Point 61 Negligence 62

Highlighting the Point 62

Highlighting the Point 63

Highlighting the Point 64 Strict Liability 64

Chapter 5—Work Set 67

Contents

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C O N T E N T Svi

c H A p T e r 6

Intellectual Property 69 Trademarks and Related Property 69

Real Case 70

Highlighting the Point 71

Highlighting the Point 72 Patents 73 Copyrights 73

Highlighting the Point 75

Highlighting the Point 75 Trade Secrets 76 International Protection for Intellectual Property 76

Linking Business Law to Your Career: Trademarks and Service Marks 78

Chapter 6—Work Set 81

c H A p T e r 7

Business Crimes 83 Civil Law and Criminal Law 83 Constitutional Safeguards 85

Highlighting the Point 86 Crimes Affecting Business 86

Highlighting the Point 87

Highlighting the Point 87 Defenses to Criminal Liability 88 Cyber Crime 89

Real Case 90

Linking Business Law to Your Career: Protect Your Company against Hacking 92

Chapter 7—Work Set 95

U N i T 2

Contracts 97

c H A p T e r 8

Introduction to Contracts 98 The Definition of a Contract 98

Real Case 99 Types of Contracts 100

Highlighting the Point 100

Highlighting the Point 101 Interpretation of Contracts 103

Chapter 8—Work Set 107

c H A p T e r 9

Offer and Acceptance 109 Requirements of the Offer 109

Highlighting the Point 110 Termination of the Offer 111

Highlighting the Point 111 Acceptance 112

Real Case 113 E-Contracts—Offer and Acceptance 114

Highlighting the Point 115

Chapter 9—Work Set 119

c H A p T e r 1 0

Consideration 121 Elements of Consideration 121

Highlighting the Point 122

Real Case 122 The Lack of Consideration 123

Highlighting the Point 123 Settlement of Claims 124

Highlighting the Point 125 Promissory Estoppel 125

Chapter 10—Work Set 129

c H A p T e r 1 1

Capacity 131 Minors 131

Highlighting the Point 132

Highlighting the Point 132

Highlighting the Point 133

Highlighting the Point 134 Intoxicated Persons 134 Mentally Incompetent Persons 135

Real Case 135

Highlighting the Point 136

Linking Business Law to Your Career: Contracts with Minors or Intoxicated Persons 137

Chapter 11—Work Set 141

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C O N T E N T S vii

c H A p T e r 1 2

The Legality of Agreements 143 Contracts Contrary to Statute 143

Real Case 144

Highlighting the Point 145 Contracts Contrary to Public Policy 146

Highlighting the Point 146

Highlighting the Point 147 The Effect of Illegality 148

Highlighting the Point 148

Highlighting the Point 149

Chapter 12—Work Set 153

c H A p T e r 1 3

Voluntary Consent 155 Mistakes 155 Fraudulent Misrepresentation 157

Real Case 157

Highlighting the Point 158

Highlighting the Point 159 Undue Influence and Duress 160

Highlighting the Point 160

Chapter 13—Work Set 163

c H A p T e r 1 4

Contracts That Must Be in Writing 165 The Statute of Frauds—

Writing Requirement 165

Highlighting the Point 167

Highlighting the Point 167

Highlighting the Point 169 The Sufficiency of the Writing 169

Real Case 170 The Parol Evidence Rule 170

Highlighting the Point 171

Linking Business Law to Your Career: Enforceable E-Mail Contracts 174

Chapter 14—Work Set 177

c H A p T e r 1 5

Third Party Rights 179 Assignments and Delegations 179

Highlighting the Point 181

Highlighting the Point 181

Highlighting the Point 183 Third Party Beneficiaries 183

Real Case 184

Linking Business Law to Your Career: Assignment and Delegation 186

Chapter 15—Work Set 189

c H A p T e r 1 6

Termination and Remedies 191 Contract Termination 191

Highlighting the Point 192

Highlighting the Point 194

Real Case 195 Contract Remedies 196

Highlighting the Point 197

Highlighting the Point 198

Linking Business Law to Your Career: Performance and Compromise 200

Chapter 16—Work Set 203

U N i T 3

Sales and Leases 205

c H A p T e r 1 7

Introduction to Sales and Lease Contracts 206 Sales and Leases of Goods 206

Highlighting the Point 207

Real Case 207 Sales and Lease Contracts 208

Highlighting the Point 209

Highlighting the Point 210

Highlighting the Point 211

Highlighting the Point 211

Highlighting the Point 212

Chapter 17—Work Set 217

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C O N T E N T Sviii

c H A p T e r 1 8

Title and Risk of Loss 219 Identification 219

Real Case 220 Passage of Title 221

Highlighting the Point 222

Highlighting the Point 223 Risk of Loss 223

Highlighting the Point 224

Highlighting the Point 225 Insurable Interest 227

Highlighting the Point 227

Linking Business Law to Your Career: Risk Management 228

Chapter 18—Work Set 231

c H A p T e r 1 9

Performance and Breach 233 Obligations of the Seller or Lessor 233

Highlighting the Point 234

Highlighting the Point 235

Highlighting the Point 236 Obligations of the Buyer or Lessee 237

Real Case 238 Remedies of the Seller or Lessor 238

Highlighting the Point 239 Remedies of the Buyer or Lessee 240

Highlighting the Point 240

Chapter 19—Work Set 245

c H A p T e r 2 0

Warranties and Product Liability 247 Warranties of Title 247

Highlighting the Point 248 Express Warranties 248

Real Case 249 Implied Warranties 249

Highlighting the Point 250 Warranty Disclaimers and Limitations on Liability 251

Highlighting the Point 252 Product Liability 252

Highlighting the Point 254

Linking Business Law to Your Career: Quality Control Management 256

Chapter 20—Work Set 259

c H A p T e r 2 1

Consumer Protection 261 Deceptive Advertising 261

Highlighting the Point 262

Highlighting the Point 263 Labeling Laws and Consumer Sales 263 Credit Protection 264

Highlighting the Point 266

Real Case 267

Highlighting the Point 268 Protection of Health and Safety 268

Highlighting the Point 269

Chapter 21—Work Set 273

U N i T 4

Negotiable Instruments 275 c H A p T e r 2 2

The Essentials of Negotiability 276 Types of Instruments 276 What Is a Negotiable Instrument? 279

Real Case 280

Highlighting the Point 282 Transfer of Instruments 282

Highlighting the Point 283

Highlighting the Point 284

Linking Business Law to Your Career: Writing and Indorsing Checks 286

Chapter 22—Work Set 289

c H A p T e r 2 3

Negotiable Instruments: Transfer and Liability 291 Requirements for HDC Status 291

Highlighting the Point 292 Signature Liability 293

Real Case 294

Highlighting the Point 296 Warranty Liability 297

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C O N T E N T S ix

Highlighting the Point 297 Defenses 298 Discharge 299

Chapter 23—Work Set 303

c H A p T e r 2 4

Banking in the Digital Age 305 Checks and the Bank-Customer Relationship 305 Honoring Checks 306

Real Case 307

Highlighting the Point 309 Accepting Deposits 310

Highlighting the Point 311 Electronic Fund Transfers 313 E-Money and Online Banking 314

Linking Business Law to Your Career: Banking Risks 315

Chapter 24—Work Set 319

U N i T 5

Agency and Employment 321

c H A p T e r 2 5

Agency Relationships 322 Principal-Agent Relationships 322

Highlighting the Point 323 Agency Formation 323

Highlighting the Point 324 Duties of Agents and Principals 324 Agent’s Authority 326

Highlighting the Point 327

Highlighting the Point 327 Liability in Agency Relationships 328

Real Case 329 Termination of Agency Relationships 329

Highlighting the Point 330

Linking Business Law to Your Career: Independent Contractors 332

Chapter 25—Work Set 335

c H A p T e r 2 6

Employment, Immigration, and Labor Law 337 Employment at Will 337

Highlighting the Point 338 Worker Protections 338

Highlighting the Point 339

Highlighting the Point 340 Retirement Income and Security 341

Highlighting the Point 343 Immigration Law 343 Labor Law 344

Real Case 345

Chapter 26—Work Set 349

c H A p T e r 2 7

Employment Discrimination 351 Title VII of the Civil Rights Act 351

Highlighting the Point 352

Real Case 354 Discrimination Based on Age 355

Highlighting the Point 356 Discrimination Based on Disability 356

Highlighting the Point 357 Defenses to Employment Discrimination 358

Linking Business Law to Your Career: Human Resources Management 359

Chapter 27—Work Set 363

U N i T 6

Business Organizations 365

c H A p T e r 2 8

Types of Business Organizations 366 Sole Proprietorships 366

Real Case 367 Partnerships 367

Highlighting the Point 369

Highlighting the Point 370

Highlighting the Point 370

Highlighting the Point 371

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C O N T E N T Sx

Highlighting the Point 372

Highlighting the Point 373

Highlighting the Point 374 Limited Liability Companies 374

Linking Business Law to Your Career: Business Formation 375

Chapter 28—Work Set 379

c H A p T e r 2 9

Formation and Ownership of a Corporation 381 Formation of a Corporation 381

Highlighting the Point 383 Corporate Classifications,

Powers, and Liability 383 Corporate Financing 385 Sales of Securities 386

Highlighting the Point 387

Real Case 387 Corporate Ownership—Shareholders 388

Highlighting the Point 389

Highlighting the Point 390

Chapter 29—Work Set 395

c H A p T e r 3 0

Management of a Corporation 397 Corporate Management—Directors 397

Highlighting the Point 399

Highlighting the Point 399 Corporate Management—Officers 400 Duties of Directors and Officers 400

Real Case 401 Liability of Directors and Officers 401

Chapter 30–Work Set 405

c H A p T e r 3 1

Combining and Dissolving Corporations 407 Mergers, Consolidations, and Share Exchanges 407

Highlighting the Point 408

Real Case 409 Purchase of Assets 409 Purchase of Stock 410

Termination of a Corporation 411

Highlighting the Point 412

Chapter 31—Work Set 415

U N i T 7

Credit and Risk 417

c H A p T e r 3 2

Security Interests and Creditors’ Remedies 418 Secured Transactions 418

Highlighting the Point 420

Highlighting the Point 421 Laws Assisting Creditors 423

Real Case 423

Highlighting the Point 424

Highlighting the Point 425

Highlighting the Point 427

Chapter 32—Work Set 431

c H A p T e r 3 3

Mortgages 433 Types of Mortgages 433

Highlighting the Point 434 Lender Protections 434

Real Case 435 Borrower Protections 435 Foreclosures 436

Highlighting the Point 437

Chapter 33—Work Set 441

c H A p T e r 3 4

Bankruptcy 443 Types of Bankruptcy Relief 443

Highlighting the Point 445 Chapter 7—Liquidation 445

Real Case 447 Chapter 11—Reorganization 448 Chapter 13—Adjustment 449

Chapter 34—Work Set 453

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C O N T E N T S xi

c H A p T e r 3 5

Insurance 455 Insurance Terminology and Concepts 455 The Insurance Contract 457

Highlighting the Point 458

Highlighting the Point 458

Highlighting the Point 459

Real Case 460

Linking Business Law to Your Career: Risk Management in Cyberspace 461

Chapter 35—Work Set 465

U N i T 8

Property 467

c H A p T e r 3 6

Personal Property 468 The Nature of Personal Property 468 Property Ownership—Rights of Possession 469

Real Case 469 Acquiring Ownership of Personal Property 470 Mislaid, Lost, and Abandoned Property 472

Highlighting the Point 472

Chapter 36—Work Set 477

c H A p T e r 3 7

Bailments 479 The Elements of a Bailment 479

Highlighting the Point 480 The Rights of the Bailee 481

Highlighting the Point 481 The Duties of the Bailee 482

Highlighting the Point 483

Real Case 483 Special Bailments 484

Chapter 37—Work Set 487

c H A p T e r 3 8

Real Property 489 The Nature of Real Property 489 Ownership Interests 491

Highlighting the Point 491

Highlighting the Point 492 Transfer of Ownership 492

Highlighting the Point 493

Real Case 494

Linking Business Law to Your Career: Eminent Domain and Commercial Development 495

Chapter 38—Work Set 499

c H A p T e r 3 9

Landlord and Tenant Law 501 Types of Tenancy 501 The Lease Agreement 502

Real Case 503 Rights and Duties of Landlords and Tenants 503

Highlighting the Point 504 Transferring Rights to Leased Property 505 Terminating the Lease 506

Highlighting the Point 506

Chapter 39—Work Set 509

c H A p T e r 4 0

Wills and Trusts 511 Wills 511

Real Case 513

Highlighting the Point 514 Intestacy Laws 515

Highlighting the Point 515 Trusts 517

Chapter 40—Work Set 521

U N i T 9

Special Topics 523

c H A p T e r 4 1

Administrative Law 524 Agency Creation 524 The Administrative Process 525

Highlighting the Point 526 Controls on Agency Powers 528

Real Case 529 Public Accountability 530

Chapter 41—Work Set 535

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C O N T E N T Sxii

c H A p T e r 4 2

Antitrust Law 537 The Sherman Act 537

Highlighting the Point 538

Highlighting the Point 540

Real Case 540

Highlighting the Point 541 The Clayton Act 541 Enforcement of Antitrust Laws 542 U.S. Antitrust Laws in the Global Context 543

Chapter 42—Work Set 547

c H A p T e r 4 3

International and Space Law 549 International Principles and Doctrines 549

Real Case 550

Doing Business Internationally 551 International Contract Provisions 552

Highlighting the Point 552 Regulation of International Business Activities 553 Space Law 554

Chapter 43—Work Set 559

A p p e N d i x

A Answers to the Issue Spotters A–1

Glossary G–1

Table of Cases TC–1

Index I–1

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C H A P T E R xiii

It is no exaggeration to say that today’s legal world is changing at a pace never before experienced. In many instances, technology is both driving and facilitat-ing this change. In the midst of this evolving environment, however, one thing remains certain: for students entering the business world, an awareness of the legal and regulatory environment of business is critical. Even for those students who do not pursue a business career, legal problems will arise. Thus, a solid background in business law is essential for everyone.

In Business Law: Text and Exercises, Ninth Edition, we present business law in a straightforward, practical manner. The essential aspects of every important topic are covered without overburdening the reader with numerous details and explana- tions of arcane exceptions.

What’s New in the Ninth edition Instructors have come to rely on the coverage, accuracy, and applicability of Busi- ness Law: Text and Exercises. That is why in the Ninth Edition we continue to focus on engaging student interest and providing a basic understanding of busi- ness law. In every chapter, we have incorporated significant new details, timely examples, helpful exhibits, and recent cases.

New Chapter Content To maintain the text’s high-quality, up-to-date content, we have added several new topics and discussions to the Ninth Edition. These content additions include the following: • A new chapter on Mortgages provides a basic explanation of mortgage loans

and the laws and processes that surround them. • The final chapter on International Law now presents a new section on the

emerging area of Space Law. • To reinforce student learning through visual aids, fourteen new Exhibits have

been added to selected chapters. • The chapter discussing employment law now includes new sections on Worker

Protections and Employee Privacy. • The coverage of corporations has been expanded to include new sections on

Sales of Securities, Corporate Ownership, Share Exchanges, and Takeover Attempts.

All-New Pedagogy The Ninth Edition complements its new content coverage with new pedagogical content. To provide students with a variety of study tools for retaining and review- ing chapter materials, we made the following additions and changes: • A new section, titled Straight to the Point, in every chapter features five to

seven questions that focus on important points in the chapter content. These straightforward questions provide pedagogical variety while helping students retain important business law terms and topics.

Preface to the Instructor

xiii

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xiv P R E F A C E T O T H E I N S T R u C T O R

• A new Ethical Question based on a recent court case in every chapter helps emphasize the importance of ethics in business.

• Every chapter presents all-new Real Cases, which are based on 2016 or 2017 cases (formerly titled Real-World Case Examples). Students can quickly read through the Real Cases to see how courts apply legal principles to everyday business scenarios.

• We have added more than forty new Highlighting the Point features. These features help students understand how business law can apply to common situations.

• We have added more than twenty new Conflict Presented/Conflict Resolved features (formerly titled Facing/Answering a Legal Problem). Each chapter opens with a brief legal Conflict Presented scenario and question. At the end of the chapter, the Conflict Resolved feature answers the Conflict Presented question.

• Examples are very helpful for students because they illustrate and clarify legal principles. We have added more than forty new Numbered Examples through- out the text.

• This edition includes forty-three new Real Law case problems (formerly called Real-World Case Problems). Most are based on 2016 cases.

Other Significant Revisions Along with engaging new content and pedagogy, the Ninth Edition also boasts significant revisions and updates. To help students comprehend the more complex concepts of business law, we have removed legalese and reorganized content for better flow and understanding. To accomplish this editorial objective, we have revised some chapters. • For smoother organization and more focused business law coverage, we have

created four new chapters on Business Torts, Business Crimes, Personal Prop- erty, and Bailments by splitting chapters from the previous edition.

• In Unit 6, on Business Organizations, the coverage of Corporations has been expanded to three chapters to simplify coverage and introduce new topics and discussions.

• A complete revision of the chapter on Bankruptcy Law makes the content less confusing and easier to follow. The chapter now focuses on three common types of bankruptcy—Chapter 7, 11, and 13—and emphasizes the bank- ruptcy basics.

• Chapter 32, titled Security Interests and Creditors’ Remedies, combines two chapters from the previous edition. The chapter has been condensed for a clear, layperson-oriented discussion of risk and credit in today’s business world.

Additional practical Learning Tools To help students review chapter materials and prepare for testing, this text provides additional effective, practical features: • Learning Outcomes—Every chapter starts with four to six Learning Outcomes.

This edition includes thirty new Learning Outcomes. Each Learning Outcome is repeated in the margin at the point where it is discussed in the text. Addi- tionally, each Chapter Summary includes that chapter’s Learning Outcomes with a succinct review of the major points students need to remember.

• Linking Business Law to Your Career—Written in an easy-to-understand style, these features emphasize tips, pitfalls, and effective strategies for students

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xvP R E F A C E T O T H E I N S T R u C T O R

to remember once they are working and applying their knowledge of basic business law to real-life workplace scenarios. In selected chapters, these fea- tures often reflect new business developments and examples.

• Work Sets—At the end of every chapter, there is a tear-out sheet called a Work Set, which features true-false and multiple-choice questions, plus an Answering More Legal Problems fill-in-the-blank feature. This in-text study guide helps students review the material covered in the chapter.

• Issue Spotters—The Issue Spotters provide students with two hypothetical sit- uations that end with questions related to the chapter topics. Students answer these questions by reviewing the topic material. They can then compare their answers with those provided in Appendix A at the end of this book.

• Glossary—For students’ convenient reference, each boldfaced key term throughout the text is defined in the Glossary.

supplements Business Law: Text and Exercises, Ninth Edition, provides a comprehensive supple- ments package. The supplements were created with a single goal in mind: to make the tasks of teaching and learning more enjoyable and efficient. The following supplements are available for instructors.

MindTap Business Law for Business Law: Text & Exercises, Ninth Edition MindTap™ is a fully online, highly personalized learning experience built upon authoritative Cengage Learning content. By combining readings, multimedia, activities, and assessments into a singular Learning Path, MindTap guides students through their course with ease and engagement. Instructors personalize the Learn- ing Path by customizing Cengage Learning resources and adding their own content via apps that integrate into the MindTap framework seamlessly with Learning Management Systems.

Business law instructors have told us it is important to help students Prepare for class, Engage with the course concepts to reinforce learning, Apply these concepts in real-world scenarios, and use legal reasoning and critical thinking to Analyze business law content. Accordingly, the Business Law MindTap product provides a four-step Learning Path designed to meet these critical needs while also allowing instructors to measure skills and outcomes with ease. • Prepare—Interactive worksheets are designed to prepare students for class-

room discussion by ensuring that they have read and understood the reading. • Engage—Real-world videos with related questions help engage students by

displaying the relevance of business law in everyday life. • Apply—Brief hypothetical case scenarios help students to practice spotting

issues and applying the law in the context of short factual scenarios. • Analyze—Case-problem analysis promotes deeper critical thinking and legal

reasoning by building on acquired knowledge. These exercises guide students step by step through a case problem and then add in a critical-thinking section based on “What If the Facts Were Different?” Each and every item in the Learning Path is assignable and gradable. This gives

instructors the knowledge of class standings and concepts that may be difficult. Additionally, students gain knowledge about where they stand—both individually and compared to the highest performers in class. MindTap also includes: • Case Collection—Instructors can find more than 1,600 additional cases

included in several previous editions of all Cengage Business Law or Legal

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xvi P R E F A C E T O T H E I N S T R u C T O R

Environment texts. These cases are searchable by name, year, state, and subject matter.

• Adaptive Test Prep—Students can generate their own practice quizzes with questions similar to those found on most exams. To view a demo video and learn more about MindTap, please visit www.cengage

.com/mindtap.

Cengage Learning Testing Powered by Cognero Cengage Learning Testing Powered by Cognero is a flexible, online system that allows instructors to do the following: • Author, edit, and manage Test Bank content from multiple Cengage Learning

solutions. • Create multiple test versions in an instant. • Deliver tests from their Learning Management System (LMS), classroom, or

wherever they want.

Start Right Away! Cengage Learning Testing Powered by Cognero works on any operating system or browser. • No special installs or downloads are needed. • Create tests from school, home, the coffee shop—anywhere with Internet

access.

What Instructors Will Find • Simplicity at every step. A desktop-inspired interface features drop-down

menus and familiar intuitive tools that take instructors through content cre- ation and management with ease.

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

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

Instructor’s Companion Website The Instructor’s Companion Website for Business Law: Text and Exercises, Ninth Edition, contains the following supplements: • Instructor’s Manual. The Instructor’s Manual contains all of the answers to

the Issue Spotters, Sraight to the Point questions, Real Law case problems, and Ethical Questions. In addition, it provides the answers to each chapter’s Work Set.

• Test Bank. The comprehensive Test Bank contains multiple-choice, true-false, and short essay questions. More than 30 percent of the material in the Test Bank is either new or has been upgraded.

• PowerPoint Slides. For more details, contact your Cengage Learning sales representative.

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Acknowledgments Business Law: Text and Exercises could never have been written without the extremely helpful criticisms, comments, and suggestions that we received from the following professors on the previous editions:

Helena Armour Southwestern College of Business

David Blumberg LaGuardia Community College–CUNY

Daniel Burnstein Gibbs College

Jeffrey S. Chase Clinton Community College

Jack R. Day Sawyer College

Diamela delCastilla University of Miami

Nancy K. Dempsey Cape Cod Community College

Joseph L. DeTorres Contra Costa College

Lucy Dorum Clover Park Technical College

Greg Drummer Stone Child College

John Elger Georgia State University

Austin Emeagwai Lemoyne Owen College

Linda Ferguson Virginia Wesleyan College

Gary Grau Northeast State Community College

Myrna Gusdorf Linn-Benton Community College

Michael Harford Morehead State University

James P. Hess Ivy Technical State College

Sharon J. Kingrey City College

Doris K. Loes Dakota County Technical College

Margaret A. Lourdes Cleary University–Howell/Ann Arbor

John F. Mastriani El Paso Community College

Arin S. Miller Keiser University

Seymour D. Mintz Queens College

Karen S. Mozengo Pitt Community College

Barb Portzen Mid-State Technical College

Alan Questall Richmond Community College

J. Kent Richards Lake Superior College

Susan Rubisch-Gisler Carlow University

Harold V. Rucker Cuyamaca College

Steve Schneider Lake Superior College

Mary T. Sessom Cuyamaca College

Tom Severance Mira Costa College

Gary T. Shara California State University–Monterey

Bay

Brenda A. Siragusa Corinthian College

Deborah Vinecour SUNY Rockland Community College

Al Walczak Linn-Benton Community College

Ron Weston Contra Costa College

Roger D. Westrup Heald Business College

Frederick D. White Indian River Community College

P R E F A C E T O T H E I N S T R u C T O R xvii

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xviii

Timothy G. Wiedman Thomas Nelson Community College

Tom Wilson Remington College

The staff at Cengage Learning went out of their way to make sure that the Ninth Edition of Business Law: Text and Exercises came out in accurate form. In particu- lar, we wish to thank Bryan Gambrel and Vicky True-Baker for their countless new ideas, many of which have been incorporated into this new edition.

We also extend special thanks to Sarah Huber, our content developer, for her many useful suggestions and for her efforts in coordinating reviews and ensuring the timely and accurate publication of all supplemental materials.

Our senior content project manager, Martha Conway, made sure that we had a visually attractive edition. We will always be in her debt. We are also indebted to project managers Ann Borman and Alison Kuzmickas at SPi Global, our composi- tor. Their ability to generate the pages for this text quickly and accurately made it possible for us to meet our ambitious printing schedule.

The copyediting services of Beverly Peavler and the proofreading services of Jeanne Yost will not go unnoticed. We also thank Vickie Reierson for her proofread- ing and project management assistance. Thank you to Leoni McVey for her detailed and thorough work on the Table of Cases and Index. Finally, our appreciation goes to Roxanna Lee and Suzanne Jasin for their special efforts on the project.

We know we are not perfect. If you find something you don’t like or want us to change, write to us via e-mail, using the text’s website. That is how we can make Business Law: Text and Exercises an even better book in the future.

R.L.M. W.E.H.

P R E F A C E T O T H E I N S T R u C T O R

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DeDication

To Clyde, Whose mastery of all things in publishing continues to live on. Thanks for everything.

—R. L. M.

Para mi esposa, Luisa, y mi hijas, Sandra y Mariel, con mucho amor.

—W. E. H.

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Chapter 1 Introduction to the Law

Chapter 2 Ethics in Business

Chapter 3 The Courts and Our Legal System

Chapter 4 Constitutional Law

Chapter 5 Business Torts

Chapter 6 Intellectual Property

Chapter 7 Business Crimes

Unit Contents

The Law and Our Legal System

UNIT 1

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2

1

2

3

4

1 Introduction to the Law

Persons entering the world of business today will find themselves subject to numerous laws and government regulations. An acquaintance with these laws and regulations is beneficial—if not essential—to anyone contemplating a successful career in business.

In this introductory chapter, we look at the nature of law in general. We also examine the history and sources—both domestic and international—of American law in particular.

1–1 What Is Law? The British jurist William Blackstone (1723–1780) described law as “a rule of civil conduct, . . . commanding what is right, and prohibiting what is wrong.” There are many sets of rules that declare what is right and what is wrong. These may come from religion, philosophy, and other scholarly sources, or arise from peer pressure, customs, and other social conventions.

Only rules enacted by the government apply with equal force to all of the individu- als in a society, however. Of course, these rules are effective only if they are enforced with penalties when they are broken. Thus, the law consists of enforceable rules governing relationships among individuals and between individuals and their society.

1–2 Business Activities and the Legal Environment

To make good business decisions, knowledge of the laws and regulations govern- ing business is essential. Businesspersons must also develop critical thinking and reasoning skills to evaluate how the law might apply in a given situation and deter- mine the best course of action. Businesspersons are also pressured to make ethical decisions. Thus, the study of business law involves an ethical dimension.

LEArNINg OUTcOmEs

The four Learning Outcomes below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to:

Define law.

List the major sources of law.

Identify the supreme law of the land.

Distinguish different legal systems.

Conflict Presented Max owns photos and other art depicting the Beatles. Max does business through his website, thebeatlesartwork.com. Apple Corps, Ltd., owns trademarks—including “The Beatles”—that it

uses to sell merchandise related to the group. Alleging trademark infringement, Apple Corps files a suit against Max.

Q can Apple corps obtain a court order to stop max’s use of “The Beatles” and recover payment for its lost sales due to that use?

LEArNINg OUTcOmE 1

Define law.

law Enforceable rules governing individuals and their society.

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C H A P T E R 1 Introduction to the Law 3

1–2a Many Different Laws May Affect a Single Business Transaction

As you will see, each chapter in this textbook covers a specific area of the law and shows how the legal rules in that area affect business activities. It is important to remember, however, that many different laws may apply to just one transaction.

Businesspersons should be aware of this and understand enough about the law to know when to hire an expert for advice. See the Linking Business Law to Your Career feature at the end of this chapter for more on this topic.

If a dispute cannot be resolved amicably, then a lawsuit may become necessary. At that point, it is also important to know about the laws and the rules concerning courts and court procedures.

lawsuit A judicial proceeding for the resolution of a dispute.

Highlighting the Point

Mark Zuckerberg starts Facebook when he is a student at Harvard University. Later, oth- ers who attended Harvard at the same time assert that Zuckerberg stole their idea for a social networking website. Meanwhile, Facebook users contend that the company tracks their website visits and scans their messages to mine data to sell to advertisers.

What are some legal issues Zuckerberg and his company could face? The fellow stu- dents may have a claim against Zuckerberg in areas of the law that concern intellec- tual property, contracts, and partnerships. Facebook could also face a class action lawsuit for violating its users’ privacy. Such an action could be brought under tort law, contract law, or constitutional law. Lastly, Facebook could be subject to action for claims by certain federal regulators, which would be based in administrative law.

class action lawsuit A lawsuit in which a number of persons join together.

1–2b The Role of the Law in a Small Business Some of you may end up working in, or owning and operating, a small business. The small-business owner is the most general of managers. When you seek additional financing, you become a finance manager. As you go over the books, you become an accountant. When you direct an advertising campaign, you are the marketing manager.

When you have employees and determine salaries and benefits, you become a human resources manager. Each of these roles has a link to the law. Exhibit 1.1 shows some of the legal issues that can arise in managing a small—or large— business.

1–3 sources of American Law To understand the law, you need to have some understanding of its origins. One major source is the common law tradition that originated in medieval England. Another is constitutional law, which includes the U.S. Constitution and the con- stitutions of the states. Statutes—the laws enacted by Congress and the state legislatures— comprise an additional source of American law. Finally, yet another source of American law is administrative law, which consists of the regulations created by administrative agencies.

1–3a The Common Law In medieval England, the courts established a uniform set of rules from the customs and traditions that had been in force in various regions of the nation. These rules— and the principles behind them—were applied to resolve similar disputes in a consis- tent way. Each application served as a guide for future decisions—a legal precedent.

LEArNINg OUTcOmE 2

List the major sources of law.

precedent A court decision that guides subsequent decisions.

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U n i t 1 The Law and Our Legal System4

Over several centuries, these decisions developed into a body of common law. The English colonists brought this law to America and set up legal systems based on the common-law method of deciding disputes. When the United States was formed, these legal systems were the model for the new nation’s courts.

Today, the common law is still a significant source of legal authority. This body of law—sometimes referred to as case law—includes court interpretations of con- stitutional provisions, statutes enacted by legislatures, and regulations issued by administrative agencies.

common law A body of law developed from court decisions.

case law Rules of law announced in court decisions.

Real Case

Rosa Parks refused to give up her seat on a bus to a white man in violation of a law in Montgomery, Alabama. This event sparked the modern Civil Rights Movement. Her role has been chronicled in books and movies, and featured on mementoes, some of which are offered for sale by Target Corp. The Rosa and Raymond Parks Institute for Self Development is a Michigan firm that owns Parks’s name and likeness. The Institute

Exhibit 1.1 Linking Business Law to the Management of a Small Business

Business Organization What is the most appropriate business organizational form,

and what type of personal liability does it entail?

Taxation How will the small business be taxed, and are there ways to reduce those taxes?

Intellectual Property Does the small business have any patents or other intellectual

property that needs to be protected, and if so, what steps should the �rm take?

Administrative Law What types of government regulations apply to the

business, and what must the �rm do to comply with them?

Employment Does the business need an employment manual,

and does management have to explicitly inform employees of their rights?

Contracts, Sales, and Leases Will the �rm be regularly entering into contracts with others, and if so, should it hire an attorney to review those contracts?

Accounting Do the �nancial statements created by an accountant need to be veri�ed for accuracy?

Finance What are appropriate and legal ways to raise

additional capital so that the business can grow?

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C H A P T E R 1 Introduction to the Law 5

filed a lawsuit against Target, alleging a violation of Michigan’s common law. The court dismissed the suit. The Institute appealed.

Did michigan’s common law protect Target’s sales of merchandise that depicted or discussed rosa Parks and the modern civil rights movement? Yes. In Rosa and Raymond Parks Institute for Self-Development v. Target Corp., the U.S. Court of Appeals for the Eleventh Circuit affirmed the dismissal. Michigan’s common law prohibits the use of a person’s name or likeness without his or her consent. But the state’s common law also includes a “privilege to communicate on matters of public interest. . . . Rosa Parks is a figure of great historical significance and the Civil Rights Movement a matter of . . . the highest public interest.” Target’s sales fell within this privilege.

—812 F.3d 824 (11th Cir.)

The Doctrine of Precedent—Stare Decisis The practice of deciding new cases with reference to previous decisions, or precedents, forms a doctrine called stare decisis (pronounced ster-ay dih-si-ses), which means “to stand on decided cases.” According to this doctrine, a judge is obligated to follow the precedents established within her or his jurisdiction.

This practice is a cornerstone of the U.S. judicial system. The doctrine helps courts to be more efficient, and makes the law more stable and predictable. Some- one bringing an action in a court can expect a result based on how the law has been applied in cases with similar facts.

Departures from Precedent A court may decide that a precedent is incorrect or that a change in society or technology has rendered it inapplicable. In that case, the court may rule contrary to the precedent.

Sometimes, there is no precedent, or there are conflicting precedents. In these situations, a court may base a decision on the principles announced in other court decisions. The court may also consider public policy, social values, or concepts and data from other fields of knowledge.

Equity A person brings a case to a court of law seeking a remedy, or relief from a wrong. Usually, that remedy is damages—the payment of money.

ExamplE 1.1 Elena is injured because of Rowan’s wrongdoing. If Elena files a lawsuit and is successful, a court can order Rowan to compensate Elena for the harm by paying her a certain amount of money (damages). The compensation is Elena’s remedy. j

Money may not always be enough to make a situation right, however. Equity is a branch of the law that seeks to supply a fairer and more adequate remedy in such a case. For instance, a court might issue an injunction to order a party to do specifically what he or she promised. Or a contract might be cancelled and the contracting parties returned to the positions they held before the deal.

Two distinct systems of courts were created to grant the different types of rem- edies. A court of law could award only damages. A court of equity could provide other relief. Today, in most states, the courts of law and equity are merged. A court may now grant either a legal or an equitable remedy, or both, in the same action.

1–3b Constitutional Law The federal government and the states have separate constitutions that set forth the general organization, powers, and limits of their governments. The U.S. Con- stitution is the supreme law of the land. A law in violation of the Constitution, no matter what its source, will not be enforced.

Each state has its own constitution. Unless it conflicts with the U.S. Constitution, a state constitution is supreme within the state’s borders.

stare decisis A doctrine under which judges must follow established precedents.

jurisdiction The authority of a court to decide a specific dispute.

action A court proceeding to enforce or protect a right, or redress or prevent a wrong.

remedy The means to enforce a right or compensate for a wrong.