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Comprehensive Volume

ANDERSON’S BUSINESS LAW

And The Legal Environment 22e

DAVID P. TWOMEY Professor of Law

Carroll School of Management Boston College

Member of the Massachusetts and Florida Bars

MARIANNE MOODY JENNINGS Professor Emeritus of Legal and Ethical Studies

W.P. Carey School of Business Arizona State University

Member of the Arizona Bar ©

Sa m pl e N am

e, iS to ck

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

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Anderson’s Business Law

and The Legal Environment, 22e

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CONNECT for

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

understanding of the legal environment of business is

crucial. Students must be equipped with the knowledge of

basic legal concepts and the skills to apply these concepts

to real-world examples in order to succeed in business.

Anderson’s Business Law and the Legal Environment,

a time-tested market leading textbook, continues the

tradition of providing crystal clear explanations of the

law, student-friendly examples, and vivid illustrations.

Perhaps the most exciting innovation to the new edition

is not what students learn but how they learn – the

cutting-edge 22nd edition continues with its proven

features and approaches for teaching and learning that are

integrated into every facet of the text and package.

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

CONNECT for LEARNING

SUCCESS The learning system introduced in the 21st Edition of Anderson’s Business Law

and the Legal Environment, proved to be an effective tool for students to make the

connection to what they are reading, what they are doing in class, and—ultimately—

what they will do in the real world as business managers and leaders. This new tool is

continued and refined for the 22nd edition.

Chapters open with a self-guided outline—helping students focus on key concepts.

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

terminology students can grasp and relate to. As a learning and study tool, key

examples are highlighted in green throughout each chapter—spotlighting the

connection between chapter concepts and real-world experiences for students.

The self-guided outlines help students

focus on the key concepts presented in

the chapter.

Examples are emphasized in every paragraph with green highlights – spotlighting the connection between legal concepts and real-world experiences for students.

learningoutcomes After studying this chapter, you should be able to

LO.1 Define business ethics

LO.2 Discuss why ethics are important in business

LO.3 Describe how to recognize and resolve ethical dilemmas

A. What Is Business Ethics?

1. THE LAW AS THE STANDARD FOR BUSINESS ETHICS

2. THE NOTION OF UNIVERSAL STANDARDS FOR BUSINESS ETHICS

3. ETHICAL THEORIES AND STANDARDS

4. THE BUSINESS STAKEHOLDER STANDARD OF BEHAVIOR

B. Why Is Business Ethics Important?

5. THE IMPORTANCE OF TRUST

6. BUSINESS ETHICS AND FINANCIAL PERFORMANCE

7. THE IMPORTANCE OF A GOOD REPUTATION

8. BUSINESS ETHICS AND BUSINESS REGULATION: PUBLIC POLICY, LAW, AND ETHICS

C. How to Recognize and Resolve Ethical Dilemmas

9. CATEGORIES OF ETHICAL BEHAVIOR

10. RESOLVING ETHICAL DILEMMAS

CHAPTER 3 Business Ethics, Social Forces, and the Law

© Manuel Gutjahr/iStockphoto.com

36

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5.55.5.5.5. THETHETHETHETHEHE IMPORTANCEIMPORTANCEIMPORTANCEIMPORTANCEIMPORTANCEMPORTANC OFOFOFOFOF TRUSTTRUSTTRUSTRUSTRUSTUST

10. RESOLVING ETHICAL DILEMMAS

2. The Notion of Universal Standards for Business Ethics Another view of ethics holds that standards exist universally and cannot be changed or modified by law. In many cases, universal standards stem from religious beliefs. In some countries today, the standards for business are still determined by religious tenets. Natural law imposes higher standards of behavior than those required by positive law and they must be followed even if those higher standards run contrary to codified law. For Example, in the early nineteenth century when slavery was legally permissible in the United States, a positive law standard supported slavery. However, slavery violates the natural law principle of individual freedom and would be unethical. Civil disobedience is the remedy natural law proponents use to change positive law.

Former Supreme Court Justice Sandra Day O’Connor, who was second in her class at Stanford Law School (the late Chief Justice William Rehnquist was first), was offered a job as a receptionist for a law firm while her male classmates were hired as attorneys. At that time, no law prohibited discrimination against women, so law f h l l d d h l f

natural law– a system of principles to guide human conduct independent of, and sometimes contrary to, enacted law and discovered by man’s rational intelligence.

civil disobedience– the term used when natural law proponents violate positive law.

38 Part 1 The Legal and Social Environment of Business

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Maximizing student success, the Make the Connection section found at the end of each chapter begins with a revised and more thorough chapter summary recapping key chapter topics. Action-oriented Learning Outcomes direct students to utilize the existing text pedagogy by serving as a direct reference point for selected For Example callouts, case summaries, and feature boxes. A list of Key Terms gives students further opportunity to check their understanding of commonly-used business law terminology. The Questions and Case Problems offer students additional opportunities for students to connect legal concepts to real-world issues. And the CPA Questions provide excellent review for the CPA Exam.

Make the Connection helps students understand and retain legal concepts by explaining them in the context of real-world examples. The result: Students are better prepared to have success in class—and in their careers as business leaders.

End-of-chapter material has been thoroughly revised and expanded! The cases, new “Thinging Things Through” examples, new ethics examples, and new “Sports and Entertainment Law” sections offer students up-to-date examples that help them understand the chapter concepts and laws covered.

MAKE THE CONNECTION

SUMMARY

Business ethics is the application of values and standards to business conduct and decisions. These values originate in various sources from positive (codified) law to natural law to ethical theories and standards and on to stakeholder values. Business ethics is important because trust is a critical component of good business relationships and free enterprise. A business with values will enjoy the additional competitive advantage of a good reputation and, over the long term, better earnings. When businesses make decisions that violate basic ethical standards, they set into motion social forces and cause the area of abuse to be regulated, resulting in additional costs and

restrictions for business. Voluntary value choices by businesses position them for a competitive advantage.

The categories of ethical values in business are truthfulness and integrity, promise keeping, loyalty and avoiding conflicts of interest, fairness, doing no harm, and maintaining confidentiality.

Resolution of ethical dilemmas is possible through the use of various models that require a businessperson to examine the impact of a decision before it is made. These models include stakeholder analysis, the Blanchard and Peale test, the front-page- of-the-newspaper test, and the Laura Nash model.

LEARNING OUTCOMES

After studying this chapter, you should be able to clearly explain:

A. What Is Business Ethics? LO.1 Define business ethics

See the discussion of the definition, balancing the goal of profits with the values of individuals and society, on p. 41–42.

B. Why Is Business Ethics Important? LO.2 Discuss why ethics are important in

business See “The Importance of Trust” on p. 42. See “Business Ethics and Financial Performance” on p. 43. See “The Importance of a Good Reputation” on p. 44.

The Family Man (2000) (PG-13)

Nicolas Cage plays a Wall Street billionaire who is suddenly given a suburban life in New Jersey with all of its family life and financial constraints. He is forced to examine who he really is and what is important.

LawFlix Continued

54 Part 1 The Legal and Social Environment of Business

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CONNECT for TEACHING

SUCCESS Instructor resources also integrate the text’s Make the Connection learning system.

The Instructor’s Manual includes a thorough explanation of the system as well as

tips for implementation. Expanded PowerPoint® presentations incorporate Learning

Outcomes into every chapter, enabling instructors to talk through examples step

by step in class. In addition, the Test Bank includes questions from the Learning

Outcomes sections.

Instructor’s Manual: This manual provides instructor

insights, chapter outlines, and teaching strategies for each chapter. Chapter overviews

and transparency integration notes ease lecture preparation.

Discussion points are provided for the textbook’s “Thinking

Things Through” and “Ethics & the Law” vignettes. Also included

are answers to CPA questions.

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

Test Bank: Thousands of true/false, multiple-choice, and case questions are available.

Power Point: PowerPoint® slides are available to help instructors enhance their lectures.

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

CREATE the PERFECT

LEARNING SOLUTION Digital Solutions that Prepare and Engage Students MINDTAP MindTap is a new personal learning experience that combines all your digital assets—readings, multimedia, activities, and assessments—into a singular learning path to improve student outcomes. MindTap offers complimentary web-apps known as MindApps. MindApps range from ReadSpeaker (which reads the text out-loud to students), to Kaltura (allowing you to insert your own video and audio into your curriculum) to ConnectYard (allowing you to create digital “yards” through social media—all without “friending” your students). CengageNOW is an app within MindTap. www.cengage.com/mindtap Instant Access Code ISBN: 9781285513102

CENGAGENOW CengageNOW is a powerful course management tool that provides control and customization to optimize the student learning experience and produce desired outcomes. CengageNOW includes:

• Interactive eBook

• Auto-Graded Homework with the following consistent question types:

• Chapter Review

• Brief Hypotheticals/Business Case Scenarios

• Legal Reasoning

• IRAC (Issue, Rule, Application, Conclusion) Case Analysis

• Synthesizing/Exam Strategy

• Application & Analysis/Business Wisdom

• Video Questions

• Personalized Study Plan with Multimedia Study Tools and videos

• Test Bank • Course Management Tools • Reporting & Assessment Options

Instant Access Code ISBN: 9781285194189

COURSEMATE CourseMate with Engagement Tracker: CourseMate brings course concepts to life with interactive learning tools and an eBook. CourseMate now includes the KnowNOW! Blog, the most current solution for the most convenient online news and classroom application. KnowNOW! brings news into your course with discipline-specific online pages and applications. www.cengage.com/coursemate Instant Access Code ISBN: 9781285194127

BRING BUSINESS LAW TO LIFE! Business Law Digital Video Library: This dynamic video library features more that ninety video clips that spark class discussion and clarify core legal principles. The library is organized into four series: Legal Conflicts in Business (includes specific modern business and e-commerce scenarios); Ask the Instructor (presents straightforward explanations of concepts for student review); Drama of the Law (features classic business scenarios that spark classroom participation); and Real World Legal (explores conflicts that arise in a variety of business environments). Access for students is free when bundled with a new textbook, or it can be purchased at www.cengagebrain.com. Instant Access Code ISBN: 9781285186658

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Unique Services for You and Your Students CENGAGE LEARNING CUSTOM SOLUTIONS Cengage Learning Custom Solutions can provide your students exactly what they need to succeed—remove extra coverage you normally skip, replace chapters with coverage that better matches your approach, supplement your text with additional cases or readings from our legal, business ethics, or our new “pop culture” case collections, and include your own material to create a complete and efficient course resource. With a customized product your students are paying for “exactly what they need” and receive a greater value for their dollar.

SAVE YOUR STUDENTS TIME AND MONEY! Tell them about CengageBrain.com to access Cengage Learning content and empower them to choose the format and savings that suits them best . . . and a better chance to succeed in your class. On CengageBrain.com students will be able to save up to 60% on their course materials through our full spectrum of options. Students will have the option to rent their textbooks, purchase print textbooks, e-textbooks, or individual e-chapters and audio books all for substantial savings over average retail prices. CengageBrain.com also includes access to Cengage Learning’s broad range of homework and study tools, and features a selection of free content. www.cengage.com/custom/

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

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

brief contents

Preface xxxi Acknowledgements xxxix About the Authors xlii

PART 1 THE LEGAL AND SOCIAL ENVIRONMENT OF BUSINESS 1 1 The Nature and Sources of Law 3 2 The Court System and Dispute Resolution 15 3 Business Ethics, Social Forces, and the Law 36 4 The Constitution as the Foundation of the Legal

Environment 59 5 Government Regulation of Competition and Prices 78 6 Administrative Agencies 92 7 The Legal Environment of International Trade 112 8 Crimes 141 9 Torts 170

10 Intellectual Property Rights and the Internet 193 11 Cyberlaw 222

PART 2 CONTRACTS 241 12 Nature and Classes of Contracts: Contracting on the

Internet 243 13 Formation of Contracts: Offer and Acceptance 260 14 Capacity and Genuine Assent 282 15 Consideration 304 16 Legality and Public Policy 320 17 Writing, Electronic Forms, and Interpretation of

Contracts 338 18 Third Persons and Contracts 361 19 Discharge of Contracts 378 20 Breach of Contract and Remedies 399

PART 3 SALES AND LEASES OF GOODS 419 21 Personal Property and Bailments 421 22 Legal Aspects of Supply Chain Management 443 23 Nature and Form of Sales 466 24 Title and Risk of Loss 493 25 Product Liability: Warranties and Torts 515 26 Obligations and Performance 538 27 Remedies for Breach of Sales Contracts 557

PART 4 NEGOTIABLE INSTRUMENTS 579 28 Kinds of Instruments, Parties, and Negotiability 581

29 Transfers of Negotiable Instruments and Warranties of Parties 600

30 Liability of the Parties under Negotiable Instruments 621 31 Checks and Funds Transfers 640

PART 5 DEBTOR-CREDITOR RELATIONSHIPS 669 32 Nature of the Debtor-Creditor Relationship 671 33 Consumer Protection 689 34 Secured Transactions in Personal Property 715 35 Bankruptcy 746 36 Insurance 773

PART 6 AGENCY AND EMPLOYMENT 797 37 Agency 799 38 Third Persons in Agency 823 39 Regulation of Employment 846 40 Equal Employment Opportunity Law 885

PART 7 BUSINESS ORGANIZATIONS 913 41 Types of Business Organizations 915 42 Partnerships 933 43 LPs, LLCs, and LLPs 961 44 Corporation Formation 978 45 Shareholder Rights in Corporations 1000 46 Securities Regulation 1026 47 Accountants’ Liability and Malpractice 1054 48 Management of Corporations 1077

PART 8 REAL PROPERTY AND ESTATES 1101 49 Real Property 1103 50 Environmental Law and Land Use Controls 1129 51 Leases 1150 52 Decedents’ Estates and Trusts 1169

APPENDICES

1 How to Find the Law A-1 2 The Constitution of the United States A-4 3 Uniform Commercial Code A-15

GLOSSARY G-1

CASE INDEX CI-1

SUBJECT INDEX SI-1

xi

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contents Preface xxxi Acknowledgements xxxix About the Authors xlii

PART 1

THE LEGAL AND SOCIAL ENVIRONMENT OF BUSINESS

CHAPTER 1 THE NATURE AND SOURCES OF LAW 3

A. Nature of Law and Legal Rights 4 1. Legal Rights 4 2. Individual Rights 4 3. The Right of Privacy 4 CASE SUMMARY 5

4. Privacy and Technology 6 Ethics & the Law 6

E-Commerce & Cyberlaw 7

B. Sources of Law 7 5. Constitutional Law 7 6. Statutory Law 8 7. Administrative Law 8 8. Private Law 8 9. Case Law, Statutory Interpretation, and Precedent 8 10. Other Forms of Law: Treaties and Executive

Orders 9 11. Uniform State Laws 9 C. Classifications of Law 10 12. Substantive Law vs. Procedural Law 10 13. Criminal Law vs. Civil Law 10 Sports & Entertainment Law 10

14. Law vs. Equity 11 LawFlix 11

CHAPTER 2 THE COURT SYSTEM AND DISPUTE RESOLUTION 15

A. The Court System 16 1. The Types of Courts 16 CASE SUMMARY 17

2. The Federal Court System 18 3. State Court Systems 20 B. Court Procedure 22

4. Participants in the Court System 22 5. Which Law Applies—Conflicts of Law 22 6. Initial Steps in a Lawsuit 23 7. The Trial 24 Thinking Things Through 25

Ethics & the Law 27

8. Posttrial Procedures 27 C. Alternative Dispute Resolution (ADR) 27 9. Arbitration 27 10. Mediation 29 11. MedArb 29 12. Reference to a Third Person 29 E-Commerce & Cyberlaw 30

13. Association Tribunals 30 14. Summary Jury Trial 30 15. Rent-A-Judge 30 16. Minitrial 31 17. Judicial Triage 31 18. Contract Provisions 31 LawFlix 31

CHAPTER 3 BUSINESS ETHICS, SOCIAL FORCES, AND THE LAW 36

A. What Is Business Ethics? 37 1. The Law as the Standard for Business Ethics 37 2. The Notion of Universal Standards for Business

Ethics 38 3. Ethical Theories and Standards 38 Thinking Things Through 40

4. The Business Stakeholder Standard of Behavior 41 Ethics & the Law 42

B. Why Is Business Ethics Important? 42 5. The Importance of Trust 42 6. Business Ethics and Financial Performance 43 Ethics & the Law 44

7. The Importance of a Good Reputation 44 8. Business Ethics and Business Regulation: Public

Policy, Law, and Ethics 44 Ethics & the Law 46

C. How to Recognize and Resolve Ethical Dilemmas 48 9. Categories of Ethical Behavior 48 Ethics & the Law 49

Sports & Entertainment Law 50

10. Resolving Ethical Dilemmas 50

xii

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E-Commerce & Cyberlaw 51

Ethics & the Law 52

LawFlix 53

CHAPTER 4 THE CONSTITUTION AS THE FOUNDATION OF THE LEGAL ENVIRONMENT 59

A. The U.S. Constitution and the Federal System 60 1. What a Constitution Is 60 2. The Branches of Government 60 B. The U.S. Constitution and the States 60 3. Delegated and Shared Powers 60 4. Other Powers 61 5. Federal Supremacy 62 CASE SUMMARY 62

C. Interpreting and Amending the Constitution 63 6. Conflicting Theories 63 7. Amending the Constitution 63 8. The Living Constitution 64 D. Federal Powers 65 9. The Power to Regulate Commerce 65 CASE SUMMARY 66

CASE SUMMARY 67

CASE SUMMARY 67

10. The Financial Powers 68 CASE SUMMARY 68

E. Constitutional Limitations on Government 69 11. Due Process 69 E-Commerce & Cyberlaw 70

12. Equal Protection of the Law 70 13. Privileges and Immunities 71 14. Protection of the Person 71 15. The Bill of Rights and Businesses as Persons 72 CASE SUMMARY 72

Thinking Things Through 73

LawFlix 73

CHAPTER 5 GOVERNMENT REGULATION OF COMPETITION AND PRICES 78

A. Power to Regulate Business 79 1. Regulation, Free Enterprise, and Deregulation 79 2. Regulation of Unfair Competition 79 B. Regulation of Horizontal Markets and Competitors 79 3. Regulation of Prices 79 4. Prevention of Monopolies and Combinations 80 Ethics & the Law 81

5. Boycotts and Refusals to Deal 81 6. Mergers among Competitors 82

E-Commerce & Cyberlaw 82

C. Regulation of the Supply Chain and Vertical Trade Restraints 83

7. Price Discrimination 83 CASE SUMMARY 83