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ETHICS TODAY

Stare Decisis versus Spider-Man Chapter 1, p. 9

Is It Ethical (and Legal) to Brew “Imported” Beer Brands Domestically? Chapter 11, p. 217

Forced Arbitration: Right or Wrong? Chaper 13, p. 267

Should There Be More Relief for Student Loan Defaults? Chapter 15, p. 337

Is It Fair to Classify Uber and Lyft Drivers as Independent Contractors? Chapter 19, p. 418

Is It Fair to Dock Employees’ Pay for Bathroom Breaks? Chapter 20, p. 442

Should Eminent Domain Be Used to Promote Private Development? Chapter 26, p. 562

MANAGERIAL STRATEGY

Should You Consent to Have Your Business Case Decided by a U.S. Magistrate Judge? Chapter 2, p. 38

Marriage Equality and the Constitution Chapter 4, p. 72

When Is a Warning Legally Bulletproof? Chapter 7, p. 142

The Criminalization of American Business Chapter 10, p. 191

Creating Liability Waivers That Are Not Unconscionable Chapter 12, p. 257

Commercial Use of Drones Chapter 14, p. 295

Can a Person Who Is Not a Member of a Protected Class Sue for Discrimination? Chapter 17, p. 376

Union Organizing Using a Company’s E-Mail System Chapter 22, p. 483

The SEC’s New Pay-Ratio Disclosure Rule Chapter 28, p. 590

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Frank B. Cross Herbert D. Kelleher

Centennial Professor in Business Law University of Texas at Austin

Roger LeRoy Miller Institute for University Studies

Arlington, Texas

The L EG A L

EN V IRONMENT of BBUSINESS

T E X T A N D C A SE S

Tenth Edition

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The Legal Environment of Business TEXT AND CASES

Tenth Edition

Frank B. Cross Roger LeRoy Miller

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Unit One THE FOUNDATIONS 1 Chapter 1 Law and Legal Reasoning 2 Chapter 2 Courts and Alternative Dispute Resolution 26 Chapter 3 Court Procedures 48 Chapter 4 Business and the Constitution 70 Chapter 5 Business Ethics 89

Unit Two THE PUBLIC AND INTERNATIONAL ENVIRONMENT 111 Chapter 6 Tort Law 112 Chapter 7 Strict Liability and Product Liability 134 Chapter 8 Intellectual Property Rights 150 Chapter 9 Internet Law, Social Media, and Privacy 170 Chapter 10 Criminal Law and Cyber Crime 187 Chapter 11 International and Space Law 211

Unit Three THE COMMERCIAL ENVIRONMENT 233 Chapter 12 Formation of Traditional and E-Contracts 234 Chapter 13 Contract Performance, Breach, and Remedies 262 Chapter 14 Sales and Lease Contracts 284 Chapter 15 Creditor-Debtor Relations and Bankruptcy 318

Unit Four THE BUSINESS AND EMPLOYMENT ENVIRONMENT 349 Chapter 16 Small Businesses and Franchises 350 Chapter 17 Limited Liability Business Forms 371 Chapter 18 Corporations 388 Chapter 19 Agency Relationships 416 Chapter 20 Employment Law 438 Chapter 21 Employment Discrimination 453 Chapter 22 Immigration and Labor Law 474

Unit Five THE REGULATORY ENVIRONMENT 495 Chapter 23 Administrative Agencies 496 Chapter 24 Consumer Protection 515 Chapter 25 Environmental Law 532 Chapter 26 Real Property and Land-Use Control 548 Chapter 27 Antitrust Law 568 Chapter 28 Investor Protection and Corporate Governance 588

Brief Contents

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iv BRIEF CONTENTS

APPENDICES A How to Brief Cases and Analyze Case Problems A-1 B �e Constitution of the United States A-5 C Articles 2 and 2A of the A of the A Uniform Commercial Code A-13 D Answers to the Issue Spotters A-51 E Sample Answers for Business Case Problems with Sample Answer A-57

GLOSSARY G-1 TABLE OF CASES TC-1 INDEX I-1

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Unit One THE FOUNDATIONS 1

Chapter 1 Law and Legal Reasoning 2 Business Activities and the Legal Environment 2 Sources of American Law 3 �e Common Law Tradition 6 Schools of Legal �ought 12 Classi�cations of Law 13 How to Find Primary Sources of Law 14 How to Read and Understand Case Law 19

Chapter 2 Courts and Alternative Dispute Resolution 26 �e Judiciary’s Role in American Government 26 Basic Judicial Requirements 27 Case Analysis 2.1 Mala v. Crown Bay Marina, Inc. (2013) 29 Spotlight on Gucci

Case 2.2 Gucci America, Inc. v. Wang Huoqing (2011) 32 �e State and Federal Court Systems 35 Case 2.3 Johnson v. Oxy USA, Inc. (2016) 36 Alternative Dispute Resolution 40 International Dispute Resolution 44

Chapter 3 Court Procedures 48 Procedural Rules 48 Pretrial Procedures 50 Case Analysis 3.1 Espresso Disposition Corp. 1 v. Santana Sales

& Marketing Group, Inc. (2013) 54 Case 3.2 Lewis v. Twenty-First Century Bean

Processing (2016) 56 Case 3.3 Brothers v. Winstead (2014) 58 �e Trial 61 Posttrial Motions 64 �e Appeal 65 Enforcing the Judgment 66

Chapter 4 Business and the Constitution 70 �e Constitutional Powers of Government 70 Classic Case 4.1 Heart of Atlanta Motel v. United

States (1964) 73 Business and the Bill of Rights 75 Spotlight on Beer Labels

Case 4.2 Bad Frog Brewery, Inc. v. New York State Liquor Authority (1998) 78

Case Analysis 4.3 Thompson v. Holm (2016) 81 Due Process and Equal Protection 83 Privacy Rights 84

Chapter 5 Business Ethics 89 Business Ethics 89 Case 5.1 Scott v. Carpanzano (2014) 91 Business Ethics and Social Media 93 Ethical Principles and Philosophies 94 Making Ethical Business Decisions 97 Case 5.2 Al-Dabagh v. Case Western Reserve

University (2015) 99 Case Analysis 5.3 Moseley v. Pepco Energy Services,

Inc. (2011) 100 Global Business Ethics 102 Unit One Application and Ethics:

“Arbitration, No Class Actions” 107

Unit Two THE PUBLIC AND INTERNATIONAL ENVIRONMENT 111

Chapter 6 Tort Law 112 �e Basis of Tort Law 112 Intentional Torts against Persons 113 Case Analysis 6.1 Blake v. Giustibelli (2016) 115 Case 6.2 Revell v. Guido (2015) 120 Intentional Torts against Property 123 Unintentional Torts—Negligence 125 Defenses to Negligence 129 Spotlight on the Seattle Mariners

Case 6.3 Taylor v. Baseball Club of Seattle, LP (2006) 129

v

Contents

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vi CONTENTS

Chapter 7 Strict Liability and Product Liability 134 Strict Liability 134 Product Liability 135 Case Analysis 7.1 Schwarck v. Arctic Cat, Inc. (2016) 136 Strict Product Liability 137 Spotlight on Injuries from Vaccines

Case 7.2 Bruesewitz v. Wyeth, LLC (2011) 138 Defenses to Product Liability 144 Case 7.3 VeRost v. Mitsubishi Caterpillar Forklift America,

Inc. (2015) 144

Chapter 8 Intellectual Property Rights 150 Trademarks and Related Property 150 Classic Case 8.1 The Coca-Cola Co. v. The Koke Co.

of America (1920) 150 Case 8.2 LFP IP, LLC v. Hustler Cincinnati, Inc. (2016) 153 Patents 157 Copyrights 160 Case Analysis 8.3 Winstead v. Jackson (2013) 161 Trade Secrets 164 International Protection for Intellectual Property 166

Chapter 9 Internet Law, Social Media, and Privacy 170 Internet Law 170 Spotlight on Internet Porn

Case 9.1 Hasbro, Inc. v. Internet Entertainment Group, Ltd. (1996) 173

Copyrights in Digital Information 174 Social Media 176 Online Defamation 178 Other Actions Involving Online Posts 180 Case Analysis 9.2 David v. Textor (2016) 181 Privacy 182 Case 9.3 Nucci v. Target Corp. (2015) 182

Chapter 10 Criminal Law and Cyber Crime 187 Civil Law and Criminal Law 187 Criminal Liability 189 Types of Crimes 192 Case 10.1 State of Minnesota v. Smith (2015) 193 Spotlight on White-Collar Crime

Case 10.2 People v. Sisuphan (2010) 195 Defenses to Criminal Liability 198 Criminal Procedures 201 Cyber Crime 204 Case Analysis 10.3 United States v. Warner (2016) 205

Chapter 11 International and Space Law 211 International Law 211 Case Analysis 11.1 Bennett v. Islamic Republic of Iran

(2016) 215 Doing Business Internationally 216 Regulation of Speci�c Business Activities 219 International Dispute Resolution 221 Case 11.2 Carlyle Investment Management, LLC v. Moonmouth

Co. SA (2015) 222 U.S. Laws in a Global Context 223 Spotlight on International Torts

Case 11.3 Daimler AG v. Bauman (2014) 223 Space Law 225 Unit Two Application and Ethics:

The Biggest Data Breach of All Time 230

Unit Three THE COMMERCIAL ENVIRONMENT 233

Chapter 12 Formation of Traditional and E-Contracts 234 An Overview of Contract Law 234 Agreement 238 Classic Case 12.1 Lucy v. Zehmer (1954) 238 Case Analysis 12.2 Hinkal v. Pardoe (2016) 243 E-Contracts 245 Consideration 248 Spotlight on Nike

Case 12.3 Already, LLC v. Nike, Inc. (2013) 251 Contractual Capacity 253 Legality 254 Form 256 �ird Party Rights 256

Chapter 13 Contract Performance, Breach, and Remedies 262 Voluntary ConsentVoluntary ConsentV 262 Case 13.1 Schneiderman v. Trump Entrepreneur Initiative, LLC

(2016) 264 Performance and Discharge 267 Case Analysis 13.2 Kohel v. Bergen Auto Enterprises, L.L.C.

(2013) 270 Damages 274

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CONTENTS vii

Spotlight on Liquidated Damages Case 13.3 Kent State University v. Ford (2015) 277

Equitable Remedies 278 Waiver of Breach 280 Contract Provisions Limiting Remedies 281

Chapter 14 Sales and Lease Contracts 284 �e Scope of Articles 2 (Sales) and 2A (A (A Leases) 284 �e Formation of Sales and Lease Contracts 286 Classic Case 14.1 Jones v. Star Credit Corp. (1969) 291 Title, Risk, and Insurable Interest 292 Case Analysis 14.2 BMW Group, LLC v. Castle Oil Corp.

(2016) 293 Performance and Breach of Sales and Lease Contracts 298 Remedies for Breach of Sales and Lease Contracts 302 Spotlight on Baseball Cards

Case 14.3 Fitl v. Strek (2005) 306 Warranties 307 Contracts for the International Sale of Goods 309

Chapter 15 Creditor-Debtor Relations and Bankruptcy 318 Laws Assisting Creditors 318 Case Analysis 15.1 Picerne Construction Corp. v. Villas

(2016) 319 Mortgages 324 Protection for Debtors 325 Bankruptcy Law 326 Liquidation Proceedings 326 Case 15.2 In re Anderson (2016) 332 Case 15.3 In re Cummings (2015) 336 Reorganizations 338 Bankruptcy Relief under Chapter 12 and Chapter 13 339 Unit Three Application and Ethics:

Fantasy Sports—Legal Gambling? 346

Unit Four THE BUSINESS AND EMPLOYMENT ENVIRONMENT 349

Chapter 16 Small Businesses and Franchises 350 General Considerations for Small Businesses 350 Sole Proprietorships 351

Case Analysis 16.1 A. Gadley Enterprises, Inc. v. Department of Labor and Industry Office of Unemployment Compensation Tax Services (2016) 352

Partnerships 355 Classic Case 16.2 Meinhard v. Salmon (1928) 358 Franchises 362 Spotlight on Holiday Inns

Case 16.3 Holiday Inn Franchising, Inc. v. Hotel Associates, Inc. (2011) 367

Chapter 17 Limited Liability Business Forms 371 �e Limited Liability Company 371 Case 17.1 Hodge v. Strong Built International, LLC (2015) 373 LLC Management and Operation 375 Dissociation and Dissolution of an LLC 377 Case Analysis 17.2 Reese v. Newman (2016) 378 Limited Liability Partnerships 379 Limited Partnerships 381 Case 17.3 DeWine v. Valley View Enterprises, Inc. (2015) 381

Chapter 18 Corporations 388 Nature and Classi�cation 388 Case 18.1 Drake Manufacturing Co. v. Polyflow, Inc.

(2015) 390 Case Analysis 18.2 Pantano v. Newark Museum (2016) 391 Formation and Powers 394 Piercing the Corporate VeilVeilV 399 Directors and O�cers 400 Classic Case 18.3 Guth v. Loft, Inc. (1939) 404 Shareholders 405 Major Business Forms Compared 411

Chapter 19 Agency Relationships 416 Agency Law 416 Formation of the Agency Relationship 419 Duties of Agents and Principals 420 Spotlight on Taser International

Case 19.1 Taser International, Inc. v. Ward (2010) 422 Case Analysis 19.2 NRT New England, LLC v. Jones (2016) 425 Agent’s Authority 426 Liability in Agency Relationships 428 Case 19.3 Asphalt & Concrete Services, Inc. v. Perry (2015) 431 Termination of an Agency 433

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viii CONTENTS

Chapter 20 Employment Law 438 Employment at Will 438 Case Analysis 20.1 Caterpillar, Inc. v. Sudlow (2016) 439 Wages, Hours, and Layo�s 441 Case 20.2 Bailey v. TitleMax of Georgia, Inc. (2015) 443 Family and Medical Leave 444 Case 20.3 Ballard v. Chicago Park District (2014) 445 Health, Safety, and Income Security 446 Employee Privacy Rights 449

Chapter 21 Employment Discrimination 453 Title VII of the Civil Rights Act 453 Case Analysis 21.1 Bauer v. Lynch (2016) 458 Case 21.2 Young v. United Parcel Service, Inc. (2015) 459 Case 21.3 Roberts v. Mike’s Trucking, Ltd. (2014) 462 Discrimination Based on Age 464 Discrimination Based on Disability 466 Discrimination Based on Military Status 469 Defenses to Employment Discrimination 469 A�rmative Action 470

Chapter 22 Immigration and Labor Law 474 Immigration Law 474 Federal Labor Laws 477 Case 22.1 Services Employees International Union v.

National Union of Healthcare Workers (2013) 478 Union Organization 479 Case Analysis 22.2 Contemporary Cars, Inc. v. National Labor

Relations Board (2016) 481 Collective Bargaining 482 Strikes and Lockouts 483 Unfair Labor Practices 485 Case 22.3 Staffing Network Holdings, LLC v.

National Labor Relations Board (2016) 486 Unit Four Application and Ethics:

Health Insurance and Small Business 492

Unit Five THE REGULATORY ENVIRONMENT 495

Chapter 23 Administrative Agencies 496 �e Practical Signi�cance of Administrative Law 496 Agency Creation and Powers 497

Case 23.1 Loving v. Internal Revenue Service (2014) 500 �e Administrative Process 502 Case 23.2 Craker v. Drug Enforcement Administration

(2013) 506 Judicial Deference to Agency Decisions 507 Case Analysis 23.3 Olivares v. Transportation Security

Administration (2016) 508 Public Accountability 510

Chapter 24 Consumer Protection 515 Advertising, Marketing, and Sales 515 Case 24.1 POM Wonderful, LLC v. Federal Trade Commission

(2015) 516 Case 24.2 Lexmark International, Inc. v. Static Control

Components, Inc. (2014) 520 Labeling and Packaging Laws 522 Protection of Health and Safety 523 Credit Protection 524 Case Analysis 24.3 Santangelo v. Comcast Corporation

(2016) 526

Chapter 25 Environmental Law 532 Common Law Actions 532 Federal, State, and Local Regulations 533 Case Analysis 25.1 Friends of Animals v. Clay (2016) 533 Air Pollution 536 Case 25.2 United States v. O’Malley (2014) 538 Water Pollution 539 Case 25.3 Entergy Corp. v. Riverkeeper, Inc. (2009) 540 Toxic Chemicals and Hazardous Waste 543

Chapter 26 Real Property and Land-Use Control 548 �e Nature of Real Property 548 Ownership and Other Interests in Real Property 550 Case 26.1 Main Omni Realty Corp. v. Matus (2015) 551 Transfer of Ownership 555 Spotlight on Sales of Haunted Houses

Case 26.2 Stambovsky v. Ackley (1991) 556 Case Analysis 26.3 Montgomery County v. Bhatt (2016) 559 Limitations on the Rights of Property Owners 561 Land-Use Control and Zoning 563

Chapter 27 Antitrust Law 568 �e Sherman Antitrust Act 568 Section 1 of the Sherman Act 569 Section 2 of the Sherman Act 572

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CONTENTS ix

Case Analysis 27.1 McWane, Inc. v. Federal Trade Commission (2015) 574

Spotlight on Weyerhaeuser Case 27.2 Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co. (2007) 576

�e Clayton Act 577 Enforcement and Exemptions 580 Case 27.3 TransWeb, LLC v. 3M Innovative Properties Co.

(2016) 580 U.S. Antitrust Laws in the Global Context 583

Chapter 28 Investor Protection and Corporate Governance 588 �e Securities Act of 1933 588 Case 28.1 Omnicare, Inc. v. Laborers District

Council Construction Industry Pension Fund (2015) 594 �e Securities Exchange Act of 1934 595 Classic Case 28.2 SEC v. Texas Gulf Sulphur Co. (1968) 596

Case Analysis 28.3 Rand-Heart of New York, Inc. v. Dolan (2016) 600

State Securities Laws 603 Corporate Governance 603 Unit Five Application and Ethics:

Climate Change 610

Appendices A How to Brief Cases and Analyze Case Problems A-1 B �e Constitution of the United States A-5 C Articles 2 and 2A of the A of the A Uniform Commercial Code A-13 D Answers to the Issue Spotters A-51 E Sample Answers for Business Case Problems with Sample

Answer A-57

Glossary G-1 Table of Cases TC-1 Index I-1

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xi

Concept Summaries

1.1 Sources of American Law 5 1.2 �e Common Law Tradition 11 1.3 Schools of Jurisprudential �ought 13 2.1 Jurisdiction 34 2.2 Types of Courts 4l 3.1 Pretrial Procedures 62 3.2 Trial Procedures 64 3.3 Posttrial Options 66 6.1 Intentional Torts against Persons 122

6.2 Intentional Torts against Property 126 7.1 Defenses to Product Liability 147

10.1 Types of Crimes 199 12.1 Types of Contracts 237 12.2 Methods byWhich

an O�er Can Be Terminated 242 14.1 O�er, Acceptance, and Consideration

under the UCC 289 15.1 Forms of Bankruptcy Relief Compared 342

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xii

1–1 Areas of the Law That Can Affect Business Decision Making 3

1–2 Equitable Maxims 7 1–3 Procedural Differences between

Actions at Law and Actions in Equity 8 1–4 National Reporter Reporter R System—Regional/FederalRegional/FederalR 16 1–5 How to Read CitationsRead CitationsR 17 1–6 A Sample Court Case 21 2–1 Exclusive and Concurrent Jurisdiction 31 2–2 The State and Federal Court Systems 35 2–3 Geographic Boundaries of the

U.S. Courts of Appeals and Appeals and A U.S. District Courts 39 2–4 Basic Differences in the Traditional Forms of ADR 42 3–1 Stages in a Typical Lawsuit 49 3–2 A Typical Complaint A Typical Complaint A 51 3–3 A Typical A Typical A Summons 52 3–4 Pretrial Motions 54 4–1 Protections Guaranteed by the Bill of RightsRightsR 76 4–2 Federal Legislation Relating to PrivacyRelating to PrivacyR 85 8–1 Forms of Intellectual Property 165

10–1 Key Differences between Civil Law and Criminal Law 188

10–2 Civil (Tort) Lawsuit and Criminal Prosecution for the Same Act 189

10–3 Major Procedural Steps in a Criminal Case 203 11–1 The Legal Systems of Selected Nations 213 11–2 Examples of International Principles

and Doctrines 216 12–1 Examples of Agreements That Lack Consideration 250 13–1 Mistakes of Fact 263 13–2 Discharge by Performance 271 13–3 Remedies for Remedies for R Breach of Contract 280 14–1 The Law Governing Contracts 285 14–2 Major Differences between

Contract Law and Sales Law 292 15–1 Suretyship and Guaranty Parties 322

15–2 Collection and Distribution of Property in Most Voluntary Voluntary V Bankruptcies 334

16–1 The FTC’s Franchise Rule Rule R RequirementsRequirementsR 364 17–1 Management of an LLC 375 17–2 A Comparison of A Comparison of A General Partnerships

and Limited Partnerships 383 18–1 Results of Cumulative Results of Cumulative R VotingVotingV 408 18–2 Major Forms of Business Compared 411 19–1 Duties of the Agent 421 19–2 Duties of the Principal 423 19–3 Termination by Act of the Parties 433 21–1 Coverage of Employment Discrimination Laws 468 22–1 Good Faith versus Bad Faith

in Collective Bargaining 484 22–2 Basic Unfair Labor Practices 485 23–1 Executive Departments

and Important Subagencies 498 23–2 Selected Independent Regulatory Regulatory R Agencies 499 23–3 The Formal Administrative

Agency Adjudication Process 505 24–1 Selected Areas of Consumer Law

Regulated by Regulated by R Statutes 516 25–1 Major Federal Environmental Statutes 535 25–2 Environmental Impact Statements 536 25–3 Pollution-Control Equipment Standards under

the Clean Air Act and the Clean Water Act 540 26–1 Interests in Real PropertyReal PropertyR 555 27–1 Required Required R Elements of a Sherman Act ViolationViolationV 569 27–2 Exemptions to Antitrust Enforcement 582 28–1 Exemptions for Securities Offerings

under the 1933 Securities Act 592 28–2 Comparison of Coverage, Application, Application, A

and Liability under SEC Rule 10b-5 and Rule 10b-5 and R Section 16(b) 599

28–3 Some Key Provisions of the Sarbanes-Oxley Act Relating to Corporate Relating to Corporate R Accountability 606

Exhibits

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xiii

The study of the legal environment of business has universal applicability. A student entering any field of A student entering any field of A business must have at least a passing understanding of business law in order to function in the real world. The Legal Environment of Business, Tenth Edition, provides the information that students need in an interesting and contemporary way.

Additionally, students preparing for a career in accounting, government and political science, econom- ics, and even medicine can use much of the information they learn in a legal environment course. In fact, every individual throughout his or her lifetime can bene�t from knowledge of environmental law, intellectual and real property, agency and employment relationships, and other legal environment topics. Consequently, we have fashioned this text as a useful “tool for living” for all of your students (including those taking the revised 2017 CPA2017 CPA2017 CP exam). A exam). A

For the Tenth Edition, we have spent a great deal of e�ort making this book more modern, exciting, and visu- ally appealing than ever before. We have added twenty- seven new features, �fty-two new cases, and seventeen new exhibits. �e text also contains more than one hundred new highlighted and numbered Cases in Point and Examples, and eighty-�ve new case problems. Spe- cial pedagogical elements within the text focus on legal, ethical, global, and corporate issues while addressing core curriculum requirements.

Highlights of the Tenth Edition Instructors have come to rely on the coverage, accuracy, and applicability of The Legal Environment of Business. To make sure that our text engages your students, solidifies their understanding of legal concepts, and provides the best teaching tools available, we now offer the following.

A Variety of New and Exciting Features The Tenth Edition of The Legal Environment of Business is filled with many new features specifically designed to cover current legal topics of high interest. Each feature is related to a topic discussed in the text and ends with Crit-Crit-Crit ical �inking or Business Questions. Suggested answers

to all the Critical �inking and Business Questions are included in the Solutions Manual for this text.

1. Ethics Today These features focus on the ethical aspects of a topic discussed in the text to empha- size that ethics is an integral part of a business law course. Examples include: • Stare Decisis versus Spiderman (Chapter 1) • Is It Ethical (and Legal) to Brew “Imported” Beer

Brands Domestically? (Chapter 11) • Forced Arbitration: Right or Wrong? (Chapter 13) • Should There Be More Relief for Student Loan

Defaults? (Chapter 15) • Is It Fair to Classify Uber and Lyft Drivers as Lyft Drivers as L

Independent Contractors? (Chapter 19) 2. Global Insight These features illustrate how other

nations deal with specific legal concepts to give stu- dents a sense of the global legal environment. Sub- jects include: • Does Cloud Computing Have a Nationality?

(Chapter 18) 3. NEW Digital Update These features are designed

to examine cutting-edge cyberlaw topics, such as the following: • Using Social Media for Service of Process

(Chapter 3) • Should Employees Have a “Right of Disconnect-

ing”? (Chapter 5) • Revenge Porn and Invasion of Privacy (Chapter 6) • Monitoring Employees’ Social Media—Right or

Wrong? (Chapter 9) • Hiring Discrimination Based on Social Media

Posts (Chapter 21) 4. Managerial Strategy These features emphasize the

management aspects of business law and the legal environment. Topics include: • Should You Consent to Have Your Business Case

Decided by a U.S. Magistrate Judge? (Chapter 2) • Marriage Equality and the Constitution (Chapter 4) • When Is a Warning Legally Bulletproof?

(Chapter 7) • The Criminalization of American Business

(Chapter 10) • Commercial Use of Drones (Chapter 14) • The SEC’s New CEO Pay-Ratio Disclosure

Rule (Chapter 28)

Preface

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xiv PREFACE

Entire Chapter on Internet Law, Social Media, and Privacy For the Tenth Edition, we include a whole chapter (Chapter 9) on Internet Law, Social Media, and Privacy. Social media have entered the mainstream and become a part of everyday life for many businesspersons. In this special chapter, we give particular emphasis to the legal issues surrounding the Internet, social media, and pri- vacy. We also recognize this trend throughout the text by incorporating the Internet and social media as they relate to the topics under discussion.

Highlighted and Numbered Examples and Case in Point Illustrations Many instructors use cases and examples to illustrate how the law applies to business. Students understand legal concepts better in the context of their real-world applica- tion. Therefore, for this edition of The Legal Environment of Business, we have expanded the number of highlighted numbered Examples and Examples and Examples Cases in Point in every chap- ter. We have added 102 new Cases in Point and 35 new Examples.

Examples illustrate how the law applies in a speci�c Examples illustrate how the law applies in a speci�c Examples situation. Cases in Point present the facts and issues of an actual case and then describe the court’s decision and rationale. �ese two features are uniquely designed and consecutively numbered throughout each chapter for easy reference. �e Examples and Examples and Examples Cases in Point are inte- grated throughout the text to help students better under-grated throughout the text to help students better under-grated throughout the text to help students better under stand how courts apply legal principles in the real world.

New Unit-Ending Application and Ethics Features For the Tenth Edition, we have created an entirely new feature that concludes each of the five units in the text. Each of these Application and Ethics features provides additional analysis on a topic related to that unit and explores its ethics ramifications. Each of the features ends with two questions—a Critical Thinking and an Ethics Question. Some topics covered by these features include the following:

• The Biggest Data Breach of All Time (Unit 2) • Fantasy Sports—Legal Gambling? (Unit 3) • Health Insurance and Small Business (Unit 4) • Climate Change (Unit 5)

Suggested answers to the questions in Application and Ethics features are included in the Solutions Manual for this text.

New Cases and Case Problems For the Tenth Edition of The Legal Environment of Busi- ness, we have added fifty-two new cases and eighty-five new case problems, most from 2016 and 2015. The new cases and problems have been carefully selected to illus- trate important points of law and to be of high interest to students and instructors. We have made it a point to find recent cases that enhance learning and are relatively easy to understand.

1. Spotlight Cases and Classic Cases. Certain cases and case problems that are exceptionally good teaching cases are labeled as Spotlight Cases and Spotlight Case Problems. Examples include Spotlight on Beer Labels, Spotlight on Gucci, Spotlight on Nike, and Spotlight on the Seattle Mariners. Instructors will find these Spotlight Cases useful to illustrate the legal concepts under discussion, and students will enjoy studying the cases because they involve inter- esting and memorable facts. Other cases have been chosen as Classic Cases because they establish a legal precedent in a particular area of law.

2. Critical Thinking Section. Each case concludes with a Critical Thinking section, which normally includes two questions. The questions may address Legal Environment, E-Commerce, Economic, Envi- ronmental, Ethical, Global, Political, or Technological issues, or they may ask What If the Facts Were Differ- ent? Each Classic Case has a section titled Impact of This Case on Today’s Law and one Critical Thinking question.

3. Longer Excerpts for Case Analysis. We have also included one longer case excerpt in every chap- ter—labeled Case Analysis—followed by three Legal Reasoning Questions. The questions are designed to guide students’ analysis of the case and develop their legal reasoning skills. These Case Analysis cases may be used for case-briefing assignments and are also tied to the Special Case Analysis questions found in every unit of the text (one per unit).

Suggested answers to all case-ending questions and case problems are included in the Solutions Manual for this text.

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PREFACE xv

Business Case Problem with Sample Answer in Each Chapter In response to those instructors who would like students to have sample answers available for some of the ques- tions and case problems, we include a Business Case Prob- lem with Sample Answer in each chapter. The Business Case Problem with Sample Answer is based on an actual case, and students can find a sample answer at the end of the text. Suggested answers to the Business Case Prob- lems with Sample Answers are provided in Appendix Appendix A E at the end of the text and in the Solutions Manual for this text.

New Exhibits and Concept Summaries For this edition, we have spent considerable effort reworking and redesigning all of the exhibits and Concept Summaries in the text to achieve better clarity and more Summaries in the text to achieve better clarity and more Summaries visual appeal. In addition, we have added seventeen new exhibits and three new Concept Summaries.

Special Case Analysis Questions For one chapter in every unit of the text, we provide a Special Case Analysis question that is based on the Case Analysis excerpt in that chapter. These special ques- tions appear in the Business Case Problems at the ends of selected chapters.

�e Special Case Analysis questions are designed to build students’ analytical skills. �ey test students’ ability to perform IRAC (IRAC (IRA Issue, Rule, Application, and Conclusion) case analysis. Students must identify the le- gal issue presented in the chapter’s Case Analysis Case, understand the rule of law, determine how the rule ap- plies to the facts of the case, and describe the court’s conclusion. Instructors can assign these questions as homework or use them in class to elicit student partici- pation and teach case analysis. Suggested answers to the Special Case Analysis questions can be found in the Solutions Manual for this text.

Reviewing Features in Every Chapter In the Tenth Edition of The Legal Environment of Busi- ness, we continue to offer a Reviewing feature at the end Reviewing feature at the end Reviewing of every chapter to help solidify students’ understanding of the chapter materials. Each Reviewing feature presents Reviewing feature presents Reviewing a hypothetical scenario and then asks a series of questions

that require students to identify the issues and apply the legal concepts discussed in the chapter.

�ese features are designed to help students review the chapter topics in a simple and interesting way and see how the legal principles discussed in the chapter af-see how the legal principles discussed in the chapter af-see how the legal principles discussed in the chapter af fect the world in which they live. An instructor can use these features as the basis for in-class discussion or en- courage students to use them for self-study prior to com- pleting homework assignments. Suggested answers to the questions posed in the Reviewing features can be found in the Solutions Manual for this text.

Two Issue Spotters At the conclusion of each chapter, we have included a special section with two Issue Spotters related to the chap- ter’s topics. These questions facilitate student learning and review of the chapter materials. Suggested answers to the Issue Spotters in every chapter are provided in Appendix Appendix A D at the end of the text and in the Solutions Manual for this text.

Legal Reasoning Group Activities For instructors who want their students to engage in group projects, each chapter of the Tenth Edition includes a special Legal Reasoning Group Activity. Each activity begins by describing a business scenario and then poses several specific questions pertaining to the scenario. Each question is to be answered by a different group of students based on the information in the chapter. These projects may be used in class to spur discussion or as homework assignments. Suggested answers to the Legal Reasoning Group Activities are included in the Solu- tions Manual for this text.

Supplements/Digital Learning Systems The Legal Environment of Business, Tenth Edition, pro- vides a comprehensive supplements package designed to make the tasks of teaching and learning more enjoyable and efficient. The following supplements and exciting new digital products are offered in conjunction with the text.

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xvi PREFACE

MindTap MindTap for The Legal Environment of Business, Tenth Edition, is a fully online, highly personalized learning experience built upon Cengage Learning content. Mind- Tap combines student learning tools—such as readings, multimedia, activities, and assessments from Cengage- NOW—into a singular NOW—into a singular NO Learning Path that intuitively guides students through their course.

Instructors can personalize the experience by cus- tomizing authoritative Cengage Learning content and learning tools. MindTap o�ers instructors the ability to add their own content in the Learning Path with apps that integrate into the MindTap framework seamlessly with Learning Management Systems (LMS).

MindTap includes:

• An Interactive book with Whiteboard Videos Videos V and Interactive Cases.

• Automatically graded homework with the folutomatically graded homework with the folutomatically graded homework - lowing consistent question types: • Worksheets—Interactive Worksheets prepare

students for class by ensuring reading and comprehension.

• Video Video V Activities—Real-world video exercises make business law engaging and relevant.

• Brief Hypotheticals—These applications pro- vide students practice in spotting the issue and applying the law in the context of a short, fac- tual scenario.

• Case Problem Analyses—These promote deeper critical thinking and legal reasoning by guiding students step-by-step through a case problem and then adding in a critical thinking section based on “What If the Facts Were Dif-f the Facts Were Dif-f the Facts Were Dif ferent?” These now include a third section, a writing component, which requires students to demonstrate their ability to forecast the legal implications of real-world business scenarios.

• Personalized Student Plan with multimedia study tools and videos.

• New Adaptive Test Prep helps students study for exams.

• Test Bank. • Reporting and Assessment options.

By using the MindTap system, students can com- plete the assignments online and can receive instant feedback on their answers. Instructors can utilize Mind- Tap to upload their course syllabi, create and customize

homework assignments, and keep track of their students’ progress. By hiding, rearranging, or adding content, in- structors control what students see and when they see it to match the Learning Path to their course syllabus exactly. Instructors can also communicate with their students about assignments and due dates, and create re- ports summarizing the data for an individual student or for the whole class.

Cengage Learning Testing Powered by Cognero Cengage Learning Testing Powered by Cognero is a flexible, online system that allows you 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 your LMS, your classroom, or

wherever you want.

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

• No special installs or downloads are needed. • Create tests from school, home, the coffee shop—

anywhere with Internet access.

What Will You Find?

• Simplicity at every step. A desktop-inspired interA desktop-inspired interA - desktop-inspired inter- desktop-inspired inter face features drop-down menus and familiar intu- itive tools that take you through content creation and management with ease.

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

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

Instructor’s Companion Web Site The Web site for the Tenth Edition of The Legal Envi- ronment of Business can be found by going to www. cengagebrain.com and entering ISBN 9781305967304. The Instructor’s Companion Web Site contains the fol- lowing supplements:

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PREFACE xvii

• Instructor’s Manual. Includes sections entitled “A“A“ dditional Cases Addressing This Issue” at the end of selected case synopses.

• Solutions Manual. Provides answers to all ques- tions presented in the text, including the ques- tions in each case and feature, the Issue Spotters, the Business Scenarios and Business Case Problems, and the unit-ending features.

• Test Bank. A comprehensive test bank that conA comprehensive test bank that conA - tains multiple-choice, true/false, and short essay questions.

• Case-Problem Cases. • Case Printouts. • PowerPoint Slides. • Lecture Outlines.

For Users of the Ninth Edition First of all, we want to thank you for helping make The Legal Environment of Business one of the best-selling legal environment texts in America today. Second, we want to make you aware of the numerous additions and changes that we have made in this edition—many in response to comments from reviewers.

Every chapter of the Tenth Every chapter of the Tenth E Edition has been revised as necessary to incorporate new developments in the law or to streamline the presentations. We have reorganized the chapters somewhat for better �ow and clarity and now divide the materials into �ve rather than six units. Each unit concludes with a new Application and Ethics feature. Other major changes and additions for this edi- tion include the following:

• Chapter 4 (Business and the Constitution)—The chapter has been revised and updated to be more business oriented. It has two new cases, four new Cases in Point, a new exhibit, and three new case problems. A Managerial Strategy feature on marriage equality and the constitution dis- cusses United States Supreme Court decisions on this issue.

• Chapter 5 (Business Ethics)—This chapter con- tains two new cases, two new Issue Spotters, three new Cases in Point (including a case involving Tom Brady’s suspension from the NFL as a result of “deflategate”), and three new case problems. The chapter includes a section on business ethics and social media, and discusses stakeholders and corporate social responsibility. The chapter also provides step-by-step guidance on making ethical

business decisions and includes materials on global business ethics. A new A new A Digital Update fea- ture examines whether employees should have the right to disconnect from their electronic devices after work hours.

• Chapter 8 (Intellectual Property Rights)—The materials on intellectual property rights have been thoroughly revised and updated to reflect the most current laws and trends. The 2016 case involves the Hustler Club and a trademark infringement claim between brothers. A Digital Update feature examines the problem of pat- ent trolls. There are eleven new Cases in Point, including cases involving FedEx’s color and logo, Google’s digitalization of books, and how the Sherlock Holmes copyright fell into the public domain.

• Chapter 9 (Internet Law, Social Media, and Pri- vacy)—This chapter, which was new to the last edition and covers legal issues that are unique to the Internet, has been thoroughly revised and updated for the Tenth Edition. It includes a new section on cyberstalking, two new cases, and a new Digital Update feature on whether employers can monitor employees’ social media use.

• Chapter 10 (Criminal Law and Cyber Crime)— This chapter includes three new cases, five new Cases in Point, three new examples, and three new case problems. A new A new A Managerial Strategy feature discusses the criminalization of American business.

• Chapter 11 (International and Space Law)—The chapter has been expanded to include a new sec- tion on space law—international and domestic. All three cases presented are new to this edition, including a Spotlight Case on a United States Supreme Court decision concerning the Alien Tort Claims Act. The chapter also now covers the Trans-Pacific Partnership (TPP) and includes an Ethics Today feature on the domestic brewing of imported beer brands.

• Chapters 12 through 15 (the Commercial Envi- ronment unit)—In this unit, we have added ten new cases (including two Spotlight Cases, a Classic Case, and several Case Analysis cases), and twenty new case problems. We have also added new Cases in Point, Examples, exhibits, graphic Concept Sum- maries, numbered lists, and a new Reviewing fea- ture. A new A new A Managerial Strategy feature discusses the commercial use of drones, and an Ethics Today feature examines whether there should be more relief for student loan debt.

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xviii PREFACE

• Chapter 19 (Agency Relationships)—This chapter has been updated to reflect the realities of the gig economy in which many people are working as independent contractors. A new A new A Ethics Today feature continues that emphasis with a discus- sion of whether Uber and Lyft drivers should be Lyft drivers should be L considered employees rather than independent contractors. In addition, new Examples, Cases in Point, and case problems have been added to help students comprehend the important issues and liability in agency relationships.

• Chapter 20 (Employment Law)—The chapter covering employment law has been thoroughly updated to include discussions of legal issues fac- ing employers today. It has three new cases, three new Cases in Point, three new Examples (including one involving wage claims of the Oakland Raiders cheerleaders), and three new case problems. An

Ethics Today feature examines whether employees should receive paid bathroom breaks.

• Chapter 21 (Employment Discrimination)—This chapter has a new section discussing discrimina- tion based on military status and new coverage of same-sex discrimination and discrimination against transgender persons. All three cases are new. There are seven new Cases in Point, five new Examples, a new exhibit, and three new case problems. A Digi- tal Update feature discusses hiring discrimination based on social media posts. We discuss relevant United States Supreme Court decisions affecting employment issues throughout the chapter.

• Chapter 24 (Consumer Protection)—This chapter includes all new cases, and has been significantly updated with new coverage, Examples, and Cases in Point. A Digital Update feature deals with “native” ads on the Internet.

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PREFACE xix

Acknowledgments for Previous Editions Since we began this project many years ago, a sizable number of legal environment of business professors and others have helped us in revising the book and it’s supplements, including the following:

Peter W. Allan Victor Valley College

William Dennis Ames Indiana University of Pennsylvania

Thomas M. Apke California State University, Fullerton

Linda Axelrod Metropolitan State University

Jane Bennett Orange Coast College

Robert C. Bird University of Connecticut

Dean Bredeson University of Texas at Austin

Sam Cassidy University of Denver

Thomas D. Cavenagh North Central College– Naperville, Illinois

Angela Cerino Villanova University

Corey Ciocchetti University of Denver

David Cooper Fullerton College

Steven R. Donley Cypress College

Paul F. Dwyer Siena College

Nena Ellison Florida Atlantic University

Joan Gabel Florida State University

Gamewell Gant Idaho State University

Jacqueline Hagerott Franklin University

Arlene M. Hibschweiler SUNY Fredonia

Barbara W. Kincaid Southern Methodist University

Marty P. Ludlum Oklahoma City Community College

Diane May Winona State University

Marty Salley McGee South Carolina State University

Robert Mitchum Arkansas State University, Beebe

Melanie Morris Raritan Valley Community College

Kathleen A. Phillips University of Houston

David Redle University of Akron

Larry A. Strate University of Nevada–Las Vegas

Dawn Swink Minnesota State University, Mankato

Brian Terry Johnson and Wales University

John Theis Mesa State College

William H. Volz Wayne State University

Michael G. Walsh Villanova University

Glynda White Community College of Southern Nevada

LeVon E. Wilson Western Carolina University

John A. Wrieden Florida International University

Eric D. Yordy Northern Arizona University

Mary-Kathryn Zachary State University of West Georgia

As in all past editions, we owe a debt of extreme grati- tude to the numerous individuals who worked directly with us or at Cengage Learning. In particular, we wish to thank Vicky True-Vicky True-V Baker, senior product manager; Su- zanne Wilder, managing content developer; Sarah Hu- ber, content developer; and Ann Borman, senior content project manager. We also thank Katie Jergens in market- ing and Michelle Kunkler, art director. We are indebted as well to the sta� at Lachina, our compositor, for accu-

rately generating pages for this text and making it pos- sible for us to meet our ambitious printing schedule.

We especially wish to thank Katherine Marie Silsbee for her management of the entire project, as well as for the application of her superb research and editorial skills. We also wish to thank William Eric Hollowell, who co- authored the Instructor’s Manual and the Test Bank, for his excellent research e�orts. We were fortunate enough to have the copyediting and proofreading services of

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xx PREFACE

Beverly Peavler and Kristi Wiswell. We are grateful for the e�orts of Vickie Vickie V Reierson and Roxanna Lee for their proofreading and other assistance, which helped to en- sure an error-free text. Finally, we thank Suzanne Jasin of K & M Consulting for her many special e�orts on this project.

�rough the years, we have enjoyed an ongoing cor-�rough the years, we have enjoyed an ongoing cor-�rough the years, we have enjoyed an ongoing cor respondence with many of you who have found points

on which you wish to comment. We continue to wel- come all comments and promise to respond promptly. By incorporating your ideas, we can continue to write a legal environment text that is best for you and best for your students.

F.B.C. R.L.M.

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To my parents and sisters. F.B.C.

To Ian Gowrie-Smith, Your amazingly high

energy level never ceases to amaze me.

Keep it up!

R.L.M.

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Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

Unit One

�e Foundations

1. Law and Legal Reasoning

2. Courts and Alternative Dispute Resolution

3. Court Procedures

4. Business and the Constitution

5. Business Ethics

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1–1a Many Different Laws May Affect a Single Business Decision

As you will note, each chapter in this text covers specific areas of the law and shows how the legal rules in each area affect business activities. Although compartmental- izing the law in this fashion promotes conceptual clarity, it does not indicate the extent to which a number of dif-it does not indicate the extent to which a number of dif-it does not indicate the extent to which a number of dif ferent laws may apply to just one decision. Exhibit 1–1 illustrates the various areas of the law that may influence business decision making.business decision making.business decision making.business decision making.business decision making.

■ EXAMPLE 1.1 When Mark Zuckerberg started Facebook as a Harvard student, he probably did not imagine all the legal challenges his company would face as a result of his business decisions. • Shortly after Facebook was launched, others claimed

that Zuckerberg had stolen their ideas for a social net- working site. Their claims involved alleged theft of intellectual property, fraudulent misrepresentation, and

CHAPTER 1

One of the most important func-tions of law in any society is to provide stability, predictability, and continuity so that people can know how to order their affairs. If any society is to survive, its citizens must be able to determine what is legally right and legally wrong. They must know what sanctions will be imposed on them if they commit wrongful acts. If they suf- fer harm as a result of others’ wrong- ful acts, they must know how they can seek compensation. By setting forth the rights, obligations, and privileges of citi- zens, the law enables individuals to go about their business with confidence and a certain degree of predictability.

Although law has various defi- nitions, they all are based on the

general observation that law con- sists of enforceable rules governing relationships among individuals and between individuals and their society. These “enforceable rules” may con- sist of unwritten principles of behav- ior established by a nomadic tribe. They may be set forth in a law code, such as the Code of Hammurabi in ancient Babylon (c. 1780 B.C.E.) or the law code of one of today’s European nations. They may consist of written laws and court decisions created by modern legislative and judicial bod- ies, as in the United States. Regardless of how such rules are created, they all have one thing in common: they establish rights, duties, and privileges that are consistent with the values

and beliefs of their society or its rul- ing group.

In this introductory chapter, we first look at an important question for any student reading this text: How does the legal environment affect business decision making? We next describe the major sources of American law, the common law tradi- tion, and some basic schools of legal thought. We conclude the chapter with sections offering practical guid- ance on several topics, including how to find the sources of law discussed in this chapter (and referred to through- out the text) and how to read and understand court opinions.

1–1 Business Activities and the Legal Environment

Laws and government regulations affect almost all business activities—from hiring and firing decisions to workplace safety, the manufacturing and marketing of products, business financing, and more. To make good business decisions, a basic knowledge of the laws and regulations governing these activities is beneficial—if not essential.

Realize also that in today’s business world, a knowl- edge of “black-letter” law and what conduct can lead to legal liability is not enough. Businesspersons must develop critical thinking and legal reasoning skills so that they can evaluate how various laws might apply to a given situation and determine the best course of action. Busi- nesspersons are also expected to make ethical decisions. Thus, the study of business law necessarily involves an ethical dimension.

222

Law and Legal Reasoning

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CHAPTER 1 Law and Legal Reasoning 3

violations of partnership law and securities law. Face- book ultimately paid $65 million to settle those claims out of court.

• Facebook has been sued repeatedly for violating users’ privacy (and federal laws) by tracking their Web site usage and by scanning private messages for purposes of data mining and user profiling. A class-action suit filed in Europe alleges that Facebook’s data-use poli- cies violate the law of the European Union. Facebook might have to pay millions in damages in this case.

• Facebook’s business decisions have also come under scrutiny by federal regulators, such as the Federal Trade Commission (FTC). The company settled a complaint filed by the FTC alleging that Facebook had failed to keep “friends” lists and other user information private. ■

1–1b Ethics and Business Decision Making Merely knowing the areas of law that may affect a busi- ness decision is not sufficient in today’s business world. Today, business decision makers need to consider not just whether a decision is legal, but also whether it is ethical.

Ethics generally is defined as the principles governing Ethics generally is defined as the principles governing Ethics what constitutes right or wrong behavior. Often, as in several of the claims against Facebook discussed above, disputes arise in business because one party feels that he or she has been treated unfairly. Thus, the underlying reason for bringing some lawsuits is a breach of ethical duties (such as when a partner or employee attempts to secretly take advantage of a business opportunity).

Throughout this text, you will learn about the rela- tionship between the law and ethics, as well as about some of the types of ethical questions that arise in business. For instance, all of the new unit-ending Application and Eth- ics features include an ics features include an ics Ethical Connection section that explores the ethical dimensions of a topic treated within the unit. We have also included Ethical Questions for Ethical Questions for Ethical Questions each unit, as well as within the critical thinking sections of many of the cases presented in this text. Ethics Today features, which focus on ethical considerations in today’s business climate, appear in selected chapters, including this chapter. A Question of Ethics case problem is included Question of Ethics case problem is included Question of Ethics at the end of every chapter to introduce you to the ethical aspects of specific cases involving real-life situations.

1–2 Sources of American Law American law has numerous sources. Often, these sources of law are classified as either primary or secondary.

Primary sources of law, or sources that establish the law, include the following: 1. The U.S. Constitution and the constitutions of the

various states. 2. Statutory law—including laws passed by Congress,

state legislatures, or local governing bodies. 3. Regulations created by administrative agencies, such

as the Federal Trade Commission. 4. Case law and common law doctrines.

EXHIBIT 1–1 Areas of the Law That Can Affect Business Decision Making

Business Decision Making

Intellectual Property

Contracts

Environmental Law and Sustainability

Internet Law, Internet Law, Internet Law Social Media, and Privacy

Product Liability

Torts

Sales

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4 UNIT ONE The Foundations

We describe each of these important sources of law in the following pages.

Secondary sources of law are books and articles that Secondary sources of law are books and articles that Secondary sources of law summarize and clarify the primary sources of law. Exam- ples include legal encyclopedias, treatises, articles in law reviews, and compilations of law, such as the Restatements of the Law (which will be discussed later). Courts often refer to secondary sources of law for guidance in interpret- ing and applying the primary sources of law discussed here.

1–2a Constitutional Law The federal government and the states have separate writ- ten constitutions that set forth the general organization, powers, and limits of their respective governments. Consti- tutional law is the law as expressed in these constitutions.

According to Article VI of the U.S. Constitution, the Constitution is the supreme law of the land. As such, it is the basis of all law in the United States. A law in viola- tion of the Constitution, if challenged, will be declared unconstitutional and will not be enforced, no matter what its source. Because of its importance in the Ameri- can legal system, we present the complete text of the U.S. Constitution in Appendix B.

The Tenth Amendment to the U.S. Constitution reserves to the states all powers not granted to the federal govern- ment. Each state in the union has its own constitution. Unless it conflicts with the U.S. Constitution or a federal law, a state constitution is supreme within the state’s borders.

1–2b Statutory Law Laws enacted by legislative bodies at any level of gov- ernment, such as statutes passed by Congress or by state legislatures, make up the body of law known as statutory law. When a legislature passes a statute, that statute ulti- mately is included in the federal code of laws or the rel- evant state code of laws.

Statutory law also includes local ordinances—regu- lations passed by municipal or county governing units to deal with matters not covered by federal or state law. Ordinances commonly have to do with city or county land use (zoning ordinances), building and safety codes, and other matters affecting the local community.

A federal statute, of course, applies to all states. A state statute, in contrast, applies only within the state’s bor- ders. State laws thus may vary from state to state. No federal statute may violate the U.S. Constitution, and no state statute or local ordinance may violate the U.S. Con- stitution or the relevant state constitution.

Uniform Laws During the 1800s, the differences among state laws frequently created difficulties for

businesspersons conducting trade and commerce among the states. To counter these problems, a group of legal scholars and lawyers formed the National Conference of Commissioners on Uniform State Laws, or NCCUSL (www.uniformlaws.org), in 1892. The NCCUSL still exists today. Its object is to draft uniform laws (model statutes) for the states to consider adopting.

Each state has the option of adopting or rejecting a uniform law. Only if a state legislature adopts a uniform law does that law become part of the statutory law of that state. Note that a state legislature may adopt all or part of a uniform law as it is written, or the legislature may rewrite the law however the legislature wishes. Hence, even though many states may have adopted a uniform law, those states’ laws may not be entirely “uniform.”

The earliest uniform law, the Uniform Negotiable Instruments Law, was completed by 1896 and adopted in every state by the 1920s (although not all states used exactly the same wording). Over the following decades, other acts were drawn up in a similar manner. In all, more than two hundred uniform acts have been issued by the NCCUSL since its inception. The most ambitious uniform act of all, however, was the Uniform Commercial Code.

The Uniform Commercial Code One of the most important uniform acts is the Uniform Commercial Code (UCC), which was created through the joint efforts of the NCCUSL and the American Law Institute.1 The UCC was first issued in 1952 and has been adopted in all fifty states,2 the District of Columbia, and the Virgin Islands.

The UCC facilitates commerce among the states by providing a uniform, yet flexible, set of rules governing commercial transactions. Because of its importance in the area of commercial law, we cite the UCC frequently in this text. We also present Article 2 of the UCC in Appendix C. From time to time, the NCCUSL revises the articles contained in the UCC and submits the revised versions to the states for adoption.

1–2c Administrative Law Another important source of American law is administra- tive law, which consists of the rules, orders, and decisions of administrative agencies. An administrative agency is a federal, state, or local government agency established to perform a specific function. Administrative law and pro- cedures constitute a dominant element in the regulatory environment of business.

1. This institute was formed in the 1920s and consists of practicing attorneys, legal scholars, and judges.

2. Louisiana has not adopted Articles 2 and 2A (covering contracts for the sale and lease of goods), however.

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CHAPTER 1 Law and Legal Reasoning 5

Rules issued by various administrative agencies now affect almost every aspect of a business’s operations. Reg- ulations govern a business’s capital structure and financ- ing, its hiring and firing procedures, its relations with employees and unions, and the way it manufactures and markets its products. Regulations enacted to protect the environment also often play a significant role in business operations.

Federal Agencies At the national level, the cabinet departments of the executive branch include numerous executive agencies. The U.S. Food and Drug Admin- istration, for instance, is an agency within the U.S. Department of Health and Human Services. Execu- tive agencies are subject to the authority of the presi- dent, who has the power to appoint and remove their officers.

There are also major independent regulatory agencies at the federal level, such as the Federal Trade Commission, the Securities and Exchange Commission, and the Federal Communications Commission. The president’s power is less pronounced in regard to inde- pendent agencies, whose officers serve for fixed terms and cannot be removed without just cause.

State and Local Agencies There are administrative agencies at the state and local levels as well. Commonly, a state agency (such as a state pollution-control agency) is created as a parallel to a federal agency (such as the Envi- ronmental Protection Agency). Just as federal statutes take precedence over conflicting state statutes, federal agency reg- ulations take precedence over conflicting state regulations.

1–2d Case Law and Common Law Doctrines

The rules of law announced in court decisions consti- tute another basic source of American law. These rules include interpretations of constitutional provisions, of statutes enacted by legislatures, and of regulations cre- ated by administrative agencies.

Today, this body of judge-made law is referred to as case law. Case law—the doctrines and principles announced in cases—governs all areas not covered by statutory law or administrative law and is part of our common law tradi- tion. We look at the origins and characteristics of the com- mon law tradition in some detail in the pages that follow.

See Concept Summary 1.1 for a review of the sources of American law.

ETHICS TODAY

Law as expressed in the U.S. Constitution or state constitutions. The U.S. Constitution is the supreme law of the land. State constitutions are supreme within state borders to the extent that they do not conflict with the U.S. Constitution.

Sources of American Law

●

●

●

●

●

●

●

●

The rules, orders, and decisions of federal, state, and local administrative agencies.

Administrative Law

Judge-made law, including interpretations of constitutional provisions, of statutes enacted by legislatures, and of regulations created by administrative agencies.

Case Law and Common Law Doctrines

Constitutional Law

Statutory Law Statutes (including uniform laws) and ordinances enacted by federal, state, and local legislatures. Federal statutes may not violate the U.S. Constitution. State statutes and local ordinances may not violate the U.S. Constitution or the relevant state constitution.

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6 UNIT ONE The Foundations

1–3 The Common Law Tradition Because of our colonial heritage, much of American law is based on the English legal system. Knowledge of this tradition is crucial to understanding our legal system today because judges in the United States still apply com- mon law principles when deciding cases.