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BUSINESS LAW

BUSINESS LAW INTRODUCTION TO INTRODUCTION TO

SE / Beatty/Samuelson/Abril / Intro to Business Law, 6e ISBN-13: 9781337404341 ©2019 Designer: Stratton Design Text & Cover printer: Quad Graphics Binding: PB Trim: 8.5” x 10” CMYK

IN TR

O D

U C

TIO N

TO BU

SIN ESS LAW

6th EDITION

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Jeffrey F. Beatty Boston University

Susan S. Samuelson Boston University

Patricia Sánchez Abril University of Miami

BUSINESS LAW

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

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Introduction to Business Law, 6th Edition Jeffrey F. Beatty, Susan S. Samuelson, and Patricia Sánchez Abril

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iii

C O N T E N T S : OV E RV I E W

Preface xv

U N I T 1 The Legal Environment 1 1 Introduction to Law 2 2 Ethics and Corporate Social Responsibility 15 3 International Law 39 4 Constitutional, Statutory, Administrative,

and Common Law 58 5 Dispute Resolution 79 6 Crime 101

U N I T 2 Torts 121 7 Intentional Torts and Business Torts 122 8 Negligence, Strict Liability, and Product

Liability 137 9 Privacy and Internet Law 156

U N I T 3 Contracts and the UCC 177 10 Forming a Contract 178 11 Requirements for a Contract 198 12 Performance of a Contract 220 13 Practical Contracts 242 14 Sales 261 15 Negotiable Instruments 278 16 Secured Transactions 295

U N I T 4 Agency and Employment Law 315 17 Agency 316 18 Employment and Labor Law 336 19 Employment Discrimination 356

U N I T 5 The Lifecycle of a Business 377 20 Starting a Business: LLCs and Other Options 378 21 Corporations 398 22 Bankruptcy 420

U N I T 6 Government Regulation 439 23 Securities and Antitrust 440 24 Consumer Protection 460 25 Environ mental Law 482 26 Accountants’ Liability 501

U N I T 7 Property 519 27 Intellectual Property 520 28 Real Property and Landlord–Tenant Law 538 29 Personal Property and Bailment 560 30 Estate Planning 576 31 Insurance 593

Appendix A The Constitution of the United States A1

Appendix B Uniform Commercial Code B1

Appendix C Answers to Selected End-of-Chapter Questions C1

Glossary G1 Table of Cases T1 Index I1

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C O N T E N T S

Preface xv

U N I T 1 The Legal Environment 1 Chapter 1 Introduction to Law 2 1-1 Exploring the Law 3

1-1a Sources of Contemporary Law 3 1-1b Classifications of Law 6

1-2 Working with the Book’s Features 7 1-2a Analyzing a Case 7 1-2b Analysis 8 1-2c Exam Strategy 9 1-2d You Be the Judge 9

Chapter Conclusion 10 Exam Review 11 Matching Questions 12 True/False Questions 12 Multiple-Choice Questions 12 Case Questions 13 Discussion Questions 14

Chapter 2 Ethics and Corporate Social Responsibility 15

2-1 Why Study Ethics? 16 2-1a Ethics in Business 17 2-1b Why Be Ethical? 17

2-2 Theories of Ethics 18 2-2a Utilitarian Ethics 19 2-2b Deontological Ethics 19 2-2c Rawlsian Justice 20 2-2d Front Page Test 20 2-2e Moral Universalism and Relativism 20

2-3 Ethics Traps 21 2-3a Money 21 2-3b Competition 22 2-3c Rationalization 22 2-3d We Can’t Be Objective about Ourselves 23 2-3e Moral Licensing 23 2-3f Conflicts of Interest 23 2-3g Conformity 23 2-3h Following Orders 24

2-3i Euphemisms and Reframing 24 2-3j Lost in a Crowd 24 2-3k Short-Term Perspective 25 2-3l Blind Spots 25 2-3m Lying: A Special Case 25 2-3n Ethics Case: Truth (?) in Borrowing 25 2-3o Avoiding Ethics Traps 26 2-3p Reacting to Unethical Behavior 27

2-4 Applying the Principles 27 2-4a Personal Ethics in the Workplace 27 2-4b Ethics Case: Weird Wierdsma 27 2-4c The Organization’s Responsibility

to Society 28 2-4d Ethics Case: Up in Smoke 28 2-4e The Organization’s Responsibility to

Its Employees 29 2-4f Ethics Case: The Storm after the Storm 29 2-4g The Organization’s Responsibility

to Its Customers 30 2-4h Ethics Case: Mickey Weighs In 30 2-4i The Organization’s Responsibility

to Overseas Workers 31 2-4j Ethics Case: A Worm in the Apple 31 2-4k Corporate Social Responsibility (CSR) 32 2-4l Ethics Case: The Beauty of a

Well-Fed Child 32

Chapter Conclusion 32 Exam Review 32 Matching Questions 34 True/False Questions 34 Multiple-Choice Questions 35 Case Questions 35 Discussion Questions 37

Chapter 3 International Law 39 3-1 International Law: Public versus Private 40 3-2 Actors in International Law 40

3-2a The United Nations 40 3-2b The International Court of Justice 41 3-2c International Chamber of Commerce 41 3-2d Sovereign Nations 41

3-3 The World’s Legal Systems 42 3-3a Common Law 42 3-3b Civil Law 42 3-3c Islamic Law 43

v

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vi CONTENTS

3-4 Sources and Applicability of International Law 44 3-4a Sources of International Law 44 3-4b Interaction of Foreign and

Domestic Laws 49

Chapter Conclusion 52 Exam Review 52 Matching Questions 54 True/False Questions 54 Multiple-Choice Questions 55 Case Questions 56 Discussion Questions 56

Chapter 4 Constitutional, Statutory, Administrative, and Common Law 58

4-1 Constitutional Law 59 4-1a Government Power 59 4-1b Power Granted 60 4-1c Protected Rights 63 4-1d Fifth Amendment: Due Process

and the Takings Clause 64 4-1e Fourteenth Amendment: Equal

Protection Clause 66 4-2 Statutory Law 66

4-2a Committee Work 67 4-3 Common Law 68

4-3a Stare Decisis 68 4-3b Bystander Cases 68

4-4 Administrative Law 70 4-4a Rule Making 70 4-4b Investigation 71 4-4c Adjudication 71

Chapter Conclusion 73 Exam Review 73 Matching Questions 75 True/False Questions 75 Multiple-Choice Questions 76 Case Questions 77 Discussion Questions 77

Chapter 5 Dispute Resolution 79 5-1 Court Systems 80

5-1a State Courts 80 5-1b Federal Courts 83

5-2 Litigation 84 5-2a Pleadings 84 5-2b The Discovery Process 87 5-2c Summary Judgment 89

5-3 Trial 90 5-3a Right to Jury Trial 91 5-3b Opening Statements 91 5-3c Burden of Proof 91 5-3d Plaintiff’s Case 92 5-3e Defendant’s Case 92 5-3f Closing Argument 92 5-3g Verdict 93

5-4 Appeals 93 5-4a Appeal Court Options 93

5-5 Alternative Dispute Resolution 94 5-5a Mediation 94 5-5b Arbitration 94

Chapter Conclusion 95 Exam Review 95 Matching Questions 97 True/False Questions 97 Multiple-Choice Questions 98 Case Questions 99 Discussion Questions 100

Chapter 6 Crime 101 6-1 Criminal Procedure 102

6-1a A Civil versus a Criminal Case 102 6-1b State of Mind 103 6-1c Gathering Evidence:

The Fourth Amendment 104 6-1d After Arrest 106

6-2 Crimes That Harm Businesses (and Their Customers) 109 6-2a Larceny 109 6-2b Embezzlement 109 6-2c Fraud 109 6-2d Arson 111 6-2e Hacking 111

6-3 Crimes Committed by Business 111 6-3a Making False Statements 111 6-3b RICO 112 6-3c Money Laundering 112 6-3d Hiring Illegal Workers 113 6-3e Foreign Corrupt Practices Act 113 6-3f Punishing a Corporation 113

Chapter Conclusion 114 Exam Review 114 Matching Questions 117 True/False Questions 117 Multiple-Choice Questions 117 Case Questions 118 Discussion Questions 119

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viiCONTENTS

U N I T 2 Torts 121 Chapter 7 Intentional Torts

and Business Torts 122 7-1 Intentional Torts 124

7-1a Defamation 124 7-1b False Imprisonment 125 7-1c Battery and Assault 125 7-1d Fraud 126 7-1e Intentional Infliction of Emotional

Distress 126 7-2 Damages 127

7-2a Compensatory Damages 127 7-2b Punitive Damages 129 7-2c Tort Reform and the Exxon Valdez 130 7-2d Business Torts 130

Chapter Conclusion 131 Exam Review 131 Matching Questions 133 True/False Questions 133 Multiple-Choice Questions 133 Case Questions 134 Discussion Questions 135

Chapter 8 Negligence, Strict Liability, and Product Liability 137

8-1 Negligence 138 8-1a Duty of Due Care 139 8-1b Special Duty: Landowners 140 8-1c Special Duty: Professionals 140 8-1d Breach of Duty 141 8-1e Causation 141 8-1f Damages 144 8-1g Defenses 145

8-2 Strict Liability and Product Liability 146 8-2a Strict Liability 146 8-2b Product Liability 147 8-2c Contemporary Trends 149

Chapter Conclusion 150 Exam Review 150 Matching Questions 152 True/False Questions 152 Multiple-Choice Questions 153 Case Questions 154 Discussion Questions 154

Chapter 9 Privacy and Internet Law 156 9-1 Privacy in a Digital World 157

9-1a How We Lose Our Privacy in the Digital World 157

9-2 The Law of Privacy 159 9-2a Constitutional Law:

The Fourth Amendment 159 9-2b Common Law: Privacy Torts 161 9-2c Privacy Statutes 163

9-3 Regulation in the Digital World 166 9-3a Regulation of User-Generated

Content 167 9-3b Online Speech 167 9-3c Liability of Internet Service

Providers 169 9-3d Consumer Protection 170

Chapter Conclusion 171 Exam Review 171 Multiple-Choice Questions 174 Case Questions 175 Discussion Questions 176

U N I T 3 Contracts and the UCC 177 Chapter 10 Forming a Contract 178 10-1 Contracts 179

10-1a Elements of a Contract 179 10-1b Types of Contracts 180 10-1c Sources of Contract Law 182

10-2 Enforcing Non-Contracts 183 10-2a Promissory Estoppel 184 10-2b Quasi-Contract 185

10-3 Agreement 186 10-3a Making an Offer 186 10-3b Termination of Offers 188 10-3c Acceptance 190 10-3d Communication of Acceptance 191

Chapter Conclusion 192 Exam Review 192 Matching Questions 194 True/False Questions 194 Multiple-Choice Questions 195 Case Questions 196 Discussion Questions 197

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viii CONTENTS

Chapter 11 Requirements for a Contract 198 11-1 Consideration 199

11-1a What Is Value? 199 11-1b What Constitutes Exchange? 200

11-2 Legality 201 11-2a Non-compete Agreements: Sale of

a Business 201 11-2b Non-compete Agreements:

Employment Contracts 202 11-2c Exculpatory Clauses 203

11-3 Capacity 205 11-3a Minors 205 11-3b Mentally Impaired Persons 206 11-3c Intoxication 206

11-4 Reality of Consent 206 11-4a Fraud 206 11-4b Mistake 208

11-5 Contracts in Writing 209 11-5a Contracts That Must Be in Writing 210 11-5b What the Writing Must Contain 212 11-5c Sale of Goods 213

Chapter Conclusion 213 Exam Review 214 Matching Questions 215 True/False Questions 216 Multiple-Choice Questions 216 Case Questions 217 Discussion Questions 218

Chapter 12 Performance of a Contract 220 12-1 Third Party Beneficiaries 221

12-1a Types of Beneficiaries 221 12-2 Assignment and Delegation 223

12-2a Assignment 223 12-2b Delegation of Duties 224

12-3 Performance and Discharge 225 12-3a Performance 225 12-3b Good Faith 227 12-3c Breach 228 12-3d Impossibility 228

12-4 Remedies 229 12-4a Expectation Interest 229 12-4b Reliance Interest 233 12-4c Restitution Interest 233 12-4d Other Equitable Interests 234 12-4e Mitigation of Damages 235

Chapter Conclusion 235 Exam Review 235

Matching Questions 237 True/False Questions 237 Multiple-Choice Questions 238 Case Questions 239 Discussion Questions 240

Chapter 13 Practical Contracts 242 13-1 Creating a Contract 243

13-1a The Lawyer 243 13-1b Who Drafts the Contract? 244 13-1c Mistakes 244

13-2 The Structure of a Contract 249 13-2a Terms That Vary by Contract 249 13-2b Boilerplate 252

Chapter Conclusion 255 Exam Review 256 Matching Questions 257 True/False Questions 258 Multiple-Choice Questions 258 Case Questions 259 Discussion Questions 260

Chapter 14 Sales 261 14-1 Sales 262

14-1a Development of the UCC 262 14-1b Contract Formation 263 14-1c Performance and Remedies 267

14-2 Warranties 268 14-2a Express Warranties 268 14-2b Implied Warranties 269

Chapter Conclusion 272 Exam Review 272 Matching Questions 274 True/False Questions 274 Multiple-Choice Questions 275 Case Questions 276 Discussion Questions 277

Chapter 15 Negotiable Instruments 278 15-1 Negotiable Instruments 279

15-1a Commercial Paper 279 15-1b Types of Negotiable Instruments 279 15-1c Negotiation 280

15-2 Holder in Due Course 285 15-2a Requirements for Being a

Holder in Due Course 285

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ixCONTENTS

15-2b Defenses against a Holder in Due Course 287

15-2c Consumer Exception 288

Chapter Conclusion 289 Exam Review 289 Matching Questions 291 True/False Questions 291 Multiple-Choice Questions 291 Case Questions 292 Discussion Questions 293

Chapter 16 Secured Transactions 295 16-1 Article 9: Terms and Scope 296

16-1a Scope of Article 9 298 16-2 Attachment of a Security Interest 298

16-2a Agreement 298 16-2b Possession 299 16-2c Value 299 16-2d Debtor Rights in the Collateral 299 16-2e Attachment to Future Property 300

16-3 Perfection 300 16-3a Perfection by Filing 300 16-3b Perfection by Possession 302 16-3c Perfection of Consumer Goods 302

16-4 Protection of Buyers 304 16-4a Buyers in Ordinary Course

of Business 304 16-5 Priorities among Creditors 306 16-6 Default and Termination 307

16-6a Default 307 16-6b Termination 309

Chapter Conclusion 310 Exam Review 310 Matching Questions 311 True/False Questions 312 Multiple-Choice Questions 312 Case Questions 313 Discussion Questions 314

U N I T 4 Agency and Employment Law 315 Chapter 17 Agency 316 17-1 The Agency Relationship 317

17-1a Creating an Agency Relationship 317 17-1b Duties of Agents to Principals 318

17-1c Duties of Principals to Agents 320 17-1d Terminating an Agency Relationship 321

17-2 Liability to Third Parties 321 17-2a Principal’s Liability for Contracts 321 17-2b Agent’s Liability for Contracts 322 17-2c Principal’s Liability for

Negligent Physical Torts 324 17-2d Principal’s Liability for Intentional

Physical Torts 328 17-2e Principal’s Liability for

Nonphysical Torts 328 17-2f Agent’s Liability for Torts 329

Chapter Conclusion 329 Exam Review 329 Matching Questions 332 True/False Questions 332 Multiple-Choice Questions 332 Case Questions 334 Discussion Questions 334

Chapter 18 Employment and Labor Law 336

18-1 Employment at Will 337 18-2 Employment Security 337

18-2a Common Law Protections 337 18-2b Family and Medical Leave Act 341 18-2c Whistleblowing 341

18-3 Workplace Freedom and Safety 342 18-3a Off-Duty Activities 342 18-3b The Right to Free Speech 343 18-3c Lie Detector Tests 344 18-3d OSHA 345 18-3e Employee Data 345 18-3f Guns 345

18-4 Financial Protection 346 18-4a Fair Labor Standards Act 346 18-4b Workers’ Compensation 346 18-4c Health Insurance 346 18-4d Social Security 346

18-5 Labor Unions 347 18-5a Organizing a Union 347 18-5b Collective Bargaining 348 18-5c Concerted Action 348

Chapter Conclusion 350 Exam Review 350 Matching Questions 352 True/False Questions 352

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x CONTENTS

Multiple-Choice Questions 353 Case Questions 354 Discussion Questions 355

Chapter 19 Employment Discrimination 356

19-1 Equal Pay Act of 1963 357 19-2 The Civil Rights Act of 1964 357

19-2a Prohibited Activities 357 19-2b Religion 362 19-2c Family Responsibility

Discrimination 362 19-2d Sexual Orientation 362 19-2e Gender Identity and Expression 362 19-2f Immigration 363 19-2g Reverse Discrimination 363 19-2h Defenses to Charges of

Discrimination 364 19-3 Pregnancy Discrimination Act 365 19-4 Age Discrimination 365 19-5 The Americans with Disabilities Act 366

19-5a The Hiring Process 367 19-5b Relationship with a Disabled Person 367 19-5c Obesity 367 19-5d Mental Disabilities 367

19-6 Genetic Information Nondiscrimination Act 367 19-7 Hiring Practices 368

19-7a Interviews 368 19-7b Social Media 368

19-8 Enforcement 369

Chapter Conclusion 370 Exam Review 370 Matching Questions 372 True/False Questions 372 Multiple-Choice Questions 373 Case Questions 374 Discussion Questions 375

U N I T 5 The Lifecycle of a Business 377 Chapter 20 Starting a Business: LLCs

and Other Options 378 20-1 Sole Proprietorships 379 20-2 Corporations 379

20-2a Corporations in General 380 20-2b Special Types of Corporations 382

20-3 Limited Liability Companies 383 20-3a Limited Liability 383 20-3b Formation 384 20-3c Flexibility 385 20-3d Transferability of Interests 385 20-3e Duration 385 20-3f Going Public 386 20-3g Piercing the Company Veil 386 20-3h Legal Uncertainty 387 20-3i Choices: LLC versus Corporation 387

20-4 Social Enterprises 388 20-5 General Partnerships 388

20-5a Tax Status 388 20-5b Liability 388 20-5c Formation 388 20-5d Raising Capital 389 20-5e Management 389 20-5f Transfer of Ownership 389 20-5g Terminating a Partnership:

Dissociation 389 20-6 Limited Liability Partnerships 390 20-7 Professional Corporations 390 20-8 Franchises 391

Chapter Conclusion 392 Exam Review 392 Matching Questions 393 True/False Questions 394 Multiple-Choice Questions 394 Case Questions 395 Discussion Questions 397

Chapter 21 Corporations 398 21-1 Promoter’s Liability 399 21-2 Incorporation Process 399

21-2a Where to Incorporate? 399 21-2b The Charter 400

21-3 After Incorporation 401 21-4 Death of the Corporation 402

21-4a Voluntary Termination by the Shareholders 402

21-4b Termination by the State 403 21-4c Piercing the Corporate Veil 404

21-5 Management Duties 404 21-5a The Business Judgment Rule 404 21-5b Applications of the Business

Judgment Rule 406 21-6 Shareholder Rights 408

21-6a The Relationship between Shareholders and Managers 408

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xiCONTENTS

21-6b Right to Information 408 21-6c Right to Vote 408

Chapter Conclusion 413 Exam Review 413 Matching Questions 416 True/False Questions 417 Multiple-Choice Questions 417 Case Questions 418 Discussion Questions 419

Chapter 22 Bankruptcy 420 22-1 Overview of the Bankruptcy Code 421 22-2 Chapter 7 Liquidation 422

22-2a Filing a Petition 422 22-2b Trustee 423 22-2c Creditors 423 22-2d Automatic Stay 423 22-2e Bankruptcy Estate 424 22-2f Payment of Claims 425 22-2g Discharge 426

22-3 Chapter 11 Reorganization 429 22-3a Debtor in Possession 430 22-3b Creditors’ Committee 430 22-3c Plan of Reorganization 430 22-3d Confirmation of the Plan 430 22-3e Discharge 430 22-3f Small-Business Bankruptcy 431

22-4 Chapter 13 Consumer Reorganizations 431 22-4a Beginning a Chapter 13 Case 432 22-4b Plan of Payment 432 22-4c Discharge 432

Chapter Conclusion 432 Exam Review 433 Matching Questions 434 True/False Questions 434 Multiple-Choice Questions 435 Case Questions 436 Discussion Questions 437

U N I T 6 Government Regulation 439 Chapter 23 Securities and Antitrust 440 23-1 Securities Laws 441

23-1a What Is a Security? 441 23-1b Securities Act of 1933 441 23-1c Securities Exchange Act of 1934 443 23-1d Insider Trading 445 23-1e Blue Sky Laws 448

23-2 Antitrust 449 23-2a The Sherman Act 449 23-2b The Clayton Act 452 23-2c The Robinson-Patman Act 453

Chapter Conclusion 453 Exam Review 453 Matching Questions 456 True/False Questions 456 Multiple-Choice Questions 457 Case Questions 458 Discussion Questions 459

Chapter 24 Consumer Protection 460 24-1 Introduction 461 24-2 Sales 461

24-2a Deceptive Acts or Practices 461 24-2b Unfair Practices 462 24-2c Abusive Acts 462 24-2d Bait-and-Switch 462 24-2e Merchandise Bought by

Mail, by Telephone, or Online 463 24-2f Telemarketing 463 24-2g Unordered Merchandise 464 24-2h Door-to-Door Sales 464

24-3 Consumer Credit 464 24-3a Payday Loans 465 24-3b Truth in Lending Act 465 24-3c Home Mortgage Loans 465 24-3d Plastic: Credit, Debit, and ATM Cards 466 24-3e Electronic Fund Transfers 468 24-3f Credit Reports 469 24-3g Debt Collection 470 24-3h Equal Credit Opportunity Act 472

24-4 Magnuson-Moss Warranty Act 473 24-5 Consumer Product Safety 473

Chapter Conclusion 474 Exam Review 474 Matching Questions 478 True/False Questions 478 Multiple-Choice Questions 478 Case Questions 479 Discussion Questions 480

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xii CONTENTS

Chapter 25 Environ mental Law 482 25-1 Introduction 483 25-2 Air Pollution 483

25-2a Clean Air Act 484 25-2b Climate Change 485 25-2c Automobile Pollution 487

25-3 Water Pollution: The Clean Water Act 487 25-3a Coverage 488 25-3b Major Provisions 488

25-4 Waste Disposal 489 25-4a Resource Conservation and

Recovery Act 490 25-4b Superfund 490

25-5 Chemicals 491 25-6 Natural Resources 492

25-6a National Environmental Policy Act 492 25-6b Endangered Species Act 493

Chapter Conclusion 494 Exam Review 495 Matching Questions 496 True/False Questions 497 Multiple-Choice Questions 497 Case Questions 498 Discussion Questions 499

Chapter 26 Accountants’ Liability 501 26-1 Introduction 502

26-1a Sarbanes-Oxley 502 26-1b Consolidation in the Accounting

Profession 503 26-1c Audits 503

26-2 Liability to Clients 505 26-2a Contract 505 26-2b Negligence 505 26-2c Common Law Fraud 506 26-2d Breach of Trust 506

26-3 Liability to Third Parties 506 26-3a Negligence 507 26-3b Fraud 508 26-3c Securities Act of 1933 508 26-3d Securities Exchange Act of 1934 508

26-4 Criminal Liability 510 26-5 Other Accountant-Client Issues 511

26-5a The Accountant-Client Relationship 511 26-5b Accountant-Client Privilege 511

Chapter Conclusion 512 Exam Review 512

Matching Questions 515 True/False Questions 515 Multiple-Choice Questions 515 Case Questions 517 Discussion Questions 518

U N I T 7 Property 519 Chapter 27 Intellectual Property 520 27-1 Patents 521

27-1a Types of Patents 521 27-1b Requirements for a Utility Patent 522 27-1c Patent Application and Issuance 524 27-1d Patent Infringement 525 27-1e International Patent Treaties 525

27-2 Copyrights 525 27-2a Copyright Term 527 27-2b Copyright Infringement and

Fair Use 527 27-2c The Digital Millennium

Copyright Act 528 27-3 Trademarks 528

27-3a Ownership and Registration 529 27-3b Valid Trademarks 529 27-3c Trademark Infringement 530

27-4 Trade Secrets 531

Chapter Conclusion 533 Exam Review 533 Matching Questions 533 True/False Questions 533 Multiple-Choice Questions 534 Case Questions 535 Discussion Questions 536

Chapter 28 Real Property and Landlord–Tenant Law 538

28-1 Nature of Real Property 539 28-2 Concurrent Estates 539

28-2a Tenancy in Common 540 28-2b Joint Tenancy 540

28-3 Adverse Possession 541 28-3a Entry and Exclusive Possession 541 28-3b Open and Notorious Possession 541 28-3c A Claim Adverse or Hostile

to the Owner 541

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xiiiCONTENTS

28-3d Continuous Possession for the Statutory Period 541

28-4 Land Use Regulation 543 28-4a Nuisance Law 543 28-4b Zoning 543 28-4c Eminent Domain 543

28-5 Landlord–Tenant Law 544 28-5a Types of Tenancy 545 28-5b Landlord’s Duties 546 28-5c Tenant’s Duties 548

28-6 Change in the Parties 549 28-6a Sale of the Property 550 28-6b Assignment and Sublease 550

28-7 Liability of Landlords and Tenants 550 28-7a Tenant’s Liability 550 28-7b Landlord’s Liability 551 28-7c Crime 551

Chapter Conclusion 552 Exam Review 552 Matching Questions 555 True/False Questions 555 Multiple-Choice Questions 556 Case Questions 557 Discussion Questions 558

Chapter 29 Personal Property and Bailment 560

29-1 Acquiring Personal Property 561 29-1a Gifts 561 29-1b Found Property 564

29-2 Bailment 565 29-2a Control 566 29-2b Rights of the Bailee 567 29-2c Duties of the Bailee 567 29-2d Rights and Duties of

the Bailor 568 29-2e Liability for Defects 569 29-2f Common Carriers and

Contract Carriers 569 29-2g Innkeepers 569

Chapter Conclusion 570 Exam Review 570 Matching Questions 572 True/False Questions 572 Multiple-Choice Questions 572 Case Questions 574 Discussion Questions 575

Chapter 30 Estate Planning 576 30-1 Introduction 577

30-1a Definitions 577 30-1b Purpose 577 30-1c Probate Law 577

30-2 Wills 578 30-2a Requirements for a Valid Will 578 30-2b Spouse’s Share 580 30-2c Children’s Share 580 30-2d Digital Assets 582 30-2e Amending a Will 583 30-2f Intestacy 583 30-2g Power of Attorney 583 30-2h Probate 583 30-2i Property Not Transferred by Will 584 30-2j Anatomical Gifts 584 30-2k End of Life Health Issues 584

30-3 Trusts 585 30-3a Advantages and Disadvantages 585 30-3b Types of Trusts 586 30-3c Trust Administration 586 30-3d A Trust’s Term 587

Chapter Conclusion 588 Exam Review 588 Matching Questions 589 True/False Questions 590 Multiple-Choice Questions 590 Case Questions 591 Discussion Questions 592

Chapter 31 Insurance 593 31-1 Introduction 594 31-2 Insurance Contract 595

31-2a Offer and Acceptance 595 31-2b Limiting Claims by the Insured 595 31-2c Bad Faith by the Insurer 597

31-3 Types of Insurance 600 31-3a Property Insurance 600 31-3b Life Insurance 600 31-3c Health Insurance 601 31-3d Disability Insurance 602 31-3e Liability Insurance 602 31-3f Automobile Insurance 603

Chapter Conclusion 603 Exam Review 603 Matching Questions 605 True/False Questions 605

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xiv CONTENTS

Multiple-Choice Questions 605 Case Questions 607 Discussion Questions 608

Appendix A The Constitution of the United States A1

Appendix B Uniform Commercial Code B1

Appendix C Answers to Selected End-of-Chapter Questions C1

Glossary G1 Table of Cases T1 Index I1

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P R E FAC E

NOTE FROM THE AUTHORS Enhanced Digital Content—MindTap™ Our goal—and yours—is for the students to learn the material. With that singular goal in mind, Cengage has created an extremely useful tool for both instructors and students. MindTap™ is a fully online, highly personalized learning experience combining readings, multimedia, activities, and assessments into a singular Learning Path. It integrates seamlessly with Learning Management Systems. MindTap guides students through their course with ease and engagement. Instructors can personalize the Learning Path by customizing Cengage resources and adding their own content via apps that integrate with MindTap.

Our students who use MindTap are better prepared for, and earn better grades on, our exams. We recognize that the online experience is as important to the students—and you—as the book itself. Thus, unlike other texts, we (the authors) have reviewed every question in the MindTap product to ensure that it meets the high standards of our book.

We have heard that business law instructors want to help students Prepare for class, Engage with the course concepts to reinforce learning, Apply these concepts in real-world scenarios, use legal reasoning and critical thinking to Analyze business law content, and Evaluate real business scenarios and their legal implications.

Accordingly, our MindTap product provides a five-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 classroom dis- cussion by ensuring that they have read and understood the reading.

Engage—Real-world videos with related questions help engage students by display- ing the relevance of business law in everyday life.

Apply—Brief hypothetical case scenarios help students practice spotting issues and applying the law in the context of short factual scenarios.

Analyze—Case-problem analysis promotes deeper critical thinking and legal rea- soning 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?” In a new third section, a writing component requires students to demonstrate their ability to forecast the legal implications of real-world business scenarios. Evaluate—New business case activities develop students’ skills to apply critical thinking and legal reasoning through relevant real-world business scenarios. These exercises give students the opportunity to advocate, evaluate, and make a decision through a variety of flexible assessment options including Discussion Questions, Multiple-Choice Questions, Short-Answer Essays, Group Work, and Ethical Dilem- mas. Whether you have a large class, small class, teach online or in a traditional class- room setting, promote group work, or individual assignments, the MindTap Business Cases offer a variety of activity types to complement and enhance how YOU teach.

xv

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卖瓜奶奶�
xvi PREFACE

Each and every item in the Learning Path is assignable and gradable. Thus instructors have up-to-the-minute information on the class’ general understanding of concepts as well as data on the performance of each individual student. Students also know where they stand— both individually and compared to the highest performers in the class. Thus, both faculty and students are less likely to face unpleasant surprises on exams.

MindTap also includes:

Case Collection where instructors can find over 1,600 additional cases that were included in several previous editions of all of the Cengage Business Law or Legal Environment texts. These cases are searchable by name, year, state, and subject matter.

Adaptive Test Prep for students, where they 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.

The Beatty/Samuelson/Abril Difference Our goal in writing this book was to capture the passion and excitement, the sheer enjoy- ment, of the law. Business law is notoriously complex, and, as authors, we are obsessed with accuracy. Yet this intriguing subject also abounds with human conflict and hard-earned wisdom, forces that we wanted to use to make this book sparkle. Look, for example, at Chapter 21 on corporations. A robust discussion of the nitty gritty of corporate governance is enlivened by court cases featuring intense personal conflict.

Once we have the students’ attention, our goal is to provide the information they will need as business people and as informed citizens. Of course, we present the theory of how laws work, but we also explain when reality is different. To take some examples, traditionally business law textbooks have simply taught students that shareholders elect the directors of public companies. Even Executive MBA students rarely understand the reality of corporate elections. But our book explains the complexity of corporate power. The practical contracts chapter focuses not on the theory of contract law but on the real-life issues involved in mak- ing an agreement: Do I need a lawyer? Should the contract be in writing? What happens if the contract has an unclear provision or an important typo? What does all that boilerplate mean anyway?

Nobel Laureate Paul Samuelson famously said, “Let those who will write the nation’s laws, if I can write its textbooks.” As authors, we never forget the privilege—and responsibility—of educating a generation of business law students. Our goal is to write a busi- ness law text like no other—a book that is authoritative, realistic, and yet a pleasure to read. Strong Narrative. The law is full of great stories, and we use them. It is easier to teach students when they come to class curious and excited. Every chapter begins with a story that is based in fact, to illustrate important issues. We also include stories in the body of the chapters. Look at Chapter 5 on dispute resolution. No tedious list of next steps in litigation, this chapter teaches the subject by tracking a double-indemnity lawsuit. An executive is dead. Did he drown accidentally, obligating the insurance company to pay? Or did the busi- nessman commit suicide, voiding the policy? Students follow the action from the discovery of the body, through each step of the lawsuit, to the final appeal. Student Reaction. Students have responded enthusiastically to our approach. One pro- fessor asked a student to compare our book with the one that the class was then using. This was the student’s reaction: “I really enjoy reading the [Beatty] textbook, and I have decided that I will give you this memo ASAP, but I am keeping the book until Wednesday so that I may continue reading. Thanks! :-)”

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xviiPREFACE

This text has been used in courses for undergraduates, MBAs, and Executive MBAs, with students ranging in age from 18 to 65. This book works, as some unsolicited comments indicate: From verified purchasers on Amazon:

“If you have this textbook for your business law class, then you are in luck! This is one of the best and most helpful textbooks that I have ever had the pleasure of using. (I mostly just use my textbooks as a pillow.) I actually did enjoy reading this and learning the material. The author breaks down the concepts so they are easy to understand. Even if you hate law, if you put forth the effort to learn this, you should have no trouble at all learning and understanding the concepts.”

“I enjoyed this book so much that I will not be selling it back to the bookstore (or anyone) because I know that I will use the book for years.”

From undergraduates: “This is the best textbook I have had in college, on any subject.”

“The textbook is awesome. A lot of the time I read more than what is assigned—I just don’t want to stop.”

“I had no idea business law could be so interesting.”

From MBA students: “Actually enjoyed reading the text book, which is a rarity for me.”

“The law textbook was excellent through and through.”

From a Fortune 500 vice president, enrolled in an Executive MBA program: “I really liked the chapters. They were crisp, organized, and current. The informa- tion was easy to understand and enjoyable.”

From business law professors: “The clarity of presentation is superlative. I have never seen the complexity of con- tract law made this readable.”

“Until I read your book I never really understood UCC 2-207.”

“With your book, we have great class discussions.”

From a state supreme court justice: “This book is a valuable blend of rich scholarship and easy readability. Students and professors should rejoice with this publication.”

Current. This 6th edition contains more than 25 new cases. Most were reported within the last two or three years, and many within the last 12 months. The law evolves continually, and our willingness to toss out old cases and add important new ones ensures that this book—and its readers—remain on the frontier of legal developments. Authoritative. We insist, as you do, on a law book that is indisputably accurate. To highlight the most important rules, we use bold print, and then follow with vivid examples written in clear, forceful English. We cheerfully venture into contentious areas, relying on very recent decisions. Can a Delaware court order the sale of a successful business? Is discrimination based on sexual orientation legal? Is the list of names in a LinkedIn group a trade secret? What are the limits to free speech on social media? Where there is doubt about the current (or future) status of a doctrine, we say so. In areas of particularly heated debate, we footnote our work. We want you to have absolute trust in this book.

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xviii PREFACE

Humor. Throughout the text we use humor—judiciously—to lighten and enlighten. We revere the law for its ancient traditions, its dazzling intricacy, and its relentless, though imper- fect, attempt to give order and decency to our world. But because we are confident of our respect for the law, we are not afraid to employ some levity, for the simple reason that humor helps retention. Research shows that the funnier or more original the example, the longer students will remember it. They are more likely to recall an intellectual property rule involv- ing the copyrightability of yoga than a plain-vanilla example about a common widget.

Features Each feature in this book is designed to meet an essential pedagogical goal. Here are some of those goals and the matching feature.

Exam Strategy GOAL: To help students learn more effectively and to prepare for exams. In developing this feature, we asked ourselves: What do students want? The short answer is—a good grade in the course. How many times a semester does a student ask you, “What can I do to study for the exam?” We are happy to help them study and earn a good grade because that means that they will also be learning.

About four times per chapter, we stop the action and give students a two-minute quiz. In the body of the text, again in the end-of-chapter review, and also in the Instructor’s Manual, we present a typical exam question. Here lies the innovation: We guide the student in analyz- ing the issue. We teach the reader—over and over—how to approach a question: to start with the overarching principle, examine the fine point raised in the question, apply the analysis that courts use, and deduce the right answer. This skill is second nature to lawyers and teach- ers, but not to students. Without practice, too many students panic, jumping at a convenient answer, and leaving aside the tools they have spent the course acquiring. Let’s change that. Students love the Exam Strategy feature.

You Be the Judge Cases GOAL: Get them thinking independently. When reading case opinions, students tend to accept the court’s “answer.” But we strive to challenge them beyond that. We want students to think through problems and reach their own answers guided by sound logic and legal knowledge. The You Be the Judge features are cases that provide the facts of the case and conflicting appellate arguments. But the court’s decision appears only in the Instructor’s Man- ual. Because students do not know the result, class discussions are more complex and lively.

Ethics GOAL: Make ethics real. We include the latest research on ethical decision-making, such as ethics traps (why people make decisions they know to be wrong).

End-of-Chapter Exam Review and Questions GOAL: Encourage students to practice! At the end of the chapters, we provide a list of review points and several additional Exam Strategy exercises. We also challenge the students with 20 or more problems—Matching, True or False, Multiple-Choice Questions, Case Questions, and Discussion Questions. The questions include the following:

You Be the Judge Writing Problem. Students are given appellate arguments on both sides of the question and then must prepare a written opinion.

Ethics. This question highlights the ethics issues of a dispute and calls upon the stu- dent to formulate a specific, reasoned response.

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xixPREFACE

CPA Questions. For topics covered by the CPA exam, administered by the American Institute of Certified Public Accountants, the Exam Review includes questions from previous CPA exams.

Answers to the odd-numbered Matching, True or False, Multiple-Choice, and Case Questions are available in Appendix C of the book.

Cases GOAL: Bring case law alive. Each case begins with a summary of the facts and a state- ment of the issue. Next comes a summary of the court’s opinion. We have written this summary ourselves to make the judges’ reasoning accessible to all readers while retain- ing the court’s focus and the decision’s impact. In the principal cases in each chapter, we provide the state or federal citation, unless it is not available, in which case we use the LEXIS and Westlaw citations.

TEACHING MATERIALS For more information about any of these ancillaries, contact your Cengage Consultant, or visit the Beatty Samuelson Abril Business Law website at www.cengagebrain.com. MindTap. MindTap is a fully online, highly personalized learning experience combining readings, multimedia, activities, and assessments into a singular Learning Path. Instructors can personalize the Learning Path by customizing Cengage resources and adding their own content via apps that integrate into the MindTap framework seamlessly with Learn- ing Management Systems. To view a demo video and learn more about MindTap, please visit www.cengage.com/mindtap. Instructor’s Manual. The Instructor’s Manual, available on the Instructor’s Support Site at www.cengagebrain.com, includes special features to enhance class discussion and student progress:

Answers to the You Be the Judge cases from the main part of the chapter and to the Exam Review questions found at the end of each chapter.

Current Focus. This feature offers updates of text material.

Additional cases and examples.

Exam Strategy Problems. If your students would like more of these problems, there is an additional section of Exam Strategy problems in the Instructor’s Manual.

Dialogues. These are a series of questions-and-answers on pivotal cases and topics. The questions provide enough material to teach a full session. In a pinch, you

could walk into class with nothing but the manual and use the Dialogues to con- duct an effective class.

Action learning ideas. Interviews, quick research projects, drafting exercises, class- room activities, and other suggested assignments get students out of their chairs and into the diverse settings of business law.

Cengage Testing Powered by Cognero. Cognero is a flexible online system that allows you to author, edit, and manage test bank content from multiple Cengage solutions; create multiple test versions in an instant; and deliver tests from your LMS, your classroom, or wherever you want.

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xx PREFACE

PowerPoint Lecture Review Slides. PowerPoint slides are available for use by instruc- tors for enhancing their lectures and to aid students in note taking. Download these slides at www.cengagebrain.com. Interaction with the Authors. This is our standard: Every professor who adopts this book must have a superior experience. We are available to help in any way we can. Adopters of this text often call or email us to ask questions, offer suggestions, share pedagogical concerns, or inquire about ancillaries. One of the pleasures of writing this book has been this link to so many colleagues around the country. We value those connections, are eager to respond, and would be happy to hear from you.

Jeffrey F. Beatty Susan S. Samuelson

Phone: (617) 353-2033 Email: ssamuels@bu.edu

Patricia Sánchez Abril Phone: (305) 284-6999

Email: pabril@miami.edu

ACKNOWLEDGMENTS The list of people who have contributed helpful comments and suggestions for this book is long. We are grateful to all of the reviewers and instructors from around the country who have helped us refine this book through all of its editions.

ABOUT THE AUTHORS Jeffrey F. Beatty (1948–2009) was an Associate Professor of Business Law at the Boston University Questrom School of Business. After receiving his B.A. from Sarah Lawrence and his J.D. from Boston University, he practiced with the Greater Boston Legal Services representing indigent clients. At Boston University, he won the Metcalf Cup and Prize, the university’s highest teaching award. Professor Beatty also wrote plays and television scripts that were performed in Boston, London, and Amsterdam.

Susan S. Samuelson is a Professor of Business Law at the Boston University Questrom School of Business. After earning her A.B. at Harvard University and her J.D. at Harvard Law School, Professor Samuelson practiced with the firm of Choate, Hall and Stewart. She has written many articles on legal issues for scholarly and popular journals, including the American Busi- ness Law Journal, Ohio State Law Journal, Boston University Law Review, Harvard Journal on Legislation, National Law Journal, Sloan Management Review, Inc. Magazine, and Boston Maga- zine. At Boston University she won the Broderick Prize for excellence in teaching.

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xxiPREFACE

Patricia Sánchez Abril is a Professor of Business Law and Vice Dean for Graduate Business Programs and Executive Education at the University of Miami School of Business Adminis- tration. Professor Abril’s research has appeared in the American Business Law Journal, Harvard Journal of Law & Technology, Florida Law Review, Houston Law Review, Wake Forest Law Review, and Columbia Business Law Journal, among other journals. In 2011, the American Business Law Journal honored her with its Distinguished Junior Faculty Award, in recognition of exceptional early career achievement. Her research has won the Outstanding Proceedings competition at the annual conference of the Academy of Legal Studies in Business and has twice earned the Hoeber Memorial Award for Excellence in Research. Professor Abril has won awards for her teaching in both the undergraduate and graduate programs at the Uni- versity of Miami.

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To w.f.s., “the fountain from the which my current runs”

s.s.s.

To a.f.a., with gratitude and love p.s.a.

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U N I T

The Legal Environment

1

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C H

A P

T E

R

The Pagans were a motorcycle gang with a reputation for violence. Two of its rougher members, Rhino and Backdraft, entered a tavern called the Pub Zone, shoving their way past the bouncer. The pair wore gang insignia, in violation of the bar’s rules. For a while, all was quiet, as the two sipped drinks at the bar. Then they followed an innocent patron toward the men’s room, and things happened fast.

“Wait a moment,” you may be thinking, “are we reading a chapter on business law or one about biker crimes in a roadside tavern?” Both.

Law is powerful, essential, and fasci- nating. We hope this book will persuade you of all three ideas. Law can also be surprising. Later in the chapter, we will return to the Pub Zone (with armed guards) and follow Rhino and Backdraft to the back of the pub. Yes, the pair engaged in street crime, which is hardly a focus of this text. However, their criminal acts will enable us to explore one of the law’s basic principles, negligence. Should a pub owner pay money damages to the victim of gang violence? The owner herself did noth- ing aggressive. Should she have prevented the harm? Does her failure to stop the assault make her liable?

We place great demands on our courts, asking them to make our large, complex, and sometimes violent society into a safer, fairer, more orderly place. The Pub Zone case is a good example of how judges reason their way through the convoluted issues involved. What began as a gang incident ends up as a matter of commercial liability. We will traipse after Rhino and Backdraft because they have a lesson to teach anyone who enters the world of business.

INTRODUCTION TO LAW

1

Should a pub owner pay money damages to the

victim of gang violence?

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3CHAPTER 1 Introduction to Law

1-1 EXPLORING THE LAW A driver is seriously injured in an automobile accident, and the jury concludes that the car had a design defect. The jurors award her $29 million. A senior vice president congratulates himself on a cagey stock purchase but is horrified to receive, not profits, but a prison sen- tence. A homeless person, ordered by local police to stop panhandling, ambles into court and walks out with an order permitting him to beg on the city’s streets. The strong hand of the law touches us all. To understand something that powerful is itself power.

Suppose, some years after graduation, you are a mid-level manager at Sublime Corp., which manufactures and distributes video games. You are delighted with this important posi- tion in an excellent company—and especially glad that you bring legal knowledge to the job. Sarah, an expert at computer-generated imagery, complains that Rob, her boss, is constantly touching her and making lewd comments. That is sexual harassment, and your knowledge of employment law helps you respond promptly and carefully.

You have dinner with Jake, who has his own software company. Jake wants to manu- facture an exciting new video game in cooperation with Sublime, but you are careful not to create a binding deal (contract law). Jake mentions that a similar game is already on the market. Do you have the right to market one like it? That answer you already know (intel- lectual property law).

LuYu, your personnel manager, reports that a silicon chip worker often seems drowsy; she suspects drug use. Does she have the right to test him (constitutional law and employment law)? On the other hand, if she fails to test him, could Sublime Corp. be liable for any harm the worker does (tort law and agency law)?

In a mere week, you might use your legal knowledge a dozen times, helping Sublime to steer clear of countless dangers. During the coming year, you encounter many other legal issues, and you and your corporation benefit from your skills.

It is not only as a corporate manager that you will confront the law. As a voter, investor, juror, entrepreneur, and community member, you will influence and be affected by the law. Whenever you take a stance about a legal issue, whether in the corporate office, the voting booth, or as part of local community groups, you help to create the social fabric of our nation. Your views are vital. This book will offer you knowledge and ideas from which to form and continually reassess your legal opinions and values.

Law is also essential. Every society of which we have any historical record has had some system of laws. Societies depend upon laws for safe communities, functioning economies, and personal liberties. An easy way to gauge the importance of law is to glance through any newspaper and read about nations that lack a strong system of justice. Notice that these coun- tries cannot ensure physical safety and personal liberties. They also fail to offer economic opportunity for most citizens. We may not always like the way our legal system works, but we depend on it to keep our society functioning.

Law is intriguing. When the jury awarded $29 million against an auto manufacturer for a defective car design, it certainly demonstrated the law’s power. But was the jury’s decision right? Should a company have to pay that much for one car accident? Maybe the jury was reacting emotionally. Or perhaps the anger caused by terrible trauma should be part of a court case. These are not abstract speculations for philosophers. Verdicts such as this may cause each of us to pay more for our next automobile. Then again, we may be driving safer cars.

1-1a Sources of Contemporary Law It would be nice if we could look up “the law” in one book, memorize it, and then apply it. But the law is not that simple. Principles and rules of law come from many different sources. Why is this so?

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4 UNIT 1 The Legal Environment

We inherited a complex structure of laws from England. Additionally, ours is a nation born in revolution and created, in large part, to protect the rights of its people from the government. Our country’s Founders created a national government but insisted that the individual states maintain control in many areas. As a result, each state has its own government with exclusive power over many important areas of our lives. What the Founders created was federalism: a double-layered system of government, with the national government and state governments each exercising important but limited powers. To top it off, the Founders guaranteed many rights to the people alone, ordering national and state governments to keep clear. They achieved all of this in one remarkable document: the United States Constitution.

United States Constitution America’s greatest legal achievement was the writing of the United States Constitution in 1787. It is the supreme law of the land, and any law that conflicts with it is void. This federal Constitution does three basic things. First, it establishes the national government of the United States, with its three branches. Second, it creates a system of checks and balances among the branches. And, third, the Constitution guarantees many basic rights to the Ameri- can people. Branches of Government. The Founders sought a division of government power. They did not want all power centralized in a monarch or anyone else. And so the Constitution divides legal authority into three pieces: legislative, executive, and judicial power.

Legislative power gives the ability to create new laws. In Article I, the Constitution gives this power to the Congress, which is comprised of two chambers—a Senate and a House of Representatives.

The House of Representatives has 435 voting members. A state’s voting power is based on its population. States with large populations (Texas, California, Florida) send dozens of representatives to the House, while sparsely populated states (Wyoming, North Dakota, Delaware) send only one. The Senate has 100 voting members—two from each state.

Executive power is the authority to enforce laws. Article II of the Constitution establishes the president as commander-in-chief of the armed forces and the head of the executive branch of the federal government.

Judicial power gives the right to interpret laws and determine their validity. Article III places the Supreme Court at the head of the judicial branch of the federal government. Interpretive power is often underrated, but it is often as important at the ability to create laws in the first place. For instance, the Supreme Court ruled that privacy provisions of the Constitution protect a woman’s right to abortion, although neither the word “privacy” nor “abortion” appears in the text of the Constitution.1 And at times, courts void laws altogether. For example, in 2016, the Supreme Court struck down a Texas law regulating abortion clinics and the doctors who worked in them. The Court found that those rules created an undue burden for Texas women by caus- ing many clinics to close and making abortions unreasonably difficult to obtain.2

Checks and Balances. The authors of the Constitution were not content to divide gov- ernment power three ways. They also wanted to give each part of the government the power over the other two branches. Many people complain about “gridlock” in Washington, but the government is sluggish by design. The Founders wanted to create a system that, without broad agreement, would tend towards inaction. The president can veto congressional leg- islation. Congress can impeach the president. The Supreme Court can void laws passed by Congress. The president appoints judges to the federal courts, but these nominees do not serve unless approved by the Senate.

Many of these checks and balances will be examined in more detail later in the text.

Federalism A double-layered system of government, with the national and state governments each exercising important but limited powers

United States Constitution The supreme law of the United States

1Roe v. Wade, 410 U.S. 113 (1973). 2Whole Woman’s Health v. Hellerstedt, 136 S. Ct. 2292 (2016).

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5CHAPTER 1 Introduction to Law

Fundamental Rights. The Constitution also grants many of our most basic liberties. For the most part, those liberties are found in the amendments to the Constitution. The First Amendment guarantees the rights of free speech, free press, and the free exercise of reli- gion. The Fourth, Fifth, and Sixth Amendments protect the rights of any person accused of a crime. Other amendments ensure that the government treats all people equally and that it pays for any property it takes from a citizen.

By creating a limited government of three branches and guaranteeing basic liberties to all citizens, the Constitution has become one of the most important documents ever written.

Statutes The second important source of law is statutory law. The Constitution gave to the U.S. Congress the power to pass laws on various subjects. These laws are called statutes, and they can cover absolutely any topic at all, so long as they do not violate the Constitution.

Almost all statutes are created by the same method. An idea for a new law—on taxes, health care, texting while driving, or anything else—is first proposed in the Congress. This idea is called a bill. The House and Senate then independently vote on the bill. To pass Congress, the bill must get approval from a simple majority of each of these chambers.

If Congress passes a bill, it goes to the White House. If the president signs it, a new stat- ute is created. It is no longer a mere idea; it is the law of the land. If a president vetoes a bill, it does not become a statute unless Congress overrides the veto. To do that, both the House and the Senate must approve the bill by a two-thirds majority. At this point, it becomes a statute without the president’s signature.

Common Law Binding legal ideas often come from the courts. Judges generally follow precedent. When courts decide a case, they tend to apply the same legal rules that other courts have used in similar cases. The principle that precedent is binding on later cases is stare decisis, which means “let the decision stand.” Stare decisis makes the law predictable, and this in turn enables busi- nesses and private citizens to plan intelligently.

It is important to note that precedent is only binding on lower courts. If the Supreme Court, for example, decided a case in one way in 1965, it is under no obligation to follow precedent if the same issue arises in 2020.

Sometimes, this is quite beneficial. In 1896, the Supreme Court decided (unbelievably) that segregation—separating people by race in schools, hotels, public transportation, and so on—was legal. In 1954, on the exact same issue, the Court changed its mind.

In other circumstances, it is more difficult to see the value in breaking with an established rule.

Court Orders Judges have the authority to issue court orders that place binding obligations on specific people or companies. A court can both compel a party to and prohibit it from doing something. An injunction is an example of court order. Injunctions can require people to do things, like perform on a contract or remove a nuisance. A judge might also issue an injunction to stop a salesperson from using his former company’s client list or prevent a counterfeiter from sell- ing fake goods. Courts have the authority to imprison or fine those who violate their orders.

Administrative Law In a society as large and complex as ours, the executive and legislative branches of government cannot oversee all aspects of commerce. Congress passes statutes about air safety, but U.S. senators do not stand around air traffic towers, serving coffee to keep everyone awake. The executive branch establishes rules concerning how foreign

Statute A law passed by Congress or by a state legislature

Stare decisis The principle that precedent is binding on later cases

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6 UNIT 1 The Legal Environment

nationals enter the United States, but presidents are reluctant to sit on the dock of the bay, watching the ships come in. Adminis- trative agencies do this day-to-day work.

Most government agencies are created by Congress. Familiar examples include the Environmental Protection Agency (EPA), the Securities and Exchange Commission (SEC), and the Internal Revenue Service (IRS), whose feelings are hurt if it does not hear from you every April 15. Agencies have the power to create laws called regulations.

1-1b Classifications of Law We have seen where laws come from. Now we need to classify them. First, we will distin- guish between criminal and civil law. Then we will take a look at the intersection between law and morality.

Criminal and Civil Law It is a crime to embezzle money from an employer, to steal a car, and to sell cocaine. Criminal law concerns behavior so threatening that society outlaws it altogether. Most criminal laws are statutes, passed by Congress or a state legislature. The government itself prosecutes the wrongdoer, regardless of what the bank president or car owner wants. A district attorney, paid by the government, brings the case to court. The injured party, for example the owner of the stolen car, is not in charge of the case, although she may appear as a witness. The government will seek to punish the defendant with a prison sentence, a fine, or both. If there is a fine, the money goes to the state, not to the injured party.

Civil law is different, and most of this book is about civil law. Civil law regulates the rights and duties between parties. Tracy agrees in writing to lease you a 30,000-square-foot store in her shopping mall. She now has a legal duty to make the space available. But then another tenant offers her more money, and she refuses to let you move in. Tracy has violated her duty, but she has not committed a crime. The government will not prosecute the case. It is up to you to file a civil lawsuit. Your case will be based on the common law of contracts. You will also seek equitable relief—namely, an injunction ordering Tracy not to lease to anyone else. You should win the suit, and you will get your injunction and some money damages. But Tracy will not go to jail.

Some conduct involves both civil and criminal law. Suppose Tracy is so upset over losing the court case that she becomes drunk and causes a serious car accident. She has committed the crime of driving while intoxicated, and the state will prosecute. Tracy may be fined or imprisoned. She has also committed negligence, and the injured party will file a lawsuit against her, seeking money.