Solution Manual For Dynamic Business Law The Essentials 6e Kubasek (1-25)

Instructor Solution Manual For Dynamic Business Law The Essentials 6e Kubasek Chapter 1-25

Chapter 1 - An Introduction to Dynamic Business Law CHAPTER OVERVIEW Chapter One lays the foundation for the textbook. Make sure you look on the publisher‘s web site for information about how business law intersects with the six functional areas of business. The authors encourage students to ―connect to the core,‖ and remember the ways in which law intersects with other areas of study, including corporate management, production and transportation, marketing, research and development, accounting and finance, and human resource management.

This manual supports the ―connecting to the core‖ theme by giving ideas for assignments that encourage students to integrate their business law knowledge with knowledge they are acquiring from their other business classes. The manual also encourages professors to improve their teaching skills. Finally, the manual suggests teaching ideas for both beginning and experienced teachers.

LEARNING OBJECTIVES After reading this chapter, students will be able to: 1-1 Define business law.

1-2 Relate the functional areas of business to the relevant areas of business law 1-3 Recall the purposes of law.

1-4 Distinguish among types of law.

1-5 Differentiate between sources of the law.

1-6 Identify the various schools of jurisprudence.

LECTURE NOTES WITH DEFINITIONS In the news…

Teaching tip: For each chapter, consider asking students to relate current news items to material from the chapter.

In addition to ideas students come up with on their own, consider weaving in news stories provided by the McGraw Hill.

For Chapter One, McGraw Hill offers the following stories: ―Smoking Ban: Tobacco Tyrants: Gone Too Far? Many States Are Putting Stronger Restrictions on Where You Can Smoke‖  Have states gone too far in banning smoking?  Whose interests are state legislatures looking out for in banning smoking? ―College Officer Dealings With Lenders Scrutinized.‖ 4-1

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  1-1 Define business law.

1-2 Relate the functional areas of business to the relevant areas of business law.

1-3 Recall the purposes of law.

1-4 Distinguish among types of law.

Should regulators take a more careful look at college officers?

Why created changes in the ways college officers interact with lenders?

Business law consists of the enforceable rules of conduct that govern commercial relationships.

Business law applies to the six functional areas of business:  Corporate management  Production and transportation  Marketing  Research and development  Accounting and finance  Human resource management  Providing order  Serving as an alternative to fighting  Facilitating a sense that change is possible  Encouraging social justice  Guaranteeing personal freedoms  Serving as a moral guide One way to classify law: Private law involves disputes between private individuals or groups.

Public law involves disputes between private individuals or groups and their government.

A second way to classify law: Civil law involves the rights and responsibilities involved in relationships between persons and between persons and their government.

Criminal law involves incidents in which someone commits an act against the public as a unit.

Teaching tip: Ask students to give an example of a fact situation that led to both criminal and civil lawsuits, e.g., the O.J. Simpson trials.

1-5 Differentiate between sources of the law.

Sources of business law are: 1. Constitutions Constitutional law refers to the general limits and powers of governments as stated in their written constitutions.

2. Statutes or legislative actions 3. Cases Case law (or common law) is the collection of legal interpretations made by judges.

Stare decisis means courts are relying on precedent.

Teaching tip: The first time your students encounter an appellate case in the readings, show them what stare decisis looks like in the context of a real case.

4. Administrative law Administrative law is the collection of rules and decisions made by 4-2

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administrative agencies.

5. Treaties A treaty is a binding agreement between two states or international organizations.

6. Executive orders An executive order is a directive that comes from the president or state governor.

1-6 Identify the various schools of jurisprudence.

Schools of jurisprudence are common guides to legal interpretation.  Natural law—certain ethical laws and principles are morally right and ―above‖ the laws devised by humans.  Legal Positivism—assumes the legitimate political authority deserves our obedience when it issues a rule.  Identification with the Vulnerable—emphasis on fairness and looking out for those with the least power.  Historical School/Tradition—emphasis on the use of stare decisis.  Legal Realism—judges consider social and economic conditions.  Cost-benefit Analysis—make calculations to maximize the ratio of benefits to costs.

Teaching tip: Consider using ―The Case of the Speluncean Explorers (link below) to make the schools of jurisprudence come alive.

Global and Comparative Law

At this point in the textbook, students should merely have an awareness that globalization has affected the scope of business law. Consequently, we highlight the definitions to the following key terms that will come up later in the book:  

Appendix on Critical Thinking and Business

Trade, i.e. the exchange of goods or services, on a global scale has led to the creation of trade agreements that serve as de facto rules governing the global business environment.

Comparative law—the field of law that studies and compares laws in different countries.

Critical thinking includes the application of evaluative standards to assess the quality or the reasoning being offered to support the conclusion. Critical thinkers will follow this pattern of careful thinking when they read an argument: 1. Find the facts.

2. Look for the issue.

3. Identify the judge‘s reasons and conclusion.

4. Locate in the decision the rules of law that govern the judge‘s reasoning.

5. Apply critical thinking to the reasoning. Evaluate the reasoning.  Look for potential ambiguity.  Consider the strength of analogies.  Check the quality of the judge‘s reasoning.  Decide whether important information is missing.  Consider the possibility of rival causes.

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TEACHING SKILLS: BLOOM’S TAXONOMY SETS THE STAGE TO THINK ABOUT THE KINDS OF QUESTIONS TO ASK YOUR STUDENTS Benjamin Bloom, in his Taxonomy of Educational Objectives,* developed a hierarchy of cognitive functions. His work sets the stage for teachers to understand why it is important to think carefully about the kinds of questions they ask in class.

The Objective Knowledge Lowest level of learning and is mostly memory.

The student recognizes and recalls information.

Sample questions  What is business law?  What are the four elements of a negligence claim?

 Comprehension Lowest level of understanding. The student  paraphrases or explains something.

What is your understanding of the concept of stare decisis?

What does your textbook mean by deontology?

 Application Student demonstrates her understanding of abstract rules, principles, or generalizations by using them  to solve life-like problems.  Analysis Student breaks down a communication to discover the hidden structure as well as assumptions. 

How would a natural law thinker respond to this particular fact pattern?

Use a particular case rule to determine whether the plaintiff will be successful in her claim.

Provide the reasoning for the following statement: All contracts do not need to be in writing to be enforceable.

Break down a particular judge‘s opinion to understand the assumptions the judge is making.

Explain how two particular schools of jurisprudence are related.

Make a connection between duress and insanity.

Identify and explain a reasoning flaw in the judge‘s argument.

Evaluate the following statement: Arbitration and mediation are better forms of dispute resolution than litigation.

 Synthesis Student creatively combines elements and parts to  form a whole new structure.  Evaluation Highest level of learning. Student makes a critical  judgment about the value of the communication.

* BENJAMIN BLOOM, TAXONOMY OF EDUCATIONAL OBJECTIVES: THE CLASSIFICATION OF EDUCATIONAL GOALS (1954).

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TEACHING IDEAS Connecting to the Core





Teaching Basics

Consider asking students to keep a ―Connecting to the Core‖ journal.

Throughout the semester, students can relate concepts they are learning in their business law class to material they are learning in their other business courses.

Ask students to take one particular area of law (Use Exhibit 1-1 as the basis for topic choices) and write a paper that explains intersections between a particular area of law and at least one functional area of business. For example, a student could choose consumer law and write a paper that links a specific consumer law issue to content from their marketing class.

Explore web sites that offer information about teaching at the college level.

Harvard has a great center. Their center links you to other centers. If you are a new teacher, make sure you look at this site‘s sample syllabi. http://bokcenter.fas.harvard.edu/icb/icb.do This syllabus tutorial at the University of Minnesota is great—it provides sample language you can use. http://www1.umn.edu/ohr/teachlearn/

Advanced Teaching

Use the Case of the Speluncean Explorers to explore the schools of jurisprudence. This hypothetical case explores the dilemma a trapped team of five spelunkers faces when they have to decide whether to eat one of their party in a quest to survive. Once rescued, the case considers whether the surviving spelunkers are guilty of murder.

You can get a copy of the case of the Speluncean Explorers through this web site: http://en.wikipedia.org/wiki/The_Case_of_the_Speluncean_Explorers Once you get a sense of the case itself, explore further to see what kinds of questions you can ask in class. http://www.earlham.edu/~peters/writing/cse.htm#assignments

A BEST PRACTICES TEACHING TIP Peer-to-peer teaching.

This teaching technique can help students engage more fully with new concepts that are referenced in this textbook. Wilbert J. McKeachie states that there are two favorable outcomes from having students play the role of a teacher: 1.) Peer-to-peer teaching can stimulate additional learning by the student who is teaching, since teaching will require greater preparation for class.

2.) Peer teaching facilitates the learning of those being taught by hearing information from an individual other than the regular 4-5

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teacher.

McKeachie notes that it is essential that faculty members supervise the student-led teaching session, as this method of teaching may not be useful if students do not take the task seriously. A substantial amount of education research supports the value of this teaching practice. In a legal education article, J.B. Biggs alludes to peer-to-peer teaching as among the most effective teaching strategies for engaging student learning: ―The best answer to the question, 'What is the most effective method of teaching?", is that it depends on the goal, the student, the content, and the teacher. But the next best answer is, "Students teaching other students." There is a wealth of evidence that peer teaching is extremely effective for a wide range of goals, content, and students of different levels and personalities‖ (144).

To read more about peer-to-peer teaching, see Wilbert J. McKeachie‘s ―Teaching Tips: A Guidebook for the Beginning College Teacher‖ or J.B. Biggs‘ ―Teaching for Better Learning.‖ References: Wilbert J. McKeachie, Teaching Tips: A Guidebook for the Beginning College Teacher, 7th ed., 1978.

J.B. Biggs, Teaching for Better Learning, 2 Legal Educ. Rev. 133 (19901991).

Chapter 2 - Business Ethics CHAPTER OVERVIEW Chapter Two explains the fundamentals of business ethics and social responsibility. It also provides a framework that allows students to engage with ethics and social responsibility material. This framework is important because it takes away students‘ tendency to believe questions of ethics are simply matters of opinion. Consider asking your students to use the ―WPH framework‖ throughout the course.

LEARNING OBJECTIVES After reading this chapter, students will be able to: 2-1 Distinguish between business ethics and the social responsibility of business.s 4-6 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

2-2 Recognize the relationship between business law and business ethics.

2-3 Analyze business decisions using the WH framework.

2-4 Appendix 2A: Explain the theories of business ethics.

LECTURE NOTES WITH DEFINITIONS In the news…

Teaching tip: For each chapter, consider asking students to relate current news items to material from the chapter.

In addition to ideas students come up with on their own, consider weaving in news stories provided by the textbook publisher.

For Chapter Two, McGraw Hill offers the following story: ―Smoke & Mirrors: Tobacco Companies Have Been Steadily Adding More Nicotine to Cigarettes to Make Them More Addictive, Especially to Teenagers.‖   

2-1 Distinguish between business ethics and the social responsibility of business.

Apply the WPH framework to the decisions tobacco companies are making.

Is it ―socially responsible‖ for tobacco companies to add nicotine to cigarettes?

Should legal rules provide additional protections to vulnerable consumers, such as teenagers?

Ethics is the study and practice of decisions about what is good or right. 

Business ethics is the application of ethics to special problems and opportunities experienced by businesspeople. An example of a business ethics question: Is the company in the Case Opener doing the right thing when it attempts to reduce the costs of advertising by not listing all possible complications of the medicine for the consumer? As explained later in this chapter there are several ways of evaluating an ethical decision, for example, the Golden Rule, the Public Disclosure test, or the Universalization Test. One reasonable answer, thus, is can be provided by the Golden Rule. Presumably, if one were the consumer of a medicine, one would want to be informed of all of the possible complications of a medicine before deciding to put the drug into one‘s body. To not desire information would be the equivalent of not caring about one‘s health or potentially dying from a dangerous drug. In light of this application of the Golden Rule, a company‘s decision to cut costs by not listing all possible negative effects of a medicine constitutes ethically questionable behavior.

An ethical dilemma is a problem about what a firm should do for which no clear, right direction is available.

The social responsibility of business consists of the expectations that the community imposes on firms doing business inside its borders.  Exhibit 2-1 provides a useful example of the way that the social responsibility of business has affected the way a business operates.

For example, notice that the values and goals sections in the code of 4-7 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

conduct pyramid put consumer needs and honesty at the forefront of the business‘s objectives.

Teaching tip: How are the concepts of ethics and social responsibility different? Do they overlap?

2-2 Recognize the relationship between business law and business ethics.

The legality of the decision is the minimal standard that must be met.

2-3 Analyze business decisions using the WH framework.

The WPH framework provides practical steps for responding to an ethical dilemma.

United States of America et al. ex rel. Andrew Hagerty v. Cyberonics, Inc. (briefed below) compares what is legal with what is ethical. Ethics presumes obedience to law.



W: Whom would the decision affect? o

stakeholders: assorted groups of people affected by the firm's decisions, e.g., owners or shareholders, employees, customers, management, general community, future generations.

o

interests of stakeholders will sometimes be in common and will sometimes conflict. 





The Case Nugget in this section involving Maria Lopez provides a useful example of how multiple stakeholders are affected by a business decision. The stakeholders include in this example include the motor suppliers, the CEO, management, and depending on the motor supplier chosen, the workers for the motor suppliers that are not transacted with.

P: Purpose—What are the ultimate purposes of the decision? o

Which values are being upheld by the decision?

o

Values are positive abstractions that capture our sense of what is good or desirable.

o

Four important values often influence business decisions: freedom (to act without restriction from rules imposed by others), security (to be safe from those wishing to interfere with your interests), justice (to receive the products of your labor), and efficiency (to get the most from a particular output).

H: How do we make ethical decisions? o

We use classical ethical guidelines, such as these:

o

The Golden Rule—―Do unto others as you would have done to you."

o

Public Disclosure Test—Suppose your decision would be published in the newspaper. (Our actions are in the open rather

o

than hidden.)

Universalization Test—If I take action X, were others to follow my example, would the world be a better place?

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o

o

The Case Nugget on Tyson Foods‘ Bribery Charges provides a useful example of the way the Universalization Test can serve as a guide in making ethical decisions. In this case, Tyson Foods was paying bribes to pass quality inspections. But, foods that are low in quality have to potential to cause diseases, like salmonella, in consumers. Thus, by circumventing safety inspections, Tyson Foods was endangering the health of their consumers. One would be hard pressed to argue that the world is a better place as a result of Tyson Foods‘ bribes.

E-Commerce and the Law: This section provides an example of the ethical dilemmas that have been created in the internet age. Specifically, the dilemma consists of weighing the rights of news agencies to protect the information they gather against the right of the government to improve national security, thereby protecting U.S. citizens.

Teaching tip: Choose a current ethical dilemma from the newspaper and ask students to apply the WPH framework to the dilemma.

Appendix on Theories of Business Ethics

     

Ethical relativism—Asserts that morality is relative.

Situational ethics—Asks the thinker to put herself in the position of the person facing an ethical dilemma.

Consequentialism—Asks the thinker to consider the harms and benefits of making a particular decision Deontology—Recognizes that certain actions are right or wrong, no matter the consequences.

Virtue ethics—Focuses on individual development, e.g., individuals develop virtues such as courage, and these virtues guide behavior.

Ethics of care—Asks the thinker to focus on caring and maintaining human relationships.

Teaching tip: Ask students how specific theories of business ethics are integrated into the WPH framework.

Teaching tip: For more information about theories of business ethics, go to these web sites: Philosophy and ethics on the web: http://www.epistemelinks.com/Main/EncyRefs.aspx?TopiCode=Ethi Santa Clara‘s Markkula Center for Applied Ethics: http://www.scu.edu/ethics/practicing/decision/framework.html A PowerPoint presentation by Ernest A. Kallman and John P. Grillo. Click on ―view graphic version.‖ http://www.ecs.csun.edu/~rlingard/COMP450/cs450edm/tsld001.htm Point/Counterpoint: Do a

Teaching tip: Here are some questions to help you tie the 4-9

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firm's ethical responsibilities extend beyond maximization of profits?

Point/Counterpoint into class discussion:   

What are the costs of corporate responsibility?

What are the costs of not having corporate responsibility?

Are there ways in which the interests of a firm can align with the interests of a community outside of profits?

For further arguments on both sides of the issue, see: http://umich.edu/~thecore/doc/Friedman.pdf and http://business.time.com/2012/05/28/why-companies-can-no-longer-affordto-ignore-their-social-responsibilities/

The Complexity of Business Ethics: The Story of Two Biotech CEOs Elizabeth Holmes is a 31-year-old billionaire whose company, Theranos, is developing a technique for doing medical diagnostic work with the draw of a single drop of blood. The objective is to create a low-priced, less painful alternative to the large blood draws that have been the traditional way to do medical diagnoses.

Ms. Holmes is designing and producing a product that is so cheap that a person can get a cholesterol test for the price of an egg McMuffin. She proudly says that she will not raise prices and will not deny access to this new technology to people in need.

Yet, in an investigative report in the fall of 2015, the Wall Street Journal revealed that Theranos was doing some medical diagnostic work using standard blood drawing technology rather than their own highly touted techniques.

In addition, the FDA announced that the Theranos innovation had not been adequately peer reviewed and was not an approved blood collection device. Martin Shkreli is the founder and CEO of Turning Pharmaceuticals. He is a year older than Ms. Holmes and has an estimated wealth of $100 million. He acquired the drug Daraprim, which is used by HIV and cancer patients, and promptly raised the price from $13.50 to $750.

In interviews, he explained that he probably should have raised the price even more because those who needed the drug would be willing to pay even more because it was so valuable for their health. Daraprim costs approximately $1 to make. Turning gives away 60% of Daraprim to those who do not have the money to pay for it. Shkreli points out that his primary responsibility is to make profits for those who own Turning. On December 17, 2015, Shkreli was arrested on charges of securities fraud for allegedly using assets from a biotech company he started to pay off unrelated business debts.

CASE BRIEFS WITH ANSWERS TO THE QUESTIONS Case 2-1 United States of America et al. ex rel. Andrew Hagerty v. Cyberonics, Inc., United States District Court for the District of Massachusetts 2015 U.S. Dist. _______, LEXIS 42166 Case Brief Issue: Did Cyberonics violate the False Claims Act (FCA) by knowingly submitting false information to the government?

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Facts: Cyberonics, Inc. is a corporation that sells a medical device known as the VNS system. In 2006, Cyberonics heavily promoted its VNS system, only for it to be denied Medicare coverage, leaving Cyberonics $132 million in debt. To make up for this loss, Cyberonics began allegedly encouraging its salespeople to sell replacement devices to patients who did not need them. Cyberonics employee Andrew Hagerty blew the whistle on Cyberonic's acts, alleging that Cyberonics was violating the False Claims Act by knowingly submitting false claims to the United States government.

Holding: The court ruled in favor of Cyberonics, dismissing its FCA claims.

Reasoning:  The court's decision revolved around Rule 9(b) of the FCA. 

Rule 9(b) states ―[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.‖



Hagerty simply claimed that Cyberonics was selling unneeded devices; he did not specify any actual false claims, any specific cases where a device was sold on fraudulent grounds, etc. 

The court argued that people buy things that they don't need every day; Hagerty needed to provide evidence that Cyberonics was selling unneeded devices on the basis of fraud.

Answers to the questions Critical Thinking One of the facts that would be useful to know in this context is the effect size of the fraudulent actions of the salespeople; that is, how many individuals were negatively affected by the dishonest sales practices and how negatively were these people affected? Another fact that could affect one's perception of the judgment is the extent to which the company's executives were involved in the fraudulent sales. If the company simply set quotas and the salespeople took unethical actions to meet these quotas, then that is a very different thing then direct orders from executives to engage in unethical behavior.

Ethical Decision Making Just because the FCA claims against Cyberonics were dismissed doesn't necessarily mean that Cyberonics was acting ethically. There are several actions that many people find highly unethical that are also entirely legal, such as driving a high-emission vehicle or smoking cigarettes at home around children. There's an argument to be made that even though Cyberonics might not have broken any laws, it was still acting unethically by providing false information to patients and essentially tricking customers into buying things they didn't need. If the Cyberonics salespeople had used the WPH framework to ask themselves why they were making fraudulent claims and who it affected, their decisions may have been more ethical.

TIPS FOR BUSINESS MANAGERS 1. Many ethical problems faced by business can be solved by following a simple rule---obey the law.

2. Use the language of the various ethical theories to activate the conversation about what the ethical course of action is.

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3. Be sensitive to the cultural context in which you are doing business for that context will provide strong signals about what social responsibility means for a business like yours

TEACHING SKILLS: PRACTICE ASKING QUESTIONS THAT FACILITATE UNDERSTANDING Practice asking questions encourage Use these questions as models: the reader to: ―Reduce‖ the document they are reading.  Why should I care about this issue?  What is the author‘s conclusion?  What is the author's reasoning?  How does the author's argument relate to the broader issue at hand?  What terms in the author's argument should be clarified?  Could this argument be a metaphor for a more abstract issue?  What sort of reasons does the author use to prove her Evaluate reasoning. point?  Are the reasons stated in an engaging manner?  Is the author using statistics, surveys, logic, or an appeal to common sense? What does each of these methods fail to take into account? How important is that omission to the determination of whether you should accept the reasoning?  Is the argument well-constructed? Is it well written?  Does the author claim any absolute truths? If so, what?  Does the author identify any deficiencies or flaws in her arguments, or does she present the reasoning as flawless?  Does the author acknowledge the "other side"?  How dedicated is the author to her conclusion?  Does the author present the possibility that she is wrong or misguided?  Does the author justify her assumptions?  What assumptions (related to the particular discipline) does the argument support and/or call into question?  What are the major tenets of this belief system? That is, Consider an unfamiliar idea. what aspects of other belief philosophies does this philosophy accept?  Is this system of beliefs an extension of another system?

A reaction to another system?  What are the key "terms" involved with this idea? How are these terms defined?  What are the various perspectives or approaches within the system?

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  

      Investigate the author/expert.

 

             Probe our individual understanding or



What are the goals of the perspective/approach?

What is the appeal of the argument/ perspective?

What kind of assumptions does the belief system make about human nature? Are we responsible? Lazy? In control? Out of control? Reasonable? Ignorant? Good?

Evil? Self-centered? Other- centered?

What evidence supports this perspective?

What kinds of relationships exist between concepts?

Is there a major conflict between two dominant perspectives, or do many perspectives disagree?

Is there a common thread among the perspectives?

Can we come to a conclusion about the issue based on various perspectives?

What factors confound the issue and prevent a concrete answer?

Who is the author, and where is she "coming from"? Has she had sufficient experience and expertise in the subject?

What (if anything) has the author stated in the past that may confirm or contradict his current argument? If the latter is the case, what factor(s) warrant this contradiction (i.e. change in ideology, pursuit of material self-interest, etc)?

What is the author's intent for writing this piece?

How does the author intend to persuade her audience?

Do I agree with her rhetorical devices?

Is the author trying to be ambiguous or non-linear for a purpose?

Does the author acknowledge the "other side"?

How dedicated is the author to her conclusion?

What stakes do the participants have in the possible outcomes of the discussion?

What value assumptions do those participating bring to the discourse?

What are the dominant paradigms the writer subscribes to?

What do other reasonable scholars have to say about the idea?

Who are the experts on this particular issue and why?

Are the experts‘ opinions based on a particular belief system or is it an independent opinion that deals with evidence that the expert feels is relevant?

Is the expert defending a particular belief or making an honest attempt to come to an appropriate conclusion?

What do I already know about this issue? How can I 4-13

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knowledge.   

Offer closure, e.g., where does this idea take us?

   

connect this information to new knowledge?

Where am I "coming from"? How do I fit into the author's view of the world?

How do I feel reading this? Angry? Amused?

Ambivalent? Why do I feel this way?

What is the best possible argument you could construct against the author's conclusion?

Do I understand this idea well enough to teach it?

Can we accept the author's conclusion? To what degree?

With what stipulations? What should we do afterwards?

Would another epistemological approach yield a drastically different conclusion?

Have we kept reasons and conclusions separate? In other words, have we acknowledged that we could agree with the author's reasoning, but nevertheless, could not endorse her conclusion? Have we admitted that we might agree with the author's conclusion but are not satisfied with her reasoning?

TEACHING IDEAS Connecting to the Core

One way to connect to the core expands the chapter‘s discussion of ethics and accounting. You may want to obtain and show your class a PBS videotape called ―Bigger than Enron,‖ available at: http://www.pbs.org/wgbh/pages/frontline/shows/regulation/ This videotape explores the collapse of Arthur Andersen, the accounting firm Enron used to help it hide its fraud. The tape asks, ―What went wrong?‖

Teaching Basics

After showing ―Bigger Than Enron,‖ ask the class questions that facilitate understanding. Here are some questions to get you started:  What argument did Hedrick Smith present in the videotape?  Why should business students care about the argument and facts in the videotape?  Is there ―another side‖ to the story?  How did the videotape make you feel, as an American citizen?

Advanced Teaching

In "Bigger Than Enron," FRONTLINE correspondent Hedrick Smith shows how corporate watchdogs, e.g., lawyers, regulators, politicians, and accountants failed to prevent the Arthur Andersen/Enron scandal. Ask your students to write a paper in which they explore a different industry (e.g., toy manufacturing) to consider the extent to which corporate watchdogs have disappointed the American people.

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“Buzz” Sessions.

This teaching technique involves splitting a class up into small subgroups, two or three students per group, and subsequently, having students address a complex question that can yield several different answers. The usefulness of this strategy for enhancing student learning has been demonstrated by several education studies. For example, according to Wilbert J. McKeachie ―data has found that students in two- and three-man groups write more new ideas after a five-minute discussion than students working alone‖ (63). Thus, the use of Buzz Sessions can promote more student engagement, and maximize the potential for creative thinking, the cognitive task that ranks highest on Bloom‘s Taxonomy of Learning. For more specific information on incorporating ―Buzz‖ Session into lectures, see ―Teaching Tips: A Guidebook for the Beginning College Teacher.‖ References: Wilbert J. McKeachie, Teaching Tips: A Guidebook for the Beginning College Teacher, 7th ed., 1978.

ANSWERS TO QUESTIONS AND PROBLEMS 1.

Business law provides a floor of acceptable behavior. Business ethics builds on business law.

It often has higher aims for acceptable behavior.

2.

Classical ethical guidelines such as the golden rule, public disclosure test, and universalization test always provides some sort of guidance. One behavior is rarely as good as the next.

3.

The WPH approach provides a practical set of rules for thinkers to follow as they sort out how to respond to an ethical dilemma.

4.

In actuality, the court ruled in favor of Kaplan, claiming that there wasn‘t enough scientific evidence to support the contention that hiring based on credit history disproportionally affected blacks negatively. However, basing a hiring decision primarily on credit reports is potentially unfair to minorities, or anyone who has little alternative but to go into debt in order to have access to basic needs. The reason for this injustice is based on the influence of the environment on individuals. More concretely, those living in poverty often have little access to education, and thus, face the often impossible task of overcoming poverty. Credit is often used as a means to buy goods or services when one does not have the income to afford such goods and services.

These goods can include very basic goods necessary for living an adequate life, such as food, water, and shelter, and services can include basic services such as hospital or medical costs. As a consequence, it is potentially unfair to base a hiring decision on credit histories because those histories can be less representative of how responsible or productive someone is, and more representative of simply someone‘s having a very low-income with few choices but to go into debt to afford basic goods and services. This case gained a lot of media attention, and therefore, did potentially affect other companies‘ use of credit histories in their hiring process.

It did not necessarily change most companies‘ behavior, but its media attention potentially made people at minimum more aware of the potential discriminatory effects of reviewing credit histories to make hiring decisions.

5.

The Supreme Court ruled, in a 5-4 decision, in favor of Walmart. The basis for this ruling was the Court‘s viewing that the plaintiffs did not have enough in common to constitute a class.

While Walmart may have won in part as a result of the substantial amount of power it holds in the U.S. by supplying many households with essential goods, it is also probable that the Court‘s decision was largely a result of the dominant values on the bench that propel the view

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that markets and labor disputes are best resolved when government intrusion is limited.

6.

By refusing to file the patent applications, Trzaska was thinking of the careers of him and his fellow attorneys, as well as the legal profession as a whole. Not only could it seriously damage the reputation of Trzaska and his colleagues if his team was caught violating professional ethics, but it would tarnish the reputation of lawyers everywhere, which is why the code of ethics exists in the first place. On the other hand, the L'Oreal managers were likely thinking of their own jobs and reputations as well. Allowing Trzaska to disregard the quota and effectively disobey orders would reflect poorly on the managers' abilities and possibly get them fired. It is very possible that the management saw this as a "him or us" situation and fired Trzaska to save themselves. The managers likely chose the values of efficiency and security in making their decision to fire Trzaska; that is, the easiest and safest choice for them to make to keep things running smoothly was to fire him.

However, the court disagreed with L'Oreal's decision. The court held that instruction by an employer that would result in the disregard of obligatory ethical standards clearly violates public policy, and that an employee cannot be terminated for refusing to engage in conduct in which he or she is prohibited from engaging. Thus, the court reversed the dismissal of Trzaska's suit and remanded for further proceedings.

7.

Obviously, the executives and shareholders of Dragon are some of the stakeholders negatively affected by the ordeal because due to the L & H shares being worthless. The less obvious stakeholders, however, include the employees of Dragon. Even if the Dragon didn't go completely under and displace all of its employees, there was likely plenty of downsizing to help cover the cost of repairing Dragon's financial situation.

Going by the Golden Rule standard within the WPH framework, the decision of Goldman Sachs' team to not inform Dragon about the status of L & H because Dragon didn't ask is highly unethical. Surely, Goldman Sachs would not have appreciated if Dragon was in their position and didn't inform them of a poor business partner, so it's hardly ethical that Goldman Sachs did just that. Ideally, a business should go as far to fulfill a contract as they would want the other party to go in fulfilling the contract. Both businesses must try to strike a fair balance between serving both their own interests and the interest of the other party.

8.

This law is intended to protect arrestees from predatory sales practices of bail bondsmen.

Without the law, a bail bondsman can sell their services to individuals immediately after they‘ve been arrested, which gives the arrestee virtually no time to collect their thoughts and make a decision that truly reflects their interests. By allowing solicitation of bail bond services only after an arrestee has made a ―bona fide request,‖ the law can be more certain that an arrestee actually wants bail services and isn‘t simply acting out of the initial panic that may come from being arrested. Within the context of the WPH framework, this law ensures that the purposes behind the solicitation are sound in order to protect the arrestee stakeholders in this situation.

9.

The Supreme Court ruled in favor of Caperton on grounds that CEO contributions to the campaign of Justice Benjamin probably created in a bias that would result in Justice Benjamin leaning towards Massey Coal Company. The Court implicitly did seem to accept that the involvement of Justice Benjamin was unfair. One reason for being unethical is tied to the principle in the legal system that everyone is entitled to a trial governed by reason. In this case, rather than opposed to appealing to reason, one could envision the Justice ruling in favor of the CEO as essentially a repayment for his campaign contributions. This was how the Court reasoned. However, it is important to notice that, like most ethical issues, there was a counterargument against the majority ruling in two dissenting opinions. In one, Justice Scalia seems to argue that if such a bias exists, then it is likely that in all states in which Justices are 4-16 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

elected there is probably a bias. But on practical grounds, there are advantages gained in electing Justices, so bias may be a cost worth the benefits. With regard to the last question, though not entirely determinable, it is possible that the CEO purposely contributed to the Justice‘s campaign as future rulings by the Justice could definitely boost his company‘s profits.

10.

Mitsubishi‘s violation of the NDA would likely cause tech companies to be very cautious about how they approach potential investors. These companies may disclose less amounts of sensitive information to potential investors out of fear that the investor would later disclose the information or use it themselves without benefiting the company.

In certain contexts, Mitsubishi‘s actions can be supported by the WPH framework. For example, if the chip technology truly was the ―Holy Grail of memory technology,‖ products derived from the technology would likely sell very well and bring in large amounts of revenue for Mitsubishi. This revenue would directly benefit Mitsubishi shareholders and would likely indirectly benefit employees. If Mitsubishi was considering these stakeholders, then its actions seems less unethical.

However, Mitsubishi‘s actions can be argued to be quite unethical under the WPH framework when interpreted differently. After all, Mitsubishi essentially benefited from Stern‘s ideas without Stern getting any credit or compensation. Stern was a stakeholder who was negatively affected in this instance. Mitsubishi‘s actions also violate some of the How‘s of the WPH framework, such as the Golden Rule. It‘s doubtful that Mitsubishi would have appreciated Stern using its ideas for his own gain without permission, so arguably it‘s unethical that Mitsubishi used Stern‘s ideas without permission.

Chapter 3: The U.S. Legal System and Alternative Dispute Resolution CHAPTER OVERVIEW This chapter sets out the structural and procedural aspects of the United States legal system.

An important cautionary note: virtually all of these terms will be common vocabulary for you.

However, your students will be encountering many of these words for the first time. Refer your students to the figures throughout the chapter. These figures should help your students understand the connections among the courts. Now, we move to alternatives to the litigation process. Some of these alternatives are included in the litigation process. These methods of dispute resolution are becoming even more popular as courts complain about overloaded dockets.

When you introduce this chapter to the students, you might want to start by identifying benefits and problems with the litigation system. You may then wish to list the similarities and distinctions between ADR methods and litigation. Given that arbitration and mediation are the most common forms of ADR, you will probably spend much of your time going over these two areas.

However, do not forget to emphasize the role of negotiation in litigation and ADR. Perhaps the hottest topic in ADR discussion is the mandatory arbitration clause. Should employees be required to sign a mandatory arbitration clause that applies to any of the potential discrimination claims? You might want to spend some class time addressing this question. Also, the material in this chapter can be somewhat tedious until you relate it to a very interesting case.

Consequently, this manual adds the Pelman case, which considers McDonalds‘ liability for the health consequences of their products. This case brings some procedural issues to life.

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LEARNING OBJECTIVES After reading this chapter, students will be able to answer the following questions:

1.

2.

3.

4.

5.

What types of jurisdiction must a court have to render a binding decision in a case?

What is venue?

What are the threshold requirements that must be met before a court will hear a case?

What are the steps in civil litigation?

How are the various forms of alternative dispute resolution used by businesses today?

BUT WHAT IF SECTIONS 1. No. Even considering the long-arm statutes that were created in most states, the defendant must still have sufficient minimum contacts within the state of the court that is serving the defendant. If Caterpillar did not sell products in the state of Kentucky, then there would be no sufficient minimum contacts within the state of Kentucky for the court to exercise in personam jurisdiction over Caterpillar.

2. Yes. The Caterpillar case would have been held at the state court level because its subject matterproduct liability and negligence- do not place the case under the exclusive jurisdiction of the federal court system.

3. While Facebook‘s forum selection clause may be sound, the court could very well rule it unreasonable in this case and refuse to enforce it. Facebook simply has far more resources and incurs less of a burden to send their lawyers to New York than for the plaintiff to send their counsel to California.

LECTURE NOTES WITH DEFINITIONS A. In the News…

Teaching tip: For each chapter, consider asking students to relate current news items to material from the chapter.

In addition to ideas students come up with on their own, consider weaving in news stories provided by the textbook publisher.

For Chapter Three, McGraw Hill offers the following story: ―Courtroom or Circus: The Controversial Judge in Anna Nicole Smith‘s Courtroom Battle Over Her Body Behaves Oddly.‖  Under what circumstances are trials likely to become a circus?  How might circus-like trials affect how Americans view their own legal system?  How might circus-like trials affect how individuals outside our country view the American legal system?

B. What are the different types of jurisdiction a court must have before it can render a 

binding decision in a case?

General Terms Plaintiff is the person or party initiating a civil lawsuit.

Defendant is the person or party against whom a lawsuit has been initiated.

Trial courts are the courts in which most criminal and civil cases start. These courts are responsible for determining motions and conducting hearings and trials.

Appellate courts are courts which review decisions of trial courts in order to determine if their 4-18 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

decisions are consistent with the requirements of the law.

Questions of law are issues concerning the interpretation or application of the law. Such questions may be resolved by trial and appellate courts.

Questions of fact are issues about an event or circumstance in a case. Such questions are exclusively resolved by trial courts.

Complaint is the pleading setting forth the factual background, legal theories and relief sought by the plaintiff in his or her case.

Summons is the document notifying the defendant of the filing of the case. It is served on the defendant as noted below.  Original Versus Appellate Jurisdiction o Original jurisdiction refers to the power to hear and decide cases when they first enter the legal system. In courts of original jurisdiction, evidence is presented and witnesses testify. o Appellate jurisdiction refers to the power to review previous judicial decisions to determine whether a trial court erred. Appellate judges review transcripts of court proceedings and consider oral/ written arguments.  Jurisdiction over Persons and Property o In personam jurisdiction (jurisdiction over the person) refers to the power to render decisions affecting a specific person's rights. This form of jurisdiction is limited to a particular geographic area. A court acquires in personam jurisdiction over a plaintiff when she files a complaint, and over a defendant when she is served a copy of the complaint and summons. Service of process usually means personal service, but can sometimes mean residential service. For corporations, the president or an agent receives service. Corporations are subject to personal jurisdiction in their state of incorporation, location of their main office, or location of conducting business. Long-arm statutes enable court to serve defendants outside the state. o in rem jurisdiction refers to jurisdiction over property.  Subject matter jurisdiction refers to the power of the court to hear certain kinds of cases. o Exclusive Federal Jurisdiction means these kinds of cases can be heard only in federal court only: admiralty, bankruptcy, federal criminal prosecutions, lawsuits by one state against another, and claims against the United States, and claims arising under federal statutes that specify exclusive federal jurisdiction. o State Jurisdiction means that state courts have the power to hear all cases not within the exclusive jurisdiction of the federal court system. o Concurrent Federal Jurisdiction means that sometimes both state and federal court systems have jurisdiction. Two types of cases concurrent jurisdiction: (1) federal question - requires interpretation of Constitution, federal statute, or federal treaty; and (2) diversity of citizenship, when the plaintiff and defendant reside in different states and amount in controversy is in excess of $75,000. Diversity must be complete. Defendants have the right to remove cases from state to federal court.

Teaching tip: Students often assume federal courts are more important than state courts. Why is this assumption false? Which courts hear the most cases?

C. What is venue?

Venue refers to the geographic location of the trial court that will hear the case.

D. What are the threshold requirements that must be met before a court will hear a case?

 

Standing—person who has the legal right to bring the action and is legally affected by the outcome of a case.

Case or controversy—there must be: 1. adverse relationship between parties, 4-19

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2. actual or threatened actions of at least one of the parties must give rise to 

an actual legal dispute, and 3. courts must have ability to render decision that will resolve the dispute.

Ripeness—a judge‘s decision must be capable of affecting parties immediately.

E. What are the steps in civil litigation?     

Pretrial Stage—before the trial Trial Parties engage in informal negotiations.

Parties submit pleadings, such as the complaint.

Parties are served, which means they are given notice of the lawsuit.

A default judgment is a judgment in favor of the plaintiff that occurs when the defendant fails to answer the complaint and the plaintiff‘s complaint alleges facts that would support such a judgment.  The defendant responds.

The defendant can file a motion to dismiss, a reply, or a counterclaim.  Parties submit pretrial motions, which provide parameters on how the trial will be conducted.

A motion for summary judgment asserts that no factual disputes exist, and that the judge must rule in favor of one of the parties.  Parties engage in discovery, e.g, they find all the evidence they need to prove or defend a claim.

Interrogatories are written questions submitted to parties that must be answered in writing under oath.

Requests for Production are submitted to parties seeking tangible evidence.

Depositions may be used to elicit oral answers under oath to questions submitted by attorneys to parties and third persons.  A pretrial conference is an informal meeting where parties may reach an agreement, or prepare for what will and will not take place at the trial.  Trial  A jury is selected.

Peremptory challenges allow attorneys to remove jury candidates without stating a reason.

Foster v. Chatman (briefed below) considers allegations of race discrimination in the use of peremptory challenges.  Parties make opening statements.  Witnesses are examined, evidence is presented.  Parties make closing arguments.  The judge gives the jury instructions.  Parties make post-trial motions.

Teaching tip: Choose two different cases from the chapter. How far did the plaintiffs in the two cases you chose get in the litigation process? Consider asking students to continue to look back at the entire legal process to see how far plaintiffs got in each case. The point is that it is more difficult to get through the litigation process than most Americans believe.  Appellate Procedure—after the trial o Parties allege errors. o Parties submit briefs, outlining their arguments about the alleged errors.

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o

Appellate courts may affirm the decision of the lower court, modify it, reverse it, or remand it. o The U.S. Supreme Court sometimes hears appeals.

A writ of certiorari is a petition in which the U.S. Supreme Court asks a lower court to send the U.S. Supreme Court a record of a case so it can review the case.

Teaching tip: Be prepared to present a list of two or three cases currently pending before the U.S. Supreme Court. Ask the students: Why these particular cases? Why would the U.S. Supreme Court choose each one, given the large number of writs of certiorari the Court receives each term?

F. How are the various forms of Alternative Dispute Resolution used by businesses today?

The various forms of ADR, primarily negotiation, mediation, and arbitration, are commonly used by businesses today:  to save time and money  to avoid the uncertainty associated with a jury decision and gain more control over the resolution of the dispute  to avoid setting a precedent through a court decision  to maintain confidentiality  to preserve a business relationship

Point/Counterpoint: Should Courts Increase Their Use of Service

by Social Media?

Teaching tip: Here are some questions to help you tie the Point/Counterpoint into class discussion:  What values are being promoted by each argument?  Would using social media to serve someone save enough time and money to be worth doing?

4. CASE BRIEFS WITH ANSWERS TO THE QUESTIONS Case 3-1 Hertz Corp. v. Friend, U.S. Supreme Court 130 S. Ct. 1181 (2010) Case Brief Issue: Did the court of appeals err in finding California to be Hertz‘s primary place of business for purposes of jurisdiction?

Facts: California employees of Hertz sued the company in California state court alleging violations of the state‘s wage and hour laws. Hertz removed the case to federal district court on the basis of diversity of citizenship. Hertz claimed that it was a citizen of the state of New Jersey as its principal place of business was located there. The district court concluded that there was no diversity as Hertz‘s primary place of business was California. Hertz appealed to the Ninth Circuit Court of Appeals, which affirmed the district court‘s holding. Hertz appealed to the U.S. 4-21 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Supreme Court.

Reasoning: The ―principal place of business‖ test is best determined by referring to the place where a corporation‘s officers direct, control and coordinate corporate activities. This is otherwise known as the ―nerve center‖ test. In practice, this is usually where the corporation maintains its headquarters, which in this case would be New Jersey. The Court cited three reasons for adoption of this test. Initially, this approach is consistent with the language of the jurisdictional statute at issue, which references ―principal place‖ of business. Second, administrative simplicity is desirable with respect to this otherwise complicated issue. Finally, the statute‘s legislative history suggests that the term ―principal place of business‖ should be interpreted in a relatively easy to apply manner. The ―nerve center‖ test is far easier to apply in this regard than the ―general business activities‖ test applied by the district court and the court of appeals.

Decision and Remedy: The U.S. Supreme Court remanded the case to the district court in order to determine Hertz‘s primary place of business utilizing the ―nerve center‖ test.

Legal Significance: This case is important because it shows the difficulties in determining corporate citizenship and affirms the necessity of examining each case on an individual basis to determine the principal place of business.

ANSWERS TO THE QUESTIONS Critical Thinking The principal critical thinking skill at issue in this case is application. Although the Court focused on the ―nerve center‖ test, it remains to be seen how this test will apply in actual practice in the determination of a corporation‘s primary place of business. The district court on remand will apply this test without specific guidance from the U.S. Supreme Court on what it believes to be the proper outcome in the case.

Ethical Decision Making The primary value underlying the court‘s opinion in this case was efficiency.

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Case 3-2 Atlantic Marine Construction Company, Inc. v. United States District Court for the Western District of Texas et al., U. S. Supreme Court, 134 S. Ct. 568 (2013) Case Brief Issue: Did the forum-selection clause give Atlantic the ability to dismiss the case?

Facts: Atlantic Construction Company, located in Virginia, subcontracted with Texas-based J-Crew Management. Despite the contract containing a clause stating that any dispute would be litigated in Virginia, J-Crew brought suit against Atlantic in the District Court for the Western District of Texas for failure to pay J-Crew for work it performed. Atlantic moved to dismiss the suit, arguing that the forum selection clause required the suit to be brought in Virginia.

Procedural History: The District Court denied Atlantic's motions, claiming that Atlantic did not show why it was in the interest of justice to hear the trial in Virginia. Atlantic appealed, and the court of appeals denied Atlantic's motions on the ground that a Texas court was proper venue given that the parties entered into and performed the agreement in that district. Atlantic appealed to the Supreme Court.

Holding: The Supreme Court reversed and remanded the court of appeals' decision; the lower court was to decide if Atlantic had grounds to transfer the case instead of dismissing it.

Reasoning: 

The Court argued that under USC §1404(a), a case should be transferred to a more convenient forum if there are good reasons to do so. The need to transfer overrides the need to dismiss.  Thus, given the valid forum-selection clause, the case in question should be transferred to a Virginia court instead of being dismissed.

Legal Significance: This case shows that if transferring a case is possible, a court will likely impose that option before simply dismissing the case.

ANSWERS TO THE QUESTIONS Critical Thinking The fact that has the most impact on the case is the fact that Atlantic and J-Crew agreed upon a forum-selection clause that stipulates that any dispute between the parties would be litigated in Virginia. The fact is heavily relied on in this case because it not only means that J-Crew cannot attempt to have the case litigated in Texas, but it also means that Atlantic cannot simply dismiss the case instead of having it moved to Virginia.

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Ethical Decision Making The value being upheld here is responsibility, in that both parties are being held to the agreement they signed and must settle their dispute fairly instead of holding the trial in an unfair location or just outright dismissing the claims.

Case 3-3 Flowers v. Mississippi, No. 17-9572, 588 U.S. ___ (2019).

Case Brief Issue: Did the prosecutor improperly use its preemptory strikes to exclude black jurors?

Facts: Curtis Flowers has been tried six separate times for the murder of four employees of a Mississippi furniture store. Flowers is black; three of the four victims were white. In five of the six trials, the State used its preemptory strikes exclusively against black jurors (no racial information existed regarding the prospective jurors in the fifth trial).

Procedural History: Flowers was sentenced to death in his first three trials, but each verdict was overturned by the Mississippi Supreme Court based on prosecutorial misconduct. Flowers‘ fourth and fifth trials ended in mistrials. At the sixth trial, the State exercised six peremptory strikes—five against black prospective jurors, allowing one black juror to be seated. Flowers re-petitioned his case to the Supreme Court.

Holding: The Supreme Court held that the prosecution had violated the Batson rule in its jury selection process and therefore found in favor of Flowers.

Reasoning: In the six trials combined, the State struck 41 of the 42 black prospective jurors it could have struck. At the sixth trial, the State struck five of six. At the sixth trial, moreover, the State engaged in dramatically disparate questioning of black and white prospective jurors. The prosecutors clearly violated Batson in striking the black jurors.

Legal Significance: This case illustrates a successful Batson challenge and thereby helps outline what a court will allow in the jury selection process.

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ANSWERS TO THE QUESTIONS Critical Thinking The problem with the Batson criteria is that it can be very easy for the prosecution to make up a race-neutral explanation when accused of using race as a factor. Even if someone can prove race discrimination, third step also requires the court to determine that the prosecution knowingly discriminated, which can be very difficult to do if the prosecution plays its cards right. In other words, the Batson rule seems relatively easy to circumvent.

Ethical Decision Making This decision emphasizes fairness, especially the kind of fairness promoted by the Sixth Amendment‘s guarantee of a trial by a jury of one‘s peers.

5. TEACHING SKILLS: PRACTICE ASKING QUESTIONS THAT ENCOURAGE STUDENTS TO EXPLAIN RELATIONSHIPS Integrative questions

  

  

How is this idea similar or different from other ideas we have encountered?

Are there elements of any other common belief systems (conservatism, liberalism, multiculturalism, feminism, etc.) found?

What is the idea reacting against? If this idea is reactionary, does it reject all of the idea that it is reacting against? Is the new idea similar with slight alterations? What is the significance of those alterations in light of the overall goals of the new idea?

What form of social policy would this ideology dictate, if any?

In what context must the argument be viewed? Could its premises be misconstrued if viewed from different disciplinary/cultural perspectives? Why or why not?

How does our legal system apply to this philosophy and vice versa? Can they coexist, or do they clash?

6. TIPS FOR BUSINESS MANAGERS 1. As a manager, take some time to familiarize yourself with basic legal terms and concepts (reading this book is a great way to do so!). Your primary job is to help run a business, sure, but even when things seem to be going well, legal disputes involving you, your employees or your business can arise without warning. Should a situation occur such that you need to be involved in litigation, you do not want to be going in blind.

2. For better or for worse, the U.S. legal system values justice over efficiency. Thus, trials and litigation are time-consuming and expensive processes that are tedious for just about everyone involved. Many trials, especially those involving contract or employment disputes, can be largely avoided if proper care is taken to ensure that contracts and 4-25 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

agreements are properly and thoroughly drafted. Insist that all contracts and agreements your business makes are in writing and consider hiring a lawyer to make sure they cover most contingencies. You may be saving yourself a lot of time and money down the road.

3. A large part of running a business involves ensuring that your business is complying with all local, state and federal statutes. Another way to avoid costly litigation is to take care in making sure that your business is not violating any laws, no matter how minor. You may consider hiring a compliance expert whose job is to make sure your business is constantly operating within the confines of the law. It may be wise to familiarize yourself with your relevant local, state, and federal court systems as well. Some courts favor businesses while others favor consumers, and it would be wise to know the attitude of your court before filing a claim there.

7. TEACHING IDEAS Pelman v. McDonald’s (which follows) is an extra case you can use as the basis for in-class discussion and assignments.

Connecting to the Core

Teaching Basics

Advanced Teaching

Ask your students to write a 3-5 page paper, outlining changes McDonald‘s has made to its menu within the last three years. Why has McDonald‘s made these changes? Has litigation such has the Pelman case had any impact, even though the plaintiffs were unsuccessful in Pelman? From a marketing standpoint, was it wise for McDonald‘s to change its menu items? How have the changes in the menu affected production at individual McDonald‘s outlets?

Practice asking basic questions about the Pelman case. Try these: 

Why did the plaintiff and defendant care about subject matter jurisdiction in the Pelman case? Where did the plaintiffs want the case to be heard? What about the defendants? Who won on this issue? Why?



Chapter Three describes the steps in civil litigation. How far did the plaintiffs in the Pelman case get? Why did McDonald‘s get what it wanted?



If this case had gone to trial, why would jury selection have been important? Describe the kind of jurors you would want if you were on Pelman‘s side. Describe the kind of jurors you would want if you were on McDonald‘s side.

Here are some advanced questions: 

What primary value underlies Judge Sweet‘s decision? Identify the value, define it, and then use language from the case to support your answer.



Judges use analogous reasoning in their decisions. What analogies did Judge Sweet use in rejecting the plaintiffs‘ first negligence claim, presented in Count III?



Find the rule the court used in Count III to reject the plaintiffs‘ claims.

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Where did the rule come from?

Pelman ex rel. Pelman v. McDonald's Corp.* 396 F.3d 508 C.A.2 (N.Y.),2005.

Jan 25, 2005 (Approx. 4 pages)

United States Court of Appeals, Second Circuit.

Ashley PELMAN, a child under the age of 18 years, by her mother and natural guardian, Roberta PELMAN, Roberta Pelman, Individually, Jazlen Bradley, a child under the age of 18 years, by her father and natural guardian, Isreal Bradley, and Isreal Bradley, Individually, Plaintiffs-Appellants, v.

MCDONALD'S CORPORATION, McDonald's Restaurants of New York, Inc., McDonald's, 1865 Bruckner Boulevard, Bronx, New York and McDonald's, 2630 Jerome Avenue, Bronx, New York, Defendants-Appellees.

No. 03-9010.

Argued: Oct. 13, 2004.

Decided: Jan. 25, 2005.

Background: Two minor customers of fast food restaurant chain sued chain claiming consumption of chain's food caused obesity and related serious health problems, and that chain violated false advertising and deceptive trade practices provisions of the New York Consumer Protection Act. The District Court, Sweet, J., 237 F.Supp.2d 512, dismissed complaint with leave to amend. Following amendment, restaurant chain moved to dismiss. The United States District Court for the Southern District of New York, Robert W. Sweet, J., 2003 WL 22052778, again dismissed. Customers appealed.

Holding: The Court of Appeals, Rakoff, District Judge, sitting by designation, held that allegations stated claim against chain for violation of deceptive trade practices provision of New York Consumer Protection Act. Vacated and remanded.

Allegations by minor customers of fast food restaurant chain that alleged deceptive trade practices by chain, including chain's failure to disclose its use of certain additives and food processing methods, and its failure to provide nutritional information about its food, caused customers' obesity and related adverse health problems stated claim against chain for violation of deceptive trade practices provision of New York Consumer Protection Act, despite customers' failure to disclose the other foods they ate, how much they exercised, and whether they had family history of health problems alleged to have been caused by chain's food; missing information was appropriately the subject of discovery, rather than what was required to satisfy notice-pleading requirements.

RAKOFF, District Judge.

* Parts of the Pelman case were reformatted for easier reading.

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In this diversity action, plaintiffs Ashley Pelman and Jazlen Bradley, by their respective parents, Roberta Pelman and Isreal Bradley, appeal from the dismissal, pursuant to Rule 12(b)(6), Fed.R.Civ.P., of Counts I-III of their amended complaint. See Pelman v. McDonald’s Corp., 2003 WL 22052778 (S.D.N.Y. Sept.

3, 2003), 2003 U.S. Dist. LEXIS 15202 ("Pelman II "). [FN1] Each of the these counts purports to *510 allege, on behalf of a putative class of consumers, that defendant McDonald's Corporation [FN2] violated both § 349 and § 350 of the New York General Business Law, commonly known as the New York Consumer Protection Act, during the years 1987 through 2002.

Specifically, Count I alleges that the combined effect of McDonald's various promotional representations during this period was to create the false impression that its food products were nutritionally beneficial and part of a healthy lifestyle if consumed daily. Count II alleges that McDonald's failed adequately to disclose that its use of certain additives and the manner of its food processing rendered certain of its foods substantially less healthy than represented.

Count III alleges that McDonald's deceptively represented that it would provide nutritional information to its New York customers [FN3] when in reality such information was not readily available at a significant number of McDonald's outlets in New York visited by the plaintiffs and others.

The amended complaint further alleges that as a result of these deceptive practices, plaintiffs, who ate at McDonald's three to five times a week throughout the years in question, were "led to believe[ ] that [McDonald's] foods were healthy and wholesome, not as detrimental to their health as medical and scientific studies have shown, ... [and] of a beneficial nutritional value," and that they "would not have purchased and/or consumed the Defendant's aforementioned products, in their entire[t]y, or on such frequency but for the aforementioned alleged representations and campaigns." Finally, the amended complaint alleges that, as a result, plaintiffs have developed "obesity, diabetes, coronary heart disease, high blood pressure, elevated cholesterol intake, related cancers, and/or other detrimental and adverse health effects ...."

What is missing from the amended complaint, however, is any express allegation that any plaintiff specifically relied to his/her detriment on any particular representation made in any particular McDonald's advertisement or promotional material. The district court concluded that, with one exception, the absence of such a particularized allegation of reliance warranted dismissal of the claims under § 350 of the New York General Business Law, which prohibits false advertising. Pelman II, 2003 U.S. Dist. LEXIS 15202, at *25-*26. As to the exception--involving McDonald's representations that its French fries and hash browns are made with 100% vegetable oil and/or are cholesterol-free-- the district *511 court found that, while the amended complaint might be read to allege implicit reliance by plaintiffs on such representations, see id., at *30, the representations themselves were objectively nonmisleading, see id., at *35.

[1] Although plaintiffs' notice of appeal states that they challenge the judgment "dismissing the Plaintiffs' Amended Complaint," their brief on appeal contains no argument as to why the district court's dismissal of the claims asserted under § 350 was incorrect. Accordingly, we regard any challenge to the dismissal of the § 350 claims as abandoned. See generally Otero v. Bridgeport Hous. Auth., 297 F.3d 142, 144 (2d Cir.2002); Day v. Morgenthau, 909 F.2d 75, 76 (2d Cir.1990); Fed. R.App. P. 28(a)(9).

[2] [3] Plaintiffs' appellate brief does, however, challenge the district court's dismissal of the claims under § 349 of the New York General Business Law, which makes unlawful "[d]eceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service in this state." Unlike a private action brought under § 350, a private action brought under § 349 does not require proof of actual reliance. See Stutman v. Chem. Bank, 95 N.Y.2d 24, 29, 709 N.Y.S.2d 892, 731 N.E.2d 608 (2000).

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[FN4] Additionally, because § 349 extends well beyond common-law fraud to cover a broad range of deceptive practices, see Gaidon, 94 N.Y.2d at 343, 704 N.Y.S.2d 177, 725 N.E.2d 598, and because a private action under § 349 does not require proof of the same essential elements (such as reliance) as common-law fraud, an action under § 349 is not subject to the pleading-with-particularity requirements of Rule 9(b), Fed.R.Civ.P., but need only meet the bare-bones notice-pleading requirements of Rule 8(a), Fed.R.Civ.P., see generally Swierkiewicz v. Sorema N.A., 534 U.S. 506, 513, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002); Leatherman v. Tarrant County Narcotics Intelligence and Coordination Unit, 507 U.S. 163, 168, 113 S.Ct. 1160, 122 L.Ed.2d 517 (1993).

FN4. Originally this was because the statute, which applies to a broad range of deceptive practices regardless of the perpetrator's intent, was only enforceable by the Attorney General. See Blue Cross and Blue Shield of N.J., Inc. v. Philip Morris, Inc., 3 N.Y.3d 200, 205, 785 N.Y.S.2d 399, 818 N.E.2d 1140 (2004); Gaidon v. Guardian Life Ins. Co. of Am., 94 N.Y.2d 330, 343, 704 N.Y.S.2d 177, 725 N.E.2d 598 (1999); N.Y. Gen. Bus. Law §§ 349(a)-(b). In 1980, however, § 349 was amended to provide a private right of action for "any person who has been injured by reason of any violation of this section." See N.Y. Gen. Bus. Law § 349(h). While the "by reason of" language might have been read to require reliance, as was the case with respect to the comparable language of § 350-e(3) permitting a private right of action under § 350, the New York courts, in keeping with the prophylactic purposes of § 349, instead required that a plaintiff seeking to recover under § 349 show only that the practice complained of was objectively misleading or deceptive and that he had suffered injury "as a result" of the practice. See Stutman. 95 N.Y.2d at 29, 709 N.Y.S.2d 892, 731 N.E.2d 608.

[4] Although the district court recognized that § 349 does not require proof of reliance, the district court nonetheless dismissed the claims under § 349 because it concluded that "[p]laintiffs have failed, however, to draw an adequate causal connection between their consumption of McDonald's food and their alleged injuries." Pelman II, 2003 U.S. Dist. LEXIS 15202, at * 30. Thus, the district court found it fatal that the complaint did not answer such questions as: What else did the plaintiffs eat? How much did they exercise? Is there a family history of the diseases which are alleged to have been caused by McDonald's *512 products? Without this additional information, McDonald's does not have sufficient information to determine if its foods are the cause of plaintiffs' obesity, or if instead McDonald's foods are only a contributing factor.

Id. at *33. This, however, is the sort of information that is appropriately the subject of discovery, rather than what is required to satisfy the limited pleading requirements of Rule 8(a), Fed.R.Civ.P. As a unanimous Supreme Court stated in Swierkiewicz: This simplified notice pleading standard [of Rule 8(a) ] relies on liberal discovery rules and summary judgment motions to define disputed facts and issues and to dispose of unmeritorious claims. "The provisions for discovery are so flexible and the provisions for pretrial procedure and summary judgment so effective, that attempted surprise in federal practice is aborted very easily, synthetic issues detected, and the gravamen of the dispute brought frankly into the open for the inspection of the court."

534 U.S. at 512-13, 122 S.Ct. 992 (quoting 5 Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure § 1202, at 76 (2d ed.1990)) (internal citations omitted). So far as the § 349 claims are concerned, the amended complaint more than meets the requirements of Rule 8(a). [FN5] FN5. Although the district court also dismissed the § 349 claims on the ground that plaintiffs' allegations of a generalized campaign to create a false impression were vague and conclusory, see Pelman II, 2003 U.S. Dist. LEXIS 15202, at *22-*26, the cure for such deficiencies, in a claim not required to be plead with particularity, is a motion for a more definite statement under Rule 12(e), Fed.R.Civ.P., rather than dismissal, see Swierkiewicz, 534 U.S. at 514-15, 122 S.Ct. 992. As for the district court's finding that McDonald's representations regarding its French fries and hash browns were objectively nonmisleading, the § 349 claims are not subject to dismissal on that basis given that the amended complaint alleges the deceptiveness of many other representations.

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Accordingly, the district court's dismissal of those portions of Counts I-III of the amended complaint as alleged violations of § 349 is VACATED, and the case is REMANDED for further proceedings consistent with this opinion.

C.A.2 (N.Y.),2005.

Pelman ex rel. Pelman v. McDonald's Corp.

396 F.3d 508 (C) 2005 Thomson/West. No Claim to Orig

CASE OPENER WRAP-UP: Caterpillar The timing of events was crucial to the outcome of the Caterpillar case. At the time Lewis filed the case in the state court system, one of the defendants and the plaintiff were from the same state, so the state court system has jurisdiction. Once the supply company reached an agreement with Lewis, the other defendant, Caterpillar, filed a motion to exercise its right of removal because diversity of citizenship existed in the absence of the Kentucky defendant. But the agreement was not final at the time of the motion because the agreement was subject to the insurer‘s approval. Thus, the appellate court ruled that because the supply company was still a party to the agreement, the federal court system could not exercise jurisdiction over the case.

The U.S. Supreme Court, however, overruled the appellate court. The Supreme Court ruled that the state court should not have granted Caterpillar‘s initial motion to remove the case because at the time of removal, the insurer had not accepted the settlement agreement, the supply company remained a party in the case, and, therefore, the diversity of citizenship was not complete. The Supreme Court held further, however, that the district court‘s error in hearing the case was not fatal because the settlement agreement was approved and the case satisfied the jurisdictional requirements by the time the federal court issued its decision. The Court ruled that to require the district court to send the case back to the state system would be an undue waste of judicial resources.

Why might Caterpillar have wanted to move the case to the federal court system? First, the case involved product liability claims. Data suggest that average damage awards in product liability cases tend to be higher in state courts than in federal courts. Second, Caterpillar may have feared local prejudice.

While all judges must strive for neutrality, out-of-state defendants may fear that state judges are slightly biased in favor of in-state parties.

8. ANSWERS TO QUESTIONS AND PROBLEMS 1. For a court to hear a case and render a binding decision over the parties it needs to have both jurisdiction over persons and property and also subject matter jurisdiction. Jurisdiction over persons and property is the power of the court to render a decision affecting the person or the property in question. Jurisdiction over a person is referred to as in personam jurisdiction or jurisdiction over the person. The court can gain this jurisdiction over a plaintiff simply by the filing of a lawsuit by the plaintiff. Once the defendant has been served with the papers stating the claim against them, the court gains jurisdiction over this person. The other type of jurisdiction needed is subject matter jurisdiction. Subject matter jurisdiction is the power of the court to hear certain kinds of cases. Subject matter jurisdiction determines which court system, state or federal, will hear the case. Subject matter jurisdiction leads to three possible scenarios: state jurisdiction of the case, exclusive federal jurisdiction of the case, or concurrent jurisdiction of the case.

2. Trial courts are "courts of original jurisdiction." Trial courts are the courts that first hear and decide cases when they enter the legal system. These courts are where evidence is presented and witnesses testify. Appellate courts, on the other hand, have the power to review previous judicial 4-30 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

decisions to determine whether the trial court erred in its decision. Appellate courts do not have trials, in the sense that trial courts have trials. Rather, appellate courts review transcripts of trial court proceedings and often times take oral and written arguments from each side to determine if the original trial's decision was erroneous. In an appellate court, the original trial is on trial, not a person or corporation as in a trial court case.

3. Three tools for discovery are: interrogatories, requests to produce documents, and depositions. Interrogatories are a serious of written questions sent to the opposing party that must be answered under oath. Requests to produce documents are exactly what they sound like, requests for the other party to turn over desired documents. A request to produce documents forces the other party to turn over the requested information, unless it is protected under privilege or is irrelevant to the case. Finally, depositions are testimony made under oath before the actual trial. Depositions are made under questioning from the attorneys and are transcribed by a court reporter so that both sides may have this information at the actual trial.

4. The three threshold requirements that are necessary for a case to be litigated are: standing, case or controversy, and ripeness. Standing is the condition a person can have that allows him or her the legal right to bring action. To have standing one must be personally affected by the outcome of the case; that is, one must have a personal stake in the matter. Also, it is required that the person can show that they were injured in some way by the defendant and that the awarding of a favorable decision to the plaintiff will redress the injury suffered. Case or controversy means that the court will not render advisory opinions. For case or controversy to exist three things are required. First, the parties involved must be adversely related. Secondly, actions, threatened or real, taken by at least one of the parties must be the source of an actual legal dispute. Finally, case or controversy requires that the court be able to render a verdict that will settle the dispute.

The decision must be based on actual situations and not hypotheticals. Ripeness is the requirement that the judge's decision be capable of immediately impacting the parties involved.

Cases where the judgment, whatever it might be, cannot affect the parties involved are considered to be moot and lacking in ripeness.

5. This difference may lead to different rulings on similar cases because state court judges have to worry about being elected for another term. Therefore, they may rule in favor of those who will vote for them when it is election time again. On the other hand, federal court judges do not have to worry about not being elected for another term. Appointments may help reduce rulings in favor of a judge‘s special interests. The advantages of being elected are that the majority of the population views the judges as people they voted for and thus judges they trust. Also, when judges are elected they are better in touch with the public that they serve. The disadvantages are that the public may not be well-equipped to decide who the most qualified judges are and there may be a conflict of interest when a judge is elected because they will continually have to worry about campaign contributions and running for the next term. The advantages of an appointment of judges for life are that the judges do not have to worry about running for office again, which reduces conflicts of interest, and that the President may be more qualified to chose a judge than the public. The disadvantages of electing a judge are that the people do not have a say and thus there is a distant relationship between the citizens and those who regulate the law.

6. The defense was not valid. In this case, the court ruled that due process only requires that a defendant ―have certain minimum contacts with [a state] such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice. In other words, a 4-31 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

defendant must have ―fair warning that a particular activity may subject them to the jurisdiction of a foreign sovereign.‖ In this case, minimum contacts existed.

7. The United States Supreme Court, unlike the lower courts, granted the defendants their writ of prohibition. The Supreme Court found that the defendants had no contracts, ties, or relations with the state of Oklahoma and therefore could not be brought to court in the state of Oklahoma.

The lack of ties between the defendant and the state of Oklahoma created a situation in which the state could not exercise in personam jurisdiction over the defendants. Accordingly, the Supreme Court dismissed the charges against the defendants.

8. The court granted the Organization‘s motion to dismiss. For a plaintiff to have standing, they must have suffered an ―injury in fact,‖ or an invasion of a legally protected interest which is concrete, particularized, and actual or imminent. Here, Castillo had never visited the Charles Playhouse, nor had the Organization physically barred her from entering. Castillo had not purchased a ticket and made no attempt to contact the Organization to request accommodation; thus, she had not been refused service. The court held that Castillo had suffered no injury in fact, and therefore she did not have standing.

9. Upon reconsideration, the court granted the plaintiff's motion. The court based their decision off of the Supreme Court case Walden v. Fiore, where the Supreme Court argued that ―the proper question is not where the plaintiff experienced a particular injury or the effect but whether the defendant's conduct connects him to the forum in a meaningful way.‖ The court argued that the behavior of these two companies did indeed connect them to the forum in a meaningful way; the evidence shows that the firms should have received the emails in their normal course of business, that the firms were likely ignoring the suit and that they therefore had no good reason to not appear at the designated forum.

10. In order for a plaintiff to have standing, or the ability to sue, the plaintiff must demonstrate that a concrete and particularized (not hypothetical or abstract) injury had occured, that the injury is fairly traceable to the challenged conduct of the defendant, and that the injury could likely be redressed by a favorable judicial decision.

First of all, the court ruled that Arpaio's claim did not demonstrate that a concrete and particularized injury had or will have occurred. The injury the Arpaio that was claiming was the hypothetical increase in crime that would come as a result of an influx immigrants under his jurisdiction that would supposedly follow the institution of DAPA. Second, Arpaio had argued that DACA had caused a migrant crisis when it was introduced, and that DAPA would do the same, resulting in more immigrants and more crime. The judge rejected this argument, stating, ―Just as we do not infer that the rooster‘s crow triggers the sunrise, we cannot infer based on chronology alone that DACA triggered the migrations that occurred two years later.‖ Thus, Arpaio failed to establish a causal link between the upcoming DAPA and a supposed increase in migration.

Finally, the court argued that it is not likely that a favorable judicial decision would solve Arpaio's supposed injury. DACA and DAPA only applied to non-dangerous immigrants and were designed to allow the DHS to ease off of immigrants who do not commit crimes in order to focus on removing immigrants who greatly disrupt public safety. Thus, under Arpaio's logic, a 4-32 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

―favorable‖ judicial decision (the repealing of DAPA) would actually make it harder to remove dangerous immigrants and worsen Arpaio's injury.

11. The appellate court affirmed the lower court‘s decision and enforced the handwritten agreement. In the handwritten agreement, Beverly offered to ―resolve this matter‖ if Abbot paid the $210,000 and mediation costs. The court held that the handwritten agreement sufficiently defined each parties‘ intentions and obligations and was therefore enforceable. Beverly argued that the handwritten agreement was not enforceable because it left out material terms that were included in the typed agreement. However, the court found Beverly‘s offer to ―resolve this matter‖ in the handwritten agreement was enough to express her acceptance, and that the anticipation of a more formal agreement does not invalidate an existing agreement.

12. The appellate court first reasoned that for Brown to claim that the court has specific jurisdiction over Lockheed, Brown‘s injuries would have had to occur from Lockheed‘s activities in Connecticut. Because this was not the case, Brown had to establish general jurisdiction over Lockheed. Brown argued that Lockheed‘s registration to do business in Connecticut indicated its consent to the exercise of general jurisdiction over it by Connecticut courts.

However, the court disagreed with Brown‘s arguments. Lockheed owns no property and maintains no offices in Connecticut. Although Lockheed‘s business in the state is not insubstantial, it represents a very small portion of Lockheed‘s enterprise; less than 0.05% of Lockheed‘s employees were based in Connecticut when the suit was filed, and the revenue generated from Connecticut operations was less than 0.107% of Lockheed‘s total annual revenue. Based on the precedent set in Daimler AG v. Bauman, ___ U.S. ___, 134 S.Ct. 746, 187 L.Ed.2d 624 (2014), the court held that Lockheed‘s business in Connecticut was far too insubstantial to exercise general jurisdiction over Lockheed. While it is true that Lockheed registered to do business in Connecticut, that fact alone is not enough to enforce general jurisdiction because it has nothing to do with whether a company actually does business in Connecticut. While a business technically can decide to consent to the application of general jurisdiction in a case like this one, there is not indication that Lockheed wished to do so. The appellate court affirmed the lower court‘s ruling.

Chapter 4: Administrative Law 1. CHAPTER OVERVIEW Not only are business subject to laws passed by Congress, but they are also subject to laws that administrative agencies pass, which are considered administrative laws. Administrative agencies are created to help the public's interest. Knowledge of the creation of administrative agencies, their primary function, and ways in which they are control is important as a business manager.

You might want to begin by asking students to read the chapter and reply to the review and case questions at the end of the chapter. Focus on the creation of administration agencies, the similarities and differences between types of administrative agencies, the functions of administrative agencies, and the limitations placed on administrative agencies.

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2. LEARNING OBJECTIVES After reading this chapter, students will be able to answer the following questions: 1. What is administrative law?

2. What is an administrative agency?

3. How and why are administrative agencies created?

4. What types of powers do administrative agencies have?

5. What is the difference between an executive agency and an independent agency?

6. What is the Administrative Procedures Act? 7. How do formal, informal and hybrid rulemaking differ from one another?

8. What are the limits on agency power?

3. BUT WHAT IF SECTIONS 1. If a member of the EPA argued that only Congress has the power to make this type of regulation, that EPA member would be incorrect. Enabling statutes grant agencies broad powers, such as rule making.

In this case, the Supreme Court ended up ruling that the Clean Air Act allows for the EPA to regulate emissions from automobiles.

2. The missing third prong that the EPA must include when publishing a rule in the Federal Registrar is a description of how the public can participate in this rule-making process.

4. LECTURE NOTES WITH DEFINITIONS A. In the news…

Teaching tip: For each chapter, consider asking students to relate current news items to material from the chapter.

In addition to ideas students come up with on their own, consider weaving in news stories provided by the textbook publisher.

For Chapter Four, McGraw Hill offers the following stories: ―Global Warming: Supreme Court orders the federal government to regulate greenhouse gas emissions from new cars (NBC)‖ • Which agencies are most likely to respond to this Supreme Court order?

• Why is the Supreme Court giving the order?

B. What is administrative law?

• Administrative law consists of the substantive and procedural rules created by administrative agencies.

Teaching tip: Encourage students to ―adopt‖ a federal agency and find out what it does with regard to rule-making, investigating, and adjudicating.

C. What is an administrative agency?

• An administrative agency is any body created by the legislative branch to carry out specific duties.

• An administrative law judge (ALJ) presides over an administrative hearing.

D. How and why are administrative agencies created?

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 

Agencies are created to do work that is too specific, burdensome, or outside the expertise of legislative bodies.

Enabling legislation specifies the name, functions, and specific powers of the administrative agency.

E. What types of powers do administrative agencies have?

• Agencies make rules, conduct investigations, and adjudicate (make decisions).

F. What is the difference between an executive agency and an independent agency?

• An executive agency includes a leader appointed by the president with the advice and consent of the U.S. Senate.

• An independent agency is governed by a board of commissioners. The president appoints the commissioners with the advice and consent of the Senate.

G. What is the Administrative Procedures Act? • The Administrative Procedures Act (APA) outlines how administrative agencies make rules.

H. How do formal, informal, and hybrid rulemaking differ from on another?

• Formal rule making—requires that all rule making include a public, formal hearing with a complete transcript. Witnesses give testimony about the pros and cons of a particular rule.

• Informal rule making—the proposed rule is published in the Federal Register, then there is an opportunity for public comment.

• Hybrid rule making—starts with publication in the Federal Register, followed by the opportunity for submission of written comments, then an informal public hearing with a more restricted opportunity for cross-examination than in formal rule making.

Teaching tip: Flip things around—now ask students to adopt an industry (e.g., trucking, funeral services, construction, etc.) and find out which agencies are the primary regulators in the industry.

I. What are the limits on agency power?

• Limitations on agency powers include: o Freedom of Information Act (FOIA)—allows citizens to have access to information from administrative agencies. o Government in the Sunshine Act—requires some meetings to be open to the public. o Privacy Act—places restrictions on the ability of administrative agencies to share information.

Wang v. Valverde (briefed below) illustrates limitations on an agency‘s use of its powers.

Point/Counterpoint: Do Agencies Have Too Much Power?

Teaching tip: Here are some questions to help you tie the Point/Counterpoint into class discussion:  If one is in favor of eliminating agencies, should we eliminate all agencies? Only eliminate some agencies?  Is it possible that some agencies have too much power, and some too little?

From whose perspective?

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5. CASE BRIEFS WITH ANSWERS TO THE QUESTIONS Case 4-1 Doe v. United States SEC, 2011 U.S. Dist. Lexis 114384, United States District Court for the Northern District of California, Eureka Division (2011).

Case Brief

Issue: Is the owner of the email address able to quash the subpoena on the grounds of anonymous speech?

Facts: The SEC issued an administrative subpoena on Google seeking the identity and contact information of the owner of the email address ―aurorapartners@gmail.com‖, which the SEC believed was used to tout the value of stock for ―Jammin Java Corp‖ in a ―pump and dump‖ scheme. Google informed the owner of the email address of the subpoena, the owner hired counsel, and counsel moved to quash the subpoena on the grounds that it violated the owner‘s right to anonymous speech.

Holding: The motion to quash the subpoena was denied.

Reasoning:   

Government agencies have the right investigate wrongdoing.

Specifically, the ECPA allows the SEC to issue administrative subpoenas requesting information from ISPs. The needs of a legitimate government investigation outweigh the interest of a party to remain anonymous.

ANSWERS TO THE QUESTIONS Critical Thinking The defendant argued that their speech was protected by the First Amendment and that therefore their speech was immune to litigation. This may be true, but the subpoena requested the identity of the defendant, which is not protected under the First Amendment, and had nothing to do with the content of the defendant‘s speech. The distinction would have probably been more clear had the court not focused so much on the content of the speech and just began with the argument that the defendant‘s identity is not protected.

Ethical Decision Making On the one hand, some may argue that a person has the natural right to engage in anonymous free speech, and that it is just as ethical to be critical anonymously as it would be to do so with a name attached. This stance is not necessarily incompatible with the golden rule, as someone who criticizes anonymously may 4-3 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

acknowledge and accept the fact that they may be anonymously criticized themselves and see the action as fair.

On the other hand, some may see anonymous criticism as unethical because it becomes extremely difficult to hold people accountable for their statements if they are posting anonymously. People may be able to make harmful speech without repercussion. Likewise, some may argue that anonymous posting violates the golden rule because it allows a person to criticize someone without people knowing whom to counter-criticize if they wish to do so.

Case 4-2 Wang v. Valverde, 162 Cal. App. 4th 616 (CA Court of Appeals 2008).

Case Brief

Issue: Does the Vehicle Code empower the state to revoke a driver‘s license if the driver cheated on the test for a different driver‘s license?

Facts: Wang‘s Class C noncommercial driver‘s license was revoked by the Department of Motor vehicles after she was caught cheating on the examination for a Class B commercial driver‘s license. Wang sued.

Procedural History: The trial court found in favor of Wang and ordered her Class C license reinstated. The Department of Motor Vehicles appealed.

Holding: Affirmed. The Department of Motor Vehicles could not revoke Wang‘s Class C license based upon her alleged cheating on the Class B examination.

Reasoning: 

The Department of Motor vehicles‘ interpretation of the Vehicle Code relating to Class B and C licenses was unreasonable and not entitled to deference. According to the Department, the Class C license of any unsuccessful Class B applicant was subject to forfeiture. This result was clearly not intended by the Vehicle Code, which imposed stricter requirements for obtaining Class B licenses.

ANSWERS TO THE QUESTIONS Critical Thinking Two facts may have changed the outcome. One such fact is if the state had prosecuted Wang for 4-4 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

cheating on the Class B examination. A second fact is if the Vehicle Code had clearly tied fraud in attempting to obtain one type of license to other related licenses held by the individual.

Ethical Decision Making The primary party with an interest in the outcome of this case is the community. While community members certainly want to ensure the integrity of the testing procedures, the community also has an interest in compliance by the Department of Motor Vehicles with the Vehicle Code in order to prevent the arbitrary revocation of licenses.

Case 4-3 Northwestern University and College Athletes Players Association (CAPA) Case 13-RC-121359, National Labor Relations Boards (NLRB) (March 26, 2014)

Case Brief Issue: Under the National Labor Relations Act, should student athletes who play football be deemed employees and given the right to collectively bargain?

Facts: Northwestern University maintains an intercollegiate athletic program wherein 112 football players participate, of which there are 85 players who receive football grant -in-aid scholarship. The players receiving this scholarship typically receive approximately $61,000 each academic year.

Procedural History: A petition was duly filed under Section 9(c) of the National Labor Relations Act, resulting in this hearing held before an officer of the National Labor Relations Boa rd.

Holding: Yes. Players receiving scholarships to perform football-related services under a contract are employees within the meaning of the Act.

Reasoning: 

Under the common law definition, an ―employee‖ is a person who performs a service for another under a contract of hire, subject to the employer‘s control, and in return for payment. The football players perform valuable services, generating revenue each year through ticket sales, television contracts, merchandise sales, and licensing agreements. The compensation provided to the football players is established in a ―tender‖ that they are required to sign before the beginning of each scholarship period, serving as a contract. Those players receiving scholarship are under strict and exacting control of the employer, the coach. For these reasons, the Board determined that the football players are indeed statutory employees.

ANSWERS TO THE QUESTIONS Critical Thinking Citing evidence of the coaching staff‘s control over the football player‘s life meets an element of the criteria for the common law definition of a statutory employee. As such, this information supports the NLRB‘s holding that a football player receiving scholarship under the control of the coaching staff is in fact a statutory employee.

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Ethical Decision Making Examples of future generations that may be affected by this decision are forthcoming non-athlete collegiate student bodies. If this decision holds, football players will have collective bargaining power, and thus, more power within the college community to make requests and demands. Additional power appointed to football players may diminish the power of other collegiate student bodies, such as when it comes time to allocate resources and attention to various student organizations.

Case 4-4: Chaverra v. United States Immigration and Customs Enforcement, 2018 U.S. Dist. LEXIS 169935 (2018)

Issue: Whether the FOIA provides an ―adequate remedy‖ for discovery of medical records, thereby foreclosing discovery requests pursuant to HIPAA‘s Privacy Rule as well as the APA?

Facts: On May 15, 2017, while detained in ICE custody at the Stewart Detention Center in Lumpkin, Georgia, Jimenez died in an apparent suicide. This unfortunate treatment spurred Jimenez‘s family—led by Chaverra—to seek more information about the circumstances of his death. Chaverra began his quest for information through the FOIA. He filed a request with ICE seeking ―all records, including medical, pertaining to‖ Jimenez. ICE ultimately denied the request. After several more attempts under FOIA followed by several denials, Chaverra sued ICE under HIPAA, arguing that HIPAA gave him a legal right to Jimenez‘s medical records.

Holding: Yes. FOIA does provide an adequate remedy, and thus Chaverra cannot pursue the records under HIPAA.

Reasoning:   

FOIA provides an adequate remedy for accessing the records Just because FOIA comes with exemptions and delays does not make it inadequate FOIA need not be the exclusive remedy to be adequate

ANSWERS TO THE QUESTIONS Critical Thinking The court points out that ICE has other avenues of providing medical records, such as an online portal.

But that method could, of course, come with its own issues, denials, and delays. On the one hand, Chaverra will probably get the information he seeks eventually after enough time and trial and error getting through ICE‘s FOIA process. On the other, one could argue that this process is so time-consuming and burdensome that it is a stretch to call it ―adequate.‖ Ethical Decision Making The value of fairness is in tension with the value of transparency in this case. Although Chaverra is in a sense entitled to transparency regarding Jimenez‘s medical records, he has to go through the same FOIA 4-6 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

process as everyone else, even though the information he seeks is very personal in nature.

6. TEACHING SKILLS: RELATE THE CHAPTER CONTENT TO SOMETHING REAL AND RECENT To try to generate interest in the law, make students see how the law plays out in the real world.

See the Centre Daily Times article, which follows.

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7. CASE OPENER WRAP-UP: EPA At the beginning of the chapter, you will recall that 19 private organizations had petitioned the EPA to require that it regulate carbon dioxide from automobile emissions. After holding hearings and requesting comments from the public, the EPA refused authority to regulate. The matter was appealed and eventually worked its way up to the U.S. Supreme Court. The Bush White House filed an amicus curie (i.e., ―friend of the court‖) brief arguing that the EPA was attempting to get the automobile industry to voluntarily reduce emissions. The Alliance of Automobile Manufacturers came to the EPA‘s defense, arguing that the EPA, as well as the states, had no authority to regulate automobile emissions.

In a 5-4 decision, the U.S. Supreme Court disagreed, holding that the Clean Air Act authorizes the EPA to regulate greenhouse gas emissions from new motor vehicles in the event that the EPA forms a ―judgment‖ that such admissions contribute to climate change. Moreover, the Court held that the Clean Air Act‘s definition of air pollutant includes carbon dioxide. As a result of the Court‘s decision, many are now calling for national standards on emissions from automobiles. 1

8. ANSWERS TO QUESTIONS AND PROBLEMS 1) The statute that creates and empowers an administrative agency.

2) Federal agency power is limited by the Constitution, federal statutes (including the enabling act) and judicial decisions. State agency power is subject to limitations created by the federal and state constitutions, federal and state statutes and the decisions of federal and state courts.

3) Agencies make rules, conduct investigations, and adjudicate (make decisions).

4) Three types of agencies are: executive, independent, and private agencies, 5) Informal rule making is a process used in situations where an agency's enabling legislation or other congressional directives do not require another form. No formal public hearing or formal record is needed, which makes informal rule making more effective for an agency, both in time and money. Because of the effectiveness of informal rule making, it is used more than formal rule making.

6) The Supreme Court ruled that the APA‘s notice-and-comment procedures only apply when enacting a legislative rule that has the ―force of law.‖ These procedures are not required when agencies enact interpretive rules, and therefore the procedures are not required when making subsequent interpretations. The Court also noted that the APA contains safeguards to prevent agencies from making substantive changes to legislate rules under the guise of ―interpretation.‖ 7) The Supreme Court held that courts must defer to an agency‘s interpretation of its jurisdiction when that jurisdiction is called into question. The Court reasoned that there is no real difference between regular ambiguity and ―important‖, ―jurisdictional‖ ambiguity. Whenever there is a new application of an ambiguous statutory term, courts must defer to the agency‘s interpretation so long as it is reasonable.

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Chapter 05 - Constitutional Law

8) The court held in favor of the Board of Immigration Appeals. A previously removed alien who re-entered the country illegally was not entitled to a hearing before an immigration judge with respect to the prior removal order. The procedures comported with due process and were a valid interpretation of the Immigration and Naturalization Act. 9) The court ruled that administrative procedures must be exhausted before the groups had grounds for a lawsuit. Thus, because the groups had failed to petition the state for rule making regarding forestry practices, the groups had not yet exhausted their possible administrative remedies and could not yet sue. The reasoning behind this policy is that a lawsuit should only be used as the last resort if there is no other way to solve the alleged problem.

10) The court ruled that the CFPB departs from settled historical practice regarding the structure of agencies due to it being led by one person. This departure makes a significant difference under the Constitution‘s separation of powers. Following precedent set by the Supreme Court, the court held that the CFPB was unconstitutionally structured.

11) The appellate court rejected Thormac‘s argument that the lower court had merely ―rubberstamped‖ the ABC Board‘s decision. The court is not required to provide its rationale for affirming the Board in substantial detail, and even so, the court did identify the basis of its conclusion. Furthermore, the Board‘s decision was not arbitrary or capricious. The court held that actions are arbitrary and capricious when they are taken ―without consideration or in disregard of facts or law or without determining principle.‖ The record showed that the Board understood the difficulty Thormac faced in complying with the ratio and yet still believed that a penalty was appropriate because Thormac undeniably violated the statute.

12) The Court held that the dual for-cause limitations on the removal of Board members contravened the Constitution‘s separation of powers. The decision on the existence of good cause was impermissibly delegated to officials who were not subject to the President‘s direct control.

Chapter 5: Constitutional Law 1. CHAPTER OVERVIEW Students often find the constitutional law material very difficult. One way to approach the material is to focus on the purpose of a country‘s constitution, in general. A country‘s constitution makes clear what that particular country values. For example, someone from another country would be quick to point out the U.S. Constitution‘s emphasis on freedom. So, start out with a broad proposition, such as, ―A country‘s constitution shows what the country values.‖ Then, highlight perhaps three cases from the chapter. Use the rules from the three cases you chose to encourage students to apply a particular rule to a new scenario.

The ―Teaching Ideas‖ section of this manual gives you some scenarios to try with your students.

2. LEARNING OBJECTIVES After reading this chapter, students will be able to answer the following questions: 1. What is federalism?

2. What is the function of each branch of government, and how does each branch serve to check the others?

3. What is the relationship between the Supremacy Clause and preemption?

4. How does the Commerce Clause affect the power of both the state and federal governments to regulate?

5. What is the difference between commercial and political speech, and why is that difference important?

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6. How do rights guaranteed by the Bill of Rights affect business managers?

3. BUT WHAT IF SECTIONS 1.

If the Act‘s mandate applied only to those individuals who already had insurance, then the mandate most likely would not be viewed as a regulation affecting interstate commerce, as the implementation of the Act would not necessarily lead to an increase in purchases of health care insurance, but rather would maintain the current level of enrollees in health insurance.

2.

Most likely. If the language of the ACA had clearly stated that the payment for failure to purchase health care insurance was a penalty and not a tax, then Congress would not have had the authority to pass the Act using its power to lay and collect taxes.

4. LECTURE NOTES WITH DEFINITIONS A. In the news…

Teaching tip: For each chapter, consider asking students to relate current news items to material from the chapter.

In addition to ideas students come up with on their own, consider weaving in news stories provided by the textbook publisher.

For Chapter Five, McGraw Hill offers the following stories: ―Close Up: The Domestic Surveillance Debate.‖  What makes domestic surveillance a constitutional issue?  As an American citizen, are you concerned about domestic surveillance, or are you glad surveillance is taking place? ―In Depth: Taking Sides: Cato Institute‘s Tim Lynch and Federal Appeals Court Judge Richard Posner Debate the Legality of Warrantless Domestic Eavesdropping.‖  Do Lynch and Posner agree about the legality of warrantless domestic eavesdropping?  What do you think? Why? ―Government vs. Google,‖ also known as ―Google‘s Privacy Flight.‖  As a Google user, what kinds of privacy rights do you want Google to have? Why?  Why is this issue one of international importance? ―Mission from God? Catholic Town, USA: Controversy Surrounds Ave Maria, An All Catholic Town Being Built in Florida.‖  What makes the issue of an all Catholic town a constitutional issue?  Would you want to live in a town that embraces your religion of choice? Why or why not?

• •

B. What is federalism?

The U.S. Constitution establishes a system of government based on federalism.

Federalism is a system of government whereby power is divided between a central authority and constituent political units.

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Chapter 05 - Constitutional Law

• •

•

•

Under federalism in the U.S. Constitution, all powers not given exclusively to the federal government are reserved to the states.

Federal legislation that affects business must be based on expressed constitutional grant of authority.

C. What is the function of each branch of government, and how does each branch serve to check the others?

The Constitution allocates power among the three branches of government: executive, legislative, and judicial branches. a. The executive branch appoints federal judges, can pardon federal offenders, can veto laws passed by the Legislative Branch, and can call special sessions of Congress. b. The legislative branch can refuse to approve the President‘s budget, can override Presidential vetoes, can refuse to approve Presidential appointments, can refuse to ratify treaties, can impeach and remove the President, can amend statutes in order to overturn judicial rulings, can impeach judges, and establishes lower courts and sets the number of judges. c. The judicial branch can declare acts of the Executive Branch unconstitutional and can declare laws passed by Congress unconstitutional.

The Constitution includes separation of powers: powers given to each branch serve as a check on other branches to prevent their taking of sufficient power to control the government.

D. What is the relationship between the Supremacy Clause and preemption?

•

The Supremacy Clause and Federal Preemption

•

Supremacy Clause: the Constitution, laws, and treaties of the United States constitute the supreme law of the land.

•

Federal preemption: when the federal government has expressed an intent to provide exclusive regulation of an area and a state attempts to regulate in this area, the state law will be struck down.

E. How does the Commerce Clause affect the power of both the state and federal governments to regulate? 

The Commerce Clause is the primary source for the most federal regulations. NLRB v. Jones & Laughlin Steel Corp. was a turning point in the Supreme Court's interpretation of the Commerce Clause. The Court held Congress could regulate labor relations at a plant because a work stoppage would have a serious impact on interstate commerce. Many statutes (e.g., Federal Mine Safety and Health Act, Americans with Disabilities Act, and the Consumer Protection Act) are valid exercises of Commerce Clause power.



In 1995, in U.S. v. Lopez, the Supreme Court began giving less deference to statutes purportedly based upon the Commerce Clause. The Court found that Congress had exceeded its authority by passing the Gun-Free School Zone Act, an act that banned possession of guns within 1000 feet of any school. The Court concluded that Congress was attempting to legislate in an area that had nothing to do with commerce or economic enterprise.

Brzonkala v. Morrison. (briefed below) considers the commerce clause in the context of the Congressional power to regulate. 

The Commerce Clause as Restriction on State Authority. Police power refers to residual powers retained by the states to enact legislation to safeguard the health and welfare of their citizens (e.g., building codes, zoning laws, sanitation standards. o What happens when these police powers conflict with interstate commerce? If the purpose of the state law is to regulate interstate commerce, the state law will be struck down. If the state law substantially interferes with interstate commerce, it will be struck down.

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o

If the state regulation is rationally related to a legitimate state end, courts will determine whether the regulatory burden imposed on interstate commerce outweighs the state interest in enforcing legislation.

Black Star Farms, LLC v. Oliver (briefed below) balances a state‘s right to regulate with the free flow of goods across state lines.

Teaching tip: Use the ―Mad About Milk‖ hypothetical (below, Hypothetical Three) in class.

• • •

• • • • 

F. What is the difference between commercial and political speech, and why is that difference important?

Political speech is when corporations support political candidates or referenda.

Commercial speech is speech that conveys information related to the sale of goods and services.

Not all corporate speech is political speech. Therefore, while corporate political speech is protected by the First Amendment to the same extent as ordinary citizens‘ political speech, some commercial speech is not protected by the First Amendment. In order to determine if commercial speech is protected by the First Amendment, the Central Hudson test is used.

G. How do the rights guaranteed by the Bill of Rights affect business managers?

The first ten amendments to the Constitution are called the Bill of Rights. Refer to Exhibit 5-1.

These amendments prohibit the federal government from infringing on individual freedoms and thus affect governmental regulation of business.

The Fourteenth Amendment also extends most of the provisions in the Bill of Rights to the states.

However, they do not limit behavior of private employers.

The First Amendment guarantees freedom of speech and press, prohibits the abridgement of the right to assemble peacefully and petition for redress of grievances, and prohibits the government from aiding the establishment of religion and from interfering with the free exercise of religion. First Amendment rights are not absolute (i.e., there are times when our speech is restricted).

David Leon Riley v. California and United States v. Wurie (briefed below) demonstrate the limits of the Fourth Amendment.

Teaching tip: Use the ―Dr. Snell‖ hypothetical (below, Hypothetical Two) in class.

•

The Fifth Amendment ensures due process in a variety of contexts, from trials to government attempt to ―take‖ property.

•

Under the Takings Clause of the Fifth Amendment, if the government takes private property for public use, it must pay the owner just compensation. When does a governmental regulation become so onerous that it constitutes a taking for which just compensation is required?

Teaching tip: Use the ―Oscar‘s II‖ hypothetical (below, Hypothetical One) in class.

Point/Counterpoint: Should warrantless wiretapping be allowed under the Fourth Amendment?

Teaching tip: Here are some questions to help you tie the Point/Counterpoint into class discussion:  What interests can take priority over procedural safeguards the legal system typically protects?  Why does the ―yes‖ side of the debate bring up the Internet?  Why does the ―no‖ side of the debate use the phrase ―shrouded in secrecy‖?

5-5

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5. CASE BRIEFS WITH ANSWERS TO THE QUESTIONS Case 5-1 Christy Brzonkala v. Antonio J. Morrison et al., 120 S.Ct. 1740 (2000).

Case Brief Issue: Did Congress have authority to provide a civil remedy under the Violence against Women Act (VAWA)?

Facts: Christy Brzonkala was allegedly raped by two male students at Virginia Polytechnic Institute (Virginia Tech). One of her alleged attackers (Morrison) later bragged in public areas about what he would do to women. Brzonkala stopped attending classes, withdrew from the university, and started taking antidepressant medication. Brzonkala filed a complaint with the school. Morrison was initially found guilty and was suspended for 2 semesters, but his suspension was ultimately set aside. Brozonkala sued the two alleged attackers, along with Virginia Tech under VAWA. The attackers moved to dismiss the complaint, arguing that VAWA's civil remedy was unconstitutional.

Procedural History: District Court dismissed the complaint because Congress lacked authority to enact the section. The Court of Appeals affirmed.

Holding: Affirmed. Congress may not regulate noneconomic, violent criminal conduct based solely on the conduct's aggregate effect on interstate commerce. The activity must "substantially affect" interstate commerce.

Reasoning: • Every law enacted by Congress must be based on one or more of the powers enumerated in the Constitution.

• Under Lopez, laws cannot fall under the Commerce Clause simply because they have an aggregate economic effect on interstate commerce.

• Gender-motivated violent crimes are not economic activity.

• Although the Congressional findings suggest that the impact of gender-motivated violence is severe, the findings were not enough to fit the VAWA civil remedy provision under the Commerce Clause. The idea that violent crime may lead to fewer women participating in interstate commerce is too far down the but-for causation line.

Dissent: Unlike the findings in Lopez, Congress provided mountains of data to support its findings that violence against women affects interstate commerce. Some congressional conclusions are given weight in that they "substantially affect" interstate commerce, while other conclusions are not.

ANSWERS TO THE QUESTIONS Critical Thinking The reasoning that supported the dissent‘s opinion was that violence against women affects interstate commerce. Thus, if this violence does affect interstate commerce, Congress would have the right to act under the Commerce Clause.

Ethical Decision Making The values that led the majority to rule that Congress lacks authority include federalism and the idea that no one branch of government should become too powerful. These values are still appropriate in this 6-1 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Chapter 02—The Chemistry of Life

situation because the institution of Congress has been harmed by this decision. The ability to create effective legislation has been cut down by the court‘s decision in Brzonkala; therefore, Congress would have preferred the minority decision in this case.

Case 5-2 Black Star Farms, LLC v. Oliver, 600 F.3d 1225 (9th Cir. 2010).

Case Brief Issue: Do exceptions to the state of Arizona‘s three-tier distribution system violate the dormant Commerce Clause?

Facts: An Arizona statute regulated the distribution of wine in the state by requiring a three-tier distribution model. There were two exceptions to this model for small producers and for out-of-state producers who were permitted to ship two cases per year to a consumer who visited the winery. A Michigan winery and two of its potential customers sued the state claiming that the exceptions discriminated against out-of-state wineries in violation of the Commerce Clause.

Procedural History: District Court granted the state‘s motion for summary judgment and upheld the exceptions to the three-tier scheme. Plaintiffs appealed.

Holding: Affirmed in favor of the state of Arizona. Arizona may continue to utilize the three-tier distribution scheme and exceptions thereto.

Reasoning: • State statutes that discriminate against interstate commerce are subject to strict scrutiny, but the party alleging discrimination bears the burden of proof.

• The exceptions to the Arizona statute were facially neutral as they applied equally to in-state and out-of-state wineries and thus did not discriminate on their face.

• There was no evidence that the exceptions had a discriminatory effect on interstate commerce.

ANSWERS TO THE QUESTIONS Critical Thinking The different facts that may have led the court to a different conclusion include if Arizona‘s law did not grant an exception for out-of-state wineries or resembled the previous scheme requiring a certain percentage of Arizona-content in order for the exception to be applicable.

Ethical Decision Making The primary beneficiary of the decision is the government, which has had its methods for regulating wine sales in the state upheld by the court. Local wineries may also benefit to the extent consumer access to out-of-state wines is thus limited, perhaps resulting in increased sales of domestic wines. Consumers may be injured by this outcome to the extent they are denied access to products such as those produced by Black Star. Certainly out-of-state wineries in a similar position to that of Black Star are injured.

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Case 5-3 Alexis Bailly Vineyard v. Harrington, 482 F.Supp.3d 820 (2020)

Case Brief Issue: Does Minnesota Farm Wineries Act violate the Dormant Commerce Clause?

Facts: Minnesota employs a system that requires separate licenses for the manufacture, wholesale distribution, and retail sale of alcoholic beverages, including wine. Farm wineries are exempt from the requirements of this system under the Minnesota Farm Wineries Act (the Act). One of the requirements to qualify as a farm winery is to produce wine with a majority of ingredients grown or produced in Minnesota. Plaintiffs Alexis Bailly Vineyard, Inc. (Alexis Bailly), and The Next Chapter Winery, LLC (Next Chapter) are Minnesota farm wineries that seek to expand their business operations. Plaintiffs allege that they cannot consistently obtain the necessary quantity and quality of wine ingredients to support expanding their operations if 51 percent of the ingredients must originate in Minnesota. Plaintiffs want to produce more wine varieties and use higher-quality and lower-cost ingredients from other states, but contend that they cannot due to the Act. Procedural History: Plaintiffs sued the Minnesota Department of Public Safety seeking a declaration that the Act violates the Dormant Commerce Clause.

Holding: Yes. The court ruled in favor of the plaintiffs.

Reasoning: • The Act regulates the in-state production and sale of wine • However, this is inconsequential because the Act does effectively favor Minnesota growers and producers of winemaking ingredients • Thus, the Act expressly favors and benefits in-state economic interests and disfavors and burdens the same economic interests outside of Minnesota • Thus, the Act is discriminatory on its face

ANSWERS TO THE QUESTIONS Critical Thinking The state could have simply defined ―farm winery‖ in a way that did not single out or benefit Minnesota in particular. It could also do away with the farm winery exception altogether and subject all Minnesota wineries to the same rules.

Ethical Decision Making The ethical norm that all market players should have an equal playing field is upheld by this decision.

6. TEACHING SKILLS: USING HYPOTEHICALS TO TEST STUDENTS’ understanding The ―Teaching Skills‖ and ―Teaching Ideas‖ sections for Chapter Five ask you to use three hypothetical fact situations, which are presented after the skills and ideas sections.

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Chapter 02—The Chemistry of Life

Tips for creating and using hypothetical questions

 

 



Create hypothetical from news stories. The ―Mad About Milk‖ scenario is based upon on NPR story I heard while driving to work one day.

Create hypotheticals from real cases. Use Westlaw and look for cases that cite the cases you highlight in the chapter. Then, shorten and simplify the facts for use as a hypothetical.

When you use a hypothetical, give your students specific instructions for what they should do with the facts, e.g., ask good questions.

Use a hypothetical at the beginning of class, to assess how well students understood a particular case. If they understood it, you can spend less time on that particular case.

Have students read the hypotheticals individually, but allow them to discuss the hypotheticals in groups of three of four before discussing the hypotheticals as a class.

7. TIPS FOR BUSINESS MANAGERS 1. Remember that if an inspector from an administrative agency shows up to do a search of your business, you have the right to ask to see a warrant as long as your business in not in an industry that has a long history of pervasive regulation.

2. Remember that while corporations enjoy most of the protections of the Bill of Rights, corporations do not have the Fifth Amendment right against self-incrimination, which means that corporate managers may be compelled to testify against the corporation.

3. Because the courts have found that corporations have free speech rights, when a regulation limits your company's advertising, you always want to ask whether the regulation violates your firm's First Amendment right to free speech.

8. TEACHING IDEAS Connecting to the Core

For hypotheticals one, two, and three, ask your students to identify a business issue the facts raise that is not a legal questions.

Here is an idea for each hypothetical: Hypothetical One: If you owned a small family business, and the neighborhood started to become a high crime neighborhood (this is what really happened), how would you decide whether to relocate your business?

What factors would be important?

Hypothetical Two: Think of two concrete ways Dr. Snell could market his chiropractic services that would not raise any concerns.

Hypothetical Three What kinds of production questions does this hypothetical fact situation raise? Can you think of any other industries that have faced something 6-4

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similar, e.g., newer companies have an advantage because they started out with new processes?

Teaching Basics

The first thing you want to do is set the stage for your students to be on track when looking at the hypotheticals. You may want to give them all three hypotheticals in the same handout, without any questions that specifically link a case they read to a particular hypothetical. Then, ask the students, ―Which case that you read for today will help you respond to each hypothetical?‖ They should say: Hypothetical One—the David Lucas case Hypothetical Two—the Bad Frog Brewery case Hypothetical Three—the NEMA (light bulb) case

Advanced Teaching

Here are more advanced questions for each hypothetical: Hypothetical One Explain: (1) one significant way in which the David Lucas case provides support for the McCoys‘ argument, and (2) one significant difference between the two cases that makes the David Lucas case less helpful than the McCoys would prefer.

Hypothetical Two In trying to reach a decision about whether IMMA Section 26(2) violates the First Amendment, you should have questions. In the space below, draft the two most important questions that will help you decide whether IMMA Section 26(2) violates the First Amendment, then tell me why these two questions are particularly significant.

Here’s my first question: This question is significant because: Here’s my second question: This question is significant because: Hypothetical Three If Mad-About-Milk challenges California‘s regulation as unconstitutional, which side is more likely to win? Why?

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Chapter 02—The Chemistry of Life

HYPOTHETICAL ONE* Recently, Oscar‘s II restaurant, located in Seattle, Washington, was sued by the city of Seattle under the state‘s 1988 state drug-abatement law. This law gives the city the power to shut down a business temporarily if it has credible evidence that drug dealing is taking place within a business establishment.

With regard to Oscar‘s II restaurant, the city had set up 18 undercover drug buys inside Oscar‘s II. After the drug buys, the city shut down Oscar‘s II for a period of one year because it believed the restaurant allowed, furthered, and condoned drug dealing within their business establishment. The city made no arrests.

The McCoys, owners of Oscars II and the land on which Oscars II sits, have filed a lawsuit against the state and the city, arguing that the Washington state law allowed the city to ―take‖ their property, and that they should be compensated for the taking. Although the restaurant will be shut down for just one year, the McCoys argue that a temporary closure is the death knell for a small family business such as theirs.

To pursue a legal fight, the McCoys have refinanced their home mortgage and are in serious debt.

HYPOTHETICAL TWO** The state of Illinois has passed a law called the Illinois Medical Malpractice Act (IMMA). This Department of Professional Regulation, which administers the IMMA, filed a complaint against chiropractor Joseph Snell alleging that, among other things, he violated the advertising restrictions set forth in section 26(2) of the act by displaying in his office waiting room a 27-page booklet. Section 26(2) states, ―It is unlawful for any person licensed under this act to use testimonials or claims of superior quality of care to entice the pubic.‖ The booklet contained preprinted forms entitled ―My Chiropractic Story.‖ Each form contained 14 questions addressed to Snell‘s past or current patients. The questions: What led you to try chiropractic care? What was your experience with the doctor? Did the chiropractic services help? Would you recommend this form of care to others? Answers to the questions were supplied by the patients in their own handwriting, and each form was accompanied by the patient‘s photograph and signature.

The administrative law judge who heard the case ruled that the booklet contained testimonials in violation of the act. The judge recommended that Snell be reprimanded and pay a fine. When an administrative law judge renders an opinion, an individual is allowed to appeal the decision to a regular court. Snell decided to appeal the administrative court‘s decision to a federal district court. In particular, he asked the court to rule on the question whether the IMMA, section 26(2) violates his First Amendment rights. He believes the IMMA, section 26(2) is an invalid restriction on commercial speech.

* Hypothetical One is based upon the facts in City of Seattle v. McCoy, 48 P.3d 993 (Wash.App. Div. 1)(2002).

** Hypothetical Two is based upon the facts in Snell v. Department of Professional Regulation, 742 N.E.2d 1282 (Ill.App. 4 Dist.)(2001).

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HYPOTHETICAL THREE*** California fluid milk standards, established by government regulators, are the highest in the United States.

California produces and sells the most nutritious milk in the country. California law requires milk producers to add milk solids and extra nutrients to milk before it can go on to grocery store shelves. The state is trying to maintain the good health of its residents, and is especially interested in preventing osteoporosis.

The state‘s regulations impose the same requirements on out-of-state milk producers. All milk sold in California must meet the state‘s nutrition requirements.

A nonprofit organization based in Wisconsin, Mad-About-Milk, wants to challenge California‘s regulations as unconstitutional. Mad-About-Milk points out that Wisconsin milk producers would have to make serious changes in processing plants before they could meet California‘s requirements. California is newer to milk production, so plants in California were initially built to comply with the state‘s high standards. Mad-About-Milk argues that, in effect, California is ―taxing‖ out-of-state milk producers by asking them to change their processing plants so they can produce milk that meets California‘s requirements.

9. CASE OPENER WRAP-UP: The Constitutionality of the Affordable Care Act Congress did not have the authority to pass the Act under the Commerce Clause. The Supreme Court of the United States reasoned that the individual mandate contained in the Act exceeded Congress‘s enumerated commerce power. However, Congress did have the authority to pass the Act under its power to lay and collect taxes. The Supreme Court reasoned that the Act increases taxes on those citizens who have a certain level of income and do not purchase insurance, which is within Congress‘s power to tax.

10. ANSWERS TO QUESTIONS AND PROBLEMS 1.

All branches of government operate under checks and balances. The executive branch, the President, can veto a legislation passed by the legislation branch, Congress. However, legislation can then over turn the veto by a vote of two thirds of the members of Congress. The judicial branch can strike down an act by Congress or the President, if it is found unconstitutional.

2.

When Sue claims the Commerce Clause increase government power, she would be speaking of the federal government. However, when Sam says the clause limits government power, he would be talking about the state government.

3.

The purpose of the Contract Clause is to prevent the passing of a law that unreasonably interferes with a contract that already exists.

4.

The Contract Clause allows legislative acts by the state to be questioned if they unreasonably interfere with a contract.

*** This hypothetical is based upon a story featured on NPR that focused on Mad-About-Milk‘s concerns.

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Chapter 02—The Chemistry of Life

5.

Protection of corporate political speech is protected differently than corporate commercial speech because in commercial speech there are more restrictions. The restrictions are known as the Central Hudson analysis.

6.

The American Beverage Association argued that the rule created a chilling effect on commercial speech by requiring SSB sellers to convey a controversial message hostile to their own products. The court held that the ordinance would be proper if it were reasonably related to a substantial government interest, which could be established if the compelled speech was purely factual, noncontroversial, and not unduly burdensome. The court then held that due to the required size of the warnings, they posed an undue burden on SSB sellers. The ordinance was thus struck down.

7.

The Supreme Court ruled unanimously in favor of Reed, arguing that the sign restrictions were unconstitutional because they were content-based restrictions, meaning that the restrictions were applied differently depending on the message of the sign. The town of Gilbert argued that the restrictions do not single out a single nonprofit or church but restrict all of them, and the Court countered this argument by stating that the First Amendment prohibits censorship of all speech on a whole topic. The Court also held that the town had no compelling interest in adding restrictions to only a certain type of sign, and so the restrictions cannot survive strict scrutiny.

The Supreme Court held that the dormant Commerce Clause forbids a state from regulating liquor sales by granting licenses only to entities that meet residency requirements.

Tennessee‘s residency requirement favors residents over nonresidents, and thus violates the dormant Commerce Clause.

8.

9.

The court vacated Milam's guilty plea, and did so for several reasons. First, the court ruled that a fraternity house is effectively no different than a private residence (as opposed to a hotel or apartment building) in the Fourth Amendment protections it provides. No part of the fraternity house is open to the general public, and the officers should not have expected normal entry into the house. Thus, the officers had no right to search the property without a warrant.

Second, even though the police met Neagli upon their entrance into the house, Neagli never consented to a search of the premises. The officers didn't even ask Neagli his name, let alone ask if they could search the house. Neagli was understandably surprised at the police presence and answered the officers' questions even though their presence was illegal. court ruled that any information discovered as a result of an officer's unlawful presence was “improper and thereby tainted the search warrant based on it.” The same logic applied here: the officers' unlawful entry irreparably tainted any consent allegedly obtained from Neagli. Thus, the search of Milam's room and the seizure of his possessions was unlawful.

Finally, in

Quintana v. Commonwealth, the

10.

The Supreme Court reversed the decision of the district court and remanded the case to the district court for entry of an order of dismissal. The Court reasoned that given the lack of evidence of the degree to which the steel cleats harmed the county‘s roads, and the undisputed fact that the county had tolerated steel cleats for many years before 2009, it was difficult to see that an outright ban on those cleats was necessary to serve a compelling state interest. Thus, the Court held that the application of ordinance to appellant violated his rights of free exercise of religion under the First Amendment of the U.S. Constitution.

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11.

The court found that there are two ways in which a taking per the can occur per the Fifth Amendment. The first is when the government requires an owner to ―suffer a permanent physical invasion of her property‖. The second way is when regulations ―completely deprive an owner of all economically beneficial use of her property‖.

The court argued that the first method clearly did not occur; the government did not physically invade Barth‘s property. As for the second method, the court found that Barth‘s facts did not establish any economic use of the property, nor the deprivation of that use by the government. The court reasoned that Barth had not presented enough evidence to show that his property had been subject to a government taking.

12.

The Supreme Court found that the law was unconstitutional and ruled in favor of Packingham. The Court held that a content-neutral regulation of speech must be narrowly tailored to meet a significant government interest. Although the government has an interest in protecting children from abuse, the law was too broad in that it restricted access to all kinds of websites. Even if the statute limited only access to social media websites, it would still be too broad because social media websites perform a vast number of functions in today‘s world. The Court argued that the same goal could be accomplished with a narrower statute.

13.

The Wisconsin Supreme Court upheld the court of appeal's decision. The curtilage of one's home is defined as the land immediately surrounding it, including any closely associated building and structures, but excluding nearby buildings and structures that contain the separate activities of other persons. A homeowner can have a reasonable expectation of privacy within the curtilage of her home; the question at hand in this case was whether the parking garage was within the curtilage of Dumstrey's home.

The Court ruled that because the parking garage underneath the apartment building was shared and used by all of the residents of the building and not just Demstrey, it did not fall within the curtilage of Demstrey's home. Because Demstrey had no individual claim over any part of the garage, he could not claim a reasonable expectation of privacy and therefore Demstrey's arrest in the garage did not occur during a warrantless entry.

14.

The majority of the Court ruled the FBI fulfilled its duty of due process in sending the letter to Dusenbery. The majority's reasons were the due process did not allow for the prisoner to get the letter from the post office, the BOP's new methods may not allow inmates to receive letters any more reliably.

The dissenting side's main reason was the Supreme Court was being too easy on a system that should be changed.

Chapter 6: Criminal Law and Business 1. CHAPTER OVERVIEW Chapter Six explains the issues of right and wrong in business conduct and allows students to recognize when wrongful conduct has become criminal. The chapter explains the elements of crime, criminal procedure, defenses to crimes, and the government's role in fighting business crimes. Because much of the book has and will focus on civil law, you might want to spend some time discussing the differences between civil and criminal law. These differences are highlighted throughout the chapter

2. LEARNING OBJECTIVES After reading this chapter, students will be able to answer the following questions: 6-9 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Chapter 02—The Chemistry of Life

1.

2.

3.

4.

5.

What are the basic elements of a crime?

How are crimes classified?

Who can be held responsible when a corporate crime is committed?

What are the basic steps of a criminal proceeding?

What laws attempt to prevent white collar crime?

3. BUT WHAT IF SECTIONS 1. Dykstra would be accountable for fraudulent concealment and perjury as well as bankruptcy fraud. If Dykstra reviewed the sold and stored items with a bankruptcy trustee prior to his hearing, he would not be liable for fraud (but would likely have to give up the proceeds of these sales and liquify the rest of his assets).

4. LECTURE NOTES WITH DEFINITIONS A. IN THE NEWS… Teaching tip: For each chapter, consider asking students to relate current news items to material from the chapter.

In addition to ideas students come up with on their own, consider weaving in news stories/videos provided by the textbook publisher. 



B. WHAT ARE THE BASIC ELEMENTS OF A CRIME? The two elements of a crime are actus reus and mens rea. o Actus reus means wrongful behavior/guilty act. o Mens rea means wrongful state of mind/intent/guilty mind.

Some crimes are strict liability crimes, which means liability without fault. One example is selling alcohol to a minor.

C. HOW ARE CRIMES CLASSIFIED?





Crimes are classified as felonies, misdemeanors, or petty offenses. o Felonies are serious crimes punishable by imprisonment for more than one year or death. o Misdemeanors are less serious crimes punishable by fines or imprisonment for less than one year.

Petty offenses are minor misdemeanors punishable by small fines or short jail sentences.

D. WHO CAN BE HELD RESPONSIBLE WHEN A CORPORATE CRIME IS COMMITTED?  

Corporations as legal entities can be held liable for crimes committed on behalf of the corporation.

Corporate officers and managers can be held liable for crimes committed on behalf of the corporation.

United States v. Park (briefed below) considers whether the president of a national food chain corporation can be held legally responsible for violating the Federal Food, Drug, and Cosmetic Act.

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Teaching tip: How does United States v. Park relate to the Sarbanes-Oxley Act? Hint: Sarbanes-Oxley includes provisions that echo United States v. Park, but are more specific in terms of what officers and managers must do to avoid liability.

E. WHAT ARE THE BASIC STEPS OF A CRIMINAL PROCEEDING? 

Pre-trial procedure includes: o Arrest Miranda v. Arizona outlines what officers must tell individuals upon arrest. o Booking o First appearance o Indictment o Arraignment  Trial includes: o Jury selection o Trial—prosecution has the burden of proof o Jury deliberations o Jury verdict  Sentencing hearing (if defendant is found guilty)  Appeal F. WHAT LAWS ATTEMPT TO PREVENT WHITE COLLAR CRIME?   

RICO—responds to racketeering. Remedy is treble damages and attorney fees in a civil action.

False Claims Act—allows employees to sue employers on behalf of the federal government for fraud against the government. The employee gets a share of the recovery as a reward for whistle blowing.

The Sarbanes-Oxley Act—encourages accountability and transparency, and increases punishments for several white collar crimes.

Point/Counterpoint: Teaching tip: Here are some questions to help you tie the Point/Counterpoint Should insider trading into class discussion: be made legal?  How are street and white-collar crimes different?  Is it unfair to not allow people to use insider information regardless of how they came about it?  Which side makes the stronger argument? Justify your answer using specific reasons.

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5. CASE BRIEFS WITH ANSWERS TO THE QUESTIONS Case 6-1 Salman v. U.S., 137 S. Ct. 420 (2016) Case Brief

Issue: Is evidence of a close family relationship enough to convict Salman of insider trading?

Facts: Maher Kara joined Citigroup‘s healthcare investment banking group in 2002. From 2004 to 2007, Kara regularly discussed mergers and acquisitions by Citigroup clients with his brother, Michael. Michael became engaged to Salman‘s sister and began to share information obtained from his brother with Salman. Salman did not directly make stock trades, but instead went through his brother-in-law, Karim Bayyouk. On several occasions, Bayyouk and Michael Kara made identical trades as those made by Citigroup clients. As a result of these trades, Salman made $2.1 million. Salman was charged with insider trading in 2011 and found guilty.

Procedural History: Salman was charged with insider trading in 2011 and found guilty. He applied for a new trial but was denied his request. Salman appealed, arguing that there was insufficient evidence that he knew the information he used to trade was insider information. The appellate court found that Salman‘s close family relationship with the Karas was sufficient evidence that he knew he was using insider information.

Holding: Affirmed.

Reasoning:   

A person commits insider trading when they know that the person who made the tip stands to benefit from disclosing insider information.

When a personal relationship is involved, such as one between a family member or a friend, a personal benefit may be inferred because it is likely that the person being tipped will return the favor.

Salman knew that the information had been improperly given to Michael before being given to himself, and that Maher stood to gain from the disclosure.

ANSWERS TO THE QUESTIONS Critical Thinking What the court means to say is that giving a gift of insider information and giving a gift of the proceeds following trading by a tipper are effectively equivalent because they lead to the same result: an individual is making a profit from insider information. One might agree with the court here, but a counterargument could be that one who simply receives the proceeds of an insider trade may not be aware that the proceeds were earned through an illegal trade.

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Ethical Decision Making The stakeholders who benefit the most from this decision are practically every trader of securities who does not engage in insider trading as this decision firmly closes yet another loophole that allowed insider traders to get away with their unfair advantage.

Case 6-2 U.S. v. Vega-Martinez, 949 F.3d 43 (2020)

Case Brief

Issue: What kind of evidence would be sufficient to convict the defendants of mail fraud?

Facts: In 2013, Vega-Martínez, Garay-Rodríguez, and their co-defendants owned competing bus companies that sought to provide busing for low-income students from Caguas to public schools in the area. That year, the municipality announced that it would hold an auction for four-year school-bus-transportation contracts. Instead of independently submitting competing bids, the conspirators met and agreed to divide up the routes among themselves. For each route, a "winner" was pre-designated, and that "winner" was assured that, at most, only one other bidder would bid on the route (to make it look like there was competition), and that bid would be a high bid. After the meeting, bids were submitted. The municipality rejected all of the high bids and instead negotiated contracts with each of the low bidders without realizing what had happened. The municipality then sent award letters to the successful defendants in the mail.

Procedural History: In May 2015, the defendants were charged in an indictment alleging conspiracy to restrain trade), conspiracy to commit mail fraud, and substantive mail fraud. All defendants were convicted on all charges. Following trial, conviction, and sentencing on charges of mail fraud and violations of the Sherman Act, Luciano Vega-Martínez and René Garay-Rodríguez appealed, raising a variety of issues, including a claim that there was not enough evidence to convict the defendant of mail fraud.

Holding: The court ruled that there was sufficient evidence to convict Vega-Martinez for his mail fraud charge, and thus his conviction was affirmed.

Reasoning:  The government had presented evidence to establish both elements of mail fraud: the defendant devised a scheme to defraud and the use of mail for executing the scheme  Proof of mail fraud does not require proof of mailing by a defendant, only that they caused the use of the mail  The defendants received their contract award letters by mail, and this was a foreseeable result of the scheme.

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ANSWERS TO THE QUESTIONS Critical Thinking The key fact in this case was not that the defendants had used the mail directly, but that they had caused a foreseeable use of the mail. Had the statute been interpreted to require the defendants to actually mail something themselves, the outcome would likely have been different.

Ethical Decision Making The public disclosure test would likely have led the defendant to not join the conspiracy. Obviously, his actions would not make him appear as an ethical actor to the public. But even beyond ethical concerns, it will likely be hard for the defendant to secure bids in this industry again because there will always be the fear that he has engaged in bid-rigging.

Case 6-3 United States v. Park, 421 U.S. 658 (1975)

Case Brief Issue: Can corporate executives be criminally liable for failing to ensure a company's compliance with the law?

Facts: The defendant, Parks, was president of a food-chain corporation. Parks had received a warning from the Food and Drug Administration that a company warehouse had unsanitary conditions. While conceding that he was responsible for the entire company, Parks claimed he had delegated responsibility for the sanitary conditions to a subordinate employee.

Procedural History: The District Court found Parks guilty. The Court of Appeals reversed. The United States Supreme Court reversed the appeals court—Parks was guilty.

Holding: Corporate executives can be criminally liable for failing to ensure a company's compliance with the law.

Reasoning: • The Supreme C • ourt has noted that the only way corporations can act is through their individual employees • The Act in questions requires stringent, affirmative actions on the part of corporate executives, but these standards are justified by the public interest in food safety.

• There is considerable evidence that the D had a duty to ensure sanitary conditions and that he violated that duty.

ANSWERS TO THE QUESTIONS Critical Thinking There is no evidence that Park could have presented that would have led to a different decision because the rule laid down states that ignorance cannot be used as a defense. Therefore, even if Park provided 7-3 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

evidence stating that he delegated the responsibility to his employees, Park is still held responsible because the company, as a whole, did not comply with the law Ethical Decision Making Since the public would be angry to learn that I had allegedly allowed rodent contamination in my company, if I were guided by the public disclosure test, would most likely take responsibility for the misconduct of my fellow employees, and attempt to save the company further embarrassment.

6. TEACHING IDEAS FOR CRIMINAL LAW AND BUSINESS Connecting to the Core

Teaching Basics

Advanced Teaching

In management, students learn about how to create a strong corporate culture, from an ethics perspective. Ask students to investigate how flawed corporate cultures were created by the CEOs accused of engaging in white collar crime. This would be a good paper topic, e.g., have each student explore just one corporate culture (not all five).

For each white collar criminal, students should consider ―their‖ CEO and:  Find the definitions of the crimes ―their‖ white collar criminal allegedly committed.  Look in Chapters Seven and Forty-One to find out the definitions of alleged crimes, e.g., use these chapters as research tools.  Explain the ultimately sanctions imposed on ―their‖ CEO. Which crimes was their criminal found guilty of committing? Where is their CEO today? Why were some accused of federal crimes, while at least one was accused of crimes defined by state law?

Students should consider their assigned white collar criminal and answer these two questions:  How does United States v. Park inform the student of the extent of their CEO‘s possible liability, assuming the principle in the case extends beyond food safety?  Would the Sarbanes-Oxley Act have prevented the acts of individual CEO‘s, e.g., If Sarbanes-Oxley would have been enacted ten years ago, would each CEO have known better than to commit the crimes they committed?

7. TIPS FOR BUSINESS MANAGERS 1. White-collar crime can cripple your business or, at the very least, greatly mire its reputation. Thus, as a business manager, you will want to root out white-collar crime before it becomes a problem.

Maintaining an internal audit service with effective and trained auditors can help you keep white-collar crime to a minimum.

2. Provide your employees with proper training so that they understand what is and is not considered ethical and legal activity within your business.

3. Screen potential employees properly and thoroughly to ensure that they have a clean record before appointing them to senior positions.

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8. CASE OPENER WRAP-UP: A Questionable Stock Investment The defendant was convicted of one count of securities fraud for his misrepresentations related to stock he sold the hotel investor. He was also convicted one count of mail fraud for sending the stock certificates via Federal Express, and one count of wire fraud for causing the approximately $1,486,323 from the hotel investor to be diverted to his own use through an interstate wire transfer of said funds to a Citibank account the defendant maintained in New York, New York. On appeal, the conviction was upheld in 2014.

Had this been an older case, the fact that the certificates were sent via Federal Express would have been important, but the mail fraud statute has now been amended to specifically include the use of commercial postal services including Federal Express and UPS.

9. ANSWERS TO QUESTIONS AND PROBLEMS 1.

Actus reus means wrongful behavior/guilty act. Mens rea means wrongful state of mind/intent/guilty mind.

2.

White collar crime refers to non-violent illegal acts against society that occur most frequently in a business context such as bribery, embezzlement, and computer-related crimes.

3.

Defenses to crimes include: Infancy—individuals who have not reached the age of majority/adulthood may be able to partially defuse the guilty-mind requirement of a crime. Mistake—the defendant made an honest and reasonable mistake. Intoxication—involuntarily ingesting an intoxicating substance can be used as a defense. Insanity—relevant when a person‘s mental condition at the time a crime was committed was so impaired that the person could not understand the wrongful nature of the specific act, or could not distinguish between right and wrong. Duress—relevant when a person is threatened with serious bodily harm or loss of life, the threat of harm must be more serious than the harm the crime caused, and the threat of harm must be immediate and inescapable. Entrapment—relevant when the idea for the crime originated with a government official who suggested it. Necessity—relevant when the harm or evil sought to be avoided is greater than sought to be prevented. Justifiable use of force—e.g., self-defense used to protect your own life.

4.

Crimes involving fraud include forgery, defalcation, false entries, false token, false pretenses, concealment, mail fraud, health care fraud, telemarketing fraud, Ponzi schemes, check kiting and pretexting.

5.

Miranda rights refer to rights that are read to a person prior to custodial interrogation by law enforcement about details of an alleged crime. They are important as it is important for those who may be accused of crimes to know their constitutional rights in advance of questioning by law enforcement personnel. Information elicited without proper ―Mirandizing‖ may be inadmissible in a later criminal prosecution.

6.

Criminal prosecution may consist of the following: (1) booking; (2) first appearance; (3) a bail hearing; (4) the decision to file a criminal information or seek indictment; (5) arraignment; and (6) trial either to the bench or a jury.

7.

Federal laws that strive to prevent white collar crime are: RICO—responds to racketeering.

Remedy is treble damages and attorney fees in a civil action. The False Claims Act—allows employees to sue employers on behalf of the federal government for fraud against the government. The employee gets a share of the recovery as a reward for whistle blowing. The Sarbanes-Oxley Act—encourages accountability and transparency, and increases punishments for several white collar crimes.

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8.

Although the DeCosters claimed to be ―powerless‖ to prevent contaminated eggs from being shipped, they were the ones who decided which facilities to test and coordinated salmonella prevention efforts. Despite knowing about the positive salmonella tests, the DeCosters did nothing to improve the situation. The DeCosters knew or should have known of the risks posed by the unsanitary conditions at the facilities, and thus were held liable for negligence.

9.

Both Carr and Hanratty were charged with insider trading. Hanratty was required to pay $277,980 in disgorgement (that is, pay back the profits of her illegal act) as well as a $250,628 penalty. Although Carr made no direct profits from his acts with Hanratty, he was barred from serving as an executive or director of a corporation for two years for insider trading. Hanratty received a similar bar.

10. The appellate court reversed Weimert‘s wire fraud conviction. While the court found that Weimert breached his fiduciary duty to AnchorBank, doing so even in combination with mail or wire communication is insufficient alone to establish mail or wire fraud. The court noted that AnchorBank might have a viable civil case against Weimert, but that was a whole other issue altogether.

11. Weaver was convicted of mail and wire fraud, conspiracy to commit both, and making false statements to a government agent. Weaver appealed his conviction, arguing that he is not guilty of fraud because his customers signed purchase agreements in which they disclaimed reliance on extra-contract representations, i.e., the oral misrepresentations of his salespeople. Weaver‘s conviction was upheld, however, with the appellate court arguing that the fraud was complete when Vendstar employees used the wires and mail to further a scheme to extract money from victims via misrepresentations. Regardless of whether anyone actually purchased a vending machine, Weaver and his team had still committed fraud.

12. Shapiro was charged with multiple counts of mail and wire fraud, as well as income tax evasion.

Shapiro had made false representations to thousands of people to bilk them of their money. Indeed, numerous victims testified at Shapiro‘s trial, each recounting how they had lost their life savings to Shapiro‘s scheme. Ultimately, Shapiro was sentenced to 25 years in prison.

13. The court found that Scammell violated Section 10(b) of the Securities Exchange Act of 1934 by trading in Marvel securities while he was aware of material nonpublic information, in breach of a duty of trust or confidence Scammell owed to his girlfriend. The court reasoned that by no later than August13, 2009, Scammell had obtained the identity of the acquisition target from his girlfriend, whether through overhearing Marvel-related conversations, by seeing electronic or paper documents in her possession related to the Marvel acquisition, or through her conversations with him.

14. Smith was convicted of burglary of a dwelling and sentenced to ten years in prison. On appeal, the Court of Appeals argued that the jury is responsible for evaluating the credibility of witnesses, and that the jury‘s guilty verdict shows that it found the testimonies of Williams and Clark to be credible. The jury did not find Smith‘s testimony to be credible, and the evidence did not weigh heavily against the jury‘s decision to find Smith guilty. Thus, according to the court, the evidence was sufficient.

CHAPTER 7: TORT LAW 1. CHAPTER OVERVIEW This chapter serves as an introduction to tort law. Your students may be most familiar with this area of the law. You might want to begin the chapter by providing a general overview of the different areas of tort law: intentional torts, negligence, and strict liability. Explain how these three areas are distinct. Next, you might wish to move into a discussion of the damages available in tort cases.

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As students read about torts, ask them to find examples of the types of torts they are learning. For example, some of the students could find a popular reference to assault and battery, while others find a reference to a recent defamation case. However, the goal is not to get your students simply to find a reference (e.g., "Britney Spears was the plaintiff in a recent defamation case."). They should apply what they learn about the tort to analyze the case. Thus, they should explain how the case would be or should be decided.

Chapter Seven continues with an examination of two another types of tort law: negligence and strict liability. When teaching students about negligence, you might want to start by introducing them to the four elements of negligence. Next, focus on what the plaintiff must prove to establish each of these elements. The Palsgraf case is particularly important in this section. Finally, you when you transition to strict liability doctrine, make sure you engage in a discussion about the public policy reasons that support the idea of imposing strict liability.

2. LEARNING OBJECTIVES After reading this chapter, students will be able to answer the following questions: 1. How are torts classified?

2. What are some of the most common intentional torts, and what are the elements needed to prove these torts?

3. What are the elements that must be proved to win a negligence case?

4. What are the doctrines that help a plaintiff win a negligence case?

5. What defenses are available in a negligence case?

6. How does a party prove a strict liability case?

7. What types of damages are available in tort cases?

3. BUT WHAT IF SECTIONS 1. If Dr. Sullivan called Dr. Bongiovi and threatened to slit his throat, this would be considered committing assault. An assault occurs when one person places another in fear or apprehension of an immediate, offensive bodily contact. Dr. Sullivan would not have committed battery because battery requires actual bodily contact.

2. If Bongiovi had no idea Jones had ever heard of Dr. Sullivan, and was telling the story simply as a reminder that no surgery is completely risk-free, it may be difficult for Dr. Sullivan to recover damages, as the plaintiff must show specific monetary loss that resulted from the defamatory statements. If Bongiovi believed that Jones had never heard of Sullivan, and therefore believed there was no chance that Jones would be seeking Sullivan‘s business, Bongiovi may argue that there was no potential monetary loss.

4. LECTURE NOTES WITH DEFINITIONS A. In the news…

Teaching tip: For each chapter, consider asking students to relate current news items to material from the chapter.

In addition to ideas students come up with on their own, consider weaving in news stories provided by the textbook publisher.

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For Chapter Seven, McGraw Hill offers the following story: ―Texas Jury Finds Drug Company Guilty—the Vioxx Fallout‖ • What torts did the makers of Vioxx allegedly commit?

• The jury award was what specific amount in damages? How do you make sense of this sum, given what you read in Chapter Five?

B. How are torts classified?

•

Objectives of tort law o Providing compensation for injured parties. o Contributes to maintaining order in society by discouraging private retaliation by injured persons or their friends. o Give citizens a sense that they live in a just society.

•

How torts are classified o Intentional torts - defendant takes action intending that certain consequences will occur and knowing they are likely to occur. o Negligent torts – defendant is careless to another person's detriment. o Strict liability torts – defendant takes action that is inherently dangerous and can never be undertaken safely.

Teaching tip: Gather short fact scenarios, and create a matching game for class, asking student to match specific facts with specific torts.

C. What are the most common intentional torts, and what are the elements needed to prove these torts?

•

Intentional torts against persons--- intentional acts that harm an individual's physical or mental integrity. o Assault and Battery  Assault: one person places another in fear or apprehension of an immediate, offensive bodily contact. Battery: intentional, unwanted, offensive bodily contact. Defenses available:  Self-defense-- responding to the force of another with comparable force to defend yourself. Defense of others. Defense of property – reasonable force to defend from intruder.  Intentional infliction of emotional distress—occurs when someone engages in outrageous, intentional conduct likely to cause extreme emotional distress to the party toward whom the conduct is directed.  Misuse of legal procedure—includes the torts of malicious prosecution, wrongful civil proceedings, and abuse of process.

•

Intentional torts against property--- intentional acts that harm an individual's o Trespass to realty--Elements: person intentionally enters land of another without permission, causes an object to be placed on the land of another without the landowner's permission, stays on the land of another when the owner tells him to depart, and refuses to remove something he placed on the property that the landowner asked him to remove. o Private nuisance-- person uses his property in an unreasonable manner that harms a neighbor's use and enjoyment of his property.

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o o •

Trespass to personality--person temporarily exerts control over another's personal property or interfering with the true owner's right to use the property.

Conversion--defendant permanently removes the personal property from the owner's possession and control. Owner recovers damages for full value of covered item.

Intentional torts against economic interests o Disparagement--defendant published a false statement of material fact about plaintiff's product or service that resulted in loss of sales. May be called slander of quality (if spoken) or trade libel (if in printed form). o Intentional interference with contract—Elements: contract between two parties existed, defendant knew of the existence of contract and its terms, defendant intentionally took steps to cause one of the parties to breach the contract, and plaintiff was injured as result of breach. o Unfair competition—occurs when someone enters a business with the sole intent of driving another firm out of business. o Fraudulent misrepresentation—occurs when a party uses deceit to facilitate personal gain.

D. What are the elements that must be proven to win a negligence case?

To win a negligence case, the plaintiff must prove four elements: • Duty– reasonable person standard is used to determine the degree of care and skill that a reasonable person would exercise under similar circumstances • Breach of duty- defendant‘s conduct violate that duty •

• •

Causation (actual and proximate) - actual cause is the determination that the defendant‘s breach of duty resulted directly in the plaintiff‘s injury. Proximate cause refers to the extent to which a defendant may be held liable for the consequences of his actions.

Damages- plaintiff must have sustained compensable injury as a result of the defendant‘s actions.

Res ipsa loquitur- ―the thing speaks for itself.‖ The plaintiff uses this doctrine to allow the judge or jury to infer that more likely than not, the defendant‘s negligence was the cause of the plaintiff‘s harm, even though there is no direct evidence of the defendant‘s lack of due care.

Teaching Tip: Swoboda v. Fontanetta (briefed below) illustrates the use of this doctrine.

E. What are the doctrines that help a plaintiff win a negligence case?

F. What defenses are available in a negligence case?

•

•

•

Negligence per se- ―negligence in or of itself.‖ This doctrine applies to cases in which the defendant has violated a statute enacted to prevent a certain type of harm from befalling a specific group to which the plaintiff belongs. Instead of showing that a reasonable person would exercise a certain duty of care toward the plaintiff, the plaintiff can offer evidence of the defendant‘s violation of the statute.

Contributory Negligence- Applies to cases in which the defendant and the plaintiff were both negligent. Last-clear-chance doctrine allows the plaintiff to recover damages despite proof of contributory negligence as long as the defendant had a final clear opportunity to avoid the action that injured the plaintiff.

Comparative Negligence- Pure comparative negligence defense is when the court determines the percentage of fault of the defendant and the defendant is then liable for the percentage of the plaintiff‘s damages. Modified comparative negligence states that the defendant must be more than 50 percent at fault before the plaintiff can recover.

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•

•

Assumption of the risk- Express assumption of the risk is when the plaintiff expressly agrees to assume the risk posed by the defendant‘s behavior, usually through a contract. Implied assumption of the risk means that the plaintiff implicitly assumed a known risk.

Special defenses to negligence- Many states have additional ways to defend against a claim of negligence including: o Good Samaritan Statutes which encourage selfless behavior by removing the threat of liability o Superseding Cause which is an unforseeable event that interrupts the causal chain between the defendant‘s breach of duty and the damages the plaintiff suffered.

G. How does a party prove a strict liability case?

Strict liability is liability without fault. A party must prove three conditions to prove a strict liability case including that the activity: • involves a risk of serious harm to people or property • it is so inherently dangerous that it cannot ever be safely undertaken • it is not usually performed in the immediate community Teaching tip: Pick a newspaper story that describes a real and recent accident. Have students calculate the likely damages, assuming the plaintiff wins.

H. What types of damages are available in tort cases?

•

• •

Compensatory damages are damages designed to compensate victim for all harm caused by person who committed the tort (tortfeasor), e.g., medical bills, lost wages, property repair bills, compensation for pain and suffering.

Nominal damages are small amounts of money given to recognize that a defendant committed a tort but no compensable damages were suffered.

Punitive damages are damages awarded to punish the defendant. o Generally given only when defendant's conduct is outrageous. o Purpose is to punish defendant and deter others who are similarly situated. o Urge to limit punitive damages. Supreme Court must review trial court's decision on constitutionality of aware de novo (no longer give deference to trial court's determination that jury award was not unconstitutionally excessive) o Virtually every state has enacted some form of tort reform law (damage caps, evidentiary standards to restrict availability, capping noneconomic damages, etc).

Point/Counterpoint: Should punitive damages be abolished?

Teaching tip: Here are some questions to help you tie the Point/Counterpoint into class discussion:  What assumption about human nature does the ―Yes‖ argument make?  Why does the legal system allow for punitive damages in the first place?  How would the behavior of businesses change if punitive damages were done away with?

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Chapter 08 - Real, Personal, and Intellectual Property

5. CASE BRIEFS WITH ANSWERS TO THE QUESTIONS Case 7-1 Aflalo v. Weiner, 2018 WL 3235529 (SDFL 2018)

Case Brief Issue: Did Weiner‘s Facebook post amount to defamation per se?

Facts: On June 8, 2017, Eugene Weiner made a post on Isaac Aflalo‘s Facebook page. The post read, ―Yurim and Isaac took advantage of a old 94plus sick man elder abuse [sic].‖ Alflalo took umbrage to the post and filed a suit against Weiner, alleging that Weiner‘s post constitutes defamation per se.

Specifically, Alflalo alleged that the post constituted defamation per se because it charged him with the commission of an infamous crime and subjected him to hatred, distrust, ridicule, or contempt. Weiner filed a motion to dismiss the case.

Holding: No. The post was not defamation per se?

Reasoning:    

The court defined ―defamation‖ as ―the invasion of a person‘s interest in her reputation and good name.‖ The court ruled that a statement is defamatory per se when it charges that a person has committed an infamous crime or tends to subject one to hatred, contempt, or disgrace.

Although elder abuse is a felony, nothing about Weiner‘s use of the phrase ―elder abuse‖ amounts to the accusation of a felony.

Aflalo also alleged the statement is defamation per se under the second ground, but he could not convince the court that a single, incoherent post written on a distant relative‘s Facebook page would engender hatred, contempt, or disgrace.

ANSWERS TO THE QUESTIONS Critical Thinking If Weiner had said something such as, ―Isaac Aflalo has committed elder abuse,‖ there might be a stronger case for defamation per se. Likewise, if Weiner had made such a statement using a medium with a bigger audience, such as a newspaper ad, Alflalo might have been successful.

Ethical Decision Making This decision furthers the value of free speech in that Weiner was free to express his opinion of Aflalo without the penalty of civil punishment.

Case 7-2 Olson v. CenturyLink, Court of Appeals of Minnesota, No. A12-0884 (2013)

Case Brief Issue: When should a defendant be held liable in tort for intentional infliction of emotional distress?

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Facts: Apellant Olson contracted to receive telephone service from respondent, CenturyLink, and also applied for reduced-rate services that CenturyLink provides through Minnesota‘s Telephone Assistance Plan (TAP), a statewide program established to reduce telephone rates for low-income households.

Olson‘s bills were not reflecting the reduced rate, and when he called the company that informed that they had not received Olson‘s application. On January 31, 2012 the company disconnected Olson‘s telephone service, and when Olson called the company to resolve the issue the company repeatedly hung up on Olson.

Procedural History: In April 2012, Olson filed suit, claiming that the respondent company violated the Minnesota Human Rights Act (MHRA) and committed intentional infliction of emotional distress. The district court determined that the action was frivolous because the claims had no basis in law. Olson appealed.

Holding: The court affirmed the denial of the petition by the district court in favor of the defendant.

Reasoning: 



To prevail on this tort, a plaintiff must establish the defendant's conduct (1) was extreme and outrageous, (2) was intentional or reckless, (3) caused emotional distress, and (4) the distress was severe. Extreme and outrageous conduct is behavior that is ―so atrocious that it passes the boundaries of decency and is utterly intolerable to the civilized community.‖ The defendant company‘s actions are not so atrocious that they pass the boundaries of decency.

ANSWERS TO THE QUESTIONS Critical Thinking According to the case law, CenturyLink would have had to engage in behaviors that caused Olson severe emotional distress, for example, nightmares, crying spells, physical illness, or post-traumatic stress disorder. The behaviors of CenturyLink would have had to cause emotional distress that is so severe that ―no reasonable man could be expected to endure it.‖ Ethical Decision Making In upholding the finding against the plaintiff, the court is upholding values of fairness and order by adhering to precedent that has already established what sort of conduct is so extreme and outrageous that it can be considered to cause emotional distress.

Case 7-3 Bonacci v. Brewster Service Station, Inc., 2016 NY Slip Op 26331 (2016)

Case Brief

Issue: Can Bonacci use the doctrine of res ipsa loquitur to prove a negligence claim?

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Chapter 08 - Real, Personal, and Intellectual Property

Facts: Tom Bonacci took his Jeep into Brewster‘s Service Station, where he was invited by a serviceman, Gebing, to place himself under the vehicle to point out where he (Bonacci) believed the problem existed with the exhaust system. He was under the vehicle a matter of seconds when the vehicle dropped, injuring both men who were under the jeep. According to another employee, the lift was under Gebing's control when the arm pulled out of the pivot arm and the Jeep fell off the lift.

Holding: Yes, Bonacci can use the doctrine of res ipsa loquitur to prove his negligence claim.

Reasoning:  To invoke res ipsa loquitur, the event in question must be of a kind that does not normally occur in the absence of negligence, must be caused by an agent or instrumentality under exclusive control of the defendant, and must not be caused by any voluntary action of the plaintiff.  Being that a vehicle does not normally fall off a lift without negligence, the lift was under the control of Gebing at the time, and Bonacci had not interacted with the lift or otherwise voluntarily contribute to his injury, Bonacci had grounds to invoke res ipsa loquitur.

ANSWERS TO THE QUESTIONS Critical Thinking If the defendant could show that something unforeseeable outside of Gebing‘s control had caused the vehicle to fall off the lift (perhaps, for example, a sudden and extreme gust of wind), then the doctrine may not have been available. Another way the defendant could have prevented the doctrine's use is if it could show that Bonacci had somehow contributed to the injury, perhaps by tampering with the lift prior to the incident.

Ethical Decision Making People who are on the receiving end of unsafe or negligent practices had their interest furthered by this ruling. By establishing that these stakeholders can use res ipsa loquitur when their injury is not a normal outcome of a negligence-free situation, such individuals have another tool that they can use to recover damages for negligence.

Case 7-4 Mazda Motor Corporation v. Hurst, 2117 Ala LEXIS 66 (2017)

Case Brief

Issue: Was Mazda liable for Hurst‘s wrongful death due to a defective design?

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Facts: On November 22, 2010, 16-year-old Sydney McLemore was driving her Mazda 3 with 15 year-old Natalie Hurst as a passenger. McLemore was driving 55 miles per hours in a 35 mile-per-hour zone when she lost control of the car. The car spun into a light pole before bursting into flames. McLemore suffered third-degree burns over 15% of her body; Hurst died at the scene from burn injuries. Hurst‘s parents filed suit against Mazda and McLemore asserting wrongful death and product liability claims. The Hursts claimed that the Mazda 3 was defectively designed in that it had a plastic fuel tank positioned a half-inch away from a steel muffler with sharp edges. When the car hit the pole, the Hursts alleged, the muffler‘s sharp edge pierced the fuel tank and allowed gasoline vapors to escape the tank and ignite, which caused the fire.

Procedural History: At trial, the jury awarded $3.9 million in wrongful-death damages to the Hursts and $3 million in compensatory damages and $3 million in punitive damages to McLemore. Mazda appealed, contending that McLemore‘s contributory negligence serves as a defense.

Holding: Affirmed in part, reversed in part, and remanded.

Reasoning:   

Expert testimony admitted at trial claimed that Ford had violated its own guidelines by designing a muffler with sharp edges to be placed so close to the fuel tank.

According to the expert, the muffler‘s design was defective.

However, while Mazda was liable for the defect, Mazda had not acted ―wantonly‖ as McLemore alleged.

ANSWERS TO THE QUESTIONS Critical Thinking Evidence that the muffler design was an industry standard or evidence that McLemore was especially negligent or had tampered with the fuel tank or muffler prior to the crash are some of the types of evidence that may have resulted in a different verdict.

Ethical Decision Making Alabama is interested in the values such as accountability, punishment for wrongdoing and deterrence in its policy to only award punitive damages.

6. TEACHING SKILLS: ADDING A REAL CASE FOR APPLICATION PURPOSES The ―Teaching Skills‖ and ―Teaching Ideas‖ sections for Chapter Seven highlight using facts from a case not in the textbook as the basis for a variety of activities both in and out of the classroom. Plus, facts from

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Chapter 08 - Real, Personal, and Intellectual Property

real cases make excellent test questions. For this chapter, Zeran v. Diamond Broadcasting, Inc. (next page, so professors can copy it for class) fits all criteria for a good case that can serve multiple uses.

Tips for selecting a case that can be used for multiple purposes. Pick a case that: (1) will interest students.

(2) where the facts are not overly complicated.

(3) allows students to explore more than one theory in the chapter.

Teaching ideas Connecting to the Core

Assign a paper that asks students: What specific managerial policies, if implemented by Diamond Broadcasting/KRXO would have prevented Zeran from suing?

Teaching Basics

Ask students: Which torts are most likely to yield recovery for Zeran? Be specific. Hint: He sued for three separate torts this chapter explains.

Advanced Teaching

Ask students: Assuming Zeran sued for: (1) defamation, (2) false light invasion of privacy, and (3) intentional infliction of emotional distress, why did he lose under each theory? Be specific.

ZERAN v. DIAMOND BROADCASTING, INC.* Diamond Broadcasting owns KRXO, a classic-rock radio station in Oklahoma City. On April 29, 1995, an AOL member sent an e-mail containing a copy of the original, April 25th posting to one of KRXO's on-air personalities, Mark ("Shannon") Fullerton, who, together with Ron ("Spinozi") Benton, hosted the "Shannon & Spinozi Show," a drive-time morning show, which usually consisted of light-hearted commentary, humor, and games. In the aftermath of the bombing, and continuing for a period of four to six weeks thereafter, however, the show had become a forum for discussion of the bombing and expression of the emotions it aroused. Its tone was serious and somber. Shannon first saw the e-mail either late in the evening on the day it was sent or early the next morning, May 1, 1995. Shannon was an AOL member and had given his screen name out over the air to enable his listeners to send messages to him. He did not know the person who sent the posting.

* Facts for this case come nearly verbatim from Zeran v. Diamond Broadcasting, Inc., 203 F.3d 714 (2000).

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Before beginning his shift on May 1, Shannon unsuccessfully attempted to e-mail Ken ZZO3 through AOL, but received a pop-up message informing him that the addressee was not a known AOL member.

He did not attempt to call the telephone number on the posting, purportedly because it was before business hours. Shannon then went on air, discussing the posting, reading the slogans, and reading Zeran's telephone number. Shannon urged his listeners to call Ken ZZ03 and tell Ken ZZ03 what they thought of him for offering such products. On that day, Zeran received approximately 80 angry, obscenity-laced calls from the Oklahoma City area, including death threats. Zeran described it as the worst day of his life and, shortly thereafter, involved law enforcement. The anxiety Zeran felt as a result eventually led him to visit his family physician, who treated Zeran by prescribing an anti-anxiety drug. Although most of the callers hung up before Zeran had an opportunity to speak, Zeran was able to learn that the posting had been mentioned on KRXO. Zeran called KRXO and asked that KRXO broadcast a retraction, which it did.

Zeran does not know of anyone who knows him by the name Kenneth Zeran who saw the AOL postings, heard the broadcast, or associated him with "Ken Z" or the phone number on the AOL postings.

7. CASE OPENER WRAP-UP: PLASTIC SURGEON DEFAMATION Bongiovi may have been able to use the defense of privilege, specifically, conditional privilege.

Under conditional privilege, a party will not be held liable for defamation unless the false statement was made with actual malice. A statement is made with actual malice if it is made with either knowledge of its falsity or reckless disregard for its truth.

If we consider the Golden Rule guideline for ethical decision making, we may conclude that Bongiovi should be required to pay damages to Sullivan. Bongiovi‘s statements to the plastic surgery client prevented Sullivan from receiving business from the client, potentially costing Sullivan thousands of dollars. If Bongiovi cost Sullivan thousands of dollars, it may be considered fair that Bongiovi repay that cost to Sullivan through damages.

8. ANSWERS TO QUESTIONS AND PROBLEMS 1) There are three types of damages available in tort cases: compensatory, nominal, and punitive.

Compensatory damages are those awarded to the victim to compensate them for damages caused by the tortfeasor. These damages tend to include things such as medical bills, lost wages, property repair bills, and compensation for pain and suffering. Lawyers' fees, however, are not recoverable by compensatory damages. Nominal damages are small amounts awarded when it is recognized that the defendant committed a tort, but damages are not compensable. Nominal damages can also be awarded for failing to prove actual damages. Punitive damages are intended to punish defendants for their outrageous conduct. Punitive damages are also meant to deter the defendant and others who are in a similar situation as the defendant. The usual trend is the worse the action, and the more wealth the defendant has, the higher the amount to be paid by the defendant. The defendants are required to pay large sums to punish them and attempt to hurt them to prevent these actions in the future.

2) Many groups see punitive damages as necessary because they are a good method for encouraging manufacturers to produce the safest products possible. Those that disagree with this say that compensatory damages are enough to punish manufacturers. These people say that punitive damages, instead of producing safe products, are more likely to discourage innovation because manufacturers will be afraid of producing a defective product and then will be forced to pay millions of dollars in law suits.

3) Five intentional torts are: assault and battery, defamation, privacy torts, false imprisonment, and intentional infliction of emotional distress: (1) Assault occurs when one person puts another in 8-6 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Chapter 08 - Real, Personal, and Intellectual Property

fear of apprehension of an immediate, offensive bodily contact. Both apprehension and immediacy are necessary to establishing if something is assault. Battery is an intentional, unwanted, offensive bodily contact. Intention must be shown to prove battery. (2) Defamation is the intentional communication to a third party of a false statement that is harmful to the plaintiff's reputation. Defamation is most often libel, if printed or permanently recorded, or slander, if spoken. To prove defamation, one must demonstrate that the comment caused a monetary loss or that the comment was so inherently harmful that general damages are assumed. Things that fall under the latter are called slander per se and include comments that: claim that the plaintiff has a loathsome, communicable disease, i.e. a venereal disease or leprosy; claims that the plaintiff is guilty of a crime worthy of imprisonment; is incompetent in their profession; or claim that a woman has engaged in sexual misconduct. Also, defamation must be proven to be a statement of fact, not an opinion. (3) Privacy torts come in four kinds: false light, public disclosure of private facts, appropriation, and invasion of privacy. To prove false light, one must show that an invalid impression of the plaintiff has been created, such as attributing characteristics or beliefs to a person that are untrue of this person. Public disclosure of private facts occurs when one person makes public information about another person that a reasonable person would find highly offensive. If a plaintiff shows that a defendant has used the plaintiff's name, likeness, voice, or other identifying characteristic for commercial gain without the plaintiff's consent, the plaintiff has proven appropriation. Invasion of privacy is proven when the plaintiff shows that their solitude, seclusion, or personal affairs were invaded, when the expected a reasonable amount of privacy. (4) False imprisonment is proven when a plaintiff shows that they were intentionally restrained or confined against their will for an appreciable amount of time. The plaintiff must also prove the use of physical restraint or someone's refusal to release the plaintiff's property occurred.

(5) Infliction of emotional distress is proven by showing that the defendant engaged in outrageous, intentional conduct that was likely to cause extreme emotional distress. Some states require proof of physical symptoms caused by the emotional distress before damages can be awarded.

4) To win a negligence case, the plaintiff must prove four elements: duty, breach of duty, causation and damages. Duty is when the plaintiff establishes that the defendant owes a duty to the plaintiff.

The reasonable person standard is used to determine the degree of care and skill that a reasonable person would exercise under similar circumstances. Breach of duty is when the defendant‘s conduct violates that duty. Causation has two elements and the plaintiff must prove both. Actual cause is the determination that the defendant‘s breach of duty resulted directly in the plaintiff‘s injury. Proximate cause refers to the extent to which a defendant may be held liable for the consequences of his actions. Damages occur when the plaintiff has sustained compensable injury as a result of the defendant‘s actions.

5) Contributory negligence applies to cases in which the defendant and the plaintiff were both negligent. The defendant must prove that the plaintiff‘s conduct fell below the standard of care needed to prevent unreasonable risk of harm and the plaintiff‘s failure was a contributing cause to the plaintiff‘s injury. If contributory negligence is proved, no matter how slight the plaintiff‘s negligence, the plaintiff will be denied any recovery damages. However, comparative negligence attempts to eliminate situations in which an extremely careless defendant can cause a great deal of harm to a plaintiff who is barred from recovery due to minimal contributory negligence. There are two types of comparative negligence. Pure comparative negligence defense is when the court determines the percentage of fault of the defendant and the defendant is then liable for the percentage of the plaintiff‘s damages. Modified comparative negligence states that the defendant must be more than 50 percent at fault before the plaintiff can recover.

6) Negligence per se and res ipsa loquitur are both doctrines that have been adopted by courts to aid plaintiffs in establishing negligence claims. Res ipsa loquitur literally means ―the thing speaks for 8-7 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

itself‖. The plaintiff uses this doctrine to allow the judge or jury to infer that more likely than not, the defendant‘s negligence was the cause of the plaintiff‘s harm, even though there is no direct evidence of the defendant‘s lack of due care. Negligence per se literally means ―negligence in or of itself‖. This doctrine applies to cases in which the defendant has violated a statute enacted to prevent a certain type of harm from befalling a specific group to which the plaintiff belongs.

Instead of showing that a reasonable person would exercise a certain duty of care toward the plaintiff, the plaintiff can offer evidence of the defendant‘s violation of the statute.

7) First, the court considered whether Eramo was a public figure. Eramo had made numerous local media appearances and had authored an opinion piece all regarding the University‘s process for handling sexual assault, all following Jackie‘s case. The court thus held that Eramo had made herself a limited-purpose public figure by conspicuously inserting herself into the public conversation regarding the case. Thus, actual malice needed to be shown. Ederly had failed to do her due diligence when researching her story. She used several pieces of evidence that were either inaccurate or were highly misrepresentative of the situation. Each piece of evidence alone was not sufficient, but the court ruled that a reasonable jury could find actual malice when taking all the evidence as a whole. In the end, the court granted Eramo‘s motion for summary judgment in part, with the case to proceed to trial.

8) Steele filed his motion to dismiss under D.C.‘s Anti-SLAPP Act (―strategic lawsuits against public participation). That law gives special protections against lawsuits arising from speech that seeks to advocate on issues of public interest. The court held that Steele‘s report is entitled to First Amendment protection regardless of Steele‘s citizenship because it contained information that could inform public debate, even if that information was unfavorable to the businessmen. The court went on to hold that Steel himself is protected by the First Amendment despite being a noncitizen because he has ―ample connections with the United States[.]‖ Finally, the court held that the businessmen are public figures, and thus must overcome the ―actual malice‖ standard of New York Times v. Sullivan.

9) The appellate court found that while the statements made about Coach Turner were certainly negative, they were all also verified to be true by numerous members of the Dolphins team. Thus, there were no false statements to support a defamation claim. Additionally, Turner was a public figure who chose to be in the spotlight by taking the job as a Dolphins coach and appear on television in shows such as HBO‘s Hard Knocks.

10) On the claims of public disclosure of private facts and false light, the court ruled in favor of Mayweather. The court argued that Mayweather had a First Amendment right to comment on his personal relationships, and that all of the information he posted on social media regarding the pregnancy and abortion was true and was acquired through legal methods.

11) To satisfy a res ipsa loquitur claim, Lyles would have to produce evidence that his Atlantis Plate had broken, that Atlantis Plates do not usually break, and that therefore the breakage of the Atlantis Plate (and, by extension, the continuation of his symptoms) could have only resulted due to negligence. The court of appeals ruled against Lyles on the grounds that he could not discount other explanations for the breaking of the Atlantis Plate other than negligence, such as malpractice on the part of his doctor.

12) In its decision, the court discusses how the privacy law at hand was drafted prior to the digital age. That said, it does forbid the use of one‘s ―name, portrait, picture or voice‖ without consent, and a video game depiction of a real-life person seems to fall under ―portrait, picture or voice.‖ Thus, Lohan‘s alleged depiction in the game could basis for a privacy claim. However, the court found no resemblance between the Lacy Jonas character and Lohan, holding that the Lacy Jonas

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Chapter 08 - Real, Personal, and Intellectual Property

character ―merely is a generic artistic depiction of a ‗twenty something‘ woman without any particular identifying characteristics.‖ Thus, Lohan‘s claim was dismissed.

13) The injunction was upheld on appeal. The appellate court pointed out that the area of the city in which the plaintiff wanted to construct a gas station was a ―zone of comparative repose‖, which contained three churches, a library and a city hall, and it was likely that the Presbyterian church purposefully selected this area as the site of their church because of its quiet nature. In other words, the gas station would be a nuisance per se and would disturb the church‘s activities, and thus was not permitted to be built in the area in question.

14) The court ruled in favor of the plaintiff. The plaintiff successfully showed that he could not have contributed to the loss and, being that care of the vehicle and the objects within it were given to the defendant while plaintiff was dining, the instrumentality of the loss was in exclusive control of the defendant. Therefore, res ipsa loquitur could be invoked, and defendant was liable for the loss.

Chapter 8: Real, Personal, and Intellectual Property 1. CHAPTER OVERVIEW What is real property? The American dream seems to typically include owning real property. Why should one own real property, ways of transferring real property, and restrictions on land use are all important issues to address when learning about real property.

You might want to begin by asking students to read the chapter and reply to the review and case questions at the end of the chapter. Focus on the nature of real property, its interests, the differences between voluntary and involuntary transfers, and restriction on land use.

The chapter continues with discussion of personal property and intellectual property. Personal property consists of tangible, movable objects. Expressions of ideas are protected through intellectual property law. Intellectual property protects property that is the result of mental creativity rather than physical effort. One way to begin a discussion of IP law is to explain that the different types of protection depend on the way that the idea is expressed. For example, if a party wants to protect a distinctive design or logo associated with its product, the party would probab ly want a trademark. In contrast, if the party has created a song or work of art, it would want a copyright. Thus, the type of protection sought depends on the form in which the idea is being expressed.

2. LEARNING OBJECTIVES After reading this chapter, students will be able to answer the following questions: 1. How are the topics of real and intellectual property related?

2. How does real property law balance private and public rights?

3. What are the interests in real property that one can hold?

4. What are the types of personal property?

5. How do you transfer personal property?

6. How does intellectual property law balance private and public rights?

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7. What are the similarities and differences among the methods for protecting various types of intellectual property?

3. BUT WHAT IF SECTIONS 1. If Samsung presented evidence at trial that half of the phones that were currently on the market and were made by companies other than Apple or Samsung also shared the iPhone‘s design of being rectangular with rounded corners, then this evidence may lead the court to the assumption that the design was actually generic, and therefore should not be registered as a trademark for a specific company. As such, Apple‘s claim of infringement may not hold in court.

2. Yes. In the Case Opener, Apple claimed that Samsung ―copied Apple‘s design of the iPhone…specifically, that Samsung copied the rounded rectangle shape of the iPhone.‖ If Samsung presented evidence that they had sold a phone with a design similar to the iPhone‘s before the iPhone came out, this evidence may call into question Apple‘s claim of infringement.

4. LECTURE NOTES WITH DEFINITIONS A. In the news…

Teaching tip: For each chapter, consider asking students to relate current news items to material from the chapter.

In addition to ideas students come up with on their own, consider weaving in news stories provided by the textbook publisher.

For Chapter Eight, McGraw-Hill offers the following story: ―Viacom sues YouTube for Copyright Infringement‖  Why did Viacom sue YouTube? Be specific.  How has the Internet made it more difficult to balance the rights of intellectual property creators with others?

B. How are the topics of real and intellectual property related?

 

Real property is land and everything permanently attached to it.

Intellectual property consists of the fruits of one‘s mind. o Therefore, the laws of intellectual property protect property that is primarily the result of mental creativity rather than physical effort.

C. How does real property law balance private and public rights?

Real property law balances private and public rights by allowing the government to require involuntary transfers of property in order to benefit the public, and to protect public health, safety, and welfare.

D. What are the interests in real property that one can hold?

Teaching tip: Students are likely to be most interested in the Kelo case, so save time for it.

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Chapter 08 - Real, Personal, and Intellectual Property









The nature of real property: o Real property—land and everything permanently attached to the land. o Type of ownership interest determines an individual‘s right to the property. o Disputes arise over whether an item is permanently attached to the land. o Fixtures—originally a piece of personal property but becomes real property because it is attached to the property. o Extent of ownership— issues can relate to airspace rights, water rights, and mineral rights.

Interests in real property: o Fee simple absolute—exclusive rights to ownership and possession. Passed to an owner‘s heir when owner dies. o Conditional estate—same interests as a fee simple absolute but with a condition. If the condition is not met, the interest is terminated. o Life estate—granted for the life of the individual. Terminates at one‘s death. Life tenant cannot neglect or abuse the property so that it decreases in value. o Future interest—person‘s right to property ownership and possession in the future. Usually, this interest consists in conjunction with a life or conditional estate. o Leasehold estate—owner had possessory interest but not ownership interest. o Nonpossessory estate—includes easements and profits. o License—right to use another‘s property. This interest is temporary and revocable.

Co-ownership: o Tenancy in common—person has the right to sell his/her interest with the consent of the owners. Heirs of a tenant in common will receive the property interest upon the tenant‘s death. o Joint tenancy—may sell his/her interest with the consent of the owner. If a tenant dies his/her property is divided equally among the remaining joint owners. o Tenancy by the entirety—co-ownership by marriage. One owner cannot sell his/her interest without the other‘s consent. A surviving spouse assumes full ownership.

Condominiums and cooperatives: o Condominiums—holder of interest has exclusive ownership rights of a ―unit‖ within the condominium. Owner shares tenancy in common with other owners. o Cooperatives—involved in the ownership of apartments. Investor resident is a shareholder in the corporation that owns the apartments. Unit owners are governed by a board of directors.

E. What are the types of personal property?

 

Tangible personal property is property that can be identified by the senses – it can be seen or touched.

Intangible personal property is property that cannot be identified by the senses – it is usually memorialized in writing.

F. How do you transfer personal property?

   

Voluntary transfers such as through purchases or gifts.

Involuntary transfers such as abandonment or lost or mislaid property.

Creation of the property implies ownership.

Confusion which usually implies the commingling of fungible goods.

8-11

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G. How does intellectual property law balance private and public rights? 

Since copyright law and freedom of speech sometimes clash, legislators and courts plan an important role in responding to potential conflicts.



They also balance the rights of innovators who create intellectual property with the interests of the community.

Courts and legislators decide what ―sticks‖ to set aside for creators of intellectual property and they decide what is left for the public, including artists and other businesses.



H. What are the similarities and differences among the methods for protecting various types of intellectual property?

  

Trademark- a distinctive mark, word, design, picture or arrangement used by a seller in conjunction with a product and tending to cause the consumer to identify the product with the producer Copyrights- protect the expressions of creative ideas, but they do not protect the ideas themselves, only their fixed form of expression Patent- protects a product, process, invention, machine, or plant produced by asexual reproduction and that meets the criteria of being novel, useful, and nonobvious.

Point/Counterpoint: Should Corporations be Allowed to Patent Genes?

Teaching tip: Here are some questions to help you tie the Point/Counterpoint into class discussion:  What are the ethical issues that accompany the idea of patenting genes?  Are there certain things in the world that no one should be allowed to patent?

5. CASE BRIEFS WITH ANSWERS TO THE QUESTIONS Case 8-1 Kelo v. City of New London, 126 S. CT. 326 (2005).

Case Brief Issue: Does a city violate the Fifth Amendment's takings clause if the city takes private property and sells it for private development, with the hopes the development will help the city's bad economy?

Facts: New London, a city in Connecticut, used its eminent domain authority to seize private property to sell to private developers. The city said developing the land would create jobs and increase tax revenues.

Kelo Susette and others whose property was seized sued New London in state court. The property owners argued the city violated the Fifth Amendment's takings clause, which guaranteed the government will not take private property for public use without just compensation. Specifically the property owners argued taking private property to sell to private developers was not public use. The Connecticut Supreme Court ruled for New London.

Procedural History: The Connecticut Supreme Court ruled for New London.

Holding: The city has not violated the Fifth Amendment. Affirmed, for New London.

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Chapter 08 - Real, Personal, and Intellectual Property

Reasoning of the majority (5-4 vote):    

The city's taking of private property to sell for private development qualified as a ―public use‖ within the meaning of the takings clause.

The city was not taking the land simply to benefit a certain group of private individuals, but was following an economic development plan. Such justifications should be given deference.

The takings here qualified as ―public use‖ despite the fact that the land was not going to be used by the public.

The Fifth Amendment did not require ―literal‖ public use, the majority said, but the ―broader and more natural interpretation of public use as 'public purpose.'―

O’Connor’s Dissent:  



Unelected (therefore voter-unaccountable) private nonprofit corporation was the primary beneficiary of the government taking. ―Any property may now be taken for the benefit of another private party, but the fallout from this decision will not be random. The beneficiaries are likely to be those citizens with disproportionate influence and power in the political process, including large corporations and development firms.‖ The decision eliminates ―any distinction between private and public use of property — and thereby effectively delete[s] the words 'for public use' from the Takings Clause of the Fifth Amendment.‖

ANSWERS TO THE QUESTIONS Critical Thinking The majority and dissenting opinions disagree about what constitutes a ―public use.‖ The reasoning above makes clear the primary dispute between the majority and dissenting opinions.

Ethical Decision Making Stakeholders include the land owners, developers, residents of New London, and others. This decision shows preference for the town, private developers, and the community, in general. The ones who lost the most were the property owners who were required to sacrifice their land.

Case 8-2 Matal, Interim Director, United States Patent and Trademark Office v Tam, 582 U.S.__ (2017).

Case Brief

Issue: Should Tam be allowed to register The Slants as a trademark despite its potentially disparaging nature?

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Facts: Simon Shiao Tam is the frontman for the Asian-American rock band The Slants. Tam claims that he named his band The Slants to ―reclaim‖ and ―take ownership‖ of Asian stereotypes. In 2011, Tam filed an application in order to register the mark ―The Slants‖ for ―Entertainment in the nature of live performances by a musical band.‖ The examiner refused to register Tam's mark under Section 2(a) of the Lanham Act, which forbids marks that ―may disparage‖ an identifiable group of Americans.

Procedural History: The Trademark Trial and Appeal Board affirmed this decision, and Tam appealed to the U.S. Court of Appeals, arguing that the Board had erred and that Section 2(a) is unconstitutional. The appellate court affirmed, and the case was appealed to the Supreme Court.

Holding: The disparagement provision of Section 2(a) was ruled to be unconstitutional. The Board's holding that Tam's mark is unregistrable was vacated and remanded.

Reasoning: 



  

Section 2(a) of the Lanham Act states that no trademark shall be refused registration unless it ―Consists of or comprises immoral, deceptive, or scandalous matter; or matter which may disparage persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt, or disrepute . . .‖ The federal government argued that Section 2(a) doesn't implicate the First Amendment at all because it doesn't actually prohibit speech. Tam was free to name his band whatever he wished and use the name in commerce without registering a trademark. The Court rejected this argument, noting that a denial of the benefits that come with trademark registration has a ―chilling effect on speech‖ and is in effect a penalty or censorship of speech.

The Court also argued that the rule was unconstitutional because it failed the Central Hudson test.

To pass the test, the commercial speech in question must concern lawful activity and not be misleading, and there must be a substantial government interest justifying the regulation.

The Court ruled that the first prong was met, as there was no claim that disparaging trademarks are unlawful or mislead the public.

The second prong was not met. The Court found that ―disapproval is not a legitimate government interest where there is no plausible basis . . . [for the speech to be] reasonably attributed to the government by the public.‖

ANSWERS TO THE QUESTIONS Critical Thinking The Supreme Court argued that the government had no compelling interest to block the trademark because the disparaging speech would not be reasonably attributed to the government. However, one could argue that the government has a duty to protect its citizens from the hate of others. After all, when someone commits a crime against another on the basis of race, that person often receives a harsher sentence. By forcing the government to trademark and tacitly accept disparaging speech, one could argue

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Chapter 08 - Real, Personal, and Intellectual Property

that a conflict is created between a government‘s duty to protect its citizens and its imposed duty to allow, and some might say endorse, the propagation of hateful speech.

Ethical Decision Making Values upheld in the Tam case include freedom of expression and individualism. If the decision went the other way, the values upheld would include empathy and prudence.

Case 8-3 Toys “R” Us, Inc. v. Canarsie Kiddie Shop, 559 F. Supp. 1189 (1983).

Case Brief Issue: Does ―Kids 'r' Us‖ infringe on the mark, ―Toys `R' Us‖?

Facts: In 1961, Plaintiff Toys-R-Us, Inc. obtained a trademark for ―Toys 'R‘ Us‖ and aggressively advertised their products, children's clothing, in stores across the country. In the late 1970s, defendant Canarsie Kiddie Shop opened two clothing shops called ―Kids 'r' Us‖ within 2 miles of a Toys-R-Us shop.

Defendant never tried to register their name.

Procedural History: Toys ―R‖ Us sued for trademark infringement in federal district court.

Holding: Judgment for Plaintiff. Defendant's use of ―Kids 'r' Us‖ was a trademark violation.

Reasoning:  



     

To determine the likelihood of confusion associated with the Defendant's mark, the court considers these factors.

Strength of the Senior User's Mark--A mark can fall into one of four general categories which, in order of ascending strength, are: (1) generic (entitled to no protection); (2) descriptive (has a secondary meaning and informs public about uses of product); (3) suggestive (suggests qualities of product but requires imagination); and (4) arbitrary or fanciful (do not describe the qualities of the product). Plaintiff's mark has a strong secondary meaning as a source of children's products, so the court determines the mark has medium strength. But it falls short of the arbitrary or fanciful protection.

Degree of Similarity Between the Two Marks--KEY QUESTION: Do consumers have the impression that purchasing from the junior user is purchasing from the senior user? Both parties use the phrase ―R Us.‖ However, Plaintiffs use inverted capitalized ―R,‖ while Defendants use non-inverted lower case ―r.‖ Plaintiff uses ―Toys‖ while Defendants use ―Kids.‖ Plaintiff‘s letter is usually multicolored.

Proximity of the Products--Both P and D sell children's clothing and are direct competitors.

The Likelihood that Plaintiff Will ―Bridge the Gap‖--First, senior user will expand sales efforts to compete with junior user. Second, consumers will assume parties are related companies.

Evidence of Actual Confusion Junior User's Good Faith--Defendant asserted he did not recall whether he was aware of Plaintiffs mark. The court does not believe him and concludes that D adopted Kids `r' Us mark with knowledge of Plaintiffs mark.

Quality of the Junior User‘s Product Sophistication of the Purchasers--Because children's clothing is not a major expenditure, customers will not exercise the same degree of care in evaluating the clothes.

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 

Junior User's Goodwill--Junior user did not expend a lot of money advertising and promoting their own name. Thus, defendants don't have a strong equitable interest in retaining their name.

Conclusion: Defendant's use of its mark creates likelihood of confusion and constitutes trademark infringement.

ANSWERS TO THE QUESTIONS Critical Thinking An alternative reason that supports the court's conclusion is that the location of the defendant's stores, combined with the content of its mark, could indicate a relation to the plaintiff‘s stores.

The two stores were physically close to each other and their names/marks differ by only one word. The lack of distance that separates the two stores, combined with the tiny difference in the name, may lead consumers to believe they are different branches of the same main source. A reason to support a different conclusion would be the difference in the classification of the majority of items that are sold at each store. Why didn't the court address the fact that the majority of items at Toys R Us stores are toys while Kids ‗r‘ Us sells only clothes? This difference in content of each store might be persuasive.

Ethical Decision Making Initially, I would bring the resemblance between the Kids 'r' Us and the Toys 'R.' Us trademarks to the company's attention. I might recognize that a possible consequence of the trademark resemblance could be that our company could be sued (and face significant costs) by Toys 'R.' Us for trademark infringement. Thus, I might want to compare the potential costs of being sued with the potential profits of using ―Kids ‗r‘ Us.‖ If the costs of being sued are lower, we might want to take a chance in using the mark. However, if I were guided by the Golden Rule, my decision would probably be different. By recognizing that I would not want a competitor infringing on my company name, I would realize our company was infringing on the Toys `R' Us mark and would conclude that we should use a different mark.

Case 8-4 USPTO v. Booking.com B.V., 140 S. Ct 2298 (2020)

Case Brief

Issue: Does combining a generic term with ―.com‖ necessarily lead to the creation of a non-registerable generic term?

Facts: Respondent Booking.com is a digital travel company that provides hotel reservations and other travel services under the brand ―Booking.com,‖ which is also the domain name of its website. Booking.com filed applications to register four marks in connection with travel-related services, each with different visual features but all containing the term ―Booking.com.‖ The U. S. Patent and Trademark Office (PTO) concluded that ―Booking.com‖ is a generic name for online hotel-reservation services and denied them registration for the marks. Booking, they reasoned, was a generic term for making travel arrangements and .com indicated a commercial website, and so consumers would believe it referred to a class of on-line travel reservation systems. Alternatively, they held that even if it was descriptive and not generic, it had not acquired secondary meaning and therefore was not eligible to be registered.

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Chapter 08 - Real, Personal, and Intellectual Property

Procedural History: Booking.com sought judicial review, and introduced evidence of consumers‘ perceptions of the term. The District Court determined that ―Booking.com‖—unlike the term ―booking‖ standing alone—is not generic. The Court of Appeals affirmed, finding no error in the District Court's assessment of how consumers perceive the term ―Booking.com.‖

Holding: No. Adding ―.com‖ can make a term non-generic.

Reasoning:    

While adding a term like ―company‖ to a generic term does not add source-identifying information, adding ―.com‖ does.

A mark like ―generic.com‖ conveys to consumers an association with a particular, unique website.

The bedrock principle of the Lanham Act is that the generic character of a term depends on its meaning to consumers.

Consumers identified the term ―Booking.com‖ with a specific website that was not in a generic class of online booking services.

ANSWERS TO THE QUESTIONS Critical Thinking The Court found the analogy of adding ―.com‖ to mark to be the same as adding ―company‖ to a mark to be flawed. The Court held that unlike ―company,‖ ―.com‖ adds information to the mark that can be distinguishing.

Ethical Decision Making Values upheld in this case include freedom of expression and individualism. If the decision went the other way, the values upheld would include clarity of information.

6. TIPS FOR BUSINESS MANAGERS 1. Before starting a business in a certain area of your city, be sure to learn about the local zoning ordinances to ensure that it is even legal to operate a business in that part of town in the first place. This tip is especially important if you decide to run a business out of your home; many zoning laws do not allow businesses in residential areas except under very particular circumstances.

2. When deciding to start a new business, you need to decide whether to lease or purchase the real property on which you pan to do business. The answer to this question relies on several factors. Do you think your business will outgrow the space? Do you want to deal with maintaining the property? How long do you intend to operate your business on that property? As a rule of thumb, it is generally cheaper in the long run to buy if you plan to operate a business on a piece of property for longer than seven years.

3. If you or an employee invent a new piece of intellectual property, it is very important that you patent it, register it as a trademark, or receive copyright protections as soon as possible. Failure to do so could lead to a competitor learning about the idea, beating you to the Patent and Trademark Office, and profiting from your idea.

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4. Be sure to keep intellectual property currently in development a secret. Hire employees you can trust and enforce strict internal security policies to ensure that your competitors do not learn about your ideas and secure a patent before you can.

5. Remember that, once you secure a trademark, it is your duty to uphold its uniqueness by preventing dilution and actively fighting against parties that use the trademark without permission. Failure to do so can result in the abandonment of the trademark, meaning your firm no longer holds the rights to the mark.

7. TEACHING SKILLS: HAVE SOME FUN WITH POPULAR CULTURE! The ―Teaching Skills‖ and ―Teaching Ideas‖ sections for the intellectual property aspect of Chapter Six ask you to have some fun with spam.

Especially for the intellectual property material, consider having some fun with popular culture.

The best way to motivate yourself to increase your students‘ interest in intellectual property, read Susan Scafidi, Intellectual Property and Cultural Products, 81 BOSTON UNIVERSITY LAW REVIEW 793 (2001).

Scafidi points out that: The overriding goal of our legal scheme is: ―To balance the social and economic value of innovation with other national interests, such as market competition and freedom of expression.‖ Legal principles help us decide: •

What do we set aside for the owner of intellectual property (e.g., Hormel‘s use of the word spam)?

•

What is left for the public (e.g., artists, other businesses)?

8. TEACHING IDEAS Connecting to the Core

Ask students questions about brand equity: • Does Hormel have equity in the name spam?

• How might Jim Henson Productions affect Hormel‘s brand equity?

Teaching Basics

Ask students: In Chapter Six, we studied the two intellectual property cases: • the Toys “R” Us case, and • the Ty, Inc.case Of these two cases, which one is the most relevant in deciding whether Jim Henson Productions, Inc. has violated Hormel‘s intellectual property rights? Explain your answer.

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Chapter 08 - Real, Personal, and Intellectual Property

Advanced Teaching

Ask students: Which side won, the plaintiff Hormel Foods, or the defendant Jim Henson Productions? Explain, showing what you have learned from Chapter Six. Note to the teacher: Jim Henson‘s parody of spam was legal, as evidenced

by Spa‘am‘s debut in ―Muppet Treasure Island.‖ Ask your students what they think of this result.

Read the following facts before answering the questions that follow. ―Hormel has made the luncheon meat Spam since 1937, and has sold over five billion cans of Spam in the United States alone. In addition, Hormel has spent millions of dollars on advertisements for Spam. In February of 1996, Henson planned to release a movie entitled Muppet Treasure Island. This movie featured the cast of regular Muppet characters, including Miss Piggy and Kermit the Frog. Among the new characters created for the movie was ―Spa‘ am,‖ the high priest of a tribe of wild boars that worship Miss Piggy as their queen.‖ In creating the character, Henson assumed people would easily recognize the Spa‘am character as a parody. Henson used parodies of well known people and products as the basis for Muppet characters.

Hormel was not happy about the Spa‘ am character. ―In anticipation of the release of the film, Hormel filed suit alleging both trademark infringement and dilution. Hormel alleged that Henson's characterization of Spa‘ am in the movie would damage its trademark for Spam, by questioning the quality of the meat.‖ Hormel believed that the character named Spa'am is a ―grotesque and noxious appearing wild boar‖ that is ―evil in porcine form.‖ •

In Chapter Eight, we studied the following two intellectual property cases: o the Toys “R” Us case, and o the Ty, Inc. case, Of these two cases, which one is the most relevant in deciding whether Jim Henson Productions, Inc. has violated Hormel‘s intellectual property rights? Explain your answer.

•

Which side won, the plaintiff Hormel Foods, or the defendant Jim Henson Productions? Explan, showing what you have learned from Chapter Six.

9. ADDITIONAL TEACHING SKILLS: HAVE STUDENTS CREATE THEIR OWN POINT/COUNTERPOINT Use the ―Rails-to-Trails‖ facts as the basis for students‘ own Point/Counterpoint.

In addition to using the facts in the scenario provided, encourage students to use Chapter Forty-Nine‘s content—both text and cases—to come up with the Point/Counterpoint.

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10. TEACHING IDEAS Here are some additional teaching skills regarding the real property aspect of Chapter 6.

Connecting to the Core

Ask students: • Using what you have learned about conflict negotiation and resolution, what could the city have done to prevent the Preseaults from suing?

Teaching Basics

Ask students: • Fill out the Point/Counterpoint chart.

Advanced Teaching

See whether students can find the outcome of the real case, using their research skills.

11. THE RAILS-TO-TRAILS CASE* In 1983, the state of Vermont enacted a Rails-to-Trails law. This law provides public funds to transform abandoned rail lines into public trails for running, walking, bicycling, cross country skiing, horseback riding, and other purposes. Rail corridors are flat or have gentle grades, which make them perfect for multiple uses.

The Rails-to-Trails program has the support of the federal government, which allows states to obtain federal money to turn rail lines into trails. Each state is allowed to develop its own rails-to-trails law and development plan. Vermont‘s intent is to make use of hundreds of miles of track. In addition to recreational purposes, Vermont‘s Rails-to-Trails law promotes historic preservation of structures along the tracks (e.g., train stations, bridges), economic revitalization (businesses such as bike and snack shops thrive near a trail) and wildlife preservation (rail-trails provide homes to birds and plants). Converting rail corridors into trails also preserves the right-of-way for any future train or transportation use.

Not everyone is happy about the Rails-to-Trails law. In particular, adjacent landowners are concerned about the impact of the trails on the value and enjoyment of their property. In 1985, Paul and Patricia Preseault bought a home near the shore of Lake Champlain in Burlington, Vermont. When they bought the property, they bought it subject to an easement. An easement is a property right that allows another party to pass through a property; it grants a right-of-way. This easement was granted to the RutlandCanadian Railroad Company (the Railroad). The Preseaults knew of the easement granted to the Railroad,

* This case is based upon a real case, Preseault v. United States, 100 F.3D 1525 (1992). In the real case, the Preseaults won. The court ruled that the railroad only acquired easements upon the original conveyances, and the terms of those easements were for the use of the railway, not for public trails. These easements also ended at the time the railroad was ended in 1975, and further conveyance from the ICC to the state and subsequently the city was unauthorized under the 5th amendment without just compensation.

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but they were not concerned because the Railroad had abandoned the tracks and no trains passed along the rails.

In 1992, the city of Burlington, Vermont, with funds granted to it through the Vermont‘s Rails-to-Trails program, completed an eight-foot wide paved strip on part of the former right-of-way granted to the Railroad. The path is approximately 60 feet from the Preseaults‘ front door. Concrete posts have been installed to block automobile traffic. The city has also erected two stop signs on the path and built a water main under the path. The path is used regularly by members of the public for walking, skating, and bicycle riding. On warm weekends, up to two hundred people an hour go through the Preseaults‘ property. People using the path often trespass on the Preseaults‘ front yard. On one occasion, Mr. Preseault was nearly run over by a cyclist as he walked across the path.

The Preseaults want to sue the state of Vermont. They want the state of Vermont to compensate them for the loss of value in their home and/or to buy their property at an appropriate price.

Should the state of Vermont to compensate the Preseaults for the loss of value in their home and/or to buy their property at an appropriate price?

Yes No

12. CASE OPENER WRAP-UP: SMARTPHONE WARS In August 2012, Apple and Samsung participated in a four-week jury trial regarding patent infringement and trademark claims. Both Apple and Samsung asserted patents in this trial; however, the jury found that (1) Samsung infringed Apple‘s patents, (2) Apple did not infringe Samsung‘s patents, and (3) the trade dress of Apple‘s iPhone was diluted by some of Samsung‘s products. The jury awarded Apple over $1 billion in damages, which was one of the highest patent infringement awards in history.

Prior to the trial, the judge issued a preliminary injunction that prevented Samsung from selling one of its tablets. However, following the trial, the injunction was lifted.

13. ANSWERS TO QUESTIONS AND PROBLEMS 1) The ―bundle of sticks‖ idea is a metaphor that states that each stick represents a distinct right an individual can have with regard to property. These sticks include the rights to possess property, use it, give it away, or take it away. With regard to real property, some important sticks are the rights to sell, lease or mortgage land, or the right to allow someone limited access. The public also has the right to take land, regulate it, and/or tax it.

2) Possessory interests in land include: leasehold estate (right to possess property for an agreed-on period of time), life estate (right to possess property until death, subject to the restriction against waste), conditional estate (right that terminates upon the happening, or non-happening, or a specified condition), and fee simple absolute (right to possess property for life and pass it on to heirs upon death).

3) The ―bundle of sticks‖ idea in relation to intellectual property includes sticks for both the creator of the property and the community. The creators of intellectual property often want to keep the property to themselves and therefore one of the most important sticks is the right to exclude others. For example, holders can put a virtual fence around the ideas trademarked of patented, and ask others to refrain from using the property. Courts and legislatures also decide what sticks to set aside for the creators of intellectual property, and they decide what is left for the public.

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4) A trademark is a distinctive mark, word, design, picture or arrangement used by a seller in conjunction with a product and tending to cause the consumer to identify the product with the producer. A patent protects a product, process, invention, machine, or plant produced by asexual reproduction and that meets the criteria of being novel, useful, and nonobvious.

5) Copyright infringement is the improper use of copyrighted work, such as reproducing the copyrighted work without the permission of the copyright owner.

6) The court found that there are two ways in which a taking per the can occur per the Fifth Amendment. The first is when the government requires an owner to ―suffer a permanent physical invasion of her property‖. The second way is when regulations ―completely deprive an owner of all economically beneficial use of her property‖.

The court argued that the first method clearly did not occur; the government did not physically invade Barth‘s property. As for the second method, the court found that Barth‘s facts did not establish any economic use of the property, nor the deprivation of that use by the government.

The court reasoned that Barth had not presented enough evidence to show that his property had been subject to a government taking.

7) The state supreme court held that Samalia had voluntarily abandoned his phone at the scene and the phone was therefore searchable without a warrant. First, Samalia had no security interest in the area that was searched (i.e., the stolen vehicle) because it did not belong to him. Second, Samalia disobeyed orders given to him by a police officer and fled the scene. The court found this act sufficient to constitute voluntary abandonment of the car and his property (i.e., the phone).

The court therefore affirmed Samalia‘s conviction based upon the evidence provided by the phone search.

8) The standard for a gift causa mortis is more stringent than for an inter vivos gift because, assuming the donor does not recover, the donor is not around to dispute the authenticity of the gifting process should the donee attempt to commit fraud. Thus, a greater amount of evidence is required for a causa mortis gift.

9) The court considered eight factors to determine whether MillerCoors was infringing the STONE mark, including similarity of the marks, consumer confusion, and proximity of the goods. On balance, the court found that the marks themselves were not especially similar, and that while there was evidence of consumer confusion, it was not particularly strong. The court allowed Stone to proceed with its case, but ruled that the evidence was not strong enough for a preliminary injunction.

10) The court found that the life estate was granted to Gail Thrasher through an antenuptial agreement that went into effect when William Thrasher died. In its reading of the antenuptial agreement, the court found no language that created a conditional limitation on Gail‘s life estate.

Thus, Gail was essentially free to do as she wished with the life estate. The judgment of the lower court was reversed and remanded in favor of Gail.

11) The court found that the BEYONCÉ mark and FEYONCÉ were very similar in text, font, and pronunciation. However, by replacing the ―B‖ with an ―F‖, the defendants created a mark that sounds like ―fiancé.‖ Being that the defendants sold wedding-related goods, FEYONCÉ is a play on words. This fact could dispel consumer confusion that might otherwise arise due to the mark‘s facial similarity to BEYONCÉ. The court could not conclude as a matter of law that consumer confusion was likely, and denied Beyoncé‘s motion for summary judgment.

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12) The court ruled in favor of Oppenheimer, stating that the defendant was using Oppenheimer's copyrighted photography without his permission and therefore infringing on the copyright. However, Oppenheimer could not prove that the damages resulting from the infringement were higher than the $750 minimum damages for such a case, let alone the $30,000 Oppenheimer had asked for. Thus, Oppenheimer was awarded $750, plus costs and fees.

13) The court ruled in favor of Schwab, reasoning that the employer‘s trade secrets claim survived summary judgment because there was at least a genuine issue of material fact as to whether the information the former employee took was ever disclosed to the public. The court denied defendant Carter‘s motion to dismiss.

14) When determining whether the Prince paintings were protected by fair use, the court considered four factors: (1) the purpose and character of the use; (2) the nature of the copyrighted work; (3) the substantiality of the portion used in relation to the copyrighted work as a whole; (4) the effect on the potential market for or value of the copyrighted work. The court found the first, third, and fourth factor to favor AWF, as the paintings were transformative, used only a portion of the photograph, and were not likely to harm the market for the original photograph. Thus, the paintings were protected by fair use.

Chapter 9: Introduction to Contracts and Agreement CHAPTER OVERVIEW Contracts are ubiquitous in business relations. A contract is a promise or a set of promises made between parties for the breach of which the law gives a remedy. Students need to first understand the sources of contract law. Next, they must understand how contracts can be classified. Finally, to be introduced to contract law, they must understand the rules that guide the interpretation of contracts.

Students may assume that it will be easy to tell when someone is making an offer. Given the ambiguity in human behavior though, this assumption is probably mistaken. In the real world, a businessperson may have a difficult time distinguishing an offer from a negotiation or a bid! The principles of contract law discussed in this chapter introduce the legal guidelines for determining when an offer has been made and accepted.

LEARNING OBJECTIVES After reading this chapter, students will be able to answer the following questions: 1. What is a contract?

2. What are the sources of contract law?

3. How can contracts be classified?

4. What are the rules that guide the interpretation of contracts?

5. What are the elements of a valid offer and valid acceptance?

6. How may an offer terminate?

BUT WHAT IF ANSWERS 1. If the Pepsi points contract required only a promise from contestants to send in Pepsi points on a certain date, this scenario would be considered a bilateral contract.

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2. There are limited circumstances where an advertisement, such as the Pepsi points advertisement, can be treated as an offer. In general, when an ad specifies a limited quantity and provides a specific means by which the offer can be accepted, the courts will treat the ad as an offer. If a commercial makes mention of the steps a potential offeree would be required to take to accept the alleged offer, this may contribute to consideration of an advertisement being treated as an offer as well. Because both the first and second scenario may be realistic to a reasonable person, and because both scenarios demonstrate the steps that must be taken to accept the alleged offer, both scenarios may constitute a realistic offer.

LECTURE NOTES WITH DEFINITIONS A. What is a contract?

• • •

A contract is a set of legally enforceable promises.

A valid contract must have agreement, consideration, legal object, and parties with legal capacity.

The objective theory of contracts means that the existence and interpretation of a contract is based upon the outward manifestations of intent by the parties. What matters is how the parties represented their intent through actions and words.

Teaching tip: Ask students, ―Why is the objective theory of contracts important? If we supported a subjective theory of contracts, what result is likely?‖ What are the sources of contract law?

• State common law is an important source of contract law.

• The Uniform Commercial Code (UCC) is an important source of contract law. Article 2 governs contracts for the sale of goods.

B. How can contracts be classified?

•

bilateral/unilateral o Bilateral—a promise in exchange for a promise. o Unilateral—a performance forms the contract, e.g., a reward.

•

express/implied o Express—all terms are clearly set forth in either written or spoken words. o Implied—arises not from words but from the conduct of the parties. o Quasi-contracts—prevent one party from getting unjustly enriched at the expense of another.

•

valid/voidable/void/unenforceable o Valid—contains all the elements of a legal contract. o Voidable—one or both parties has the ability to withdraw from the contract or refrain from enforcing it. o Void—not a contract at all. o unenforeceable—a law prohibits a court from enforcing a particular contract. o executed/executory o Executed—terms of the contract have been fully performed. o Executory—some terms still need to be performed.

•

formal/informal o Formal—some contracts must be created in a specific manner, e.g., letters of credit.

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o

Informal—no formalities are required in making them. They can range from simple to complex.

C. What are the rules that guide the interpretation of contracts?

• • •

Rules are determined by courts.

The plain meaning rule says that when a writing appears to be unambiguous, its meaning must be determined from the four corners of the instrument.

Certain interpretations are standard. For example, if preprinted and handwritten words both appear on the document, handwritten words prevail.

D. What are the elements of a valid offer and valid acceptance?

•

A valid offer requires: o Manifestation of the offeror‘s intent to be bound

Trapani Const. Co. v. Elliot Group, Inc. (briefed below) considers whether there was an intent to create a contract.

Reed v. Ezelle Investment Properties, Inc. (briefed below) considers whether an acceptance can change the terms of an offer. o o

Definite and certain terms Communication by the offeree

Teaching tip: Ask students, do both of these cases help you explain the outcome in Vian v. Carey (see teaching ideas section) •

An acceptance is valid when a manifestation of intent to be bound to the terms of the offer is communicated to the offeror by the offeree.

E. How does an offer terminate?  Ways an offer can be terminated: o o o o o o

Revocation by the offeror Rejection or counteroffer by the offeree Death or incapacity of the offeror Destruction or subsequent illegality of the subject matter Lapse of time Failure of other conditions stated in the offer

Point/Counterpoint: Should the business world embrace smart contracts?

Teaching tip: Here are some questions to help you tie the Point/Counterpoint into class discussion:  Are smart contracts too complex to be practical?  Proponents of smart contracts argue that they are advantageous because they cut out the middleman and allow two parties to efficiently contract on their own. What are some of the potential benefits and harms of this feature?

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CASE BRIEFS WITH ANSWERS TO THE QUESTIONS Case 9-1 In Re. Zappos.com Inc., Customer Data Security Breach Litigation, United States District Court of Nevada WL 4466660 (2012) Case Brief Issue: Is an arbitration clause illusory, and therefore unenforceable, when a defendant company can avoid their promise to arbitrate by amending a provision, while customers are simultaneously bound to arbitration?

Facts: A hacker hacked into a defendant website, Zappos.com, known for discounted shoe sales, to access personal account information of website shoppers. Website shoppers invoked numerous lawsuits after the website hack, and the defendant website company moved to compel arbitration, arguing that it and its customers were in a bilateral agreement stating that arbitration must be used in the event of a dispute between the two parties, as supported by its Customer Terms of Use. Plaintiff customers argued that the defendant made no promise to its customers regarding dispute resolution, and argued that they should not have to use arbitration and instead should be able to file their class action lawsuit.

Procedural History: None.

Holding: Yes, the arbitration clause is illusory. The court denied the defendant‘s motion to compel arbitration.

Reasoning:

 

When the terms of use bind consumers to arbitration while leaving the defendant company free to litigate or arbitrate wherever it sees fit, there exists no mutuality of obligation.

When there is no mutuality of agreement, said arbitration agreement is illusory and therefore unenforceable.

ANSWERS TO THE QUESTIONS Critical Thinking If the court were to assume that the word ―agreement‖ encompassed a party‘s disclosure of its ability to unilaterally change the terms of use, then Zappos could argue that it had an agreement with its customers.

Ethical Decision Making Common values that a court may elevate during a decision in a contract case would be consistency, fairness, and reliability.

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Case 9-2 Trapani Const. Co. v. Elliot Group, Inc., 64 NE 3d 132 (2016)

Case Brief

Issue: Was there an implied contract between Trapani and Elliot?

Facts: Trapani, a construction firm, sent a proposal to Elliot to provide construction services on a new development. Trapani sent a total of five draft contracts to Elliot in which Elliot was listed as the contracting party. Although none of the drafts were signed, Trapani began construction at Elliot‘s Arlington site. After Trapani finished its work, it sought payment from Trapani. Although Elliot paid most of the payments, it failed to pay for the final invoice. When Trapani sued for breach of contract, Elliot asserted that no contract between Elliot and Trapani existed.

Procedural History: The trial court ruled in favor of Trapani, and Elliot appealed.

Holding: Affirmed.

Reasoning:   

Trapani had worked with Elliot several times in the past under similar circumstances (i.e., under unsigned draft contracts) and had received payment Elliot had approved 16 written contract change orders during the course of the project to allow the project to continue and had received weekly reports on the status of the construction Elliot clearly knew that construction was taking place and did not object to it; therefore, there was an implied contract in fact.

ANSWERS TO THE QUESTIONS Critical Thinking One situation where it might be less clear is if Trapani had begun construction based only on its history with Elliot (that is, it had worked for Elliot in the past and so it just assumed it would do this project as well) and/or Trapani did not send weekly updates to Elliot and Elliot did not know the construction was even taking place.

Ethical Decision Making The interests of contract beneficiaries are harmed by this decision while the interests of performing parties are helped.

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Case 9-3 Reed v. Ezelle Investment Properties, Inc., 353 F. Supp. 3d 1025 (D. Or. 2018)

Case Brief

Issue: Can there be a valid contract if the terms of an acceptance change any of the terms of the offer?

Facts: Aaron Reed, a photographer, was in a dispute with Ezelle Investment Properties, Inc. over Ezelle‘s allegedly using one of Reed's photographs without permission. Reed sent Ezelle a cease-and-desist letter along with a proposed settlement agreement that gave Ezelle the option of immediately settling for $5,000. The settlement agreement contained, among other things, a confidentiality clause. After negotiations, the parties agreed to the amount of $1000. Ezelle sent Reed a check for $1,000, along with a signed settlement agreement with the confidentiality clause crossed out. Reed accepted the payment, but told Ezelle that the confidentiality clause was non-negotiable. Reed then demanded $20,000 to settle the case. Shortly thereafter, Reed filed suit. Ezelle moved for summary judgment, arguing that the settlement agreement precluded Reed's suit.

Procedural History: Trial court found for Zehmer. No contract had been formed.

Holding: Because there was no acceptance of Ezelle‘s counteroffer, there was no contract, and Reed‘s lawsuit was not allowed to continue.

Reasoning: • • •

Ezelle’s purported acceptance modified a material term of the agreement and thus constituted a counteroffer Under the mirror image rule, Ezelle’s tender, which included deletion of the confidentiality clause, constituted a rejection of Reed’s offer Because Reed did not accept this counteroffer, the parties did not enter into a binding agreement

ANSWERS TO THE QUESTIONS Critical Thinking Had Ezelle sent back the agreement without the check and with the confidentiality clause crossed out, it might have been more clear to Reed that it was presenting a counteroffer, and the suit may never have happened.

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Ethical Decision Making If the parties were thinking about the universalization test, they very well may have communicated better.

They would have asked what the world would be like if everyone acted the way they did, and realized contracts like this one would fall through all the time for similar reasons.

TEACHING SKILLS: ENCOURAGE YOUR STUDENTS TO SEE THE “BIG PICTURE” Advent Systems Ltd. v. Unisys Corp. (which follows) is an extra case you can use as the basis for in-class discussion and assignments.

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Encourage students to see the big picture

If the Advent Systems case had been included in the chapter, where would it have fit? Ask your students to place it in a general outline of the chapter.

Explain to your students why the case fits into the outline under the question ―What are the sources of contract law?‖ Your students will want to practice their ―big picture‖ skills in every chapter.

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TIPS FOR BUSINESS MANAGERS 4. As a manager, take some time to familiarize yourself with basic legal terms and concepts (reading this book is a great way to do so!). Your primary job is to help run a business, sure, but even when things seem to be going well, legal disputes involving you, your employees or your business can arise without warning. Should a situation occur such that you need to be involved in litigation, you do not want to be going in blind.

5. For better or for worse, the U.S. legal system values justice over efficiency. Thus, trials and litigation are time-consuming and expensive processes that are tedious for just about everyone involved. Many trials, especially those involving contract or employment disputes, can be largely avoided if proper care is taken to ensure that contracts and agreements are properly and thoroughly drafted. Insist that all contracts and agreements your business makes are in writing and consider hiring a lawyer to make sure they cover most contingencies. You may be saving yourself a lot of time and money down the road.

6. A large part of running a business involves ensuring that your business is complying with all local, state and federal statutes. Another way to avoid costly litigation is to take care in making sure that your business is not violating any laws, no matter how minor. You may consider hiring a compliance expert whose job is to make sure your business is constantly operating within the confines of the law. It may be wise to familiarize yourself with your relevant local, state, and federal court systems as well. Some courts favor businesses while others favor consumers, and it would be wise to know the attitude of your court before filing a claim there.

TEACHING IDEAS Advent Systems Ltd. v. Unisys Corp. (which follows) is an extra case you can use as the basis for in-class discussion and assignments. You might also want to use the case on a test.

Connecting to the Core

Teaching Basics

Advanced Teaching

Ask your students to write a 3-5 page paper, outlining the case, and then explaining how litigation could have been avoided. In particular, why didn‘t Unisys discover earlier that it would be ―better served by developing its own document system‖? If Unisys had made this discovery earlier, it would not have contracted with Advent. What went wrong at Unisys in terms of decision-making and strategic planning?

Practice asking basic questions about the Advent Systems case. Try these: • Why does it matter whether the agreement between Advent and Unisys falls under the UCC? •

Is computer software a good or a service?

•

What rationale does the court use to support its decision?

Here are some advanced questions: • What are the implications of this case for other companies?

•

What value or ethical norm does the judge prefer?

•

Do you agree with the opinion? Explain your answer.

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Advent Systems Ltd. v. Unisys Corp.*, 925 F.2d 670; C.A.3 (Pa.),1991.

Plaintiff, Advent Systems Limited, is engaged primarily in the production of software for computers. As a result of its research and development efforts, by 1986 the company had developed an electronic document management system (EDMS), a process for transforming engineering drawings and similar documents into a computer data base.

Unisys Corporation manufactures a variety of computers. As a result of information gained by its wholly-owned United Kingdom subsidiary during 1986, Unisys decided to market the document management system in the United States. In June 1987 Advent and Unisys signed two documents, one labeled “Heads of Agreement” (in British parlance “an outline of agreement”) and, the other “Distribution Agreement.”

In these documents, Advent agreed to provide the software and hardware making up the document systems to be sold by Unisys in the United States. Advent was obligated to provide sales and marketing material and manpower as well as technical personnel to work with Unisys employees in building and installing the document systems. The agreement was to continue for two years, subject to automatic renewal or termination on notice.

During the summer of 1987, Unisys attempted to sell the document system to Arco, a large oil company, but was unsuccessful. Nevertheless, progress on the sales and training programs in the United States was satisfactory, and negotiations for a contract between Unisys (UK) and Advent were underway.

The relationship, however, soon came to an end. Unisys, in the throes of restructuring, decided it would be better served by developing its own document system and in December 1987 told Advent their arrangement had ended. Unisys also advised its UK subsidiary of those developments and, as a result, negotiations there were terminated.

Advent filed a complaint in the district court alleging, inter alia, breach of contract, fraud, and tortious interference with contractual relations. The district court ruled at pretrial that the Uniform Commercial Code did not apply because although goods were to be sold, the services aspect of the contract predominated.

A jury found for Unisys on the fraud count, but awarded damages to Advent in the sum of $4,550,000 on the breach of contract claim, and $4,350,000 on the count for wrongful interference with Unisys U.K. The district court granted judgment n.o.v. to defendant on the interference claim but did not disturb the verdict awarding damages for breach of contract.

On appeal Advent argues that the Distribution Agreement prohibited Unisys from pressuring its UK subsidiary to terminate negotiations on a corollary contract. Unisys contends that the relationship between it and Advent was one for the sale of goods and hence subject to the terms of statute of frauds in the Uniform Commercial Code. Because the agreements lacked an express provision on quantity, Unisys insists that the statute of frauds bans enforcement. In addition, Unisys contends that the evidence did not support the damage verdict.

* This case was edited in two ways. First, some formatting was changed to make it easier for students to read the case. Second, sections unrelated to whether software is a “good” under the UCC have been omitted.

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SOFTWARE AND THE UNIFORM COMMERCIAL CODE The district court ruled that as a matter of law the arrangement between the two *674 parties was not within the Uniform Commercial Code and, consequently, the statute of frauds was not applicable. As the district court appraised the transaction, provisions for services outweighed those for products and, consequently, the arrangement was not predominantly one for the sale of goods.

In the “Heads of Agreement” Advent and Unisys purported to enter into a “joint business collaboration.” Advent was to modify its software and hardware interfaces to run initially on equipment not manufactured by Unisys but eventually on Unisys hardware. It was Advent's responsibility to purchase the necessary hardware. “[I]n so far as Advent has successfully completed [some of the processing] of software and hardware interfaces,” Unisys promised to reimburse Advent to the extent of $150,000 derived from a “surcharge” on products purchased.

Advent agreed to provide twelve man-weeks of marketing manpower, but with Unisys bearing certain expenses. Advent also undertook to furnish an experienced systems builder to work with Unisys personnel at Advent's prevailing rates, and to provide sales and support training for Unisys staff as well as its customers.

The Distribution Agreement begins with the statement, “Unisys desires to purchase, and Advent desires to sell, on a non-exclusive basis, certain of Advent hardware products and software licenses for resale worldwide.” Following a heading “Subject Matter of Sales,” appears this sentence, “(a) Advent agrees to sell hardware and license software to Unisys, and Unisys agrees to buy from Advent the products listed in Schedule A.” Schedule A lists twenty products, such as computer cards, plotters, imagers, scanners and designer systems.

Advent was to invoice Unisys for each product purchased upon shipment, but to issue separate invoices for maintenance fees. The cost of the “support services” was set at 3% “per annum of the prevailing Advent user list price of each software module for which Unisys is receiving revenue from a customer.” Services included field technical bulletins, enhancement and maintenance releases, telephone consultation, and software patches, among others. At no charge to Unisys, Advent was to provide publications such as installation manuals, servicing and adjustment manuals, diagnostic operation and test procedures, sales materials, product brochures and similar items. In turn, Unisys was to “employ resources in performing marketing efforts” and develop “the technical ability to be thoroughly familiar” with the products.

In support of the district court's ruling that the U.C.C. did not apply, Advent contends that the agreement's requirement of furnishing services did not come within the Code. Moreover, the argument continues, the “software” referred to in the agreement as a “product” was not a “good” but intellectual property outside the ambit of the Uniform Commercial Code.

Because software was a major portion of the “products” described in the agreement, this matter requires some discussion. Computer systems consist of “hardware” and “software.” Hardware is the computer machinery, its electronic circuitry and peripheral items such as keyboards, readers, scanners and printers. Software is a more elusive concept. Generally speaking, “software” refers to the medium that stores input and output data as well as computer programs. The medium includes hard disks, floppy disks, and magnetic tapes.

In simplistic terms, programs are codes prepared by a programmer that instruct the computer to perform certain functions. When the program is transposed onto a medium compatible with the computer's needs, it becomes software. The process of preparing a program is discussed in some detail in Whelan Associates, Inc. v. Jaslow Dental Laboratory, Inc., 797 F.2d 1222, 1229 (3d Cir.1986), cert. denied, 479 U.S. 1031, 107 S.Ct. 877, 93 L.Ed.2d 831 (1987) and Apple Computer, Inc. v. Franklin Computer Corp., 714 F.2d 1240 (3d Cir.1983), cert. dismissed, 464 U.S. 1033, 104 S.Ct. 690, 79 L.Ed.2d 158 (1984). See also Rodau, *675 Computer Software: Does Article 2 of the Uniform Commercial Code Apply?, 35 Emory L.J. 853, 864-74 (1986).

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[3] The increasing frequency of computer products as subjects of commercial litigation has led to controversy over whether software is a “good” or intellectual property. The Code does not specifically mention software.

In the absence of express legislative guidance, courts interpret the Code in light of commercial and technological developments. The Code is designed “[t]o simplify, clarify and modernize the law governing commercial transactions” and “[t]o permit the continued expansion of commercial practices.” 13 Pa.Cons.Stat.Ann. § 1102 (Purdon 1984). As the Official Commentary makes clear: “This Act is drawn to provide flexibility so that, since it is intended to be a semi-permanent piece of legislation, it will provide its own machinery for expansion of commercial practices. It is intended to make it possible for the law embodied in this Act to be developed by the courts in the light of unforeseen and new circumstances and practices.”

Id. comment 1.

The Code “applies to transactions in goods.” 13 Pa.Cons.Stat.Ann. § 2102 (Purdon 1984). Goods are defined as “all things (including specially manufactured goods) which are moveable at the time of the identification for sale.” Id. at § 2105. The Pennsylvania courts have recognized that “ „goods' has a very extensive meaning” under the U.C.C. Duffee v. Judson, 251 Pa.Super. 406, 380 A.2d 843, 846 (1977); see also Lobianco v. Property Protection, Inc., 292 Pa.Super. 346, 437 A.2d 417 (1981) (“goods” under U.C.C. embraces every species of property other than real estate, choses in action, or investment securities.).

Our Court has addressed computer package sales in other cases, but has not been required to consider whether the U.C.C. applied to software per se. See Chatlos Systems, Inc. v. National Cash Register Corp., 635 F.2d 1081 (3d Cir.1980) (parties conceded that furnishing the plaintiff with hardware, software and associated services was governed by the U.C.C.); see also Carl Beasley Ford, Inc. v. Burroughs Corporation, 361 F.Supp. 325 (E.D.Pa.1973) (U.C.C. applied without discussion), aff'd 493 F.2d 1400 (3d Cir.1974). Other Courts of Appeals have also discussed transactions of this nature. RRX Industries, Inc. v. Lab-Con, Inc., 772 F.2d 543 (9th Cir.1985) (goods aspects of transaction predominated in a sale of a software system); Triangle Underwriters, Inc. v. Honeywell, Inc., 604 F.2d 737, 742-43 (2d Cir.1979) (in sale of computer hardware, software, and customized software goods aspects predominated; services were incidental).

Computer programs are the product of an intellectual process, but once implanted in a medium are widely distributed to computer owners. An analogy can be drawn to a compact disc recording of an orchestral rendition. The music is produced by the artistry of musicians and in itself is not a “good,” but when transferred to a laser-readable disc becomes a readily merchantable commodity. Similarly, when a professor delivers a lecture, it is not a good, but, when transcribed as a book, it becomes a good.

That a computer program may be copyrightable as intellectual property does not alter the fact that once in the form of a floppy disc or other medium, the program is tangible, moveable and available in the marketplace. The fact that some programs may be tailored for specific purposes need not alter their status as “goods” because the Code definition includes “specially manufactured goods.”

The topic has stimulated academic commentary with the majority espousing the *676 view that software fits within the definition of a “good” in the U.C.C. Applying the U.C.C. to computer software transactions offers substantial benefits to litigants and the courts. The Code offers a uniform body of law on a wide range of questions likely to arise in computer software disputes: implied warranties, consequential damages, disclaimers of liability, the statute of limitations, to name a few.

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The importance of software to the commercial world and the advantages to be gained by the uniformity inherent in the U.C.C. are strong policy arguments favoring inclusion. The contrary arguments are not persuasive, and we hold that software is a “good” within the definition in the Code.

[4] The relationship at issue here is a typical mixed goods and services arrangement. The services are not substantially different from those generally accompanying package sales of computer systems consisting of hardware and software. See Chatlos Systems, Inc. v. National Cash Register Corp., 479 F.Supp. 738, 741 (D.N.J.1979); Beasley Ford, 361 F.Supp. at 328.

Although determining the applicability of the U.C.C. to a contract by examining the predominance of goods or services has been criticized, we see no reason to depart from that practice here. As we pointed out in De Filippo v. Ford Motor Co., 516 F.2d 1313, 1323 (3d Cir.), cert. denied, 423 U.S. 912, 96 S.Ct. 216, 46 L.Ed.2d 141 (1975), segregating goods from non-goods and insisting “that the Statute of Frauds apply only to a portion of the contract, would be to make the contract divisible and impossible of performance within the intention of the parties.”

We consider the purpose or essence of the contract. Comparing the relative costs of the materials supplied with the costs of the labor may be helpful in this analysis, but not dispositive.

Compare RRX, 772 F.2d at 546 (“essence” of the agreement) with Triangle, 604 F.2d at 743 (“compensation” structure of the contract).

In this case the contract's main objective was to transfer “products.” The specific provisions for training of Unisys personnel by Advent were but a small part of the parties' contemplated relationship.

The compensation structure of the agreement also focuses on “goods.” The projected sales figures introduced during the trial demonstrate that in the contemplation of the parties the sale of goods clearly predominated. The payment provision of $150,000 for developmental work which Advent had previously completed, was to be made through individual purchases of software and hardware rather than through the fees for services and is further evidence that the intellectual work was to be subsumed into tangible items for sale.

We are persuaded that the transaction at issue here was within the scope of the Uniform Commercial Code and, therefore, the judgment in favor of the plaintiff must be reversed.

ADDITIONAL TEACHING SKILLS: Vian v. Carey (which follows) is an extra case you can use as the basis for in-class discussion and assignments.

Encourage students to see the big picture

If Vian v. Carey had been included in the chapter, where would it have fit? Ask your students to place it in a general outline of the chapter.

Hint to the teacher: Here is the court‘s conclusion in the case: ―In sum, plaintiff has not raised a triable issue of fact as to the existence of a contract. Viewing the facts in the light most favorable to plaintiff, as I have done in deciding this motion, there is no evidence that defendant thought, or should have

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thought, that plaintiff was serious about entering into a contract, nor that she believed she had bound herself to a licensing agreement for ‗Mariah dolls‘ by saying ‗okay‘ and nodding her head when her stepfather made passing references to the idea. The objective circumstances as portrayed by plaintiff do not indicate the existence of a legally binding agreement, and consideration is lacking.‖

ADDITIONAL TEACHING IDEAS Vian v. Carey (which follows) is an extra case you can use as the basis for in-class discussion and assignments. You might also want to use the case on a test.

Connecting to the Core

Teaching Basics

From a marketing perspective, do you believe the ―Mariah dolls‖ would have been good sellers? What do you want to know about Vian‘s history in the novelty item business before you decide?

Practice asking basic questions about Vian v. Carey. Try these:  We know from reading the case that Carey won. 

Advanced Teaching

Identify and explain which two cases in the chapter are most relevant in explaining why Carey won.

Here are some advanced questions:  What value or ethical norm does the judge prefer? 

Do you agree with the decision?



What does the dispute say about the relationship between Vian and Carey?

1993 WL 138837 (S.D.N.Y.)

Joseph Vian v. Mariah Carey, No. 92 Civ. 0485 (MBM)(1993).* Defendant Mariah Carey is a famous, successful and apparently wealthy entertainer. Plaintiff Joseph Vian was her stepfather before she achieved stardom, but at the start of this litigation was in the process of becoming divorced from defendant's mother. He claims defendant agreed orally that he would have a license to market singing dolls in her likeness, and sues for breach

* These facts are verbatim from the case.

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of that agreement. Defendant moves for summary judgment pursuant to Fed.R.Civ.P. 56, claiming that no contract existed and that the damages plaintiff seeks are not recoverable as a matter of law. For the reasons discussed below, defendant's motion is granted.

I. Plaintiff claims that he and Carey had an oral contract for him to receive a license to market “Mariah dolls.” These dolls would be statuettes of the singer and would play her most popular songs. Plaintiff claims that the contract was in consideration of his financial and emotional support of defendant, including picking her up from late-night recording sessions, providing her with the use of a car, paying for dental care, allowing her to use his boat for business meetings and rehearsals, and giving her various items, including unused wedding gifts from his marriage to her mother, to help furnish her apartment. (Complaint ¶ 6) The alleged basis of the oral contract is that on at least three occasions, twice in the family car and once on Vian‟s boat, Vian told Carey, “Don't forget the Mariah dolls,” and “I get the Mariah dolls.” (Liebman Aff. Exhs 2, 4, 5, 6) According to Vian, on one occasion Carey responded “okay” and on other occasions she merely smiled and nodded. ( Id.) Although Carey admits Vian mentioned the dolls two or three times, she testified that she thought it was a joke. ( Carey Depo., Liebman Aff. Exh. 7) For 30 years plaintiff has been in the business of designing, producing, and marketing gift and novelty items. (Pre-Trial Order at 3)

CASE OPENER WRAP-UP: The Problematic Promotion Much to the plaintiff‘s dismay, the court in the Pepsi case found that the commercial could not be regarded as sufficiently definite to be an offer, because it specifically reserved the details of the offer to a separate writing, the catalog.2 Also, the commercial itself made no mention of the steps a potential offeree would be required to take to accept the alleged offer of a Harrier jet. As in most cases where a consumer attempts to place an order for an advertised item, the court regarded the plaintiff‘s purported acceptance as an offer. And it was an offer that Pepsi obviously rejected.

ANSWERS TO QUESTIONS AND PROBLEMS 1.

Because, if the alleged contract is a contract for the sale of a good, Article 2 of the Uniform Commercial Code governs.

2.

A bilateral—a promise in exchange for a promise, whereas a unilateral—a performance forms the contract, e.g., a reward. The difference is important because individuals who enter into contracts must understand expectations about how to execute the terms of the deal.

3.

A person who wants to recover using a quasi-contract theory must prove that: (1) a benefit was conferred on the defendant; (2) the defendant appreciated the benefit; and (3) because of the circumstances, it would be unjust to allow the defendant to retain the benefit without compensating the party that conferred it.

2 Leonard v. Pepsico, 210 F.3d 88, 2000 U.S. App. LEXIS 6855.

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4.

The mirror image rule says that the terms of the acceptance must mirror the terms of the offer.

5.

The mailbox rule provides that an acceptance is valid when it is placed in the mailbox, whereas a revocation is effective only when received by the offeree.

6.

The two ways an offeree can manifest intent to enter into a contract are performance or return promise, i.e., saying or doing something to form the contract. The fact that Julie informed Janice about her student loan debt, began making payments to Janice, and indicated that she would be reducing the amount of each payment indicate that Julie agreed to the offer. Consequentially, the court found that there was a valid agreement between Julie and Janice.

7.

The court dismissed the case against the FDIC on jurisdictional grounds. For the case to be within the court‘s jurisdiction, the extension offer would need to have been irrevocable and Reddick would have needed to be terminated under the extension. However, the court found that the terms of the extension offer provided no evidence that it was irrevocable, and thus the FDIC was allowed to revoke the offer before the extension period started.

8.

The court allowed Willoughby Supply‟s claim to go forward. The court found that Villhauer wrote his name on the space provided for his “name” and dated the guarantee. He could have crossed out the personal guarantee section, left it blank, or sought another supplier, but he chose not to. Villhauer provided his personal information, bank information, and a list of his other credit accounts, which all point towards his intent to be bound. Thus, it was ruled Willoughby Supply may introduce parol evidence to show Villhauer‟s intent.

9.

The court ruled that the agreement between Groisman and Pfeifer was an option contract. In other words, Groisman‘s obligation to sell the properties to Pfeifer would only arise if and when Pfeifer satisfied the liens on the properties (thus giving Pfeifer the option of settling the liens at some date and then buying the properties or backing away from the deal altogether). Because Pfeifer never satisfied the liens, Groisman was free to sell the properties to another party.

10.

The court held that the doctrine of implied authority cannot be used to create an agent‘s actual authority to bind the government in contract when the agency‘s internal procedures specifically preclude that agent from exercising such authority. In other words, even though Sgt. Kosa stated he had authority to contract with Panther, the fact he truly did not have that authority means there was no contract. The same logic applies to LTG Ingram as well; the Guard had deliberately separated LTG Ingram‘s program from the contracting program, and thus he did not have the authority to form a contract with Panther. There were other Army offices that specifically held the power to form contracts, and Panther should have been communicating with them instead. The court ultimately ruled against Panther.

11.

The court found that the relevant statute did not prohibit conditioning a contract on the receipt of payment as opposed to sending it. The inclusion of this condition indicated the parties effectively agreed to ignore the mailbox rule. The court held that this is not necessarily an absurd result; although this is not the standard rule for contracts, the parties were free to agree to it. Thus, no contract was formed.

Chapter 10: Consideration 1. CHAPTER OVERVIEW Consideration is an essential element for the formation of a contract. In this chapter, students learn about the basic concept of consideration, plus all the topics that add layers of complexity to the concept—from

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promissory estoppel, to illusory promises, to accord and satisfaction. Cases in Chapter Ten bring the concept to life. Highlight the cases, and the extra case in the ―Teaching Ideas‖ section of the manual.

2. LEARNING OBJECTIVES After reading this chapter, students will be able to answer the following questions: What is consideration?

When is consideration required?

What is promissory estoppel and when can it be used?

What is adequacy of consideration?

What is an illusory promise?

What is past consideration?

What is preexisting duty?

What is the difference between a liquidated debt and an unliquidated debt?

What is an accord and satisfaction?

3. LECTURE NOTES WITH DEFINITIONS A. What is consideration?

Consideration is a required element of a contract. It is defined as a bargained for exchange having legal value. Alternatively, each side gains a benefit while also suffering a detriment as a result of the agreement.

B. When is consideration required?

Consideration is a required element of all unilateral and bilateral contracts.

C. What is promissory estoppels and when can it be used?

An exception to the general rule requiring consideration is captured in the concept of promissory estoppel. This concept says that when one party makes a promise knowing the party will rely on it, the other party does rely on it, and the only way to avoid injustice is to enforce the promise even though it is not supported by consideration.

Teaching tip: Ask students to explain the concept of promissory estoppel in their own words.

D. What is adequacy of consideration?

Adequacy of consideration refers to the amount of consideration given in return for a promise. Courts will generally not examine the adequacy of consideration absent fraud.

E. What is an illusory promise?

An illusory promise is not a promise at all.

F. What is past consideration?

Past consideration refers to past actions of a party and generally cannot serve as consideration for new contractual obligations.

G. What is a preexisting duty?

A preexisting duty is an obligation that a party already has to others and generally cannot serve as consideration for new obligations.

Teaching tip: Ask students, ―What is the main difference between a requirement and output contract?‖ 10-9 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

H. What is the difference between a liquidated debt and an unliquidated debt?

A liquidated debt is one in which the amount owed is clear.

An unliquidated debt is one in which the amount owed is in dispute.

I. What is an accord and satisfaction?

An accord and satisfaction requires: o an unliquidated debt o the creditor agrees to accept as full payment less than is owed o the debtor pays the amount agreed on The accord is the agreement. The satisfaction is the payment.

Teaching tip: Ask students to explain the concept of accord and satisfaction in their own words.

Point/Counterpoint: S houlourts require consideration to create a binding contract?

Teaching tip: Here are some questions to help you tie the Point/Counterpoint into class discussion:  Rules regarding consideration have been part of contract law for a long time. Why would a reasonable person want to change the requirement?  What purpose, if any, does consideration have in contract formation?  Could we replace consideration with something else?

4. CASE BRIEFS WITH ANSWERS TO THE QUESTIONS Case 10-1 Hamer v. Sidway, 124 N.Y. 538 (1891).

Case Brief Issue: Is a promise of forbearance valid and lawful consideration?

Facts: Story and his nephew agreed that the uncle would pay the nephew $5000 if he would refrain from drinking, using tobacco, swearing, and playing cards and billards for money until he turned 21 years old. When he turned 21, the uncle sent his nephew a letter acknowledging that he had earned the money and would hold the money until the nephew could responsibly use it. The nephew agreed. The uncle died 12 years later without having paid the money. The nephew assigned his right to collection to Hamer.

Procedural History: Hamer brought suit against the executor of the uncle‘s estate, Sidway, for payment of the money. The trial judge ruled in favor of Hamer but was reversed on appeal. Hamer appealed to the New York Court of Appeals.

Holding: There is no consideration, and the promise to pay could be enforced.

Reasoning: Consideration merely requires that one party abandon a legal right in the present or limit his legal freedom in the future.

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The nephew abandoned his legal right to engage in certain activities over a period of several years.

Having refrained from engaging in such activities for the required time, the nephew was entitled to the money even if there was no demonstrable benefit to his uncle.

ANSWERS TO THE QUESTIONS Critical Thinking Valid consideration in this case depends on forbearance from activities in which one has a legal right to engage. Refraining from engaging in activities in which one does not have a legal right to engage may not serve as consideration.

Ethical Decision Making Consideration upholds the values of freedom, justice, and efficiency.

Case 10-2 Thelma Agnes Smith v. David Phillip Riley, App. Lexis 65 (2002).

Case Brief Issue: Is $1 plus ―love and affection‖ is adequate consideration for the transfer of property?

Facts: Smith and Riley lived together, out of wedlock, for several years. When the relationship ended, Smith sought to enforce two written agreements regarding the sale and assignment of property to her.

Riley argued that the agreements could not be enforced because they lacked consideration.

Procedural History: The trial court enforced the agreements. Defendant Riley appealed.

Holding: Yes. The judgment in favor of plaintiff Smith was affirmed.

Reasoning: To be binding, a contract must have consideration.

Any consideration, however small, will support a promise.

Consideration of $1 is enough.

Here, there is also ―society and consortium‖, and love and affection is further evidence of sufficient consideration to support these conveyances.

ANSWERS TO THE QUESTIONS Critical Thinking He reasons that $1 is not enough to be a binding consideration. He overlooked the fact that any amount given in good faith and without fraud is consideration.

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Ethical Decision Making The court values security. It wants people in Smith‘s shoes to know that a court will protect their interests when a relationship ends.

Case 10-3 State v. Blake, 2015 OHIO 4762 (2015), Court of Appeals of Ohio, Eighth Appellate District, Cuyahoga County

Case Brief Issue: Can the fact that Hinton-Blake‘s sisters helped care for her prior to death serve as consideration for Blake‘s promise after her death?

Facts: Defendant Kenneth Blake was married to Charlene Hinton-Blake, who died in 2012. Three of Hinton-Blake's sisters assisted her with day-to-day care during a four-year period of illness preceding her death. Following Hinton-Blake's death, it was discovered that Blake was to receive $260,000 from a life insurance policy. Blake agreed to give Hinton-Blake's three sisters half of the insurance proceeds to be divided equally amongst themselves. To this end, Blake and the sisters prepared a notarized document to evidence their agreement. One sister stated that Blake chose to share the insurance proceeds with the sisters because he knew they had helped care for Hinton-Blake prior to her death. Blake received the insurance proceeds in June 2012 and wrote two checks to himself for $100,000 each. He then wrote checks to the sister in the amounts of $22,000 and $100,246. The $22,000 check cleared but the $100,246 check was returned due to insufficient funds.

Procedural History: Blake was criminally charged and pled guilty to one count of passing bad checks and was referred for a presentence investigation report. At sentencing, the trial court ordered Blake to pay restitution in the amount of the bad check, $100,246, and imposed a 180-day jail term along with five years of community control sanctions. Blake appeals, challenging only the order of restitution.

Holding: No.

Reasoning:  To recover restitution damages, economic loss needs to be established.  Here, however, the victims suffered no economic loss because their agreement with Blake was not enforceable due to a lack of consideration.  The victim‘s actions in caring for Blake‘s wife already occurred and cannot be bargained for, and thus cannot serve as consideration.

ANSWERS TO THE QUESTIONS Critical Thinking Arguably, the state was still right in prosecuting the case because it had a good-faith basis for asserting that Blake had caused an economic loss. Although the court found no consideration for the promise and therefore no economic loss, Blake did promise the sister $100,000 and wrote a check he probably knew would bounce.

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Ethical Decision Making On the one hand, a very reasonable argument could be made that incarcerating Blake for a crime he technically did not commit is unethical. On the other hand, it is uncontested he wrote a bad check, and the only reason it wasn‘t a criminal offense was because his promise to honor the check wasn‘t supported by consideration and therefore not a true agreement. Some might argue that Blake still deserves some form of punishment, even if it is not exactly what he was charged with.

Case 10-4 Margeson v. Artis, 776 N.W.2D 652 Supreme Court of Iowa (2009)

Case Brief Issue: Was the addendum supported by consideration?

Facts: John and Jennifer Margeson entered into a contract to sell a business to Theresa Artis for $125,000. An addendum to the agreement increased the sale price to $155,000, with $135,000 payable at the time of closing. The remaining portion of the purchase price was to be paid in monthly installments.

At closing, Artis paid $125,000 of the amount with a bank loan and an additional $10,000 with two personal checks. The parties ran into disputes following the closing, however. Artis stopped payment on one of the checks and stopped making monthly payments. The Margesons responded by suing for breach of the addendum. Artis asserted the addendum was unenforceable due to lack of consideration.

Procedural History: The district court found that the addendum was supported by consideration and granted summary judgment to the Margesons. Artis appealed, and the court of appeals affirmed the ruling.

Artis appealed again to the Supreme Court of Iowa.

Holding: No. The addendum was not supported by consideration.

Reasoning:  Artis promised additional compensation for the same performance by the Margesons.

Artis received no additional benefit from the addendum; the modification was nothing more than a unilateral price hike.  No consideration exists when the promisee has a preexisting duty to perform because a promisor is already entitled to receive the promise.

ANSWERS TO THE QUESTIONS Critical Thinking On the one hand, the judge is correct in finding that Artis was paying more for the same business than she initially agreed to. On the other hand, Artis presumably read and certainly agreed to the addendum, and some would argue that Artis‘ agreement is enough to bind her to the addendum so long as it is not unconscionable.

Ethical Decision Making Some people might argue that when someone agrees to something, they are held to their promise with very little exception. After all, what would the world be like if people could regularly back out of their

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promises? However, others might argue that Artis was put into an unfair and disadvantageous position when the Margesons suddenly increased the sale price through the addendum. It is very likely that the Margesons were displeased with the outcome of this case.

5. TEACHING SKILLS: DRAWING ON LANDMARK CASES TO FIND NEW CASES Whitmore v. Whitmore (next page) is the basis for the teaching sections for Chapter Eight.

If you are looking for extra cases for use in class or on a test, use the name of a landmark case to find a new one that explores the same principle

Knowing that Hamer v. Sidway Is a classic ―consideration‖ case, I search for a relatively new case that cites Hamer v. Sidway.

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Chapter 11 - Capacity and Legality

6. TIPS FOR BUSINESS MANAGERS 1. In many states, an option contract for the purchase of real property requires considerations that is separate from the consideration required for the sale of the land itself.

When in doubt, consult a local real estate attorney.

2. Negotiate well. Absent fraud (or other extenuating circumstances) the courts will not review adequacy of consideration. If you make a bad deal, you are stuck with it.

3. Never cash a check marked ―paid in full‖ (or with any similar language) unless you are happy to accept that amount and forego collection of any balance owed to you.

7. TEACHING IDEAS Connecting to the Core

Ask students, ―How do business students have an advantage when it comes to thinking through the implications of marriage?‖ Use Whitmore v.

Whitmore to answer the questions.

Teaching Basics

Ask students: How did the concept of consideration benefit Holly Whitmore?

What did John Whitmore believe constituted consideration? Explain his point in your own words.

Advanced Teaching

Ask students: Which case from Chapter Eight is most helpful in anticipating the holding in Whitmore v. Whitmore? How so?

Identify and explain one fact that would have changed the outcome of the case.

8 A.D.3d 371, 778 N.Y.S.2d 73, 2004 N.Y. Slip Op. 04705 Supreme Court, Appellate Division, Second Department, New York.

Holly T. WHITMORE, respondent, v.

John W. WHITMORE, appellant.1 June 7, 2004.

Background: In action for divorce and ancillary relief, the Supreme Court, Suffolk County, Sgroi, J., denied husband's motion for partial summary judgment based on postnuptial agreement.

Husband appealed.

Holding: The Supreme Court, Appellate Division, held that postnuptial agreement lacked consideration.

Affirmed.

In an action for a divorce and ancillary relief, the defendant appeals from an order of the Supreme Court, Suffolk County (Sgroi, J.), dated August 13, 2003, which denied his motion for summary judgment, in effect, dismissing certain causes of action based on a determination that the parties' postnuptial agreement was valid and granting the plaintiff's cross motion to dismiss an affirmative defense alleging that the postnuptial agreement precluded certain claims.

ORDERED that the order is affirmed, with costs.

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The parties were married on January 28, 1984. Approximately three months after their marriage, the parties executed a document entitled “Marital Agreement” (hereinafter the postnuptial agreement) in which the wife waived her right to any business property owned by the husband, regardless whether it was acquired before or after the marriage.

In October 2002 after approximately 18 years of marriage, the wife commenced a divorce action against the husband on the grounds of adultery and cruel and inhuman treatment. The husband moved for summary judgment, in effect, dismissing certain causes of action based on a determination that the postnuptial agreement, which was executed by both parties, was valid and enforceable, and the wife cross-moved to dismiss an affirmative defense alleging that the postnuptial agreement precluded certain claims. The Supreme Court found that the postnuptial agreement was not binding because it lacked consideration. We agree.

[1] [2] In New York, postnuptial agreements are specifically authorized by Domestic Relations Law § 236(B)(3). Postnuptial**75 agreements are contracts ( see Lesesne v. Lesesne, 292 A.D.2d 507, 508, 740 N.Y.S.2d 352), are subject to ordinary principles of contract interpretation ( see Cappelli v. Cappelli, 286 A.D.2d 359, 729 N.Y.S.2d 174), and require consideration ( see 2 Lindey and Parley on Separation Agreements and Antenuptial Contracts § 120.53 [5] at 12020[2d ed.] ). Consideration exists if there is a “benefit to the promisor or a detriment to the promisee” and “ „[i]t is enough that something is promised, done, forborne or suffered by the party to whom the promise is made as consideration for the promise made to him‟ ” ( Weiner v.

McGraw-Hill, Inc., 57 N.Y.2d 458, 464, 457 N.Y.S.2d 193, 443 N.E.2d 441, quoting Hamer v.

Sidway, 124 N.Y. 538, 545, 27 N.E. 256).

[3] Here, the wife received no consideration for signing the postnuptial agreement. The postnuptial agreement does not recite any consideration, and does not contain any mutual promises. Although the wife released her claims on the husband's business property, he did not relinquish any rights to any of her property or give the wife anything in return. The husband claims that his continuing to remain married to the wife provided adequate consideration. We disagree. Under the circumstances of this case, the continuation of the marriage did not provide adequate consideration ( see Combs v. Sherry-Combs, 865 P.2d 50, 53-56; 2 Lindey and Parley on Separation Agreements and Antenuptial Contracts § 120.53[5], at 120-20[2d ed.]; cf. Zagari v. Zagari, 191 Misc.2d 733, 737, 746 N.Y.S.2d 235).

The husband‟s remaining contentions are without merit.

CASE OPENER WRAP-UP: Upper Deck As you know from the Case Opener, Passante sued Upper Deck for breach of oral contract. At trial, the jury awarded him close to $33 million – the value of 3 percent of Upper Deck‘s stock at the time of the trial in 1993. Upper Deck appealed As a matter of law, any claim by Passante for breach of contract is necessarily based on the rule that consideration must result from a bargained-for exchange. In this case, the appellate court held that if the stock promised was truly bargained for, then Passante had an obligation to Upper Deck, a its counsel, to give the firm the opportunity to have separate counsel represent it in the course of that bargaining. The legal profession has certain rules regarding business transactions with clients. Bargaining between the parties might have resulted in Passante‘s settling for just a reasonable finder‘s fee.

Passante had already arranged the loan (even though the loan had not been formally accepted by the board) before the idea of giving him the stock was ever brought up. There was no evidence that Passante had any expectation that he be given stock in return for arranging the $100,000 loan. All of Passante‘s services had already been rendered by the time the idea of giving him some stock was proposed. If there was no expectation of payment by either party when the services were rendered, the promise was a mere promise to make a gift and not enforceable. The promise of 3 percent of the stock 11-2 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Chapter 11 - Capacity and Legality

was simply a gift – that is, an unenforceable promise from a grateful corporate board. It represented a moral obligation but was legally unenforceable.

ANSWERS TO QUESTIONS AND PROBLEMS 1.

The four kinds of consideration are: a benefit to the promisor, a detriment to the promisee, a promise to do something, and a promise to refrain from doing something.

2.

Promissory estoppel occurs when one party makes a promise knowing the other party will rely on it, the other party does rely on it, and the only way to avoid injustice is to enforce the promise.

3.

Yes. Any consideration, no matter how small, will support a promise.

4.

Exceptions to the preexisting duty rule—unforeseen circumstances, additional work, and UCC—sale of goods.

5.

The debt is unliquidated, the creditor agrees to accept as full payment less than the creditor claims is owed, and the debtor pays the amount they have agreed on.

6.

The court ruled that the arbitration agreement was an illusory promise. dmDickason was able to unilaterally avoid arbitration by amending the agreement without notice at any time before Jamrowski files an arbitration claim, and therefore the agreement failed for lack of consideration.

7.

The court found that the parties did indeed enter into an accord and satisfaction. Ingram sent Pendergrass a check to fulfill what he argued was the rest of his bill. Pendergrass modified the check and considered it credit toward the $9,073 balance, but the important part is that Pendergrass accepted the check. The court applied the precedent set by Hussey v. Crass, a case with similar circumstances that held that accepting the check was akin to accepting a settlement. If Pendergrass was not satisfied with the value of the check, it should have rejected the check outright or talked to Ingram about using the check as credit toward the remaining balance before actually doing so.

8.

The court denied Altria's motion to compel arbitration. It concluded that because Altria was given the right to unilaterally modify or terminate the dispute resolution agreement, the agreement was not supported by mutual consideration, and was therefore "invalid and unenforceable."

9.

Bouton sued under the theory of promissory estoppel. She argued that her father made a promise, that she reasonably relied upon it, and that she suffered great detriment when her father did not uphold the promise. The court agreed and found Byer liable for damages.

10.

The employer‘s motion to compel arbitration was denied based on unconscionability, and mandamus relief was sought. The court found that because the employer had the ability to modify or terminate the contract at any time without giving prior notice to its employees, the promise to arbitrate was illusory, and the arbitration agreement was unenforceable. Mandamus relief was denied.

11.

The court ruled that an enforceable oral contract did in fact exist between Peter and Laureen.

The trial judge stated that consideration consists of ―either a benefit to the party promising or a prejudice or trouble to the party to whom the promise is made.‖ In this case, Peter‘s promises would have served as a benefit to Laureen and thus constituted consideration. Despite Peter‘s claims that he made no promise regarding access to Laureen‘s pension, the trial judge found Laureen and the childrens‘ testimonies asserting the existence of the promise to be credible, 11-3 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

and thus the case was ruled as it was.

12.

This matter proceeded to a two-day evidentiary hearing before a magistrate, who held that the 1998 and 2006 noncompete agreements were enforceable, but the 2008 noncompete agreement was unenforceable. The trial court sustained 84 Lumber‘s objection to the magistrate‘s decision on the issue of adequate consideration with regard to the 2008 contract. The trial court ruled that 84 Lumber‘s granting Houser a consistent paycheck was sufficient consideration supporting the 2008 contract. The appellate court affirmed this judgment, agreeing that there was adequate consideration to support the noncompete agreement.

13.

The court ruled that at-will employment of any form, ―new‖ or not, is not valid consideration; the terms and conditions of at-will employment are unilaterally imposed on employees whether the employee approves or not. The agreement also lacked mutual obligation, as it largely exempted Cintas from arbitrating the types of claims that it‘d be likely to bring against Jimenez, while Jimenez was bound to arbitrate her claims against Cintas. Therefore, Cintas‘ movement to compel arbitration was overruled.

Chapter 11: Capacity and Legality 1. CHAPTER OVERVIEW To enter into a contract, parties must have capacity, which means the parties must have the mental ability to understand their rights and obligations under a contract, so they can comply with the terms. In addition, contracts must be legal—they must have a legal object. Chapter Eleven considers these two important elements of contract formation. In this chapter, students will be especially interested in the facts regarding incapacity.

2. LEARNING OBJECTIVES After reading this chapter, students will be able to answer the following questions: 1. When would a minor have only limited capacity to enter into a contract?

2. How can a contract created when one is a minor be ratified after one is no longer a minor?

3. Under what conditions is a contract unenforceable by law?

4. When does unfairness affect a contract‘s enforceability?

5. What is the legal effect of entering into a contract for an illegal purpose?

6. Why would anyone care whether a contract was severable?

3. BUT WHAT IF SECTIONS 1.

Unless a minor is emancipated, a parent would have legal control over their minor child. As such, the parent would be able to void a contract entered into by their minor child.

2.

Persons suffering from a mental illness may have full, limited, or no legal capacity to enter into a binding contract, depending on the nature and extent of their mental deficiency. A person has only limited capacity to enter into a contract if he or she suffers from a mental illness of deficiency that prevents him or her from understanding the nature of the transaction being entered into. If Chloe was convinced that she owned a dog even though she didn‘t, she would most likely have limited to no capacity, allowing her to avoid her contract. If Chloe had been adjudicated insane, she would be deemed as having no capacity.

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Chapter 11 - Capacity and Legality

Chloe would have a guardian appointed who would be responsible for entering into contracts on her behalf. If Chloe‘s sister was her guardian, her sister could void the contract for Chloe.

4. LECTURE NOTES WITH DEFINITIONS A. When would a minor have only limited capacity to enter into a contract? 

One of the limitations on capacity is the ability of minors to enter into only voidable contracts. In almost all states, a minor is someone under the age of eighteen. In Alabama, Nebraska, and Wyoming the age is nineteen and in Mississippi the age is 21.

B. How can a contract created when one is a minor be ratified after one is no longer a minor?

  

Once a person reaches the age of majority, he or she may ratify, or legally affirm contracts made as a minor.

Express Ratification is when the party states, either orally or in writing, that he or she intends to be bound by the contract entered into as a minor.

Implied Ratification occurs when the former minor takes some action after reaching the age of majority that is consistent with an intent to ratify the contract.

C. Under what conditions is a contract unenforceable by law?

When contracts are against generally accepted public policy, or violate a state or federal statute, these agreements are determined to be unenforceable, and not void.

D. When does unfairness affect a contract’s enforceability?

Unfairness affects a contract‘s enforceability when there is a heavily one-sided agreement. The term unconscionable refers to this type of agreement where the agreement in question is so unfair as to be void of conscious. There are two types of unconscionable agreements:  Procedural unconscionability relates conditions that would impair one party‘s understanding of a contract, as well as to the integration of the terms into a contract.  Substantive unconscionability involves overly harsh or lopsided substance to an agreement.

E.

What is the legal effect of entering into a contract for an illegal purpose?

Any contract that is an agreement to commit an illegal purpose is seen as unenforceable. If a contract is legal when it was formed and then the subject of the contract becomes illegal under a new statute, the contract is considered to be discharge by law.

F.

Why would anyone care whether a contract was severable?

Severable contacts are those that contain multiple parts that can be performed separately. Someone would care whether a contract was severable because severable contracts have a huge advantage over indivisible contracts because if the severable contract has both legal and illegal portions, courts have the option of declaring void only those sections of the agreement that are illegal.

Point/Counterpoint: Should minors have full

capacity to enter into binding

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Teaching tip: Here are some questions to help you tie the Point/Counterpoint into class discussion:

 

The ―yes‖ argument claims that the law is inconsistent in its treatment of minors. Does this inconsistency have benefits for society? If so, do these benefits outweigh the downsides?

Does the infancy doctrine provide an unfair advantage to minors?

5. CASE BRIEFS WITH ANSWERS TO THE QUESTIONS Case 11-1 Lopez v. K-Mart Corporation, United States District Court N.D. California

Case Brief Issue: Did Lopez have the right to disaffirm the agreement due to him being a minor when he signed it?

Facts: In April of 2013, K-Mart hired Adrian Lopez as a cashier in its Concord, California store. At the time, Lopez was 16 years old and a sophomore in high school. Before Lopez began working, he was required to participate in K-Mart's online training program. During the program, Lopez was presented with an electronic arbitration agreement. Lopez electronically signed the agreement and acknowledged his receipt of the agreement. In January of 2015, one month after his 18th birthday, Lopez filed a class action complaint against K-Mart alleging violations of California wage and hour laws. K-Mart filed a motion to compel arbitration. Lopez contended that, because he was a minor when he acknowledged the agreement, he is now entitled to disaffirm the agreement and render it void, thus allowing Lopez to pursue his claim in court.

Holding: Yes. Lopez had the right to disaffirm the agreement and did so in a timely manner, rendering the agreement void. K-Mart's movement to compel arbitration was denied and Lopez was free to pursue his class action claim in court.

Reasoning:   

The court found that the arbitration agreement was valid, but acknowledged that this fact hardly mattered if Lopez could disaffirm the agreement.

The California Family Code provides that minors have the capacity to form contracts and may disaffirm contracts before age 18 or within a reasonable time afterwards.

Lopez claimed disaffirmance within a month of turning 18, which the court found to be a reasonable timeframe.

ANSWERS TO THE QUESTIONS Critical Thinking The court wasn‘t necessarily discouraging employers from hiring minors in the future; the ruling has no bearing on the ability of minors to perform work for an employer. This case simply serves to remind employers that they may be taking a risk when hiring minors for certain positions, a risk that was present before and after this case was decided.

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Ethical Decision Making In this case, the values of innocence and paternalism in regards to minors were in conflict with accountability and conscionability.

Case 11-2 King v. Riedl, Alabama Civil Court of Appeals, 58 So. 3d 190 (2010).

Case Brief

Issue: Does King‘s lacking a homebuilder‘s license preclude him from enforcing his contract with the Riedls?

Facts: Jim King provided services to the Riedls to make improvements on the Riedls‘ home. After King‘s services, the Riedls were unsatisfied, and filed a small claims complaint in the small-claims division of the Madison District Court, alleging that King had damaged her house. King filed an action in the Madison Circuit Court against the Riedls, alleging a number of claims, including breach of contract as the Riedls had not fully paid King. The cases were consolidated.

Procedural History: The circuit court entered a summary judgment in favor of the Riedls, dismissing all

Holding: Affirmed in favor of the Riedls.

Reasoning:    

When a homebuilder is contracted for over $10,000, he or she is obligated by the law to obtain a homebuilder‘s license.

The evidence indicates that King was contracted for an amount exceeding $10,000.

King‘s argument that the payments he received that totaled over $10,000 should be considered separately is contrary to precedent, and thus, unpersuasive.

King violated § 34-14A-14 because he performed work, under his direct control and supervision, for more than $10,000.

ANSWERS TO THE QUESTIONS Critical Thinking An especially important fact in the determination of this case was whether King had been paid for his services in excess of $10,000. This fact is particularly significant because if King instead had been paid under $10,000, then the Riedls would have likely not been granted summary judgment because King would not have been legally required to obtain a homebuilder‘s license.

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Chapter 11 - Capacity and Legality

Ethical Decision Making Contractors who offer services for small home projects are particularly advantaged by the exemption because these ―small business‖ contractors do not usually contract their services for a payment over $10,000. So, in general, those contractors who do not own a large business, offer an abundance of services, and generally agree to short term projects would likely benefit from this exception because these types of services are generally less costly.

Case 11-3 Baja Properties, LLC v. Mattera, 812 SE 2d 358 (2018)

Case Brief

Issue: Is Baja Properties‘s right to sue barred by statute?

Facts: In September 2013, Ugo Mattera entered into a written construction contract with Baja Properties, LLC.; Stephen Chad Golden, the sole owner of Baja Properties, signed the contract and addendums on Baja Properties’s behalf. Pursuant to the contract, Baja Properties agreed to build a house for Ugo Mattera on land he and Kellie Mattera owned. Baja Properties completed some of the construction, but disputes developed and Ugo Mattera terminated the contract before the house was completed. Stephen Golden did not have a Georgia builder’s or contractor’s license when the parties entered into the contract or when the work was performed.

Procedural History: The Matteras moved for summary judgment on Baja Properties‘s claims against them, asserting that OCGA § 43-41-17 (b) bars an unlicensed contractor from enforcing in law or equity a contract for the performance of work for which a license is required. The trial court granted the Matteras‘ motion for summary judgment on all of Baja Properties‘s claims, finding that the claims were barred by OCGA § 43-41-17 (b). Baja Properties appealed.

Holding: Yes. The statute at hand barred Baja Properties‘s right to sue.

Reasoning:    

The relevant statute holds that contracts between an owner and an unlicensed contractor shall be unenforceable by the contractor It is undisputed that Baja Properties and the Goldens did not have contractors licenses while the work was being performed Baja Properties argued it was exempted under the section that allows unlicensed contractors to do work on their own property However, the court held that this exemption clearly doesn‘t apply

In addition to all these factors, Riley agreed to a contract that clearly stated that the maximum value of property allowed to be stored in the self-storage unit was $5,000. Riley then ignored the agreement and stored property allegedly worth $1.5 million in the unit. The agreement also stated 11-5 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

that Iron Gate was only liable for $5,000, which was reasonable considering the $5,000 storage limit.

Critical Thinking Facts that would have changed the outcome include if Baja Properties were doing work on its own property or, simply, if Baja Properties had a license. The case would have also turned out differently if Mattera was trying to enforce the contract against Baja Properties; the statute only bars suit by Baja Properties, not the other way around.

Ethical Decision Making Homeowners who want to do work on their own home are advantaged by this decision, whereas contractors who would otherwise do that work, especially without a license, are disadvantaged.

6. TIPS FOR BUSINESS MANAGERS 1. Remember that people don't always look their age, so always make sure to verify the age of anyone with whom you are entering into a contract. You do not want to find out you have entered into a contract with a minor by their telling you they want to disaffirm the agreement.

2. There may be times when you need an exculpatory clause in one of your contracts. To ensure that the exculpatory agreement is enforceable, it is a good idea to make sure the clause is printed in a large font and initialed by both parties. If possible, as in Case 16-3, provide options to the other party, so that the clause is clearly negotiated.

3. When drafting a covenant not to compete in conjunction with the sale of a business, make sure that it is clearly reasonable both in terms of the length of time it is valid for and the geographic area. One way to determine reasonableness of both is to rely on your customer list, both in terms of where your customers live and how frequently they use your services. Because of the value of this information if you should sell your business, it is a good idea to maintain good customer lists because you never know when you may decide to sell.

7. TEACHING SKILLS: ENCOURAGE YOUR STUDENTS TO COMPARE TWO CASES Use Reed Mill & Lumber v. Jensen (an extra case) enhance student learning.

Comparing two cases can help students understand the material. Use the chart that follows Reed Mill & Lumber v. Jensen to compare the two cases

Ask students to compare Case 16-3. Gann v.

Morris, with Reed Mill & Lumber v. Jensen.

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8. TEACHING IDEAS Connecting to the Core

From a management perspective, why are covenants not to compete a good idea? Who benefits from them? How can companies structure them so they do not violate public policy?

Teaching Basics

See the chart that follows the case. When students fill out the chart, it sets the stage for you to engage in teaching basics.

Advanced Teaching

See the chart that follows the case. When students answer the questions that follow the chart, it sets the stage for you to engage in advanced teaching.

165 P.3d 733, 2006-2 Trade Cases P 75,425, 25 IER Cases 298 Colorado Court of Appeals, Div. IV. REED MILL & LUMBER CO., INC., Plaintiff-Appellant and Cross-Appellee, v.

Neil JENSEN, Defendant-Appellee and Cross-Appellant, and General Building Materials, Inc., Defendant-Appellee.

No. 05CA0431.

Sept. 21, 2006.

I. Background Jensen worked for Reed Mill, a mill and lumber business, from 1973 until 2002. During his employment, and before the company was sold in 1996, Jensen received a bonus in the form of company stock.

In 1996, Reed Mill sold its name and all or nearly all of its operating assets to Vranian Enterprises, Inc. (buyer). During the parties' negotiations, it was agreed that each of Reed Mill's shareholders would be required to sign a noncompete agreement.

Section 10 of the purchase agreement states that Reed Mill's covenant not to compete was necessary to ensure the continuation of the business with regard to the assets being sold. It states further that, as consideration and necessary inducement for the purchase, Reed Mill agreed that for a period of three years from the closing date, it would not, among other things, own, manage, operate, or participate in the management or control of any enterprise within a 100-mile radius that was engaged in the provision of mill and lumber services and products.

Reed Mill distributed the proceeds of the sale to its shareholders in accordance with the percentage of shares held by each. Jensen received $50,000 for his shares of the company stock. Shortly after the transaction closed, Jensen and the other shareholders signed noncompete agreements. Of the total price the buyer paid to Reed Mill, $115,000 was allocated as compensation for goodwill and the covenant not to compete. Of this amount, Reed Mill paid Jensen a pro rata share in the amount of $9,857.

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Chapter 12 - Reality of Assent

Jensen's noncompete agreement states that it was made pursuant to the asset purchase agreement. It provides that the three-year prohibition against competition would begin upon termination of Jensen's employment for any reason, and continue for three years thereafter. The agreement also contains a provision entitling the prevailing party to attorney fees and costs in the event of litigation.

For the first few years after the sale, buyer operated the business under the Reed Mill name, and Jensen continued to manage and oversee the new Reed Mill's operations as its general manager, and remained responsible for operations and sales. Thereafter, although he continued to be responsible for sales, his operational responsibilities were assigned to other employees.

Jensen resigned in 2002 and began working for General Building Materials, Inc. (GBM). Reed Mill sued Jensen for breach of the noncompete agreement and sued GBM for tortious interference with contract.

After the jury reached a verdict in favor of Reed Mill, Jensen and GBM filed motions for a directed verdict and for judgment not withstanding verdict, contending that the noncompete agreement was invalid.

The trial court concluded that because the parties executed the noncompete in connection with the sale and purchase of a business, the noncompete was permitted under an exception to Colorado's statutory bar on covenants not to compete. It also found that, at the time of his departure, Jensen was not an executive or management employee of the company, and therefore the executive and management personnel exception did not apply.

The court noted that buyer's principal admitted that the three-year noncompete agreement signed by Reed Mill's majority shareholder, who owned nearly ten times more shares than Jensen, was reasonable to protect buyer's purchase of Reed Mill's good will. On that basis, the court concluded that three years was more than sufficient for buyer to establish itself in the industry.

On these premises, the court found no valid reason why Jensen, a mere employee and an owner of only a small percentage of the business, should be prohibited from competing with Reed Mill in 2002, six years after the closing date. The court also found that prohibiting Jensen from employment in the only area in which he had experience would place an undue hardship on him, and that it was not necessary to bar Jensen for six years after the date of sale, much less for nine years after the sale.

Accordingly, the court ordered a directed verdict and entered judgment for defendants, finding that the duration of the noncompete agreement was unreasonable. The court ordered*736 each party to pay its own attorney fees.

Reed Mill appeals the directed verdict, and Jensen cross-appeals the rulings that the parties must pay their own attorney fees and that the noncompete was made in connection with the sale of a business.

II. Reasonableness in Connection with Sale Reed Mill contends that although the trial court correctly concluded that Jensen's noncompete agreement was made in connection with the purchase agreement, it erred when it concluded that the duration of the agreement was unreasonable. We perceive no error.

A. Covenants Not to Compete [1] [2] [3] Colorado public policy disfavors covenants not to compete. However, § 8-2-113, C.R.S.2006, permits such covenants in limited circumstances. DBA Enters., Inc. v. Findlay, 923 P.2d 298, 302

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(Colo.App.1996). When a covenant not to compete is statutorily permitted, it is enforceable only if it is reasonable in duration and geographic scope. Nat'l Graphics Co. v. Dilley, 681 P.2d 546 (Colo.App.1984); Colo. Accounting Machs., Inc. v. Mergenthaler, 44 Colo.App. 155, 609 P.2d 1125 (1980). To be reasonable, a noncompete agreement must not be broader than necessary to protect the promisee's legitimate interests, and it must not impose hardship on the promisor. See Whittenberg v.

Williams, 110 Colo. 418, 135 P.2d 228 (1943). Covenants not to compete ―for terms up to five years and within distances of 100 miles‖ are commonly upheld. Harrison v. Albright, 40 Colo.App. 227, 231, 577 P.2d 302, 305 (1977).

1. Covenants Ancillary to the Purchase of a Business [4] Section 8-2-113(2)(a), C.R.S.2006, permits covenants not to compete in connection with contracts for the purchase and sale of a business or the assets of a business. When ancillary to the sale of a business, such covenants protect the buyer's right to enjoy the business good will for which it paid. Gibson v.

Eberle, 762 P.2d 777, 779 (Colo.App.1988). Good will ―is an incident of a continuing business having a particular locality or name,‖ and includes ―the expectation of continued and repeated public patronage.‖ Nat'l Propane Corp. v. Miller, 18 P.3d 782, 786 (Colo.App.2000).

[5] Where the evidence provides adequate support, we will not overturn the trial court's finding that a noncompete agreement was made in connection with a sale of business under § 8-2-113(2)(a). Boulder Med. Ctr. v. Moore, 651 P.2d 464, 465 (Colo.App.1982).

2. Reasonableness and Enforceability [6] The reasonableness of covenants ancillary to the sale of business depends on whether the restraint on competition provides fair protection to the buyer's purchase of good will, while imposing restrictions no greater than necessary to protect the value of that good will. See Barrows v. McMurtry Mfg. Co., 54 Colo.

432, 131 P. 430 (1913) (an agreement that arbitrarily binds the seller beyond the duration and geographical scope necessary to protect the good will transferred is without consideration); Gibson v.

Eberle, supra, 762 P.2d at 779.

[7] [8] Reasonableness turns on the facts of each case. Zeff, Farrington, & Assocs., Inc. v. Farrington, 168 Colo. 48, 50, 449 P.2d 813, 814 (1969). ―To the extent that the legal determinations turn on questions of fact-for example whether a restrictive covenant was reasonable in scope-the [appellate] court must accept the district court's findings unless those findings are clearly erroneous.‖ Bus. Records Corp. v. Lueth, 981 F.2d 957, 959 (7th Cir.1992) (citation omitted).

[9] Some courts have held that, depending on the circumstances, a covenant not to compete that is ancillary to the sale of a business may be enforceable even when a covenant of similar breadth incident to employment would not be. See Rent-A-Ctr., Inc. v. Canyon Television & Appliance Rental, Inc., 944 F.2d 597, 600 (9th Cir.1991); Gann v. Morris, 122 Ariz. 517, 518, 596 P.2d 43, 44 (Ct.App.1979); *737 H & R Block, Inc. v. Lovelace, 208 Kan. 538, 544, 493 P.2d 205, 210 (1972). Nonetheless, when the duration of a covenant not to compete is greater than is necessary to protect legitimate interests, it is unreasonable and, consequently, unenforceable. See Alexander & Alexander, Inc. v. Danahy, 21 Mass.App.Ct. 488, 488 N.E.2d 22, 29 (1986).

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Chapter 12 - Reality of Assent

B. Unenforceable Agreement [10] Reed Mill asserts that it was reasonable to begin the three-year noncompetition period upon termination of Jensen's employment because Jensen possessed good will at the time of the sale and maintained that good will during his employment with the new company. We disagree.

The purchase agreement states that the covenant not to compete was necessary to ensure the continuation of the business. And, indeed, buyer purchased the good will that was incident to old Reed Mill's locality, name, and expectation of continued and repeated patronage by its customers. It purchased the company's good will from its owners. Because Jensen was an owner, Jensen received a pro rata share of the amount buyer paid for that good will.

Buyer was entitled to protect its enjoyment of that good will and establish itself in the industry without competition from the former company or its owners. Such protection was afforded by a period of noncompetition that prevented the former owners from benefiting from the company's good will, gave buyer time to convert that good will to its own, and dissipated the extent to which the marketplace identified the company with the former owners.

For the first three years after the sale, buyer enjoyed the absence of competition from any former owner, including Jensen. In addition, Jensen did not benefit personally from old Reed Mill's good will. Instead, as one employee of new Reed Mill's employees, he participated in buyer's efforts to convert that good will to its own, preserve the patronage of past customers, and establish itself in the locale and industry. Thus, during this time, buyer's right to the good will was protected.

For purposes of our analysis here, it does not matter whether the absence of competition from Jensen during this period resulted from his compliance with the noncompete agreement or buyer's decision to hire Jensen and, thereby, also obtain his loyalty. Nor does it matter that by hiring Jensen, buyer made the noncompete agreement unnecessary for the duration of the employment relationship. What matters is whether enforcement of the covenant after those three years was necessary to provide fair protection to buyer's legitimate interests in converting old Reed Mill's good will to its own.

In this regard, we recognize the possibility that the identification of Jensen with old Reed Mill did not dissipate to the same extent as it did with regard to shareholders whom buyer did not employ. Hence, it is conceivable that, although new Reed Mill had had three years to convert the company's good will to its own, and was in a better position in that regard than it had been immediately after the sale, Jensen may have posed a greater risk to Reed Mill's ability to continue to enjoy that good will than did the former shareholders who had remained completely out of the marketplace.

But Reed Mill continued to employ Jensen for another three years after the noncompetition obligations of the other former shareholders expired. Thus, the question as presented to the trial court was not whether the agreement was enforceable at its inception, but rather, whether beginning six years after buyer purchased old Reed Mill's good will, enforcement of yet another three years of freedom from Jensen's competition was reasonable as a means of protecting the value of buyer's purchase.

Consistent with the appropriate reasonableness analysis, the trial court considered Jensen's percentage of ownership, the nature of Jensen's employment at Reed Mill after the purchase, Jensen's professional experience, and the terms of the other shareholders' noncompete agreements. The court found that (1) the evidence established that three years was a sufficient time for buyer to take over the business, learn the trade, and be free of competition from the former owners of Reed Mill; (2) three years was a *738 reasonable period of time and more than sufficient for buyer to establish itself in the industry; (3) there was no valid reason why Jensen should have a noncompete agreement that extended six years; (4) at the 12-4 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

time of his termination from new Reed Mill, Jensen was not in a position of management or in an executive position; and (5) under the circumstances, it would pose an undue hardship on Jensen to require that he not participate in employment in the only area in which he had experience. Each of these findings is supported in the record and is supportive of the court's finding that the agreement to commence the period of noncompetition beginning six years after the purchase was not reasonable.

In addition, it is undisputed that at the time of the court's ruling, buyer had had a period of six years after the purchase to ensure continuation of the business and to protect the value of the good will it had purchased. Had the trial court allowed Reed Mill to enforce the agreement, Reed Mill would have expanded that period to nine years. And the record supports the court's findings that doing so would have restricted Jensen's right to work and to receive compensation for his work more than was necessary to protect the value of buyer's purchase of good will and, thus, that the hardship on Jensen would have been undue.

Therefore, we conclude that the trial court did not err when it found that the agreement was not reasonable and, accordingly, concluded that it was no longer enforceable.

Judgment affirmed.

Complete the following chart, and then answer the questions that follow: Gann v. Morris

Reed Mill & Lumber v. Jensen

Describe the covenant not to compete.

Issue

Holding

Rationale



How were the covenants not to compete different in terms of context? The precise terms?



How do you reconcile the outcomes of the case, e.g., that the covenant was upheld in Gann V. Morris, and struck down in Reed Mill & Lumber v. Jensen?

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Chapter 12 - Reality of Assent

9. CASE OPENER WRAP-UP The court deemed the individual purchases made by the minors as separate contracts between Apple and the minors.

In response to the plaintiffs‘ alleging that each separate and voidable contract may be disaffirmed by a parent or guardian on behalf of the minor, the court ruled in favor of the plaintiffs. Apple‘s request to dismiss Plaintiffs‘ First Cause of Action was denied.

10. ANSWERS TO QUESTIONS AND PROBLEMS 1) In general, minors can disaffirm any contract formed before they turn 18 as long as the contract is not for a necessary, such as food, shelter, and basic medical care.

2) Minors who choose to disaffirm a contract must: notify relevant parties of the intent to disaffirm, return consideration that is still in the minor‘s control, to pay restitution for damaged goods in some cases, disaffirm within a reasonable time of the minor‘s reaching the age of majority.

3) Exceptions to the general rule that minors are allowed to disaffirm contracts are when the contract is for life insurance, health insurance, psychological counseling, performance of duties related to certain financial transactions, educational loan contracts, child support contracts, marriage contracts, and contracts to enlist in the armed services. The public wants minors to comply with their agreements when doing so is in the individual‘s, or society‘s, best interests.

4) Legally, the proof required for a ―crazy‖ person is whether the person is adjudicated insane.

Sometimes a person has a guardian appointed for him/her. The guardian will then have the ability to enter into contracts on that person‘s behalf.

5) Factors that courts look at in covenant not to compete cases include the geographic area covered, the time period for which the restraint is to be in effect, and the hardship imposed on the promisor.

6) A relationship between contracts in restraint of trade an unconscionable contract is that both are agreements in contradiction to public policy. Rather than being illegal per se, they are unenforceable when they are not in society‘s best interests.

7) The jury returned a $586,790 verdict in favor of the plaintiff private airline charter company, Sentient Jet LLC. To support his case, Sanchez pointed to language in the agreement holding that ―any claim, dispute, or controversy between Employee and Company . . . must be resolved by final and binding arbitration . . .‖ Sanchez argued that this language was too broad and was unconscionable because it gave Gruma a huge, unfair advantage in deciding whether to arbitrate.

But the court pointed to other language in the agreement that stated that this language and other lists of claims were not exhaustive and served only as an example. The court found no mutuality problem and thus the agreement was not unconscionable.

8) For a minor to properly disaffirm a contract, the minor cannot continue to benefit from the contract following disaffirmance. However, the minors continued to use Valve‘s Steam service following their alleged disaffirmance, and in fact their continued use was contingent upon accepting the Steam Service Agreement. Thus, the court allowed Valve to compel arbitration.

9) The key here is that Kentucky‘s legal interest rate was 5% per annum, not per month as the loan agreements stipulated. On a per annum basis, the interest rate of the Prospect loans was closer to 79%, far above the legal rate. The court also held that the language of the usury statute clearly indicates that it extends beyond just loans. So even if Prospect referred to the loans as ―nonrecourse investments,‖ they were still barred under the usury statute. The court ruled in favor of Boling, although he was ultimately required to pay back the $30,000 he borrowed.

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10) While the line between what is usurious and what is not may be difficult to determine when one is dealing with, say, 17% instead of 16%, it should be noted that the interest rate in this case was far above the (arguably arbitrary) limit of 16%.

11) The court held that not remembering signing an arbitration agreement is not grounds for voiding the agreement. Although Nitka signed the agreement in 2015 at the age of 17, she waived her ability to disavow the agreement when she continued to work for ERJ upon turning 18 and beyond.

Chapter 12: Reality of Assent 1. CHAPTER OVERVIEW This chapter explores the obstacles to obtaining valid legal consent in a contracts case. By reading the chapter, students will understand that it is important to express themselves clearly. For each case, students should consider how litigation could have been avoided. Fundamentally, increased clarity would have prevented most of the cases in this chapter.

2. LEARNING OBJECTIVES After reading this chapter, students will be able to answer the following questions:  Why is genuine assent important?  What are the elements of mistake?  What are the elements of misrepresentation?  What are the elements of undue influence?  What are the elements of duress?

3. BUT WHAT IF SECTIONS 1.

If Knafel was incorrectly told by her doctor that the baby was Jordan‘s and she then told Jordan that she was carrying his baby, this would be considered an innocent misrepresentation, or a false statement about a fact material to an agreement that the person who made the statement believed to be true. Innocent misrepresentations do permit the party that was misled by the false statement to rescind the contract, however, the aggrieved party cannot sue for damages.

2.

If Knafel discovered the baby was not in fact Jordan‘s, but did not relay the information to him, this would be considered an intentional misrepresentation because Knafel would have known that the factual claim was false and that there was no basis for the assertion.

4. LECTURE NOTES WITH DEFINITIONS A. Why is genuine assent important?

Teaching tip: Encourage your students to brainstorm about why genuine assent is important.   

Genuine assent is a promise to buy or sell that courts will require parties to obey.

Courts consider some forms of assent more genuine than others.

The purpose of genuine assent rules is to make transactions more smooth and dependable.

B. What are the elements of mistake?  Legally, a mistake means an erroneous belief that existed at the time a contract was formed about the material facts of the contract.

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Chapter 12 - Reality of Assent



Mistakes of fact are the only type of mistake that allow a contract to be rescinded. o A unilateral mistake means that one party has made an error about a material fact.

Generally, a unilateral mistake does not present grounds to void a contract. Exceptions where rescission may be possible are: when one party made the mistake, but the other party knew or had reason to know of it; the mistake was the result of a clerical error; the mistake is so serious that it would be unconscionable to enforce the contract. o

A mutual mistake means that both parties are mistaken about a material fact. Either party can choose to rescind.

Simkin v. Blank (briefed below) considers a case involving the elements of mutual mistake.

C. What are the elements of misrepresentation?  A misrepresentation is an untruthful assertion by one party about a material fact.  An innocent misrepresentation is a false statement made, with a person thinking it was true.

With an innocent misrepresentation, the party who was misled can rescind, but not sue for damages.  A negligent misrepresentation occurs when the person making the statement would have known the truth if he had sued reasonable care to discover the fact.  A fraudulent misrepresentation occurs when a person consciously misrepresents a fact to the other party who relied on it, and the reliance is justified. In this case, the contract can be rescinded because there was no meeting of the minds.

D. What are the elements of undue influence?  Undue influence occurs when one party has taken advantage of a dominant position to unduly persuade the other party. Courts consider the mental condition of the less dominant party, and the extent to which the dominant party used persuasive techniques to get assent. In cases of undue influence, a contract can be rescinded.

E. What are the elements of duress?  Duress occurs when one party is forced to consent to an agreement by the wrongful act of another. The party claiming duress must show there was no reasonable alternative to signing the contract. In cases of duress, the contract can be voided.

Teaching tip: Gather short scenarios from news stories that provide examples of problems with assent (e.g., undue influence, duress), and turn the scenarios into a matching game, e.g., match the facts with the relevant problem.

Point/Counterpoint: Should Contracts Made through Tweets be Legally Binding?

Teaching tip: Here are some questions to help you tie the Point/Counterpoint into class discussion:  Is the internet an extension of the real world, or are they two different spheres? Should we hold people just as accountable for what they say and do on the internet as in the real world?  If tweets and similar postings are widely considered to be legally binding, would that change how people use social media? Would you personally change how you post?

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5. CASE BRIEFS WITH ANSWERS TO THE QUESTIONS Case 12-1 Jerome M. Eisenberg, Inc. v. Hall, 147 A.D. 3rd 602 (2017)

Case Brief Issue: Should the contract between Eisenburg and Hall be voided on summary judgment under the theory of mutual mistake?

Facts: Jerome M. Eisenberg is an antiquities dealer and a self-proclaimed expert in classical antiquities with a doctorate in Roman, Egyptian, and Near Eastern art. Maurice E. Hall, Jr. is an art dealer that mainly deals in sixteenth to nineteenth century art. Hall asserts that his expertise is in Renaissance art and that he is merely an ―amateur collector‖ of classical antiquities.

In 2009, Eisenberg visited Hall‘s townhouse, out of which Hall operated his business, and purchased two items: a marble bust of Faustina II, purported to be ancient Roman, and a bronze warrior statue purported to be Etruscan or Roman era. A few months later, Eisenberg sold the bust to the Mougins Museum of Classical Art in France. In April 2011, Eisenberg submitted the bronze statue to a lab in France for metallographic analysis. The lab determined that the statue was from the nineteenth or twentieth century, and therefore not ancient. In September 2011, the Mougins Museum informed Eisenberg that the bust was a fake in that it was modern and not ancient.

Procedural History: Eisenberg filed suit against Hall, claiming the contract should be voided due to mutual mistake. The trial court ruled in favor of Hall, and Eisenburg appealed.

Holding: No. The circumstances surrounding the transactions, including Hall‘s visits with little discussion about the history of the pieces, cast doubt on Eisenberg‘s mistake.

Reasoning:   

A plaintiff may be permitted to use a mutual mistake claim in the context of an agreement if the mutual mistake existed at the time that the contract was entered into, and if the mistake is ―material.‖ Mutual mistake cannot be invoked by a party to avoid the consequences of its own negligence.

Questions as to whether Eisenbeg genuinely believed the bust and statute to be ancient or simply assumed the risk that they were not.

ANSWERS TO THE QUESTIONS Critical Thinking This case rests on whether one believes that Eisenberg should have been conscious of the risk that the objects may not be ancient. The dissent likely thought that there was still reason for Eisenberg to believe that the items were ancient even though he was able to examine them.

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Chapter 03 - The U.S. Legal System and Alternative Dispute Resolution

Ethical Decision Making

The values of care and caution were furthered by this case. If Eisenberg had been more careful about examining the objects, this case may never have happened.

Case 12-2 Fantastic Sams Salons Corp. v. PSTEVO, LLC and Jeremy Baker, United States District Court, N.D. Illinois, Eastern Division

Case Brief Issue: Did Fantastic Sam‘s have the right, under the franchise agreement, to dismiss the misrepresentation claims?

Facts: Fantastic Sams Salons entered into a franchise agreement with PSTEVO, LLC and Jeremy Baker (collectively, ―PSTEVO‖) in which Fantastic Sams allowed PSTEVO to operate a Fantastic Sams franchised salon. Later, Fantastic Sams initiated a lawsuit against PSTEVO seeking declaratory relief with regard to the franchise agreement. PSTEVO then asserted several counterclaims, including a claim of fraudulent misrepresentation by Fantastic Sams. PSTEVO alleged that, prior to entering into the franchise agreement, Baker met with two agents of Fantastic Sams who presented Baker with several financial disclosure documents. The documents allegedly stated that PSTEVO only needed three months‘ worth of working capital to open the salon, and that the salon would be profitable after this three-month period. PSTEVO alleged that the agents and Fantastic Sams knew that it would take longer than three months for the salon to be profitable, and that these misrepresentations were material because PSTEVO relied on them when deciding whether to enter into the agreement. Fantastic Sams moved to dismiss the fraudulent misrepresentation claims.

Holding: The court granted Fantastic Sams' motion to dismiss the fraudulent misrepresentation claims under FRCP 12(b)(6).

Reasoning:   

Fantastic Sams argued that PSTEVO‘s claims were insufficient because Baker signed a document agreeing that no representation of the franchise‘s profitability was made to him Thus, PSTEVO was precluded from claiming it relied on Fantastic Sams‘ representation of the franchise‘s profitability Being that Baker lacked this reliance, PSTEVO could not make a convincing claim that Fantastic Sams was liable for fraudulent misrepresentation

ANSWERS TO THE QUESTIONS Critical Thinking PSTEVO‘s claims were based upon supposed fraudulent misrepresentations regarding profitability of a franchise by Fantastic Sams. However, Baker signed a disclaimer where he stated that no such representations were made. If it were the case that representations regarding profitability were made to Baker, as PSTEVO later alleged, then he should have indicated that when he signed the disclaimer.

Otherwise, if it‘s true that no such representations were made, then PSTEVO has no basis for their case.

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Ethical Decision Making Like the other cases in this chapter, the decision in this case promotes accountability and staying true to an agreement.

Case 12-3 Garage Solutions, LLC v. Monty J. Person, 201 So.3d 962 (2016)

Case Brief Issue: Was the agreement between Person and Fontenot void due to Person‘s alleged duress when signing it?

Facts: Monty J. Person began working for Garage Solutions in March 2015. Three months into his employment, Person was sent to Rexburg, Idaho and Little Rock, Arkansas to complete corporate training. Two days before leaving for training, Person was presented with three contracts. One contract was a non-compete agreement and the other two were reimbursement contracts. The latter two contracts stated that if Person left the company within a year of receiving his training, he would have to reimburse Garage Solutions for the cost of the training. Person did not sign the non-compete, but he did sign the two reimbursement contracts a month after receiving training. Person left Garage Solutions in August 2015 and the company sued Person seeking reimbursement.

Procedural History: The trial court found the reimbursement contracts unenforceable because Person was under duress when he signed the contracts. Garage Solutions appealed.

Holding: Affirmed in favor of Person.

Reasoning:   

The evidence presented at trial shows that Person clearly did not want to sign the reimbursement contracts In fact, Person did not agree to sign until the owner of Garage Solutions threatened to withhold Person‘s paycheck for the time spent at training until Person signed The court found this evidence to show that Person signed the contracts under duress and that the contracts were therefore unenforceable.

ANSWERS TO THE QUESTIONS Critical Thinking It is possible that if Person knew well in advance that he would not receive wages while training if he did not sign that contracts that it would have changed the case. However, the timing issue seems to simply exacerbate the larger issue of Garage Solutions withholding wages from Person until he agrees to sign. It is from this larger issue that the duress seems to stem.

Ethical Decision Making On the one hand, the court‘s enlarging of the pleadings seems fair in that it supports truth and justice. The court is trying to find what actually happened and give a fair ruling based on these events. On the other hand, it may seem unfair that the court is going beyond the arguments presented to make a ruling. This 13-3 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Chapter 03 - The U.S. Legal System and Alternative Dispute Resolution

action flies in the face of the adversarial system and makes negative assumptions about the autonomy of defendants.

6. TEACHING SKILLS: TEACH STUDENTS THAT RATIONAL PEOPLE DRAW LINES Chapter Twelve is filled with ambiguous words and phrases, such as ―unconscionable.‖ Teach your students that one strength of judicial decisionmaking is that judges show us they know how to ―draw a line‖—they can tell us what makes one contract ―unconscionable,‖ and another unfair, but not to the point of ―unconscionable.‖

Use the South Florida Sun Sentinel article (below) to determine what ―unconscionable‖ might mean. See whether the students can ―fill in the blanks‖ below. Then, ask, ―How would you draw the line between ‗conscionable‘ and ‗unconscionable‘?‖

7. TIPS FOR BUSINESS MANAGER 1. Costly mistakes can often arise because someone is making an assumption that the other party is not making. It is a good idea, when you are about to either draft or sign a contract, to ask yourself whether there are any questionable assumptions you are making that might not be shared by the other party to the potential contract.

2. You do not want to be sued for misrepresentation, so before you make any assertions of material fact related to a contract, make sure that you are certain of those facts.

3. If you are about to enter into a contract with a party with whom you have what might be perceived as a dominant-subservient relationship, and you could be perceived as the dominant party, advise the weaker party to get legal advice before entering into the contract, to ensure the contract is enforceable.

8. CASE OPENER WRAP-UP: A DISAGREEMENT OVER AN AGREEMENT Both parties are not able to legally assent to an agreement if there is a misrepresentation about a material fact. A contract between two parties may be rescinded, even though the person making the false assertion was entirely innocent of any intentional deception. In the case at hand, the court found that Knafel concealed from Jordan the material fact that he was not the child‘s father. On appeal, the appellate

court affirmed this holding.

If there were any ethical system that would permit Knafel to be able to recover the $5 million for breach of contract, it would most likely be the Golden Rule guideline for ethical decision making. For example, if one were to assume that Knafel truly did not know that a DNA test would show that Jordan was not the father, and she truly believed that the child was Jordan‘s, one may consider her position and low income in comparison to Jordan‘s as reason to rule in her favor, given the previous agreement between Knafel and Jordan.

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9. ANSWERS TO QUESTIONS AND PROBLEMS 1) A unilateral mistake means that one party has made an error about a material fact, while a mutual mistake means that both parties are mistaken about a material fact.

2) A unilateral mistake means that one party has made an error about a material fact. Generally, a unilateral mistake does not present grounds to void a contract. Exceptions where rescission may be possible are: when one party made the mistake, but the other party knew or had reason to know of it; the mistake was the result of a clerical error; the mistake is so serious that it would be unconscionable to enforce the contract.

3) A negligent misrepresentation occurs when the person making the statement would have known the truth if he had sued reasonable care to discover the fact. A fraudulent misrepresentation occurs when a person consciously misrepresents a fact to the other party who relied on it, and the reliance is justified.

4) Courts will now find nondisclosure as having the same legal effect as an actual false assertion when a relationship of trust exists between the parties to a contract, and when there is a failure to correct assertions of fact that are no longer true in light of events that have occurred since the initial consent to the terms of the agreement.

5) Undue influence occurs when one party has taken advantage of a dominant position to unduly persuade the other party. Duress occurs when one party is forced to consent to an agreement by the wrongful act of another. The party claiming duress must show there was no reasonable alternative to signing the contract.

6) The appellate court affirmed the lower court‘s ruling. The court argued that Connaughton had failed to show any compensable damages resulting from Chipotle‘s alleged fraud. Connaughton argued that he stopped soliciting potential buyers when he relied on Chipotle‘s fraudulent omissions, but he failed to allege that he rejected the offers of other buyers when he did so. In other words, there was no provable injury for which Connaughton could seek damages.

7) The Supreme Court of Ohio reversed the trial court‘s ruling, holding, among other things, that the trial court erred in ruling that Lucarell had signed the agreement under duress. The Court held that duress must be proven by clear and convincing evidence, and that there was scant evidence proving duress. Lucarell had testified that Nationwide threatened to withhold her next cash infusion if she refused to sign, but these were not required by any contract and were instead good faith advances she would receive if she signed.

8) On appeal, the case was reversed and remanded in favor of the plaintiff. The court made a number of holdings regarding the doctrine of unilateral mistake. First, one party can have knowledge that the other side is making a mistake but has no obligation to point it out. But if any party makes a disclosure, it has to be a full disclosure; making ―partial representations‖ is fraudulent. Finally, a seller is stuck with mistakes that result from their own negligence. If Starboard is found to be negligent in selling the diamond for a low price, it cannot void the contract through unilateral mistake.

9) On appeal, the case was reversed in favor of the plaintiff. The court determined that the defendants, as dance instructors, had superior knowledge as to the plaintiff‘s abilities.

Furthermore, the plaintiff and defendants were not on equal footing. Consequently, the plaintiff is entitled to a trial to determine damages.

10) For mutual mistake to occur, a basic assumption about the subject matter, a material effect on the agreement, and an adverse effect on a party who did not agree to bear the risk of mistake must be present. In this case, the appellate court reversed the lower court‘s ruling of mutual mistake and damages of $44,000. Hayes actually failed to file a response or appear at trial, thus waiving her defense of mutual mistake.

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Chapter 03 - The U.S. Legal System and Alternative Dispute Resolution

11) The legal basis that Portugues formed the suit on was that Domingo had made false representations in bad faith as to the availability of a franchise. These false representations induced Portugues to enter into agreements with Domingo and Bayh, which led to material loss for Portugues.

The Supreme Court of Ohio refused to vacate the order. The father failed to provide clear and convincing evidence of a unilateral mistake or that he did not understand the terms of the agreement. The record showed that the father intended to be bound by the parenting agreement, and thus the magistrate did not err in his decision to incorporate the parenting agreement into the judgement.

Chapter 13: Contracts in Writing and Third-Party Contracts 1. CHAPTER OVERVIEW Contracts that must be in writing fall within the statute of frauds, while those that do not fall outside the statute. The statute of fraud is important. This legal doctrine brings with it many rules, and many exceptions. Students are often frustrated by the exceptions, yet, from a teaching perspective, the exceptions provide an important springboard for discussing context and circumstance within the legal system. Additionally, continually ask your students whether the exceptions preserve the rules‘ purposes.

Sometimes two parties will enter into a contract with the intent to benefit a third party. In these situations, a third-party beneficiary contract is formed. This chapter explores the essentials of third-party contracts.

Students may have difficulty following the rights and obligations of the parties to these more complex contracts. Diagrams are often quite helpful in this regard. You may also want to ask several students to stand in the front of the class and use them to illustrate how a third-party contract, assignment, or delegation would work. The material also identifies potential pitfalls when creating third-party contracts. The cases help to illustrate how parties become victims of these pitfalls. You may want to discuss the critical thinking questions at the close of the cases.

2. LEARNING OBJECTIVES After reading this chapter, students will be able to answer the following questions:

1.

2.

3.

4.

5.

6.

7.

What types of contracts fall within the statute of frauds What are the requirements for a writing to satisfy the statute of frauds?

What does the parol evidence rule do?

What is the difference between an assignment and a delegation?

What does it mean to say that the assignee stands in the shoes of the assignor?

What is the difference between an intended beneficiary and an incidental beneficiary?

What is the difference between a creditor beneficiary and a done beneficiary?

3. BUT WHAT IF SECTIONS 1.

Typically, rights cannot be assigned when the contract expressly forbids assignments, such as when parties include an antiassignment clause in their contract. However, the wording of the antiassignment clause is determinative regarding the effectiveness of the clause. If worked improperly or ambiguously, the clause does not effectively limit assignments.

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No. Duties cannot be delegated if the delagatee‘s performance would vary significantly from the delgator‘s performance. This is the case to protect the obligee.

2.

3.

The third party beneficiary would be the charity recipients; the promisor would be the venue owner; and the promisee would be Tyson.

4. LECTURE NOTES WITH DEFINITIONS What types of contracts  fall within the statute of frauds?

What are the requirements for a writing to satisfy the statute of frauds?

What does the parol evidence rule do?

What is the difference between an assignment and a delegation?

Contracts that must be in writing are: o Contracts for the sale of real property. o Contracts that cannot be performed in one year. o Contracts for the sale of goods valued at $500 or more. o Contracts for the sale of intellectual property valued at $5,000 or more. o Contracts to answer another‘s debt. o Other specific contracts, such as prenuptial agreements.  In order for a contract to satisfy the statute of frauds, there must be: Identified parties to the contract.

An agreed subject matter of the contract.

Consideration.

The signature of the party against whom enforcement is sought.

Any other pertinent terms.  The parole evidence rule is a common law rule specifically addressing the admissibility of oral evidence a it relates to written contracts. It provides that oral evidence of an agreement made prior to or contemporaneously with a written agreement is inadmissible when the parties intend to have the written agreement be the complete and final version of their agreement.

Teaching tip: Consider starting your in-class discussion with Case 12-3, Lawrence v. Fox, as it goes to the heart of third party rights. Discuss both the majority and dissenting opinions.  

 

What does it mean to say that the assignee

An assignment is a transfer of a contract right to a third party. To create an assignment, words and actions of the assignor must indicate an intent to transfer rights to the assignee.

Parties to an assignment are: o Obligor—one who is obligated to perform. o Obligee—one who has the right to expect performance. o Assignor—what the obligee becomes after transferring her contract rights. o Assignee—person to whom the contract is assigned.

Most contract rights are assignable. Exceptions are: assignments that increase the burden on the obligor, assignments that violate public policy, personal service contracts, contracts that prohibit assignments.

A delegation is a transfer of a contract duty to a third party.

Teaching tip: Walk and talk your students through the chapter exhibits that make clear the differences between assignment and delegation.  When an obligor does not perform: assignee steps into the shoes of the assignor, assignee can sue obligor, and assignee is subject to any

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Chapter 03 - The U.S. Legal System and Alternative Dispute Resolution

stands in the shoes of the assignor?

What are the difference between an intended beneficiary and an incidental beneficiary?



  

What is the difference between a creditor beneficiary and a done beneficiary?



An incidental beneficiary is one who unintentionally gains a benefit from a contract between other parties.

One significant difference between intended and incidental beneficiaries is incidental beneficiaries cannot sue to enforce a contract.

Incidental beneficiaries maintain no rights to enforce other people‘s contracts.

A Creditor Beneficiary is a third party who benefits from a contract where the promisor agrees to pay the promisee‘s debt.

Lawrence v. Fox (briefed below) is a famous case where the courts began to recognize the right of third parties to sue promisors for performance.

 Point/Counterpoint: Should obligors have a say in who becomes an assignee?

defenses the obligor could raise against the assignor.

When an assignor promises he does not know of any defenses the obligor can assert against the assignee, this is known as an implied warranty of assignability.

A Donee Beneficiary is a third party who benefits from a contract where a promisor agrees to give a gift to the third party.

Teaching tip: Here are some questions to help you tie the Point/Counterpoint into class discussion:  What are some situations in which the conclusion of the ―yes‖ argument would be more fair? What about the ―no‖ argument?  What are the ―no‖ side‘s main arguments? Is it more difficult to agree with the ―no‖ side?

5. CASE BRIEFS WITH ANSWERS TO THE QUESTIONS Case 13-1 Northern Group, Inc. v. Tech 4 Kids, Inc., 352 F.Supp.3d 882 (E.D. Wisconsin 2018)

Case Brief Issue: Could the contract have been completed in less than a year, and therefore not fall under the statute of frauds?

Facts: Northern Group, Inc. is a Wisconsin corporation that contracts with manufacturers and suppliers to develop marketing strategies and promotions to third-party retailers. In exchange for these services, Northern Group receives a commission based upon a percentage of total sales the manufacturer makes to the retailer. Tech 4 Kids (T4K) is a firm based in Ontario, Canada that produces children‘s toys and entertainment products. In 2008, T4K entered into an oral agreement with Northern Group in which Northern Group would provide marketing services to T4K in exchange for commission. Part of the agreement involved Northern Group marketing T4K‘s products to several American retailers.

Pursuant to the agreement, T4K was to pay Northern Group 4% of the net sales price of products purchased by the retailers on a quarterly basis. In 2016, T4K advised Northern Group in writing that it 3-8 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

was terminating the agreement. Northern Group sued T4K for breach of contract. In response, T4K argued that this claimed oral contract was void because of Wisconsin‘s statute of frauds. According to T4K, the contract could not have been completed within a year and therefore was required to be in writing.

Procedural History: Northern Group sued T4K for breach of contract. In response, T4K argued that this claimed oral contract was void because of Wisconsin‘s statute of frauds. According to T4K, the contract could not have been completed within a year and therefore was required to be in writing.

Holding: Yes. The contract was capable of being performed within a year and is not void.

Reasoning:   

The statute of frauds requires that any contracts that cannot be completed in under a year must be in writing to be enforceable.

T4K alleges the agreements Northern Group arranged sometimes took years However, the question is not how long it actually took to perform the contract, but whether it could be completed within a year

ANSWERS TO THE QUESTIONS Critical Thinking If T4K had spelled out in its agreement with Northern Group that the contracts would take longer than a year, it might have prevailed in this case. Also, if T4K had paid its commissions yearly instead of quarterly, it might have a better argument under the statute of frauds.

Ethical Decision Making The value of clear communication is furthered by this case. If T4K had drafted a clearer contract with Northern Group, this dispute may have been avoided.

Case 13-3 Lawrence v. Fox, 20 N.Y. 268 (1859).

Case Brief Issue: Was the deposit agreement between Barker and Price the entire agreement and therefore enforceable?

Facts: In 2014, Barker contacted Price about a van Price had advertised for sale. The advertisement described the van as a 1994 Ford E-350. Barker inspected the van and orally agreed to purchase the van for $15,000. The parties then agreed in writing that Barker would make an immediate $2,000 deposit and that Price would provide Barker with the title. The deposit agreement did not specify the model year of the van. Later, Price provided Barker with a certificate of title for the van. The certificate described the van as a 1993 model rather than a 1994 model. Barker refused to accept the title and demanded a refund of his $2,000. Price refused, and Barker sued.

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Chapter 03 - The U.S. Legal System and Alternative Dispute Resolution

Procedural History: The trial court concluded that the model year of the van was not material to the deposit agreement because that agreement made no reference to the year of the vehicle and because Barker accepted the van and paid the deposit following his inspection. Barker appealed.

Reasoning: 

The deposit agreement did not contain the model year of the van.



Despite Price‘s arguments to the contrary, the model year could very well be material to the agreement because there is usually a correlation between model year and price in auto sales.



Because the deposit agreement did not contain the whole agreement, it is necessary for the case to be remanded and parol evidence to be considered.

ANSWERS TO THE QUESTIONS Critical Thinking If Price could produce evidence that Barker was aware of the actual model year prior to the agreement or that the 1993 and 1994 model are the same in functionality and market value, he could be successful at trial (it is incredibly unlikely, however, that this evidence exists or is accurate).

Ethical Decision Making The court is furthering the concept of the “meeting of the minds” and the value of fairness. The court based its decision on the fact that there was no mutual agreement because Barker did not know/agree to all of the pertinent details. In the court’s eyes, this is unfair to Barker.

Case 13-3 Lawrence v. Fox, 20 N.Y. 268 (1859).

Case Brief Issue: Did Lawrence have a right to sue Fox for performance?

Facts: Holly loaned Fox $300. Holly informed Fox that she owed Lawrence $300, due the next day. Fox agreed to pay Lawrence $300, for Holly, the next day. Fox did not pay. Lawrence sued Fox. Procedural History: The jury found in favor of Lawrence. Fox appealed. The judgment was affirmed.

Fox appealed again.

Holding: Fox lost again. Lawrence had a right to sue Fox for performance.

Reasoning: 

Fox owes the sum of money demanded of him.

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

Fox has the duty to pay the sum to Lawrence.

Requiring Fox to pay is consistent with the idea of justice.

 ANSWERS TO THE QUESTIONS Critical Thinking

The ruling provides the basis of contract law. If a promise is made, it must be carried out, even if it is for another. When two parties make an agreement, both parties must hold up each end of the bargain. In this case, Fox did not, so Lawrence had the right to sue to enforce the agreement. While the case is old, it still holds meaning. This type of reasoning does not detract from modern deliberation. When a contract is breached, the offended party has the right to seek enforcement.

Ethical Decision Making Fox has the general community in mind. He believed he was not contractually obligated to Lawrence because the debt was not his. He was working on the assumption of freedom. Because it was not his debt, he believed he was free to back out of his original agreement with Holly. Just because he wanted to help Holly did not put him into a contractual relationship with Lawrence.

6. TEACHING SKILLS: INTEGRATING A RECENT NEWS STORY WITH MATERIAL FROM CHAPTER EIGHTEEN The Press Register article (which follows) allows students to integrate material from the chapter to a recent news story.

A note to instructors: The fastest way to find recent news stories is by using Westlaw or Lexis-Nexis Academic, which is available through most college library web sites.

7. TIPS FOR BUSINESS MANAGERS 1. Even though only certain contracts need to be in writing to be enforceable, it is a good idea as a matter of policy to ALWAYS put contracts in writing.

2. Whenever entering into a contract, to ensure that you do not have a parol evidence problem, include a simple statement at the end of the contract stating that the document intended to be the complete and final version of the contract.

3. If a party makes you an oral promise just before you sign a written agreement, and that promise is not in the written agreement, insist that the additional promise be handwritten on the contract and signed by both parties to prevent a potential parole evidence problem.

8. ADDITIONAL TEACHING SKILLS: GIVE STUDENTS EXTRA ASSIGNMENTS TO TEST THEIR UNDERSTANDING OF CHAPTER MATERIAL Chapter Thirteen is complex. Consider giving Assignments 1 and 2 (which follow) to test students‘ understanding of the material.

You will start to get the hang of creating additional assignments. The key? Interesting facts, combined with complex ideas.

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9. ADDITIONAL TEACHING IDEAS Connecting to the Core

The ―Connecting to the Core‖ text box in Chapter Thirteen highlights the concept of ―delegation‖ from a management perspective. Does the concept of delegation (from a management perspective) relate more clearly to the facts in Assignment 1, or Assignment 2? Why? Be specific.

Teaching Basics

Assignment 1 reinforces basic chapter lessons.

Advanced Teaching

Assignment 2 is consistent with advanced teaching techniques.

10. ASSIGNMENT ONE 1. Read the article relating to the disclosure of health care information. Discuss the questions that follow the article.

2. The fact pattern given in this assignment is based on a real case. You may want to have the students answer the questions and then look up the real case to see how the court decided it.

HIPPA's Lack of Private Right to Sue not a Total Bar

by Jackie Huchens ki & Linda Abdel -Malek 6/19/00 National Law Journal B20 When a health care provider contracts to provide coverage for a person, what rights does the provider have over the person's health records? Often a health care provider will convey health information to a business partner. The free flow of this private information is of great concern to privacy rights advocates. The Health Insurance Portability and Accountability Act (HIPPA) was intended to protect privacy interests in health-related information. Many privacy rights advocates were disappointed when the Act did not grant individuals a private right of action for wrongful disclosure of information. However, administrative regulations passed subsequent to the Act may open the door for an individual right of action. The Department of Health and Human Services has mandated that contracts between health care providers and their business partners must recognize the individuals whose information is being disclosed as third-party beneficiaries.

QUESTIONS 1. Given what you know about third party beneficiary contracts, will the administrative provision be a useful tool for people who feel their private information was wrongfully disclosed?

2. What are the public policy reasons for allowing individuals to be intended beneficiaries to these contracts? How about for allowing them to be incidental beneficiaries?

11. ASSIGNMENT TWO Third-Party Beneficiary From the Environment by Frona M. Powell 27 Real Est. L.J. 315 (1999) Adapted from the case: Delaware County Redevelopment Authority v. McLaren/Hart Environmental Engineering Corp. (1998 WL 181817) Corporation X wanted to sell their property, but they needed an environmental assessment of it before they could determine a purchase price. Corp. X contracted with Th e Good Earth

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environmental assessment company to identify sources of contamination on the property and in the building. The Good Earth found asbestos in the building and estimated it would cost about $8,000 to remove it. Corp. X decided it would still seek out a buyer. The Redevelopment Group decided to buy the building for a nominal sum. Redevelopment and Corp. X agreed to split the cost of the environmental cleanup and then split the cost of the sale of the property. Corp. X assured Redevelopment that the assessment from The Good Earth was accurate and could be relied on. Redevelopment decided to commit to the sale and sign a contract. Things were going fine between the two parties until additional asbestos was discovered in the building. The estimated cost of the clean up jumped to $900,000. Redevelopment sued The Good Earth. Redevelopment claims it is a third-party beneficiary to the contract between Corp. X and The Good Earth.

QUESTIONS 1. Given what you know about third party beneficiaries what do you think the outcome of the case will be?

2. What other information would be helpful to have before assessing this case?

12.

CASE OPENER WRAP-UP: Fallout from a Forgettable Fight

The court hearing the Tyson case quickly dismissed the claims. The court held the fans were in no way third-party beneficiaries to any contract into which Tyson, the promoters, or the telecasters had entered.

The fans cannot meet any of the tests for determining that a party is an intended beneficiary. Simply put, the fans are incidental beneficiaries.

13.

ANSWERS TO QUESTIONS AND PROBLEMS

1.

Unlike the common law statute of frauds, the UCC does not require that parties are named in the agreement. The UCC also requires that contracts pertaining to the sale of goods valued at over $500 must be in writing, whereas common law does not have this requirement.

2.

Contracts that must be in writing are: contracts for the sale of real property, contracts that cannot be performed in one year, contracts for the sale of goods valued at $500 or more, contracts for the sale of intellectual property valued at $5,000 or more, contracts to answer another‘s debt, and other specific contracts, such as prenuptial agreements.

3.

The parole evidence rule says that parole evidence will not be admitted in court to contradict the terms of a written, integrated contract. Exceptions—evidence is allowed to describe negotiations after the contract is signed is permitted, to explain ambiguous or incomplete writings, to show a contract contingent on an event not stated in the writing, to show a writing contains a clerical error, and to establish that a contract is voidable due to incapacity, or reality of assent.

4.

An assignment is a transfer of a contract right to a third party, while a delegation is a transfer of a contract duty to a third party.

5.

Incidental beneficiaries cannot enforce rights under a contract because of intent—the incidental beneficiary unintentionally gains a benefit from a contract, so has fewer rights.

6.

A delegator‘s liability after rights have been transferred to a third party differs from an assignor‘s liability. A delegator is liable to the obligee if the delegate does not perform. This is in contrast with an assignor, who has no more rights after assignment.

7.

Businesses want to transfer rights or duties to third parties because doing so gives them freedom and/or flexibility.

8.

The court agreed that, being that there was no written contract, the agreement would normally

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fall under the statute of frauds. However, because Moore had admitted on numerous occasions prior to the trial that an agreement to sell the car to Haber existed (one such instance was witnessed and affirmed by the mechanic), an exception to the statute of frauds could be established by Haber. Thus, the order was reversed and the case was remanded.

9.

The oral agreement was not allowed because the oral agreement in question is one the parties would expect to be embodied in the writing. In other words, the agreement to remove the ice house is one we would expect to see in the written contract. So, oral evidence is not allowed to change the written contract.

10.

The court argued that the requirements for satisfying the statute of frauds are rather minimal.

The court cited other decisions that held that emails can satisfy the statute of frauds if they contain all of the essential terms, even in the absence of a signature. The text messages sent by SJH‘s agent contained a clear acceptance without any modifications. Therefore, the texts satisfied the statute of frauds and Two Electronics was bound to its contract with SJH.

11.

The statute of frauds holds that contracts of indefinite duration do not fall under the statute of frauds, regardless of how long performance actually takes. Thus, the statute of frauds did not apply to the agreement in question and the plaintiff‘s action was not barred.

12.

Although the parties here were aware that the laboratory was being built for the City‘s use, there were no grounds to find that the City was an intended third-party beneficiary. First, the City is clearly not the only entity that can recover under the Perkins contract as DASNY has brought its own breach of contract claim. Second, while the contract between DASNY and Samson expressly gives third-party enforcement rights to the City, the Perkins contract does not. Even if the City benefits from the construction, that does not in itself establish enforcement rights for the City.

13.

The state supreme court affirmed the lower court‘s ruling in favor of the defendants. The outcome of this case hinged on whether the plaintiff was an intended or incidental beneficiary to the contract between the defendants. Based on the evidence presented at trial, it was not clear that the subcontractor knew anything about the agreement between the contractor and the plaintiff, let alone whether its work was benefiting plaintiff. Thus, it could not be said that the plaintiff was an intended beneficiary, and the subcontractor did not breach a contract with the plaintiff.

14.

The court of appeals reversed in favor of MetLife. When State Farm assigned the SSA to MetLife, MetLife gained all the rights and obligations that State Farm originally had. Thus, MetLife had the right to enforce the anti-assignment agreement against Johnson, just as State Farm did.

15.

The court firmly held that the parties must clearly express their intent to make a party a thirdparty beneficiary for them to be so. Likewise, the court held that no oral contract regarding third-party beneficiaries was created. Even if one was, it would, at best, show the parties intent to enter into such an agreement and would not itself be sufficient.

16.

The court ruled in favor of First Bank, agreeing that the loan commitment letters did not express intent to make Brumitt a third-party beneficiary to the loans. The court noted that while one may presume that Brumitt, as the seller of the existing business, would benefit from the transaction and therefore First Bank‘s agreement to finance the transaction, that presumption is not enough to support Brumitt‘s claim.

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Chapter 14: Discharge and Remedies 1. CHAPTER OVERVIEW This chapter focuses on how contractual obligations are discharged or terminated and what happens after the contract's demise. You should impress upon students that not all discharges are a result of a misdeed.

Contracts can be discharged because of a party's carelessness, uncontrollable circumstances, or the parties desire to discharge. The nature and amount of damages is often at issue in cases. To ensure that the students understand the different damage measurements, you may want to ask them to apply what they have learned to the case examples. The critical thinking questions at the end of each case will also help to enhance students' understanding of the material. The chapter closes with a section on equitable remedies.

You may want to use this section as a catalyst for reviewing the equitable features of contracts discussed in earlier chapters.

2. LEARNING OBJECTIVES After reading this chapter, students will be able to answer the following questions: 1. What are the primary methods for discharging a contract?

2. What are the primary legal remedies available for a breach of contract?

3. What are the primary equitable remedies available for a breach of contract?

3.

BUT WHAT IF SECTIONS

1.

The requirement regarding population increase would be an express condition. Being that this express condition specifically stipulates an increase of 10,000 residents, it is very unlikely the court would allow a breach with an increase of only 9,500.

If CPI stopped manufacturing Encore‘s products in its factory, then CPI would commit a material breach because the contract between Encore and Anchor is based on Encore paying Anchor and CPI in exchange for the manufacturing of glass bottles. Because a material breach would have occurred, the nonbreaching party, Encore, would be discharged from its obligations under the contract.

Anchor does not have to remain in the contract because CPI‘s leaving would result in it being outrageously expensive to manufacture the products. In other words, Anchor could claim commercial impracticability to discharge itself from the contract. Commercial impracticability arises when, because of an unforeseeable event, one party would incur unreasonable expense, injury, or loss if that party were forced to carry out the terms of the agreement. Anchor would have to prove the following three elements to discharge itself through commercial impracticability:

2.

3.

1. That an event occurred whose nonoccurrence was a basic assumption of the contract.

2. That there is commercial impracticability of continued performance.

3. That the party claiming discharge did not expressly or impliedly agree to performance in spite of impracticability that would otherwise justify nonperformance.

4. LECTURE NOTES WITH DEFINITIONS In the news…

Teaching tip: For each chapter, consider asking students to relate current news items to material from the chapter.

In addition to ideas students come up with on their own, consider weaving

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in news stories provided by the textbook publisher.

For Chapter Thirteen, McGraw Hill offers the following stories: ―California Governor Arnold Schwarzenegger gives up consulting contracts with fitness magazines due to conflict of interest.‖  How does the content of this story relate to material in Chapter Thirteen? Be specific.

What are the primary methods for discharging a contract?

―People Magazine‘s Mark Dagostino and Court TV‘s Catherine Crier discuss the breach of contract trial.‖  What are the facts that led to the breach of contract trial?  According to the story, which side is more likely to win? Why?  What are the possible implications (e.g., damages) of the case?  Contracts can be discharged by performance. o Some contracts must be performed exactly on time. o Even brief tardiness can constitute a material breach. o Contracts can be discharged by substantial performance. Obligations under contract are discharged if a party makes a good faith effort to perform exactly as promised and provides the essential benefits of the promise. The other party can be compensated for reasonable costs to cure the defects. o Even brief tardiness can constitute a material breach.  Contracts can be discharged by material breach. o This occurs when a party fails to substantially perform. o In this situation, the other parties are discharged. o If the breach is minor, the non-breaching party can sue for damages—obligations are not necessarily discharged. o When one party knows in advance that it will breach and lets the other party know, this is called an anticipatory repudiation. The non-breaching party can rescind and recover the value of consideration, sue for breach right away, or wait for the time of performance and sue.  Contracts can be discharged by agreement. o Conditional contracts are promises under the contract that are conditioned on a certain event. When the event occurs, the contract is discharged. o Mutual rescission is an agreement to cancel the contract. It is considered a separate contract and must meet the elements of a contract. o A novation is an agreement to substitute one party in a contract for another. The party leaving the contractual agreement is discharged. o An accord and satisfaction occurs when parties agree to substitute a settlement contract for the original contract.  Contracts can be discharged by operation of law.

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o Most contractual obligations can be discharged through bankruptcy—when remaining assets are distributed to creditors. o Under a statute of limitations, court action must be brought within a certain time period or else the right to bring the action is waived. o If a party willfully changes a contract in a material way, then the other party can discharge, using the idea of alteration.  Contracts can be discharged by changed circumstances. o Impossibility—when some event makes the performance literally impossible, the promisor must pay damages for failure to perform, e.g., death or incapacity of an essential party in a personal service contract, destruction of a unique subject matter. o Frustration of purpose—when performance is not impossible, but somehow the contract‘s purpose has been destroyed. o Commercial impracticability—when performance is more expensive than originally thought, and the financial hardship is extreme.

Thrifty Rent-a-Car System v. South Florida Transport (briefed below) illustrates how the courts sometimes struggle to determine whether to apply the doctrine of commercial impracticability to discharge a contract.

What are the primary legal remedies available for breach of contract?

Teaching tip: Ask students to explain why each case is in the chapter, e.g., ―This case _________________ is in the chapter to provide an example of _________________________.‖  The primary legal remedy for breach of contract is monetary or money damages.  Ways to measure money damages: o Expectation remedy—an innocent party gets the amount of money necessary to put him or her in the financial position he/she expected t be in if the contract had been performed. o Compensatory damages—covers direct loss from the breach. o Incidental damages—covers expenditures that were incidental to the contract. o Consequential (special) damages—covers more remote and unusual damages, and only those damages that could be reasonably foreseen.  There are, however, limitations on money damages: o The non-breaching party has a duty to mitigate— he/she must try to lessen the other party‘s damages. o Courts can award nominal damages in the amount of one dollar when the breach does not result in money 15-6

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damages. o Consequential damages are recoverable only if they were foreseeable at the time of contract formation.

Parties can only assume the risks to which they agreed.  Liquidated damages are damages parties agree to in advance, indicating the amount to be paid in case of a breach.  Restitution is the remedy available when one party has partially performed an unenforceable contract. Purpose is to return parties to their position before the contract was made. Quantum meruit is an equitable doctrine under which restitution damages can be awarded. Usually this doctrine provides compensation for services rendered.

Reliance damages are an alternative measurement to expectation damages. The purpose is to return parties to positions before the contract was made. Reliance damages are usually awarded using the doctrine of promissory estoppel.

What are the primary equitable remedies available for a breach of contract?

Point/Counterpoint: Should specific performance automatically be granted in every breach of contract for the sale of real property?

Teaching tip: Ask students about the advantages of each remedy the chapter lists and explains, and the circumstances in which each remedy might be a party‘s best option.  Equitable remedies include: o Specific performance—a court order to perform a specific act. Most common use is when a seller of land breaches. o Injunction—a court order to refrain from performing a specific act. o Reformation—a court will rewrite a contract and enforce the rewritten version. This remedy is used when a writing does not reflect the intent of the parties.

Teaching tip: Here are some questions to help you tie the Point/Counterpoint into class discussion:  Why might this requirement be the most equitable solution when a contract is reached?  Are there any circumstances where automatically granting specific performance may actually hurt the buyer of real property?  Which side makes the better argument, the ―no‖ side, or the ―yes‖ side? Why? Be specific.

5. CASE BRIEFS WITH ANSWERS TO THE QUESTIONS Case 14-1 Doran 610 Apartments, LLC v. Merritt, 2018 WL 3520983 (2018) Case Brief Issue: Had Merritt materially breached her lease by installing a security system?

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Facts: In July 2017, Latrice Merritt entered a residential lease with Doran 610 Apartments, LLC. Under the terms of the lease agreement, Merritt was prohibited from installing a private security system in her apartment. On July 18, 2017, a maintenance worker triggered a private security system Merritt installed while responding to a maintenance request. Doran informed Merritt that her private security system was in breach of the lease and that she must remove it as soon as possible. In the following days, two false alarms occurred in which police arrived at Merritt‘s apartment. Both times, Merritt was not home and Doran was unable to deactivate the alarm.

On July 31, Merritt and Doran signed an addendum to the lease that permitted Merritt to keep her stalling to enter Merritt‘s apartment to respond to false alarms. Despite her agreement, Merritt was not forthcoming with the disarm code. Doran advised Merritt that her refusal to provide the code was a breach of the lease addendum. Merritt responded by stating that she would not provide the access code and instead provided an ―emergency password.‖ A Doran employee went to Merritt‘s apartment to see if the ―emergency password‖ would disarm the system. It did not.

Procedural History: Doran commenced an eviction action based on Merritt‘s breach of the lease addendum. The district court concluded that Merritt had materially breached the lease by failing to provide the access code. Merritt appealed.

Holding: Affirmed in favor of Dorian.

Reasoning: A breach is material when one of the primary purposes of a contract is violated Doran needs access to the apartment to perform repairs and respond to emergencies Merritt‘s breach implicated the safety and security of building residents, which landlords are required to address Thus, the breach was material Answers to the questions Critical Thinking If Merritt was able to remotely disable the alarm system when asked to let employees into the apartment, the outcome may be different. Likewise, if the code she provided to Doran had actually worked, Merritt may have been off the hook, especially considering the addendum she had signed with Doran.

Ethical Decision Making If Merritt had asked how she would like it if every place she entered set off an alarm that she was unable to disable, and if she had thought about how difficult that would make her life, she may have acted differently.

Case 14-2 Hamilton v. State Farm Fire & Casualty Insurance Company, U.S. Court of Appeals for the Fifth Circuit, 2012 U.S. App. Lexis 8744.

Case Brief Issue: Was there a material breach of a contract between Hamilton and State Farm?

Facts: The Hamiltons sought an insurance claim from their insurance company when their home was ruined by a hurricane. However, the Hamiltons refused to allow representatives from the 15-6 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

company to inspect their other homes and refused to give the agency documents proving the damage of certain assets. The insurance company denied the insurance claim, claiming that the Hamiltons breached the contract by not complying with the cooperation clause.

Procedural History: An appellate court found in favor of the insurance company. The Hamiltons appealed.

Holding: Affirmed. There was a material breach.

Reasoning:

 

Complying with the cooperation clause is a condition precedent to recovery under insurance policies.

The Hamiltions‘ failure to respond to State Farm‘s multiple verbal and written requests for examinations under oath is in direct violation of the cooperation clause.

Answers to the questions Critical Thinking State Farm claimed that there were contradictions in some of the documents that the Hamiltons provided and that State Farm was prohibited from inspecting the properties that were damaged because of the hurricane. Instead, the Hamilton‘s provided State Farm with several receipts regarding the damages incurred from the hurricane. State Farm desires to minimize its chances of being a victim of fraud.

Therefore, State Farm would have been more likely persuaded by the Hamiltons had the Hamiltons allowed State Farm to examine the relevant properties, as opposed to relying on the Hamiltons‘ subjective words and receipts. The court‘s logic in supporting the enforcement of the cooperation clause was that insurance agencies have a right to protect themselves, and, indirectly, others whom are insured, from the fraudulent acts of others. In other words, the court reasoned that the receipts and word of an insured individual is not enough evidence to prove that the insured individual is not attempting to defraud the insurance company. Rather, the court seemed to advocate on behalf of the belief that insured individuals should comply with the cooperation clause because this clause is a reasonable means of protecting against such fraud.

Ethical Decision Making The universalization principle asks us to consider what the world would be like were our decision copied by everyone else. This principle could potentially aid the Hamiltons in understanding the logic behind State Farm if the Hamiltons consider whether State Farm and all insured individuals would be better off if everyone tried to seek insurance claims without abiding by the cooperation clause. If everyone behaved as such, it is likely that insurance would seize to exist because companies would have a tremendously hard time protecting against fraud. However, this outcome would not be desirable because insurance is one of the main avenues people have to guard against risk.

Case 14-3 Thrifty Rent-a-Car System v. South Florida Transport, 2005 U.S. Dist. Lexis 38489 (U.S. District Court N.D. Okla.)

Case Brief Issue: Can SFT, the defendant, use the doctrine of commercial impracticability to reduce the amount it owes to Thrifty Rent-a-Car and its affiliate DTG?

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Facts: A dispute arose after SFT made several delinquent payment to Thrifty and DTG and also sold 51 vehicles without authorization, brining the amount of the debt owed up to $4,238, 249.53 Procedural History: Thrifty Rent-a-Car and its affiliate DTG asked a trial court for a summary judgment, ruling that it should be fully reimbursed for debts owed by SFT. Holding: No. The plaintiffs‘ motion for summary judgment is granted.

Reasoning:

 Hurricanes in late summer 2004 clearly constitute supervening events for the purposes of the impracticability doctrine.  Here, SFT cannot use the defense of commercial impracticability.  The non-occurrence of hurricanes was not a basic assumption of the parties‘ agreements.  SFT provides no evidence that the event of the hurricanes made the cost of erformance even remotely more expensive.  SFT was behind on its payments before the hurricanes.

Answers to the questions Critical Thinking It seems that any agreement dealing with severe weather and problems arising from that need to be addressed at the time of the original contract. Because the hurricanes did not make the contract commercially impractical, it shows that businesses must plan ahead for problems that are offered in the area. For example, stores in upstate New York would have to plan for heavy snow. Parties need to plan for problems as a result of weather.

Ethical Decision Making The values that are furthered by the decision in this case are taking responsibility for one‘s own being is little ethical responsibility for one party to make sure that the other is ready for extreme circumstances; such as weather in this case.

Case 14-4 S. Brooke Purll, Inc., T / A Purll Construction v. Patrick Darrell Vailes 850 A.2d 1135 (2004).

Case Brief Issue: Was the clause imposing a payment of 35% of the contract value for breach by the owner a penalty clause or a valid liquidated damages clause?

Facts: P hired D to renovate his house and paid him a $5,000.00 initial payment under the construction contract, but failed to do initial demolition work required under the contract. P sued Defendant Contractor for return of his deposit, and D counterclaimed for $36,102 and attorney‘s fees, the amount that would be require under the liquidated damages clause to be an unenforceable penalty clause, and awarded the contractor $1,722.

Procedural History: Defendant appealed.

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Holding: Reversed, in favor of Defendant Contractor Reasoning: Courts tend to uphold clauses that simplify the resolution of a breach of contract dispute unless they are clearly unreasonable The liquidated sum must simply bear a reasonable relation to the damages foreseeable at the time the contract was made.

The burden of proof is on the breaching party to demonstrate that the damages clause is disproportionate to the foreseeable damages.

Answers to the questions Critical Thinking The evidence that the plaintiff could have brought forward that might have changed the outcome of this case include evidence showing that the amount specified by the Defendant Contractor is so unreasonable as to not seem to bear any reasonable relationship to foreseeable costs. If this evidence was brought forth, the clause would be seen as an unenforceable penalty clause and thus the court would rule in favor of the plaintiff.

Ethical Decision Making The stakeholders who benefit by the courts‘ placing the burden of proving the unreasonableness of the liquidated damages clause on the breaching party include companies such as construction companies who make contracts with clients, and those who do not breach contracts. Those who are disadvantaged by this placement are usually the clients of these companies who have to go out and find contradicting facts in order to prove the unreasonableness of the liquidated damages. In this case, S. Brooke Purll, Inc. and T / A Purll Construction benefited while Patrick Darrell Vailes was disadvantaged.

6.

TIPS FOR BUSINESS MANAGERS 1. If your need for a particular contract is contingent on the occurrence or nonoccurrence of a particular event, then make sure you make that contract a conditional one. Include a clause in the contract making it conditioned on that event either happening or no longer happening.

2. When you know that you will have damages if a contract is not performed on time and the damages may be difficult to calculate or prove, be sure to include a liquidated damages clause in the contract.

3. When drafting a liquidated damages clause, to be safe, err on the side of making the amount of the award on the low side because you do not want the award to be thrown out as being an unreasonable penalty clause. The better you can substantiate the basis for your stipulated award, the more likely it is to be upheld.

CASE OPENER WRAP-UP: Impossible Wine Bottles Under the amended agreement between Anchor and Encore, the production of bottles was to take place at the Lavington plant. The Lavington plant was the only facility owned by CPI that was capable of producing the specific type and quality of glass container that is required by the wine industry. According to the court‘s ruling, when the Lavington plant was sold and the new owners did not take over CPI‘s

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obligations, the terms of the contract became impossible for Anchor to meet. As a result of the impossibility of performance, Anchor was discharged from the contract.

7. ANSWERS TO QUESTIONS AND PROBLEMS 1.

Legal remedies are damages, while equitable remedies are some form of court-ordered action.

2.

A condition precedent is a particular event that must occur in order for a party‘s duty to arise.

If the event does not arise, the party‘s duty to perform does not arise. A condition subsequent is a future event that terminates the obligations of the parties when it occurs.

3.

Commercial impracticability is used when performance is still objectively possible, but would be extraordinarily injurious or expensive to one party. Frustration of purpose is relevant when both parties recognize that the contract is to fulfill a particular purpose, the particular purpose if foundational to the agreement, and, due to factors beyond the parties‘ control, the event does not occur. In this circumstance, the contract may be discharged.

4.

The appellate court affirmed in favor of the homeowners‘ association. The developer had intentionally misrepresented the land being sold to members of the homeowners‘ association and thus was entitled to compensate the members.

5.

Specific performance is only available when a party can show that monetary damages would not constitute adequate compensation for another party‘s nonperformance. However, the court held that the Sellers failed to meet this burden. First, the Sellers could have accepted the $40,000 in earnest money when the Buyers told them they wanted to terminate to contract. The Sellers could have then immediately put the house back on the market, and evidence presented showed that the Sellers very likely could sold the house for at least the contract price. The Sellers did not show that the contract price plus $40,000 was not an adequate remedy. The Sellers argued that the house was ―unique‖ and thus required specific performance. The court held that while the house may be unique, the Buyers were not, and being that the house could reasonably be resold for the same price to another buyer meant there was no need for specific performance.

6.

The appellate court did not agree with Severn and ultimately affirmed in favor of IFC. The agreement between Severn and IFC clearly stated that the sum that Severn was paying IFC for its fumigation services was not sufficient to warrant IFC assuming any risk. Severn argued that even with this clause, its negligence claims should be allowed to proceed. The court once again disagreed with Severn because IFC was performing its contractual duties normally when the explosion occurred.

7.

The court defined liquidated damages as damages a party agrees to pay if he breaks some promise. The liquidated damages must be a reasonable forecast of just compensation for the harm that is caused by the breach. Fresh Food made their final $3,333.33 payment fifteen days past the default date. When they made this final payment, Jet Star had not yet filed its suit. Jet Star accepted the payment. The court failed to see how $5,000 is just compensation for a fifteen-day late payment of $3,333.33. Thus, the $5,000 was an unreasonable and unenforceable penalty.

8.

The court held that Tabe‘s employment agreement expressly declares that Texas Inpatient ―will commence payment of salary/benefits only after the credentialing at all the facilities and orientation is completed.‖ The use of ―only after‖ manifests an intent to condition the payment of Tabe‘s salary and benefits on the successful completion of ―all‖ credentialing and orientation. When Tabe withdrew, only two of the four hospitals had completed his credentialing, and thus the ―successful completion of ‗all‘ credentialing‖ had not yet occurred.

Furthermore, the liquidated damages clause of the agreement only triggers if the employee

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terminates his or her employment, not their prospective employment. The court ruled in favor of Tabe.

9.

The jury decided in favor of Nurtisoya. Sunrich appealed, but the court of appeals decided that Sunrich's instructions were irrelevant to whether they had or had not breached the contract with Nutrisoya.

10.

The court affirmed in favor of Environs. Following the running theme of this chapter, the court ruled that SAMS and Environs are two sophisticated business entities that knew the risks and freely bargained for the terms of the contract. Thus, SAMS acknowledged and accepted the risk when it entered into the contract with Environs that contained the liquidated-damages clause. SAMS was only entitled to collect up to $70,000, as the contract clearly stated.

11.

The court of appeals held that whether it was impossible for Dr. Rasheed to continue practicing was irrelevant. The agreement was legally possible to enforce when it was signed, and it required the repayment of the advanced payments in the event of breach for any reason.

Thus, the court reversed in favor of the hospital.

12.

The appellate court reversed and remitted to the lower court. According to the court, ―a contractual duty ordinarily will not be construed as a condition precedent absent clear language showing that the parties intended to make it a condition.‖ Because the contract of sale said nothing about the plaintiff‘s rights in the event he failed to remove the equipment within 60 days, it cannot be assumed that the removal was a condition precedent to plaintiff‘s recovery of the $8,000. Thus, the plaintiff was entitled to recover the funds.

Chapter 15: Formation and Performance of Sales and Lease Contracts CHAPTER OVERVIEW The Uniform Commercial Code (UCC) was created for businesses and organizations that purchase products. The language in the UCC can apply to many different organizations. For example, the University of Minnesota is considered a merchant under the UCC. Because the UCC affects many businesses and organizations, each business or organization needs to be aware of the laws that apply to it.

Begin by asking students to read the chapter and reply to review and case questions at the end of the chapter Focus on the scope and significance of the UCC, Articles 2 and 2(A) of the UCC, and how contracts are formed under the UCC. To help students develop critical thinking skills, assign the critical thinking questions that follow each case.

LEARNING OBJECTIVES After reading this chapter, students will be able to answer the following questions: 1. What kinds of contracts fall under the UCC interpretations?

2. What is a sales contract under the UCC? 3. What is a merchant, and why is that designation significant?

4. What is a lease contract?

5. What is the CISG? 6. What is the concept of title? How does it pass?

7. What is risk of loss?‘

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BUT WHAT IF SECTIONS 1.

If the plaintiff agreed to accept risk of loss with the title via a contract, then they are liable as soon as they gain title of the mobile home.

LECTURE NOTES WITH DEFINITIONS What is a sales contract under the UCC?

 

The Uniform Commercial Code (UCC) is a uniform/model law that governs commercial transactions.

The UCC adds clarity and predictability to sales law.

Teaching tip: Ask students, ―What other uniform/model laws have we studied so far? Do they have the same purpose, e.g., to add clarity and predictability to an area of law?‖ 

Article 2 (Sales) covers contracts for the sale of goods. o A sale is the passing of title from the seller to the buyer for a price. o Goods are tangible things that can be moved. o If a contract includes both goods and services, Article 2 applies if goods are the predominant part of the transaction. o Merchants are buyers or sellers who (1) deal in goods of the kind, (2), by occupation, hold themselves out as having knowledge and skill unique to the practices or goods involved in the transaction, or (3) employ a merchant as a broker, agent, or other intermediary.

What kinds of contracts fall under the UCC interpretations?



The types of contracts that fall under the UCC interpretations include sales contracts, under Article 2, and lease contracts, under Article 2(A).

What is a merchant, and why is that designation significant?



The UCC does not apply the mirror-image rule. Courts consider whether to allow additional terms on a case-by-case basis.



Contracts for the sale of goods must be in writing if the goods are valued at $500 or more.

Exceptions exist for: o Specifically manufactured goods. o Contracts that parties admit exist. o Situations in which partial performance has occurred.



What is the CISG?

What is a lease contract?

Teaching tip: Ask students to compare the three cases in this section of the chapter—why is each in the book?  The CISG is a treaty countries can sign that governs international business-to-business sales contracts.  The CISG provides clarity, predictability, and uniformity for businesses that operate in the global economy.  Article 2(A) (Leases) covers contracts for the lease of goods. o A lease transfers the right of possession and use of goods for a 15-6

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o What is the concept of title? How does it pass?



specific term, in return for consideration.

The UCC outlines rules for various kinds of leases, including consumer leases and finance leases.

Three kinds of title: o o o

Good title—acquired from someone who owns goods, free and clear.

Void title—acquired from someone with stolen goods.

Voidable title—occurs in situations in which the contract between the original parties would be void, but the goods have already been sold to a third party.

Alfonso Candela v. Port Motors, Inc. (briefed below) considers the sale of a

stolen vehicle and whether a car dealership‘s title was voidable or void.  

Third party purchasers usually get good title.

If an owner entrusts the possession of goods to a merchant, the merchant can transfer all rights in the books to a buyer in the ordinary course of business.

Teaching tip: In this chapter, it will be important for you to walk through the facts of every case with the students—the material is especially complex.

What is risk of loss?



Point/Counterpoint: Should the UCC Be Expanded to Include the Sale of Realty and Services?

Teaching tip: Here are some questions to help you tie the Point/Counterpoint into class discussion:  Is the UCC the best legal structure to handle realty and service sales?

Risk of loss is a concept that articulate whether the buyer or seller bears the burden when something goes wrong.



What would we lose by switching to the UCC?

CASE BRIEFS WITH ANSWERS TO THE QUESTIONS Case 15-1 Larson v. Burton Constr., Inc., 2018 WY 74 (2018)

Case Brief

Issue: Is the matter at hand a mutual mistake or a breach of contract?

Facts: Burton entered into a written contract with Larson in which Larson agreed to purchase a mobile home from Burton. The contract was a ―form‖ contract consisting of boilerplate text with blank lines in which to enter information. Although the mobile home in question was new and the parties intended to convey a new mobile home, the form was for the sale a used mobile home. Thus, the contract required Burton to execute and deliver a title at closing. Burton argued that despite the language of the contract, it was not his custom to deliver a title to purchasers of a new mobile home. Receiving no title at the closing, Larson sued for breach of contract.

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Procedural History: The district court reversed the circuit court‘s finding of a mutual mistake of the parties. Larson appealed.

Holding: Affirmed in part and reversed in part.

Reasoning:  The contract unambiguously requires Burton to provide a title at closing.  A reasonable layperson such as Larson would not be knowledgeable of the dealer‘s process of transferring title, and as such is not in breach.

Answers to the questions

Critical Thinking The intent of the parties tends to matter only in cases where two parties are equally ignorant about circumstances material to the agreement. In this case, Burton bears the responsibility of using the correct form and has the knowledge to realize when he is not. Burton knew or should have known the responsibilities that came with the form he used and thus his alleged intent matters little.

Ethical Decision Making While the use of the wrong form may have been a mistake, the court‘s perspective seems to be that it was a mistake that could have been avoided with a modicum of effort. Being that Burton has the upper hand regarding knowledge of RV sales and being that he expressed carelessness in using the wrong form, he has little recourse here.

Case 15-2 Alfonso Candela v. Port Motors, Inc., 617 N.Y.S.2D 49 (1994).

Case Brief

Issue: Is Port Motors‘ title void or voidable? (The significance of this issue is that if it is void (e.g., if Port Motors purchased the car from a thief), it could not have conveyed a good title to P. Facts: P (Candela) bought an automobile from D (Port Motors). The car was later seized by the police, who claimed the car was stolen. P is suing D for breach of warranty of title. D argued that it passed a good title to P. 15-6 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Procedural History: Trial court, New York Sup. Ct., granted summary judgment in favor of D, holding that it was a voidable title.

Holding: Reversed. The issue of whether D purchased the car from a thief is a matter to be decided at trial. Grant of summary judgment is reversed.

Reasoning:  

If D purchased the car from a thief or successor in interest to the thief, D would not have good title to the car.

D did not do an adequate job of proving the car was not stolen.

Answers to the questions

Critical Thinking The key fact that will determine if the title was void or voidable is the following: who sold to the wholesaler, Joseph Scaffadi? If a thief stole the car and sold it to the wholesaler who later sold it to Port Motors, the title would not be good. Furthermore, the court will want to know more about Port Motors‘ investigation into the car title history. If Port Motors engaged in no investigation, the court would probably be more likely to find that the car dealer breached its warranty.

Ethical Decision Making Port Motors would value efficiency, meaning the dealer wants to function as best it can to make the smost sales at the least expense. If the court determines that Port Motors breached its warranty, Port Motors is going to be forced to thoroughly investigate each car it purchases to ensure the title is good.

This investigation would likely be expensive and time-consuming. Furthermore, other customers who purchased cars from Port Motors may later discover that their cars had similarly been stolen; Port Motors could face great liability from former customers. Port Motors probably believes that it should not be forced to bear this burden and is thus fighting Candela in court.

Case 15-1 Frenk v. Solomon, 2018 N.Y. Misc. LEXIS 3846 (2018)

Case Brief

Issue: Is Weidler‘s holding of the paintings an entrustment, and therefore can she pass good title to a buyer even though she is not the title-holder?

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Facts: Frenk‘s father, the art critic Paul Westheim, fled Nazi Germany in 1933, leaving his art collection with Weidler, a Berlin art dealer. When the war ended, Westheim inquired as to the whereabouts of his art collection. Weidler‘s sister responded that Westheim‘s entire collection had been destroyed by bombing during the war. Frenk, however, asserts in this case that the collection was not destroyed but that Weidler stole the collection and began selling off pieces after Westheim died. In 1973, Frenk‘s mother signed a release preventing her or her heirs from engaging in litigation against Weidler regarding the artwork.

Despite the release, Frenk sued to recover four paintings that Weidler had sold to Solomon.

Holding: Weidler‘s holding was not an entrustment, but the 1973 release is enforceable. Summary judgment granted to Weidler.

Reasoning:  Due to the circumstances under which Westheim gave his collection to Weidler, it is not safe to assume that Westheim intended Weidler to sell his art collection and give the proceeds to Westheim.  Despite Weidler not having good title, Frenk‘s mother essentially signed the rights to the artwork away and thus, Frenk has no case here.

Answers to the questions

Critical Thinking Some may argue that the unique, extreme, and extenuating circumstances in which Westheim gave up his art collection demand a unique decision to ensure that justice is preserved. Under this mindset, the 1973 agreement would likely be ignored to return the paintings to their rightful estate. Others may argue that Frenk‘s mother made the decision to sign the 1973 agreement and that it is the court‘s duty to honor and enforce that agreement. Making an exception here undermines the sanctity of all other agreements made in good faith.

Ethical Decision Making Certainly, the side one takes in this case depends largely on one‘s definition of justice and their own sense of values.

TEACHING SKILLS: USING WEB SITES TO ENHANCE LEARNING Ask students to look at a particular web site, and relate the site‘s content to the

chapter‘s

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content.

For this chapter, ask students to go to: http://www.carfax.com/

At this web site, students can find important background information about a car that affects its safety and retail value. For example, you can ask for a title check

TIPS FOR BUSINESS MANAGERS 1. Save yourself potential headaches by making clear when negotiating any contract as to whether you are interpreting the transaction as being governed by the UCC. Also, make sure that that other party understands this. Plus, put that expectation into the contract, i.e., ―The parties agree that this agreement is governed by Article 2 or 2(a) of the Uniform Commercial Code.‖ 2. Language is very, very important. Even when a mistake is made in completely good faith, language can come back and bite you if you are not very careful. One of the reasons to have experienced attorneys review all legal documents, managers need to develop a habit of closely reading what representations are made on any document.

3. Speaking of language, parties are free to draft the language in any contract. The UCC provides the ―gap‖ meaning or assumptions when contracts are silent. For example, the parties are free to determine when title actually passes. If the contract is silent, then the UCC fills in the ―gap.‖

TEACHING IDEAS Connecting to the Core

Ask students:  How does CARFAX make money?  Have students look for CARFAX competitors.  Compare the CARFAX web site to competitors‘ web sites.  Do similar services exist for other types of products?

Teaching Basics

Ask students:  How do web sites like CARFAX reduce litigation? Be specific.

Advanced Teaching

Ask students:  What if the information a person gets from CARFAX is inaccurate, e.g., what if CARFAX information suggests no problems with a car title, and then there are problems?

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CASE OPENER WRAP-UP: On Your Mark, Get Set, Go! It is uncontested that the agreement is a valid and enforceable contract between the parties. Rather, the heart of the parties‘ dispute is the construction of the terms ―sale‖ and ―sell,‖ which are undefined in the agreement. The defendant argues that the terms ―sale‖ and ―sell‖ should be construed to include installment sales such as the one reflected by the purchase agreement, thereby making that a timely sale under the agreement, even though the entire purchase price would not be paid until five months later. We are unpersuaded.

The parties acknowledge that the sale of the 1969 Lola was a consignment sale under the terms of the agreement. Such a sale is governed by Article 2 of the UCC. According to the UCC, a ―sale‖ consists in the passing of title from the seller to the buyer for a price. Thus, construing the purchase agreement pursuant to Article 2 of the UCC, the sale of the 1969 Lola would not occur until title passed to Gideon in March of 2017, well outside the October 20, 2016 deadline. Therefore, we conclude that the mere execution of the purchase agreement between the defendant and Gideon did not constitute a timely ―sale‖ under the terms of the agreement.

ANSWERS TO QUESTIONS AND PROBLEMS 1.

What determines whether a contract is covered by the UCC is whether the contract is a sale of goods or a lease of goods. For the sale of goods, a good must be tangible and moveable, contracts that include both goods and services are only included if the goods are the predominant part of the transaction, and the sellers must be classified as a merchant. For the lease of goods, the lease must transfer the right to possession and use of goods for a term in return for consideration.

2.

These rights are broken up because there can be several stages between purchasing and receiving a good. If something should happen to the good at one of those stages, it‘s important to know who has the title and who is liable.

3.

The court ruled that for the contract to be governed by UCC Article 2, the defendants had to prove that the agreement was predominantly for the sale of goods. The court held that, ultimately, the defendants were providing a service to refurbish the yacht moreso than the goods used to refurbish it. Thus, the UCC does not apply.

4.

Where close questions arise about whether a transaction involved the transfer of goods or performance of services, courts commonly choose one or the other by asking what was the ―predominant thrust.‖ The Court of Appeals treated the agreement as a contract for services because that is how the language of the contract suggested the parties themselves understood it; they used terms such as ―to act,‖ and treated the object of the contract as the programmer’s knowledge, skill, and ability. It also relied on common law principles of implied warranty of skill and diligence by ―those who hold themselves out to the world as possessing skill and qualifications in their respective trades or professions.‖ But The arrangement between POA and Gray Loon contemplated a custom design for a single customer and an ongoing hosting relationship. As such, conventional ―predominant thrust‖ doctrine suggests that the U.C.C. did not apply.

The action that POA argues constitutes conversion amounts to Gray Loon‘s “destruction” of the paid-for website. Piece of America claims that Gray Loon ―specifically and unambiguously represented that POA owned the work product.‖

5.

This case involves a dispute over the validity of the plaintiff's interest in a prefabricated Kullman dining car (diner) which was assembled onsite at 75 North Franklin Street in the 16-1 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Chapter 16 - Sales and Lease Contracts: Performance, Warranties, and Remedies

Village of Hempstead, New York, and was formerly operated as the Hempstead Town House.

The overriding issue raised on appeal is whether the Hempstead Town House diner is to be treated as realty or personalty. The diner was prefabricated in New Jersey and then transported in three sections on flatbed trailers to the site in Hempstead where it was unloaded, assembled onsite and installed upon the foundation which had been built in the ground. The court held that the diner is a trade fixture and thus is personalty, subject to a factual determination as to whether it can be removed without material damage to the freehold.

6.

The court concluded that the Uniform Commercial Code does not apply and that the web design firm could collect for its work under principles of common law contract. As for a counter-claim alleging conversion of the intellectual product, the court ruled that copyright law supports ownership by the designer.

7.

The U.S. Court of Appeals for the Third Circuit vacated the district court‘s judgment and remanded the case for further proceedings. It was necessary to utilize New Jersey‘s choice of law rules to determine whether New Jersey or Argentine form requirements governed the claim.

Since the district court concluded that a writing was necessary without performing this choice of law analysis, a remand was necessary.

8.

Although the contract makes references to the UCC, it is still ultimately an international deal.

Even if a contract makes reference to a specific state‘s version of the UCC, the state is bound by the Supremacy Clause. Accordingly, under the Supremacy Clause, the law in every state is that the CISG is applicable to contracts between two CISG countries unless expressly disclaimed.

Thus, the contract was governed by the CISG.

9.

Under Arkansas's version of the Uniform Commercial Code, ―[t]he seller retains an insurable interest in goods so long as title to or any security interest in the goods remains in him.‖ ―Unless otherwise explicitly agreed title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods ․ [I]f the contract requires or authorizes the seller to send the goods to the buyer but does not require him to deliver them at destination, title passes to the buyer at the time and place of shipment.‖ SMG does not argue, nor does the record show that SMG retained any security interest in the goods after title passed when the cargo was delivered to the carrier. Therefore, under Arkansas law, SMG did not retain an insurable interest in the cargo.

10.

The court ruled that Sunkissed was responsible for the loss of the heater because there was no delivery to Marilyn. She had purchased an ―installed‖ pool heater. Because it had not yet been installed, the heater had not been delivered. Thus, the seller retained the risk of loss.

11.

The difficulty with Zaid, the defendant's, contentions is that the Code substantially modified the law on which it relies, and now it is significantly material whether Miss Clark, the buyer of the furniture, did or did not make an effective rejection of the furniture, and the facts on which the answer would turn are in genuine dispute. If the rejection was warranted and effective, the Code imposes on Miss Clark certain duties as well as giving her various privileges and optional rights which could result in her prevailing as defendant and counterclaimant; if the rejection was unwarranted and ineffective she could become liable for the balance of the purchase price, and a trier of fact should determine the issue of rightful rejection on evidence presented to it.

If Miss Clark's rejection of the goods was rightful, her sale of the damaged buffet for its full value was not an exercise of ownership by her that would constitute acceptance or conversion of the goods and she would be entitled to the $515.00 paid by the insurer on account of the $900.16 deposit she made. If the rejection was unjustified and Miss Clark is found to be liable for the unpaid balance of the purchase price, see §§ 2-607(1) and 2-709, the $515.00 could be applied on the $1,600 she would owe on the unpaid balance of the purchase price.

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12.

Review the text material for ―When the Seller Is in Breach.‖ The factual matter that will potentially be decisive is what is meant by a reasonable time. The buyer may revoke the contract.

13.

The U.S. Court of Appeals for the Eleventh Circuit affirmed the district court‘s judgment. The contract was properly construed under the CISG according to the parties‘ past course of dealing.

Furthermore, the seller took reasonable measures to mitigate its losses after the buyer breached the contract as required by the CISG.

14.

―Rejection of the goods must be within a reasonable period of time after their delivery or tender. It is ineffective unless the buyer seasonably notifies the seller.‖ U.C.C. § 2-602(1). If the buyer fails to make an effective rejection, the buyer will be deemed to have accepted the goods.

U.C.C. § 2-606(1)(b).

Mr. Nwabuoku‘s rejection of the goods was ―wrongful‖ in that there is not even an allegation that the goods failed to conform to the contract. Under these circumstances, and, again assuming a seasonable rejection, must Mr. Nwabuoku pay for the goods, particularly when he has not returned them to Y&N. The invoice states in bold, conspicuous writing, above and adjacent to Mr. Nwabuoku‘s two signatures: ―No Cash Refund‖ and ―All Sales Are Custom Special Orders and Are Non-Cancelable.‖

15.

The U.S. Court of Appeals for the Sixth Circuit affirmed the judgment of the district court. The evidence supported a finding that the parties had modified the agreement and the modifications complied with the UCC based upon e-mail correspondence between the parties.

Chapter 16: Sales and Lease Contracts: Performance, Warranties, and Remedies CHAPTER OVERVIEW Students, as future business managers, must understand the rights and obligations of businesses to engage in efficient business transactions. Obligations for sellers and lessors are different than the obligations of buyers and lessees. The Perfect Tender rule governs sellers and lessors while the general obligation is stated for buyers and lessees.

When a contract is breached, remedies are needed for the other party. Remedies for sellers/lessors are different than remedies available to buyers/lessees. There are certain modifications that can be made to the remedies available, if it is specified in the agreement. If they are engaging in contracts with other parties, businesses need to be aware of the remedies available to them for a breached contract and remedies the other party would have available if the business breached a contract.

You might want to begin by asking students to read the chapter and reply to the review and case questions at the end of the chapter. Focus on the similarities and differences of the obligations of sellers/lessors and buyers/lessees. As an in class activity, you can discuss the Vitol chapter opener and what obligations each party had to the other. To help students to develop their critical thinking skills, assign the critical thinking questions following each case.

LEARNING OBJECTIVES After reading this chapter, students will be able to answer the following questions: 1. What is the difference between conforming and nonconforming goods?

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Chapter 16 - Sales and Lease Contracts: Performance, Warranties, and Remedies

2.

3.

4.

5.

6.

7.

8.

9.

What is the perfect tender rule?

What is the right to cure?

What is commercial impracticability?

What are implied warranties of title, merchantability, and particular purpose?

How are third parties affected by implied warranties?

How can implied warranties be disclaimed?

What is cover and resale?

When are money damages available?

BUT WHAT IF SECTIONS 1. The first statement is an implied warranty. By saying that the windows have been sealed, the seller is implying therefore that water will not leak through cracks in the windows. The second statement is an express warranty, as the seller is ensuring that the RV has no leaking issues. The seller is in a position where he knows or should know whether his statement is true and is making a material statement about the RV. 2. In all likelihood, the buyers would be successful only in suing for the value of the RV. It would be possible for the buyers to claim emotional distress, but they would need substantial proof that such distress actually occurred.

LECTURE NOTES WITH DEFINITIONS What is the difference between conforming and nonconforming goods?

  

What is the perfect tender rule?

The UCC requires sellers and lessors to transfer and deliver conforming goods.

In turn, buyer and lessees must accept and pay.

The standard the UCC requires is a good faith standard in performance and enforcement of contracts.  The perfect tender rule indicates that if goods or tender of delivery fail in any respect to conform to the contract, the buyer/lessee has the right to accept the goods, reject the entire shipment, or accept part and reject part.

Alaska Pacific Trading Co. v. Eagon Forest Products, Inc. (briefed below) provides an illustration of a situation in which the UCC‘s version of the perfect tender rule was relevant.

What is the right to cure?

Teaching tip: Make sure your student understand why the perfect tender rule matters, and can list its major exceptions.  The right to cure is an exception to the perfect tender rule.  Another exception is the concept of substantial performance.

What is commercial impracticability?



Commercial impracticability applies when a contingency has occurred that was not contemplated when the parties reach an agreement.

16-4

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What are implied warranties of title, merchantability, and particular purpose?





Implied Warranties of Title are not explicitly stated, but are automatically injected into contract.

Implied Warranties of Merchantability are the expectation you have when you expect a product to work a certain way.

Webster v. Blue Ship Tea Room (briefed below) focuses on the merchantability of food. 

How are third parties affected by the implied warranties?

How can implied warranties be disclaimed?

Implied Warranties of Particular Purpose are when a seller or lessor knows or has reason to know why the buyer or lessee is purchasing or leasing the goods in question and that the buyer or lessee is relying on him or her to make the selection.

Teaching tip: Ask students, ―How is the implied warranty of fitness for a particular purpose different from an implied warranty of merchantability?

Be specific.‖  Third-party beneficiaries of warranties: o Seller‘s warranties may extend to the buyer‘s household members and guests. o Seller‘s warranties may extend to any reasonable and foreseeable user.  Seller‘s warranties may extend to anyone injured by the good.  Implied warranties can be disclaimed by the seller doing so in clear, unambiguous, conspicuous language.  In order to disclaim the implied warranty of fitness for a particular purpose, the seller must disclaim the warranty in writing.  To disclaim the warranty of merchantability, the seller may do so orally or in writing.

What is cover and resale?



When are money damages available?



Point/Counterpoint: Do implied warranties diminish the fundamental free market and the right to contract?

Teaching tip: Here are some questions to help you tie the Point/Counterpoint into class discussion:  What values are in conflict in this debate?  Is some amount of paternalism in the marketplace a good thing? Do these implied warranties serve a useful purpose?

Cover is when buyers and lessees substitute goods for those due under the sales or lease agreement.  Resale is when the seller or lessor sells the goods when the buyer is in breach of the contract and the goods have not yet been delivered.

When there are damages for lost profits which are called consequential damages.

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Chapter 16 - Sales and Lease Contracts: Performance, Warranties, and Remedies

CASE BRIEFS WITH ANSWERS TO THE QUESTIONS Case 16-1 Alaska Pacific Trading Co. v. Eagon Forest Products, Inc., 933 P.2D 417 (1997).

Case Brief Issue: Did P break the contract between themselves and D? Facts: The P (Alaska Pacific) and D (Eagon) entered into a contract to buy and sell raw logs. P did not ship the goods by the delivery date. D claims P breached the contract under UCC guidelines by failing to deliver. However, P claims they did not breach the contract under the common law doctrine of material breach.

Procedural History: Sup. Ct. ruled in favor of D. Holding: D wins.

Reasoning:  The P broke the perfect tender rule because it did not deliver the goods on the date of shipment.  The goods were not delivered in a reasonable time.

Answers to the questions Critical Thinking The judge simplified the case by claiming that the case was governed by the Uniform Commercial Code, Article II. However, he never really addressed why the common law claim did not apply.

According to P, the time of delivery had been modified. The judge speaks of how ALPAC did not deliver the logs on the specified date that was in the contract and thus breached the contract. However, he did not consider the effect of the parties modifying the delivery date.

Ethical Decision Making One ethical norm guiding the judge's decision is efficiency, in the sense that the judge wants a clear rule to come to a quick decision. This judge seems to want to ignore context and instead focus on a bright line rule to come to a quick decision.

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Case 16-2 Adel v. Greensprings of Vermont, Inc., 363 F. Supp. 2d 692 (D. Vt. 2005) Case Brief Issue:

Is water a good under the UCC Article 2 or a service of ―providing water?‖ If the former, does the implied warranty of merchantability apply?

Facts: After returning from a skiing vacation in Vermont, Leslie Adel came down with Legionnaire‘s Disease.

He claimed it was from the water drunk at the ski resort and provided by Greensprings of Vermont Inc. Holding: Reversed, in favor of the defendant.

Reasoning:  The court determines based on precedent from other courts that water is indeed a good under the UCC  If water is a good under the UCC, and Greensprings is furnishing that good, then there must be an implied warranty  There is no basis to provide any special exemptions for sellers of water Answers to the questions Critical Thinking On the one hand, one could argue that delivering a vaccine is essentially a service. After all, the important part of the vaccine isn‘t, say, the syringe it comes in, but the immunity it provides. But on the other hand, like the water in Adel, the vaccine itself is a substance ―ingested‖ by the consumer, and could maybe be considered a good.

Ethical Decision Making The answer to this question may rest on how reasonable you think it is for the resort to ensure that its water supply is totally clean and will not result in any illness. Some may argue this is the least a consumer can expect from an establish that provides drinking water. But others may argue that, given the sheer number of guests and amount of water dispensed, it may be impractical to maintain that level of care.

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Chapter 16 - Sales and Lease Contracts: Performance, Warranties, and Remedies

Case 16-3 Stern Oil Co. v. Brown, 2018 S.D. 15, 908 N.W.2d 144 (2018) Case Brief Issue: Did the circuit court err in instructing the jury that Stern Oil‘s damages had to be foreseeable to Brown?

Facts: In 2005, Brown and Stern Oil entered into two ten-year Motor Fuel Supply Agreements (MFSAs) for Stern Oil to supply ExxonMobil branded fuel to Brown to sell at his two convenience stores. The MFSAs required Stern Oil to sell and deliver up to a contractually determined "Maximum Annual Volume" of fuel to Brown. Brown was obligated to purchase at least 75 percent of that amount annually.

Approximately a year and a half into the ten-year agreements, Brown stopped purchasing fuel from Stern Oil. Procedural History: The circuit court granted Stern Oil's motion for summary judgment on its claims for breach of contract and on Brown's fraud claims. The parties waived a jury on the issue of damages, and the case proceeded to a bench trial in October 2009 and January 2010. The circuit court awarded Stern Oil lost profits in the amount of $925,317.

Holding: Reversed, in favor of the plaintiff.

Reasoning:  Because the lost profit damages stem from the MFSAs, the damages were direct and not consequential.  Because the damages were direct, Stern Oil did not have an obligation to show foreseeability because they are foreseeable by nature.

Answers to the questions Critical Thinking In this case, it is irrelevant as to who the seller thought the baker was; the seller still failed to deliver on the contract and profits were lost. Had the seller done his due diligence and was aware of what type of baker the buyer was, the lost profits would have certainly been foreseeable.

Ethical Decision Making Some may argue that regardless of whether someone is a merchant, if their breach contributes to lost profits then they should be liable for those profits. However, others would argue that it is unfair to hold someone who is not a merchant and therefore does not avail themselves of the risk/reward venture that is business to the same standard.

TEACHING SKILLS: PRACTICE ASKING HIGHER ORDER THINKING QUESTIONS

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Use Chapter Fourteen as an opportunity to practice asking questions that are higherorder thinking questions.

Students may need practice, especially with questions that ask them to evaluate, and to explain the significance of a concept.

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TIPS FOR BUSINESS MANAGERS 1. Don‘t try to take advantage of a good faith mistake by another party. You might win, but the cost may be considerable. This kind of dishonest action can impact your reputation. Put yourself in the position of the party who made the mistake. How would you want to be treated?

2. Remember that if a seller wishes to disclaim an implied warranty, it must be done with clear, conspicuous language and must use the language of the warrant itself. For example, if a seller is disclaiming the implied warranty of merchantability, include the language ―implied warranty of merchantability‖ in the disclaimer.

3. The UCC was created to ease and facilitate commercial transactions between buyer and seller.

When a breach occurs, don‘t ―lawyer up‖ and run immediately to litigation. Work it out with the other party if at all possible. Remember the old adage that the only winners when a case goes to trial are the attorneys.

CASE OPENER WRAP-UP: A Nightmare of a Vacation Plaintiffs sought damages under the following theories: revocation of acceptance, pursuant to of the Magnuson-Moss Warranty Act (Magnuson-Moss Act), breach of implied warranty of merchantability, pursuant to of the Magnuson-Moss Act; and revocation of acceptance and cancellation of contract. They also sought to recover the purchase price. Plaintiffs attached the following documents to their complaint: (1) the first page of the parties's contract for the sale of the RV, an alleged expert's report regarding water leakage and mold, (3) the letter to defendant purporting to confirm the revocation of acceptance, and (4) rental rates for a 23-foot trailer.

The court found there were two instances of non-conforming issues. The first one, dealing with leaking into the dinette area, had been remedied, at least to some degree. When the leaking reappeared in greater force, the court treated it as a new breach. While the RV had been sent to the manufacturer for repair, the owners revoked acceptance and demanded their purchase price back. The plaintiff claims that the unreasonable time for the cure should be calculated from the first leak‘s appearance. The court agreed with the defendants that the first leak‘s issue was satisfied and a new clock began running with the appearance of the second, more serious leak. Since it had only been two weeks since the second leak was reported, a reasonable time for cure, as a matter of law, had not expired yet.

TEACHING IDEAS Connecting to the Core Teaching Basics Advanced Teaching

See question 6 (below).

See questions 3 and 5 (below).

See questions 1, 2 and 4 (below).

Discussion Questions

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1. Evaluate the following statement: Obligations in basic performance are determined only by the rules outlined in the UCC. The statement is false. Obligations are determined not only by the rules of the UCC, but also by terms outlined in an agreement between parties and customs.

2. Evaluate the following statement: The perfect tender rule is very inflexible and no exceptions can be made to the rule.

The statement is false. Even though the perfect tender rule is very strict, there are some exceptions. For example, exceptions can be outlined in a party's agreement. Also, if commercial impracticability applies, an exception can be made. Other exceptions are norms in the industry and past dealings between parties, the seller's/lessor's right to cure, destroyed goods, and substantial impairment.

3. What sections of the UCC use the concept of substantial impairment to modify the perfect tender rule?

One section allows a buyer to revoke acceptance of goods if the buyer can shows defects in the goods substantially impair the value of the goods. The second section permits a buyer/lessee to reject an installment of an installment contract if the defects substantially impair the value of the goods and cannot be cured.

4. Why is the rule of commercial impracticability important?

The rule of commercial impracticability is important because it protects buyers and sellers from being sued for breach of contract for circumstances for which they are not responsible. Without this rule, a buyer or seller would be held responsible for circumstances such as changed laws.

5. Can a buyer always revoke acceptance of goods?

No, to revoke acceptance of goods the buyer/lessee must prove the defect impairs the value of the goods and provide a good reason for original acceptance.

6. In the chapter’s “Connecting to the Core” section, the authors mention choiceboards. What are the down sides to choiceboards?

One down side is the customers do not always have the wisdom to know how to create a customized purchase they will be satisfied with when it arrives. Of course, the customer bears this particular risk.

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ANSWERS TO QUESTIONS AND PROBLEMS 1.

The obligations of sellers/lessors and buyers/lessees are determined by: (1) terms the parties outline in agreements, (2) custom, and (3) rules outlined by the UCC.

2.

UCC Section 1-203 requires good faith in the performance and enforcement of every contract. Good faith means honesty in fact. Between merchants, the UCC imposes more than honesty in fact—it requires reasonable commercial standards of fair dealing, or commercial reasonableness.

3.

The court found that a sale of a dog was indeed a sale of a good under UCC Article 2. The seller was a merchant, and therefore the implied warranty of merchantability is tied to the sale of any goods from the seller. In the end, the plaintiff was awarded reimbursement for her veterinarian bills.

4.

The court ruled that the UCC applies here in that a good faith purchaser (i.e., the defendant) can obtain title of a good sold by a merchant even when the sale violates an agreement between the merchant and the owner. Whether the term ―merchant‖ applies here was undetermined, and thus the motion to dismiss was denied.

5.

The trial court found in favor of the defendant jewelers, Mandarin Gems. However, the appellate court reversed in favor of Sarah Jane. Specifically, the court argued that the fact proved that the plaintiff had standing to enforce a contract between her former husband and the defendant as a third-party beneficiary because the ring had been bought for the sole purpose of Jane‘s having it, and the defendant jeweler must have understood the former husband‘s intent to enter into a contract for the ring for the benefit of plaintiff Jane. As such, the court concluded that the trial court had erred in dismissing the case, and the case was reversed and remanded for further proceedings on whether damages should be awarded for the alleged breach of contract.

6.

The court recounted the history of seafood and chowder in great detail to determine that it is reasonable for consumers of fish chowder to expect small fish bones in their food. Thus, Ms. Webster could not claim a warranty of merchantability because she should have expected that there may have been a bone in her chowder.

7.

Just as in Blue Ship Tea Room, the court held that when one eats fish, it is reasonable for them to expect to find a bone or two. There was no breach of any UCC warranties, and the court affirmed the granting of summary judgment to the defendant.

8.

The judge ruled that the manner of examination that is required to discover such a defect is not reasonably expected of a casual consumer, and so it was found that the implied warranty of mechantability was breached.

9.

According to a right to cure claim, the defendant must show that reasonable efforts could have been taken to mitigate damages by the nonbreaching party. This case thus rested on whether the plaintiff had taken reasonable efforts to avoid suing for damages. The court found that the plaintiff had in fact made a reasonable effort to avoid seeking damages by informing its client that the stone could be replaced by the defendant. This case shows that a nonbreaching cannot directly proceed to a damage claim; rather, it must show that it made a reasonable effort to avoid damages and respect the defendant‘s right to cure.

10.

Yes, Reeves can rescind. The time frame within which the Reeves asked for rescission was reasonable. His continued use of the computer system did not prevent him from asking for rescission.

11.

The buyer prevailed in this case. The court of relied on a precedent set by a previous case where a buyer of a new car rejected a replacement after the car broke down a mile outside of

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the dealership. In that case, the buyer stated that his confidence in that brand of car was forever shaken and no replacement would satisfy him. Similarly, Gappelberg argued that he did not want a replacement television because his confidence in that brand of televisions was damaged. The court ruled that once a buyer has properly revoked acceptance, the seller has neither the right to cure by repair nor by replacement.

12.

The court ruled in favor of the defendant, concluding that the statute of limitations barred the plaintiff from suing for breach of contract.

13.

The U.S. Court of Appeals for the Second Circuit affirmed the district court judgment in favor of the insurance company. The court found that even if the insured‘s title was voidable, the insured could not have it declared void in this case. The insured also could not show that its right to challenge title was within the policy‘s definition of insured property.

14.

The court ruled in favor of The Inn Between. The nonconformities of the system substantially impaired the value of the computer to the restaurant. The "Inn" lost information it had inputted on that system. These problems were not cured because Remanco never finally fixed the problem. The "Inn" revoked its acceptance within a reasonable time, so The Inn Between is awarded the value of computer system. However, this judgment was conditioned on the return of the system to Remanco.

15.

The appellate court ruled in favor of Newark. The issue at hand was that Newark was left with only loose paper and that there was no market for loose paper. Thus, Newark repudiated the contract because it was impossible to sell the loose paper.

Chapter 17: Negotiable Instruments: Negotiability and Transferability CHAPTER OVERVIEW Negotiable instruments are important to the payment of a contract. This chapter discusses the language in and criteria for negotiable instruments, along with the various types of negotiable instruments encountered in business law.

The chapter continues with checks and electronic funds transfers. The relationship between banks and their customers can be complicated, especially with today's options for electronic transactions. This chapter focuses on the checks and deposits of the relationship between bank and customer, and which party is liable in certain circumstances arising from the relationship. Different types of electronic fund transfers are also discussed.

You might want to begin by asking the students to read the chapter and respond to the discussi on questions listed later in the chapter. Focus primarily on what qualities constitute a negotiable instrument, different types of checks, and which party is liable in a disagreement between bank and customer. Class discussions involving the cases and the critical thinking and ethical moment questions following will help students apply the information.

LEARNING OBJECTIVES After reading this chapter, students will be able to answer the following questions: 1. Why is there a need for negotiable instruments?

2. What are the types of negotiable instruments recognized by the UCC? 17-4 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

3.

4.

5.

6.

7.

8.

What are the requirements of negotiability?

What are the words of negotiability?

What are the components of a check?

What are the differences among the various types of checks?

How and where are deposits accepted?

When may a bank charge a customer‘s account?

BUT WHAT IF SECTIONS 1. In this case, the judge would still rely only on the written agreement. Nevada law requires a written agreement to be made for situations such as these. Shack could not furnish a written agreement for the court. Even if Shack had a recording of the oral agreement, it'd have no bearing on the decision.

2. No, it would not. A negotiable instrument requires an unconditional promise to pay. Being that Shack would be making no such promise, the document would not be a negotiable instrument.

LECTURE NOTES WITH DEFINITIONS  A negotiable instrument is a written document containing the signature of the creator that makes an unconditional promise or order to pay a sum certain in money at either a time certain or on demand.

Why is there a need for negotiable instruments?

Teaching tip: Ask students, ―Why are negotiable instruments important?‖ What are the types of negotiable instruments recognized by the UCC?

What are the requirements of negotiability?

What are the words of



Important types of negotiable instruments are: o A note is a promise by the maker of the note to pay a payee. o A draft is an order by a drawer to a drawee to pay a payee. o With a demand instrument the payee can demand actual payment at any time. o A certificate of deposit is a promise made by a bank to pay a payee a certain amount of money at a future time. o A check is a specific draft, drawn by the owner of a checking account, ordering the bank to pay the payee from that drawer‘s account.

Teaching tip: Bring to class tangible examples of negotiable instruments to show students what they actually look like. For example, if you have a copy of a ―note‖ from your own life, bring it to class.  The six requirements for negotiability are: o The instrument is a written document. o It is signed by the creator of the instrument. o The instrument has an unconditional promise or order to pay. o The amount to be paid is a sum certain in money. o Payment is to be made either on demand or at a fixed future time. o The document must contain the words of negotiability, e.g., ―to the order of.‖  By having the phrase ―to the order of‖ near the 17-5

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negotiability?

What are the components of a check?

What are the differences among the various types of checks?



How and where are deposits accepted?

payee, the instrument can indicate it was created for the purpose of being transferred. Other words of negotiability include ―pay to the bearer‖ or ―pay to cash‖.  A check is a draft that orders the bank to pay the payee a certain amount of money on demand.  Cashier’s checks are checks in which the drawer and drawee are the same bank.  A teller’s check is one in which both the drawer and drawee are banks.  The UCC considers money orders checks. They are distributed by banks and nonbanks.

Certified checks are checks accepted at that bank from which they are drawn.

Teaching tip: Ask students whether they have used or received a cashier‘s check or certified check. Explore the circumstances  Banks must credit customers‘ accounts as well as draw from them.  Four types of banks involved in check collection are: o Depository banks o Payor banks o Collecting banks o Intermediary banks  A depository bank is sometimes the same as a payor bank.  When this happens, a check is deposited, but it does not have to be sent out to another bank.  When check collection involves different banks, once a check reaches a bank, the check must be passed on before midnight the next day.  Once a check reaches a payor bank, the bank must dishonor it or be liable for the amount.  The Federal Reserve System for clearing checks consists of twelve central banks. Each bank acts as a clearinghouse for the check collection process.  In the past, checks were once physically presented to each bank, but now they are electronically presented.

Teaching tip: Ask students to imagine how the world of banking has changed now that checks are presented electronically, rather than physically.

When may a bank  If a customer‘s account cannot cover a check, the charge a customer‘s bank will dishonor it, and the customer will be held liable account? for the amount.  A bank must honor a check if it is properly payable.  An overdraft occurs when a bank pays a check and charges the amount short.  If the bank chooses to dishonor the check, the holder can attempt to resubmit the check later.  A stop payment order is an order by the drawer to the drawee not to pay a check that has been drawn on the customer‘s account.

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account? What were the consequences? Be specific.‖  

Point/Counterpoint: Should a company be allowed to require that employees receive payment through direct deposit?

Today, most checks are paid without regard to the date.

If a check is not presented to a bank within six months of the date, it is a stale check.  If a bank is not aware of a customer‘s death or incompetence, then it is authorized to pay the check.  Usually, if a bank pays a forged check, the bank will be liable for the check.  If the customer‘s negligence contributed to the problem, the bank is not liable to repay the customer.  However, if the bank is also negligent, the customer bay be compensated for some of the money.  If a bank is not notified thirty days after a bank statement has been received, then the bank is not liable.  If an unauthorized check is made, then the check is unauthorized.  If a bank pays on an altered check, the bank is usually liable.  Usually, the first party to accept a forged instrument is responsible for the loss.

Teaching tip: Here are some questions to help you tie the Point/Counterpoint into class discussion:  Why wouldn‘t an employee want to receive their pay through direct deposit?  The ―no‖ side of the debate lists problems with direct deposit, but many of the problems listed seem easy to solve. How so?

CASE BRIEFS WITH ANSWERS TO THE QUESTIONS Case 17-1 Amplify Federal Credit Union v. Garcia, Tex. Court of Appeals, 3rd District (2017) Case Brief Facts: In December 2008, Jason Garcia signed a motor vehicle sales contract with Mac Haik Dodge Chrysler Jeep, a dealer. In the contract, Garcia agreed to purchase a 2009 Dodge Ram 1500. The contract includes Garcia‘s agreement to pay a total of $62,370 spread out over 84 monthly payments of $742.50.Mac Haik Dodge Chrysler Jeep assigned the sales contract to Amplify Federal Credit Union (AFCU).In2010, after Garcia defaulted on payments, AFCU repossessed the vehicle, sold it, and applied the proceeds to the remaining balance. Garcia still owed $20,711 on the sales agreement and continued to accrue interest. In 2015, AFCU sued Garcia to recover over $35,000 and Garcia responded by asserting AFCU‘s claim was barred by the statute of limitations. Both parties moved for summary judgement.

Issue: Did the six-year negotiable instrument statute of limitations apply to AFCU‘s claim?

Reasoning: 

The contract contained none of the typical ―negotiable language‖ that an instrument requires to be negotiable, such as ―to the order‖



Because the sales contract was not payable to bearer or payable to order, it lacked negotiability

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

Thus, the six-year negotiable instrument statute of limitations was inapplicable to this case

Holding: The four-year sales contract statute of limitations applied, not the six-year negotiable instrument statute of limitations. Affirmed in favor of Garcia.

Significance of the Case: This case provides an illustration of how the court determines whether a note constitutes a negotiable instrument. Specifically, one can see the vigorous attention the court gives to the specific language of a note.

Answers to the questions Critical Thinking An instrument is payable to bearer if it states that it is payable to anyone who possess the instrument or if a payee is not named. However, the contract identified the dealership as the payee and was therefore not payable to bearer.

Ethical Decision Making Honoring a deal is valued in the negotiability criteria because by not making all notes negotiable, people are prevented from carelessly trading notes as if they were cash. By not making the note negotiable in this case, it ensures that the original deal between Garcia and the dealership is preserved.

Case 17-2 Jones v. Wells Fargo Bank, 56 F.3d 955 (5th Cir. 2012).

Case Brief Facts: In September 2006, Adley Abdulwahab opened a business account with Wells Fargo Bank on behalf of W Financial Group, LLC. Upon opening the account, Abdulwahab received a business account agreement that described the terms governing the account. In January 2007, Abdulwahab withdrew $1,701,250 from W Financial's account at Wells Fargo. Abdulwahab used the money to purchase a cashiers check payable to Lubna, Misba, Shahed and Zahed Lateef. Later that day, Abdulwahab went to another Wells Fargo branch and deposited the cashier's check into the account of a separate entity, CA Houston Investment Center, LLC. The Lateefs never received or endorsed the check. Rather, Wells Fargo stamped the back of the check and processed it. In 2008, the SEC brought an action against W Financial for allegedly selling false securities. Vernon T. Jones was appointed as a receiver for the purpose of recovering W Financial's assets for the benefit of investors. In the course of his duties, Jones filed an action against Wells Fargo, alleging that Wells Fargo was liable for conversion (that is, taking the personal property of a party without their permission) and responsible for the $1,701,250 in damages.

Issue: Was Wells Fargo liable for the damages resulting from the processing of the bad check?

Reasoning: In making their decision, the court relied on Texas's version of the UCC (which is almost identical to the UCC itself), particularly the provision that holds that a bank may be liable for conversion if ―a bank makes or obtains payment with respect to the instrument for a person not entitled to enforce the instrument or receive payment.‖ The court determined that CA Houston had no right to enforce the check and receive payment. The only way CA Houston could have been considered an enforcer was if W Financial directly gave the check to CA Houston, and this was not what had occurred in the case.

Because Wells Fargo made payment on the check to CA Houston, an entity that had no right to enforce the check, Wells Fargo was liable for conversion.

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The court also determined that Wells Fargo was liable for conversion because it deposited the check without the necessary endorsement. Wells Fargo accepted the check even though the check had not been endorsed by the Lateefs. Wells Fargo simply stamped ―Credited to the account of within named payee Lack of Endorsement Guaranteed Wells Fargo Bank, N.A.‖ and processed the check without an endorsement. Once again, the court considered the UCC in their decision. The court cited Southwest Bank v. Information Support Concepts, Inc., a case where it was held that the UCC places the burden on the first bank in the collection chain to ensure an endorsement's authenticity.

Holding: The Court of Appeals affirmed the district court's decision; Wells Fargo was liable for conversion and was held responsible for the $1,701,250.

Significance of the Case: While there are exceptions, financial institutions are often liable for damages resulting from processing bad checks and this case is just one example of this phenomenon.

Answers to the questions Critical Thinking The judge ruled in favor of the plaintiff because he felt that Wells Fargo had a duty to ensure that the check met all of the standards of a negotiable instrument before processing the check, and Wells Fargo failed to fulfill that duty. Wells Fargo, however, argued that the incorrect endorsement was ―immaterial‖; perhaps if we better knew the circumstances surrounding the decision to process the check, we would know if Wells Fargo had truly failed to fulfill its duties.

Ethical Decision Making Two of the values the court's decision promotes include accountability and vigilance. If Jones (and, by extension, W Financial Group) operated under the ethics-of-care philosophy, it may not have taken Wells Fargo to court. By taking Wells Fargo to court, Jones is essentially holding Wells Fargo liable for not being vigilant enough to notice that the firm was being taken advantage of by Abdulwahab. The ethicsof-care philosophy would likely advise against taking Wells Fargo to court because in doing so, Wells Fargo is being heavily punished for being tricked.

Case 17-3 In re Estate of Thomas John Heck Jr., 2019 IL App (1st) 182414 (2019) Case Brief Facts: On June 14, 1988, Thomas John Heck Jr. executed a note promising to pay Paul D. Heck $51,000 at 7% interest compounded annually. The note contains the following payment terms: "Perpetual 90 day note[.] Borrower shall make a single payment on demand within 90 days of demand letter. If payment is not demanded or paid by borrower[,] this note will renew automatically in full force of the terms until said note is paid."

On November 7, 2016, Thomas John Heck Jr. died. During his life, the decedent never made a payment on the note and the claimant never made a demand for payment. On December 8, 2017, Paul D. Heck made a written demand upon the estate for payment of the note. The estate did not pay the note, and on January 3, 2018, Paul D. Heck filed a claim against the estate for $362,886.62 due on the note, plus interest, attorney fees, and costs. On May 14, 2018, Robert B. Heck, as executor of the estate (respondent), filed a motion to dismiss the claim as time-barred.

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Issue: Is Paul‘s demand for payment on the note time-barred?

Reasoning: A note is a demand note if it states that it is payable on demand, otherwise indicates that it is payable at the will of the holder, or does not state a definite time for payment. The note, which is the subject of this litigation, is not payable on a certain date; rather, it is payable "on demand within 90 days of a demand letter." The due date is indefinite, and the obligation to pay is triggered by a demand.

Therefore, the note is a demand note. The court was not persuaded by the claimant's argument that the language describing the note as a perpetual 90-day note that renews automatically until the note is paid is evidence that the note is not a demand note or that the maker intended that it not be subject to a 10-year statute of limitations. In fact, this language of the note supports its characterization as a demand note because a perpetual 90-day note that continues to renew has an unlimited or indefinite due date. A note with an indefinite due date is a demand note.

As the claimant in this case could have demanded payment on the date of the note's execution and the decedent would have been required to make payment thereon within 90 days thereafter, any cause of action against the decedent based on the note accrued either on execution or, at the very latest, 90 days thereafter. The claimant did not file his claim against the estate until January 3, 2018, long past the expiration of 10 years following the accrual of his cause of action; consequently, his claim is timebarred. It is for these reasons that the court ruled in favor of the estate.

Holding: Motion to dismiss GRANTED. Answers to the questions Critical Thinking The key language in this case was that payment was to be rendered ―within 90 days of a demand letter.‖ Because no deadline for this demand letter was specified, it could be provi ded at any point in the future and payment would be required within 90 days. This indefiniteness makes the note a demand note.

Ethical Decision Making This decision greatly benefits those who hold notes with indefinite payment periods. The court here ruled that indefinite payment periods mean payment can be demanded any time in the future with no limitations.

TEACHING SKILLS: INTEGRATING A RECENT NEWS STORY WITH MATERIAL FROM CHAPTER SIXTEEN The Baltimore Sun article (which follows) allows students to integrate material from the chapter to a recent news story.

A note to instructors: The fastest way to find recent news stories is by using Westlaw or Lexis-Nexis Academic, which is available through most college library web sites.

TIPS FOR BUSINESS MANAGERS 1.

Remember that all negotiable instruments are essentially contracts and that all rules of contracts apply to negotiable instruments.

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2.

As has been stressed in this book several times before, it is always important to have written documentation for your business transactions. Negotiable instruments are always in writing per their nature, but, as the Case Opener shows, even the agreements surrounding a negotiable instrument should be in writing.

3.

Whenever dealing with negotiable instruments, be sure to keep in mind the seven requirements for negotiability. A negotiable instrument can still be an enforceable contract without all seven factors, but it is not negotiable.

TEACHING IDEAS Connecting to the Core

Advanced Teaching

Ask students:  Chapter Sixteen explains the idea of ―float.‖ What is float?  Using what you have learned in finance classes, identify and explain an additional scheme that serves the same purpose as ―float.‖ Ask students:  How are changes in the law eliminating ―float‖?  Who suffers from check kiting? Be specific.  Why are some people ―unbanked‖? What changes in law would allow every American citizen to be ―banked‖?

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ADDITIONAL TEACHING SKILLS: CREATE A DEBATE At this point in the semester, your students should be able to create their own point/counterpoint debate.

Ask your student to use the Christian Science Monitor article (below), as a starting point for their Point/Counterpoint debate.

Ask your students how the issue they debate differs from the Point/Counterpoint debate in the textbook, e.g., whether a company should be allowed to require that employees receive payment through direct deposit.

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ADDITIONAL TEACHING IDEAS Connecting to the Core

Ask students:

Teaching Basics

Assume you are a bank manager. Under what circumstances would you be in favor of direct deposit of social security checks? In what circumstances would you be against direct deposit? Explain your answer.

Ask students:

Advanced Teaching

What are the main arguments in favor of direct deposit of social security checks? What are the main arguments against direct deposits of social security checks?

Divide your students into two sides. Ask them to debate the issue whether social security checks should be deposited directly. Ideally, students should debate the side they disagree with—this will force students to step into the other side‘s shoes and acknowledge the good arguments on both sides of the debate.

CASE OPENER WRAP-UP: An Oral Agreement with MGM Referring to the dispute between MGM Desert Inn Inc. and Shack, the court held that the potential oral agreement was irrelevant to the negotiability of the checks. Instead, the district court focused on the criteria established within the UCC for negotiability, and it concluded that the checks were negotiable instruments. The checks were written documents, were signed by the maker, contained an unconditional promise to pay, specified the sum of money to be paid, were payable on demand, and contained words of negotiability, so the checks were determined negotiable instruments. Hence, MGM was considered the holder of the instruments.

ANSWERS TO QUESTIONS AND PROBLEMS 1.

After a sales contract is formed, it is up to the buyer to pay for his or her purchase. Payments usually occur in one of three ways: cash, credit, or a substitute for cash. It is the substitute for cash that requires negotiable instruments. These were used dating back to ancient times when actual currency was in short supply, or when it was unsafe to carry large sums of money.

Promises for later payment were written on paper and used as currency.

2.

Negotiable instruments are more similar to contracts. This is because they are in fact negotiable, whereas money is not. If a negotiable instrument is used to make a purchase and the purchased item turns out to be defective, the buyer can refuse payment of the negotiable item on grounds that the original sales contract was breached when the seller sold the buyer defective goods.

3.

The elements of negotiability are the following: the document must be written; the document must be signed by its creator; the instrument must have an unconditional promise or order to pay; the amount to be paid is a sum certain in money; payment is to be made either on demand or at a fixed future time; and the document must contain the words "to the order of or some set of words indicating that it is a bearer instrument. A written document must have relative permanence and it must have moveability. Signature of the maker or drawer requires an affirmation mark, a duly authorized agent, handwritten even without signature, and

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automated signature. The requirement for an unconditional order or promise to pay is that the document be specific and not implied. The document must contain a sum certain in money, in currency only, any currency acceptable. Payable at a time certain or on demand requires acceleration of payment, or extension of payment. The requirement of words of negotiability includes the provisions of "to the order of and an order instrument.

4.

Both order paper and bearer paper must be delivered in order to be negotiated, but order paper must be endorsed prior to delivery in order to be negotiable whereas bearer paper may simply be delivered without endorsement.

5.

The three parties involved are the drawer, who orders a party to pay, the drawee, which is the party that must obey the order to pay, and the payee, which is the party directed to receive the money.

6.

Being that a bank is not necessarily aware of the thoughts or spending habits of a customer, a bank is not nearly as equipped to notice strange or exorbitant charges as the customer is. Thus, it is the duty of the customer to examine his or her statement and report unauthorized charges to their bank within 30 days of the statement becoming available.

7.

The customer may be responsible if he or she fails to notice the forgery after a statement of the account has been sent to the customer, and the customer has had time to review the statement.

8.

The agreement did not fulfill the sum-certain element primarily because the date of the cash advance (or whether there was only one cash-advance date) was unknown. Because this information was unknown, the court was also unable to determine the amount of interest and therefore unable to determine the principal as well. For these reasons, the agreement was not negotiable and the four-year statute of limitations applied.

9.

The court found that ―[t]here is simply no requirement that an entity in possession of a negotiable instrument that has been endorsed in blank must establish how it came into possession of the instrument in order to be able to enforce it‖. Thus, Logan‘s arguments were without merit.

10.

The court ruled that the non-recourse provision did not shield Cooper. The language of the promissory note makes it clear that the non-recourse provision does not take effect until ―after the application of such distributions.‖ In other words, the non-recourse provision only applies after all the money is properly distributed, which Cooper failed to do. Instead of spending his partnership distributions to repay the note, he spent them elsewhere. Thus, the non-recourse provision did not yet take effect and Cooper is still liable.

11.

The appellate court affirmed the circuit court‘s order in favor of the bank. The bill tendered by the mortgagor was not a negotiable instrument because it was not made payable to bearer or to order. Additionally, the bill was not a check because it was not drawn on a bank.

12.

The results of the case hinged on whether the promissory notes were considered negotiable instruments. If they were considered negotiable instruments, then the 6-year statute of limitations had not yet expired. If they were not, then the 4-year statute of limitations that applies to sales contracts would have expired. The reasoning the appeals court used when overturning the original decision was that while the promissory notes referenced the underlying sales contracts, the notes themselves were still unconditional promises to pay. Thus, the promissory notes were considered negotiable instruments and therefore the statute of limitations for bringing the case had not yet expired.

13.

Obviously, the section on checks in this chapter generally applies to this case, as the case involves the illegal use of checks. More specifically, however, the ―forgeries and alterations‖ section strongly applies to this case, as Casey Anthony had fraudulently forged her friend‘s signature on her checks in order to make them payable to Anthony. Additionally, Huizenga‘s

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potential negligence may come into play here, as this negligence could have contributed to Anthony‘s ability to steal the checkbook. Perhaps most important, though, is the bank‘s responsibility for cashing the forged checks.

14.

The court held that the insurance policy cover forgery of ―directions to pay a sum certain in Money.‖ The court held that while the delivery tickets might represent a direction to pay, the tickets themselves are not directions to pay. In other words, while the tickets would not exist without a direction to pay and thus imply the existence of a direction to pay, they are not the actual directions. When Leicht says ―the delivery tickets functioned as a direction to make payment, just as the policies required,‖ it is mistaken. Thus, the court ruled in favor of the insurance company and held that the policy does not cover Pallet Central‘s forgeries.

Chapter 18: Holder in Due Course, Liability, and Defenses CHAPTER OVERVIEW Agreements involving negotiation, as well as what determines whether an instrument is negotiable, can be tricky. This chapter discusses characteristics of negotiation, as well as how a party becomes a holder in due course.

It is not always clear what party in a negotiable instrument should be held liable. This chapter provides different ways in which a party may be found liable. Signature liabilities and warranties liabilities are two such ways. A discussion of primary and secondary liability, as well as defenses, also provides further ways in which a party may be found liable in a negotiable instrument. Finally, ways in which liability can be avoided are investigated.

You might want to begin by asking the students to read the chapter and respond to the discussion questions listed later in the chapter. Focus on the qualities of negotiation and the purposes for becoming a holder in due course. Class discussions involving the cases and the critical thinking and ethical moment questions following will help students apply the information.

LEARNING OBJECTIVES After reading this chapter, students will be able to answer the following questions: 1. What is a holder in due course?

2. What requirements must be met to obtain holder in due course status?

3. What is the shelter principle?

4. In what ways has the holder in due course doctrine been abused?

5. What information is needed to determine signature liability?

6. What is warranty liability?

7. How does one avoid liability for negotiable instruments?

BUT WHAT IF SECTIONS 1. Mills is a holder of the check because Cigna created the check specifically for Mills. As such, if Mills breaches his contract with Cigna, Cigna could sue for such a breach. Alternatively, if Mills were an HDC somehow, then Cigna would still be required to pay the check because HDCs have more legal

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protection than the ordinary holder.

2. This action would create a conditional restrictive endorsement because Cigna is agreeing to create a check payable to Triffin on the condition that Triffin doesn‘t cash the other check. This check, however, can be further negotiated to others, and therefore, qualifies as a negotiable instrument.

LECTURE NOTES WITH DEFINITIONS What is a holder in due course?

What is the shelter principle?

In what ways has the holder in due course doctrine been abused?

 To be a holder in due course, a party must: o Be a holder of a complete and authentic negotiable instrument. o Take the instrument for value. o Take the instrument in good faith. o Take the instrument without notice of defects.

Creative Ventures, LLC v. Jim Ward & Associates (briefed below) examines the required elements of holder in due course status.

Teaching tip: Make sure your students understand the significance of each case, e.g., why each case is in the book.  The shelter principle means that generally, if an item is transferred from one person to another, the transferee acquires all the rights that the transferor had in the item.

Teaching tip: Ask students, ―Which stakeholders appreciate the shelter principle most?‖  Sometimes, intermediaries might attempt to abuse the protection the HDC doctrine provides.  Savvy judges prevent individuals from trying to abuse HDC doctrine.  The FTC has created rules that prevent abuse.

Teaching tip: Ask students why is it important that both courts and administrative agencies take steps to prevent abuse of HDC status.

What information is needed to determine signature liability?

Teaching tip: Talk students through Exhibit 28-1 on page 716. This exhibit outlines the roles of parties that sign a negotiable instrument.  A party can be held liable for an instrument only if the party has signed the instrument.  Primary liability of drawers and endorser—they must pay the amount on the instrument when it is presented for payment.  Secondary liability—they must pay the amount on the instrument if the primarily liable party dishonors the instrument and the following conditions are met: presentment, dishonor, notice of dishonor.  Accommodation party—one who signs an instrument to provide credit for another party who has also signed the instrument.

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 What is warranty liability?

If a signature to a negotiable instrument is unauthorized, this unauthorized signature will not imposed liability to the named party.

Transfer warranty—when a party transfers an instrument to another party for consideration, the party makes certain promises or warranties regarding the instrument and the transfer itself.

Presentment warranty—when a party presents an instrument for acceptance, the party makes certain promises regarding the instrument and the party who is entitled to payment.

Teaching tip: Ask students to explain how transfer and presentment warranties are different.

How does one avoid liability for negotiable instruments?

Teaching tip: Ask students to list defenses to liability, and ways parties can be released from liability.  Defenses to liability can be real or personal defenses.  Release from liability can occur when there has been payment, cancellation or renunciation, reacquisition, impairment of recourse, or impairment of collateral.

Point/Counterpoint: Should Holder-in-DueCourse Laws Be Revised?

Teaching tip: Here are some questions to help you tie the Point/Counterpoint into class discussion:  The ―yes‖ side of the debate prefers which value or ethical norm? Define and explain your choice.  The ―no‖ side of the debate prefers which value or ethical norm? Define and explain your choice.

CASE BRIEF WITH ANSWERS TO THE QUESTIONS Case 18-1 Wawel Savings Bank v. Jersey Tractor Trailer Training, Inc., 500 F. 3D 147, U.S. App. LEXIS 19597 (2009) Case Brief

Issue: Did Wawel or Yale have priority over JTTT‘s accounts?

Facts: Wawel Savings Bank entered into a loan agreement with Jersey Tractor Trailer Training (JTTT) Inc. for the amount of $315,000. In the agreement, JTTT pledged all capital equipment and assets of the company as collateral, and Wawel filed UCC financing statements. Sometime later, JTTT also entered into a factoring agreement with Yale Factors LLC, whereby JTTT agreed to sell the rights to its accounts receivable in return for a 61.5 percent up-front payment of the amount due on the particular accounts receivable.

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On April 4, 2006, JTTT filed a voluntary petition for bankruptcy, and on June 29, 2006, Wawel brought action against JTTT, seeking declaratory relief that its lien on JTTT‘s accounts receivable had priority over that of Yale‘s.

Procedural History: The bankruptcy court found in favor of Wawel, stating that Wawel did not authorize JTTT‘s factoring agreement with Yale and that Yale could not be considered a purchaser of instruments or a holder in due course because it did not establish that it acted in good faith by observing reasonable commercial standards of fair dealing. Yale appealed the decision.

Reasoning: 

Yale argued that it was a holder in due course and therefore takes priority over Wawel‘s earlier security interest.



Yale is considered a holder in due course if it took possession of the accounts receivable in good faith and without knowledge that it was violating JTTT‘s agreement with Wawel.



Whether Yale truly was a holder in due course needs to be determined.

Holding: The court remanded the case so that it could be determined whether Yale was a holder in due course.

Significance of the Case: This case shows the way in which a court reasons with regard to the issue of determining who has priority over a security interest. Specifically, you should be able to see the privileges that a holder in due course is granted.

Answers to the questions Critical Thinking Whether you agree with your colleague depends on your opinion of the reasonable person standard, which the definition invokes. Some find the reasonable person standard to be inadequate, because diluting the myriad behaviors of billions of people into a single ―reasonable person‖ is absurd. Others argue, however, that despite our various behaviors, most people act in expectable patterns and that these patterns can be considered the standard of reasonableness.

Under this latter view, the UCC‘s definition of good faith may not be considered too ambiguous.

Ethical Decision Making Sometimes, being honest and transparent is simply not conducive to making the most profit, which some would argue to be the primary if not the only goal of a business. Clearly, being honest and transparent with competitors can put yourself at a disadvantage, but even transparency with consumers can be hazardous for a business‘s bottom line. Balancing these values is one of the hardest parts of running a business.

Case 18-2 Creative Ventures, LLC v. Jim Ward & Associates, Court of Appeals of California 195 Cal. App. 4th 1430 (2011).

Case Brief

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Issue: Does anyone claiming holder in due course status need to physically possess the document for which the claim is being made?

Facts: Creative Ventures (CV) borrowed roughly $3 million from Jim Ward & Associates (JW) to buy property in California. CV signed promissory notes, payable to JW. JW then sold the loan to 54 individual investors and kept possession of the promissory notes. CV made its payments to JW, and JW paid their shares to the investors.

California has a law making it illegal to charge an interest rate over 8%, except when the loan is made by a licensed real estate broker. JW claimed it was such a broker; it was not. CV learned of the lie and sued both JW and the investors for a refund of all interest it had already paid on the loan as the California statute permitted. The investors claimed that as holders in due course, they did not owe CV any interest because they had taken the note free of any claim against JW.

Procedural History: The trial court agreed with the investors; CV is appealing.

Reasoning: The Appeals Court pointed out that one of the criteria for being a holder in due course is possession. JW is the holder because it has the notes. The investors were benefitting from their relationship with JW, but they did not have the promissory notes. In short, the investors could not be a holder in due course because they are not holding the notes.

Holding: The only rights the investors have are those possessed by the person who offered them the original contract, i.e., JW. Therefore, CV is entitled to a full refund of the interest it has paid; the investors must return to CV all interest payments they have received.

Significance of the Case: Knowing all the elements necessary to be a holder in due course can have significant business implications.

Answers to the questions

Critical Thinking First of all, the investors should have asked if they had any rights beyond those provided to JW in its contract with CV. Instead, the investors simply assumed they‘d be protected by HDC status despite not actually possessing the promissory notes. Second, the investors should have asked whether JW was the type of broker that could demand an interest rate as high as the one on the loan.

Ethical Decision Making The obvious stakeholders in this case are CV, JW and the investors, but these stakeholders really represent borrowers, loaners and investors in loans at large. As is typical in cases involving similar stakeholders, the rights of the borrower, in this case CV, are valued the highest. JW and the investors are ranked lower, especially because JW lied about its status as a real estate broker.

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Case 18-3 Walker v. Probandt, 902 NW 2d 468 (2017) Case Brief

Issue: Is Skyline a holder in due course?

Facts: A & G Precision Parts, LLC (Parts LLC), was a limited liability company whose members at the time of organization were Dennis Walker, John Raynor, John Probandt, John Brazier, and Walter Glass. In 2002, Parts LLC, Walker, Raynor, and Brazier obtained a loan from a bank for approximately $2.1 million. Parts LLC did not make the loan payments as required, and the bank made demand for full payment. In March 2008, the parties negotiated with First State Bank (FSB) to refinance the loan. In conjunction with the loan, Parts LLC, Walker, Raynor, Brazier, and Mark Herz signed a promissory note for $1.5 million. Under the promissory note, Walker, Raynor, Brazier, and Herz were cosigners on the loan and assumed joint and several liability for the repayment of the loan. Parts LLC defaulted on the loan, and FSB commenced this action to recover on the note. Walker entered into a settlement agreement in which FSB assigned the note to Skyline Acquisition (Skyline), which then proceeded to pursue Raynor for the rest of the money.

Procedural History: A judgment was entered against Raynor for $2,306,244.76, which he appeals on the grounds that, among other things, Skyline is not a holder in due course.

Reasoning: Skyline is not a holder in due course because it did not pay value for the note.

Instead, Walker paid the consideration and FSB agreed to assign the note to Skyline. Because Skyline is not an HDC, Raynor can assert any defenses against it that he could against FSB. Holding: Reversed and remanded for Raynor.

Significance of the Case: This case outlines the requirements of holder in due course status, as well as what it means to have or not have that status.

Answers to the questions

Critical Thinking Put simply, Skyline would have had to have paid for the note to become a holder in due course. Because Skyline did not pay for the note, it did not meet all the criteria of HDC status.

Ethical Decision Making The values of attention to details and equal application of the rules are advanced here. If Skyline had just completed the last step to becoming a HDC, it might have prevailed here. Skyline is held to the same HDC rules as everyone else, even if its omission seems minor.

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TEACHING SKILLS: INTEGRATING A RECENT NEWS STORY WITH MATERIAL FROM CHAPTER SEVENTEEN The Business Week article (which follows) allows students to integrate material from the chapter to a recent news story.

A note to instructors: The fastest way to find recent news stories is by using Westlaw or Lexis-Nexis Academic, which is available through most college library web sites.

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TIPS FOR BUSINESS MANAGERS 1. If you pay a party with a negotiable instrument and that party negotiates that note to a third party, HDC status means that you are obligated to pay that third party even if the first party wronged you. If you seek recourse, it must be against the party that wronged you, not the third party.

2. On the other hand, if someone else is taking action against your business for an instrument you received from another party, remember the protections that HDC status provides you with and that the shelter principle can protect you even if you would normally be just a holder.

3. Some firms you try to do business with may try to abuse the protections of HDC status. If this happens, remember that there are rules against certain abuses, such as taking instruments in bad faith. In other words, HDC status is not necessarily bulletproof, and you may have options for recourse.

CASE OPENER WRAP-UP: Dishonored Check and Holder-in-Due-Course Status In this case, the court ruled in favor of Triffin and ordered Cigna to pay him $484 plus interest for the check. Even though Triffin knew the check was dishonored when he purchased it, he still was able to receive payment under the shelter principle and holder in due course. That is, the court ruled that the transfer by a holder in due course to a third party, even one with notice of the dishonor, transfers all rights of the holder in due course to the successor in interest.

As discussed earlier in the chapter, the purpose of the holder-in-due-course doctrine is to protect financial intermediaries and encourage them to continue to engage in financial transactions. If you were a manager for Sun‘s Market and discovered that the insurance company would not be responsible for the dishonored check, you would probably be less likely to accept checks in the future. The holder-in-due-course doctrine and shelter principle encourage market transactions and shield businesses like Sun‘s Market from unnecessary risks.

ANSWERS TO QUESTIONS AND PROBLEMS 1.

Holder in due course status protects financial intermediaries from having to shoulder the responsibility of the transaction risks. By protecting the holder in due course, the law is taking away some of the risk involved in financial transactions, making them a safer practice.

Because financial transactions are safer when one has the status of holder in due course, people will be more likely to engage in financial transactions, knowing the risk has been decreased. Less risk means more transactions.

2.

The requirements for holder in due course status are the following: the party must be holder of a complete and authentic negotiable instrument; the holder must take the instrument for value; the holder must take the instrument in good faith; and the holder must take the instrument without notice of defects.

3.

If a party is primarily liable for an amount, it must pay the agreed upon amount. In contrast, if a party is secondarily liable, it must pay if the primary party defaults.

4.

This statement is generally true. However, we must know whether a party signs as a maker, drawer, acceptor, or endorser.

5.

When a party transfers an instrument, it warrants that: 1) transferor can enforce the instrument, 2)

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Chapter 20 - Agency and Liability to Third Parties

signatures are authentic, 3) the instrument has not been altered, 4) it is not subject to a defense or claim in recoupment, and 5) the transferor has no knowledge of insolvency proceeding against maker, drawer, etc. In contrast, when a holder gives a presentment warranty, the holder guarantees that the warrantor is entitled to enforce the instrument, the instrument has not been altered, and the warrantor has no knowledge of unauthorization.

6.

Real defenses apply to all parties involved; they are universal. In contrast, personal defenses do not apply to holders in due course.

7.

Although this type of situation is likely not what lawmakers had in mind when they created the doctrine, the court ruled that Wells Fargo met all the criteria of a holder in due course and therefore could enjoy the benefits of that status.

8.

Because the endorsements were undated, Wells Fargo cannot prove when the note was endorsed and therefore could not prove that it had standing to foreclose on the note when it filed its complaint. Therefore, the court reversed, remanded for entry of an order of involuntary dismissal.

9.

It probably comes with little surprise that Lissiak‘s evidence was not enough to call into question the signature on the note. To prove that the SW was the maker of the note, the Lissiak must have presented summary judgment evidence indicating that an agent of SW‘s signature appears on the note.

10.

The NYUCC definition of ―good faith‖ is a subjective one. Instead of determining whether statements made by Wachovia were objectively and factually untrue, Wachovia's statements were examined to see whether Wachovia had an intent to defraud Lodge and other customers.

For example, if Wachovia withheld crucial information that may have deterred Lodge from buying a home had she known the information, Wachovia may not be acting in good faith.

Wachovia would have to prove to the judge that it did not act in a dishonest manner against Lodge's best interests if they wish to be granted summary judgement.

11.

Many would argue that Triffin's actions are an abuse of the HDC system and shelter principle.

After all, Triffin acquired his HDC status through proxy and through no real actions of his own, and then he proceeded to use his HDC status to take money from a child support recipient who didn't do anything wrong. On the other hand, the shelter principle makes investing in negotiable instruments less risky and therefore allows many people to legitimately benefit from the marketing of negotiable instruments. One must decide whether they think that the malicious actions of a few outweigh the honest benefits of many.

12.

For Albertson to have a reasonable argument that he should not be held liable for the dishonored checks, he would need to provide evidence that the check in question was conditioned on Albertson‘s having sufficient funds in his bank account. Evidence of this would be strongest if a written contract were presented clarifying Albertson‘s oral agreement with the used-car dealer.

13.

The court ruled in favor of Wachovia, arguing that Foster was in a greater position to determine whether the check had been altered because it had reason to suspect that the person who deposited the check was not the intended payee.

14.

Bank of America argued that it owed the firm no duty, but the UCC says otherwise: when a negotiable instrument is presented to a bank by third party (in this case, Flaska) for the benefit of this third party, the bank has a duty of inquiry to the party on the check, meaning the bank has a duty to investigate for fraudulent intentions or defects on the check. Being that a requirement of HDC status is taking the instrument without notice of defects, Bank of America could not have been considered a HDC without performing an inquiry (which it did not do) and finding no defects. The fact that Flaska was depositing checks intended for charitable use

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into his personal account should have sparked an inquiry into the checks.

15.

To determine whether the wife was an ―accommodation party‖ for purposes of determining liability regarding the debt instrument that she signed, we would have to know what type of accommodation party the wife is because accommodations parties can be primarily or secondarily liable. If the wife signed as a maker, she would have primary liability. However, if she signed as a party, she would have secondary liability. If the wife is found to be secondarily liable, then she must pay the amount on the instrument if the primary liable party dishonors the instrument and the following three conditions are met: (1) presentment, (2) dishonor, and (3) notice of dishonor.

Chapter 19: Secured Transactions and Bankruptcy 1. CHAPTER OVERVIEW Secured property is important to a creditor in collecting a debt. Chapter 18 covers the language associated with secured transactions, and the creation, perfection, and scope of secured interest. Priority disputes and default are also discussed. Chapter 18 also reviews bankruptcy law. Bankruptcies are available to businesses, individuals, partnerships, and corporations. An individual may be eligible for one type of bankruptcy, but not another because the definition of "debtor" varies in each type of bankruptcy.

2. LEARNING OBJECTIVES After reading this chapter, students will be able to answer the following questions: 1. What are the important definitions associated with secured transactions?

2. How are secured interests created?

3. How are security interests perfected?

4. What is the scope of a security interest?

5. How are disputes regarding priority handled?

6. What is a default?

7. What are the goals of the Bankruptcy Act? 8. What specific types of relief are available through bankruptcy?

9. How are the various creditors‘ claims prioritized in bankruptcy?

3. BUT WHAT IF SECTIONS 1. The second, secured bank would have priority in claiming the vehicle were AirPro to default on all its payments.

2. Prosperity Bank is free to keep the collateral, but only if they were to notify AirPro and it did not object within 20 days.

4. LECTURE NOTES WITH DEFINITIONS What are the important definitions associated

 A secured interest is an interest in personal property or fixtures which secures payment or

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Chapter 20 - Agency and Liability to Third Parties

with secured transactions?

How are secured interests created?

How are security interests perfected?

What is the scope of a security interest?

How are disputes regarding priority handled?

What is a default?

performance of an obligation. o A secured party holds interest in the secured property. o A debtor has an obligation to pay the secured party. o A security agreement is an agreement in which the debtor gives secured interest to the secured party. o Collateral is the property that is subject to the security interest.

Teaching tip: Practice with students, asking them to recite the important definitions associated with secured transactions.  A security interest is created by: o Filing o Possession o Automatic perfection  Security interests may be perfected many different ways depending on the nature of the collateral. These methods include: Filing of a financing statement Possession of the collateral Automatically for consumer goods Notation on certificate of title for motor vehicles  After-acquired property is property acquired from the security interest.

Teaching tip: Ask students to give an example of when the concept of after-acquired property is relevant.  Secured creditors have priority over unsecured creditors.  When two creditors are involved, priority is determined by considerations of time and perfection.  The perfected PMSI has priority as long as it is perfected within ten days.  A buyer in the ordinary course of business is a person who routinely buys in good faith from one who routinely sells goods. The buyer can take goods free from any security interest.  Regarding buyers of consumer goods, the secured party must file a financing statement. 

Each security agreement provides its own specific definition of default.

Teaching tip: Ask students whether they have known anyone who has defaulted on a loan. What were the circumstances? The consequences?  If a debtor defaults on a loan, the secured party can take possession. However, breaching the peace is not allowed.

The secured party may sell, lease, or transfer the collateral.

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What are the goals of the Bankruptcy Act?

What specific types of relief are available through bankruptcy?

Teaching tip: As a starting point, ask students about the primary triggers of personal bankruptcy. By the end of the chapter, students will learn that the purchase of luxury items is not the primary trigger of bankruptcy.  Bankruptcy law is federal law.  The federal bankruptcy law was seriously revised in 2005.  Most people who file for bankruptcy do so after a major event, such as Hurricane Katrina, which devastated many home owners in Louisiana and surrounding states.  Several types of relief are available under bankruptcy law: o Chapter 7—liquidation—when a debtor turns over all assets to a trustee, an individual who takes over administration of the debtor‘s estate. o Chapter 11—reorganization—allows creditors and a debtor to create a plan to reorganize the debtor‘s financial affairs under the supervision of the bankruptcy court. Assets are not liquidated.

Teaching tip: Are your students aware of companies that have reorganized under Chapter 11 in recent years? o Chapter 13—individual repayment plans—permits individuals to pay their debts to creditors in installment plans, under a court‘s supervision. o Chapter 12—family farmer plans—considers the unique circumstances of farmers. Farmers with creditors to adjust and discharge debt.

How are the various creditors‘ claims prioritized through bankruptcy?

Point/Counterpoint: Is the Credit Counseling Requirement Helpful to Consumers?

Teaching tip: Ask students to list the advantages and disadvantages of each kind of bankruptcy.  Alimony and child support  Costs and fees associated with the bankruptcy  Secured claims  Various types of unsecured claims Teaching tip: Here are some questions to help you tie the Point/Counterpoint into class discussion:  What different assumptions do the ―yes‖ and ―no‖ sides of the debate make?  Do you agree that debtors and creditors are rational actors? Do the cases in this chapter support this particular assertion?  How many creditors does the requirement need to help for us to consider it useful?

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Chapter 20 - Agency and Liability to Third Parties

4. CASE BRIEFS WITH ANSWERS TO THE QUESTIONS Case 19-1 Price Auto Sales, Inc. v. Sanders, Texas Court of Appeals 2012 Tex. App. Lexis 7274 Case Brief Issue: Were Price Auto and Kuykendall liable for Sanders' injuries?

Facts: Price Auto hired David Kuykendall to repossess Carlous Sanders' Cadillac DeVille. On May 11, 2009, Kuykendall went to the apartment complex where Sanders lived and located the car. Kuykendall entered the car and started the engine. At that time, Sanders came downstairs and approached the vehicle.

Kuykendall started backing out and the car rolled over Sanders' foot and leg. Kuykendall did not stop to render aid and exited the apartment complex.

Procedural History: Sanders sued Price Auto and Kuykendall for his injuries, alleging that they were liable for breach of peace. Sanders was awarded damages at trial, and Price Auto appealed.

Holding: Affirmed in favor of Sanders.

Reasoning:  A nonjudicial repossession of collateral is allowed ―if it proceeds without breach of the peace.‖  Sanders was injured during the repossession; the repossession was not complete at the time of the injuries  Thus, Price Auto is liable for Sanders' injuries.

Answers to the questions Critical Thinking The judge is arguing that society's interest in preserving the peace is more important than a party's right to possession. Sanders sustained injuries due to Kuykendall's actions while repossessing the car and thus violated the aforementioned doctrine Information that may have been left out in this case was to what extent the behaviors of Sanders and Kuykendall contributed to Sanders' injuries. Did Sanders safely approach the vehicle, and Kuykendall's recklessness is what caused the injuries? Or did Sanders position himself in such a way, putting his foot under the moving vehicle, for example, that made it very difficult for Kuykendall to not injure Sanders?

Ethical Decision Making If the manager of Price Auto were following the Golden Rule, he likely would have instructed Kuykendall to take extra care to take the vehicle peaceably and informed Kuykendall that Sanders' safety is a higher priority than repossessing the car. After all, how would the manager feel if he fell behind on some car payments and effectively ended up severely injured because of them?

Case 19-2 In re Metz, 589 B.R. 750 (Bankr. D. Kan. 2018) Case Brief 20-6 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Issue: Would Metz suffer undue hardship if required to repay the loans in full with interest?

Facts: Vicki Metz filed a voluntary petition under Chapter 13 of the Bankruptcy Code in 2018. Metz had student loans totaling $16,613.73 in principal and more than $50,000 in accrued interest owing to Educational Credit Management Corporation (ECMC). The amount of Metz‘s payments was insufficient to service the interest accruing at 9% annually on the principal and accrued interest. Metz claimed that she could not meet a minimal standard of living if she was forced to repay the principal amount of the student loans plus the accrued interest. Metz worked as a community health worker and received gross annual pay ranging between $40,000 and $43,000. Metz was single, had no dependents, lived alone, and was in her late fifties. Her expenses consisted of rent, a car payment, health and automobile insurance premiums, a small contribution to a retirement fund, groceries, dining out at fast food restaurants, liquor, cigarettes, and occasional visits to a casino. She occasionally exceeded her monthly budget for these items, and her bank account was overdrawn at times. ECMC opposed the request to discharge the interest payments.

Holding: Yes. The Metz‘s interest was discharged, but she was still required to repay the principal balance of the loans.

Reasoning:  The court established three factors to define ―undue hardship‖: whether Metz could not maintain a ―minimal standard of living if forced to repay the loans, whether these circumstances are likely to persist throughout the repayment period, and whether Metz made good faith attempts to repay the loans  The court found that Metz met all three factors and that requiring her to repay the loans and accrued interest would provide her with ―a minimal standard of living‖ that she was barely maintaining  The court found that Metz would be able to pay $203 per month on the loans and maintain a minimal standard of living, and thus simply discharged the accrued interest.

Answers to the questions Critical Thinking The answer to the first question depends greatly on one‘s standards of living. Some would believe that the factors included are sufficient for a comfortable life, while others may find providing for the basics to not be quite enough.

As for the second question, the court tried to balance both the interests of the Murray‘s and ECMC. While the court found that it was not fair to expect the Murrays to live less than a minimal lifestyle to repay the loans, it was also not fair to deprive ECMC of all of the money owed to it.

Ethical Decision Making The court is honoring the values of fairness and the sanctity of a deal. While it may be tempting to simply ―stick it to the big guy‖ and discharge all of the Murray‘s debt, ECMC loaned the money to the Murrays in good faith and the Murrays agreed to pay the loan back. It would be unfair to deny ECMC all of what it is fairly owed.

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Chapter 20 - Agency and Liability to Third Parties

5. TEACHING SKILLS: INTEGRATING A RECENT NEWS STORY WITH MATERIAL FROM CHAPTER SEVENTEEN The Chicago Tribune article (which follows) allows students to integrate material from the chapter to a recent news story.

A note to instructors: The fastest way to find recent news stories is by using Westlaw or Lexis-Nexis Academic, which is available through most college library web sites.

6. TIPS FOR BUSINESS MANAGERS 1. Compliance with the technical requirements including filing rules and deadlines are imperative if a secured creditor wishes to preserve its position with respect to the collateral and in relation to other creditors. Failure to strictly follow the rules places a creditor in jeopardy of losing its secured position and ending up as an unsecured creditors.

2. It is imperative for secured creditors to conduct due diligence with respect to the debtor‘s business activities and status of the collateral. Sales and movement of the collateral may negatively affect an unsuspecting secured creditor‘s status.

3. Secured creditors must act in a reasonable manner when they seek to repossess collateral upon default. Creditors must keep in mind that the actions of those retained to conduct the actual repossession can and will be attributed to them and may result in unanticipated and unwelcome liability.

4. Laws relating to bankruptcy are extremely complex with many technical requirements including prepetition credit counseling, document filing requirements, automatic stays, and notice provisions.

Compliance is imperative from the perspective of debtors and creditors. Failure to strictly follow the rules places a debtor‘s ability to obtain a discharge or a creditor‘s ability to recover on its claim in jeopardy.

Debtors and creditors should not navigate the intricacies of bankruptcy without at least the advice, if not representation, of legal counsel.

5. Truthfulness and full disclosure matter in bankruptcy. Bankruptcy is not the time for dishonesty, obfuscation or denial. Bankruptcy proceedings lay bare a debtor‘s financial position without exaggerations or misrepresentations. This may be discomforting or embarrassing for some debtors.

However, it must be remembered that a discharge of debts is a privilege and not a right and may be denied to debtors who make less than complete and truthful financial disclosures.

6. Bankruptcy should be a last resort for debtors and creditors. Although the stigma of bankruptcy has been somewhat alleviated, it nevertheless has serious implications for a debtor‘s future financial dealings.

Contrary to popular belief, debtors cannot declare bankruptcy, keep all of their assets, and discharge their debts. Creditors should try to avoid bankruptcy as well. Not only might creditors lose a portion of the value of their claims, but they are also subject to the rulings of a federal bankruptcy court with respect to repayment. Bankruptcy may be avoided in many situations by honest and open dialogue between creditors and debtors.

CASE OPENER WRAP-UP: A Commercially Reasonable Sale?

The Delaware Court of Common Pleas held that, in order to receive a deficiency judgment on a secured 20-8 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

loan, a secured creditor must establish that every aspect of the sale of the collateral was commercially reasonable. The burden of proof in this regard is entirely upon the secured creditor by a preponderance of the evidence. M&T Bank failed to meet its burden of proof. It was unfamiliar with the circumstances surrounding the auction of the car. The bank did not provide any evidence relating to the advertisement of the sale or how the sale was conducted. Furthermore, M & T Bank did not prove that the auction was an industry-approved method for disposing of repossessed vehicles. Therefore, it is not entitled to recover the deficiency balance on the loan.

7. ANSWERS TO QUESTIONS AND PROBLEMS 1.

A security interest is created when: (1) the two parties create a security agreement, (2) the secured party has given something of value to get the security agreement, and (3) the debtor has a right in or to the collateral.

2.

A creditor can take possession of the collateral, dispose of the collateral, or retain the collateral if a debtor defaults.

3.

Bankruptcy laws benefit debtors by providing them with a fresh financial start. Creditors are benefited because bankruptcy laws guarantee that creditors who are competing for a debtor's assets are treated equally.

4.

Chapter 7 bankruptcy would occur if an individual wanted to turn over all of his/her assets to a trustee, who will sell all nonexempt items and distribute the money to creditors. Chapter 9 bankruptcy is available for the adjustment of a municipality's debts. In a Chapter 11 bankruptcy, a debtor and a creditor create a plan in which the debtor pays part of the money that is owed back. In order to qualify for Chapter 12 bankruptcy, an individual must be a farmer who has a regular annual income in which over 50% comes from farming and 80% or more of the debt must be from farming.

5.

The court held that, in order to receive a deficiency judgment on a secured loan, a secured creditor must establish that every aspect of the sale of the collateral was commercially reasonable. The burden of proof in this regard is entirely upon the secured creditor by a preponderance of the evidence. M&T Bank failed to meet its burden of proof. It was unfamiliar with the circumstances surrounding the auction of the car. The bank did not provide any evidence relating to the advertisement of the sale or how the sale was conducted. Furthermore, M&T Bank did not prove that the auction was an industry-approved method for disposing of the repossessed vehicles. Therefore, it is not entitled to recover the deficiency balance on the loan.

6.

The court ruled in favor of Stearns. Stearns, as a secured creditor, had the cumulative right to foreclose on the collateral. It also had a security interest in the proceeds of the collateral, which included damage to the collateral. Thus, Stearns‘ claim to the settlement proceeds outweighed Amegy‘s.

7.

Although the court held that Campogan‘s negligence was the cause of Zoe‘s death, there was simply no evidence that Campogan acted willfully or maliciously. By all other accounts, Campogan was a dutiful and caring childcare provider, and while she acted in a way that increased the risk of Zoe‘s death, by no means did she act with ―substantial certainty‖ that Zoe would die. Thus, the court ruled that the debt was dischargeable.

8.

Continuation statements need to be filed within six months before the expiration of a financial filing statement; the Bank filed to file such a statement until far after applicable period elapsed. Tidewater was not a ―purchaser for value‖ because it did not actually purchase the Tigercats but instead accepted them from Shepherd in exchange for credit on future purposes. Thus, Tidewater never had ―actual knowledge‖ of the Bank‘s security

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Chapter 20 - Agency and Liability to Third Parties

interest and had no duty to investigate whether such an interest existed. The court held Tidewater not liable and affirmed in its favor.

9.

An individual must be considered a debtor in order to petition for relief under bankruptcy. An individual cannot be a debtor if they have not received their credit counseling within 180 days prior to filing for bankruptcy. Even if Arkuszewski completed her credit counseling prior to filing, she did not submit her certificate until about a month after filing, and so she is at best a ―might-become debtor‖. ―Might-become debtors‖ cannot file for bankruptcy.

10.

To answer the question of whether Townsend‘s injury was ―willful and malicious,‖ it examined the elements Ganci needed to prove Townsend had intentionally inflicted emotional distress on her. First, she proved that Townsend made Ganci‘s working conditions intolerable; second, she proved that Ganci‘s gender was a motivating factor in Townsend‘s actions; and third, she proved that her resignation was a reasonably foreseeable result of Townsend‘s actions. The court held that the third element satisfied the willfulness prong of the bankruptcy statute because the jury found that Townsend had acted willfully to compel Ganci‘s resignation. Thus, the injury is ―willful and malicious‖ and the debt is non-dischargable.

11.

The bankruptcy court discharged the Murray‘s accrued interest, but held that they must pay the principal balance of their student loans. The court found that requiring the Murrays to repay both the loans and the interest would provide them with ―a minimal or spartan standard of living.‖ The court applied the undue hardship factors and found that the Murrays met all three. The Murrays would be deprived of a minimal standard of living, the loans were more than 20 years old and the Murrays were well into their careers, and they had made good faith efforts to repay the loans for the entire period.

12.

The court reviewed precedent that indicated that ―derived during‖ is simply surplusage in the statute that adds nothing substantive to the definition of ―current monthly income.‖ Thus, it would be improper to impart extra meaning to the language. The court held that when calculating monthly income, a debtor should include all income actually received during the six-month period regardless of when the income was earned. The court granted summary judgment to the trustee.

13

The court found that Bolles had committed fraud by knowingly lying to the plaintiff about his condition, thus inducing her to have sex with him. Bolles had also committed battery by willfully and offensively touching the plaintiff, even if she did not realize the incident was a battery at the time. Both of these crimes include willfulness or intentionality as an element, and both are malicious. Thus, Bolles can not discharge the plaintiff‘s claims.

14.

The court explained that bankruptcy is intended to give debtors a fresh start, and debtors are often given the benefit of the doubt when they claim assets were withheld as a mistake. However, the court held that Hickman‘s behavior was obviously with the intent to hide assets. The fact that Hickman moved his money around immediately before hiring bankruptcy lawyers meant the court simply could not construe the doubt in his favor. Thus, he was unable to discharge the assets.

15.

The court ruled that because the lender granted the deferment, even erroneously, the deferment was an applicable suspension. Therefore, the loans had not yet become due more than seven years prior to Woodcock‘s filing for bankruptcy and were not dischargeable through bankruptcy.

16.

The court ruled that the 401(K) loan repayment was not a necessary expense. Payments were not deductible under the means test. The debtor contended that replenishment of his 401(K) was necessary to his long-term health and welfare, but the court determined that these payments were voluntary.

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Chapter 20: Agency and Liability to Third Parties CHAPTER OVERVIEW Agency relationships are a crucial part of the business world. Depending on different types of relationships, different laws will be applicable. The creation and the nature of an agency relationship are also very important in the law. The chapter continues with the different types of authority that are given for various types of agency. Expressed agency agreement, implied agency, agency by estoppel, and agency by ratification all have an associated form of authority associated with them.

You might want to begin by asking students to read the chapter and reply to the review and case questions at the end of the chapter. Focus on the how agency relationships can be created, the various types of agency relationships, and the duties of both an agent and a principal. As an in-class activity, you can discuss the National Farmers Union Insurance case and how Oestman's rights vary depending on if he is an employee or an independent contractor. To help students to develop their critical thinking skills, assign the critical thinking questions following each case.

LEARNING OBJECTIVES After reading this chapter, students will be able to answer the following questions: 1.

2.

3.

4.

5.

6.

7.

8.

How is an agency relationship created?

What are the different types of agency?

What are the different types of agency relationships?

What are the duties of the agent?

What are the duties of the principal?

What are the different types of authority of the agent?

Do the principal and the agent have any contractual liability? How so?

How can an agency relationship be terminated?

BUT WHAT IF SECTIONS 1. Rick is correct only if FedEx has given Rick (independent contractor) the authority to make contracts on behalf of FedEx. If FedEx has not given this authority to Rick, then Rick is wrong because independent contractors cannot enter into contracts on behalf of a principal unless the contractor possesses authority from the principal.

2. Yes, FedEx as the principal has owes this duty to Janelle. According to the principles of agency law, an agent who feels she is not being properly compensated, especially when working on commission, may demand an accounting and may withhold further performance of her duties until the principal supplies appropriate accounting data.

LECTURE NOTES WITH DEFINITIONS How is an agency relationship created?



An agency relationship can be created by a written or oral contract in which a plaintiff asks another

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Chapter 20 - Agency and Liability to Third Parties

individual to act on behalf of himself/herself.



For an agency relationship to be created, the purposes of the agency relationship must be lawful, the agent must be mentally competent, and the agent must not be a minor.

What are the different types of agency?



Agencies that may be created are: o Express agreement/agency by agreement—written or oral agreement, agent acts on behalf of the principal as specified in the agreement. One example is a power of attorney, which gives an agent the power to sign a legal document for the principal. o Agency by implied authority—implied by the conduct of the parties, the circumstances determine the power of the agent. o Agency by apparent agency/agency by estoppel— a principal leads a third party to believe another individual acts as the principal‘s agent. o Agency by ratification—an individual misrepresents himself/herself as an agent for another person, and the principal accepts or ratifies the unauthorized act.



Teaching tip: Create fact situations that allow students to practice distinguishing different ways agency relationships can be created.

What are the different types of agency relationships?



Different agency relationships are:

o Principal-agency relationship—employer hires an employee to enter into contracts on behalf of the employer. o Employer-employee relationship—employer hires employee to perform a physical service, employee is subject to employer‘s control, employees are considered agents of the employer. o Employer-independent contractor relationship— independent contract is not an employee, not controlled by the employer, not subject to the employer‘s control, cannot enter into contracts on behalf of the principal unless expressly authorized.  Employees enjoy these benefits, while independent contracts do not: worker‘s compensation, worker safety assurances, protection from employment discrimination, unemployment benefits.  Employers are liable for employees‘ actions, but not

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the actions of independent contracts.  To determine whether a worker is an employee or an independent contractor, courts consider many factors, e.g., how much control the employer exerts over the individual, how the worker is paid.

Teaching tip: Create fact situations that allow students to practice distinguishing different types of agency relationships.

What are the duties of the agent?

 o o o o o

What are the duties of the principal?

 o o o o

What are the different types of authority of the agent?

The agent owes these duties to the principal: Loyalty Performance Notification Obedience Accounting The principal owes these duties to the agent: Compensation Reimbursement and indemnification Cooperation Safe working conditions

Teaching tip: Ask students why the subject matter in Chapter Nineteen is especially important.



Each type of agency creates a certain type of authority: o Express authority—the principal has explicitly instructed the agent to do something. Binding because it gives the agent power to make transactions/agreements with a third party. o Implied authority—the authority is implied on the basis of words and/or actions of the agent and the principal. o Apparent authority—a third party believes an agent‘s authority exists because of the actions of the principal. o The principal and/or agent may or may not be responsible for the agent‘s actions depending on what type of authority the agent has.

Do the principal and the agent have any contractual liability?

How so?



In a contract dispute, the third party‘s knowledge (or lack of it) determines the classification of the principal.  Principals can be disclosed, partially disclosed, or undisclosed.  With regard to authorized acts: o An agent is not liable if he/she acts within his/her authority for a disclosed or partially disclosed principal. o If the agent acts within his/her authority for an

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Chapter 20 - Agency and Liability to Third Parties

undisclosed principal, the agent is liable.  With regard to unauthorized acts: o The principal is not bound to an agreement made by an agent who acted outside of his/her authority.

How can an agency relationship be terminated?

Point/Counterpoint: Should a business owner hire independent contractors instead of employees?



Agency relationships may be terminated by the acts of parties: lapse of time, fulfillment of purpose, mutual agreement by the parties, revocation of authority, renunciation by agent.  Agency relationships may be terminated by operation of law: automatic termination, death, insanity, bankruptcy, changed circumstances, impossibility, war.

Teaching tip: Here are some questions to help you tie the Point/Counterpoint into class discussion:  Should one hire exclusively employees or independent contractors?

Are there industries or positions in which one type of agent is clearly a better choice?  Does the pizza delivery driver example work better for the ―yes‖ or ―no‖ side of the debate? Explain your answer.

CASE BRIEFS WITH ANSWERS TO THE QUESTIONS Case 20-1 Shanahan v. Nat’l Auto Prot. Corp., 2020 U.S. Dist. LEXIS 101031 (N.D. Ill. June 9, 2020) Case Brief Issue: Do National Auto and Matrix have an agency relationship, and does this relationship confer personal jurisdiction on Matrix?

Facts: In 2019, Catherine Shanahan received an unsolicited phone call. When she answered, she heard a prerecorded voice message advertising extended automobile warranties (Service Plans). Shanahan stayed on the line and was connected to an agent who reiterated that ―he was selling vehicle service contracts for extended auto warranties.‖ Shanahan decided to purchase a Service Plan. Shanahan learned that National Auto had been the company that called and sold her the Service Plan. But when her Service Plan contract and brochure arrived, Shanahan realized that although National Auto sold her the Plan, a company named ―Matrix‖ administered the Plan. Shanahan also noticed that the Service Plan directed her to contact Matrix Warranty Solutions to obtain service but then listed Nation Motor as the administrator for all 24-hour roadside assistance.

Procedural History: The Matrix Defendants and Nation Motor moved to dismiss over lack of personal jurisdiction, but Shanahan argues that the court can exercise personal jurisdiction over them because National Auto acted as their agent when it called her.

Holding: No. No agency relationship existed, so personal jurisdiction cannot be conferred.

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Reasoning:  Apparent authority may vest when ―a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal‘s manifestations.‖



The agreement between Matrix and National Auto granted some power over National Auto, but not nearly enough to establish an agency relationship.



At no time did Matrix identify National Auto as its agent.



Businesses sell or market the goods of other businesses all the time without establishing agency relationships, like when TV stations run ads for products



The plaintiff did not plausibly allege apparent authority between Matrix and National Auto.

Answers to the questions Critical Thinking One fact that could have changed the outcome would be if the National Auto representative Shanahan spoke to had made mention of Matrix, whether referring to them as the principal or perhaps even mentioning that Matrix would administering the plan. This might have given Shanahan a better position to argue that National Auto was acting under the apparent authority of Matrix.

Ethical Decision Making Following the Golden Rule would probably not have led to this case in the first place. Shanahan probably felt like the rug had been pulled from under her; even if Matrix didn‘t necessarily do anything illegal, it still had National Auto lead her on as to who would administer the plan. Matrix would likely not appreciate apparently entering a contract with one party only to find out that another party was actually handling the contract.

Case 20-2 Doe v. Uber Technologies, Inc., United States District Court for the Northern District of California, 184 F. Supp. 3D 774 (2016) Case Brief Issue: Is Uber liable for the criminal acts of its drivers?

Facts: In February 2015, in Boston, Massachusetts, Doe 1 and her friends used the Uber app to get a ride after they had gone to a party. An Uber driver named Abderrahim Dakiri picked up Doe 1 and her party.

Dakiri dropped of Doe 1‘s friends first. With Doe 1 the sole remaining customer in the Uber, Dakiri subsequently began to sexually assault her, taking a circuitous route ―to increase his opportunity to sexually assault her,‖ and parking the car in a remote area.

In August 2015, in Charleston, South Carolina, Doe 2 and her friends arranged a ride using Uber‘s app.

Uber driver Patrick Aiello drove Doe 2 and her group to a bar and someone in the group asked Aiello if he would agree to pick them up later. Aiello eventually drove Doe 2 and her friends to one of the group‘s apartment. While still in the Uber driver‘s car, Doe 2 mentioned she could not find her phone and wanted to search for it in the apartment. Doe 2 searched for the phone and then left, intending to walk back to her own apartment. When Doe 2 went outside, Aiello was waiting and offered to drive her home. Doe accepted under the assumption that Aiello was still acting as an Uber driver. Aiello subsequently raped Doe 2.

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Chapter 20 - Agency and Liability to Third Parties

Procedural History: The plaintiffs brought suit against Uber under six claims for relief, four of which rely on a theory of respondeat superior. Uber moved to dismiss the complaint for failure to state a claim.

Holding: Uber‘s motion to dismiss the case was denied.

Reasoning:  Under the doctrine of respondeat superior, an employer can be held liable for the tortuous or criminal acts of an employee if the acts were committed during the course of the employment.



The plaintiffs provided sufficient evidence to show that Uber exercises enough control over its drivers for the drivers to be considered employees.



Uber argued that sudden sexual assaults are necessarily outside the scope of a driver‘s duties.



However, the plaintiffs were clearly under the impression that the drivers were operating as Uber drivers at the time of the assaults.

Answers to the questions Critical Thinking In the case of Mary M., the police officer stopped the victim, detained her, drove her to her house and sexually assaulted her. Thus, the police officer was on-duty and in the middle of doing his job when he committed the crime. In Lisa M., the hospital employed the technician to conduct ultrasound examinations. After the examination was complete (thus, the technician‘s duties were complete), the technician molested the victim. Whereas the police officer was clearly within the scope of his employment when he decided to commit a crime, the technician was arguably only within the location of employment, not within the scope of his duties.

Ethical Decision Making The shareholder being considered is the public at large that might be injured by agents while within the scope of their employment. The ethical idea underpinning respondeat superior is that employers should not be shielded from the tortious actions of their employees, being that that employee would not be able to commit a crime on the job without said job. The doctrine enforces fairness by holding that if employers reap a benefit from the work of their employees, then they should bear some responsibility for the harms caused by their employees as well.

Case 20-3 Iglesia Christiana La Casa del Senor, Inc. v. L.M., 783 So.2d 353 (2001).

Case Brief Issue: Is a church liable for a pastor‘s criminal act?

Facts: Pacheco, pastor of a church, sexually assaulted L.M. L.M. sued Pacheco and the church.

Procedural History: Jury found the church liable for the pastor‘s criminal act. The church appealed.

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Holding: No. The church is not liable.

Reasoning:  Under the doctrine of respondeat superior, an employer cannot be held liable for the tortuous or criminal acts of an employee, unless the acts were committed during the course of the employment and to further a purpose or interest of the employer.



The sexual assault did not occur on the church‘s property.



The criminal act against L.M. did not constitute the kind of conduct the pastor was employed to perform.



Pacheco was satisfying his personal interests.



No counseling occurred on the day of the crime.



The sexual assault was an independent, self-serving act by Pacheco.



The church cannot be held vicariously liable for Pacheco‘s act.

Answers to the questions Critical Thinking L.M. would emphasize Pacheco‘s words that she would soon be cured. She would have had a much stronger case if Pacheco had assaulted her on church grounds.

Ethical Decision Making The judge prefers the ethical norm of security—the judge wants the church to be free from the psychological discomfort that would undoubtedly exist if the church thought it could be vicariously liable for sexual assault.

TEACHING SKILLS: USE A PRESS RELEASE AS THE BASIS FOR AN IN-CLASS ASSIGNMENT OR TEST QUESTION Look for press releases online that can serve as the basis for an in-class exercise and/or a test question.

The press release about Allstate gives you an idea of the kinds of ―news‖ that crate good assignments and questions.

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TIPS FOR BUSINESS MANAGERS 1. It is very important to know the distinction between an employee and an independent contractor and whether your agent is an employee or an independent contractor under the law. Several businesses have gotten into major legal disputes for classifying their employees as independent contractors. Properly classifying your agents in the first place and fulfilling the obligations of each distinction will save you a lot of trouble.

2. Once you understand the distinction between an employee and an independent contractor, you must then decide which type of agent will best suit your business needs. Employees tend to provide more reliable work but come with numerous obligations. Independent contractors can be good for temporary jobs, but you must maintain a hands-off approach to how they work. See this chapter‘s Point/Counterpoint for a more in-depth discussion of the pros and cons of employees and independent contractors.

3. Remember that an agency relationship is a two-way street. You owe your agent certain duties as a principal, but the agent also owes certain duties to you. As with most agreements, it is wise to have a written agency contract that lays out these duties and provides options for settling any disputes.

CASE OPENER WRAP-UP: FedEx and Independent Contractors Ultimately, the court ruled in favor of FedEx and found that the board‘s decision was unenforceable because the drivers in question were independent contractors rather than employees. To determine whether the FedEx drivers should be classified as employees or independent contractors, the court applied traditional agency law principles. It discovered that FedEx ―may not prescribe hours of work, whether or when the drivers take breaks, what routes they follow, or other details of performance‖; drivers ―are not subject to reprimands or other discipline‖; and the owners of the FedEx stores (called contractors) are responsible for all the costs associated with operating and maintaining their vehicles. Therefore, FedEx does not exercise the degree of control necessary for the relationship to be considered employeremployee. Rather, in this situation, the route drivers are independent contractors who have ―significant entrepreneurial opportunity for gain or loss‖ because they can operate multiple routes, hire additional drivers and helpers, sell routes without permission, and negotiate their price to deliver the packages. Therefore, the rights and duties of employees as agents discussed throughout the chapter do not apply to FedEx drivers.

This case illustrates the importance of understanding agency relations and whether a person is an employee or independent contractor. Although FedEx was successful in the case, this case suggests that it is essential for businesses to have knowledge of the kinds of agency relationships involved in their transactions. In the future, your knowledge about agency relationships could save you or your company large amounts of time and money that would have been spent on litigation.

ANSWERS TO QUESTIONS AND PROBLEMS 1.

Anyone can be an agent as long as the agent is not hired for illegal purposes and is not a minor or incompetent.

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Chapter 21 - Partnerships

2.

A principal-agent relationship exists if an employer hires an employee to enter into contracts on behalf of the employer. If physical service is needed, an employer-employee relationship exists. An independent contractor is not controlled by another individual and therefore, cannot enter into agreements on behalf of an employer.

3.

It is important to determine if an individual is an employee or an independent agent because that will determine worker's compensation, workplace safety, and unemployment status.

4.

Expressed agency is a relationship made by a written or oral agreement. Apparent agency differs from expressed agency because the agent has no knowledge of the relationship.

5.

An agent can have express authority, which is binding and gives an agent the power to make transactions with third parties. Implied authority gives an agent the power to make decisions that customarily go along with a position. It is important to identify the type of authority held by an agent because the type of authority will determine if an agent is held liable for damages.

6.

The doctrine of respondeat superior holds that a principal can be held vicariously liable for the torts of an agent if the agent commits the torts in the scope of his normal employment and for the benefit of the principal.

7.

Respondeat superior holds employers to higher standards when it comes to choosing, training and supervising employees. Employers must be aware of whether they are hiring employees or independent contractors and must remain vigilant at all times as to the actions of their agents in order to not be held liable for the acts of an agent down the line.

8.

The court of appeals ruled in favor of the City. The evidence indicated that Davis‘ actions were not traceable to any conduct of the mayor and that Davis did not have the authority to enter into the agreement on the City and the mayor‘s behalf.

9.

The authority of an agent need not be in writing to exist; the court will examine the nature of the relationship in order to determine if an agency relationship existed. It was clear from the original sales contract that Fisher recognized Scheerer as his agent and that Fisher intended to pay Scheerer a commission for his work. Thus, an agency existed even without a written agency contract.

10.

For the actual agency count, the court found that Marriot International had very little control over the daily operations of the hotel, with Marriot International simply providing training programs and supervision support to the hotel. In addition, the fact that Marriot Services is a subsidiary of Marriot International was not enough to establish any liability on the part of Marriot International. Thus, the court ruled in favor of Marriot International on the actual agency count.

For the apparent agency count, the court found that it was not objectively reasonable for Stenlund to believe that Marriot International had an agency relationship with the casino. The casino employees wore different uniforms than the hotel employees that did not bear the name ―Marriott‖, the exterior entrance to the casino was distinct in appearance and location from the hotel, and the casino‘s operator was only allowed to use the Marriot name for the purpose of indicating that the casino and hotel are on the same plot of land. Stenlund‘s arguments had no merit, and Marriot International was granted summary judgment.

11.

To succeed in this case, LiveJournal must show that it meets the requirements for the safe harbor defense, that it had no knowledge of the infringing images, and that it did not financially benefit from infringements it had the right and ability to control.

12.

The appeals court ruled that even though a motor carrier may act through an independent contractor, the carrier still retains responsibility for the safe operation of its vehicles, leased or owned. In the event of an accident that results in bodily harm, such as this one, FMI is still

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vicariously liable. One relevant stakeholder here is anyone who may be injured by the negligent driving of a FMI driver. Not only will the driver be held liable for damages, but FMI could be as well.

13.

A constructive trust is a remedy used to cure unjust enrichment. It is not an actual trust because it has no trustee. Instead, the constructive trust orders the person who was unjustly enriched to transfer the property to the intended party.

The court was not persuaded by this argument and stated that the inference urged by the plaintiff was nothing more than mere conjecture. The only evidence regarding the kickbacks was that they were paid to the defendant in cash. Given the lack of conclusive evidence, the appellate court argued that the imposition of a constructive trust unsupported by evidence was improper.

Chapter 21 - Partnerships CHAPTER OVERVIEW It is important to understand the laws surrounding a partnership before entering into a partnership. The Uniform Partnership Act establishes rules for partnerships. The creation and operation of a partnership should also be understood. The termination of a partnership should also be considered. Certain responsibilities are associated with a partnership. Some of those responsibilities are about the termination of a partnership. When a partnership ends the responsibilities associated with the partnership no longer exist. Another issue one should address when talking about partnerships is limited partnerships.

You might want to begin by asking students to read the chapter and reply to the review and case questions at the end of the chapter. Focus on the formation of partnerships, how partners should interact with each other, and how partners should interact with third parties. As an in class activity, you can discuss the AirTouch Cellular Partnership and if the partnership was violated. To help students to develop their critical thinking skills, assign the critical thinking questions following each case.

LEARNING OBJECTIVES After reading this chapter, students will be able to answer the following questions: 1. What is a partnership?

2. What are the different ways in which a partnership can be formed?

3. What are the rights of partners as they interact with each other?

4. Are all members of a partnership liable for interactions with third parties?

5. What are the steps involved in termination of a partnership?

6. How is a limited partnership formed?

BUT WHAT IF SECTIONS 1. Assuming Sara and Melissa owned the Dunkin Donuts strictly through a partnership, Sara would be liable for the $50,000 loss as well.

2. This new company would be a joint venture.

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Chapter 21 - Partnerships

LECTURE NOTES WITH DEFINITIONS What is a partnership?

What are the different ways in which a partnership can be formed?

What are the rights of partners as they interact with each other?

Are all members of a partnership liable for interactions with third parties?

Teaching tip: Review what students have already learned about partnerships.  A partnership has important traits: o According to the Uniform Partnership Act o (UPA), a partnership is an association of two or more persons to carry on as co-owners in a business for profit. o Usually, profits are shared. o As a legal entity, it is important to point out that a person is separate from the partnership. o Every partner is an agent of the partnership. o Every partner has a fiduciary relationship with the other partners. o As a legal aggregate, the debts of the partnership eventually become the debts of the individual. o A partnership ceases to exist when a partner dies.  Partnerships are formed: o A written agreement is not required, but is highly advised. o A partnership by estoppel is used when a non-partner represents himself/herself and a third parties relies on the information.

Teaching tip: Ask students, ―In what ways is a partnership like a marriage?

What does that say in terms of the desirability of a written partnership agreement that outlines what will happen if the relationship has weaknesses?‖  Duties of partners to one another: o Fiduciary duty/duty to be loyal o Duty of obedience o Duty of care  Rights of partners in their interactions with other partners; o Right to share management o Right to share in profits o Right to compensation o Property rights o Right to partnership interest o Right to inspect books o Right to an accountant  Interactions between partners and third parties: o Each partner is an agent for the partnership o Partners have actual authority to bind the partnership in an agreement. o Partners do not have the implied authority to sell any property without consent from other partners. o Partners are jointly liable for partnership debts. o If a partner commits a tort/breach the partners are jointly and severally liable.

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What are the steps involved in termination of a partnership?

o A new partner assumes liability for any obligations that occurred before she/he was added.

Teaching tip: Remind students of what they already know about partnerships. 

 

Partnerships are dissolved by: o An act of the partners (e.g., a partner can withdraw at will). o Operation of the law (e.g., a partner dies, a partner is bankrupt). o An act of the court (e.g., a partner is adjudicated insane).

A partner must notify the other partner is she/he wants to dissolve/withdraw from the partnership.

To wind up the business, partners must complete unfinished partnership business, collect and pay debts, collect partnership assets, and take inventory. Throughout, partners must fulfill their fiduciary duty.

Teaching tip: Compare the cases in the chapter—make sure students understand why each case appears in Chapter Twenty. 

How is a limited partnership formed?

Point/Counterpoint: Should aspiring business owners form an LLC instead of a corporation?

Continuing partners can preserve a partnership through a continuation agreement.  Noncontinuing parties must receive his/her interest in the partnership.  A limited partnership is an agreement between at least one general partner and one limited partner. o A general partner has management responsibilities, and unlimited liability for the partnership‘s debts. o A limited partner has no liability beyond the capital she/he invested.

Teaching tip: Here are some questions to help you tie the Point/Counterpoint into class discussion:  The ―no‖ argument claims that one of the main advantages of a corporation is that it can issue stock. What are some other ways a business can raise money? Are any of those methods preferable to issuing stock?  Does the expected size of a new business make one choice more advantageous than the other?

CASE BRIEFS WITH ANSWERS TO THE QUESTIONS Case 21-1 Taxinet, Corp. v. Leon, No. 16-23266 (S.D. Fl. 2020) Case Brief

Issue: Had a joint venture truly been formed between the parties?

Facts: This case arises from a failed joint venture to provide a mobile taxi hailing service in Mexico City.

Plaintiff, Taxinet, Corp., is claiming that it entered into a joint venture with Defendant Santiago Leon to obtain a concession agreement with Mexico City, and Leon cut Taxinet out of the deal. Mexico City awarded Leon a concession agreement to operate the service for ten years. Plaintiff seeks damages incurred as a result of its lost opportunity to operate the concession agreement in Mexico City. Leon moves for summary judgment on the affirmative defense that the Statute of Frauds bars Taxinet's claims.

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Chapter 21 - Partnerships

He argues the parties' oral joint venture agreement was to operate a mobile taxi hailing service in Mexico City, which could performed within not be a year and thus, any claims arising from that agreement are barred by the Statute of Frauds. Taxinet argues that the joint venture was formed for the sole purpose of obtaining the concession agreement, which can (and was) completed in under a year. Taxinet relies on the parties' text messages and emails, two of which bear Leon's electronic signature, as evidence of the joint venture agreement.

Holding: No. A joint venture had not been formed.

Reasoning: A signed writing overcomes the Statute of Frauds defense. The Magistrate Judge concluded that there was no signed writing establishing a meeting of the minds on the essential terms of a joint venture in this case. The parties agree the material terms of a joint venture are (1) community of interest in the performance of the common purpose; (2) joint control or right to control; (3) a joint proprietary interest in the subject matter; (4) a right to share in the profits; and (5) a duty to share in any of the losses, which may be sustained.

In late October 24, 2015, Leon sent the first signed email where he complains about technical software issues and proposes a revised equity split to reduce Taxinet's interest. In that email, he refers to his "future partners" and signs it with a "hope you can agree." Leon's second email days later again changes the equity split, but changes Pedro Domit's interest. Tellingly, that email states that they had a meeting where the "aim was to be clear about what we believe would be a fair plan in the different possible scenarios. . .I have agreed to add my basic observations in order to establish a common starting point for the successful and correct implementation on the project. . . I think that today we set out the necessary foundations to speak openly about our interests, which must work for the common good of all parties in the end."

Taxinet views this email as a proposed amendment to the prior agreement, which is not evidenced in an executed writing. The parties had previously exchanged text messages on the equity split. Similarly, the emails from Domit summarize discussions about the proposed by-laws and articles of incorporation, but he asks Leon and Noboa "if anything is wrong, or missing, add it." Whether they agreed or not is not in the record. Moreover, the terms themselves contemplate future agreement, as he stated in the email: "the consolidation process of the operation with Taxinet Corp. will be documented in an agreement between Taxinet Corp. and the partners of the Mexican company."

The Magistrate Judge correctly concluded that Leon's stand-alone emails cannot evidence a meeting of the minds. Even if the Court views his signed emails together with the text messages, they do not show a meeting of the minds as to the equity split, but rather, as the Magistrate Judge concluded "memorialize a number of different agreements reached on this term." The emails are replete with language contemplating a future agreement. Domit's email similarly states it is a summary of his understanding of the discussions and requests input from the partners. Accordingly, the Court agrees with the Report's recommendation that the writings do not establish a meeting of the minds showing agreement on the material terms.

Answers to the questions Critical Thinking While writings can often help prove the existence of a contract, here they did they opposite. The language of the emails showed that the parties had contemplated entering an agreement, but that the agreement had not yet come to pass. Just a few words in a few emails ended the whole case for Taxinet.

Ethical Decision Making

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The ―who‖ in this case are Taxinet and Leon. The ―how‖ seems to be the universalization principle: if the court enforced every ―almost‖ contract and joint venture, then business communications would break down as everyone tried to avoid being bound by unintentional contracts. Thus, it ruled for Leon.

Case 21-2 Live Cryo, LLC v. CryoUSA Import and Sales, LLC, United States District Court, E.D. Michigan, Southern Division (2017) Case Brief Issue: Should the forum-selection clause be enforced?

Facts: CryoUSA Import and Sales, LLC, CryoUSA Holding, LLC, and CryoUSA Mobile, LLC are Texas corporations. Together, they obtain, supply, and provide training to operate cryotherapy chambers. Live Cryo, LLC is a Michigan corporation that entered an agreement with the CryoUSA corporations. The agreement provided that Live Cryo could exclusively distribute cryotherapy chambers in Michigan for a 24-month period. The agreement also provided that Live Cryo had to purchase 15 chambers within the first six months to maintain the exclusive dealership status. In addition, CryoUSA was to control all marketing and training, with all cryotherapy chambers bearing its mark. Relevant to this case, the agreement also contained a choice-of-law provision that called for the application of Texas law in any legal dispute.

Live Cryo found that the cryotherapy chambers did not work as described. Experiencing various difficulties, Live Cryo sued the CryoUSA corporations, alleging the defendants had engaged in fraud and were in violation of the Michigan Franchise Investment Law (MFIL). In its defense, CryoUSA argued that Texas law should apply because of the choice-of-law provision in the agreement. Live Cryo contended that the MFIL made void the choice-of-law provision. In response, CryoUSA argued that MFIL did not apply because Live Cryo was not a franchisee.

Holding: There is a question of fact as to whether the parties have a franchise agreement. Therefore, the forumselection clause contained in the agreement in question is not to be enforced.

Reasoning:  CryoUSA argued that Live Cryo was not a franchisee, but the facts do not necessarily support this conclusion.  CryoUSA advertised on its website the ability to ―Own a Franchise‖, and one of the defendants is CryoUSA Franchising, LLC.  Live Cryo paid a $10,000 fee that it understood to be a franchise renewal fee.  Enforcing the forum selection clause, especially when the details of the agreement as a whole are unclear, would create an undue burden on Live Cryo.

Answers to the questions Critical Thinking Had any of the three criteria not been satisfied, the court may have ruled that there was no franchise agreement. For example, if the cryochambers did not bear the CryoUSA mark or if Live Cryo did not have to pay a fee to maintain the agreement, the court may have ruled the other way.

Ethical Decision Making

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Chapter 21 - Partnerships

Potential franchisors would benefit from these laws because they could receive the benefits of a franchise agreement without the responsibilities should a business be ruled to not be a franchise.

Case 21-3 Cousins Subs Systems, Inc. v. Micheal R. McKinney, U.S. District Court for the Eastern District of Wisconsin, 59 F. Supp. 2d 816 (1999) Case Brief Issue: Did Cousins Subs Systems make misleading statements of material facts?

Facts: Cousins Subs Systems entered into an agreement with Michael McKinney, a Minnesota businessman who owned a company that operated a chain of gas stations, for McKinney to operate several Cousins submarine sandwich shops. The sub shops were to be placed in the gas stations. In April 1998, McKinney became disillusioned with the agreement and terminated the agreement. McKinney claimed that Cousins guaranteed him annual sales at each of his franchises ranging from $250,000 to $500,000. Furthermore, McKinney argued that Cousins promised to provide advertising for the franchises. McKinney also claimed that Cousins guaranteed it would provide assistance in recruiting other franchises. McKinney alleges that he terminated the agreement because Cousins failed to uphold these promises. In June 1998, Cousins filed suit against McKinney for wrongfully terminating the agreement with Cousins. Later in 1998, McKinney filed a counterclaim against Cousins. Cousins filed a motion to dismiss the counterclaim.

Holding: No. The court ruled in favor of Cousins.

Reasoning:  McKinney claimed that Cousins made false verbal statements of material facts.  However, when an alleged verbal statement contradicts a written contract, the contract carries more weight.  The contract stated that no promises were made regarding profits, that advertising was McKinney‘s responsibility, and that the contract contained all of the terms and conditions.

Answers to the questions Critical Thinking On the one hand, having the written contract overrule oral agreements helps ensure that the original deal between the parties is honored. It also means that the original deal is ―set in stone‖ by a written contract and that the contract can be viewed and verified at any time. However, this rule also stymies later, oral, informal changes to the contract that both parties may be in favor of making.

Ethical Decision Making The stakeholders most affected by this decision are people like McKinney who, in good faith, rely on the oral promises of another party.

TEACHING SKILLS: ENCOURAGE STUDENTS TO GENERATE ADDITIONAL QUESTIONS In addition to using the Selig/Loria article as encouraged below, ask students to generate additional, relevant questions.

Make sure the students‘ questions raise issues that encourage them to test their understanding of material from Chapter Twenty-One.

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TIPS FOR BUSINESS MANAGERS 1. As this chapter demonstrates, there are many, many ways to organize your business, each with its distinct advantages and disadvantages. Before starting a business, take ample time to think about what type of business model will best suit your needs. Consider questions such as, what type of product or service do I want to provide? Should I operate this business on my own, or do I need help running it?

Will I need to raise funds or capital at some point in my business‘s life? Do I intend to manage this business for a long time? Thinking about these and other factors can help you decide how best to form your business.

2. Although there are statutes that cover all forms of doing business, each type of business organization has its own set of rules and regulations as well. For example, the laws surrounding partnerships are different from the ones concerning corporations. Be sure to know the law surrounding your particular type of business and do not assume that just because an LLC can do action X means that your franchise or joint venture can also do X. 3. The cases in this chapter should indicate to you that franchises, while beneficial in many ways, come with their own complex legal disputes concerning employees and agreements. If you decide to start a franchise, do your best to keep communication open between yourself, your franchisor, and your employees so that each party knows its duties and rights under the franchise agreement.

CASE OPENER WRAP-UP: Rockwell/Swenson The relationship between Seth Rockwell and Eric Swenson did not constitute a partnership because the two me had no both had the intent required by the then existing version of the Uniform Partnership Act that was required to form a partnership. Both men did not have the intent to enter into a voluntary or consensual partnership that would be required for Swenson‘s argument to win the case. Thus, the appellate court ruled in favor of Rockwell, awarding him $41,580 in unpaid wages and $10,869.39 the court determined to be due to him as an employee of Swenson.

If a partnership had been established between the two men, they would have been bound by the duties and rights of partners that are described in this chapter. Thus, the outcome of this case may have been quite different if there was a partnership. Rockwell would have been entitled to an accounting of the organization, but may not have been entitled to lost wages and lose reimbursement funds.

ANSWERS TO QUESTIONS AND PROBLEMS 1.

2.

3.

4.

The UPA defines a partnership as "an association of two or more persons to carry on as co-owners a business for profit." The UPA uses association to mean that the partnership is a voluntary and consensual relationship. The UPA defines "persons" as "individuals, partnerships, corporations, and other associations." These persons must have the capacity to serve as partners. The UPA says that a business is any trade, occupation, or profession. "Carrying on" a business simply means several transactions. "Co-owners" requires that the partners share in the profits and management of the corporation. Finally, "for profit" means that the partners are trying to turn a profit through there endeavor.

A partnership by estoppel is used when a party knows of a misrepresentation to a third party but does not correct it. A non-partner represents him/herself as a partner, and a third party relies on that information.

The possible problems with any single list of the legal liabilities of a partner are that such lists fail to reflect the case-by-case nature of disputes and their resolution.

The court ruled that while the member did not ―own‖ the house, he controlled it enough to where he was responsible for keeping the house safe for its tenants. Thus, he could be held liable for the

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5.

6.

7.

8.

9.

10.

11

injuries of the plaintiffs.

This decision leaves open situations where individuals who did not form a corporation by a certain time to essentially claim that they believed the corporation to be valid at the time, therefore granting it de facto status. This loophole will likely lead to future litigation.

The appellate court determined that Karimi had, in fact, misrepresented the state of the hotel and its renovations in letters to Red Lion. This gave Red Lion the right to send Karimi the notification of default.

According to the judge, a common-law trust is generally unable to sue or be sued. By contrast, some states allow a business trust to sue and be sued in its own name. This distinction likely exists to prevent profit-earning organizations (e.g., businesses) from hiding behind the ―trust‖ title to avoid being sued.

The court ruled in favor of Millennium. More specifically, Millennium argued that the franchisor (Got Junk) wrongfully terminated the contract. The fundamental issue as to whether wrongful termination had occurred was whether the franchise agreement specified the application of the law of Washington State. Got Junk argued that the choice of law provision in the franchise agreement was not enforceable because there was no basis for applying Washington law; Got Junk desired to apply California law. The court disagreed, and it granted that Washington law was applicable. This determination resulted in a ruling in favor of Millennium because the law gave the franchisee superior protection from summary termination under the chosen law of another state, i.e. California.

This type of franchise is a chain-style business operation because Why Not opened frozen yogurt stores under the Yumilicious name and used Yumilicious products. As for Why Not‘s counterclaims, Why Not failed to show that it suffered injuries due to its reliance on false information provided by Yumilicious. Thus, Why Not‘s counterclaims were correctly dismissed.

The elements of a joint venture are (1) an express or implied agreement to engage in a joint venture, (2) a community of interest in the venture, (3) an agreement to share profits and losses from the enterprise, and (4) a mutual right of control or management of the enterprise. The court found that Parker‘s statements did nothing more than clarify that there was no partnership agreement between him and Lamb. There was no evidence that Parker and Lamb were part of a joint venture, let alone one for the purpose of stealing the church‘s money.

The court found that if Ortega had made any inquiry at all into the property, he would have noticed the obvious red flags of fraud. However, Ortega failed to perform any due diligence and carelessly bought into the property. Thus, he had no recourse.

Chapter 22: Corporations: Formation and Organization CHAPTER OVERVIEW This chapter explains how corporations are legal entities and how these entities are created. While students talk about corporations every day, they probably do not know all of the specific ways in which a corporation is different from other types of business organizations. Thus, you might want to start your discussion of this chapter by asking the students to generate a list of characteristics of corporations. After they generate the list (which will probably be small), ask them to read the chapter.

One of the hot topics discussed in this chapter is the possibility of piercing the corporate veil. Given the WorldCom and Enron scandals, you might want to ask the students whether they believe the traditional rule regarding veil piercing should be changed. You can use the J-Mart Jewelry case to facilitate this discussion.

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LEARNING OBJECTIVES After reading this chapter, students will be able to answer the following questions: 1.

2.

3.

4.

5.

6.

7.

What are the powers granted to corporations by the states?

How are corporations formed?

What is the role of a director, an officer, and a shareholder?

What are the duties of directors, officers, and shareholders?

In what ways can a director, officer, and shareholder be held liable?

What are the rights of directors, officers, and shareholders?

What are mergers and consolidations?

BUT WHAT IF SECTIONS 1. At the time of the crash, Facebook would continue to live on, even without its shareholders.

Depending on what state Facebook was incorporated in, the corporation might die out after a statedetermined duration, but there are no federal limits on the life of a corporation.

2. Zuckerberg very likely has nothing to worry about. Being that the error is very minor and that Facebook has been a corporation for a while, which indicates that it has received its certificate of incorporation, it will probably be ruled a de jure corporation. However, if a lawsuit is brought against Facebook for an offense it committed prior to noticing the error, Facebook cannot claim that it was not a corporation at the time due to the error.

LECTURE NOTES WITH DEFINITIONS What are the powers granted to corporations by the states?



 

How are corporations formed? 

States give corporations powers. These include: perpetual existence, can sue and be sued in corporation‘s name, acquire property for the corporation, make contracts and borrow money, lend money, make charitable contributions, and make laws for managing the business.

The ultra vires act says that if a corporation wants to perform an ext beyond the express and implied powers of the corporation, the act is an ultra vires act.

If a corporation engages in an ultra vires the RMBCA permits the following remedies: o A shareholder may sue to prohibit corporation from engaging in the ultra vires act. o The corporation or shareholders may sue the directors or officers of the corporation from engaging in the ultra vires act. o The State Attorney General can begin proceedings to have the corporation dissolved or to prevent the corporation from engaging in the ultra vires act.  Promoters are individuals who bring about the creation of the corporation by arranging for necessary capital, financing, licenses.

Subscription agreements are agreements in which the investor agrees to purchase stock in the new corporation. Subscribers are investors who

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



What is the role of a director, an officer, and a shareholder?

agree to purchase stock in the new corporation.

To pick a state for incorporation, look at: tax rates, flexibility for management of the corporation, rights given to the shareholder, restrictions placed on distribution of dividends, and protections against stakeholders.

The legal process of incorporation includes: selection of the corporate name, incorporators apply for incorporation on behalf of the corporation, articles of incorporation are drafted, the corporation holds an organizational meeting.

Teaching tip: Review what students remember about corporations from prior chapters. 

What are the duties of directors, officers, and shareholders?



In what ways can a director, officer, and shareholder be held liable?



Roles of directors, officers, and shareholders: o Directors must get approval of other directors before the company will begin to move in a particular direction. o Shareholders use a majority vote to elect directors. o Corporate articles or bylaws specify the number of directors the corporation will appoint. o A quorum must be present at a director‘s meeting if decisions are to be valid. o Directors appoint, supervise, and remove corporate officers as they see fit. o Directors are responsible for financial decisions and authorizing corporate policy decisions. o Officers are the executive managers the board hires to run the organization. o Officers act as agents of the corporation. o Shareholders must approve major corporate decisions. o Shareholders have the power to elect and remove the board of directors. o Shareholder meetings occur once a year.

Duties of directors, officers, and shareholders: o Directors and officers have a fiduciary duty of care. o Directors and officers must make decisions that have rational purposes. o Directors and officers have a duty of loyalty, e.g., they cannot engage in self-dealing. o They also have a duty to disclose conflicts of interest. o Shareholders also have fiduciary duties to the corporation, and the minority shareholders.

Liability of directors and officers: o Directors and officers may be held liable for violating their fiduciary duties to the corporation. o Directors and officers can be held liable for their own torts and crimes, as well as the torts and crimes of other employees in the organization.

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o

Under the business judgment rule, directors and officers are not liable for decisions that have harmed that corporation if they were acting in good faith at the time of the decision.

KDW Restructuring & Liquidation v. Greenfield (briefed below) demonstrates the extent to which the business judgment rule can be used as a protection.



Liability of shareholders: o Shareholders face liability for the debts of the corporation.

Teaching tip: Review the rights and responsibilities of directors, officers, and shareholders.

What are the rights of directors, officers, and shareholders?

What are mergers and consolidations?

Point/Counterpoint: Is shareholder activism good for business?



Rights of directors, officers, and shareholders: o Four major directors‘ rights are: compensation, participation, inspection, and indemnification. o Officer rights are defined by the employment contracts drawn up by the board of directors. o All shareholders have preemptive rights. o Shareholders can take legal action to force directors to declare a dividend. o All shareholders have the right to inspection in statutory and common law. o Shareholders may petition for dissolution if they feel the company has taken a turn for the worse. o Shareholders can file a shareholder‘s derivative suit if directors fail to sue when the corporation has been harmed. o Before filing, the shareholder must go to the board of directors with a complaint. o Derivative suits are most important when the directors are causing harm to the corporation.  Mergers are legal contracts combining two or more corporations such that only one of the corporations continues to exist.  Consolidations are legal contracts combining two or more corporations, resulting in an entirely new corporation.

Teaching tip: Here are some questions to help you tie the Point/Counterpoint into class discussion:  In general, do you think that shareholders understand business enough to make good decisions for the company?  Regardless of whether shareholders understand business, should they have the right to force a business to change in ways described by the Point/Counterpoint?

CASE BRIEFS WITH ANSWERS TO THE QUESTIONS Case 22-1 Protect my Check, Inc. v. Craig C. Dilger, John Steffen, 176 F.Supp.3D 685 (2016)

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Case Brief Issue: Do Kentucky‘s laws against direct corporate contributions to political campaigns violate the First Amendment?

Facts: Protect My Check is a non-profit organization that does business in Kentucky. Its purpose in Kentucky is to promote right-to-work protections for employees. To carry out its mission, PMC makes both direct and indirect contributions to candidates for state and local offices. Kentucky‘s Constitution forbids corporations from contributing money or other assets to influence elections. PMC brought action against the Kentucky Registry of Election Finance to seek relief from Kentucky‘s political contribution laws. PMC asserted that these laws violated the First Amendment by restricting speech.

Reasoning:  Kentucky argued that it had such restrictions on direct contributions to prevent quid pro quo corruption between corporations and politicians.  While Citizens United made more types of contribution available, the Supreme Court specifically held that direct contributions were not supported by the First Amendment and that avoiding quid pro quo corruption is a valid reason for instituting a ban on direct contributions.  PMC could not point to any authority that found bans on direct contributions to be unconstitutional.

Holding: No. This part of the case was ruled in favor of Kentucky.

Significance: This case illustrates restrictions on corporate speech, especially regarding contributions to political campaigns.

Answers to the questions Critical Thinking Rights, by their very nature, conflict with each other. As the saying goes, ―Your rights end where mine begin.‖ Thus, holding one right as the very highest above all will naturally lead to undesirable conflicts with other rights. Valuing free speech over all other values, such as one‘s right to safety and peace of mind, would mean that people really could shout ―Fire!‖ in a crowded theater without fear of punishment. It is important to weigh different rights against each other in different contexts.

Ethical Decision Making The court valued honesty and transparency in government by trying to prevent quid pro quo corruption between government and corporations.

Case 22-2 Woodruff Construction, LLC v. Clark, No. 17-1422 (Iowa Ct. App. 2018) Case Brief Issue: Should Clark Farms’ corporate veil be pierced?

Facts: Clark Farms is an Iowa Corporation with K.W. Clark as its president, secretary, and treasurer.

Clark owns and operates two other entities, Casey Clark Farm and White Pines Farm. Woodruff is a commercial industrial construction company. In 2009, Woodruff contracted with the city of Leon, Iowa, to act as general contractor during the construction of a wastewater treatment facility. In April 2010, Woodruff contracted with Clark Farms for lagoon sludge removal. Clark Farms began work, then in 2011

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abandoned the project when Clark determined he had underbid the contract, leaving the work incomplete.

In July 2012, Woodruff brought a breach of contract action against Clark Farms. In September 2014, Woodruff obtained a judgment against Clark Farms for $410,066.83 plus interest. Clark Farms failed to pay the judgment. In June 2015, Woodruff brought suit to pierce the corporate veil of Clark Farms and recover personally from Clark and impose a constructive trust and equitable lien on all assets of Clark Farms. In a deposition that July, Clark stated Clark Farms still existed but was not bidding any projects and no longer had any employees aside from the bookkeeper. By the time of trial, Clark Farms had no employees. In 2017, the court denied Woodruff‘s request to pierce the corporate veil. Woodruff appeals.

Holding: Yes. The court pierced Clark Farms‘ corporate veil.

Reasoning:  The court considered a number of factors: whether Clark Farms was undercapitalized, followed corporate formalities, kept separate books, commingled finances, and was a sham corporation.  While Clark Farms was not doing well financially, there was no evidence it was purposefully undercapitalized.  There was evidence that Clark often used the funds of Clark Farms as his own and owed the company hundreds of thousands of dollars.  Likewise, Clark‘s and Clark Farms‘ expenses were not kept in separate books.  Clark Farms was not a sham business, but it did fail to follow corporate formalities.

Based on these factors, the court found it appropriate to pierce the corporate veil.

Answers to the questions Critical Thinking The whole point of corporations is to provide limited liability to owners and shareholders. Limited liability encourages entrepreneurs to take business risks knowing that they can only lose so much. This healthy risk-taking is one of the foundations of our business world. Thus, courts only pierce the corporate veil in extreme circumstances so that corporations can maintain confidence in their business decisions.

Ethical Decision Making The court is pursuing the values of prudence, trust, and accountability. As stated above, the court is very careful about piercing the veil to maintain trust in the corporate system, but when Clark decided to abuse the corporate system for unfair gains, they held him accountable.

Case 22-3 KDW Restructuring & Liquidation v. Greenfield, United States District Court, S. D. New York. 874 F.Supp.2D 213 (2012).

Case Brief Issue: Were the directors of Jennifer Convertibles, Inc. protected by the business judgment rule?

Facts: KDW Restructuring & Liquidation Services, LLC. (KDW) is the trustee of a litigation trust held on the behalf of debtor Jennifer Convertibles, Inc. (Jennifer). In 2009, Jennifer had losses from a transaction between Jennifer and Jara Enterprise Inc. As a result of the loss, KDW brought an action against the members of Jennifer‘s 2009 Board of Directors: Harley Greenfield, Edward G. Bohn, Kevin L. Coyle,

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Rami Abada, and Mark J. Berman. All defendants moved to dismiss the breach of fiduciary duty claim based on the business judgment rule.

Holding: Abada‘s motion to dismiss was granted in full. Berman‘s, Bohn‘s, and Coyle‘s motions were denied in part and granted in part. Greenfield‘s motion was denied.

Reasoning:  The facts show that most of the board acted in bad faith by voting to continue transactions with Jara.  Abada, however, was skeptical of the situation and hired an outside consulting firm to help him make a case to his colleagues that transactions with Jara should be halted (which were summarily ignored).  Thus, Abada is protected by the business judgment rule, whereas the others are not and face full liability.

Answers to the questions Critical Thinking Some of the ambiguous words and phrases in the court‘s reasoning include ―acting in good faith‖ and to act in ―self-interest.‖ Depending on how these phrases are defined, the conclusion is very likely to change, since whether the board acted in good faith or out of self-interest is of great importance to the conclusion.

Ethical Decision Making Had the board been using the universalization test, they would have asked themselves, ―What would the world be like if everybody did what I was about to do?‖ If every board of directors made decisions that harmed the corporation but benefited the directors, we could hardly have functioning corporations at all.

Case 22-4 Campbell and Williams v. Pothas Corporation, 238 F.3d 792 (6th Circuit 2001).

Case Brief Issue: Are the "golden parachute" agreements enforceable or a violation of public policy?

Facts: PCS and Arcadian merged operations. As a result, Arcadian‘s board approved a severance package for certain executives within the company. The severance package allowed executives to leave the company and receive an aggregate payment in one lump sum. Three Arcadian executives elected to take the severance package, but the merged company refused to pay on the basis that the package violated public policy. The three executives sued.

Procedural History: The trial court found for the severance package enforceable. PCS appealed.

Holding: Affirmed. The package is valid.

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Reasoning:  PCS contended the agreements were void as violations of public policy.  Although discouraged, PCS could not prove such agreements were illegal or per se unlawful.  PCS had already received the benefit of the bargain with respect to the agreements, specifically, an orderly change in corporate control, and could refuse enforcement as a result.

Answers to the questions Critical Thinking The details of the specific contract would be very beneficial in helping to evaluate the court's conclusion. How much exactly was the severance pay? If the severance pay was quite high, the court's reasoning may not apply.

Ethical Decision Making The purpose of the court's decision is to allow the plaintiffs to be awarded the money they seemingly deserve in return for an orderly transition in corporate management after the merger. One value that is represented in the court's decision is justice, in the sense that a fair contract made by Arcadian should be upheld, and the parties to this contract should receive what they "deserve."

TEACHING SKILLS: USE A NEWS STORY TO COMPARE TWO CASES As much as you can, encourage your students to compare cases—cases in the chapter, or a case in the chapter with a case described in the news.

Ask student co compare case 22-1 with the case described in the Patriot Ledger article.

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TIPS FOR BUSINESS MANAGERS 1. One of the biggest advantages to forming a corporation is the liability ―veil‖ it provides. Due to a corporation‘s status as a ―legal person,‖ most legal disputes are aimed at the corporation and not at its shareholders. Remember, however, that this veil is not entirely impenetrable; shareholders can, on occasion, be held liable for corporate actions. In other words, do not assume that forming a corporation makes you legally bulletproof.

2. Remember that most states will not allow you to do business in their state unless you file a certificate of authority in that state. Failure to do so can result in fines and other legal trouble.

3. 3. It may be wise to create a shareholder agreement that outlines the rights and responsibilities of shareholders. Such an agreement limits the power of shareholders and may prevent the increasingly popular trend of shareholder activism.

The J-Mart Case (Case 22-1)

The Emmanouil Case (described in the Patriot Ledger article)

Describe the behavior of the defendant: Explain why a court was willing to pierce the corporate veil: Have you learned anything in your finance and management classes that help you understand why the outcomes here are not only fair, but good business decision?

CASE OPENER WRAP-UP: The Formation of the Facebook Corporation Zuckerberg‘s actions in 2004 were instrumental in creating what is now Facebook today. There are currently over 250 million users on the website from all over the world. In 2007, Microsoft bought a 1.6 percent share of the corporation for $240 million. Facebook gained another investor in November of that year, a billionaire from Hong Kong, Li Ka-shing, for $60 million. Estimates put the corporation‘s value around $4 billion to $5 billion. Ultimately, its corporate status allows Facebook to enjoy perpetual existence, to sue and be sued, to acquire property, to make contracts, to borrow and lend money, to make charitable donations, and to establish rules for managing the corporation. Moreover, Facebook‘s shareholders enjoy limited liability.

ANSWERS TO QUESTIONS AND PROBLEMS 1.

Characteristics that distinguish the corporation from other forms of business are: legal entity, rights as a person and citizen, creature of the state, limited liability, free transferability of corporate shares, 23-1 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

perpetual existence, centralized management, corporate taxation, and liability for officers and employees.

2.

An ultra vires act is related to the corporation‘s powers, in that, the act exceeds corporate powers.

Corporations have express and implied powers to act. When a corporation attempts to perform an act beyond the scope of the corporation‘s power, the act is called an ultra vires act.

3.

Common stock is ownership to a portion of a corporation without preferences; whereas preferred stock entitles preferences in regards to assets and dividends. Common stock owners have a right to vote, usually having one share equal to one vote. Preferred stock owners have limited or no voting rights in the corporation. Preferred stock owners are entitled to their percentage of the dividend before owners of common stock.

4.

The primary duties of the officers and directors are the duties of care, loyalty, and disclosure of conflict of interest. The duty of care means that officers and directors must act with due care. Due care implies that the officers and directors are exercising the care that a rational and prudent person would exercise in the management of their own assets. Acting in due care is acting in good faith, in a manner that is thought to be in the best interest of the corporation. The duty of loyalty requires that officers and directors act in interest of the corporation and not personal interests. Put another way, duty of loyalty is putting the corporation‘s interest above one‘s own personal interests in a business decision. The duty to disclose conflicts, or potential, conflicts of interest simply requires officers or directors to inform the other officers and directors when decisions are to be made that could personally benefit said officer or director. The person is to inform the others of the potential conflict of interest and then abstain from voting on the issue.

5.

The business judgment rule is a rule designed to protect officers and directors who have made bad decisions that harm the company. The officers and directors are expected to make decisions in the interests of the corporation, but they are not expected to make perfect decisions. The business judgment rule claims that officers and directors are not liable for decisions they have made that have harmed the corporation if they were acting in good faith at the time of the decision.

6.

Despite the two businesses working together as a Dual-Listed Corporation and that DLC exhibiting some similarities to a single corporation, the two businesses were still separate entities. As the court argued, ―[i]ndeed, regardless of whether an entity exhibits qualities common to corporations, it is not properly subject to treatment as a corporation absent incorporation, the fundamental act of corporate creation and the dividing line between corporations and non-corporations.‖ In order for corporation by estoppel to apply, the DLC would have had to have done business as a normal corporation, which would have estopped it from denying its corporate status. But in this case, the employees had no contract with the DLC but with an entirely different firm, and the employees admitted that they had no reason to believe that they were contracting with the DLC.

7.

Arguably, Leo is acting in an oppressive manner toward Vladimir and his daughters by using his slight majority to force Vladimir to sell his shares. In addition, there was sufficient evidence that Leo had engaged in corporate looting by falsifying over $750,000 in loans to the corporation.

8.

The Garner Doctrine is a precedent that allows shareholders of a corporation to ―invade the corporation‘s attorney-client privilege in order to prove fiduciary breaches‖, provided the shareholders have ―good cause‖ to do so. In this case, IBEW was attempting to invoke the doctrine in order to access documents that could potentially show Wal-Mart‘s involvement in the bribing scandal. Wal-Mart argued that the Garner doctrine is generally available to litigants, but not to shareholders. The court disagreed.

9.

The judge agreed with the FDIC‘s argument; the statute concerning the business judgment rule specifically refers to directors, not officers.

10.

The appellants argued that they were entitled to a remedy under law, and that dismissing the suit would deny them that remedy. The court ruled, however, that just because the larger lawsuit was dismissed

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does not mean that Kellmer and Agnes could not file a separate suit afterwards. In other words, although their derivative suit was being dismissed along with the primary lawsuit, Kellmer and Agnes were not barred from pursuing action own their own.

11.

The court determined that Moto did not act fraudulently, nor was its selected method for valuing its shares ―oppressive‖. To prove shareholder oppression, Kirchoff could have shown that the directors of Moto acted fraudulently and against the interests of the company as a whole to serve their own private interests (however, this is not in fact what happened).

12.

The business judgment rule holds that when a director takes an action that affects a corporation (usually negatively), he cannot be held liable if he was acting in good faith, reasonable care, and in the best interests of the corporation. If an application of the business judgment rule is irrebuttable, that means that the director‘s decision can only be challenged on the basis of waste, i.e., the decision cannot be attributed to any rational business purpose. A rebuttable application may be challenged on the grounds of a violation of the duty of care or duty of loyalty.

Chapter 23: Securities Regulation CHAPTER OVERVIEW Issuing securities is one way to raise money need for a business. Securities typically issued from corporations as stocks and bonds. As a future businessperson, one should be aware of what a security is and what laws regulate securities.

Begin by asking students to read the chapter and reply to the review and case questions at the end of the chapter.

LEARNING OBJECTIVES After reading this chapter, students will be able to answer the following questions: 1.

2.

3.

4.

5.

What is security?

What requirements are imposed by the Securities Act of 1933?

How does the Securities and Exchange Act of 1934 regulate the trading of securities?

How are investment companies regulated?

How do states regulate securities?

BUT WHAT IF SECTIONS 1. Waskal has completed the steps needed in order to sell securities. He just has to be sure to send the final prospectus to any purchasers of his securities.

2. Being that Stewart heard about the rejection from the news, which is a public source of information, Stewart did nothing wrong.

LECTURE NOTES WITH DEFINITIONS In the news…

Teaching tip: For each chapter, consider asking students to relate current news items to material from the chapter.

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In addition to ideas students come up with on their own, consider weaving in news stories provided by the textbook publisher.

For Chapter Twenty-Three, McGraw Hill offers the following stories: ―Officials Investigate CEOs in Stock Options Scams (PBS)‖  Which officials are investigating which CEOs? Why?  Ask students to engage in research to find out what ultimately happened to each CEO profiled.

What is security?

What requirements are imposed by the Securities Act of 1933?

How do the Securities and Exchange Acts of 1933 and 1934 regulate the trading of securities?

―SEC Brings Charges of Insider Trading (PBS)‖  What were the specific charges?  Ask students to engage in research to find out what ultimately happened in the case described.  Security is an investment in a common enterprise with the reasonable expectation of profit gained predominantly from others‘ efforts.  The Securities Act of 1933 mandates that any corporation, partnership, association, or individual who offers the sale of securities to the public through the use of mails or through any facility of interstate commerce is required to register that security unless it is an exemption.  Any issuer of securities must file a written registration and prospectus with the SEC. Teaching tip: The cases in this chapter bring the material to life. Use the cases as the focal point of in-class discussions and activities.  A security is a piece of paper, and the worth is determined by what the paper represents.  Securities can take a range of forms, from stocks to warrants. What makes something a stock is that there is investment in a common enterprise with the reasonable expectation of profit gained predominantly from others‘ efforts.

Securities and Exchange Commission v. Arcturus Corporation (briefed below) illustrates how courts apply the Howey test.

  

 The Securities Act of 1933 regulates the issuance of corporate securities by companies.  The Securities Act of 1934 oversees the sale of securities.  Both acts are intended to provide more stability to securities transactions.

The Securities and Exchange Commission (SEC) is an independent agency whose function is to administer the federal securities laws.

Under the 1933 Act, the focus is on the registration process.

Registration statements include: a description of the securities offered for sale, an explanation of how the proceeds from the sale will be used, 23-4

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a description of the registrant‘s business and property, information about the management of the company, a description of any pending lawsuits in which the registrant is involved, and financial statements certified by an independent public accountant.

How are investment companies regulated?



Periods of the filing process are pre-filing, waiting, and post-effective.  Under the 1934 Act, Section 10(b) and Rule 10b5(3) are important because they prohibit manipulation and deception. In particular, they prohibit fraud associated with the purchase or sale of securities.  Insider trading occurs when an employee or executive encounters and uses material inside information to make a profit.  It is illegal because it gives the employee or an executive an important advantage over the general public.

Insiders can be: corporate officers, directors, employees, lawyers, consultants, accountants, majority shareholders, or other individuals who receive private information regarding the trading of securities.

Securities and Exchange Commission v. Texas Gulf Sulphur Co. (briefed below) considers a case of alleged insider trading.  Under Section 16(b), individuals who are a ten percent shareholder are insiders. All short-swing profits must be returned to the company.

State securities laws regulate sale within a state.

Securities brokers and dealers are regulated by state law.

Most states have adopted the Uniform Securities Act.

How do states regulate securities?

  

Point/Counterpoint: Should cryptocurrencies be Regulated as Securities?

Teaching tip: Here are some questions to help you tie the Point/Counterpoint into class discussion:  In what ways do cryptocurrencies resemble traditional securities? In what ways are they different?  Who would be protected by cryptocurrency regulation? Who would be disadvantaged?  Which side do you agree with more? Why? Be specific.

CASE BRIEFS WITH ANSWERS TO THE QUESTIONS Case 23-1 Securities and Exchange Commission v. Arcturus Corporation, 171 F.Supp.3D 512 (2016) Case Brief Issue: Were the ―Joint Ventures‖ actually securities regulated under the Securities Act of 1934?

Facts:

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Arcturus Corporation and Aschere Energy, LLC are two companies owned by Leon Parvizian. The companies were Texas corporations based in Dallas that offered and sold interests in gas and oil drilling ventures. Parvizian and his companies sold the drilling interests, which were officially called ―Joint Ventures,‖ through limited liability companies that cold-called United States residents.

In 2013, the SEC filed an action against Parvizian, Arcturus, Aschere, and the cold-calling contractors.

The SEC alleged that the Joint Ventures offered and sold by Arcturus and Aschere were actual securities and Parvizian was trying to avoid securities regulation by naming them Joint Ventures. The defendants filed a motion to dismiss which was rejected by the trial court. Both the SEC and the defendants subsequently moved for summary judgement against each other. The crucial first question the court had to decide was whether the Joint Ventures were in fact securities regulated under the Securities Act of 1934.

Procedural History: The district court granted summary judgment to the SEC. Arcturus appealed.

Holding: Affirmed in favor of the SEC. Reasoning:  The ―joint ventures‖ satisfied the Howey test because they involved an investment of money on an expectation of profits derived solely from the efforts of individuals other than the investor.  The venturers had almost no control over the operation of the business, meaning they were not regular partners but simply speculative investors.  Contrary to Parvizian‘s arguments, the venturers were clearly paying money into the business and expected returns without gaining any control of the business, i.e., the ―joint ventures‖ were securities.

Answers to the questions Critical Thinking The logic here is unsound. The entire point of the Williamson factors is to determine whether an alleged joint venture or similar business is actually an investment contract. Not all joint ventures are actually investment contracts, but all that meet the Williamson factors are. Each individual factor, when satisfied, provides very strong evidence that the entity being considered is an investment contract. Thus, satisfying any of the three factors can lead to that same conclusion.

Ethical Decision Making It is unlikely that any of the emails would have been sent if the venturers were applying the public disclosure test as the emails certainly raise suspicion that the venturers are trying to hide something.

Case 23-2 Securities and Exchange Commission v. Texas Gulf Sulphur Co., 401 F.2D 833 (1968).

Case Brief Issue: Did the D (Texas Gulf Sulphur) violate the New York law?

Facts:

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D bought land and preliminary drilling showed that the land had great amounts of copper and zinc. The information was supposed to be kept a secret. However, some officials received "tips." Rumors appeared in the newspaper about the minerals. D first denied the allegations, then D confirmed the allegations. Two individuals combined shares of D's stock. P (SEC) filed suit against D for violating Section 10(b) and 10(b)-5.

Procedural History: Dist. Ct. dismissed the case.

Holding: P wins.

Reasoning:  The omitted information constituted material facts.

Answers to the questions Critical Thinking I can see a difference between the information in this case and the last in that in case 40-2 the omitted information was much more speculative than the information in 40-3. Here the company knew that if they had a good ore strike that their stock would definitely increase. The information in case 40-2 does not indicate a definite reaction with respect to the securities at hand.

Ethical Decision Making The value of equality of opportunity, meaning each person should have the same opportunity to engage in purchasing securities. Insider information gives those possessing that information an unfair advantage and better opportunity than the public.

Case 23-3 Marshall v. United States, Southern District of New York, No. 17-cv-2951 (SDNY 2018) Case Brief Issue: Had Marshall‘s actions met the elements of insider trading?

Facts: John Marshall and Alan Tucker began working together at Marshall's financial consulting firm in approximately 1995. In addition to working at his firm, Marshall served as a member of the Board of Directors of the International Securities Exchange ("ISE"). From late 2006 through early 2007, the ISE engaged in merger discussions with several other exchanges. In his role on the ISE Board of Directors, Marshall learned material, non-public information relating to discussions about that potential merger.

From late 2006 through April 2007, Marshall provided Tucker with that material, nonpublic information.

Marshall instructed Tucker "to make certain trades from which they would share the profits." Tucker performed those transactions, and when the merger was made public around April 30, 2007, Marshall and Tucker "made a significant profit."

Procedural History: On March 13, 2008, the Government filed a complaint charging Marshall, Tucker, and a third defendant with several counts of securities fraud, to which Marshall pled guilty. Marshall now files a petition for a

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writ of error because, he alleges, he is innocent of the crimes he pled guilty to. Specifically, he argues that the elements of insider trading were not met.

Holding: Yes. Marshall‘s conviction for insider trading was upheld.

Reasoning:  Marshall argued he was innocent of insider trading because he never expected to receive any benefit in exchange for the tip he gave to Tucker.  Marshall tipped Tucker with the expectation that Tucker would trade on the information.  Evidence showed that Marshall and Tucker had agreed to split the profits of Tucker‘s trades.

Answers to the questions Critical Thinking Marshall‘s strongest argument would be that, even if he expected Tucker to trade on the tip, he did not expect to share in the profits of the resulting trades. Therefore, he did not expect to benefit from the tip.

Even if it were true that Tucker did not share the profits with Marshall, Marshall may still have been convicted of insider trading. As the court points out, the benefit conferred by a tipper-tippee relationship need not be monetary. The fact that Marshall and Tucker had a longstanding relationship and that the favor Marshall did for Tucker would likely be repaid in some way is enough.

Ethical Decision Making If Marshall had thought about the universalization test, he likely would have acted very differently. He might have considered what the stock market would be like if everyone with insider information traded on it. Marshall could have envisioned a world where no one could trust the market enough to invest in it because people have unfair advantages due to insider information.

TEACHING SKILLS: SO HOW ARE YOUR TEACHING SKILLS COMING ALONG? At this point, you should be good at finding your own scenarios to relate course material to current news stories.

Your task: Find a recent story about alleged securities crimes. Ask students questions that tie the news story to chapter material, and material they have learned in their business core classes.

Just in case you did not find one on your own, feel free to use the Sweet 16 story.

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Chapter 24 - Employment and Discrimination Law

TIPS FOR BUSINESS MANAGERS 1. Insider business information can sometimes be easy to come upon and presents the temptation of using it to engage in insider trading. However, being convicted of insider trading can cost huge amounts of money and ruin a career. It may be best to think twice before using insider information for illegal gains.

2. As this chapter demonstrates, registering securities to be offered to the public is a complex and multistep process. It may be wise to seek counsel before attempting to register securities to ensure that you make no fatal mistakes in the process.

3. If you manage an investment company, the SEC provides a whole other set of regulatory hoops to jump through. Be sure to keep up on the rules and regulations so that you do not, for example, miss an annual report and find yourself in trouble.

CASE OPENER WRAP-UP: Martha Stewart Although the SEC sought to charge Martha Stewart with illegal insider trading, a grand jury did not indict Stewart on this charge. The grand jury did, however, indict Stewart and her broker on nine criminal charges, including securities fraud, obstruction of justice, and conspiracy. Stewart pled not guilty to all charges.

The district court threw out the securities fraud charge on grounds that ―no reasonable jury could find it to be accurate.‖ A week later, however, a jury convicted her of the four remaining counts against her, all of which related to her statements to SEC investigators in their investigation of her sale of ImClone stock. The jury sentenced her to five months in a minimum-security prison. A federal appellate court upheld her sentence.3

ANSWERS TO QUESTIONS AND PROBLEMS 1.

Security regulations were created to provide greater stability to security transactions. The Securities Act of 1933 regulates the issuance of corporate securities by companies. The Securities Act of 1934 oversees the later purchases and sales of securities.

2.

The SEC is responsible for enforcing security laws, interrupting the provisions of the security acts, adopting rules that further the purpose of the acts, and regulating the activities of securities brokers, dealers, and advisors.

3.

To register a security, an individual must file a document that contains the following information: (1) a description of the securities offered for the sale, (2) an explanation of how the proceeds from the sale will be used, (3) a description of the registrant's business and properties, (4) information about the management of the company, (5) a description of any pending lawsuits in which the registrant is involved, and (6) financial statements certified by an independent public accountant.

3

433 F3d 273.

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The issuer must also file a prospectus, which is very similar to the registration document, but is used by potential investors who use the prospectus to decide if they should buy the securities.

4.

Securities may be exempt from the registration process because they may involve a very small amount of money, may only be available to sophisticated buyers, which a both known as limited offers. The Private Placement Exemption exempts an individual if s/he is making a private offering of securities. Intrastate securities are exempt from registration. Finally, the resale of securities is exempt from registration.

5.

Insider trading is illegal because it allows an employee or executive of a company to have a considerable advantage over the general public or shareholders, who would not be supplied with the information.

6.

The misappropriation theory applies to insider trading because it holds the individual liable for the using of inside information for personal gain, which is stealing inside information for personal gain.

7.

Under the tipper/tipee theory, the court ruled the doctor and the trader liable.

8.

The appeals court ruled in favor of Newman and Chiasson, stating that there was insufficient evidence that corporate insiders provided Newman and Chiasson information for personal benefit.

9.

The court found that Cadian had engaged in short-swing insider trading, thereby violation Section 16(b). Thus, Cadian‘s motion to dismiss was denied.

10.

The court ruled that there was nothing inherently misleading about CVB‘s statements. The district court characterized the claims as puffery, and the appellate court agreed. The court argued that the SEC would have needed to allege facts demonstrating that the defendants ―knowingly and recklessly engaged in an improper accounting practice.‖ A few boasts about the company‘s success, even exaggerated, does not amount to wrongdoing.

11.

The appellate court affirmed in favor of Sanofi. Although Sanofi remained optimistic in the face of FDA concerns its misplaced optimism amounted to an opinion, not a statement of fact.

Quoting the Supreme Court, the appellate court held that ―a statement of opinion is not misleading just because external facts show the opinion to be incorrect.‖ Thus, Sanofi had made no misleading statements.

12.

The court found that there was sufficient evidence to rule all of Vivendi‘s statements (including the forward-looking ones) to be materially false or misleading with respect to liquidity risk. The court subsequently ruled against Vivendi.

Chapter 24: Employment and Discrimination Law CHAPTER OVERVIEW Many students will probably come into this chapter with misconceptions about the law with regard to discrimination laws such as sexual harassment, affirmative action, and the ADA. Thus, this chapter can be particularly useful in clearing up these misconceptions. One of the most important ideas to convey is that disparate treatment is used to prove discrimination under Title VII, Age Discrimination, and the ADA. It is also important to point out that, the number one way for employers to avoid getting sued for discrimination is to refrain from discriminating. Use this idea as a theme—it will carry you through all the cases.

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Chapter 24 - Employment and Discrimination Law

LEARNING OBJECTIVES After reading this chapter, students will be able to answer the following questions: 1. What does it mean to be an ―at will‖ employee?

2. What are the federal laws governing employment discrimination?

3. What are the legal requirements for a charge of sex discrimination or sexual harassment?

4. What categories of people are protected from discrimination?

5. What are the rights of employees and obligations of employers with regard to privacy in the workplace?

6. What laws protect employees‘ wages, benefits, health and safety standards, and rights?

7. What are the main laws governing labor unions?

LECTURE NOTES WITH DEFINITIONS In the news…

Teaching tip: For each chapter, consider asking students to relate current news items to material from the chapter.

In addition to ideas students come up with on their own, consider weaving in news stories provided by the textbook publisher.

For Chapter Twenty-Four, McGraw Hill offers the following stories: ―U.S. Supreme Court Rules on Sex Discrimination Case (NBC)‖  What case does the news story describe?  Place this story within the chapter‘s outline. Where does it fit?

Explain your choice. ―American‘s Number One Retailer, Wal-Mart, Faces the Biggest Civil Rights Case Ever Against a U.S. Company (NBC)‖ Why was Wal-Mart sued for employment discrimination? If you were in Wal-Mart‘s shoes, what would you do? (Hint: Refrain from discriminating!)

What does it mean to be an ―at will‖ employee?

What are the federal laws governing employment discrimination?

What are the legal requirements for a charge of sex discrimination or sexual harassment?

Teaching tip: Students are usually surprised by the idea they will probably be at-will employees, so spend some time on this concept. 

The concept of employment-at-will means that the employer can fire the employee for any reason at all.  Exceptions to the employment-at-will doctrine are: o Implied contract o Violations of public policy Implied covenant of good faith and fair dealing.  Federal anti-discrimination laws protect employees from discrimination based upon race, color, religion, national origin, sex, age, disability, and pregnancy. The laws also prohibit sexual harassment.  Two forms of sexual harassment are hostile environment and quid pro quo harassment: o Hostile-environment—behavior that has the effect of creating an intimidating, hostile, or offensive work environment. o Quid pro quo—sexual favors are implicitly a term 24-3

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What categories of people are protected from discrimination?

What are the rights of employees and obligations of employers with regard to privacy in the workplace?

What laws protect employees‘ wages, benefits, health and safety standards, and rights?

or condition of employment. o With both forms of harassment, the behavior must be unwelcome.  The Civil Rights Act (CRA) protects employees against discrimination based on race, color, religion, national origin, and sex. It also prohibits sexual harassment based on the same protected categories.  The Age Discrimination Act (ADEA) prohibits employers from refusing to hire, discharge, or discriminate in terms and conditions of employment on the basis of an employee‘s or applicant‘s being age 40 or older.  The Americans with Disabilities Act prohibits discrimination against employees and job applicants with disabilities.  The Equal Pay Act prohibits an employer from paying workers of one gender less than the wages paid to employees of the opposite gender for work which requires equal skill, effort, and responsibility.

Bostock v. Clayton County, Georgia (briefed below) demonstrates the standard used by the U.S. Supreme Court to determine whether an employer‘s conduct constitutes discrimination on the basis of sex.

Teaching tip: Ask students, ―How could the employer have avoided litigation in the Bostock case?  The key in privacy cases is whether employees had a reasonable expectation of privacy.  Employee rights in this area are limited.

 Wage and Hour Laws: Federal and state laws that impose minimum wage and hour requirements for employees.  Family and Medical Leave Act (FMLA): Requires certain employers to establish a policy that provides all eligible employees with up to 12 weeks of leave during any 12-month period for several familyrelated occurrences, such as birth of a child.  Unemployment Compensation: The Federal Unemployment Tax Act (FUTA) creates a state system that provides unemployment compensation to qualified employees who lose their jobs.  Workers’ Compensation Laws: State laws that provide financial compensation to employees or their dependents when the covered employee is injured on the job.  Consolidated Omnibus Reconciliation Act (COBRA): Ensures that employees are allowed to remain covered by their employer‘s health care policies 24-4

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Chapter 24 - Employment and Discrimination Law

What are the main laws governing labor unions?

Point/Counterpoint: Should employers be permitted to fire employees ―at will?‖

for 18 months, if they pay premiums. This law matters when employees lose their jobs or their hours get reduced.  Employee Retirement Income Security (ERISA): A federal law that sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans.  The Occupation Safety and Health Act (OSHA): Responsible for setting and enforcing workplace safety standards.  The Wagner Act of 1935 encouraged the formation of labor unions and provided for collective bargaining between employers and unions.  The NLRB, or National Labor Relations Board, is an administrative agency that interprets and enforces labor laws.  The Taft Hartley Act of 1947 curtails some of unions‘ powers.  The Landrum-Griffin Act of 1959 governs the internal operations of unions.

Teaching tip: Here are some questions to help you tie the Point/Counterpoint into class discussion:  How would this change benefit employees? How would it harm them? How would it affect businesses?  How would the flow of business change if every employee was a contract employee? Do the benefits of this change for employees (if any) outweigh the downsides for businesses?

CASE BRIEFS WITH ANSWERS TO THE QUESTIONS Case 24-1 Brennan v. Townsend & O’Leary Enterprises, Inc., 199 Cal. App. 4th 1336 (2011) Case Brief Issue: Did the offensive email constitute sexual harassment?

Facts: Plaintiff Stephanie Crowley Brennan sued her employer for sexual harassment. At trial, plaintiff testified that an August 2004 e-mail was the only incident of harassment based on her gender directed at her.

Although the August 2004 e-mail, which referred to plaintiff as a ―big-titted, mindless one‖ (although it did not mention her by name), was rude, insulting, and unprofessional, the record shows it was an isolated event as there was no evidence that the sender (or any employee of the agency) made any other derogatory remarks about plaintiff, sex based, or otherwise, in any other context. The evidence showed the e-mail was not intended to be shared publicly. Instead, it was indisputably intended to have been only sent to one person. Plaintiff saw the August 2004 e-mail only after it was inadvertently forwarded it to another employee, who in turn forwarded it to plaintiff. Plaintiff was a vice-president of the agency at the time of the August 2004 e-mail, and the author of the e-mail was never her supervisor.

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Procedural History: A jury found that plaintiff was subjected to severe or pervasive harassment based on her gender, in violation of Gov. Code, § 12940, of the Fair Employment and Housing Act. The Superior Court of Orange County, California, granted defendant employer's motion for judgment notwithstanding the verdict, and the employee appealed.

Holding: Affirmed, in favor of defendants.

Reasoning:  The email was the only instance of alleged sexual harassment perpetrated against Brennan, and Brennan was not even supposed to see the email at that.  The plaintiff produced no evidence that she was ever assaulted, subjected to ―unwanted physical contact,‖ threatened, propositioned, or subjected to explicit language at her workplace.  There was simply no pattern of harassment, and therefore Brennan‘s sexual harassment claim was without merit.

Answers to the questions Critical Thinking Some may make the argument that a single instance of harassment should be enough to be actionable, regardless of whether it is a part of a larger pattern or if it is ―severe enough‖. However, others may argue that it is not fair for someone to be suable just because they make one offensive remark, especially if it was made in ignorance and the perpetrator sincerely regrets their actions. The pattern of behavior helps establish that the perpetrator either knows what they are doing is inappropriate and/or has been confronted over the issue and continues to harass anyways.

Ethical Decision Making Being that the defendant intended the message containing the insult in question to be part of a private conversation between himself and a single coworker, it is arguable that he should suffer no repercussions for his words. Had this message been intended to be received by Brennan, this would be a different case.

Case 24-2 Bostock v. Clayton County, Georgia, 140 S. Ct. 1731 (2020) Case Brief Issue: Does Title VII's protection against sex-based discrimination apply to sexual orientation as well?

Facts: In each of these cases, an employer allegedly fired a long-time employee simply for being homosexual or transgender. Clayton County, Georgia, fired Gerald Bostock for conduct ―unbecoming‖ a county employee shortly after he began participating in a gay recreational softball league. Altitude Express fired Donald Zarda days after he mentioned being gay. And R. G. & G. R. Harris Funeral Homes fired Aimee Stephens, who presented as a male when she was hired, after she informed her employer that she planned to ―live and work full-time as a woman.‖ Each employee sued, alleging sex discrimination under Title VII of the Civil Rights Act of 1964. The employers do not dispute that they fired their employees for being homosexual or transgender. Rather, they contend that even intentional discrimination against employees based on their homosexual or transgender status is not a basis for Title VII liability.

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Chapter 24 - Employment and Discrimination Law

Holding: Reversed in favor of Bostock. Title VII does cover discrimination on the basis of sexual orientation.

Reasoning:  Title VII does not explicitly list sexual orientation as a prohibited basis for employment actions  However, Title VII does cover sex- and gender-based reasons for employment actions.  Sexual orientation is inherently a sex-based consideration, and so alleged discrimination on sexual orientation grounds is covered by Title VII's sex discrimination protections Answers to the questions Critical Thinking Often, the textualist approach is used to narrow the interpretation of a statute, whereas considering the intent typically broadens it. Here, however, the opposite seems to be true: a textual reading of the Civil Rights Act encompasses more classes than the drafters intended, at least according to the defendants.

Even following the legislative intent approach, though, an argument could be made that the drafters wished to end as much discrimination as possible, considering the Civil Rights Act encompasses sex, race, religion, etc. Although the drafters may not have conceived of the class of people at hand in this case, they may very well would have wanted them to not face discrimination.

Ethical Decision Making On the one hand, religious organizations may argue that accepting individuals of certain sexual orientations runs contrary to their beliefs, and that they cannot fulfill their religious purpose if made to do so. On the other, one could argue that every individual deserves to live free from discrimination in every venue, and that this right supersedes the wishes of individual organizations.

Case 24-3 Bobby Dean Nickel v. Staples Contract & Commercial Inc., Cal. App. 2nd (2016) Case Brief Issue: Was there sufficient evidence to support that Nickel had been discriminated against for his age?

Facts: Nickel worked for an office-supply business that was bought by Staples in 2008. Nickel‘s new manager, Marrero, sought to cut costs by replacing older, higher-paid employees with part-time and temporary workers. His method was to increase workloads for older employees until they retired or ―[write] them up‖ for ethical violations so he could fire them.

In 2011, when Nickel was 64 years old, Marrero fired him for allegedly stealing a bell pepper from the facility‘s cafeteria. Nickel claimed that there was an accepted practice of taking food from the cafeteria after hours and paying for it later, and that he did in fact pay for the pepper later. This claim was corroborated by a cafeteria worker. Following his termination, Nickel sued Staples for age-based discrimination.

Procedural History: The jury sided with Nickel and he was awarded $3.2 million in compensatory damages and $13 million in punitive damages.

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Holding: Affirmed in favor of Nickel.

Reasoning:  Marrero‘s comments about older employees and his intention to eliminate them from the workforce provided sufficient evidence of age-based discrimination  Former employees and managers testified that they and their coworkers were pushed out of their jobs for similar reasons.

Answers to the questions Critical Thinking Although some may argue for a zero-tolerance policy, the bell pepper that Nickel allegedly stole was worth $0.68. Even without the evidence of age discrimination, it seems a little ridiculous to fire someone over an isolated $0.68 loss.

Ethical Decision Making In its decision, the court protected the values of fairness and rationality. It was not fair of Marrero to fire Nickel for practically no reason, especially when he really had ulterior motives.

TEACHING SKILLS: ASK A VERY OPEN-ENDED QUESTION AND SEE WHAT STUDENTS DO WITH IT Here‘s the open-ended question: Is the electronics store engaging in unlawful discrimination against Bob?

In class, or on a test, try asking a very openended question to see what your students do with it. Use the ―What about Bob?‖ scenario.

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Chapter 25 - Consumer Law

TIPS FOR BUSINESS MANAGERS 1. Employers should have privacy-related policies or handbooks for employees that are reviewed for compliance with the NLRA and state law.

2. Employee handbooks and policies should have a ―disclaimer‖ that is sufficient to assure the employee‘s status remains at-will.

3. All policies and handbooks should be reviewed annually and updated by an employment law attorney.

TEACHING IDEAS Here are questions to ask students, in case they do not do well with the open-ended question:  If you were the store‘s general manager, would you move Bob? Connecting to the Core Why or why not? Be specific.  Are electronics store employees stereotyping Bob? Explain. If so, Teaching Basics why does this matter?  How is Bob‘s situation similar to other cases in the chapter? How is it different? Be specific.  Does the BFOQ defense apply to the electronics store? Why or why not?  Does the Americans with Disabilities Act (ADA) protect Bob, even Advanced Teaching though he does not see himself as disabled? Explain.

What about Bob?* Bob is a sales employee at a large electronics store and has a mild neurological condition that sporadically causes an involuntary jerk of his head. Although he is well-spoken and fully capable of performing all functions of the job, his co-workers and supervisors prevent him from interacting with several of the customers. They suspect that he will scare some of the customers and hurt business.

This exclusion significantly limits his chances to make substantial commissions from these potential sales.

At this point, Bob's co-workers and lower level supervisors have regarded him as disabled; they believe he is unable to successfully interact with customers, and that he is substantially limited in the major life activity of working and/or interacting with others.

* Facts here are almost verbatim from Comment, Taming the Nature of the Beast: Why a Reasonable Accommodation for a Perceived Disability Should No Longer be Considered the ADA’s Necessary Evil, 32 U. DAYTON L. REV. (2006).

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By preventing him from fully interacting with customers, and competing for commissions, Bob believes his employer has also discriminated against him because of his impairment.

Bob has asked the store's general manager that he be moved to another department or shift so that he can work with different co-workers and supervisors. The general manager has communicated with Bob and investigated the issue. The general manager now realizes that company employees may be misperceiving the extent of Bob‟s true impairment and its impact on customer interactions.

However, the general manager has decided that moving Bob will cause unnecessary scheduling problems. The general manager has informed Bob that he must remain in his current department.

Is the electronics store engaging in unlawful discrimination against Bob?

CASE OPENER WRAP-UP: Brad versus So Clean and Jennifer At the beginning of this chapter, you were confronted with the situation between Brad and Jennifer. By now you should be able to answer all the questions presented to you.

In many states, an employee can legally be fired based on sexual orientation. Discrimination in this area is based solely on state law. There is no federal protection against discrimination based on being gay. Similarly, firing an employee for smoking (including off the job) is also a state law issue. In Michigan, for example, such a firing would be legal. Many states are now passing laws preventing employers from firing those who smoke outside the workplace.

Brad is an at-will employee, but that does not mean that he can be fired for an illegal (i.e., discriminatory) reason. Laws protecting employees against sex discrimination and sexual harassment are just as applicable to men as they are to women. Anyone who is treated in a discriminatory way ―based on sex‖ may sue under the appropriate state or federal antidiscrimination laws. Most, though not all states, have their own state laws against discrimination and harassment. States may give more protection than federal laws but not less protection. There are still a few states that have no state laws against discrimination (one such state is Georgia).

These are basic issues that every employer and employee should be familiar with. Remember, knowledge is power. The more you know, the better off you and your business will be.

ANSWERS TO QUESTIONS AND PROBLEMS 1.

Title VII of the Civil Rights Act, the Pregnancy Discrimination Act, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Equal Pay Act.

2.

Yes, Title VII does apply to same-sex harassment.

3.

In July 2009, the Senate passed a bill stating that all minimum-wage jobs will pay no less than $7.25 an hour.

4.

FMLA covers all public employers, as well as private employers with 50 or more employees.

Eligible employees are employees who have worked at least 25 hours a week for each of 12 months prior to the leave.

5.

The Age Discrimination in Employment Act protects employees or applicants age 40 or older.

6.

The court ruled in favor of the employees. The ADEA ordinarily concerns the effect of a facially neutral policy on all employees at least forty years old. Here, the plaintiffs showed that the policy caused a significantly disproportionate adverse impact based on age. Just because 25-2 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Chapter 25 - Consumer Law

that impact was on a subgroup of the ADEA class—that is, employees over fifty—does not nullify the ADEA protections.

7.

The court allowed Blatt‘s ADA claim to proceed. The court found that Blatt‘s diagnosed gender dysphoria goes beyond merely identifying with another gender and is characterized by clinically significant stress and other impairments. Therefore, Blatt‘s condition is not excluded by the ADA.

8.

The Supreme Court ruled that the Pregnancy Discrimination Act does not necessarily require an employer to provide the same work accommodations to a pregnant employer as they would to someone with non-pregnancy-related that are similarly debilitating limitations. However, courts must evaluate the extent to which an employer's policy treats pregnant workers less favorably than non-pregnant workers with similar limitations and and determine if there are any legitimate reasons for such differences. Thus, the court reversed the judgment against Young and remanded the case to a lower court.

9.

The court ruled that the ―age 60 rule‖ was, indeed, a bona fide occupational qualification. The defendant gave testimony stating that the purpose for the rule was air safety, being that ―aging causes a physiological and cognitive decline‖ and Exxon assumed that this decline raised the chances of accidents occurring. While the plaintiff pointed out that such accidents were rare, the court agreed with Exxon's reasoning.

10.

Rizo prevailed on her appeal. According to the court, prior salary cannot be a sufficient defense to an Equal Pay Act violation on its own because relying on prior salary simply perpetuates previous pay disparities between men and women. The court explains its reasoning in an example: ―For example, assume that a male and a female employee have the same education and number of years' experience as each other, but the male employee was paid a higher prior salary than the female employee. The current employer sets salary by considering the employee's education, years of experience, and prior salary. Using these factors, the employer gives both employees the same salary credit for their identical education and experience, but the employer pays the male employee a higher salary than the female employee because of his higher prior salary. In this example, it is prior salary alone that accounts for the pay differential, even though the employer also considered other factors when setting pay.”

11.

The court ruled that obesity is indeed a disability under the ADA and that Harrison had been wrongfully terminated.

12.

The court ruled in the city‘s favor, although it did not grant a summary judgment regarding the supervisor‘s behavior. The court found that the city was not subject to suit under federal wiretapping statute. It also ruled that the summary judgment in favor of individual defendants (the supervisor) was precluded on claims under wiretapping statutes. The court determined that, absent evidence of city manager's intent, city manager could not be held liable under Georgia law to city employee for invasion of privacy. Finally, the court ruled that the intentional monitoring of city employee's conversation, leading to her termination, was not sufficiently outrageous conduct to support a claim of intentional infliction of emotional distress.

13.

The Oklahoma Court of Appeals upheld the trial court‘s judgment. The court held that the injury arose out of the course of employment as there was no evidence that the employee and the customer had any previous confrontations. The employee did nothing to provoke the attack.

14.

The Utah Supreme Court ruled that an employee‘s right to self-defense outweighs an employers‘ interest in regulating its workforce. Thus, an employee may maintain a wrongful termination action if they are fired for practicing self-defense in a situation where the 25-3 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

employee faced imminent threat of serious bodily harm.

15.

The court ruled in favor of Seton Hall. The court held that the Law Against Discrimination's (LAD) exemption for educational facilities operated or maintained by a bona fide religious institution, which exempted such educational facilities from the prohibition against discrimination on the basis of sexual orientation, could not be waived.

Chapter 25: Consumer Law 1.

CHAPTER OVERVIEW

Various laws are created to protect consumers' interest. Laws are created to protect consumers from unfair trade practices of sellers and unsafe products. A range of laws exist, in order to fully understand the Federal Trade Commission.

You might want to begin by asking students to read the chapter and reply to the review and case questions at the end of the chapter. Focus on the Federal Trade Commission and the various types of consumer laws. As an in class activity, you can discuss the Firestone Recall case and in what manner you would have handled the action.

2.

LEARNING OBJECTIVES

After reading this chapter, students will be able to answer the following questions: 1. What is the purpose of the Federal Trade Commission Act? 2. How does the Federal Trade Commission determine what constitutes deceptive advertising?

3. What is the purpose of the labeling and packaging laws?

4. What are the different acts that provide credit protection?

5. What are the different acts that help ensure consumer health and safety?

3. BUT WHAT IF SECTIONS 1. In this situation, the two parties can resolve the issue through a consent order or a cease-and-desist order.

2. This is an unsolicited merchandise sale, and it is illegal for Trudeau to assert payment for the unsolicited merchandise.

4. LECTURE NOTES WITH DEFINITIONS In the news…

Teaching tip: For each chapter, consider asking students to relate current news items to material from the chapter.

In addition to ideas students come up with on their own, consider weaving in news stories provided by the textbook publisher.

For Chapter Twenty-Five, McGraw Hill offers the following stories:

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Chapter 25 - Consumer Law

What is the purpose of the Federal Trade Commission Act?

How does the Federal Trade Commission determine what constitutes deceptive advertising?

What is the purpose of the labeling and packaging laws?

What are the different acts that provide credit protection?

―Swiped: Identity Theft in America: Ways to Keep Personal Information Personal (NBC)‖  Why is identity theft on the rise?  Why is identity theft a matter for the FTC?  The FTC prevents fraud, deception, and unfair business practices.

Teaching tip: Tap into your students‘ experiences as consumers to make this chapter come alive.  Advertising is deceptive if it is misleading to a reasonable consumer.  The FTC focuses on three elements: (1) material misrepresentation, omission, or practice, that is (2) likely to mislead, a (3) reasonable consumer.

Gotlin v. Lederman (briefed below) considers the definition of deceptive advertising.  Labeling and packaging laws require manufacturers to provide accurate, understandable information on labels.  If a product is potentially harmful, the manufacturer must make the consumer aware of this harm.  Acts that provide credit protection are: o The Truth-in-Lending Act—requires sellers to disclose terms of the loan. o The Fair Credit Reporting Act—ensures accurate credit reporting. o The Fair Debt Collection Practices Act—regulates the actions of debt collectors. o The Credit Card Fraud Act—closes loopholes in other laws, ensuring that people who engage in credit card fraud are punished. o The Fair Credit Billing Act—seeks to rectify problems and abuses associated with credit billing errors. o The Fair and Accurate Credit Transactions Act—takes affirmative actions to control and prosecute identity theft.

Crawford v. LVNV Funding, LLC (briefed below) considers a collection agency‘s actions under the FDCPA.

What are the different acts that help ensure consumer health and safety?

 Acts that ensure consumer health and safety: o The Federal Food, Drug, and Cosmetic Act protects consumers against misbranded or adulterated food, drugs, medical devices, or cosmetics. o The Consumer Product Safety Act created the Consumer Product Safety Commission (CPSC) to protect the public against unreasonable risks of injuries and deaths associated with consumer products.

United States v. Kaplan (briefed below) considers whether the use of contaminated instruments in a medical procedure violated the FDCA. Teaching tip:Ask students which case in the chapter they found the most 25-5

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Point/Counterpoint: Should prescription drugs be allowed to be advertised directly to consumers?

interesting, and why.

Teaching tip: Here are some questions to help you tie the Point/Counterpoint into class discussion:  Are there better alternatives to advertising for informing consumers about diseases and treatments?  Do consumers need to be protected from this kind of advertising, or should we leave it to consumers to protect themselves?

4. CASE BRIEFS WITH ANSWERS TO THE QUESTIONS Case 25-1 Ehlers v. Ben & Jerry’s Homemade Inc., No. 2:19-cv-00194 (D. Vt. 2020) Case Brief Issue: Did Ben & Jerry‘s engage in deceptive advertising by not sourcing its milk from ―happy cows?‖ Facts: Ben & Jerry‘s was sued by James Ehlers in a class action suit alleging false advertising. Ehlers asserted that Ben & Jerry's rose to prominence in the 1980s and 1990s as a socially conscious, Vermontbased company which attracted consumers due to "the brand and all that it represented[.]" Ehlers alleged that in the "past several years," Unilever, Ben & Jerry‘s parent company, has breached consumers' trust by representing on Ben & Jerry's ice cream packaging and website that Ben & Jerry's products are "sourced exclusively from `happy cows' on Vermont dairies that participate in a special, humane `Caring Dairy' program." Ehlers asserted that until just prior to the suit, Ben & Jerry‘s website claimed that the ―Caring Dairy‖ program is ―required for all farmers.‖ In reality, however, Ehlers asserted that only a percentage of the milk used in Ben & Jerry's products is sourced from the Caring Dairy program, while the remainder comes from mass-production dairy operations, purportedly "exactly what consumers who choose Ben & Jerry's Products would like to avoid." Ben & Jerry's ice cream packaging, signage in its retail locations, and take-away cups "present the Products as made with milk produced by `happy cows'" and feature cartoon images of happy cows in green fields under blue skies in order to depict "happy animals."

Holding: No. The plaintiff‘s interpretation of the ―happy cows‖ line is unreasonable, and the line itself is not misleading.

Reasoning:  

A statement is misleading under Vermont law if it is likely to mislead a reasonable consumer.

Statements from the Ben & Jerry‘s website set forth the standards for a farm to be considered a ―Caring Dairy farm‖ and make clear that participation is voluntary.  The plaintiff relies on an unreasonable interpretation of a single line he allegedly found on Ben & Jerry‘s website.

Answers to the questions Critical Thinking The evidence the court relied on was statements found on Ben & Jerry‘s website and packaging.

Information that could be missing here are additional statements by Ben & Jerry‘s found elsewhere that Ehlers could point that claim that Ben & Jerry‘s sources its dairy products exclusively from ―happy cows.‖

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Chapter 25 - Consumer Law

Ethical Decision Making Values that the court highlighted were thoroughness and common sense. The court acknowledged that, in a vacuum, the line Ehlers pointed to on Ben & Jerry‘s website may mislead a consumer into believing that the company sources all its dairy from Caring Dairy farms. However, when reading other statements located in close proximity to this one, it becomes clear that this is not the case. The court held that a reasonable consumer who reads the Ben & Jerry‘s website and/or packaging will come to the conclusion that not all Ben & Jerry‘s suppliers are Caring Dairy farms.

Case 25-2 Crawford v. LVNV Funding, LLC, United States Court of Appeals, Eleventh Circuit, 758 F.3D 1254 (2014).

Case Brief Issue: Did the debt collecting behavior of LVNV violate the Fair Debt Collection Practices Act? Facts: Stanley Crawford owed $2,037.99 to the Heilig-Meyers furniture company. Heilig-Meyers charged off the debt in 1999 and in September 2001, a company affiliated with the defendant in this case, LVNV Funding, LLC, acquired the debt. On October 2004, the debt became unenforceable due to Alabama‘s statute of limitations and because the last transaction on the debt occurred three years earlier in October 2001. In 2008, Crawford filed for Chapter 13 bankruptcy. LVNV filed a proof of claim to collect the Heilig-Meyers debt in spite of the expired limitations period. Crawford filed a counterclaim against LVNV via an adversary proceeding.

Procedural History: Crawford‘s counterclaim was dismissed, and this ruling was affirmed by the district court.

Holding: No. The bank did not violate the FCRA. District court‘s decision is affirmed.

Reasoning:  Section 1692e of the FDCPA provides that a ―debt collector may not use false, deceptive, or misleading representation or means in connection the collection of any debt‖.  LVNV regularly filed time-barred proofs of claim in hopes that the debtor would not object and pay anyways, despite the claim‘s unenforceability in court.  LVNV‘s actions were considered by the court to be misleading means.

Answers to the questions Critical Thinking One may be able to find a few ambiguous terms in this case. One such term is ―unfair‖, which, as the court notes, Congress did not provide a definition for in the FDCPA. Thus, the court turned to a dictionary to determine if LVNV‘s actions fell under the definition of ―unfair‖. Another ambiguous term is ―collection activity‖. LVNV tried to argue that its proof of claim was not a ―collection activity‖ and was therefore not regulated by the FDCPA. Once again, Congress did not provide a definition of the term

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in the FDCPA, but by interpreting ―to collect a debt‖ as used in § 1692(a)(6), the court ruled that LVNV‘s actions did indeed constitute a ―collection activity‖.

Ethical Decision Making This decision strongly affects consumers who are unaware of their rights when it comes to debt collection, especially their rights concerning statutes of limitations and stale claims. The court effectively established that actions such as those performed by LVNV are predatory and cannot succeed under the FDCPA. Obviously, predatory debt collectors like LVNV are also affected by this decision.

The FDCPA was designed to protect consumers. Thus, in a case involving the FDCPA, it may seem reasonable that a court would elevate the interests of consumers over the interests of debt collectors.

Case 25-3 US v. Kaplan, MD United States Court of Appeals, Ninth Circuit 836 F.3D 1199 (2016) Case Brief Issue: Could Kaplan be criminally prosecuted under the FDCA? Facts: Kaplan was a urologist who owned and operated two urology clinics in Nevada. Both clinic regularly performed prostate needle biopsies, a procedure that involved using a needle to penetrate the rectal wall and gather a necessary tissue sample. To stabilize the needle, an enclosure called a needle guide is used.

Needle guides can become contaminated with bodily tissues, fluids, and bacteria, and therefore needle guides come in reusable stainless steel which must be sterilized or disposable plastic forms. Kaplan‘s clinic used the stainless steel version and a sterilizing machine until the machine broke in 2010. Kaplan ordered a refurbished machine but was unable to continue using the stainless steel needle guide. Instead, Kaplan‘s clinics began using plastic needle guides. Kaplan‘s assistants started noticing that the plastic needle guides appeared unsanitary, and that a used needle guide could be distinguished from an unused one due to discoloration. Kaplan‘s assistants reported him to the state medical board, and the FDA charged Kaplan with conspiracy to commit adulteration and violation of the FDCA. Procedural History: Kaplan was found guilty and appealed, arguing that he could not be criminally prosecuted under the FDCA. Holding: Yes. Affirmed for the FDA. Reasoning:  Kaplan argued that the relevant statutes of the FDCA did not apply to him because he was not selling the guides to his patients.  However, it is reasonable to assume that, being that Kaplan operated his practice for profit, the cost of the guide was included in the price of the procedure.  Thus, Kaplan was, in effect, selling the guides to his patients, and therefore the FDCA applies.  Kaplan was blatantly disregarding the safety of his patients in the interest of his own profits by reusing guides intended for single use.

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Chapter 25 - Consumer Law

Answers to the questions Critical Thinking Your friend is assuming that meanings are not permanently fixed; the interpretations and meanings of words change over time. Thus, the interpretations of statutes that are composed of these mutable words are liable to change as well.

Ethical Decision Making It is arguable that, despite their efforts to wash their hands of this debacle, Brandt and Golden acted negligently by either A) relying on obviously poor evidence to justify nonaction or B) knowing a problem exists and doing practically nothing to stop it from occurring.

5. TEACHING SKILLS: HAVE STUDENTS CREATE THEIR OWN POINT/COUNTERPOINT Use the ―Dream Trip‖ facts as the basis for students‘ own Point/Counterpoint.

In addition to using the facts in the scenario provided, encourage students to use Chapter Twenty-Five‘s content—both text and cases— to come up with reasons for the Point/Counterpoint.

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Chapter 25 - Consumer Law

6. TIPS FOR BUSINESS MANAGERS 1. While it may be tempting to tout your products beyond their abilities, the Bayer example shows why this can be a costly mistake in terms of both time and money. Always advertise your products accurately.

While puffing is allowed, make sure the claim is clearly a joke or an exaggeration or you may find yourself in trouble.

2. Product recalls can be very expensive and can tarnish the reputation of your business. Instead of rushing a product out the door, it is usually a better idea to take your time to fully test it for defects to avoid spending more money on a recall later.

3. As this chapter explains, there are many different types of making sales and each one generally has its own set of rules attached to it. Before trying to make a certain type of sale, be sure you know any regulations attached to it so that you do not violate the law in the process.

7. ANSWERS TO QUESTIONS AND PROBLEMS 1.

The FTC prevents fraud, deception, and unfair business practices. Examples of legislation that help the FCT carry out its work are the 1991 Telephone Consumer Protection Act and the Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994.

2.

Advertising is deceptive if it is misleading to a reasonable consumer. The FTC focuses on three elements: (1) material misrepresentation, omission, or practice, that is (2) likely to mislead, a (3) reasonable consumer.

3.

The Truth-in-Lending Act requires that sellers disclose the terms of the credit or loan to facilitate the consumer‘s comparison to a variety of credit lines or loans.

4.

1. The court ruled that there were defects in Comenity‘s notice of consumer rights regarding the loss of rights due to unsatisfactory purchases. These defects raised a sufficient risk of harm to meet standing requirements.

2. However, Strubel failed to demonstrate sufficient risk of harm from Comenity‘s failure to notify her about time limitations related to her billing plan. Thus, she lacked standing to pursue the TILA claims. The claims were subsequently dismissed for lack of jurisdiction.

3. Comenity‘s notice that certain TILA protections applied only to unsatisfactory purchases that were not paid in full did not violate the relevant statutes. This count was dismissed.

4. Because the TILA does not require unsatisfactory purchases to be reported in writing, Comenity‘s alleged failure to disclose this requirement did not violate any statutes. This count was dismissed.

5.

The safe harbor doctrine precludes plaintiffs from bringing claims ―based on actions the Legislature permits.‖ In other words, challenged conduct falls under the doctrine if the conduct is affirmatively permitted by statute. The federal preemption doctrine holds that federal law preempts state law, even when the laws conflict. The court held that no reasonable consumer would be deceived as to the amount of product in each tube of Sugar because the Sugar label discloses the correct weight of the product and the product‘s design was commonplace in the market. Thus, the court affirmed the judgment in favor of Fresh, Inc.

6.

The Gunns argued that they were annoyed and intimidated by the letter and that this was the injury forming their suit. But in spite of this, the Gunns did not contend that the letter was an invasion of 1-1 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.

Chapter 01 - An Introduction to Dynamic Business Law privacy. They owned a home and owed a debt, and the association and its firm were entitled to communicate with the Gunns about the debt, regardless of how unwelcome the Gunns found the demand for payment. The court pointed out that practically every suit is filed by someone who is annoyed with someone else; that fact alone does not indicate an injury or a basis for liability.

7.

Because Wilson's issue appeared to be an isolated incident, and because Hewlett-Packard did not know of the defect at the time of sale and tried to cooperate with Wilson to fix the problem after his warranty had expired, the court ruled that Hewlett-Packard had not violated Consumer Safety law.

8.

This case involved a class-action suit and the defining of who is included in the ―class‖ of a classaction suit.

9.

The court ruled in favor of the Gilberts. The court held that the three-year limitation concerns the right of rescission and does not require the borrowers to file a claim to invoke that right. Thus, the Gilberts could (and did) exercise their right of rescission within the three years even though they did not file the suit within those three years.

10.

The duty of sameness requires generic drugs to maintain the same labelling as their brand-name counterparts. This duty is imposed by the FDCA, but the court holds there is no equivalent in Tennessee law. And because claims regarding violations of the FDCA can be pursued only by the federal government, McDaniel‘s claims are preempted here.

11.

The court held that none of XYZ‘s challenged statements about .com availability were false or misleading. False statements are not actionable unless they deceive consumers because A) such regulations are put in place to protect consumers, not other businesses and B) if this were not the case, Verisign could simply claim they found XYZ‘s statements deceiving and prevail with practically no evidence. As the court notes, a plaintiff usually proves that advertising is deceptive through consumer survey data.

12.

The debt collector did not violate the FDCPA. The letters were only sent to the plaintiff‘s attorney, were not addressed to the plaintiff, and did not contain a threat to contact the plaintiff directly.

13.

The case remained pending at the time of the preparation of the instructor‘s manual. Students may access information regarding the current status of the case at In the Matter of POM Wonderful, LLC, FTC Docket No. 9344, available at http://www.ftc.gov/os/adjpro/d9344/index.sht

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