Solution Manual For The Legal Environment Today 10th Edition by Roger LeRoy Miller & Frank Cross

SOLUTION MANUAL

SOLUTION MANUAL

Chapter 1 Law and Legal Reasoning Chapter 2 Courts and Alternative Dispute Resolution Chapter 3 Ethics in Business Chapter 4 Business and the Constitution Chapter 5 Torts and Product Liability Chapter 6 Criminal Law and Cyber Crime Chapter 7 International and Space Law Unit One Task-Based Simulation

UNIT TWO: THE COMMERCIAL ENVIRONMENT Chapter 8 Intellectual Property Rights Chapter 9 Internet Law, Social Media, and Privacy Chapter 10 The Formation of Traditional and E-Contracts Chapter 11 Contract Performance, Breach, and Remedies Chapter 12 Sales and Lease Law Chapter 13 Creditor-Debtor Relations and Bankruptcy Unit Two Task-Based Simulation

UNIT THREE: THE EMPLOYMENT AND BUSINESS ENVIRONMENT Chapter 14 Agency Relationships Chapter 15 Employment, Immigration, and Labor Law Chapter 16 Employment Discrimination Chapter 17 Business Organizations Chapter 18 Corporations Chapter 19 Investor Protection and Corporate Governance Unit Three Task-Based Simulation

UNIT FOUR: THE REGULATORY ENVIRONMENT Chapter 20 Administrative Law Chapter 21 Consumer Protection Chapter 22 Environmental Law Chapter 23 Real and Personal Property Chapter 24 Antitrust Law and Promoting Competition Unit Four Task-Based Simulation

Solution Manual For: SM The Legal Environment Today 10e Roger Leroy Miller Frank B. Cross;

Solution Manual For SM The Legal Environment Today 10e Roger Leroy Miller Frank B. Cross; Chapter 01: Law and Legal Reasoning

Table of Contents Critical Thinking Questions in Features .................................................................................................................. 1 Managerial Strategy—Business Questions ................................................................................................ 1 Chapter Review ................................................................................................................................................................ 2 Practice and Review .................................................................................................................................. 2 Practice and Review: Debate This ............................................................................................................. 2 Issue Spotters ............................................................................................................................................ 3 Business Scenarios and Case Problems ..................................................................................................... 3 Critical Thinking and Writing Assignments ................................................................................................ 7 Appendix Exhibit........................................................................................................................................ 8

Critical Thinking Questions in Features Managerial Strategy—Business Questions 1.

―When faced with a clearly erroneous precedent, my rule is simple,‖ writes Supreme Court Justice Clarence Thomas. ―We should not follow it.‖ How do these words offer a cautionary tale for managers relying on stare decisis to make business decisions?

Solution Simply put, the doctrine of stare decisis applies in all instances, except when it does not. As noted in the text, a court is able to depart from precedent if it feels that legal, social, or technological changes have rendered the previous decision untenable. In this case, just because the United State Supreme Court believes, at present, that automobile salespeople are exempt from the overtime rules of the FLSA, there is a possibility that the Court could reverse itself in the future. In this context, managers need to be aware that (1) any decision they make based on a court decision is subject to change, and (2) if they believe that a previous business law-related court decision is flawed, they can challenge it in court.

2.

Should Roberta consider paying her salespeople overtime even though it is not required by federal law? Why or why not?

Solution Just because Roberta is legally able to avoid paying the salespeople at her new used car dealership overtime, should she? As with so many managerial decisions, the answer to this question involves the tricky determination of costs and benefits. On the one hand, Roberta‘s costs will be lower if she does not have to pay overtime to the salespeople. On the other hand, the

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Solution Manual For: Chapter 01: Law and Legal Reasoning

salespeople may be more motivated if they feel they are being properly compensated for the extra hours they spend on the lot. The extra motivation will likely lead to additional sales, which very well may offset the overtime costs.

Chapter Review Practice and Review Suppose that the California legislature passes a law that severely restricts carbon dioxide emissions of automobiles in that state. A group of automobile manufacturers files a suit against the state of California to prevent enforcement of the law. The automakers claim that a federal law already sets fuel economy standards nationwide and that these standards are essentially the same as carbon dioxide emission standards. According to the automobile manufacturers, it is unfair to allow California to impose more stringent regulations than those set by the federal law. Using the information presented in the chapter, answer the following questions.

1.

Who are the parties (the plaintiffs and the defendant) in this lawsuit?

Solution In this situation, the automobile manufacturers are the plaintiffs, and the state of California is the defendant.

2.

Are the plaintiffs seeking a legal remedy or an equitable remedy? Why? Solution The plaintiffs are seeking an injunction, which is an equitable remedy, to prevent the state of California from enforcing its statute restricting carbon dioxide emissions.

3.

What is the primary source of the law that is at issue here?

Solution This case involves a law passed by the California legislature and a federal statute, thus the primary source of law is statutory law.

4.

Read through the appendix that follows this chapter, and then answer the following question: Where would you look to find the relevant California and federal laws?

Solution Federal statutes are found in the United States Code, and California statutes are published in the California Code. You would look in both of these sources to find the relevant state and federal statutes.

Practice and Review: Debate This 1.

Under the doctrine of stare decisis, courts are obligated to follow the precedents established in their jurisdictions unless there is a compelling reason not to. Should U.S. courts continue to adhere to this common law principle, given that our government now regulates so many areas by statute?

Solution Both England and the U.S. legal systems were constructed on the common law system. The doctrine of stare decisis has always been a major part of this system—courts should follow

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Solution Manual For: Chapter 01: Law and Legal Reasoning

precedents when they are clearly established, excepted when compelling reasons dictate otherwise. Even though more common law is being turned into statutory law, the doctrine of stare decisis is still valid. After all, statutes often must to be interpreted by courts. What better basis for judges to render their decisions than by basing them on precedents related to the subject at hand?

In contrast, some students may argue that the doctrine of stare decisis is passé. There is certainly less common law governing, say, environmental law than there was 100 years ago. Given that federal and state governments increasingly are regulating more aspects of commercial transactions between merchants and consumers, perhaps the courts should simply stick to statutory language when disputes arise.

Issue Spotters 1.

The First Amendment to the U.S. Constitution provides protection for the free exercise of religion.

A state legislature enacts a law that outlaws all religions that do not derive from the JudeoChristian tradition. Is this law valid within that state? Why or why not?

Solution No. The U.S. Constitution is the supreme law of the land, and applies to all jurisdictions. A law in violation of the Constitution (in this question, the First Amendment to the Constitution) will be declared unconstitutional.

2.

Apex Corporation learns that a federal administrative agency is considering a rule that will have a negative impact on the firm‘s ability to do business. Does the firm have any opportunity to express its opinion about the pending rule? Explain.

Solution Yes. Administrative rulemaking starts with the publication of a notice of the rulemaking in the Federal Register. Among other details, this notice states where and when the proceedings, such as a public hearing, will be held. Proponents and opponents can offer their comments and concerns regarding the pending rule. After reviewing all the comments from the proceedings, the agency‘s decision makers consider what was presented and draft the final rule.

Business Scenarios and Case Problems 1.

Binding versus Persuasive Authority. A county court in Illinois is deciding a case involving an issue that has never been addressed before in that state‘s courts. The Iowa Supreme Court, however, recently decided a case involving a very similar fact pattern. Is the Illinois court obligated to follow the Iowa Supreme Court‘s decision on the issue? If the United States Supreme Court had decided a similar case, would that decision be binding on the Illinois court? Explain. (See The Common Law.) Solution A decision of a court is binding on all inferior courts. Because no state‘s court is inferior to any other state‘s court, no state‘s court is obligated to follow the decision of another state‘s court on an issue. The decision may be persuasive, however, depending on the nature of the case and the particular judge hearing it. A decision of the United States Supreme Court on an issue is binding, like the decision of any higher court, on all inferior courts. The United States Supreme Court is the nation‘s highest court, however, and thus, its decisions are binding on all courts, including state courts.

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2.

Sources of Law. This chapter discussed a number of sources of American law. Which source of law takes priority in the following situations, and why? (See Sources of American Law.) 1. A federal statute conflicts with the U.S. Constitution.

Solution 1. The U.S. Constitution—The U.S. Constitution is the supreme law of the land. A law in violation of the Constitution, no matter what its source, will be declared unconstitutional and will not be enforced.

2.

A federal statute conflicts with a state constitutional provision.

Solution 2. The federal statute—Under the U.S. Constitution, when there is a conflict between a federal law and a state law, the state law is rendered invalid.

3.

A state statute conflicts with the common law of that state.

Solution 3. The state statute—State statutes are enacted by state legislatures. Areas not covered by state statutory law are governed by state case law.

4.

A state constitutional amendment conflicts with the U.S. Constitution.

Solution 4. The U.S. Constitution—State constitutions are supreme within their respective borders unless they conflict with the U.S. Constitution, which is the supreme law of the land.

3.

Remedies. Arthur Rabe is suing Xavier Sanchez for breaching a contract in which Sanchez promised to sell Rabe a Van Gogh painting for $150,000. (See The Common Law.) 1. In this lawsuit, who is the plaintiff, and who is the defendant?

Solution 1. In a suit by Arthur Rabe against Xavier Sanchez, Rabe is the plaintiff and Sanchez is the defendant.

2.

If Rabe wants Sanchez to perform the contract as promised, what remedy should Rabe seek?

Solution 2. Specific performance is the remedy that includes an order to a party to perform a contract as promised.

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3.

Suppose that Rabe wants to cancel the contract because Sanchez fraudulently misrepresented the painting as an original Van Gogh when in fact it is a copy. In this situation, what remedy should Rabe seek?

Solution 3. Rescission is a remedy that includes an order to cancel a contract.

4.

Will the remedy Rabe seeks in either situation be a remedy at law or a remedy in equity?

Solution 4. In both cases, these remedies are remedies in equity.

4.

Philosophy of Law. After World War II ended in 1945, an international tribunal of judges convened at Nuremberg, Germany. The judges convicted several Nazi war criminals of ―crimes against humanity.‖ Assuming that the Nazis who were convicted had not disobeyed any law of their country and had merely been following their government‘s (Hitler‘s) orders, what law had they violated? Explain. (See The Common Law.) Solution Crimes against humanity constituted, at the time of the Nuremberg trials, a new international crime, consisting of ―murder, extermination, enslavement, deportation, and other inhumane acts committed against any civilian population, before or during the war, or persecutions on political, racial or religious ground.‖ In response to the defendants‘ assertion that they had only been following orders, the Nuremberg judges explained in part that these were familiar crimes within domestic jurisdictions and that thus the accused must have known, when they committed their acts, that they would be considered criminal.

In terms of a philosophy of law, it might be said that these criminals violated ―natural law.‖ The oldest and one of the most significant schools of jurisprudence is the natural law school. Those who adhere to the natural law school of thought believe that government and the legal system should reflect universal moral and ethical principles that are inherent in human nature. Because natural law is universal, it takes on a higher order than positive, or conventional, law. The natural law tradition presupposes that the legitimacy of conventional, or positive, law derives from natural law. Whenever it conflicts with natural law, conventional law loses its legitimacy. For example, a precept of natural law may be that murder is wrong, which is a value reflected by specific laws prohibiting murder. If a specific, written law requires murder, it conflicts with the natural law precept, in which case individuals should disobey the written law and obey the natural law.

5.

Spotlight on AOL—Common Law. AOL, LLC, mistakenly made public the personal information of 650,000 of its members. The members filed a suit, alleging violations of California law. AOL asked the court to dismiss the suit on the basis of a ―forum-selection‖ clause in its member agreement that designates Virginia courts as the place where member disputes will be tried.

Under a decision of the United States Supreme Court, a forum-selection clause is unenforceable ―if enforcement would contravene a strong public policy of the forum in which suit is brought.‖ California has declared in other cases that the AOL clause contravenes a strong public policy. If the court applies the doctrine of stare decisis, will it dismiss the suit? Explain. [Doe 1 v. AOL, LLC, 552 F.3d 1077 (9th Cir. 2009)] (See The Common Law.) Solution

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Solution Manual For: Chapter 01: Law and Legal Reasoning

The doctrine of stare decisis is the process of deciding cases with reference to former decisions, or precedents. Under this doctrine, judges are obligated to follow the precedents established within their jurisdiction.

In this problem, the enforceability of a forum selection clause is at issue. There are two precedents mentioned in the facts that the court can apply. The United States Supreme Court has held that a forum selection clause is unenforceable ―if enforcement would contravene a strong public policy of the forum in which suit is brought.‖ And California has declared in other cases that the AOL clause contravenes a strong public policy. If the court applies the doctrine of stare decisis, it will allow the suit to move forward.

In the actual case on which this problem is based, the court determined that the clause is not enforceable under those precedents.

6.

Business Case Problem with Sample Answer— Reading Citations. Assume that you want to read the entire court opinion in the case of Friends of Buckingham v. State Air Pollution Control Board, 947 F.3d 68 (4th Cir. 2020).

Refer to the appendix to this chapter, and then explain specifically where you would find the court‘s opinion. (See Finding Case Law.) —For a sample answer to Problem 1–6, go to Appendix E. Solution The court‘s opinion in the case Friends of Buckingham v. State Air Pollution Control Board can be found in volume 947 of the Federal Reporter, third series, on page 68. The Federal Reporter contains the decisions of all the United States Courts of Appeals, including, as is the case here, the Fourth Circuit Court of Appeals. Also, this case was decided (though not necessarily filed) in 2020.

7.

A Question of Ethics—The Doctrine of Precedent. Sandra White operated a travel agency. To obtain lower airline fares for her nonmilitary clients, she booked military-rate travel by forwarding fake military identification cards to the airlines. The government charged White with identity theft, which requires the ―use‖ of another‘s identification. The trial court had two cases that represented precedents.

In the first case, David Miller obtained a loan to buy land by representing that certain investors had approved the loan when, in fact, they had not. Miller‘s conviction for identity theft was overturned because he had merely said that the investors had done something when they had not. According to the court, this was not the ―use‖ of another‘s identification.

In the second case, Kathy Medlock, an ambulance service operator, had transported patients for whom there was no medical necessity to do so. To obtain payment, Medlock had forged a physician‘s signature. The court concluded that this was ―use‖ of another person‘s identity. [United States v. White, 846 F.3d 170 (6th Cir. 2017)] (See Sources of American Law.) 1. Which precedent—the Miller case or the Medlock case—is similar to White‘s situation, and why?

Solution In this problem, White operated a travel agency. To obtain low fares for her clients, she submitted fake military identification cards to the airlines. She was charged with the crime of

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Solution Manual For: Chapter 01: Law and Legal Reasoning

identity theft, which requires the ―use‖ of another‘s identification. In a previous case, David Miller, to obtain a loan, represented that certain investors approved of the loan when they did not. Miller‘s conviction for identity theft was overturned on the ground that he had not ―used‖ the investors‘ identities—he had only said that they had done something when they had not.

In a second case, Kathy Medlock, the operator of an ambulance service, obtained payment for transporting patients for whom there was no medical necessity to do so by forging a physician‘s signature. White‘s actions most closely resemble Medlock‘s forgery. White not only told the airlines that her clients were members of the military—she created false identification cards and sent them to the airlines.

In all of these cases, the defendants lied about their actions. Whether or not their conduct fell within the meaning of a word within a statute, or matched the actions of a perpetrator in another case, none of these parties can claim to have acted ethically. Honesty is a part of ethical behavior in any set of circumstances, and none these defendants were truthful about their actions.

In the actual case on which this problem is based, the court concluded that White‘s actions were most similar to Medlock‘s. White was convicted of identity theft. On appeal, the U.S. Court of Appeals for the Sixth Circuit affirmed the conviction.

1.

In the two cases cited by the court, were there any ethical differences in the actions of the parties? Explain your answer.

Solution No, in the two cases cited by the White court—and in the White case—there were no ethical differences in the actions of the parties.

Almost any definition of ethics, and any set of ethical standards, includes honesty as a component. In the White case, Sandra White lied to the airlines that her clients were members of the military, and created false identification cards to obtain cheaper fares. In the first case cited by the White court, David Miller, to obtain a loan, represented that certain investors approved of the loan when they did not. In the second case cited by the White court, Kathy Medlock, the operator of an ambulance service, obtained payment for transporting patients for whom there was no medical necessity to do so by forging a physician‘s signature.

In all of these cases, the defendants lied. Whether or not their conduct fell within the meaning of a word within a statute, or matched the unlawful actions of each other, none of these parties can claim to have acted ethically. Honesty is a part of ethical behavior in any set of circumstances, and none these defendants were truthful.

Critical Thinking and Writing Assignments 1.

Business Law Writing. John‘s company is involved in a lawsuit with a customer, Beth. John argues that for fifty years higher courts in that state have decided cases involving circumstances similar to his case in a way that indicates he can expect a ruling in his company‘s favor. Write at least one paragraph discussing whether this is a valid argument. Write another paragraph discussing whether the judge in this case must rule as those other judges did, and why. (See The Common Law.) Solution

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Solution Manual For: Chapter 01: Law and Legal Reasoning

John‘s argument is valid. Under the doctrine of stare decisis, judges are generally bound to follow the precedents set in their jurisdictions by the judges who have decided similar cases. A judge does not always have to rule as other judges have, however. A judge can depart from precedent.

One argument that a party might offer to counter an assertion of precedent is that the times have changed—the social, economic, political, or other circumstances have changed—and thus it is time to change the law.

2.

Time-Limited Group Assignment—Court Opinions. Go to the section entitled Reading and Understanding Case Law in the appendix at the end of this chapter, and read through the subsection entitled ―Decisions and Opinions.‖ 1. One group will explain the difference between a concurring opinion and a majority opinion.

Solution A majority opinion is a written opinion outlining the views of the majority of the judges or justices deciding a particular case. A concurring opinion is a written opinion by a judge or justice who agrees with the conclusion reached by the majority of the court but not necessarily with the legal reasoning that led the conclusion.

2.

Another group will outline the difference between a concurring opinion and a dissenting opinion.

Solution A concurring opinion will voice alternative or additional reasons as to why the conclusion is warranted or clarify certain legal points concerning the issue. A dissenting opinion is a written opinion in which judges or justices who do not agree with the conclusion reached by the majority of the court expound their views on the case.

The third group will explain why judges and justices write concurring and dissenting opinions, given that these opinions will not affect the outcome of the case at hand, which has already been decided by majority vote.

Solution Obviously, a concurring or dissenting opinion will not affect the case involved—because it has already been decided by majority vote. Nevertheless, such opinions often are used by another court later to support its position on a similar issue.

Appendix Exhibit 1.

For a federal district court to hear a case, the ―amount in controversy‖ must be at least $75,000.

Jones paid $5,000 for the motor and $304 in freight charges. What other losses or injuries might Jones claim in order to cross the ―amount in controversy‖ threshold? Explain.

Solution The amount in controversy in a dispute is measured by the value of the object of the litigation.

This is not necessarily the amount of money sought or the award obtained through a judgment— it is the value of the consequences that may result from the litigation. It should be considered from the perspective of the plaintiff, with a focus on the economic value of the rights the plaintiff seeks to protect.

In the Adelman’s case, Jones could have sought the price of the nonconforming goods, the freight charges, and other costs directly related to the alleged breach of contract—lost profits

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Solution and Answer Guide: Miller, The Legal Environment Today 10e, 9780357635582; Chapter 02: Courts and Alternative Dispute Resolution

attributable to the time that the truck was out of operation due to the defective motor, for example.

In the facts of the actual case, Jones asked for damages for emotional distress, punitive damages, and attorney fees, based on a tort claim. The appellate court was ―convinced‖ that ―Jones‘s alleged monetary damages would result in an amount in controversy of $138,171, well above the $75,000 requirement.‖ And ―there is no evidence that Jones‘s damages claims were made in bad faith,‖ which is clearly an important factor.

Solution and Answer Guide Miller, The Legal Environment Today 10e, 9780357635582; Chapter 02: Courts and Alternative Dispute Resolution

Table of Contents Critical Thinking Questions in Features .................................................................................................................. 9 Adapting the Law to the Online Environment ........................................................................................... 9 Critical Thinking Questions in Cases ..................................................................................................................... 10 Case 2.1 ................................................................................................................................................... 10 Case 2.2 ................................................................................................................................................... 10 Case 2.3 ................................................................................................................................................... 11 Chapter Review ............................................................................................................................................................. 11 Practice and Review ................................................................................................................................ 11 Practice and Review: Debate This ........................................................................................................... 12 Issue Spotters .......................................................................................................................................... 13 Business Scenarios and Case Problems ................................................................................................... 13 Critical Thinking and Writing Assignments .............................................................................................. 19

Critical Thinking Questions in Features Adapting the Law to the Online Environment 2.

In our connected world, is there any way a defendant could avoid service of process via social media?

Solution Yes, there is one way. That defendant could have to have no social media accounts whatsoever.

Increasingly, though, fewer and fewer individuals are not connected to others via social media.

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Solution and Answer Guide: Miller, The Legal Environment Today 10e, 9780357635582; Chapter 02: Courts and Alternative Dispute Resolution

Critical Thinking Questions in Cases Case 2.1 1.

Suppose that Gucci had not presented evidence that Huoqing made one actual sale through his website to a resident of the court‘s district (the private investigator). Would the court still have found that it had personal jurisdiction over Huoqing? Why or why not?

Solution The single sale to a resident of the district, Gucci‘s private investigator, helped the plaintiff establish that the defendant‘s website was interactive and that the defendant used the website to sell goods to residents in the court‘s district. It is possible that without proof of such a sale, the court would not have found that it had personal jurisdiction over the foreign defendant. The reason is that courts cannot exercise jurisdiction over foreign defendants unless they can show the defendants had minimum contacts with the forum, such as by selling goods within the forum.

Case 2.2 2.

Should an appellate court‘s review of the amount of damages awarded at trial be subject to the principle that limits appellate review of other evidence? Why or why not?

Solution Yes, an appellate court‘s review of the amount of damages awarded at trial should be—and is— subject to the same rule that limits the court‘s review of other evidence.

An appellate court determines whether the factual findings of a trial court are supported by competent evidence. Only if the findings of fact are not supported by competent evidence in the record will there will be a reversal.

This principle applies to an assessment of damages. Unless it clearly appears that the amount awarded resulted from partiality, caprice, prejudice, corruption, or some other improper influence, an appellate court should not interfere with it. In other words, as long as there is a reasonable relationship between the amount of an award and its proof, it is not the function of a court to substitute its judgment for that of a fact-finder.

In the Oxford case, Christophe and Frenchie‘s provided documentation in support of their counterclaim at the trial that, in the view of the appellate court, supported the fact-finder‘s determination of the amount awarded. Of course, constructive eviction caused by the sewage and water erupting from the pipe, and the landlord‘s failure to remedy the problem, was the legal basis for the award.

3.

A judge or a jury can decide a question of fact, but only a judge can rule on a question of law.

Why? Solution A question of fact is decided by a trier of fact. In a jury trial, this is the jury. In a nonjury trial, this is the judge. A ruling on a question of law is made only by a judge, not a jury, which generally consists of laypersons.

A question of fact concerns what really happened with respect to a dispute being tried—such as, in the Oxford case, whether a certain act violated a contract. A question of law concerns the

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Solution and Answer Guide: Miller, The Legal Environment Today 10e, 9780357635582; Chapter 02: Courts and Alternative Dispute Resolution

application or interpretation of the law—such as, again in the Oxford case, whether an act that violated a contract also violated the law.

One of the reasons for the distinction between those who can decide questions of fact and those who can decide questions of law is that judges have special training and expertise to make decisions on questions of law that the typical lay member of a jury lacks.

Case 2.3 4.

Should the cost of corrective discovery efforts be imposed on an uncooperative party if those efforts turn up nothing of real value to the case? Explain.

Solution Yes, the cost of corrective discovery efforts should be imposed on an uncooperative party even if those efforts turn up nothing of real value to the case. A party‘s uncooperative behavior can make it reasonable to undertake expensive corrective discovery efforts. Those costs should be imposed on the uncooperative party to deter others from destroying, hiding, or stubbornly refusing to reveal materials that are required to be retained and disclosed. There is no way to know beforehand whether such tactics are actually concealing relevant information. But a persistent refusal to comply with a discovery request provides a sufficient ground to suspect that there is value in the hidden evidence.

5.

Should it be inferred from a business‘s failure to keep backup copies of its database that the business must therefore have destroyed the data? Discuss.

Solution No, a business‘s failure to keep backup copies of its database does not necessarily indicate that the business destroyed the data. There are other, less culpable reasons that backup copies may not be available. For example, they may have been inadvertently destroyed or lost. Or they may not have been created in the first place. Such a failure does not equate with the willful misconduct that occurred in the Klipsch case. There, it could be reasonably inferred from ePRO‘s actions that the missing documents and data were relevant and that their absence harmed Klipsch.

Chapter Review Practice and Review Stan Garner resides in Illinois and promotes boxing matches for SuperSports, Inc., an Illinois corporation. Garner created the promotional concept of the ―Ages‖ fights—a series of three boxing matches pitting an older fighter (George Foreman) against a younger fighter, such as John Ruiz or Riddick Bowe. The concept included titles for each of the three fights (―Challenge of the Ages,‖ ―Battle of the Ages,‖ and ―Fight of the Ages‖), as well as promotional epithets to characterize the two fighters (―the Foreman Factor‖).

Garner contacted George Foreman and his manager, who both reside in Texas, to sell the idea, and they arranged a meeting at Caesar‘s Palace in Las Vegas, Nevada. At some point in the negotiations, Foreman‘s manager signed a nondisclosure agreement prohibiting him from disclosing Garner‘s promotional concepts unless they signed a contract. Nevertheless, after negotiations between Garner and Foreman fell through, Foreman used Garner‘s ―Battle of the Ages‖ concept to promote a subsequent fight. Garner filed a lawsuit against Foreman and his

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Solution and Answer Guide: Miller, The Legal Environment Today 10e, 9780357635582; Chapter 02: Courts and Alternative Dispute Resolution

manager in a federal district court in Illinois, alleging breach of contract. Using the information presented in the chapter, answer the following questions.

6.

On what basis might the federal district court in Illinois exercise jurisdiction in this case?

Solution The federal district court can exercise jurisdiction in this case because the case involves diversity of citizenship. Diversity jurisdiction requires that the plaintiff and defendant be from different states and that the dollar amount of the controversy exceed $75,000. Here, Garner resides in Illinois, and Foreman and his manager live in Texas. Because the dispute involved the promotion of a series of boxing matches with George Foreman, the amount in controversy likely exceeded the required threshold amount.

7.

Does the federal district court have original or appellate jurisdiction?

Solution Original jurisdiction, because the case was initiated in that court and that is where the trial will take place. Courts having original jurisdiction are courts of the first instance, or trial courts—that is courts in which lawsuits begin, trials take place, and evidence is presented. In the federal court system, the district courts are the trial courts, so the federal district court has original jurisdiction.

8.

Suppose that Garner had filed his action in an Illinois state court. Could an Illinois state court have exercised personal jurisdiction over Foreman or his manager? Why or why not?

Solution No, because the defendants lacked minimum contacts with the state of Illinois. Because the defendants were located out of the state, the court would have to determine whether they had sufficient contacts with the state for the Illinois to exercise jurisdiction based on a long arm statute. Here, the defendants never came to Illinois, and the contract that they are alleged to have breached was not formed in Illinois. Thus, it is unlikely that an Illinois state court would find that sufficient minimum contacts existed to exercise jurisdiction.

9.

What if Garner had filed his action in a Nevada state court? Would that court have had personal jurisdiction over Foreman or his manager? Explain.

Solution Yes, because the defendants met with Garner and formed a contract in the state of Nevada. A state can exercise jurisdiction over out-of-state defendants under a long arm statute if the defendants had sufficient contacts with the state. Here, the parties met and negotiated their contract in Nevada, and a court would likely hold that these activities were sufficient to justify a Nevada court‘s exercising personal jurisdiction.

Practice and Review: Debate This 10. In this age of the Internet, when people communicate via e-mail, tweets, social media, and Skype, is the concept of jurisdiction losing its meaning?

Solution Many believe that yes, the idea of determining jurisdiction based on individuals‘ and companies‘ physical locations no longer has much meaning. Increasingly, contracts are formed via online

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Solution and Answer Guide: Miller, The Legal Environment Today 10e, 9780357635582; Chapter 02: Courts and Alternative Dispute Resolution

communications. Does it matter where one of the parties has a physical presence? Does it matter where the e-mail server or webpage server is located? Probably not.

In contrast, in one sense, jurisdiction still has to be decided when conflicts arise. Slowly, but ever so surely, courts are developing rules to determine where jurisdiction lies when one or both parties used online systems to sell or buy goods or services. In the final analysis, a specific court in a specific physical location has to try each case.

Issue Spotters 11. At the trial, after Sue calls her witnesses, offers her evidence, and otherwise presents her side of the case, Tom has at least two choices between courses of actions. Tom can call his first witness.

What else might he do?

Solution Tom could file a motion for a directed verdict. This motion asks the judge to direct a verdict for Tom on the ground that Sue presented no evidence that would justify granting Jan relief. The judge grants the motion if there is insufficient evidence to raise an issue of fact.

12. Lexi contracts with Theo to deliver a quantity of computers to Lexi‘s Computer Store. They disagree over the amount, the delivery date, the price, and the quality. Lexi files a suit against Theo in a state court. Their state requires that their dispute be submitted to mediation or nonbinding arbitration. If the dispute is not resolved, or if either party disagrees with the decision of the mediator or arbitrator, will a court hear the case? Explain.

Solution Yes. Submission of the dispute to mediation or nonbinding arbitration is mandatory, but compliance with the decision of the mediator or arbitrator is voluntary.

Business Scenarios and Case Problems 13. Standing to Sue. Jack and Maggie Turton bought a house in Jefferson County, Idaho, located directly across the street from a gravel pit. A few years later, the county converted the pit to a landfill. The landfill accepted many kinds of trash that cause harm to the environment, including major appliances, animal carcasses, containers with hazardous content warnings, leaking car batteries, and waste oil. The Turtons complained to the county, but the county did nothing. The Turtons then filed a lawsuit against the county alleging violations of federal environmental laws pertaining to groundwater contamination and other pollution. Do the Turtons have standing to sue? Why or why not? (See Basic Judicial Requirements.)

Solution This problem concerns standing to sue. As you read in the chapter, to have standing to sue, a party must have a legally protected, tangible interest at stake. Parties must show that they have been injured, or are likely to be injured, by the actions of the parties that they seek to sue. In this problem, the issue is whether the Turtons had been injured, or were likely to be injured, by the county‘s landfill operations. Clearly, one could argue that the injuries that the Turtons complained of directly resulted from the county‘s violations of environmental laws while operating the landfill.

The Turtons lived directly across from the landfill, and they were experiencing the specific types of harms (fires, scavenger problems, groundwater contamination) that those laws were enacted to address. Thus, the Turtons would have standing to bring their suit.

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14. Discovery. Advance Technology Consultants, Inc. (ATC), contracted with RoadTrac, LLC, to provide software and client software systems for products using global positioning satellite (GPS) technology being developed by RoadTrac. RoadTrac agreed to provide ATC with hardware with which ATC‘s software would interface. Problems soon arose, however, and RoadTrac filed a lawsuit against ATC alleging breach of contract. During discovery, RoadTrac requested ATC‘s customer lists and marketing procedures. ATC objected to providing this information because RoadTrac and ATC had become competitors in the GPS industry. Should a party to a lawsuit have to hand over its confidential business secrets as part of a discovery request? Why or why not? What limitations might a court consider imposing before requiring ATC to produce this material? (See Following a State Court Case.)

Solution Under the work-product rule, attorneys are allowed to protect information that they have gathered as a result of their own skill and diligence. For example, an attorney for a party involved in an auto accident can go out to the scene of the accident and observe the fact that there is a stop sign missing without being under any obligation to divulge such information to his opponent in the lawsuit. Similarly, attorneys who discover recently decided case decisions supporting their theories are under no obligation to share these discoveries with opposing attorneys. If attorneys had to share everything, they would be less inclined to expend efforts on behalf of their clients because, in essence, they would be working for both sides at once.

15. Arbitration. Horton Automatics and the Industrial Division of the Communications Workers of America—the union that represented Horton‘s workers—negotiated a collective bargaining agreement. If an employee‘s discharge for a workplace-rule violation was submitted to arbitration, the agreement limited the arbitrator to determining whether the rule was reasonable and whether the employee had violated it. When Horton discharged its employee Ruben de la Garza, the union appealed to arbitration. The arbitrator found that de la Garza had violated a reasonable safety rule, but ―was not totally convinced‖ that Horton should have treated the violation more seriously than other rule violations. The arbitrator ordered de la Garza reinstated to his job. Can a court set aside this order from the arbitrator? Explain. [Horton Automatics v. The Industrial Division of the Communications Workers of America, AFL-CIO, 506 Fed. Appx. 253 (5th Cir. 2013)] (See Alternative Dispute Resolution.)

Solution Yes, a court can set aside this order. The parties to an arbitration proceeding can appeal an arbitrator‘s decision, but court‘s review of the decision may be more restricted in scope than an appellate court‘s review of a trial court‘s decision. In fact, the arbitrator‘s decision is usually the final word on a matter. A court will set aside an award if the arbitrator exceeded any powers—that is, arbitrated issues that the parties did not agree to submit to arbitration.

In this problem, Horton discharged its employee de la Garza, whose union appealed the discharge to arbitration. Under the parties‘ arbitration agreement, the arbitrator was limited to determining whether the rule was reasonable and whether the employee violated it. The arbitrator found that de la Garza had violated a reasonable safety rule, but ―was not totally convinced‖ that the employer should have treated the violation more seriously than other rule violations and ordered de la Garza reinstated. This order exceeded the arbitrator‘s authority under the parties‘ agreement. This was a ground for setting aside the order.

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In the actual case on which this problem is based, on the reasoning stated here, the U.S. Court of Appeals for the Fifth Circuit reached the same conclusion.

16. Discovery. Jessica Lester died from injuries suffered in an auto accident caused by the driver of a truck owned by Allied Concrete Co. Jessica‘s widower, Isaiah, filed a suit against Allied for damages. The defendant requested copies of all of Isaiah‘s Facebook photos and other postings.

Before responding, Isaiah ―cleaned up‖ his Facebook page. Allied suspected that some of the items had been deleted, including a photo of Isaiah holding a beer can while wearing a T-shirt that declared ―I [heart] hotmoms.‖ Can this material be recovered? If so, how? What effect might Isaiah‘s ―misconduct‖ have on the result in this case? Discuss. [Allied Concrete Co. v. Lester, 736 S.E.2d 699 (Va. 2013)] (See Following a State Court Case.)

Solution Yes, the items that were deleted from a Facebook page can be recovered. Normally, a party must hire an expert to recover material in an electronic format, and this can be time consuming and expensive.

Electronic evidence, or e-evidence, consists of all computer-generated or electronically recorded information, such as posts on Facebook and other social media sites. The effect that e-evidence can have in a case depends on its relevance and what it reveals. In the facts presented in this problem, Isaiah should be sanctioned—he should be required to cover Allied‘s cost to hire the recovery expert and attorney‘s fees to confront the misconduct. In a jury trial, the court might also instruct the jury to presume that any missing items are harmful to Isaiah‘s case. If all of the material is retrieved and presented at the trial, any prejudice to Allied‘s case might thereby be mitigated. If not, of course, the court might go so far as to order a new trial.

In the actual case on which this problem is based, Allied hired an expert, who determined that Isaiah had in fact removed some photos and other items from his Facebook page. After the expert testified about the missing material, Isaiah provided Allied with all of it, including the photos that he had deleted. Allied sought a retrial, but the court instead reduced the amount of Isaiah‘s damages by the amount that it cost Allied to address his ―misconduct.‖ 17. Electronic Filing. Betsy Faden worked for the U.S. Department of Veterans Affairs. Faden was removed from her position in April 2012 and was given until May 29 to appeal the removal decision. She submitted an appeal through the Merit Systems Protection Board‘s e-filing system seven days after the deadline. Ordered to show good cause for the delay, Faden testified that she had attempted to e-file the appeal while the board‘s system was down. The board acknowledged that its system had not been functioning on May 27, 28, and 29. Was Faden sufficiently diligent in ensuring a timely filing? Discuss. [Faden v. Merit Systems Protection Board, 553 Fed. Appx. 991 (Fed. Cir. 2014)] (See Courts Online.)

Solution No, Faden was not sufficiently diligent in ensuring a timely filing. Diligence in this context requires carefulness and persistence. Excusable delay might be evidenced by proof of circumstances beyond a party‘s control that prevents a timely filing.

From the facts as stated, it appears that Faden attempted to file her appeal only at the end of the relevant period when the Board‘s e-filing system was down. But there is no indication that anything prevented her from e-filing at a time when the Board‘s system was not down, or from

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mailing or faxing her appeal at any time, before the deadline. Thus, Faden appears to have been neither timely nor diligent in filing her appeal before the deadline.

In the actual case on which this problem is based, the Merit Systems Protection Board dismissed Faden‘s appeal. The Board found that she was not reasonably diligent in ensuring timely filing. On her further appeal, the U.S. Court of Appeals for the Federal Circuit affirmed.

18. Business Case Problem with Sample Answer—Corporate Contacts. LG Electronics, Inc., a South Korean company, and nineteen other foreign companies participated in the global market for cathode ray tube (CRT) products. CRTs were components in consumer goods, including television sets, and sold for many years in high volume in the United States, including the state of Washington. The state filed a suit against LG and the others, alleging a conspiracy to raise prices and set production levels in the market for CRTs in violation of a state consumer protection statute. The defendants filed a motion to dismiss the suit for lack of personal jurisdiction. Should this motion be granted? Explain your answer. [State of Washington v. LG Electronics, Inc., 185 Wash. App. 394, 341 P.3d 346 (2015)] (See Basic Judicial Requirements.)

—For a sample answer to Problem 2–6, go to Appendix E. Solution No, the defendants‘ motion to dismiss the suit for lack of personal jurisdiction should not be granted. A corporation normally is subject to jurisdiction in a state in which it is doing business. A court applies the minimum-contacts test to determine whether it can exercise jurisdiction over an out-of-state corporation. This requirement is met if the corporation sells its products within the state or places its goods in the ―stream of commerce‖ with the intent that the goods be sold in the state.

In this problem, the state of Washington filed a suit in a Washington state court against LG Electronics, Inc., and nineteen other foreign companies that participated in the global market for cathode ray tube (CRT) products. The state alleged a conspiracy to raise prices and set production levels in the market for CRTs in violation of a state consumer protection statute. The defendants filed a motion to dismiss the suit for lack of personal jurisdiction. These goods were sold for many years in high volume in the United States, including the state of Washington. In other words, the corporations purposefully established minimum contacts in the state of Washington. This is a sufficient basis for a Washington state court to assert personal jurisdiction over the defendants.

In the actual case on which this problem is based, the court dismissed the suit for lack of personal jurisdiction. On appeal, a state intermediate appellate court reversed on the reasoning stated above.

19. Appellate, or Reviewing, Courts. Angelica Westbrook was employed as a collector for Franklin Collection Service, Inc. During a collection call, Westbrook told a debtor that a $15 processing fee was an ―interest‖ charge. This violated company policy, and Westbrook was fired. She filed a claim for unemployment benefits, which the Mississippi Department of Employment Security (MDES) approved. Franklin objected. At an MDES hearing, a Franklin supervisor testified that she had heard Westbrook make the false statement, although she admitted that there had been no similar incidents with Westbrook. Westbrook denied making the statement but added that, if she had said it, she did not remember it. The agency found that Franklin‘s reason for terminating Westbrook did not amount to the misconduct required to disqualify her for benefits and upheld the approval. Franklin appealed to a state intermediate appellate court. Is the court likely to uphold the agency‘s findings of fact? Explain. [Franklin Collection Service, Inc. v. Mississippi

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Department of Employment Security, 184 So.3d 330 (Miss.App. 2016)] (See The State and Federal Court Systems.)

Solution Yes, the state intermediate appellate court is likely to uphold the agency‘s findings of fact.

Appellate courts normally defer to lower tribunals‘ findings on questions of fact because those forums‘ decision makers are in a better position to evaluate testimony. A trial court judge or jury, for example, can directly observe witnesses‘ gestures, demeanor, and other nonverbal conduct during a trial. A judge or justice sitting on an appellate court cannot.

In this problem, Angelica Westbrook, an employee of Franklin Collection Service, Inc., allegedly made a statement during a call to a debtor that violated company policy. Westbrook was fired, and applied for unemployment benefits. Benefits were approved, but Franklin objected. Witnesses at an administrative hearing on the dispute included a Franklin supervisor who testified that she heard Westbrook make the false statement, although she admitted that Westbrook had not been involved in any similar incidents. Westbrook denied making the statement, but added that if she had said it, she did not remember it. The agency found that Franklin‘s reason for terminating Westbrook did not amount to the misconduct required to disqualify her for benefits and upheld the approval. Franklin appealed. Under the standard for appellate review of findings of fact, the appellate court will likely affirm the agency‘s findings.

In the actual case on which this problem is based, the state intermediate appellate court to which Franklin appealed the MDES‘s approval of Johnson‘s claim upheld the agency‘s decision.

20. Service of Process. Bentley Bay Retail, LLC, filed a suit in a Florida state court against Soho Bay Restaurant LLC, and its corporate officers, Luiz and Karine Queiroz, in their individual capacities.

The charge against the Queirozes was for a breach of their personal guaranty for Soho Bay‘s debt to Bentley Bay. The plaintiff filed notices with the court to depose the Queirozes, who reside in Brazil. The Queirozes argued that they could not be deposed in Brazil. The court ordered them to appear in Florida to provide depositions in their corporate capacity. Witnesses appearing in court outside the jurisdiction of their residence are immune from service of process while in court. On the Queirozes‘ appearance in Florida, can they be served with process in their individual capacities? Explain. [Queiroz v. Bentley Bay Retail, LLC, 43 Fla. L. Weekly D85, 27 So.3d 1108 (3 Dist. 2018)] (See The State and Federal Court Systems.)

Solution No, on the Queriozes‘ appearance in Florida to provide depositions in their corporate capacities, they cannot be served with process in their individual capacities.

As stated in the problem, witnesses appearing in court outside the jurisdiction of their residence are immune from service of process while in court. The Queirozes reside in Brazil. Bentley Bay filed a suit in a Florida state court against the Queriozes‘ company, Soho Bay Restaurant LLC, and against the Queriozes, as its corporate officers, in their individual capacities. The charge was for breach of a personal guaranty. Bentley Bay sought to depose the Queirozes. The court ordered them to appear in Florida to be deposed in their corporate capacity. These circumstances would not support serving them with process in their individual capacities.

In the actual case on which this problem is based, Bentley Bay served the Queriozes in Florida with a copy of the summons and complaint. They moved to quash service, arguing that they were

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immune from service because they were appearing in the jurisdiction in their corporate capacities.

The court denied the motion. A state intermediate appellate court reversed, on the principle stated above.

21. A Question of Ethics—The IDDR Approach and Complaints. John Verble worked as a financial advisor for Morgan Stanley Smith Barney, LLC. After nearly seven years, Verble was fired. He filed a suit in a federal district court against his ex-employer. In his complaint, Verble alleged that he had learned of illegal activity by Morgan Stanley and its clients. He claimed that he had reported the activity to the Federal Bureau of Investigation, and that he was fired in retaliation. His complaint contained no additional facts. [Verble v. Morgan Stanley Smith Barney LLC, 676 Fed. Appx. 421 (6th Cir. 2017)] (See Following a State Court Case.)

1. To avoid a dismissal of his suit, does Verble have a legal obligation to support his claims with more facts? Explain.

2. Does Verble owe an ethical duty to back up his claims with more facts? Use the IDDR approach to express your answer.

Solution 1. A suit begins when a plaintiff files a complaint in a court with appropriate jurisdiction. A complaint must include a statement of facts necessary to show that the plaintiff is entitled to a remedy.

In this problem, John Verble, a financial advisor for Morgan Stanley Smith Barney, LLC for nearly seven years, was terminated. He filed a complaint in a federal district court against Morgan Stanley. Verble alleged that he learned of illegal activity by his employer and its clients. He claimed that he reported this to the Federal Bureau of Investigation and was fired in retaliation. His complaint contained no additional facts. From a legal standpoint, Verble clearly needed to provide more facts to support his conclusory allegations. His complaint should have contained facts that showed he was engaged in a protected activity, that he acted to stop a specific illegal activity by Morgan Stanley and its clients, and that he was fired in retaliation. A claim is plausible when a plaintiff pleads facts that allow a court to draw a reasonable inference that the defendant is liable for the alleged misconduct. Here, without additional facts, it is within the discretion of the court to dismiss Verble‘s complaint.

2. Yes, Verble has an ethical duty to supply additional facts to back up his claims. Not doing so fails to meet even the minimal ethical standard in this case.

The steps in the IDDR approach begin with an Inquiry that identifies the ethical issue, the stakeholders, and relevant ethical theories. Here, the issue is whether Verble has a duty to support the claims in his complaint with more facts. Besides Verble, the stakeholders include the court and other litigants. The applicable ethical concepts include the categorical imperative—that individuals should evaluate their actions in light of the consequences that would follow if everyone in society acted the same way.

The second step discusses possible actions. Factors include the strengths and weaknesses of each, considering the consequences and the impacts on stakeholders. Verble might choose to proceed without supporting his claims, or he could decide to go ahead only with added facts.

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A party has a legal duty to allege sufficient facts in a complaint to state a plausible claim for relief. This is an ethical duty, at a minimum. Thus, choosing to proceed without sufficient factual support presents almost no advantage. In the face of an unsupported complaint, for example, an opponent who might otherwise be willing to settle would have little motivation to do so. A failure to meet the legal standard undercuts credibility, jeopardizes a case, wastes judicial resources, and affects the ability of other litigants to timely present their cases. If everyone chose to present their complaints in the same way, the courts would be clogged with insufficient complaints, and even legitimate claims would not be redressed.

The IDDR approach‘s third step is to make a decision and provide reasons for it. In all cases, it seems that the best decision would be to support a claim with sufficient facts. This would comport with the legal duty, meet the minimal ethical standard, and avoid the negative effects of doing otherwise.

The last step is to review the chosen action to determine its success or failure in terms of the issue and the stakeholders. Plaintiffs have a legal and ethical responsibility to properly plead their cases. Litigation requires the parties to invest time and money, and a court to expend its own limited time and money. Vague, unsupported allegations can waste everyone‘s resources. Therefore, choosing to present sufficient facts to state a plausible claim is clearly the best ethical act.

Critical Thinking and Writing Assignments 22. Time-Limited Group Assignment—Access to Courts. Assume that a statute in your state requires that all civil lawsuits involving damages of less than $50,000 be arbitrated. Such a case can be tried in court only if a party is dissatisfied with the arbitrator‘s decision. The statute also provides that if a trial does not result in an improvement of more than 10 percent in the position of the party who demanded the trial, that party must pay the entire cost of the arbitration proceeding. (See Alternative Dispute Resolution.)

1. One group will argue that the state statute violates litigants‘ rights of access to the courts and trial by jury.

2. Another group will argue that the statute does not violate litigants‘ right of access to the courts.

3. A third group will evaluate how the determination on right of access would be changed if the statute was part of a pilot program that affected only a few judicial districts in the state.

Solution 1. The statute violates litigants‘ rights of access to the courts and to a jury trial because the imposition of arbitration costs on those who improve their positions by less than 10 percent on an appeal is an unreasonable burden. And the statute forces parties to arbitrate before they litigate—an added step in the process of dispute resolution. The limits on the rights of the parties to appeal the results of their arbitration to a court further impede their rights of access. The arbitration procedures mandated by the statute are not reasonably related to the legitimate governmental interest of attaining less costly resolutions of disputes.

2. The statute does not violate litigants‘ constitutional right of access to the courts because it provides the parties with an opportunity for a court trial in the event either party is dissatisfied with an arbitrator‘s decision. The burdens on a person‘s access to the courts are reasonable. The state judicial system can avoid the expense of a trial in many cases. And parties who cannot improve their positions by more than 10 percent on appeal are arguably

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3.

wasting everyone‘s time. The assessment of the costs of the arbitration on such parties may discourage appeals in some cases, which allows the courts to further avoid the expense of a trial. The arbitration procedures mandated by the statute are reasonably related to the legitimate governmental interest of attaining speedier and less costly resolution of disputes.

The determination on rights of access could be different if the statute was part of a pilot program and affected only a few judicial districts in the state because only parties who fell under the jurisdiction of those districts would be subject to the limits. Opponents might argue that the program violates the due process of the Fifth Amendment because it is not applied fairly throughout the state. Proponents might counter that parties who object to an arbitrator‘s decision have an opportunity to appeal it to a court. Opponents might argue that the program exceeds what the state legislature can impose because it does not reasonably relate to a legitimate governmental objective—it arbitrarily requires only litigants who reside in a few jurisdictions to submit to arbitration. Proponents might counter that this is aimed at the reduction of court costs—that the statute rationally relates to a legitimate governmental end. An equal protection challenge would most likely be subject to a similar rational basis test. Under these and other arguments, the reduction of court costs would be a difficult objective to successfully argue against.

Solution and Answer Guide Miller, The Legal Environment Today 10e, 9780357635582; Chapter 03: Ethics in Business

Table of Contents Critical Thinking Questions in Features ............................................................................................................... 20 Adapting the Law to the Online Environment ......................................................................................... 20 Managerial Strategy ................................................................................................................................ 21 Critical Thinking Questions in Cases ..................................................................................................................... 21 Case 3.1 ................................................................................................................................................... 21 Case 3.2 ................................................................................................................................................... 22 Chapter Review ............................................................................................................................................................. 23 Practice and Review ................................................................................................................................ 23 Practice and Review: Debate This ........................................................................................................... 24 Issue Spotters .......................................................................................................................................... 24 Business Scenarios and Case Problems ................................................................................................... 26 Critical Thinking and Writing Assignments .............................................................................................. 34

Critical Thinking Questions in Features Adapting the Law to the Online Environment 23. From an ethical point of view, is there any difference between calling subordinates during off hours for work-related questions and sending e-mails or text messages?

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Solution The basic ethical issue is whether employees should be compensated for time spent on workrelated electronic communications for which they are not paid. Under the FLSA, managers are normally not eligible for overtime pay. But what about employees who are, in fact, covered by the overtime rules of the FLSA? If an employee is required to check and respond to e-mails, texts, or other electronic communications, then should be entitled to overtime pay under FLSA. If the employee checks and responds to electronic communications voluntarily, however, it is not likely that the employee would be entitled to overtime pay.

Managerial Strategy 24. After a school shooting, Dick‘s Sporting Goods stopped selling certain firearms at its stores. What are the potential benefits and drawbacks of this form of corporate social responsibility?

Solution Anytime a company takes a stance on a political or social issue, it can assume that it will receive support from some customers and criticism from others. In this instance, given the fervor of the gun control debate in the United States today, Dick‘s certainly expected to lose customers who are passionate about the right to bear arms. In fact, the company experienced a 3.1 percent decline in sales for the fiscal year following its policy change. Afterwards, however, sales rose at a commensurate rate, showing that the public may have a short attention span even when it comes to the most highly-charged political issues.

25. Why might a state law require corporate managers to maximize company profits?

Solution Laws that require corporate managers and directors to focus on maximizing profits are designed to ensure accountability. Without these controls, the theory goes, managers would be tempted to use factors other than profitability in the decision-making process. These factors could be ethical, such as a sincere desire to protect the environment, or unethical, such as economic selfinterest. By forcing managers to make business judgments, rather than moral or personal ones, such laws provide a measure of stability for shareholders and stakeholders alike. Furthermore, if companies are less profitable and less efficient, not only will investors suffer, but employees and customers will also be worse off.

Critical Thinking Questions in Cases Case 3.1 26. Suppose that Case Western had tolerated Al-Dabagh‘s conduct and awarded him a diploma.

What impact might that have had on other students at the school? Why? Solution Al-Dabagh‘s expulsion for unprofessional, unethical behavior stood as an example for other students. If Case Western had tolerated Al-Dabagh‘s conduct and awarded him a diploma, it is likely that other students would have taken their cue from this result to engage in their own misconduct, and they would have expected their misbehavior to be accepted.

Just as the administration of a university sets the ethical tone of the school by its adoption and enforcement of an ethics policy, so does management‘s behavior set a firm‘s ethical tone. Top management demonstrates its commitment to ethical decision making by maintaining an ethical

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workplace. Discharging an employee for ethical reasons, for instance, acts as a deterrent to unethical behavior in the workplace.

A manager who is not committed to an ethical workplace is not likely to succeed in creating one.

For example, a manager who looks the other way when knowing about an employee‘s unethical behavior sets an example—one indicating that transgressions will be tolerated.

Case 3.2 27. What marketing tool did Watson gain by inflating its AWPs? Solution The marketing tool that Watson gained by inflating the AWPs of its drugs was ―the spread‖—the difference between the fabricated numbers and the prices that pharmacies actually paid.

Watson knew that Mississippi Medicaid would reimburse the pharmacies at rates based on Watson‘s published AWPs. The higher these numbers were, the more the pharmacies would be paid, regardless of the actual costs. Watson could use this fact to make the purchase of their products more profitably attractive to the pharmacies.

Of course, the higher the published AWPs were, the higher could be the prices that Watson charged the pharmacies. But Watson could negotiate ―discounts‖ with their customers to further convince the pharmacies they were making a ―profitable‖ deal.

28. Watson argued that AWP was a ―term of art‖ in the pharmaceutical industry that meant ―suggested price.‖ Suppose that the court had accepted this argument. What might have been the effect of this decision?

Solution If the court had accepted Watson‘s contention that AWP was a term of art in the pharmaceutical industry meaning merely suggested price,‖ there are a number of possible effects. Any of these results would have had negative reverberations throughout—and beyond—the industry.

The court‘s acceptance of the argument would have condoned Watson‘s pricing policy. This would likely have led to a judgment in the drug maker‘s favor in this case, which would have meant a forfeit by Mississippi Medicaid, the state, and the taxpayers of the amounts previously overpaid.

As a precedent, this would have allowed Watson to publish any number whatsoever as an AWP. This number could be as inflated as the market would bear, serving as the basis for prices charged to Watson‘s customers as well as for reimbursements by the state to those customers. And the numbers could be fabricated with no relation to actual prices or costs. The possibility of this sort of extraordinary fraud would not likely be lost on Watson‘s competitors, who could begin to engage in the same conduct. This deceit might maximize each company‘s profits, but it would be to the burden of the taxpayers and the public‘s trust.

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Chapter Review Practice and Review James Stilton is the chief executive officer (CEO) of RightLiving, Inc., a company that buys life insurance policies at a discount from terminally ill persons and sells the policies to investors.

RightLiving pays the terminally ill patients a percentage of the future death benefit (usually 65 percent) and then sells the policies to investors for 85 percent of the value of the future benefit. The patients receive the cash to use for medical and other expenses, and the investors are ―guaranteed‖ a positive return on their investment. The difference between the purchase and sale prices is Right Living‘s profit. Stilton is aware that some sick patients may obtain insurance policies through fraud (by not revealing their illness on the insurance application). An insurance company that discovers such fraud will cancel the policy and refuse to pay. Stilton believes that most of the policies he has purchased are legitimate, but he knows that some probably are not. Using the information presented in this chapter, answer the following questions.

29. Would a person who adheres to the principle of rights consider it ethical for Stilton not to disclose the potential risk of cancellation to investors? Why or why not?

Solution If one of the fundamental rights is the right to be treated fairly and to be able to invest one‘s money with full understanding of the risks, then it would be unethical for Stilton to sell these viaticals without full disclosure that some may be subject to cancellation.

30. Using Immanuel Kant‘s categorical imperative, are the actions of RightLiving ethical? Why or why not?

Solution The categorical imperative asks the decision maker to assess the results of the action as if everyone in a similar situation made the same decision. If all insurance companies participated in the viatical industry and did not disclose the risk of cancellation, then investors would become leery of investing in the products and the market would disappear. The people for whom the sale of these policies is necessary to sustain a respectable life as it ends would not be able to get the cash to help them die with dignity. This would make the world a worse place and therefore the actions are not ethical.

31. Under utilitarianism, are Stilton‘s actions ethical? Why or why not? If most of the policies are, in fact, legitimate, does this make a difference in your analysis?

Solution Utilitarianism asks the decision maker to perform a cost/benefit analysis of the alternatives.

Stilton should evaluate the risks or chances of an investor buying a void policy compared to the benefits gained from purchasing legitimate policies. The cost/benefit analysis also should include whether he sells individual policies to individual investors or whether he sells a share of a bundle of policies. If he does the former, the risks to the individual investor are greater than if the latter.

If the latter, the benefit of the legitimate policies may offset any loss from cancelled policies.

32. Using the IDDR approach, discuss the decision process Stilton should use in deciding whether to disclose the risk of fraudulent policies to potential investors.

Solution

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The steps in the IDDR approach begin with an Inquiry that identifies the ethical issue, the stakeholders, and relevant ethical theories. Here, then, Stilton must recognize the issue—whether to disclose the potential fraud by those whose policies he buys. He should identify the stakeholders, including his company‘s investors and employees, those insured by the policies, the insurance companies that are at risk of being defrauded, and the larger insurance market and investment communities. To fully weigh the consequences, Stilton should be familiar with the laws related to insurance, his personal ethical standards, and his company‘s policies.

The second step in the IDDR approach discusses possible actions. Factors include the strengths and weaknesses of each, considering the consequences and the impacts on stakeholders. As part of this step, Stilton should list the alternatives, and the likely results of each. This is also when Stilton should apply the mission and goals of his company.

The IDDR approach‘s third step is to make a Decision and provide reasons for it. At this point, using the analysis produced in the previous steps, Stilton must decide what to do and why.

The last step is to Review the chosen action to determine its success or failure in terms of the issue and the stakeholders.

Practice and Review: Debate This 33. Executives in large corporations are ultimately rewarded if their companies do well, particularly as evidenced by rising stock prices. Consequently, shouldn‘t we just let those who run corporations be able to decide what level of negative side effects is ―acceptable‖ or their companies‘ products?

Solution The first problem with this attitude is that executives and managers (and even directors) may be looking at only short-run profits. They therefore might ignore the long-run profitability to their company. If a drug that works well against a potential pandemic causes severe side effects in some people, in the short run, this same drug may save many lives and reduce human suffering. Thus profits could be great initially, with a consequent rise in the stock price. In the longer run, though, when the news gets around that some of those who took the drug suffered severe side effects, future sales of the drug might fall, thus reducing profits and causing the stock to price to drop.

One now has to ask the question about who is in the best situation to decide the optimum level of side effects of any drug or good or service sold. (It‘s impossible to create drugs with zero negative side effects.) Any government regulator will want to make sure that there are few, if any, people who suffer from negative side effects. After all, the government regulator will look bad if the press reports about those who reacted badly to a drug. Therefore, there is a bias within any government regulatory apparatus against any good or service that has bad side effects. More limits on drugs, though, that help millions just because few suffer side effects will cost those who don‘t obtain the drug—perhaps with their lives.

Issue Spotters 34. Acme Corporation decides to respond to what it sees as a moral obligation to correct for past discrimination by adjusting pay differences among its employees. Does this raise an ethical conflict between Acme and its employees? Between Acme and its shareholders? Explain your answers.

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Solution When a corporation decides to respond to what it sees as a moral obligation to correct for past discrimination by adjusting pay differences among its employees, an ethical conflict is raised between the firm and its employees and between the firm and its shareholders. This dilemma arises directly out of the effect such a decision has on the firm‘s profits. If satisfying this obligation increases profitability, then the dilemma is easily resolved in favor of ―doing the right thing.‖ 35. Delta Tools, Inc., markets a product that under some circumstances is capable of seriously injuring consumers. Does Delta have an ethical duty to remove this product from the market, even if the injuries result only from misuse? Why or why not?

Solution Maybe. On the one hand, it is not the company‘s ―fault‖ when a product is misused. Also, keeping the product on the market is not a violation of the law, and stopping sales would hurt profits. On the other hand, suspending sales could reduce suffering and could stop potential negative publicity if sales continued.

Business Scenarios and Case Problems 36. Business Ethics. Jason Trevor owns a commercial bakery in Blakely, Georgia, that produces a variety of goods sold in grocery stores. Trevor is required by law to perform internal tests on food produced at his plant to check for contamination. On three occasions, tests of food products containing peanut butter were positive for salmonella contamination. Trevor was not required to report the results to U.S. Food and Drug Administration officials, however, so he did not. Instead, Trevor instructed his employees to simply repeat the tests until the results were negative.

Meanwhile, the products that had originally tested positive for salmonella were eventually shipped out to retailers. Five people who ate Trevor‘s baked goods that year became seriously ill, and one person died from a salmonella infection. Even though Trevor‘s conduct was legal, was it unethical for him to sell goods that had once tested positive for salmonella? Why or why not?

(See Ethics and the Role of Business.)

Solution Of course, it was unethical to sell goods that their maker knew were defective and could cause harm. This is the most reasonable and likely conclusion under any set of standards, even if it were possible to eventually obtain a negative result with respect to a defect from testing that repeatedly yielded a positive result.

The decision maker must identify the parties involved (the bakery, its employees, and the general public) and collect the relevant facts to understand the problem. Ingesting food tainted with salmonella can cause serious illness and death. Because selling food contaminated with salmonella is a public health risk, the general public is a stakeholder in this problem. The owner of the bakery (Trevor) and its employees are also stakeholders, and although they are interested in making a profit, they also will suffer a loss if the bakery‘s conduct results contamination and customers stop buying the bakery‘s products. The bakery may not be legally required to report the initial test results to the Food and Drug Administration (FDA), but it is clearly unethical not to do anything to address the salmonella contamination found in food that will be sold to the public.

Instructing employees to retest the food until the results come out differently does not remedy the problem or avoid potentially fatal consequences. Liability can attach through tort and contract law principles to the sale of goods that the seller knows or should know are defective. Thus, the baker‘s action in this problem can lead to legal liability if someone is injured by salmonella.

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The bakery could report the initial results to the FDA, even though it is not required, and ask for the agency‘s advice on how to handle the salmonella contamination. The bakery should establish procedures for testing (and retesting) food and discover the source of the contamination. This will show employees that the company is concerned with doing the right thing. The bakery might also refuse to sell and voluntarily dispose of the tainted goods.

Clearly, the bakery‘s decision should not be to simply retest the food until the results are negative and ship it to retailers because this shows a lack of concern for the buyers and indirectly the company‘s other stakeholders The decision might be to report to the FDA, and follow its instructions for retesting or disposing of the food. Or it might be to voluntarily pull the tainted food off the shelves so as not to put public health at risk. In either situation, the bakery needs to decide how to avoid potential salmonella contamination in the future.

The decision makers need to document the reasons underlying their decision and course of action. If the decision was to report the results to the FDA and follow its advice on how to handle the contamination, the bakery could justify its actions by articulating that it is concerned with public safety. The same justification applies to a decision to destroy the tainted food. The bakery is justified in taking a course of action showing it is better to be safe (and take a monetary loss) than sorry (when a buyer ingests salmonella and dies). Either of these courses of action avoids potentially costly litigation that could result from injured persons suing the company over defective goods, avoids negative publicity and loss of goodwill from a salmonella outbreak. In addition, taking such preventive measures allows the bakery to avoid having the FDA investigate the salmonella problem and possibly issue regulations that would hamper its operation and profits.

Whether the bakery decided to report the results to the FDA or just destroy the contaminated food, it should evaluate the effectiveness of its decision and how to avoid potential salmonella contamination in the future. It should establish internal procedures for testing and retesting for salmonella, and should instruct employees on safe handling of food to avoid contamination.

37. Ethical Conduct. Internet giant Zoidle, a U.S. company, generated sales of £2.5 billion in the United Kingdom (UK) in 2013 (roughly $4 billion in U.S. dollars). The U.K. corporate tax rate is usually between 20 percent and 24 percent, but Zoidle paid only 3 percent (£6 million). At a press conference, company officials touted how the company took advantage of tax loopholes and sheltered profits to avoid paying the full corporate income tax. They justified their practices as ethical, declaring that it would be verging on illegal to tell shareholders that the company paid more taxes than it should.

Zoidle receives significant benefits for doing business in the UK, including large sales tax exemptions and some property tax breaks. The UK relies on the corporate income tax to provide services to the poor and to help run the agency that regulates corporations. Is it ethical for Zoidle to avoid paying taxes? Why or why not? (See Ethics and the Role of Business.)

Solution Minimizing taxes can increase profits. Some people argue that a corporation‘s only goal should be profit maximization, which will be reflected in a higher market value. From an economist‘s perspective, when all firms strictly adhere to the goal of profit maximization, resources tend to

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flow to where they are most highly valued by society. Ultimately, profit maximization, in theory, leads to the most efficient allocation of scarce resources.

But a business‘s focus on profits in the short run can lead to unethical conduct in the long run. In the short run, a company may increase its profits by taking full advantage of tax laws, even though it knows that the public may perceive this conduct as less than ethical. In the long run, because of bad publicity—exemplified by the executive‘s statements in this problem—as well as government audits or investigations, and public or private lawsuits, such perception may compound and cause profits to suffer.

Those who run corporations can and should act ethically. Some business leaders and others believe further that corporations should be accountable to society for their actions. One view of corporate social responsibility stresses that corporations have a duty not just to shareholders, but also to other groups affected by corporate decisions. Under this approach, a corporation would consider the impact of its decision on the firm‘s employees, customers, creditors, suppliers, and the community in which the corporation operates. Another theory of social responsibility argues that corporations should behave as good citizens by promoting goals that society deems worthwhile and taking positive steps toward solving social problems—employment discrimination, human rights, environmental concerns, and similar issues. Under either of these views, in this problem, the corporation would consider the government and the poor in determining and executing fiscal and tax policies.

Aside from the public‘s perception and a corporation‘s social responsibility, an overemphasis on short-term profit maximization is the most common reason that ethical problems occur in business. Thus, the conduct of the corporation in this problem—taking full advantage of the letter of the tax laws and touting that choice publicly—may lead to unintended unethical consequences.

38. Consumer Rights. Best Buy, a national electronics retailer, offered a credit card that allowed users to earn ―reward points‖ that could be redeemed for discounts on Best Buy goods. After reading a newspaper advertisement for the card, Gary Davis applied for, and was given, a credit card. As part of the application process, he visited a Web page containing Frequently Asked Questions as well as terms and conditions for the card. He clicked on a button affirming that he understood the terms and conditions. When Davis received his card, it came with seven brochures about the card and the reward point program. As he read the brochures, he discovered that a $59 annual fee would be charged for the card. Davis went back to the Web pages he had visited and found a statement that the card ―may‖ have an annual fee. Davis sued, claiming that the company did not adequately disclose the fee. Is it unethical for companies to put terms and conditions, especially terms that may cost the consumer money, in an electronic document that is too long to read on one screen? Why or why not? Assuming that the Best Buy credit-card materials were legally sufficient, discuss the ethical aspects of businesses strictly following the language of the law as opposed to following the intent of the law. [Davis v. HSBC Bank Nevada, N.A., 691 F.3d 1152 (9th Cir. 2012)] (See Ethics and the Role of Business.)

Solution In this case, the court found that the company did not violate any laws and that the disclosures were adequate. From an ethical perspective, the question becomes whether the word ―may‖ on the website gave adequate notice to the potential user or borrower that a charge would occur. It is settled legally that it up to a contract signer to read all the components of a contract. In the

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online environment, it is hard to ever prove that a Web page was not edited or changed from one day to the next.

A consumer may read the terms and conditions just before a round of edits and then agree and seem bound by changes that did not exist at the time they read them. From a fairness perspective, that would be unethical. At the same time, presumably the reader could print off a copy of the agreement and keep it filed. Underlying societal questions exist as to whether it is fair to assume that a purchaser in an online environment would print off that form contract language in the same way that a signer of a contract keeps a copy of the written contract.

The law often is considered the minimum ethical standard that society will allow. If a company follows the law, there will be no formal, societally-imposed consequences. There are many instances, and this is one, where following the law strictly may not be the most ethical action. If the purpose of the Truth-in-Lending Act is to ensure that consumers have full information before making a decision, there may be more ethical ways (warnings, bigger text announcing continuation of terms, more specific language than ―may‖ in the terms) that a company can help consumers be fully informed.

39. Business Ethics. Mark Ramun worked as a manager for Allied Erecting and Dismantling Co., where he had a tense relationship with his father, who was Allied‘s president. After more than ten years, Mark left Allied, taking 15,000 pages of Allied‘s documents on DVDs and CDs, which constituted trade secrets. Later, he joined Allied‘s competitor, Genesis Equipment & Manufacturing, Inc. Genesis soon developed a piece of equipment that incorporated elements of Allied equipment. How might business ethics have been violated in these circumstances? Discuss.

[Allied Erecting and Dismantling Co. v. Genesis Equipment & Manufacturing, Inc., 511 Fed.Appx.

398 (6th Cir. 2013)] (See Making Ethical Business Decisions.)

Solution Business ethics might have been violated in these circumstances by Mark Ramun, Mark‘s father, and the employees and managers of Genesis.

The ―tense relationship‖ between Mark and his father at Allied may have been caused or exacerbated by either or both of them. And instead of confronting whatever it was that made their relationship ―tense,‖ they may have exacted revenge—the father by forcing Mark out of the firm, or Mark by leaving it, after ten years. Of course, this is speculation.

What is not speculation, however, is that Mark took 15,000 pages of Allied‘s documents on DVDs and CDs (trade secrets) when he left the firm. This act was likely a violation of the law (theft or misappropriation) and clearly a violation of business ethics. Later, Mark joined Allied‘s competitor, Genesis Equipment & Manufacturing, Inc. Genesis soon developed a piece of equipment that incorporated elements of Allied equipment. This points to a second violation of the law and ethics (use of stolen property) by both Mark and Genesis. Mark appears to have been competing against his family in the marketplace and trying to sell his products through another company. Assuming that Genesis profited from its sale of the equipment, this would have caused losses to Allied and unjustly enriched Genesis. If Mark was paid a bonus or given a promotion, he too would have gained undeservedly.

In the actual case on which this problem is based, Allied filed a suit in a federal district court against Genesis and Mark for misappropriation of trade secrets. A jury awarded Allied more than

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$3 million in damages, but the court issued a judgment as a matter of law in favor of the defendants. On appeal, the U.S. Court of Appeals for the Sixth Circuit reversed. ―It is neither speculative nor conjectural that Genesis unjustly benefitted from its use of Allied's trade secrets.‖ 40. Ethical Principles. Stephen Glass made himself infamous as a dishonest journalist by fabricating material for more than forty articles for The New Republic magazine and other publications. He also fabricated supporting materials to delude The New Republic’s fact checkers. At the time, he was a law student at Georgetown University. Once suspicions were aroused, Glass tried to avoid detection. Later, Glass applied for admission to the California bar. The California Supreme Court denied his application, citing ―numerous instances of dishonesty and disingenuousness‖ during his ―rehabilitation‖ following the exposure of his misdeeds. How do these circumstances underscore the importance of ethics? Discuss. [In re Glass, 58 Cal.4th 500, 316 P.3d 1199 (2014)] (See Ethical Principles and Philosophies.)

Solution Ethics is the study of what constitutes right and wrong behavior. It is a branch of philosophy focusing on morality and the way moral principles are derived and implemented. Ethics has to do with the fairness, justness, rightness, or wrongness of an action. Those who study ethics evaluate what duties and responsibilities exist or should exist for its practitioners. The circumstances set out in this problem underscore the importance of ethics by illustrating the consequences of engaging in ethical misconduct. Those consequences can extend beyond the short run.

Clearly, Glass engaged in ethical misconduct. By fabricating material for more than forty articles for The New Republic magazine and other publications whose reputations are founded on truth, Glass betrayed the trust of his editors. He further behaved unethically by fabricating supporting materials to delude The New Republic's fact checkers. And once he was suspected, he tried to avoid detection. Later, based on these misdeeds and others, the California Supreme Court refused to admit Glass to the California bar.

Does Glass deserve a ―second chance‖? Based on the facts in this problem, it can be argued that no, he does not—he had more than one ―second chance‖ and blew them all. This is indicated by the California Supreme Court‘s citation of ―numerous instances of dishonesty and disingenuousness‖ during Glass‘s ―rehabilitation‖ following ―the exposure of his misdeeds.‖ From a more forgiving perspective, it could be argued that he does deserve another chance—because of his misdeeds, his every move will be closely scrutinized and any misconduct would most likely be swiftly spotted and thwarted.

In the actual case on which this problem is based, Glass had earlier applied for, and been denied, admission to the New York bar. Then, as stated in the facts, on Glass‘s application to the California bar, the California Supreme Court denied him.

41. Business Case Problem with Sample Answer— Business Ethics. Operating out of an apartment in Secane, Pennsylvania, Hratch Ilanjian convinced Vicken Setrakian, the president of Kenset Corp., that he was an international businessman who could help turn around Kenset‘s business in the Middle East. At Ilanjian‘s insistence, Setrakian provided confidential business documents. Claiming that they had an agreement, Ilanjian demanded full, immediate payment and threatened to disclose the confidential information to a Kenset supplier if payment was not forthcoming. Kenset denied that there was a contract and filed a suit in a federal district court against Ilanjian, seeking return of the documents. During discovery, Ilanjian was uncooperative. Who behaved unethically

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in these circumstances? Explain. [Kenset Corp. v. Ilanjian, 600 Fed.Appx. 827 (3d Cir. 2015)] (See Making Ethical Business Decisions.)

—For a sample answer to Problem 3–6, go to Apppendix E. Solution It seems obvious from the facts stated in this problem that Hratch Ilanjian behaved unethically in the circumstances. Ethics, of course, involves questions relating to the fairness, justness, rightness, or wrongness of an action. Business ethics focuses on the decisions that businesses and businesspersons apply moral and ethical principles to make their decisions and whether those decisions are right or wrong.

In this problem, from an apartment, Ilanjian defrauded Vicken Setrakian, the president of Kenset Corp., into believing that Ilanjian was an international businessman who could help Kenset turn around its business in the Middle East. Ilanjian insisted that Setrakian provide confidential business documents. Then, claiming that they had an agreement, Ilanjian demanded full and immediate payment. He threatened to disclose the confidential information to a Kenset supplier if payment was not forthcoming. Kenset denied that they had a contract. In the ensuing litigation, during discovery, Ilanjian was uncooperative. Each of these acts was unethical.

In the actual case on which this problem is based, in negotiations with Setrakian, Ilanjian misrepresented himself. Later, he threatened to use Kenset‘s information in violation of the confidence between the parties. And during discovery, he was uncooperative. The court concluded that there was no contract, ordered the return of confidential documents, and enjoined Ilanjian from using the information. The U.S. Court of Appeals for the Third Circuit affirmed.

42. Spotlight on Bed, Bath & Beyond—Ethics and the Role of Business. Bed Bath & Beyond Inc. sold a ceramic pot, called the ―FireBurners‖ Pot, with a stainless steel fuel reservoir at its center and a bottle of gelled fuel for use with the fire pot called ―FireGel.‖ A red sticker on the fire pot warned, ―DON‘T REFILL UNTIL FLAME IS OUT & CUP IS COOL.‖ ―CARE AND USE INSTRUCTIONS‖ with the product cautioned, in a ―WARNINGS‖ section, ―Do not add fuel when lit and never pour gel on an open fire or hot surface.‖ The label on the back of the fuel gel bottle instructed, ―NEVER add fuel to a burning fire,‖ and under a bold ―WARNING‖ stated, ―DANGER, FLAMMABLE LIQUID & VAPOR.‖ M.H., a minor, was injured when a fire pot in one of the products—bought from Bed Bath & Beyond—was refueled with the gel and an explosion occurred. Safer alternatives for the design of the fire pot existed, but its manufacturer chose not to use them. In these circumstances, is Bed, Bath & Beyond ethically responsible for the injury to M.H.? Discuss. [M.H. v. Bed, Bath & Beyond, Inc., 156 A.D.3d 33, 64 N.Y.S.3d 205 (1 Dept. 2017)] (See Ethics and the Role of Business.)

Solution Yes, Bed, Bath & Beyond is ethically responsible for the injury that its ―FireBurners‖ pot caused to M.H. In designing and making a product for consumers, its maker has a duty to make the product reasonably safe so that it does not create an unreasonable risk of harm to the user. This is the standard under the law of product liability. Liability for its breach can be assessed against any seller of the product. As the legal standard, these principles also express the minimal ethical standards.

In this problem, a manufacturer made a ceramic pot, called the ―FireBurners‖ Pot, with a stainless steel fuel reservoir at its center and a bottle of gelled fuel for use with the fire pot called ―FireGel.‖ The design was apparently unsafe, prompting the addition of a plethora of warnings about the

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use of the pot. These warnings generally cautioned against adding fuel to the reservoir when it was hot. Safer alternatives for the design existed, but its maker chose not to use them. M.H., a consumer, was injured when a pot was refueled with the gel and an explosion occurred. Under the law of product liability, the seller—Bed, Bath & Beyond—could be held liable for the injury on the basis of a breach of the applicable legal duty. The sale of the pot in an unsafe condition was likewise a breach of a minimal ethical duty.

It could also be contended that the retailer owed a greater ethical obligation to its customers, and to anyone who might suffer harm due to the unsafe design of the pot. This obligation could be framed in the same terms as the legal responsibility—the product should be made reasonably safe. This duty could be met by retaining the pot‘s decorative quality while disabling its gel burning capacity or adopting any other safer alternative. Doing so effectively could work to the satisfaction of the seller‘s customers, as well as its owners, shareholders, and others.

In the actual case on which this problem is based, M.H. filed a suit in a New York state court against Bed, Bath & Beyond. The court denied the plaintiff‘s motion for summary judgment. A state intermediate appellate court reversed the denial, and remanded the case for the entry of a summary judgment in M.H.‘s favor.

43. A Question of Ethics—Applying the IDDR Framework. Priscilla Dickman worked as a medical technologist at the University of Connecticut Health Center for twenty-eight years. Early in her career at the Health Center, Dickman sustained a back injury while at work. The condition eventually worsened, causing her significant back pain and disability. Her physician ordered restrictions on her work duties for several years. Then Dickman‘s supervisor received complaints that Dickman was getting personal phone calls and was frequently absent from her work area.

Based on e-mails and other documents found on her work computer, it appeared that she had been running two side businesses (selling jewelry and providing travel agent services) while at work. The state investigated, and she was convicted of a civil ethics violation for engaging in ―personal business for financial gain on state time utilizing state resources.‖ Separate investigations resulted in criminal convictions for forgery and the filing of an unrelated fraudulent insurance claim. Dickman ―retired‖ from her job (after she obtained approval for disability retirement) and filed a claim with the state of Connecticut against the health center. She alleged that her former employer had initiated the investigations to harass her and force her to quit. She claimed that the Health Center was unlawfully retaliating against her for being disabled and being put on workplace restrictions. [Dickman v. University of Connecticut Health Center, 162 Conn.App. 441, 132 A.3d 739 (2016)] (See Making Ethical Business Decisions.)

44. Assume that you are Dickman‘s supervisor and have been informed that she is frequently away from her desk and often makes personal phone calls. The first step of using the IDDR method is inquiry, so you start asking questions. Several people tell you that that Dickman has offered to sell them jewelry. Others say she has offered to make travel arrangements for them. You have not spoken to Dickman directly about the complaints and are not sure if you should. You know that the Health Center would need more evidence of wrongdoing to justify firing Dickman but are uncertain as to whether you can search her computer. Should you report your findings to management? Is there any ethical problem involved in investigating and possibly firing a longterm employee? Is it fair to terminate an employee who is under disability restrictions? How would you frame the ethical dilemma that the Health Center faced in this case, and who are the stakeholders? What ethical theories would you use to guide your decision?

Solution

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Yes, as Dickman‘s supervisor, you should report your findings to management. A supervisor might also want to speak with Dickman before going to management, to explain that others have noticed her away from her desk, and get her side of the story. Given the complaints that the employer received, there is no ethical dilemma in investigating Dickman. The possibility of misconduct would warrant investigation and possibly termination, even in a long-term employee or an employee who has a disability restriction. ―Disability restrictions‖ do not make an otherwise fair termination unfair. The ethical dilemma that the Health Center faced in this case was whether to discharge Dickman. Besides Dickman, the stakeholders include the Health Center and its employees and also the patients served by the health center. Perhaps the most pertinent ethical theory is the categorical imperative—what would happen if Dickman were allowed to stay on staff, and other employees took this as a cue to emulate her conduct.

A supervisor should be circumspect and make sure that the complaints against an employee are not based based on gossip and innuendo. For instance, if the supervisor knew that the co-workers who complained about Dickman did not like her or were trying to get Dickman fired. But there is no indication of that here. The comments about Dickman are presented as factual and seem to have been offered without hostility. A simple check of her presence at her workstation, a log of the calls from her work phone, and the history of website visits on her work computer could prove or disprove the information. She might be asked about any negative findings. This would give her a reasonable opportunity to explain. The supervisor and employer should taken into consideration the length of Dickman‘s employment and her disability, as well as the credibility of her response and her demeanor.

If the findings prove to be true, management‘s dilemma is whether to discharge Dickman. It could be believed that her workplace transgressions are not so serious as to warrant a discharge. Her actions have not been secretive, however—other employees are aware of at least some of her misconduct. Permitting her to stay on would likely encourage others to commit similar acts.

45. Now suppose that you are Dickman. You have been a medical technologist for a long time but now experience severe back pain while at your desk at the Health Center. You find that you have less pain if you get up and move around during the day, rather than just sitting. That is why you are often away from your desk. You know that you will not be able to do this job much longer, and that is why you recently started a jewelry business and began providing travel services. Sure, you have made a few personal phone calls related to those businesses while at the Health Center, but other employees make personal calls, and they have not been fired. You feel that the Health Center‘s investigation was intended to force you to quit because you are disabled and cannot perform the tasks that you used to perform. Using the inquiry portion of the IDDR method, how might you frame the ethical issue you face, and who are the stakeholders? What ethical principles can help you analyze the problem thoroughly?

Solution Dickman‘s ethical dilemma is how to continue performing her medical technologist job when she cannot sit at her desk without pain and to what extent she can run side businesses from the health center.‖ Medical technologists work in the lab, analyzing and testing blood, fluid, tissue, and urine samples of patients. Dickman has an ethical duty to the patients and to the health center to competently perform this analysis and testing. Patients could be harmed if she fails to do the lab tests properly or in a timely fashion. Therefore, Dickman needs to decide how she can continue competently performing this work. The stakeholders affected by her decision include herself, her employer, her co-workers, and patients of the health center.

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As stated in the facts to this question, Dickman experiences pain sitting at her work desk. She finds it less painful to move around—i.e., away from her desk. But did she inform her supervisor or tell any of her co-workers or a physician about this pain? She would need to gather any witnesses or evidence she has to support her claim. Also, she needs to decide whether it is acceptable for her to run side businesses while she‘s at the health center. Is she merely making a few personal phone calls related to these side businesses, or is it taking time away from the testing and analysis that she was hired to perform. Applicable ethical principles include the categorical imperative—if her co-workers copy her conduct, what might result? If the side jobs are interfering with her medical technologist duties, she most likely cannot justify spending time on them. The amount of time spent could be verified by looking at her work call log and computer history. If it turns out that she spent a great deal of time on these side business and neglected her technologist duties, then the employer would clearly have a right to fire her.

In the actual case on which this problem is based, Dickman‘s discrimination claim was dismissed for lack of ―credible evidence or legal support.‖ She appealed the dismissal. A state intermediate appellate court affirmed it.

Critical Thinking and Writing Assignments 46. Business Law Writing. Assume that you are a high-level manager for a shoe manufacturer. You know that your firm could increase its profit margin by producing shoes in Indonesia, where you could hire women for $100 a month to assemble them. You also know that human rights advocates recently accused a competing shoe manufacturer of engaging in exploitative labor practices because the manufacturer sold shoes made by Indonesian women for similarly low wages. You personally do not believe that paying $100 a month to Indonesian women is unethical because you know that in their country, $100 a month is a better-than-average wage rate.

Write one page explaining whether you would have the shoes manufactured in Indonesia and make higher profits for the company, or avoid the risk of negative publicity and its potential adverse consequences for the firm‘s reputation. Are there other alternatives? Discuss fully. (See Business Ethics on a Global Level.)

Solution It is arguable that ethical behavior generates sufficient good will to warrant practicing it out of a desire for increased profits. Corporate activities that receive wide publicity and are perceived as ―positive‖ may benefit shareholders in the long run, if the enhanced public image of the corporation entices more consumers to buy its product. But such long-run possible benefits are difficult to calculate. Under the same reasoning, ―negative‖ choices may have an impact on a company‘s business, but that impact may also be difficult to gauge. This is in part because motive is difficult to determine, especially in the complicated world of business ethics, both with respect to a business and to its market and customers. In the debate between motive and conduct as a measure of ethical behavior, conduct may be the most practical option and the measure that will have the greatest impact. Thus, a firm might choose to do business in a more costly manner— here, by opting out of the less expensive production facility or by paying higher wages—and ultimately realize a healthier return. Of course, making that decision might have different consequences.

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Solution and Answer Guide: Miller, The Legal Environment Today 10e, 9780357635582; Chapter 03: Ethics in Business

47. Time-Limited Group Assignment—Corporate Social Responsibility. Methamphetamine (meth) is an addictive drug made chiefly in small toxic labs (STLs) in homes, tents, barns, and hotel rooms. The manufacturing process is dangerous, often resulting in explosions, burns, and toxic fumes. Government entities spend time and resources to find and destroy STLs, imprison meth dealers and users, treat addicts, and provide services for affected families.

Meth cannot be made without ingredients that are also used in cold and allergy medications.

Arkansas has one of the highest numbers of STLs in the United States. To recoup the costs of fighting the meth epidemic, twenty counties in Arkansas filed a suit against Pfizer, Inc., which makes cold and allergy medications. They argued that it was Pfizer‘s ethical responsibility to either stop using ingredients in their cold and allergy medications that can be used to make meth or to compensate the government for the amount it spends closing down meth labs. (See Ethics and the Role of Business, Ethical Principles and Philosophies, and Making Ethical Business Decisions.)

48. The first group will outline Pfizer‘s ethical responsibility under the corporate social responsibility doctrine. To whom does Pfizer owe duties?

Solution It could be argued that the defendants have an ethical responsibility to society to voluntarily take steps to reduce the availability of their products to meth makers. This might have become a more certain obligation once the defendants were aware that their products were used in the manufacture of meth. Retailers might have been asked to place the products behind the counter or lock them in display cases and limit sales or require consumers to sign for purchases. Retailers might have been educated about the suspicious behavior of buyers with illegal intent. (These measures were imposed as federal regulations in 2005.) The defendants might have developed alternative medications that did not contain ephedrine or pseudoephedrine.

49. The second group will formulate an argument on behalf of Pfizer that the company has not breached any of its ethical responsibilities.

Solution It could also be argued that the defendants have an ethical responsibility to their shareholders and other stakeholders in their companies to fight regulatory efforts to limit the availability of their products so they could continue making profits. The central purpose of their businesses is to make money, not to affect social change. And the effects on society of the meth epidemic are not the natural and foreseeable consequences of the sales of the defendants‘ products. In other words, the company could effectively argue that it has not breached any of its ethical responsibilities.

50. The third group will assume that they work for Pfizer and that the company is trying to determine the best course of action to prevent its medications from being used to make meth. The group will apply the IDDR approach and explain the steps in the reasoning used.

Solution After applying the IDDR approach to determine the best course of action to prevent its medications from being used to make meth, the conclusion might be that the company should advise and encourage retailers at the point of sale to spot and stop buyers who appear to intend that purpose.

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Solution and Answer Guide: Miller, The Legal Environment Today 10e, 9780357635582; Chapter 03: Ethics in Business

The IDDR approach has four steps, which begin with an Inquiry to express the issue, identify the stakeholders, and indicate potential ethical standards. Here, the question is what a manufacturer might do to prevent its products from being put to illegal uses. The stakeholders include the company, its owners, officers, employees, and customers, and society. Applicable standards derive from the company‘s situation—it makes and markets the product, which would suggest a duty to guard against its illegal use.

The second step of the IDDR approach is a Discussion that considers actions to address the issue.

Factors include the strengths and weaknesses of the actions, and the consequences and the effects on the stakeholders. How might the manufacturer discourage the illicit use of its product?

Some answers to this question depend on the nature of the product. Could harmless additives to the product make its misuse impossible? Could some ingredients be substituted for the illegally used components? Should the company stop making the product altogether? Technically, additives or substitutes may not be possible—they may not be available, they could dilute the medicinal effects, or they might be cost prohibitive. Removing the product from the market would benefit none of the stakeholders (except, of course, those suffering the consequences of the product‘s illegal use, which might impact only a relatively small part of the community).

The third step of the approach is to come to a Decision and state the reasons. In the eyes of the public, the company could benefit by taking some action to prevent its product‘s misuse. This action might be to advise and encourage retailers at the point of sale to spot and stop buyers who appear to intend that misuse. This could enhance the value of the company to those who own it and work for it, as well as its image to its customers and society. And this action can actually improve the situation within the community by limiting the ability of those who would misuse the product to do so.

The last step of the approach is a Review of the success or failure of the action to resolve the issue, and satisfy the stakeholders. No action would be completely successful, but a failure to take any action would guaranty a failure to protect the interests of at least some of the stakeholders.

This supports the company‘s obligation to do something, such as the choice suggested in this answer.

51. The fourth group will adopt a utilitarian point of view and perform a cost-benefit analysis to determine what the company should do. Specifically, should the company pay compensation to the state, or should it stop using certain ingredients in its medications?

Solution In the actual case on which this problem is based, the court compared the counties‘ claims to other plaintiffs‘ attempts to recover from gun manufacturers the costs associated with the criminal use of guns. In terms of legal liability, the circumstances connecting the sales of the medications to the provision of government services were too weak for the counties to recoup their costs from the defendants on a theory of implied contract. Also, the sales of the medications were legal, the operations of the STLs were not, the latter were not likely consequences of the former, and thus, in terms of proximate cause for tort liability, the costs to the counties were not reasonably foreseeable. The suit was dismissed.

This result indicates that applying the minimal ethical standard—compliance with the law—and a cost-benefit analysis shows the connection between the actions of the company and the consequences in the community to be too tenuous to mandate either of the steps suggested in

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the question. That is, it might be said that the benefits of the products outweigh the costs that might be imposed on the company.

Solution and Answer Guide Miller, The Legal Environment Today 10e, 9780357635582; Chapter 04: Business and the Constitution

Table of Contents Critical Thinking Questions in Features ............................................................................................................... 37 Digital Update.......................................................................................................................................... 37 Critical Thinking Questions in Cases ..................................................................................................................... 38 Case 4.1 ................................................................................................................................................... 38 Case 4.2 ................................................................................................................................................... 39 Case 4.3 ................................................................................................................................................... 40 Chapter Review ............................................................................................................................................................. 40 Practice and Review ................................................................................................................................ 40 Practice and Review: Debate This ........................................................................................................... 41 Issue Spotters .......................................................................................................................................... 42 Business Scenarios and Case Problems ................................................................................................... 42 Critical Thinking and Writing Assignments .............................................................................................. 48

Critical Thinking Questions in Features Digital Update 52. One observer has said that the American legal system should evaluate social media companies based on how ―they affect us as citizens, not only [on how] they affect us as consumers.‖ What is your opinion of this statement?

Solution The person who made this statement clearly sees a ―citizen‖ as having different motivations and concerns than a ―consumer.‖ Presumably, a citizen is mostly concerned with the good of society as a whole, and therefore would be open to the idea of government regulation that restricted the negative influence of social media, regardless of the First Amendment. A consumer, by contrast, would be primarily concerned with having a marketplace that offers the widest possible varieties of freedom (of choice, of speech, etc.) and would for that reason be opposed to government regulation of social media. There is, however, an argument to be made that the citizens who make up a society benefit when the marketplace of ideas—whether those ideas are subjectively ―positive‖ or ―negative‖—is allowed to flourish in the absence of government regulation.

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Solution and Answer Guide: Miller, The Legal Environment Today 10e, 9780357635582; Chapter 04: Business and the Constitution

53. Even though corporations can restrict the speech of their employees, should they do so? Explain your answer.

Solution Corporate managers have several incentives to restrict the speech of employees. Discussion of political subjects and other non-work-related issues can sow discord within the workplace. If the break room becomes a staging area for political debate, hard feelings may contaminate working relationships, harming the company‘s productivity. This is particularly true if the comments are— or are perceived to be—discriminatory or even hateful. Furthermore, an employee‘s political opinions that go public can damage the company‘s image and, ultimately, its bottom line.

At the same time, as noted in the feature, many employees spend hours at their places of work, not to mention the fact that a person‘s job contributes greatly to one‘s self-identity. If employees do not feel free to ―be themselves‖ at work, they might not enjoy the work experience, or want to give extra effort on behalf of what they see as a stifling and controlling corporation. In balancing the needs of the employees with the needs of the company, executives and managers need to determine the effect of non-restricted speech on employee morale, the company‘s public image, customer relations, anti-discrimination law, and any number of other factors. The resulting policy should support a corporate culture that is reasonably fair, open, and productive.

54. Tim Cook, Apple‘s chief operating officer, has suggested that the U.S. Congress should pass a law limiting the ability of Apple and other tech companies to keep consumer data private. Why would a business executive make such a request?

Solution Cook may have wanted to end a controversy that puts Apple squarely at odds with the federal government. After all, large companies such as Apple rely on favorable treatment from the government in regulatory matters, international trade agreements, and many other areas. Also, large corporations such as Apple sometimes gain an advantage over competitors when their industries are regulated. For example, Apple has significant resources with which to lobby Congress for favorable treatment, and it is better positioned to bear the costs of regulation than are other, smaller tech companies. Finally, Apple‘s position as a champion of consumer privacy would be damaged if it ―caved‖ and changed its stance without being forced to do so by a new federal law.

Critical Thinking Questions in Cases Case 4.1 55. What ―dangerous conditions‖ might have prompted the city to enact the ordinances at issue in this case? Why? Solution As noted in the facts of the case, both ordinances at issue included an extensive rationale for their adoption, stating essentially that a geographically small city has the right to restrict a business from operating within the city when the restriction is for the safety of the city‘s citizens and visitors.

The appellate court referred to ―the dangerous conditions‖ created by the irresponsible driving behavior of scooter renters, especially at night, amplified by the lack of training, supervision, and oversight practiced by the rental scooter businesses that ―existed throughout the entire city‖ as

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the basis for the city‘s regulation. The court paraphrased the expressive clauses in the ordinances more specifically: • •

• • • •

The City is geographically small and crowded and is being besieged by inexperienced scooter drivers seeking amusement and driving in a dangerous manner.

The City is a tourist destination frequented by tens of thousands, and its streets are congested by scooters that are being driven illegally and in areas where they are not permitted.

The City‘s residents and visitors are put in dangerous situations as a result of the improper use of scooters, especially at night.

City businesses have complained about numerous trespasses on their property by people driving scooters while being disruptive City police have been unable to cope with the situation and essential police resources are being drained.

The City has been unable to control the situation through less restrictive means.

56. What is the likely economic impact of the ordinances on the businesses in the city? Discuss.

Solution With the exception of the scooter rental businesses, the effect on the city‘s economy is likely to be positive in light of the result in the Classy case.

The answer to the previous question contains the reasons in support of this outlook. With a ban on motorized scooters, the ―small and crowded‖ city is not likely to be ―besieged by inexperienced scooter drivers seeking amusement and driving in a dangerous manner.‖ The streets, filled with ―tens of thousands‖ of tourists will not be ―congested by scooters that are being driven illegally and in areas where they are not permitted.‖ Residents and visitors will not be ―put in dangerous situations as a result of the improper use of scooters, especially at night.‖ There will be an end to the ―numerous trespasses‖ on business property ―by people driving scooters while being disruptive.‖ And ―essential police resources‖ will not be ―drained,‖ at least not by irresponsible scooter drivers and riders. All of which bodes well for business.

Case 4.2 57. If this case had involved a small, private retail business that did not advertise nationally, would the result have been the same? Why or why not?

Solution It is not likely that the result in this case would have been different even if the facts had involved a small, private retail business that did not advertise nationally. The intended impact of the decision in Heart of Atlanta was to uphold the constitutionality of the Civil Rights Act of 1964 and the power of Congress to regulate interstate commerce to stop local discriminatory practices. In the Supreme Court‘s opinion, ―The power of Congress to promote interstate commerce also includes the power to regulate the local incidents thereof, including local activities in both the States of origin and destination, which might have a substantial and harmful effect upon that commerce.‖ Thus, if the case had involved a small, local retail business, the Court would have found participation in interstate commerce based on the use of a phone, or a Facebook page (or other Internet presence), or sales to customers who traveled across state lines—or, as in Wickard v.

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Filburn, participation might have been based on any transaction that might otherwise have occurred in interstate commerce.

Case 4.3 58. Whose interests are advanced by the banning of certain types of advertising?

Solution The government‘s interests are advanced when certain ads are banned. For example, in the Bad Frog case, the court acknowledged, by advising the state to restrict the locations where certain ads could be displayed, that banning of ―vulgar and profane‖ advertising from children‘s sight arguably advanced the state‘s interest in protecting children from those ads.

59. If Bad Frog had sought to use the offensive label to market toys instead of beer, would the court‘s ruling likely have been the same? Explain your answer.

Solution Probably not. The reasoning underlying the court‘s decision in the case was, in part, that ―the State‘s prohibition of the labels . . . does not materially advance its asserted interests in insulating children from vulgarity . . . and is not narrowly tailored to the interest concerning children.‖ The court‘s reasoning was supported in part by the fact that children cannot buy beer. If the labels advertised toys, however, the court‘s reasoning might have been different.

Chapter Review Practice and Review A state legislature enacted a statute that required any motorcycle operator or passenger on the state‘s highways to wear a protective helmet. Jim Alderman, a licensed motorcycle operator, sued the state to block enforcement of the law. Alderman asserted that the statute violated the equal protection clause because it placed requirements on motorcyclists that were not imposed on other motorists. Using the information presented in the chapter, answer the following questions.

60. Why does this statute raise equal protection issues instead of substantive due process concerns?

Solution When a law or action limits the liberty of some persons but not others, it may violate the equal protection clause. Here, because the law applies only to motorcycle operators and passengers, it raises equal protection issues.

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Solution and Answer Guide: Miller, The Legal Environment Today 10e, 9780357635582; Chapter 04: Business and the Constitution

61. What are the three levels of scrutiny that the courts use in determining whether a law violates the equal protection clause?

Solution The three levels of scrutiny that courts apply to determine whether the law or action violates equal protection are strict scrutiny (if fundamental rights are at stake), intermediate scrutiny (in cases involving discrimination based on gender or legitimacy), and the ―rational basis‖ test (in matters of economic or social welfare).

62. Which level of scrutiny or test would apply to this situation? Why? Solution The court would likely apply the rational basis test, because the statute regulates a matter of social welfare by requiring helmets. Similar to seat-belt laws and speed limits, a helmet statute involves the state‘s attempt to protect the welfare of its citizens. Thus, the court would consider it a matter a social welfare and require that it be rationally related to a legitimate government objective.

63. Under this standard or test, is the helmet statute constitutional? Why or why not?

Solution The statute is probably constitutional, because requiring helmets is rationally related to a legitimate government objective (public health and safety). Under the rational basis test, courts rarely strike down laws as unconstitutional, and this statute will likely further the legitimate state interest of protecting the welfare of citizens and promoting safety.

Practice and Review: Debate This 64. Legislation aimed at protecting people from themselves concerns the individual as well as the public in general. Protective helmet laws are just one example of such legislation. Should individuals be allowed to engage in unsafe activities if they choose to do so?

Solution Certainly many will argue in favor of individual rights. If certain people wish to engage in risky activities such as riding motorcycles without a helmet, so be it. That should be their choice. No one is going to argue that motorcycle riders believe that there is zero danger when riding a motorcycle without a helmet. In other words, individuals should be free to make their own decisions and consequently, their own mistakes.

In contrast, there is a public policy issue involved. If motorcyclists injure themselves in accidents because they were not wearing protective helmets, society ends up paying in the form of increased medical care expenses, lost productivity, and even welfare for other family members. Thus, the state has an interest in protecting the public in general by limiting some individual rights.

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Solution and Answer Guide: Miller, The Legal Environment Today 10e, 9780357635582; Chapter 04: Business and the Constitution

Issue Spotters 1.

South Dakota wants its citizens to conserve energy. To help reduce consumer consumption of electricity, the state passes a law that bans all advertising by power utilities within the state. What argument could the power utilities use as a defense to the enforcement of this state law?

Solution Even if commercial speech is neither related to illegal activities nor misleading, it may be restricted if a state has a substantial interest that cannot be achieved by less restrictive means. In this situation, however, the interest in energy conservation is substantial, but it could be achieved by less restrictive means. That would be the utilities‘ defense against the enforcement of this state law.

2.

Suppose that a state imposes a higher tax on out-of-state companies doing business in the state than it imposes on in-state companies. Is this a violation of the equal protection clause if the only reason for the tax is to protect the local firms from out-of-state competition? Explain.

Solution Yes. The tax would limit the liberty of some persons (out of state businesses), so it is subject to a review under the equal protection clause. Protecting local businesses from out-of-state competition is not a legitimate government objective. Thus, such a tax would violate the equal protection clause.

Business Scenarios and Case Problems 1.

The Free Exercise Clause. Thomas worked in the nonmilitary operations of a large firm that produced both military and nonmilitary goods. When the company discontinued the production of nonmilitary goods, Thomas was transferred to the plant producing military equipment. Thomas left his job, claiming that it violated his religious principles to participate in the manufacture of goods to be used in destroying life. In effect, he argued, the transfer to the military equipment plant forced him to quit his job. He was denied unemployment compensation by the state because he had not been effectively ―discharged‖ by the employer but had voluntarily terminated his employment. Did the state‘s denial of unemployment benefits to Thomas violate the free exercise clause of the First Amendment? Explain. (See Business and the Bill of Rights.)

Solution Thomas has a constitutionally protected right to the free exercise of his religion. In denying his claim for unemployment benefits, the state violated this right. Employers are obligated to make reasonable accommodations for their employees‘ beliefs that are openly and sincerely held, as were Thomas‘s beliefs. By moving him to a department that made military goods, his employer effectively forced him to choose between his job and his religious principles. This unilateral decision on the part of the employer was the reason Thomas left his job and why the company was required to compensate Thomas for his resulting unemployment.

65.

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2.

Spotlight on Plagiarism—Due Process. The Russ College of Engineering and Technology of Ohio University announced in a press conference that it had found ―rampant and flagrant plagiarism‖ in the theses of mechanical engineering graduate students. Faculty singled out for ―ignoring their ethical responsibilities‖ included Jay Gunasekera, chair of the department.

Gunasekera was prohibited from advising students. He filed a suit against Dennis Irwin, the dean of Russ College, for violating his due process rights. What does due process require in these circumstances? Why? [Gunasekera v. Irwin, 551 F.3d 461 (6th Cir. 2009)] (See Due Process and Equal Protection.)

Solution To adequately claim a due process violation, a plaintiff must allege that he was deprived of ―life, liberty, or property‖ without due process of law. A faculty member‘s academic reputation is a protected interest. The question is what process is due to deprive a faculty member of this interest and in this case whether Gunasekera was provided it. When employers inflict a public stigma on employees, the only way that employees can clear their name is through publicity.

Gunasekera‘s alleged injury was his public association with the plagiarism scandal. Here, the court reasoned that ―a name-clearing hearing with no public component would not address this harm because it would not alert members of the public who read the first report that Gunasekera challenged the allegations. Similarly, if Gunasekera‘s name was cleared at an unpublicized hearing, members of the public who had seen only the stories accusing him would not know that this stigma was undeserved.‖ Thus the court held that Gunasekera was entitled to a public nameclearing hearing.

3.

Business Case Problem with Sample Answer— Freedom of Speech. Mark Wooden sent an email to an alderwoman for the city of St. Louis. Attached was a nineteen-minute audio that compared her to the biblical character Jezebel—she was a ―bitch in the Sixth Ward,‖ spending too much time with the rich and powerful and too little time with the poor. In a menacing, maniacal tone, Wooden said that he was ―dusting off a sawed-off shotgun,‖ called himself a ―domestic terrorist,‖ and referred to the assassination of President John F. Kennedy, the murder of a federal judge, and the shooting of Congresswoman Gabrielle Giffords. Feeling threatened, the alderwoman called the police. Wooden was convicted of harassment under a state criminal statute. Was this conviction unconstitutional under the First Amendment? Discuss. [State of Missouri v. Wooden, 388 S.W.3d 522 (Mo. 2013)] (See Business and the Bill of Rights.) —For a sample answer to Problem 4–3, go to Appendix D. Solution No, Wooden‘s conviction was not unconstitutional. Certain speech is not protected under the First Amendment. Speech that violates criminal laws—threatening speech, for example—is not constitutionally protected. Other unprotected speech includes fighting words, or words that are likely to incite others to respond violently. And speech that harms the good reputation of another, or defamatory speech, is not protected under the First Amendment.

In his e-mail and audio notes to the alderwoman, Wooden discussed using a sawed-off shotgun, domestic terrorism, and the assassination and murder of politicians. He compared the alderwoman to the biblical character Jezebel, referring to her as a ―bitch in the Sixth Ward.‖ These references caused the alderwoman to feel threatened. The First Amendment does not protect such threats, which in this case violated a state criminal statute. There was nothing unconstitutional about punishing Wooden for this unprotected speech.

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Solution and Answer Guide: Miller, The Legal Environment Today 10e, 9780357635582; Chapter 04: Business and the Constitution

In the actual case on which this problem is based, Wooden appealed his conviction, arguing that it violated his right to freedom of speech. Under the principles set out above, the Missouri Supreme Court affirmed the conviction.

4.

Equal Protection. Abbott Laboratories licensed SmithKline Beecham Corp. to market an Abbott human immunodeficiency virus (HIV) drug in conjunction with one of SmithKline‘s drugs. Abbott then increased the price of its drug fourfold, forcing SmithKline to increase its prices and thereby driving business to Abbott‘s own combination drug. SmithKline filed a suit in a federal district court against Abbott. During jury selection, Abbott struck the only self-identified gay person among the potential jurors. (The pricing of HIV drugs is of considerable concern in the gay community.) Could the equal protection clause be applied to prohibit discrimination based on sexual orientation in jury selection? Discuss. [SmithKline Beecham Corp. v. Abbott Laboratories, 740 F.3d 471 (9th Cir. 2014)] (See Due Process and Equal Protection.)

Solution Yes, the equal protection clause can be applied to prohibit discrimination based on sexual orientation in jury selection. The appropriate level of scrutiny would be intermediate scrutiny.

Under the equal protection clause of the Fourteenth Amendment, the government cannot enact a law or take another action that treats similarly situated individuals differently. If it does, a court examines the basis for the distinction. Intermediate scrutiny applies in cases involving discrimination based on gender. Under this test, a distinction must be substantially related to an important government objective.

Gays and lesbians were long excluded from participating in our government and the privileges of citizenship. A juror strike on the basis of sexual orientation tells the individual who has been struck, as well as the trial participants and the general public, that the judicial system still treats gays and lesbians differently. This deprives these individuals of the opportunity to participate in a democratic institution on the basis of a characteristic that has nothing to do with their fitness to serve.

In the actual case on which this problem is based, SmithKline challenged the strike. The judge denied the challenge. On SmithKline‘s appeal, the U.S. Court of Appeals for the Ninth Circuit held that the equal protection clause prohibits discrimination based on sexual orientation in jury selection and requires that heightened scrutiny be applied to equal protection claims involving sexual orientation. The appellate court remanded the case for a new trial.

5.

Procedural Due Process. Robert Brown applied for admission to the University of Kansas School of Law. Brown answered ―no‖ to questions on the application asking if he had a criminal history and acknowledged that a false answer constituted ―cause for . . . dismissal.‖ In fact, Brown had criminal convictions for domestic battery and driving under the influence. He was accepted for admission to the school. When school officials discovered his history, however, he was notified of their intent to dismiss him and given an opportunity to respond in writing. He demanded a hearing. The officials refused to grant Brown a hearing and then expelled him. Did the school‘s actions deny Brown due process? Discuss. [Brown v. University of Kansas, 599 Fed.Appx. 833 (10th Cir. 2015)] (See Due Process and Equal Protection.)

Solution No, the school‘s actions did not deny Brown due process. Procedural due process requires that any government decision to take life, liberty, or property must be made fairly. The government

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must give a person proper notice and an opportunity to be heard. The government must use fair procedures—the person must have at least an opportunity to object to a proposed action before a fair, neutral decision maker.

In this problem, Robert Brown applied for admission to the University of Kansas School of Law. He answered ―no‖ to the questions on the application about criminal history and acknowledged that a false answer constituted cause for dismissal. He was accepted for admission to the school. But Brown had previous criminal convictions for domestic battery and driving under the influence.

When school officials discovered this history, Brown was notified of their intent to dismiss him and given an opportunity to respond in writing. He demanded a hearing. The officials refused, and expelled him. As for due process, Brown knew he could be dismissed for false answers on his application. The school gave Brown notice of its intent to expel him and gave him an opportunity to be heard (in writing). Due process does not require that any specific set of detailed procedures be followed as long as the procedures are fair.

In the actual case on which this problem is based, Brown filed a suit in a federal district court against the school, alleging denial of due process. From a judgment in the school‘s favor, Brown appealed. The U.S. Court of Appeals for the Tenth Circuit affirmed, concluding that ―the procedures afforded to Mr. Brown were fair.‖ 6.

The Commerce Clause. Regency Transportation, Inc., operates a freight business throughout the eastern United States. Regency maintains its corporate headquarters, four warehouses, and a maintenance facility and terminal location for repairing and storing vehicles in Massachusetts. All of the vehicles in Regency‘s fleet were bought in other states. Massachusetts imposes a use tax on all taxpayers subject to its jurisdiction, including those that do business in interstate commerce, as Regency does. When Massachusetts imposed the tax on the purchase price of each tractor and trailer in Regency‘s fleet, the trucking firm challenged the assessment as discriminatory under the commerce clause. What is the chief consideration under the commerce clause when a state law affects interstate commerce? Is Massachusetts‘s use tax valid? Explain. [Regency Transportation, Inc. v. Commissioner of Revenue, 473 Mass. 459, 42 N.E.3d 1133 (2016)] (See The Constitutional Powers of Government.)

Solution Yes, Massachusetts‘s use tax is valid under the commerce clause. When a state regulation that affects interstate commerce is challenged under the commerce clause, the court weighs the state‘s interest in regulating the matter against the burden that the regulation places on interstate commerce. Because a court balances the interests involved, it is difficult to predict the outcome in a particular case. State laws that alter conditions of competition to favor in-state interests over out-of-state competitors in a market are considered discriminatory and usually invalidated.

In this problem, Regency Transportation, Inc., operates a freight business throughout the eastern United States. Regency maintains a headquarters, warehouses, and other facilities in Massachusetts. All of the vehicles in Regency‘s fleet were bought in other states. When Massachusetts imposed a use tax on the purchase price of each tractor and trailer in Regency‘s fleet, the trucking firm challenged the assessment as discriminatory under the commerce clause.

But Massachusetts imposes the tax on all taxpayers subject to its jurisdiction, not only those that, like Regency, do business in interstate commerce. Hence, the tax is not discriminatory. As for the balancing test, Massachusetts presumably imposes the tax based on the benefits derived from a

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company‘s using and storing vehicles in the state. The burden that the regulation places on interstate commerce seems slight weighed against the state‘s interest in regulating this matter.

In the actual case on which this problem is based, Nichols filed a suit in a federal district court against TNI, alleging discrimination on the basis of sex. TNI filed a motion for summary judgment, which the court granted. But the U.S. Court of Appeals for the Eighth Circuit reversed. ―Genuine issues of material fact remain.‖ 7.

Freedom of Speech. Wandering Dago, Inc. (WD) operates a food truck in Albany, New York. WD brands itself and the food it sells with language generally viewed as ethnic slurs. Owners Andrea Loguidice and Brandon Snooks, however, view the branding as giving a ―nod to their Italian heritage‖ and ―weakening the derogatory force of the slur.‖ Twice, WD applied to participate as a vendor in a summer lunch program in a state-owned plaza. Both times, the New York State Office of General Services (OGS) denied the application because of WD‘s branding. WD filed a suit in a federal district court against RoAnn Destito, the commissioner of OGS, contending that the agency had violated WD‘s right to free speech. What principles apply to the government‘s regulation of the content of speech? How do those principles apply in WD‘s case? Explain.

[Wandering Dago, Inc. v. Destito, 879 F.3d 20 (2d Cir. 2018)] (See Business and the Bill of Rights.)

Solution The First Amendment to the U.S. Constitution protects the freedom of speech. Government regulation of speech is presumed to be unconstitutional. To ―pass muster‖ under the free-speech clause, a law or government action that regulates the content of speech must serve a compelling state interest and must be narrowly tailored to achieve that interest.

In this problem, the government, through OGS, disfavored WD‘s speech because of its branding.

The agency may have labeled the branding offensive because of its perceived effect on the members of a certain ethnic group. The interest that the government sought to serve might have been a mandate of positive expression. But denying the business application of any vendor whose branding might demean or offend could silence dissent in the ―marketplace of ideas.‖ In some contexts, an ethnic slur might be hostile and involve conduct. A regulation of that conduct would arguably serve the interest of preventing immediate harm. For example, the government can regulate threats of violence, harassment, and fighting words. But WD‘s speech did not fall into any of these categories.

WD‘s use of ethnic slurs reflected its owners‘ viewpoint about when and how such language should be used. There does not seem to be a sufficiently substantial compelling state interest to justify proscribing this viewpoint. By rejecting WD‘s application only on the ground of the business‘s branding, OGS impermissibly discriminated against WD‘s expression of the owners‘ viewpoint, and thereby violated the First Amendment.

In the actual case on which this problem is based, the court rejected WD‘s contention and entered a judgment in the defendants‘ favor. A state intermediate appellate court reversed, holding, based in part on the points stated above, that OGS violated WD‘s right to freedom of speech. The appellate court concluded that WD was entitled to an injunction denying WD‘s future lunch program applications because of the use of ethnic slurs in its branding.

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8.

A Question of Ethics 4–8. Free Speech. Michael Mayfield, the president of Mendo Mill and Lumber Co., in California, received a ―notice of a legal claim‖ from Edward Starski. The ―claim‖ alleged that a stack of lumber had fallen on a customer as a result of a Mendo employee‘s ―incompetence.‖ The ―notice‖ presented a settlement offer on the customer‘s behalf in exchange for a release of liability for Mendo. In a follow-up phone conversation with Mayfield, Starski said that he was an attorney—which, in fact, he was not. Starski was arrested and charged with violating a state criminal statute that prohibited the unauthorized practice of law. [People v.

Starski, 7 Cal.App.5th 215, 212 Cal. Rptr.3d 622 (1 Dist. Div. 2 2017)] (See Business and the Bill of Rights.)

1.

Starski argued that ―creating an illusion‖ that he was an attorney was protected by the First Amendment. Is Starski correct? Explain.

Solution No. The First Amendment guarantees the freedom of speech for individuals against interference by the government. To protect citizens from those who would abuse the right, speech is subject to reasonable restrictions. Speech that violates criminal laws is not constitutionally protected.

In this problem, Michael Mayfield received a ―notice of a legal claim‖ from Edward Starski. The ―claim‖ alleged that a stack of lumber fell on a customer at Mayfield‘s company as a result of ―incompetence‖ of one of Mayfield‘s employees. The ―notice‖ included a settlement offer on the customer‘s behalf in exchange for a release of liability. In a conversation with Mayfield, Starski stated that he was an attorney—when, in fact, he was not. He was arrested and charged with violating a state statute that prohibited the unlawful practice of law. He argued that ―creating an illusion‖ he was an attorney fell within the protection of the First Amendment. He is wrong. It is within the government‘s power to restrict speech to frustrate a false claim made to accomplish a fraud. And the interest of the government in regulating the practice of law is part of its interest in protecting the public.

In the actual case on which this problem is based, the court convicted Starski of the charge.

On appeal, a state intermediate appellate court affirmed the conviction. Responding to his free speech defense, the court concluded, that Starski was wrong.

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2.

Identify, discuss, and resolve the conflict between the right to free speech and the government‘s regulation of the practice of law.

Solution The question concerns the extent to which the government can regulate the practice of law without infringing on certain rights. The rights at issue include the right of a person to exercise free speech, and the rights of the public to be protected from misleading or deceptive speech, and to have access to competent legal representation.

In recognition of a person‘s right to exercise free speech, the government might choose not to prohibit the unauthorized practice of law. This would deny the public‘s right to be protected from misleading or deceptive speech. The government might choose to prohibit the practice of law entirely, but this would deprive the public of legal representation of all kinds in all circumstances. So, the government must strike a balance that protects the public and individual rights.

The government generally prohibits the unauthorized practice of law—the practice of law by those who have not met the state‘s competency standards to be licensed as attorneys. The government also sanctions persons who have not met the standards from misrepresenting their status to practice law.

The government‘s objective is to ensure that those performing legal services do so competently, without infringing on the rights to free speech, to be protected from misleading or deceptive speech, and to have access to competent legal representation. The regulation protects the public and goes no further than necessary, in recognition of the rights at issue.

Critical Thinking and Writing Assignments 1.

Time-Limited Group Assignment—Free Speech and Equal Protection. For many years, New York City has had to deal with the vandalism and defacement of public property caused by unauthorized graffiti. In an effort to stop the damage, the city banned the sale of aerosol spraypaint cans and broad-tipped indelible markers to persons under twenty-one years of age. The new rules also prohibited people from possessing these items on property other than their own.

Within a year, five people under age twenty-one were cited for violations of these regulations, and nearly nine hundred individuals were arrested for actually making graffiti. Lindsey Vincenty and other artists wished to create graffiti on legal surfaces, such as canvas, wood, and clothing.

Unable to buy supplies in the city or to carry them in the city if they were bought elsewhere, Vincenty and others filed a lawsuit on behalf of themselves and other young artists against Michael Bloomberg, the city‘s mayor, and others. The plaintiffs claimed that, among other things, the new rules violated their right to freedom of speech. (See The Constitutional Powers of Government.)

1.

One group will argue in favor of the plaintiffs and provide several reasons why the court should hold that the city‘s new rules violate the plaintiffs‘ freedom of speech.

Solution The rules in this problem regulate the content of expression. Such rules must serve a compelling governmental interest and must be narrowly written to achieve that interest. In other words, for the rules to be valid, a compelling governmental interest must be furthered only by those rules. To make this determination, the government‘s interest is balanced against the individual‘s constitutional right to be free of the rules. For example, a city has a legitimate interest in banning

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the littering of its public areas with paper, but that does not justify a prohibition against the public distribution of handbills, even if the recipients often just toss them into the street. In this problem, the prohibition against young adults' possession of spray paint and markers in public places imposes a substantial burden on innocent expression because it applies even when the individuals have a legitimate purpose for the supplies. The contrast between the numbers of those cited for violating the rules and those arrested for actually making illegal graffiti also undercuts any claim that the interest in eliminating illegal graffiti could not be achieved as effectively by other means.

2.

Another group will develop a counterargument that outlines the reasons why the new rules do not violate free speech rights.

Solution The rules in this problem do not regulate the content of expression—they are not aimed at suppressing the expressive conduct of young adults but only of that conduct being fostered on unsuspecting and unwilling audiences. The restrictions are instead aimed at combating the societal problem of criminal graffiti. In other words, the rules are content neutral. Even if they were not entirely content neutral, expression is always subject to reasonable restrictions. Of course, a balance must be struck between the government‘s obligation to protect its citizens and those citizens‘ exercise of their right. But the rules at the center of this problem meet that standard. Young adults have other creative outlets and other means of artistic expression available.

3.

A third group will argue that the city‘s ban violates the equal protection clause because it applies only to persons under age twenty-one.

Solution Under the equal protection clause of the Fourteenth Amendment, a state may not ―deny to any person within its jurisdiction the equal protection of the laws.‖ This clause requires a review of the substance of the rules. If they limit the liberty of some person but not others, they may violate the equal protection clause. Here, the rules apply only to persons under the age of twenty-one. To succeed on an equal protection claim, opponents should argue that the rules should be subject to strict scrutiny—that the age restriction is similar to restrictions based on race, national origin, or citizenship. Under this standard, the rules must be necessary to promote a compelling governmental interest. The argument would be that they are not necessary—there are other means that could accomplish this objective more effectively.

Alternatively, opponents could argue that the rules should be subject to intermediate scrutiny—that the age restriction is similar to restrictions based on gender or legitimacy.

Under this level of scrutiny, the restrictions must be substantially related to an important government objective. In this problem, the contrast between the numbers of those cited for violating the rules and those arrested for actually making illegal graffiti undermines any claim that the restrictions are substantially related to the interest in eliminating illegal graffiti. If neither of these arguments is successful, opponents could cite these same numbers to argue that the rules are not valid because there is no rational basis on which their restrictions on certain persons relate to a legitimate government interest.

Solution and Answer Guide Miller, The Legal Environment Today 10e, 9780357635582; Chapter 05: Torts and Product Liability

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Table of Contents Critical Thinking Questions in Features ............................................................................................................... 50 Digital Update.......................................................................................................................................... 50 Cybersecurity and the Law ...................................................................................................................... 51 Critical Thinking Questions in Cases ..................................................................................................................... 51 Case 5.1 ................................................................................................................................................... 51 Case 5.2 ................................................................................................................................................... 52 Case 5.3 ................................................................................................................................................... 53 Chapter Review ............................................................................................................................................................. 53 Practice and Review ................................................................................................................................ 53 Practice and Review: Debate This ........................................................................................................... 54 Issue Spotters .......................................................................................................................................... 55 Business Scenarios and Case Problems ................................................................................................... 55 Critical Thinking and Writing Assignments .............................................................................................. 63

Critical Thinking Questions in Features Digital Update 66. Why might the appellate court have decided that the evidence did not support Nadia Hussain‘s intentional infliction of emotional distress claim?

Solution Because some courts allow claims for intentional infliction of emotional distress only when the victim cannot recover damages for the defendant's conduct under another tort theory. Hussain‘s suit against Patel was based on conduct that was actionable under other tort theories: invasion of privacy and public disclosure of private facts. Therefore, the Texas appellate court held that the intentional infliction claim was not available. The court stated that intentional infliction of emotional distress is a ―gap-filler tort, judicially created for the limited purpose of allowing recovery in those rare instances in which a defendant intentionally inflicts severe emotional distress in a manner so unusual that the victim has no other recognized theory of redress.‖

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Cybersecurity and the Law 1.

Security engineers discovered that faulty coding in the Chrysler Jeep‘s entertainment software made the car vulnerable to cyber attacks, conceivably enabling hackers to gain control of the vehicles. The United States Supreme Court has allowed a breach of warranty lawsuit against Chrysler by Jeep owners who contend they would not have purchased the cars had they known about the security defect. Why might the outcome of this case be important for strict product liability law?

Solution An important question in the developing field of IoT strict product liability law is: who is liable for product malfunction that results from hacking and causes harm? The hacker, certainly. The manufacturer, perhaps, but only if a failing security system qualifies as a defective condition that makes the IoT product ―unreasonably dangerous‖ to consumers or users. Even though it is not a strict product liability case, the Chrysler lawsuit does involve plaintiffs who have been harmed, albeit economically, by a manufacturer‘s failure to protect its product against cyberattacks.

Whether or not the plaintiffs prevail, their case will establish a precedent for the extent to which civil law is willing to hold manufacturers responsible for lapses in the cybersecurity embedded in their products.

Critical Thinking Questions in Cases Case 5.1 67. Punitive damages may be awarded in a tort action when a defendant‘s actions show malice—that is, when a person‘s conduct is characterized by hatred, ill will, or a spirit of revenge. Would an award of punitive damages be appropriate in this case? Explain.

Solution Yes, an award of punitive damages would be appropriate in the Sky case.

The purpose of punitive damages is not to compensate a plaintiff, but to punish and deter a defendant‘s conduct. As noted in the lead up to the question, however, an award of punitive damages is available only on a finding of malice.

For an award of punitive damages, malice is the state of mind under which a person‘s conduct is characterized by hatred, ill will, or a spirit of revenge (or, in some cases, a conscious disregard for the rights and safety of other persons that has a great probability of causing substantial harm).

Because punitive damages are assessed for punishment and not compensation, a positive element of conscious wrongdoing is required.

In the Sky case, the court heard testimony and viewed other evidence that, from the court‘s perspective, established that Van Der Westhuizen acted with malice. The nature of the defamatory statements in the e-mail and online reviews, the recipient to whom the e-mail was directed, and the fact that Sky and Van Der Westhuizen were competing breeders, support a finding of malice and thus an award of punitive damages.

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68. Should Van Der Westhuizen make an effort to remove all of the false online statements and reviews of Sky that she posted? Why or why not?

Solution Yes, Van Der Westhuizen should make an effort to remove all of the false online statements and reviews of Sky that she posted.

Damage to a person‘s reputation cannot be adequately compensated for monetarily, nor can an award of compensatory damages put someone in the same position that they were in before the defamation. Removing the defamatory statements is, however, a step in that direction and will help to prevent further harm. For those reasons, removal is an ethically necessary act.

Here, the issue is framed as an ethical question, but it is also a legal one. In both contexts, the removal of the posts can be needed to return defamed parties to the position they were in before the defamatory statements. In the Sky case, the trial court issued a permanent injunction to require Van Der Westhuizen to remove any online posts, reviews, and other defamatory statements concerning Sky, including statements on social media and other websites, and to prevent any such later acts by the defendant. The court‘s reasons were as stated above.

Case 5.2 69. The NIU Chapter invited nonmember sorority women to participate in the hazing event by filling the pledges‘ cups with vodka and directing them to drink it. Did these women owe a duty of care to the pledges? Discuss.

Solution Yes, the nonmember sorority women who participated in the hazing event owed a duty of care to the pledges.

As explained in the Illinois Supreme Court‘s opinion in the Bogenberger case, a hazing injury is reasonably foreseeable and is likely to occur. The magnitude of the burden of guarding against the injury is small. Thus, it is reasonable to impose a duty of care on individuals who actively participate in a hazing event.

The nonmember sorority women were invited to participate in the NIU Chapter‘s hazing event, and willingly agreed. They took part by filling the pledges‘ cups with vodka and directing them to drink it. The women were more than guests encouraging the pledges to drink. They were an integral part of the event with as much influence over the pledges as the NIU Chapter and its officers.

Hazing is illegal, and those individuals who choose to participate in such acts should bear the consequences. Under the circumstances stated in the question, the nonmember women owed a duty to the pledges, including of course David Bogenberger.

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70. Suppose that the pledges‘ attendance at the hazing event had been optional, and the NIU Chapter had furnished alcohol, but not required its consumption. Would the result have been different? Explain.

Solution Yes, if the facts stated in the question had been the facts in the actual case, there would have been a difference in the result.

In normal circumstances, there is no basis for liability in the sale or gift of alcoholic beverages (except under a dram shop law). The difference between the hazing event in the Bogenberger case and a ―social host‖ situation is that in the former the consumption of alcohol was required to gain admission to the NIU Chapter. This led directly to the injury that served as the basis for the plaintiff‘s complaint. This required consumption was in violation of the state hazing statute, the university‘s rules, and the national Pi Kappa Alpha organization‘s policy, furnishing a further ground for the imposition of liability here.

Case 5.3 71. Would the result in this case have been different if Taylor‘s minor son, rather than Taylor herself, had been struck by the ball? Should courts apply the doctrine of assumption of risk to children?

Discuss.

Solution There is no legal bar to applying assumption of risk to children. Children are expected to use the degree of caution required of a child of like age and intelligence under similar circumstances. The courts have therefore applied the doctrine of assumption of the risk in numerous cases, such as when a child was injured while playing on a trampoline, swinging from a rope swing, or diving into a swimming pool. The key is whether the child knew of the danger, was able to appreciate the risks associated with it, and voluntarily chose to run the risk. Normally, it is up to a jury (or a judge in a bench trial) to decide if the facts indicate that the child voluntarily undertook the risk.

Chapter Review Practice and Review Elaine Sweeney went to Ragged Mountain Ski Resort in New Hampshire with a friend. Elaine went snow tubing down a run designed exclusively for snow tubers. No Ragged Mountain employees were present in the snow-tube area to instruct Elaine on the proper use of a snow tube. On her fourth run down the trail, Elaine crossed over the center line between snow-tube lanes, collided with another snow tuber, and was injured. Elaine filed a negligence action against Ragged Mountain seeking compensation for the injuries that she sustained. Two years earlier, the New Hampshire state legislature had enacted a statute that prohibited a person who participates in the sport of skiing from suing a ski-area operator for injuries caused by the risks inherent in skiing. Using the information presented in the chapter, answer the following questions.

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72. What defense will Ragged Mountain probably assert?

Solution The strongest defense will be assumption of the risk, which is common in sports. That defense is strengthened by the state statute that formalizes the defense.

73. The central question in this case is whether the state statute establishing that skiers assume the risks inherent in the sport applies to Elaine‘s suit. What would your decision be on this issue?

Why? Solution Yes, because the statute strengthened the traditional common law rule. The legislature can change or limit common law rules, such as those for liability. Here the legislature strengthened the rule of assumption of the risk, which makes it very difficult for a plaintiff to overcome.

74. Suppose that the court concludes that the statute applies only to skiing and not to snow tubing.

Will Elaine‘s lawsuit be successful? Explain.

Solution No, because of assumption of the risk. The defense of assumption of the risk would still likely be a successful defense for the ski resort. That rule generally applies to participants in sporting events unless the host creates unreasonably dangerous conditions and does not warn clients.

75. Now suppose that the jury concludes that Elaine was partly at fault for the accident. Under what theory might her damages be reduced in proportion to how much her actions contributed to the accident and her resulting injuries?

Solution Comparative negligence allows the jury to compute the contributions of both parties to the situation. This results in the reduction or elimination of the plaintiff‘s recovery, depending on the state rule and the percent of negligence contributed.

Practice and Review: Debate This 76. Each time a state legislature enacts a law that applies the assumption of risk doctrine to a particular sport, participants in that sport suffer.

Solution The argument is that the less liability imposed on a sports-activity operator, the less that operator will take care to maintain the sports terrain and equipment. In other words, using the example of a ski area, a law that exempts the ski area from liability for skiing accidents will result in the ski area owner investing less in maintaining the trail system as well in the signage indicating hidden hazards. Additionally, ski area owner will pay for fewer ski patrollers who force fast skiers to slow down in congested areas or areas reserved for beginners.

In contrast, there may be an upside to applying the assumption of risk doctrine to sports that are obviously not always safe. The benefit to all of those who participate is that tickets for such sports as Alpine skiing will be cheaper. There is competition among ski resorts. Therefore, if the ski resort owner pays less in liability insurance because of the state law under study in this debate topic, at least part of the savings will be passed on to ticket buyers. Also, when participants know that they can‘t sue for accidents, some may ski less recklessly.

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Issue Spotters 3.

Jana leaves her truck‘s motor running while she enters a Kwik-Pik Store. The truck‘s transmission engages, and the vehicle crashes into a gas pump, starting a fire that spreads to a warehouse on the next block. The warehouse collapses, causing its billboard to fall and injure Lou, a bystander.

Can Lou recover from Jana? Why or why not?

Solution Probably. To recover on the basis of negligence, the injured party as a plaintiff must show that the truck‘s owner owed the plaintiff a duty of care, that the owner breached that duty, that the plaintiff was injured, and that the breach caused the injury. In this problem, the owner‘s actions breached the duty of reasonable care. The billboard falling on the plaintiff was the direct cause of the injury, not the plaintiff‘s own negligence. Thus, liability turns on whether the plaintiff can connect the breach of duty to the injury. This involves the test of proximate cause—the question of foreseeability. The consequences to the injured party must have been a foreseeable result of the owner‘s carelessness.

4.

Rim Corporation makes tire rims that it sells to Superior Vehicles, Inc., which installs them on cars.

One set of rims is defective. An inspection would have revealed the defect, but Superior does not inspect the rims. The car with the defective rims is sold to Town Auto Sales, which sells the car to Uri. Soon, the car is in an accident caused by the defective rims, and Uri is injured. Is Superior Vehicles liable? Explain your answer.

Solution Yes. Those who make, sell, or lease goods are liable for the harm or damages caused by those goods to a consumer, user, or bystander. The maker of component parts may also be liable. In this situation, Rim Corporation makes tires that Superior installs on its vehicles before selling them to dealers. Thus, Superior is the manufacturer, and Rim is the maker of component parts. A manufacturer is liable for its failure to exercise due care to any person who sustains an injury proximately caused by a negligently made (defective) product. Superior‘s failure to inspect and test the tires it installs is a failure to use due care. Thus, Superior is liable to the injured buyer, Uri. Rim Corporation may also be liable.

Business Scenarios and Case Problems 9.

Defamation. Richard is an employee of the Dun Construction Corp. While delivering materials to a construction site, he carelessly backs Dun‘s truck into a passenger vehicle driven by Green. This is Richard‘s second accident in six months. When the company owner, Dun, learns of this latest accident, a heated discussion ensues, and Dun fires Richard. Dun is so angry that he immediately writes a letter to the union of which Richard is a member and to all other construction companies in the community. In it, Dun states that Richard is the ―worst driver in the city‖ and that ―anyone who hires him is asking for legal liability.‖ Richard files a suit against Dun, alleging libel on the basis of the statements made in the letters. Discuss. (See Intentional Torts against Persons.)

Solution The legal issue is whether Dun has libeled Richard‘s character. For Richard to recover in a legal action, he must prove the following elements: (a) that the defendant‘s writing contained a false statement, not privileged, presented as fact (called a false statement of fact), or a statement of opinion that was overpublicized, or even a true statement of fact that was overpublicized; (b) that the writing was made known to others besides the plaintiff (called publication); and (c) that

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damage occurred, if damages are sought by plaintiff. In this case, the writing of the letter and its distribution could not be considered privileged. One could argue that privilege may be extended to Dun if a union contract required that specific notice and reasons for firing union members be given to union officials. Such privilege, however, would not extend to the other construction businesses.

Dun could also argue that the statements were true. Truth is a defense against a defamation suit.

Richard would then argue that the statements were presented as facts, not merely opinion, and were false, or that even if they were true, they were overpublicized. Proof of publication is already established.

Finally, if Richard cannot secure comparable work because of the letters, he might be able to recover lost wages. (Note here that if compensatory damages are proved, Richard will probably also be awarded punitive damages.)

10. Liability to Business Invitees. Kim went to Ling‘s Market to pick up a few items for dinner. It was a stormy day, and the wind had blown water through the market‘s door each time it opened. As Kim entered through the door, she slipped and fell in the rainwater that had accumulated on the floor. The manager knew of the weather conditions but had not posted any sign to warn customers of the water hazard. Kim injured her back as a result of the fall and sued Ling‘s for damages. Can Ling‘s be held liable for negligence? Discuss. (See Negligence.)

Solution Yes. An occupier of the premises has a duty to use ordinary care to keep its premises in a reasonably safe condition and to warn customers of any foreseeable hazards. What constitutes a foreseeable hazard depends on whether a reasonably prudent person would conclude that harm could likely result from the conditions. Here, the manager knew of the storm conditions, knew that water accumulated rapidly on the floor, and knew or should have known that the water created a hazard. A court could find that the manager‘s failure to remove the water constituted negligence, and the manager could be held liable for Kim‘s injuries.

11. Business Case Problem with Sample Answer— Negligence. At the Weatherford Hotel in Flagstaff, Arizona, in Room 59, a balcony extends across thirty inches of the room‘s only window, leaving a twelveinch gap with a three-story drop to the concrete below. A sign prohibits smoking in the room but invites guests to ―step out onto the balcony‖ to smoke. Toni Lucario was a guest in Room 59 when she climbed out of the window and fell to her death. Patrick McMurtry, her estate‘s personal representative, filed a suit against the Weatherford. Did the hotel breach a duty of care to Lucario? What might the Weatherford assert in its defense? Explain. [McMurtry v.

Weatherford Hotel, Inc., 231 Ariz. 244, 293 P.3d 520 (2013)] (See Negligence.) —For a sample answer to Problem 5–3, go to Appendix D. Solution Negligence requires proof that (1) the defendant owed a duty of care to the plaintiff; (2) the defendant breached that duty; (3) the defendant's breach caused the plaintiff‘s injury; and (4) the plaintiff suffered a legally recognizable injury. With respect to the duty of care, a business owner has a duty to use reasonable care to protect business invitees. This duty includes an obligation to discover and correct or warn of unreasonably dangerous conditions that the owner of the premises should reasonably foresee might endanger an invitee. Some risks are so obvious that an

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owner need not warn of them. But even if a risk is obvious, a business owner may not be excused from the duty to protect its customers from foreseeable harm.

Because Lucario was the Weatherford‘s business invitee, the hotel owed her a duty of reasonable care to make its premises safe for her use. The balcony ran nearly the entire width of the window in Lucario‘s room. She could have reasonably believed that the window was a means of access to the balcony. The window/ balcony configuration was dangerous, however, because the window opened wide enough for an adult to climb out, but the twelve-inch gap between one side of the window and the balcony was unprotected, and this unprotected gap opened to a drop of more than three stories to a concrete surface below.

Should the hotel have anticipated the potential harm to a guest opening the window in Room 59 and attempting to access the balcony? The hotel encouraged guests to ―step out onto the balcony‖ to smoke. The dangerous condition of the window/ balcony configuration could have been remedied at a minimal cost. These circumstances could be perceived as creating an ―unreasonably dangerous‖ condition. And it could be concluded that the hotel created or knew of the condition and failed to take reasonable steps to warn of it or correct it. Of course, the Weatherford might argue that the window/ balcony configuration was so obvious that the hotel was not liable for Lucario‘s fall.

In the actual case on which this problem is based, the court concluded that the Weatherford did not breach its duty of care to Lucario. On McMurtry‘s appeal, a state intermediate appellate court held that this conclusion was in error, vacated the lower court‘s judgment in favor of the hotel on this issue, and remanded the case.

12. Negligence. Ronald Rawls and Zabian Bailey were in an auto accident in Bridgeport, Connecticut.

Bailey rear-ended Rawls at a stoplight. Evidence showed it was more likely than not that Bailey failed to apply his brakes in time to avoid the collision, failed to turn his vehicle to avoid the collision, failed to keep his vehicle under control, and was inattentive to his surroundings. Rawls filed a suit in a Connecticut state court against his insurance company, Progressive Northern Insurance Co., to obtain benefits under an underinsured motorist clause, alleging that Bailey had been negligent. Could Rawls collect? Discuss. [Rawls v. Progressive Northern Insurance Co., 310 Conn. 768, 83 A.3d 576 (2014)] (See Negligence.)

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Solution Yes, Rawls could obtain benefits from Progressive Northern Insurance Co. under an underinsured motorist clause, on the ground that Bailey had been negligent. To succeed in a negligence action, the plaintiff must prove that (1) the defendant owed a duty of care to the injured party (plaintiff), (2) the defendant breached that duty, (3) the breach was the cause of harm to the plaintiff, and (4) the harm to the plaintiff was a legally recognizable injury. The duty must be such that a reasonable person engaging in the same activity would anticipate a risk of the negative consequences and guard against it.

In this problem, Zabian Bailey rear-ended Rawls at a stoplight. According to the facts, the evidence showed it was more likely than not that Bailey failed to apply his brakes in time to avoid the collision, failed to turn his vehicle to avoid the collision, failed to keep his vehicle under control, and was inattentive to his surroundings. Bailey‘s duty to Rawls included any and all of thee precautions—braking in time, turning the vehicle, keeping the vehicle under control, and remaining attentive to the surroundings. Clearly, Bailey breached this duty, and the breach caused whatever harm Rawls suffered—damage to his vehicle and injury to himself. Depending on whether Bailey was grossly negligent, punitive damages might be appropriate.

In the actual case on which this problem is based, a jury found in Rawls‘s favor, and the court entered a judgment against Progressive. On the insurer‘s appeal, a state intermediate appellate court reversed, but on further appeal the state supreme court reversed again, holding that the evidence supported the jury‘s findings in Rawls‘s favor.

13. Negligence. Charles Robison, an employee of West Star Transportation, Inc., was ordered to cover an unevenly loaded flatbed trailer with a 150-pound tarpaulin. The load included uncrated equipment and pallet crates of different heights, about thirteen feet off the ground at its highest point. While standing on the load, manipulating the tarpaulin without safety equipment or assistance, Robison fell headfirst and sustained a traumatic head injury. He filed a suit against West Star to recover for his injury. Was West Star ―negligent in failing to provide a reasonably safe place to work,‖ as Robison claimed? Explain. [West Star Transportation, Inc. v. Robison, 457 S.W.3d 178 (Tex.App.— Amarillo 2015)] (See Negligence.)

Solution Yes, West Star was negligent in failing to provide a reasonably safe place to work. Central to the tort of negligence is the concept of duty of care. Tort law measures duty by the reasonable person standard—how a reasonable person would have acted in the same circumstances. But the degree of care to be exercised varies, depending on the person‘s profession, the person‘s relationship with the injured party, and other factors—in other words, it is what a reasonable person in the position of the defendant in a negligence case would have done in the particular circumstances.

In this problem, West Star Transportation, Inc., ordered its employee Charles Robison to cover an unevenly loaded flatbed trailer with a heavy tarpaulin. The load was ungainly, uneven, and about thirteen feet above the ground at its highest point. Manipulating the tarpaulin without safety equipment or assistance, Charles fell from the load and sustained a head injury. West Star owed a duty to its employee to exercise reasonable care, but West Star did not do what a shipper of ordinary prudence would have done under the same or similar circumstances. West Star should have refused to handle a load requiring unreasonably dangerous tarping or the company should have taken appropriate safety precautions.

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In the actual case on which this problem is based, a jury found that West Star's negligence proximately caused the incident. On West Star‘s appeal, a state intermediate appellate court affirmed.

14. Negligence. DSC Industrial Supply and Road Rider Supply are located in North Kitsap Business Park in Seattle, Washington. Both firms are owned by Paul and Suzanne Marshall. The Marshalls had outstanding commercial loans from Frontier Bank. The bank dispatched one of its employees, Suzette Gould, to North Kitsap to ―spread Christmas cheer‖ to the Marshalls as an expression of appreciation for their business. Approaching the entry to Road Rider, Gould tripped over a concrete ―wheel stop‖ and fell, suffering a broken arm and a dislocated elbow. The stop was not clearly visible, it had not been painted a contrasting color, and it was not marked with a sign.

Gould had not been aware of the stop before she tripped over it. Is North Kitsap liable to Gould for negligence? Explain. [Gould v. North Kitsap Business Park Management, LLC, 192 Wash.App. 1021 (2016)] (See Negligence.)

Solution Yes, North Kitsap is liable to Gould in the circumstances of this problem for negligence. To succeed in an action for negligence, a plaintiff must prove that the defendant owed a duty of care to the plaintiff, the defendant breached the duty, the breach caused an injury to the plaintiff, and the plaintiff thereby suffered a legally recognizable injury.

In this problem, Frontier Bank sent one of its employees, Suzette Gould, to North Kitsap Business Park in Seattle, Washington, to ―spread Christmas cheer‖ to a couple of the bank‘s customers, Paul and Suzanne Marshall, as an expression of appreciation for their business. The Marshalls owned DSC Industrial Supply and Road Rider Supply, which were located in North Kitsap. Approaching the entry to Road Rider, Gould tripped over a concrete ―wheel stop‖ and fell, suffering a broken arm and a dislocated elbow.

Applying the principles of negligence theory to these facts, North Kitsap owed Gould a duty as a business invitee of the Marshalls (and thus of North Kitsap) to protect her from dangerous conditions on the premises. Gould was not aware of the wheel stop, which was a dangerous condition because it was not clearly visible, and not painted a contrasting color or marked with a sign. North Kitsap breached its duty by not making the stop safer. This breach was the proximate cause of Gould‘s injuries.

In the actual case on which this problem is based, Gould filed a suit in a Washington state court against North Kitsap, alleging negligence. The court issued a judgment in her favor. A state intermediate appellate court affirmed the judgment, on the reasoning stated here.

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15. Defamation. Jonathan Martin, an offensive lineman with the Miami Dolphins, abruptly quit the team and checked himself into a hospital seeking psychological treatment. Later, he explained that he left because of persistent taunting from other Dolphins players. The National Football League hired attorney Theodore Wells to investigate Martin‘s allegations of bullying. After receiving Wells‘s report, the Dolphins fired their offensive line coach, James Turner. Turner was a prominent person on the Dolphins team, and during his career he chose to thrust himself further into the public arena. He was the subject of articles discussing his coaching philosophy, and the focus of one season of HBO‘s ―Hard Knocks,‖ showcasing his coaching style. Turner filed a suit in a federal district court against Wells, alleging defamation. He charged that Wells had failed to properly analyze certain information. Is Turner likely to succeed on his claim? Explain. [Turner v.

Wells, 879 F.3d 1254 (11th Cir. 2018)] (See Intentional Torts against Persons.)

Solution No, Turner is not likely to succeed on his claim for defamation. Persons in the public eye are public figures. Generally, false statements that appear in the media, or otherwise, about public figures do not constitute defamation unless the statements are made with actual malice. In other words, to succeed on a claim for defamation, a public figure has to prove malice. To be made with malice, a false statement must be made with knowledge of its falsity or a reckless disregard for its truth.

In this problem, Turner qualifies as a public figure. He was a prominent person—the offensive line coach—on the Miami Dolphins. During his career, he chose to thrust himself further into the public arena. For instance, he was the subject of articles discussing his coaching philosophy, and the focus of one season of HBO‘s ―Hard Knocks,‖ showcasing his coaching style. Thus, to prove his claim against Wells, Turner would have to prove malice. Wells investigated allegations of bullying among the Dolphins. After receiving Wells‘ report, the team fired Turner. He claimed defamation, charging that Wells, in his report, failed to properly analyze certain information. But this is not proof of malice. In fact, this is not even an allegation of malice.

In the actual case on which this problem is based, the court dismissed Turner‘s suit. The U.S. Court of Appeals for the Eleventh Circuit affirmed. ―Turner is a public figure who has failed to adequately plead that the Defendants acted with malice in drafting and publishing the Report.‖ 16. Product Liability. Barbara Kaiser had surgery to implant the Prolift Anterior Pelvic Floor Repair System, a medical device that supports the pelvic muscles. Within a few years, Kaiser began suffering severe pelvic pain. Kaiser‘s physician attributed the pain to the Prolift and told her that the pain was likely permanent, because, in her situation, as with some other patients, it was impossible to remove the device safely. Kaiser filed a strict product liability suit in a federal district court against Ethicon, the maker of the Prolift, and Ethicon‘s parent company Johnson & Johnson, to recover for her injuries. At the trial, pelvic-floor surgeons testifying on Kaiser‘s behalf revealed that they had not known of the risks associated with the Prolift and ―once [they] found out about them, [they] stopped using it.‖ What made this product so defective as to be unreasonably dangerous? Explain. (Hint: Who are Prolift‘s ―ordinary consumers,‖ and how was the product so dangerous as to exceed their expectations?) [Kaiser v. Johnson & Johnson, 947 F.3d 996 (7th Cir. 2020)] (See Product Liability.)

Solution What made the Prolift so defective as to be unreasonably dangerous was that it was dangerous beyond the reasonable expectation of its ―ordinary consumers.‖ The Prolift‘s ordinary consumers

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are pelvic-floor surgeons, such as the physician who implanted the device at the heart of the Kaiser case. Ethicon created risks in the use of the Prolift beyond the expectations of these surgeons when none of them were appraised of all of the possible risks and subsequent problems associated with the device.

The Prolift is a medical device that supports the pelvic muscles. Ethicon makes and sells the Prolift. In this case, Barbara Kaiser received an implant of the device. Her subsequent pain was attributed to the Prolift by her physician, who told her that the pain was likely permanent because the device could not be safely removed. In Kaiser‘s product liability suit against Ethicon (and its parent company, Johnson & Johnson), surgeons testified on the plaintiff‘s behalf that they had not known of the risks associated with the Prolift and ―once [they] found out about them, [they] stopped using it.‖ The controlling principle here is that a product is unreasonably dangerous when it exposes its user to a risk of harm extending beyond the ordinary consumer‘s expectations. In applying this principle, a jury in the Kaiser case could properly consider evidence of the frequency and severity of the Prolift‘s complications. And, based on the testimony of Kaiser‘s witnesses, the jury could conclude that the Prolift created risks beyond the expectations of the device‘s ordinary consumers—pelvic-floor surgeons. Finally, on this record, the jury could conclude that Prolift was unreasonably dangerous.

In the actual case on which this problem is based, a jury issued a verdict in Kaiser‘s favor, and the court awarded $20 million in damages. Ethicon appealed, arguing that Kaiser had not proved the Prolift was unreasonably dangerous. The U.S. Court of Appeals for the Seventh Circuit affirmed the judgment of the lower court, according to the reasoning spelled out above.

17. The IDDR Approach and Wrongful Interference. Julie Whitchurch was an employee of Vizant Technologies, LLC. After she was fired, she created a website falsely accusing Vizant of fraud and mismanagement to discourage others from doing business with the company. Vizant filed a suit in a federal district court against her, alleging wrongful interference with a business relationship.

The court concluded that Whitchurch‘s online criticism of Vizant adversely affected its employees and operations, forced it to accept reduced compensation to obtain business, and deterred outside investment. The court ordered Whitchurch to stop her online efforts to discourage others from doing business with Vizant. [Vizant Technologies, LLC v. Whitchurch, 675 Fed.Appx. 201 (3d Cir. 2017)] (See Intentional Torts against Persons.)

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1.

How does the motivation for Whitchurch‘s conduct differ from that in other cases involving wrongful interference? What does this suggest about the ethics in this situation? Discuss.

Solution Wrongful interference with another‘s business rights can be divided into two categories— wrongful interference with a contractual relationship and wrongful interference with a business relationship. The typical case of wrongful interference involves a scheme to attract another‘s employee or customer to work for or do business with the party who commits the tort. In either circumstance, the motivation is normally to gain or increase a share of a market.

In this problem, Julie Whitchurch worked for Vizant Technologies. After she was terminated, she created a website falsely accusing Vizant of fraud and mismanagement. Her purpose was to discourage others from doing business with her ex-employer. Vizant sued Whitchurch, alleging wrongful interference with a business relationship. The court concluded that Whitchurch‘s disparagement of Vizant adversely affected its employees and operations, forced it to accept lower compensation to attract business, and deterred outside investment in the company. The results of Whitchurch‘s action may be similar to the results in other cases of wrongful interference. But her motivation was not to gain or increase a share of a market.

Her motive appears to have been revenge.

This suggests that Whitchurch suffered from a greater lack of ethics than the typical defendant accused of wrongful interference. From a utilitarian perspective, an attempt to gain or increase a market share can have arguably positive results. A desire to exact revenge, however, is almost wholly gratuitous, especially in the circumstances of this case.

In the actual case on which this problem is based, the court issued a judgment in Vizant‘s favor and enjoined Whitchurch from discouraging others to do business with Vizant. The U.S. Court of Appeals for the Third Circuit affirmed the judgment and injunction.

2.

Another group will argue that the statute does not violate litigants‘ right of access to the courts.Using the IDDR approach, analyze and evaluate Vizant‘s decision to file a suit against Whitchurch.

Solution Vizant‘s decision to file a suit was probably motivated by a desire to end the impact of Whitchurch‘s criticism of the company. The decision will most likely prove to be a success.

Whitchurch created a website to falsely accuse Vizant of fraud and mismanagement. She intended to discourage others from doing business with the company. The disparagement had its intended effect, adversely affecting the firm‘s employees and operations. Vizant was forced to lower its prices to obtain business. Outside investors were deterred from investing in the firm.

The IDDR approach has four steps—Inquiry, Discussion, Decision, and Review. The purpose of the first step, Inquiry, is to identify the issue, the stakeholders, and applicable ethical theories.

In this problem, the impact of Whitchurch‘s accusations likely prompted Vizant to consider actions to curtail them. The company might have chosen to do nothing, or it might have attempted to negotiate with Whitchurch. A third option would be to file a suit against her.

Aside from the principal parties, the stakeholders include the company‘s owners, directors,

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officers, employees, and customers, as well as other members of the firm‘s community. These are the persons who suffer when business is bad. Ethics standards may derive from religious or philosophical principles, the principle-of-rights theory, the categorical imperative, or utilitarianism.

The second step, Discussion, involves analyzing possible actions to address the issue. Factors include the strengths and weaknesses of those actions, considering their consequences and their effects on stakeholders. Choosing to do nothing could effectively rob Whitchurch‘s accusations of credibility. Negotiations might lead to a retraction of, and an end to, her comments. Either course would save the cost and publicity of litigation. If these actions were tried and failed, a suit could become the only viable option to stop the criticism. Utilitarianism would seem to be the ethical theory to apply here—a suit would be the proper action if it would produce the greatest good for the most people. Considering the number of stakeholders, there is little doubt that a successful suit against Whitchurch would have the optimal result.

The third step is to make a Decision and state the reasons. Clearly, in this case, Vizant decided to proceed with its suit. The reasons include those stated above. After the filing of the complaint and before the trial, there would have been time for the parties to negotiate a quicker, less expensive end to the matter. Of course, this did not happen—Whitchurch continued, even after a loss at trial, up to or perhaps through an appeal.

The final step, Review, determines the success or failure of the action to resolve the issue, and satisfy the stakeholders. In the actual case on which this problem is based, the court issued a judgment in Vizant‘s favor and enjoined Whitchurch from discouraging others to do business with Vizant. The U.S. Court of Appeals for the Third Circuit affirmed the judgment and the injunction. This indicates the success of Vizant‘s action to at least temporarily resolve the issue and, assuming a decline in negative effects coincident with the imposition of the injunction, satisfy the stakeholders.

Critical Thinking and Writing Assignments 1.

Negligence. Donald and Gloria Bowden hosted a cookout at their home in South Carolina, inviting mostly business acquaintances. Justin Parks, who was nineteen years old, attended the party. Alcoholic beverages were available to all of the guests, even those who, like Parks, were between the ages of eighteen and twenty-one. Parks consumed alcohol at the party and left with other guests. One of these guests detained Parks at the guest‘s home to give Parks time to ―sober up.‖ Parks then drove himself from this guest‘s home and was killed in a one-car accident. At the time of death, he had a blood alcohol content of 0.291 percent, which exceeded the state‘s limit for driving a motor vehicle. Linda Marcum, Parks‘s mother, filed a suit in a South Carolina state court against the Bowdens and others, alleging negligence. (See Negligence.)

1.

The first group will present arguments in favor of holding the social hosts (Donald and Gloria Bowden) liable in this situation.

Solution If there were a statute in South Carolina that could be applied to this set of facts, as there are in some states, it would present a nearly unassailable argument in favor of imposing liability.

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In the absence of such a specific law, an alcoholic beverage control statute might provide a basis for imposing liability, under limited circumstances, on commercial hosts (the owners of bars, for example). For policy reasons, those circumstances might be limited to the service of alcoholic beverages to an intoxicated adult to whom recovery might be denied. Commercial entities might also be statutorily liable for knowingly selling alcoholic beverages to minors, who may be allowed to recover. It could be argued that liability might extend, under at least the latter statutes, to social hosts. But these statutes would likely not support imposing a common-law negligence duty on a social host with recovery by an underage individual who consumed the alcoholic beverages. Why? Because this would impose a higher standard on the social host than that to which the commercial provider was subject.

Or public policy might warrant treating underage individuals as lacking full adult capacity to make informed decisions concerning the ingestion of alcoholic beverages and holding liable adult social hosts who knowingly and intentionally serve, or cause to be served, alcoholic beverages to persons they know or should know to be between the ages of eighteen and twenty.

2.

The second group will formulate arguments against holding the social hosts liable.

Solution In any situation, it might be argued that underage drinkers who are not minors should be considered the same as other adults, with no liability imposed on their social hosts for torts committed by intoxicated guests.

3.

The states vary widely in assessing liability and imposing sanctions in the circumstances described in this problem. The third group will analyze the possible reasons why some courts treat social hosts who serve alcohol differently than parents who serve alcohol to their underage children.

Solution The contrast in liability and punishments among the states is a consequence of conflicting public attitudes about underage drinking. Parents who would not approve of their underage children consuming alcoholic beverages outside their homes, for example, might condone such drinking in their homes. In that situation, the rationalization might be to keep teenagers off the road and out of other kinds of trouble. Some might view this attitude and its supporting ―reasoning‖ as what is sometimes referred to as ―situation ethics.‖ The legal environment might unintentionally lend support to these parents by rarely holding them responsible for allowing teenagers to consume alcohol in their homes. This is in part because it is difficult to prove in such circumstances which adults provided the alcohol or condoned its use. In some states, it is legal for minors to consume alcohol in their parents‘ presence and in other limited circumstances—in conjunction with a religious ceremony, for example. Even parents who might allow their children to drink in their presence might object strongly to other adults making that choice for them.

4.

The fourth group will decide whether the guest who detained Parks at his home to give Parks time to sober up could be held liable for negligence. What defense might this guest raise?

Solution

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The guest who detained Parks at his home to give Parks time to sober up could be held liable for negligence on the basis that he assumed a duty to Parks by taking this action and breached the duty by letting him drive home. The breach might be construed as the proximate cause of the accident that resulted in Parks‘ death, with his parents suffering emotional injuries for their loss.

The defenses to the charge in this scenario that the guest might assert include that he owed no duty, that if he did it was not breached, that if there was a breach of duty, it was not the direct or proximate cause of Parks‘ accident, and that even if those elements of negligence might be proved, his parents suffered no compensable injury. All of these defenses would be predicated on the fact of Parks‘ underage over-consumption of alcohol at the Bowdens‘ party, for which the guest was not responsible.

Alternately, the guest might claim that by temporarily detaining Parks to sober up, the guest was acting as a Good Samaritan, and under such a statute one who voluntarily aids another is protected from being held liable for negligence. Or the guest might argue that a state dram shop act designates those who might be liable for injuries caused by intoxicated persons as the sellers or servers who contributed to it—the guest was neither a seller nor a server of alcohol to Parks. The guest might also argue that Parks assumed the risk of his own death by drinking to excess and then driving, or that under either a contributory or comparative negligence theory the guest was entitled to avoid liability for the greater negligence of the hosts or Park himself.

Solution and Answer Guide Miller, The Legal Environment Today 10e, 9780357635582; Chapter 06: Criminal Law and Cyber Crime

Table of Contents Critical Thinking Questions in Features ............................................................................................................... 66 Adapting the Law to the Online Environment ......................................................................................... 66 Critical Thinking Questions in Cases ..................................................................................................................... 67 Case 6.1 ................................................................................................................................................... 67 Case 6.2 ................................................................................................................................................... 67 Chapter Review ............................................................................................................................................................. 68 Practice and Review ................................................................................................................................ 68 Practice and Review: Debate This ........................................................................................................... 69 Issue Spotters .......................................................................................................................................... 69 Business Scenarios and Case Problems ................................................................................................... 70 Critical Thinking and Writing Assignments .............................................................................................. 75

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Critical Thinking Questions in Features Adapting the Law to the Online Environment 77. Despite Bitcoin‘s oversized presence on the dark web, only about 1 percent of all transactions using the cryptocurrency involve an illegal exchange of goods. How does this fact impact arguments in favor of banning Bitcoin?

Solution The relatively low level of illegal activity actually associated with Bitcoin argues against its prohibition. As a society, we accept the widespread use of many items that, under certain circumstances, can be used to further a criminal goal. To use the most obvious example for this topic, even though cash is used in a great many crimes—far more than Bitcoin—nobody would suggest banning the use of cash.

Interestingly, several European countries have limited the amount of cash that can be legally used in any single transaction, primarily to combat money laundering and other forms of tax evasion.

In these situations, one could argue that the funds themselves are part of the actus reus of the crime. In most cases not involving counterfeiting, however, the actus reus of a crime that involves the exchange of illegal goods is the exchange, not the currency used.

Managerial Strategy—Business Questions Why might a corporation‘s managers agree to pay a large fine rather than to be indicted and proceed to trial?

Solution Most corporate managers choose to pay the fine because they worry that a criminal indictment will harm their corporation‘s reputation, its profitability, and ultimately, its existence.

78. How do managers determine the optimal amount of legal research to undertake to prevent their companies from violating the many thousands of federal regulations?

Solution Every manager is faced with the task of determining how best to use the limited resources at their disposal. Clearly, no manager in a small company would decide to devote 50 percent of the company‘s annual costs to preventing violations of federal regulations. Hence, each manager must weigh the potential costs of violating federal rules and regulations with the legal fees that must be incurred to learn about those regulations.

Cybersecurity and the Law—Critical Thinking 79. One suggestion for alleviating the problem of ―fraud sourced‖ money is to require proof of identity from anyone who wants to trade virtual items on online gaming platforms. Do you think this strategy would be successful? Why or why not?

Solution The reasoning behind an identification requirement seems sound. Cybercriminals thrive on anonymity. If there is a record linking them to any suspicious activity, it will deter that activity. It also gives companies like Valve and Epic Games, which owns Fortnite, the ability to monitor the behavior of specific players and traders, and, if this activity becomes suspicious, report it to law enforcement.

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At the same time, cyber criminals are skilled in hiding their identities, and would certainly put this expertise to use on online gaming markets if given an incentive to do so. Furthermore, the identification requirement is not necessarily fair to legitimate gamers, who may want to operate in anonymity for privacy reasons. Many such players would switch from online gaming platforms that did require identification to those that did not, therefore causing economic hardship to those companies trying to do the ―right thing.‖

Critical Thinking Questions in Cases Case 6.1 80. Could Crabtree have successfully avoided her conviction by arguing that her only ―crime‖ was ―naively trusting her co-workers?‖ Why or why not?

Solution No, Crabtree is not likely to have avoided her conviction by arguing that her only ―crime‖ was ―naively trusting her co-workers.‖ This claim would have been refuted by the same evidence that supported the jury‘s finding of her knowledge of, and voluntary participation in, the fraud with which she was charged.

This evidence included the testimony of HCSN employees that Crabtree complied with their requests to modify patient notes to satisfy Medicare qualifications. Further, Crabtree acknowledged in conversation that some of the patients suffered from conditions that were unsuitable for treatment at HCSN. In addition, there was the evidence that Crabtree fulfilled requests to change and falsify notes for billing and Medicare purposes. This supported the finding that she voluntarily joined the conspiracy.

81. It seems reasonable to assume that one of the purposes of any business is to ―maximize billing potential.‖ When does conduct to accomplish that purpose become unethical?

Solution Conduct to ―maximize billing potential,‖ or to realize any other financial objective, becomes unethical when decisions and actions fail to reflect ―good corporate citizenship.‖ In the Crabtree case, for example, the defendant (and, of course, others who participated in the fraud with which she was charged) failed to evaluate—at a minimum—the legal implications of their conduct before engaging in it. Most importantly, Crabtree should have taken into account the health needs of the patients whose therapy she vouched for. She might also have given thought to the possible consequences of her ill-conceived actions on her family and her reputation, as well as within the healthcare community generally.

Case 6.2 82. Why was Sisuphan convicted of embezzlement instead of larceny? What is the difference between these two crimes?

Solution One of the key differences between embezzlement and larceny has to do with the element of possession. Larceny involves the wrongful taking of property in the possession of another, as does robbery (the latter crime involves the violent taking of the property). Embezzlement, in contrast,

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involves the wrongful appropriation of property that has been entrusted to the person appropriating it, typically an employee. In other words, the property is already in the perpetrator‘s possession. Thus, Sisuphan was convicted of embezzlement instead of larceny because, as a dealership employee, he was in legitimate possession of the money until he took the added step of keeping it.

Chapter Review Practice and Review Edward Hanousek worked for Pacific & Arctic Railway and Navigation Company (P&A) as a roadmaster of the White Pass & Yukon Railroad in Alaska. As an officer of the corporation, Hanousek was responsible ―for every detail of the safe and efficient maintenance and construction of track, structures, and marine facilities of the entire railroad,‖ including special projects. One project was a rock quarry, known as ―6-mile,‖ above the Skagway River. Next to the quarry, and just beneath the surface, ran a high-pressure oil pipeline owned by Pacific & Arctic Pipeline, Inc., P&A‘s sister company.

When the quarry‘s backhoe operator punctured the pipeline, an estimated one thousand to five thousand gallons of oil were discharged into the river. Hanousek was charged with negligently discharging a harmful quantity of oil into a navigable water of the United States in violation of the criminal provisions of the Clean Water Act (CWA). Using the information presented in the chapter, answer the following questions.

83. Did Hanousek have the required mental state (mens rea) to be convicted of a crime? Why or why not?

Solution Yes, because he was the corporate officer responsible for the project and had the power to prevent the criminal violation. Corporate directors and officers are personally liable for the crimes they commit, and can also be held liable for the crimes of employees under their supervision.

Because Hanousek was the corporate officer responsible for every detail of the ―6-mile‖ quarry, he had the power to prevent the criminal violation. Therefore, Hanousek can be held criminally negligent for the backhoe operator puncturing the pipeline.

84. Which theory discussed in the chapter would enable a court to hold Hanousek criminally liable for violating the statute regardless of whether he participated in, directed, or even knew about the specific violation?

Solution Under the responsible corporate officer doctrine, a corporate officer can be held liable for a crime because he was in a responsible relationship to the corporation and could have prevented the violation. The corporate officer does not have to intend the crime or even know about it, to incur liability under this doctrine.

85. Could the backhoe operator who punctured the pipeline also be charged with a crime in this situation? Explain.

Solution No, because he did not have the required mental state (mens rea) and was not a corporate officer in a responsible position to prevent the criminal violation. Criminal liability requires a guilty act at the same time as the defendant had a wrongful mental state. In this situation, the backhoe operator did pierce the pipeline (the guilty act), but he did not have a wrongful mental state

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because he was unaware that the pipeline was there. As an employee, a court would not use the same standard as if he were a responsible corporate officer who ―knew or should have known‖ of the existence of the pipeline. Because both elements of criminal liability (guilty act and wrongful mental state) did not occur, the backhoe operator could not be charged with a crime.

86. Suppose that, at trial, Hanousek argued that he could not be convicted because he was not aware of the requirements of the CWA. Would this defense be successful? Why or why not?

Solution No, because Hanousek was the corporate officer responsible for the project and should have known the requirements of the law. Because Hanousek was in a responsible position at the corporation and specifically in charge of the 6-mile quarry, a court would find that he ―should have known‖ of the requirements of the law. Therefore, lack of knowledge of the requirements of the Clean Water Act would not operate as a defense in his case.

Practice and Review: Debate This 87. Because of overcriminalization, particularly by the federal government, Americans may be breaking the law regularly without knowing it. Should Congress rescind many of the more than four thousand federal crimes now on the books?

Solution Drastic times require drastic measures. This nation now has more than three hundred million residents who move frequently. Moreover, the pervasiveness of the Internet means that business fraud is increasing at a rapid rate. Consequently, the federal government must step in to make sure that criminal actions do not go unpunished. That‘s why so many new federal crimes have been added to the body of criminal statutes.

The Constitution reserves for the states police powers for activities within state boarders. Crimes have always been defined by state and local governments. Just because we have a larger population that has access to the Internet does not mean that Congress should be in the business of creating so many federal crimes. Moreover, many new federal criminal statutes do not require intent—a cornerstone of the prosecution of most crimes for ages.

Issue Spotters 88. Dana takes her roommate‘s credit card, intending to charge expenses that she incurs on a vacation. Her first stop is a gas station, where she uses the card to pay for gas. With respect to the gas station, has she committed a crime? If so, what is it?

Solution Yes. With respect to the gas station, she has obtained goods by false pretenses. She might also be charged with larceny and forgery, and most states have special statutes covering illegal use of credit cards.

89. Without permission, Ben downloads consumer credit files from a computer belonging to Consumer Credit Agency. He then sells the data to Dawn. Has Ben committed a crime? If so, what is it?

Solution

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Yes. The Counterfeit Access Device and Computer Fraud and Abuse Act provides that a person who accesses a computer online, without permission, to obtain classified data—such as consumer credit files in a credit agency‘s database—is subject to criminal prosecution. The crime has two elements: (1) accessing the computer without permission and (2) taking data. It is a felony if done for private financial gain. Penalties include fines and imprisonment for up to twenty years. The victim of the theft can also bring a civil suit against the criminal to obtain damages and other relief.

Business Scenarios and Case Problems 1.

Types of Cyber Crimes. The following situations are similar, but each represents a variation of a particular crime. Identify the crime and point out the differences in the variations. (See Cyber Crime.)

1. Chen, posing fraudulently as Diamond Credit Card Co., sends an e-mail to Emily, stating that the company has observed suspicious activity in her account and has frozen the account. The e-mail asks her to reregister her credit card number and password to reopen the account.

Solution This is a form of identity theft. The traditional crimes of theft (robbery, burglary, larceny, and other) consist of wrongfully taking and carrying away another‘s personal property with the intent of depriving the owner permanently of it. Unique to crimes of identity theft is that they involve taking another‘s identity, and unique to cyber variations of the offense is that the criminal acts are committed with computers, often online. A stolen identity is typically used to commit more crimes.

2.

Claiming falsely to be Big Buy Retail Finance Co., Conner sends an e-mail to Dino, asking him to confirm or update his personal security information to prevent his Big Buy account from being discontinued.

Solution As in the previous problem, this is a form of identity theft. This problem describes a factual situation referred to as phishing. In such a set of circumstances, once an unsuspecting individual responds by entering the requested information, the phisher can use it to pose as that person or to steal the funds in the victim‘s bank or other account.

2.

Cyber Scam. Kayla, a student at Learnwell University, owes $20,000 in unpaid tuition. If Kayla does not pay the tuition, Learnwell will not allow her to graduate. To obtain the funds to pay the debt, she sends e-mails to people that she does not know asking them for financial help to send her child, who has a disability, to a special school. In reality, Kayla has no children. Is this a crime?

If so, which one? (See Cyber Crime.)

Solution Kayla has committed fraud in an e-mail sent via the Internet. The elements of the tort of fraud are as follows: 1. The misrepresentation of material facts or conditions was made with knowledge that they were false or with reckless disregard for the truth.

2. There was an intent to induce another to rely on the misrepresentation.

3. There was justifiable reliance on the misrepresentation by the deceived party.

4. Damages were suffered as a result of the reliance.

5. There was a causal connection between the misrepresentation and the injury.

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If any of Kayla‘s recipients reply to her false plea with cash, it is likely that all of these requirements for fraud will have been met.

3.

Business Case Problem with Sample Answer—White-Collar Crime. Matthew Simpson and others created and operated a series of corporate entities to defraud telecommunications companies, creditors, credit reporting agencies, and others. Through these entities, Simpson and his confederates used routing codes and spoofing services to make long-distance calls appear to be local. They stole other firms‘ network capacity and diverted payments to themselves. They leased goods and services without paying for them. To hide their association with their corporate entities and with each other, they used false identities, addresses, and credit histories, and issued false bills, invoices, financial statements, and credit references. Did these acts constitute mail and wire fraud? Discuss. [United States v. Simpson, 741 F.3d 539 (5th Cir. 2014)] (See Types of Crimes.)

Solution Yes, the acts committed by Matthew Simpson and the others, and described in this problem, constitute wire and mail fraud. Federal law makes it a crime to devise any scheme that uses the U.S. mail, commercial carriers (FedEx, UPS), or wire (telegraph, telephone, television, the Internet, e-mail) with the intent to defraud the public.

Here, as stated in the facts, Simpson and his cohorts created and operated a series of corporate entities to defraud telecommunications companies, creditors, credit reporting agencies, and others. Through these entities, Simpson and the others used routing codes and spoofing services to make long distance calls appear to be local. They stole other firms‘ network capacity and diverted payments to themselves. They leased goods and services without paying for them. And they assumed false identities, addresses, and credit histories, and issued false bills, invoices, financial statements, and credit references, in order to hide their association with their entities and with each other. The ―scheme‖ was to defraud telecommunications companies and other members of the public to the perpetrators‘ gain of a variety of goods and services. Wire services—the Internet, and presumably phones and other qualifying services—were used to further the scheme.

In the actual case on which this problem is based, a federal district court convicted Simpson of participating in a wire and mail fraud conspiracy (and other crimes). On appeal, the U.S. Court of Appeals for the Fifth Circuit affirmed the conviction.

4.

Defenses to Criminal Liability. George Castro told Ambrosio Medrano that a bribe to a certain corrupt Los Angeles County official would buy a contract with the county hospitals. To share in the deal, Medrano recruited Gustavo Buenrostro. In turn, Buenrostro contacted his friend James Barta, the owner of Sav–Rx, which provides prescription benefit management services. Barta was asked to pay a ―finder‘s fee‖ to Castro. He did not pay, even after frequent e-mails and calls with deadlines and ultimatums delivered over a period of months. Eventually, Barta wrote Castro a Sav–Rx check for $6,500, saying that it was to help his friend Buenrostro. Castro was an FBI agent, and the county official and contract were fictional. Barta was charged with conspiracy to commit bribery. At trial, the government conceded that Barta was not predisposed to commit the crime.

Could he be absolved of the charge on a defense of entrapment? Explain. [United States v. Barta, 776 F.3d 931 (7th Cir. 2015)] (See Defenses to Criminal Liability.)

Solution

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Yes, Barta could be absolved of the charge of conspiracy to commit bribery on a defense of entrapment. This defense is designed to prevent police officers and other government agents from enticing persons to commit crimes so that they can later be prosecuted for criminal acts. For entrapment to succeed as a defense, both the suggestion and the inducement to commit the crime must take place. The critical question is whether the person who is charged with the commission of a crime was predisposed to commit it or did so only because the officer induced it.

In this problem, the government, through its agent George Castro, entrapped Barta into participating in a conspiracy to bribe a fictional county official. The government conceded at Barta‘s trial that he was not predisposed to conspire to commit bribery. Castro frequently emailed and called Barta over a period of months, with no response from him, even when the messages included deadlines and ultimatums. And Barta‘s statement, when he eventually did write a check on his company‘s account to Castro, that it was to help his friend gave the government reason to believe that Barta was making a deal only to benefit his friend.

In the actual case on which this problem is based, Barta was arrested, charged, and tried for conspiracy to commit bribery. He pleaded entrapment but was convicted. The U.S. Court of Appeals for the Seventh Circuit reversed his conviction, on the reasoning stated above.

5.

Fourth Amendment Protections. Federal officers obtained a warrant to arrest Kateena Norman on charges of credit card fraud and identity theft. Evidence of the crime included videos, photos, and a fingerprint on a fraudulent check. A previous search of Norman‘s house had uncovered credit cards, new merchandise, and identifying information for other persons. An Internet account registered to the address had been used to apply for fraudulent credit cards, and a fraudulently obtained rental car was parked on the property. As the officers arrested Norman outside her house, they saw another woman and a caged pit bull inside. They further believed that Norman‘s boyfriend, who had a criminal record and was also suspected of identify theft, could be there. In less than a minute, the officers searched only those areas within the house in which a person could hide. Would it be reasonable to admit evidence revealed in this ―protective sweep‖ during Norman‘s trial on the arrest charges? Discuss. [United States v. Norman, 637 Fed. Appx. 934 (11th Cir. 2016)] (See Constitutional Safeguards.)

Solution Yes, it would be reasonable to admit evidence revealed in the ―protective sweep‖ of the defendant‘s house in this problem during Norman‘s trial on the arrest charges.

The Fourth Amendment to the U.S. Constitution protects the ―right of the people to be secure in their persons, houses, papers, and effects.‖ Under this amendment, before searching private property, law enforcement officers must obtain a search warrant. Evidence obtained in violation of this requirement is not admissible at trial. But a warrantless search can be reasonable when probable cause and exigent circumstances exist. Thus, when an officer possesses a reasonable belief based on specific facts that an individual posing a danger is hidden inside a certain location, a search for the individual—a ―protective sweep‖— confined to those places on site in which a person might be hiding would be reasonable.

In this problem, from outside a house belonging to Kateena Norman, during the execution of a warrant for the arrest of Norman on charges of credit-card fraud and identity theft, federal officers saw another woman and a caged pit bull inside. The officers further believed that Norman‘s boyfriend, who had a criminal record and was also suspected of identify theft, could be

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inside. In less than a minute, the officers searched only those areas within the house in which a person could hide. Under these circumstances, the warrantless search was reasonable and therefore any evidence discovered in the search would be admissible during her trial on the arrest charges.

In the actual case on which this problem is based, Norman filed a motion to suppress this evidence, which the court denied. The U.S. Court of Appeals for the Eleventh Circuit affirmed. ―The protective sweep was reasonable.‖ 6.

Types of Crimes. In Texas, Chigger Ridge Ranch, L.P., operated a 700-acre commercial hunting area called Coyote Crossing Ranch (CCR). Chigger Ridge leased CCR and its assets for twelve months to George Briscoe‘s company, VPW Management, LLC. The lease identified all of the vehicles and equipment that belonged to Chigger Ridge, which VPW could use in the course of business, but the lease did not convey any ownership interest. During the lease term, however, Briscoe told his employees to sell some of the vehicles and equipment. Briscoe did nothing to correct the buyers‘ false impression that he owned the property and was authorized to sell it. The buyers paid with checks, which were deposited into an account to which only Briscoe and his spouse had access. Which crime, if any, did Briscoe commit? Explain. [Briscoe v. State of Texas, 2018 WL 792255 (Tex.App.—Texarkana 2018)] (See Types of Crimes.)

Solution Briscoe committed the crime of obtaining property by false pretense. This is a crime in which the goal is economic gain through the acquisition of another‘s money, services, or property. This type of theft is accomplished by trickery or fraud.

In the Briscoe case, Briscoe leased Chigger Ridge Ranch for twelve months. The lease delineated the vehicles and equipment that belonged to the ranch, and which VPW could use for the term, but the lease did not convey any ownership interest. Despite the lack of ownership rights, Briscoe had his employees sell some of the vehicles and equipment. The buyers had the impression that Briscoe either owned the property or was authorized to sell it, and he did nothing to correct their false impression of this pretense. The buyers paid with checks, which Briscoe deposited in his own account. The goal of this scheme was to acquire the buyers‘ money. The theft was accomplished by fraud.

In the actual case on which this problem is based, Briscoe was convicted in a Texas state court of giving a false statement to obtain property. A state intermediate appellate court affirmed. ―Briscoe obtained the checks by deception—that is, by failing to correct [the buyers‘] impression that he . . . owned the equipment or was authorized to sell it.‖

7.

A Question of Ethics—The IDDR Approach and Identity Theft. Heesham Broussard obtained counterfeit money instruments. To distribute them, he used account information and numbers on compromised FedEx accounts procured from hackers. Text messages from Broussard indicated that he had participated previously in a similar scam and that he knew the packages would be delivered only if the FedEx accounts were ―good.‖ For his use of the accounts, Broussard was charged with identity theft. In defense, he argued that the government could not prove he knew the misappropriated accounts belonged to real persons or businesses. [United States v. Broussard, 675 Fed.Appx. 454 (5th Cir. 2017)] (See Cyber Crime.)

1. Does the evidence support Broussard‘s assertion? From an ethical perspective, does it matter whether he knew that the accounts belonged to real customers? Why or why not?

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Solution No, the evidence does not support Broussard‘s assertion. In fact, it suggests the opposite—that Broussard knew what was going on.

In this problem, Heesham Broussard obtained counterfeit money instruments. To distribute the items, he used FedEx account information and numbers misappropriated by hackers. Broussard‘s text messages indicated that he had participated in an earlier, similar scam. Further, the messages showed that he knew the packages would be delivered only if the FedEx accounts were ―good.‖ Charged with identity theft, he argued that the government could not prove he knew the FedEx accounts belonged to real persons or businesses. His text messages, however, indicated the contrary. A judge or juror could infer from these statements that he knew the packages would not be delivered successfully unless the account information and numbers belonged to real customers.

From an ethical perspective, it does not matter whether Broussard knew that the accounts belonged to real customers. And it does not matter whether he knew the owners of the accounts, whether they knew him, or whether the accounts belonged to persons or businesses. Broussard committed a crime. An accompanying violation of any standard of ethics is certain. Here, he acted dishonestly, with fraudulent intent, misrepresenting himself as the authorized sender of FedEx packages filled with counterfeit money instruments.

In the actual case on which this problem is based, the court convicted Broussard of the charge of identity theft. The U.S. Court of Appeals for the Fifth Circuit affirmed the conviction, responding to his argument on appeal according to the reasoning stated above.

2.

Assuming that FedEx knew its customers‘ account information had been compromised, use the IDDR approach to consider whether the company had an ethical obligation to take steps to protect those customers from theft.

Solution The conclusion seems foregone—if FedEx knew that its customers‘ account information had been compromised, the company had an ethical obligation to take steps to protect those customers from theft.

The first step of the IDDR approach is an Inquiry—identify the issue, the stakeholders, and ethical standards. In the facts of this question, hackers stole the account information of FedEx customers.

Was FedEx obligated to act to protect those customers from theft? Besides those customers and FedEx, the stakeholders could include the owners and employees of the company, as well as the society as a whole. Relevant ethical standards could derive from the company‘s policies, or from religious, philosophical, or other standards. These would include such general principles as acting for the benefit of the most people.

The second step of the approach is a Discussion to analyze actions that might address the issue.

Factors include the strengths and weaknesses of those actions, considering their consequences and the effects on stakeholders. To protect against theft through the use of stolen account information, FedEx might have to do as little as assign its customers new account names, numbers, or passwords. If the information could be used for illicit purposes other than fraudulent delivery charges, FedEx could notify its customers, publicize the theft, and alert law enforcement.

The company might offer to pay to monitor victimized customers‘ credit information. None of

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these actions would seem to be weak or costly, and their results and effects could be almost entirely beneficial—customers might feel protected, society‘s interest in the reliability of FedEx accounts could be reassured, and the owners and employees of the company might believe more strongly in its continued success.

The third step of the IDDR approach is to make a Decision and state the reasons. The decision is clear—FedEx should act to protect its customers and the other stakeholders. The actions the company should take include those discussed above. The reasons for this conclusion are also stated above—to benefit those customers, the owners and employees of the company, and the public generally. This would further assure these stakeholders of the commitment of the firm to the continuing viability of its business.

The final step of this approach is a Review to weigh the success or failure of the action to resolve the issue, and satisfy the stakeholders. According to the facts, FedEx policy is to deliver packages only if an account is ―good.‖ Thus, if FedEx were to take the steps indicated above, its actions would likely prove successful. The stolen data would not be able to initiate FedEx deliveries, and would become potentially useless for almost any other purpose. These results could satisfy all of the stakeholders.

Critical Thinking and Writing Assignments 1.

Critical Legal Thinking. Ray steals a purse from an unattended car at a gas station. Because the purse contains money and a handgun, Ray is convicted of grand theft of property (cash) and grand theft of a firearm. On appeal, Ray claims that he is not guilty of grand theft of a firearm because he did not know that the purse contained a gun. Can Ray be convicted of grand theft of a firearm even though he did not know that the gun was in the purse? Explain. (See Types of Crimes.)

Solution No. A separate crime occurs only when there are separate distinct acts of seizing the property of another. In the circumstances described in the question, Ray committed the crime of grand theft because of the value of property in the purse, including the value of the gun. Only one crime of theft occurred, however. Ray saw the purse and took it without knowing what it contained: there was one intent and one act.

2.

Time-Limited Group Assignment—Cyber Crime. Cyber crime costs consumers millions of dollars every year. It costs businesses, including banks and other credit card issuers, even more.

Nonetheless, when cyber criminals are caught and convicted, they are rarely ordered to pay restitution or sentenced to long prison terms. (See Cyber Crime.)

1. One group should formulate an argument that stiffer sentences would reduce the amount of cyber crime.

Solution It goes without saying that the higher the anticipated cost of engaging in cyber crime activity, the lower will be the amount demanded. In other words, heavy fines and long jail sentences would have some deterrent effect. The real question is by how much. Many hackers who bring down corporate and government computer systems are teenagers. They cost businesses billions of dollars yet gain no monetary reward for their hacking—they do it to prove that they are as good or better than other hackers. If caught, they could not engage in much meaningful restitution to

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their corporate victims. In contrast, adult cyber criminals who engage in identity theft, credit-card fraud, and online auction fraud often make large sums of money from this criminal activity. They could be forced to engage in meaningful restitution to their victims. They could be sentenced to long jail terms, just as we routinely do for traditional thieves. Restitution and long jail terms might serve as a deterrent to such cyber criminal activities. U.S. authorities, though, cannot easily arrest, try, convict, and sentence cyber criminals living and operating in, say, Russia.

2.

A second group should determine how businesspersons can best protect themselves from cyber crime and avoid the associated costs.

Solution Protection against cyber crime starts with the awareness at management and staff levels of the potential harm that could result. Even the temporary loss of a system‘s functions while its software is replaced due to a virus‘s infection or other destructive event could prove costly. Thus, management should make appropriate funds available to pay for security, impose procedures to identify the system‘s vulnerability, require the use of security hardware and software, and conduct security audits on an ongoing basis. The use of passwords among those with access to the system is also an important step when used correctly. Backed-up data can be key, and storing the backed-up data off-site can be even more effective.

3.

A third group should decide how and when a court should order cyber criminals to pay restitution to their victims. Should victims whose computers have been infected with worms or viruses be entitled to restitution, or only victims of theft who have experienced financial loss? What should the measure of restitution be? Should large companies that are victims of cyber crime be entitled to the same restitution as individuals?

Solution Cyber criminals could and should arguably be ordered to pay restitution to their victims whenever those persons or businesses suffer a financial loss. The victims whose computers are infected with worms or viruses most likely must pay for cleansing software or a security sweep, or more, to clear their data of the infections. Victims of theft of course experience financial loss.

The measure of the restitution might include the value of what was taken, the cost to recover it, the expense of repair, and the price of the investigation that it may have taken to discover the illegal breach.

There is no reason why large companies—such as Facebook, Apple, Netflix, or Alphabet—should not be entitled to the same restitution as other victims.

Solution and Answer Guide Miller, The Legal Environment Today 10e, 9780357635582; Chapter 7: International and Space Law

Table of Contents Critical Thinking Questions in Cases ..................................................................................................................... 77 Case 7.1 ................................................................................................................................................... 77

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Case 7.2 ................................................................................................................................................... 79 Case 7.3 ................................................................................................................................................... 79 Chapter Review ............................................................................................................................................................. 80 Practice and Review ................................................................................................................................ 80 Practice and Review: Debate This ........................................................................................................... 81 Issue Spotters .......................................................................................................................................... 81 Business Scenarios and Case Problems ................................................................................................... 82 Critical Thinking and Writing Assignments .............................................................................................. 90

Critical Thinking Questions in Features Adapting the Law to the Online Environment 90. Why is international law better suited for satellite regulation than national law?

Solution Once launched and having entered orbit, a satellite will spend relatively little time directly above the territory of the government or private company that manufactured it. Therefore, a legal regime in which individual countries retained jurisdiction over satellite activity in low earth orbit (an altitude of approximately 1,200 miles where most satellites operate) above their earthly boundaries would be prohibitively complex and contentious. Clearly, the future of satellite law going to be governed by international law.

As has been discussed at length in this chapter, the purpose of international law is the orderly settlement of disputes between nations. Indeed, the U.N.‘s Outer Space Treaty does provide a broad framework for international space law. More specifically, as noted in the text, under the Liability Convention any harm caused by a satellite on Earth is the financial responsibility of the country that launched it, regardless of who or what actually caused the damage.

It should be noted that, in the context of twenty-first century cybersecurity and widespread computer hacking by malicious third parties, the Liability Convention is somewhat outdated. A more helpful model for such satellite-related disputes can be found in the treaties and established practices that govern international waters. Customarily, the law of the sea holds that damages caused by ships or other vessels are the financial responsibility of the party that controls the vessel, not the party that owns it.

Critical Thinking Questions in Cases Case 7.1 91. Is the Court‘s interpretation of Section 1610(g) consistent with the purpose of the FSIA? Explain.

Solution Yes. The Court‘s interpretation of Section 1610(g) is consistent with the purpose of the FSIA. The act expressly provides that states are not immune from the jurisdiction of U.S. courts ―insofar as their commercial activities are concerned, and their commercial property may be levied upon for

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the satisfaction of judgments rendered against them in connection with their commercial activities.‖ This point is reflected in the subsections of Section 1610, as noted in the excerpt of the Rubin case. For example, Section 1610(a) provides that ―‗property in the United States . . . used for a commercial activity in the United States . . . shall not be immune‘ from attachment and execution in seven enumerated circumstances . . . . [Section 1610(b), (d), (e), and (f)] similarly set out circumstances in which certain property of a foreign state ‗shall not be immune.‘‖ In other words, these subsections outline exceptions to immunity when a foreign state‘s property is used for commercial activity. The Court‘s interpretation of Section 1610(g) simply means that a party with an applicable judgment must rely on at least one of those other provisions to attach and execute property in satisfaction.

This reading also aligns with the principle of interpretation to construe a statute so as to give effect to all of its provisions. A holding that Section 1610(g) establishes a basis for the attachment and execution against otherwise immune property would have rendered the other provisions of the statute superfluous.

92. What practical lesson might be learned from the decision and result in the Rubin case? Discuss.

Solution One lesson that might be learned from the holding of the Rubin case is that, in terms of filing an action, a plaintiff should carefully determine the legal basis for the claim. Here, in the eyes of the appellate courts, the plaintiffs‘ attorneys relied on the wrong section of the Foreign Sovereign Immunities Act to support their claims. A careful reading of that statute and its sections might have led to a very different result. There might then have been no dispensing of legal fees and a lawyer‘s expensive time on an unrewarding attempt.

A second message that could be inferred from the facts and the conclusion in the Rubin case relates to the property sought to satisfy a judgment.

In the Rubin case, the plaintiffs attempted to attach and execute against a cultural asset, the Persepolis Collection. Obviously, these items are significant in terms of the history of Iran—they are on loan to the University of Chicago for cataloging, translation, and study—but also they might arguably be important to the cultural heritage of all civilization. Under different circumstances, would a court be likely to allow the sale of Native American artifacts to pay damages resulting from a violent activist‘s purportedly political act? Or would a court order the forfeiture of an original copy of the Declaration of Independence on tour in a foreign nation to satisfy a levy against an American agent whose actions caused harm in that land?

Plaintiffs are more likely to succeed, at least in terms of the Foreign Sovereign Immunities Act, if they seek to execute a judgment against property used in a commercial activity. In the Rubin case, the Court provides an example of the assets of a state-owned telecommunications company.

Although cited for a different point, the Court adds that ―the plaintiffs could attach and execute against the property of the state-owned entity . . . , so long as the plaintiffs can establish that the property is otherwise not immune (e.g., pursuant to Section 1610(a) because it is used in commercial activity in the United States).‖

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Case 7.2 93. How does the Changzhou case illustrate that dumping is an unfair international trade practice?

Discuss.

Solution The factual findings and legal conclusions in the Changzhou case underscore the unfairness of dumping as an international trade practice. Dumping is the sale of imported goods at less than fair value. Fair value is the price of the goods in the exporting country. Foreign firms that practice dumping in the United States intend to undersell domestic businesses to obtain an increased share of the domestic market. Dumping is generally subsidized by the government of the foreign exporting country. This makes the practice unfair.

In the Changzhou case, Changzhou, a Chinese firm, made crystalline silicon photovoltaic (CSPV) cells and related products that Trina imported into the United States. The U.S. Department of Commerce found that the imports were subsidized by the Chinese government and sold in the United States at less than fair value. The International Trade Commission (ITC) determined that the Chinese imports materially injured the domestic CSPV industry.

On appeal, the U.S. Court of Appeals for the Federal Circuit referred to the ITC‘s detailed findings and variety of evidence. The court listed the subject areas that the ITC reviewed. Finally, the court reiterated the ITC‘s conclusion that the effect of the ―unfairly priced and subsidized subject imports‖ on the domestic industry was ―more than inconsequential, immaterial, or unimportant‖ and led to the U.S. producers‘ loss of market share.

94. Suppose that the ITC had not issued detailed findings supported by a variety of evidence, but had only released a statement that the subject imports seemed to have a negative effect on the domestic industry. Would the result have been different? Explain.

Solution Most likely, yes, the result in the Changzhou case would have been different if the ITC had released a conclusory statement that the subject imports seemed to have a negative effect on the domestic industry, without findings and evidence.

The ITC‘s findings, supported by substantial evidence, formed the basis on which the U.S. Court of Appeals for the Federal Circuit affirmed the ITC‘s determination ―that subject imports were a significant cause of the decline in prices.‖ If the court had not had this material on which to base a conclusion, the court would have had to look elsewhere in the record for support. There is nothing provided in the facts or reasoning of this case to indicate another basis beyond the apparent ―coincidence‖ of the imports and the decline in domestic prices. This would not likely have been sufficient.

Case 7.3 1.

What are the consequences for Daimler of the decision in this case?

Solution Daimler AG was not exonerated by the decision in this case, but the corporation did avoid liability under the Court‘s ruling. Otherwise, it might have been subject to huge claims for collaborating with the state security services of the Argentinian government‘s alleged atrocities (extremely cruel acts). Of course, the plaintiffs might still seek other laws in other forums to obtain relief.

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Chapter Review Practice and Review Robco, Inc., was a Florida arms dealer. The armed forces of Honduras contracted to purchase weapons from Robco over a six-year period. After the government was replaced and a democracy installed, the Honduran government sought to reduce the size of its military, and its relationship with Robco deteriorated.

Honduras refused to honor the contract by purchasing the inventory of arms, which Robco could sell only at a much lower price. Robco filed a suit in a federal district court in the United States to recover damages for this breach of contract by the government of Honduras. Using the information provided in the chapter, answer the following questions.

95. Should the Foreign Sovereign Immunities Act preclude this lawsuit? Why or why not?

Solution Because the armed forces of Honduras contracted to purchase weapons from a U.S. company (Robco), this would fall under the commercial activity exception to the FSIA. The sales contract was an action taken in connection with a commercial activity carried on in the United States, and the sale has a direct effect in the United States. Therefore, the FSIA would not bar this lawsuit.

96. Does the act of state doctrine bar Robco from seeking to enforce the contract? Explain.

Solution The act of state doctrine provides that the judicial branch of one country will not examine the validity of public acts committed by a recognized foreign government within its own territory.

Here, the newly democratic government of Honduras is seeking to reduce the size of its military.

The U.S. government likely recognized the new democratic regime since the United States supports democratization globally. The United States is also likely to be supportive of its efforts to reduce the size of its military and its inventory of weapons. Because the Honduran government‘s policy decision is public act within its own territory, the U.S. judicial branch will most likely be unwilling to intervene and force the government to fulfill its contract to purchase arms. There is more at stake than a simple contract because enforcing an arms deal may harm international relations between the United States and the new government of Honduras.

97. Suppose that before Robco filed its lawsuit, the new government of Honduras enacted a law making it illegal to purchase weapons from foreign arms dealers. What doctrine might lead a U.S. court to dismiss Robco‘s case in that situation?

Solution The principle of comity might apply here. This principle is a doctrine of deference. Under this principle, one nation will defer and give effect to the laws and judicial decrees of another country, as long as those laws are consistent with the law and public policy of the accommodating nation.

The principle of comity is based on respect and is a customary courtesy extended to other nations. If a U.S. court extends comity to the new Honduran government‘s law pertaining to arms dealing, then it would dismiss Robco‘s case.

98. Now suppose that the U.S. court hears the case and awards damages to Robco, but the government of Honduras has no assets in the United States that can be used to satisfy the

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judgment. Under which doctrine might Robco be able to collect the damages by asking another nation‘s court to enforce the U.S. judgment?

Solution Under the principle of comity, one nation will defer and give effect to the laws and judicial decrees of another country, as long as those laws are consistent with the law and public policy of the accommodating nation. This would be very useful to Robco in its attempt to collect damages under the award. Robco could take the judgment issued by a U.S. court to any nation in which the government of Honduras does have assets and ask that nation‘s court to enforce the judgment under the principle of comity.

Practice and Review: Debate This 99. The U.S. federal courts are accepting too many lawsuits initiated by foreigners that concern matters not relevant to this country.

Solution Our federal courts are already overwhelmed by normal lawsuits that concern purported wrongs committed on U.S. soil that involve residents of this country. Why should we become the preferred jurisdiction for lawsuits that involve human rights issues in other countries? Why should we become the preferred jurisdiction for purported employment discrimination that might have taken place outside of the United States? We are not the world‘s conscience.

The United States has one of the best-run and most fair federal judiciaries in the world. We still support freedom and democracy. Therefore, it is appropriate that when, for example, human rights are violated by companies that operate in other countries, the aggrieved can avail themselves of our federal courts. Also, if a U.S. company that operates abroad violates our employment discrimination or antitrust laws, then that company should be sued in the United States. Obviously, other countries do not have the same high standards that we have in these matters.

Issue Spotters 100.

Café Rojo, Ltd., an Ecuadoran firm, agrees to sell coffee beans to Dark Roast Coffee Company, a U.S. firm. Dark Roast accepts the beans but refuses to pay. Café Rojo sues Dark Roast in an Ecuadoran court and is awarded damages, but Dark Roast‘s assets are in the United States.

Under what circumstances would a U.S. court enforce the judgment of the Ecuadoran court?

Solution Under the principle of comity, a U.S court would defer and give effect to foreign laws and judicial decrees that are consistent with U.S. law and public policy.

101.

Gems International, Ltd., is a foreign firm that has a 12 percent share of the U.S. market for diamonds. To capture a larger share, Gems offers its products at a below-cost discount to U.S. buyers (and inflates the prices in its own country to make up the difference). How can this attempt to undersell U.S. businesses be defeated?

Solution The practice described in this problem is known as dumping, which is regarded as an unfair international trade practice. Dumping is the sale of imported goods at ―less than fair value.‖ Based

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on the price of those goods in the exporting country, an extra tariff—known as an antidumping duty—can be imposed on the imports.

Business Scenarios and Case Problems 8.

Doing Business Internationally. Macrotech, Inc., develops an innovative computer chip and obtains a patent on it. The firm markets the chip under the trademarked brand name ―Flash.‖ Macrotech wants to sell the chip to Nitron, Ltd., in Pacifica, a foreign country. Macrotech is concerned, however, that after an initial purchase Nitron will duplicate the chip, pirate it, and sell the pirated version to computer manufacturers in Pacifica. To avoid this possibility, Macrotech could establish its own manufacturing facility in Pacifica, but it does not want to do this. How can Macrotech, without establishing a manufacturing facility in Pacifica, protect Flash from being pirated by Nitron? (See Doing Business Internationally.)

Solution An alternative to exporting is the establishment of foreign manufacturing facilities, which Macrotech does not want to do in this problem. A U.S. firm can also manufacture goods in other countries by licensing, franchising, and investing in a wholly owned subsidiary or joint venture.

Licensing is an attractive alternative to establishing a foreign production facility when a process or product has been patented, because the patent protects against the possibility that the innovation could be pirated. Licensing generally involves a payment of royalties, such as a percentage of profits from units sold. Licensing can benefit all of the parties involved. A firm that receives a license gains an established reputation for quality, and a firm that grants a license gets income from foreign sales and expands the scope of its reputation and possible demand for its products.

Franchising is a form of licensing that generally involves trademarks more than patented products. If Macrotech had not obtained a patent on its chip but had trademarked the brand name ―Flash,‖ for example, the firm could license Nitron to use the mark, probably under certain conditions or limitations, in exchange for a fee, based on a percentage of sales.

Another way to expand into the Pacifica market would be to establish a wholly owned subsidiary in Pacifica. Macrotech would own the facility and could maintain authority and control over all phases of the operation. Macrotech might alternatively enter into a joint venture with Nitron. In a joint venture, Macrotech and Nitron would each own only part of the operation, and they would both share responsibilities, profits, and liabilities.

9.

Dumping. U.S. pineapple producers alleged that producers of canned pineapple from the Philippines were selling their canned pineapple in the United States for less than its fair market value (dumping). The Philippine producers also exported other products, such as pineapple juice and juice concentrate, which used separate parts of the same pineapple used for the canned pineapple. All these products shared raw material costs, according to the producers‘ own financial records. To determine fair value and antidumping duties, the plaintiffs argued that a court should calculate the Philippine producers‘ cost of production and allocate a portion of the shared fruit costs to the canned fruit. The result of this allocation showed that more than 90 percent of the canned fruit sales were below the cost of production. Is this a reasonable approach to determining the production costs and fair market value of canned pineapple in the United States?

Why or why not? (See Regulation of Specific Business Activities.)

Solution

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Yes. It is reasonable to rely on the producers‘ financial records, which are reasonably reflective of their costs because their normal allocation methods were used for a number of years. These records are historically relied on to present important financial information to shareholders, lenders, tax authorities, auditors, and other third parties. Provided that the producers‘ records and books comply with generally accepted accounting principles and were verified by independent auditors, it is reasonable to use them to determine the production costs and fair market value of canned pineapple in the United States.

10. Sovereign Immunity. Bell Helicopter Textron, Inc., designs, makes, and sells helicopters with distinctive and famous trade dress that identifies them as Bell aircraft. Bell also owns the helicopters‘ design patents. Bell‘s Model 206 Series includes the Jet Ranger. Thirty-six years after Bell developed the Jet Ranger, the Islamic Republic of Iran began to make and sell counterfeit Model 206 Series helicopters and parts. Iran‘s counterfeit versions—the Shahed 278 and the Shahed 285—used Bell‘s trade dress. The Shahed aircraft was promoted at an international air show in Iran to aircraft customers. Bell filed a suit in a U.S. district court against Iran, alleging violations of trademark and patent laws. Is Iran—a foreign nation—exempt in these circumstances from the jurisdiction of U.S. courts? Explain. [Bell Helicopter Textron, Inc. v. Islamic Republic of Iran, 734 F.3d 1175 (C.A.D.C. 2013)] (See International Law.)

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Solution The doctrine of sovereign immunity exempts foreign nations from the jurisdiction of U.S. courts, subject to certain conditions. The Foreign Sovereign Immunities Act (FSIA) of 1976 codifies this doctrine and exclusively governs the circumstances in which an action may be brought in a U.S. court against a foreign nation. A foreign state is not immune from the jurisdiction of U.S. courts when the state (1) waives immunity, (2) engages in commercial activity, or (3) commits a tort in the United States or violates certain international laws. Under the FSIA, a foreign state includes its political subdivisions and ―instrumentalities‖—departments and agencies. A commercial activity is a regular course of commercial conduct, transaction, or act that is carried out by the foreign state within the United States or has a direct effect in the United States.

The details of what constitutes a commercial activity are left to the courts. But it seems clear that a foreign government can be considered to engage in commercial activity when, instead of regulating a market, the government participates in it. In other words, when a foreign state, or its political subdivisions or instrumentalities, performs the type of actions in which a private party engages in commerce, the state‘s actions are likewise commercial.

In the facts of this problem, Iran engaged in commercial activity outside the United States by making and marketing its counterfeit versions of Bell‘s Model 206 Series helicopters. This activity caused a direct effect in the United States by the consumer confusion that will likely result from Iran‘s unauthorized use of Bell‘s trade dress. Thus, the court can exercise jurisdiction in these circumstances, and Iran may be as liable as a private party would be for the same acts.

In the actual case on which this problem is based, Iran did not respond to Bell‘s complaint. The court held that it had jurisdiction under the FSIA‘s commercial activity exception, as explained above. The court entered a default judgment against Iran and awarded damages and an injunction to Bell.

11. Sovereign Immunity. In 1954, the government of Bolivia began expropriating land from Francisco Loza for public projects, including an international airport. The government directed the payment of compensation in exchange for at least some of his land. But the government never paid the full amount. Decades later, his heirs, Genoveva and Marcel Loza, who were both U.S. citizens, filed a suit in a federal district court in the United States against the government of Bolivia, seeking damages for the taking. Can the court exercise jurisdiction? Explain. [Santivanez v.

Estado Plurinacional de Bolivia, 2013 WL 879983 (11th Cir. 2013)] (See International Law.) Solution No. A U.S. court does not have jurisdiction in the Santivanez case. When applicable, the doctrine of sovereign immunity shields a foreign nation from the jurisdiction of a U.S. court. In such a case, individuals who own (or owned) property overseas generally have little legal protection against government actions with resp3ect to their property in those countries. The federal Foreign Sovereign Immunities Act (FSIA) exclusively governs the circumstances in which an action may be brought in the United States against a foreign nation, including attempts to attach a foreign nation‘s property. Under the law, a plaintiff generally has the burden of showing that a defendant is not entitled to sovereign immunity. An exception exists when a foreign nation has (1) waived its immunity, (2) engaged in commercial activity in the United States, or (3) committed a tort here.

In this problem, the government of Bolivia expropriated land from Francisco Loza for public projects and directed compensation in exchange for his land, but never paid. His heirs, Genoveva

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and Marcel Loza, filed a suit in a U.S. federal district court against Bolivia seeking damages for the taking. The FSIA provides for U.S. jurisdiction over cases in which rights in property are taken in violation of international law. But when a foreign nation confiscates the property of its own citizens, a U.S. court does not have jurisdiction. None of the exceptions under the FSIA apply here.

In the actual case on which this problem is based, a federal district court ruled in Bolivia‘s favor.

On the Lozas‘ appeal, the U.S. Court of Appeals for the Eleventh Circuit affirmed, based on the reasoning above.

12. Business Case Problem with Sample Answer— Import Controls. The Wind Tower Trade Coalition is an association of domestic manufacturers of utility-scale wind towers. The coalition filed a suit in the U.S. Court of International Trade against the U.S. Department of Commerce. It challenged the Commerce Department‘s decision to impose only prospective antidumping duties, rather than retrospective (retroactive) duties, on imports of utility-scale wind towers from China and Vietnam. The department had found that the domestic industry had not suffered any ―material injury‖ or ―threat of material injury‖ from such imports and that it would be protected by a prospective assessment. Can an antidumping duty be assessed retrospectively? If so, should it be assessed here? Discuss. [Wind Tower Trade Coalition v. United States, 741 F.3d 89 (Fed. Cir. 2014)] (See Regulation of Specific Business Activities.)

Solution Yes. An antidumping duty can be assessed retrospectively (retroactively). But it does not seem likely that such a duty should be assessed here.

In this problem, the Wind Tower Trade Coalition (an association of domestic manufacturers of utility scale wind towers) filed a suit in the U.S. Court of International Trade against the U.S. Department of Commerce, challenging its decision to impose only prospective antidumping duties on imports of utility scale wind towers from China and Vietnam. The Commerce Department had found that the domestic industry had not suffered any ―material injury‖ or ―threat of material injury,‖ and that it would be protected by a prospective assessment. Without a previously cognizable injury—and the fact that any retrospective duties collected would not by payable to the members of the domestic industry in any event—it does not seem likely that retroactive duties should be imposed.

In the actual case on which this problem is based, the court denied the plaintiff‘s request for an injunction. On appeal, the U.S. Court of Appeals for the Federal Circuit affirmed the denial, holding that the lower court acted within its discretion in determining that retrospective duties were not appropriate.

13. The Principle of Comity. Holocaust survivors and the heirs of Holocaust victims filed a suit in a federal district court in the United States against the Hungarian national railway, the Hungarian national bank, and several private Hungarian banks. The plaintiffs alleged that the defendants had participated in expropriating the property of Hungarian Jews who were victims of the Holocaust.

The claims arose from events in Hungary seventy years earlier. The plaintiffs had not exhausted remedies available through Hungarian courts. Indeed, they had not even attempted to seek remedies in Hungarian courts, and they did not provide a legally compelling reason for their failure to do so. The defendants asked the court to dismiss the suit. Does the principle of comity support the defendants‘ request? Explain. [Fischer v. Magyar Államvasutak Zrt., 777 F.3d 847 (7th Cir. 2015)] (See International Law.)

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Solution Yes. The principle of comity supports the defendants‘ request to dismiss the plaintiffs‘ claims.

Under the principle of comity, one nation defers to and gives effect to the laws and judicial decrees of another country when those are consistent with the laws and public policy of the accommodating nation.

In the fact of this problem, Holocaust survivors and the heirs of other Holocaust victims filed a suit in a federal district court in the United States against a variety of entities based in Hungary—the national railway, the national bank, and several private banks—alleging that the defendants expropriated property from Hungarian Jews who were victims of the Holocaust seventy years ago.

The plaintiffs had not tried to exhaust remedies available through Hungarian courts nor did they provide a legally compelling reason for not making the attempt. As the defendants requested, the court should dismiss the suit. Comity requires that Hungarian courts be given the first opportunity to hear the claims. Of course, the U.S. court could agree to hear the suit if the plaintiffs could show that Hungarian remedies were inadequate, procedural rules would unreasonably bar their claims, or other circumstances would prevent a fair and impartial hearing.

In the actual case on which this problem is based, the court dismissed the complaint. The U.S. Court of Appeals for the Seventh Circuit affirmed the dismissal for the reason stated above.

14. International Law. For fifty years, the Soviet Union made and sold Stolichnaya vodka. At the time, VVO-SPI, a Soviet state enterprise, licensed the Stolichnaya trademark in the United States.

When the Soviet Union collapsed, VVO-SPI was purportedly privatized and fell under the control of Spirits International B.V. (SPI). In 2000, a Russian court held that VVO-SPI had not been validly privatized under Russian law. Thus, ownership of the Stolichnaya mark remained with the Soviet Union‘s successor, the Russian Federation. The Russian Federation assigned the mark to Federal Treasury Enterprise Sojuzplodoimport, OAO (FTE). FTE then filed a suit in a U.S. federal district court against SPI, asserting unlawful misappropriation and commercial exploitation of the mark in violation of federal law. Is the validity of the assignment of the mark to FTE a question to be determined by the court? Why or why not? [Federal Treasury Enterprise Sojuzplodoimport v. Spirits International B.V., 809 F.3d 737 (2d Cir. 2016)] (See International Law.)

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Solution No. The validity of the assignment of the Stolichnaya mark by the Russian Federation to FTE is not a question to be determined by a U.S. court. Under the international act of state doctrine, the judicial branch of one country does not review the validity of public acts committed by a recognized foreign government within the latter‘s own boundaries.

Here, the Soviet Union made and sold Stolichnaya vodka, and licensed its trademark for use in the United States. After the Soviet Union collapsed, the state enterprise that had managed the mark was privatized and later came under the control of Spirits International B.V. (SPI).Still later, a Russian court held that the enterprise had not been validly privatized under Russian law and that ownership of the Stolichnaya mark remained with the Soviet Union‘s successor, the Russian Federation. The Russian Federation assigned the mark to Federal Treasury Enterprise Sojuzplodoimport, OAO (FTE). In FTE‘s suit in a U.S. federal district court against SPI for unlawful misappropriation and commercial exploitation of the mark in violation of the Lanham Act, a question arose as to the validity of the assignment. But under the act of sate doctrine, this is not an issue for a U.S. court to decide.

In the actual case on which this problem is based, the court ruled that the assignment to FTE was invalid under Russian law. On FTE‘s appeal, the U.S. Court of Appeals for the Second Circuit reversed. The validity of the assignment ―is a question of Russian law decided within Russia‘s borders.‖ The act of state doctrine precludes the review of an act of a foreign government done within its own territory by a U.S. court.

15. Import Controls. Goods exported to a foreign country for repair or alteration can qualify for tariff-free or reduced-tariff treatment when they re-enter the United States. But the goods do not qualify for favorable import-duty treatment if, in the foreign country, they are transformed into commercially different goods. Daimler-Chrysler AG Sprinter vans are marketed in the United States as cargo vans. Pleasure-Way Industries, Inc., bought 144 Sprinter vans and exported them to Canada for conversion into motorhomes. This included the installation of fully plumbed and furnished kitchens, bathrooms, and sleeping quarters. After the conversion, Pleasure-Way sought to import the vehicles back into the United States to market the motorhomes under new model names as upscale leisure vehicles at prices double or triple the price for Sprinter vans. Do the converted vans qualify for favorable import-tariff treatment? Discuss. [Pleasure-Way Industries, Inc.v. United States, 878 F.3d 1348 (Fed.Cir. 2018)] (See Regulation of Specific Business Activities.)

Solution No. Pleasure-Way‘s vans do not qualify for favorable import-tariff treatment. Goods exported to a foreign country for repair or alteration can qualify for tariff-free or reduced tariff treatment when they re-enter the United States. But the goods do not qualify for favorable import-duty treatment if, in the foreign country, they are transformed into commercially different goods.

Tariffs are taxes on imports. A tariff may be assessed as a percentage of the value of the import or as a flat rate per unit. Tariffs raise the prices of goods. The ultimate effect is to cause some consumers to buy more domestically produced goods.

In this problem, Pleasure-Way bought Sprinter cargo vans and exported them to Canada for conversion into motorhomes. This included the installation of plumbed and outfitted kitchens, bathrooms, and sleeping quarters. After the conversion, Pleasure-Way sought to import the vehicles back into the United States for sale under new model names—the Ascent TS or Plateau

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TS—as upscale leisure vehicles at prices double or triple the price for Sprinter vans. In Canada, Pleasure-Way‘s vans were not just repaired or altered; they were transformed into commercially different goods. For this reason, they fail to qualify for favorable import-tariff treatment.

In the actual case on which this problem is based, the U.S. Bureau of Customs and Border Protection determined that the converted vans did not qualify for favorable import-tariff treatment. The U.S. Court of Appeals for International Trade and, on further appeal, the U.S. Court of Appeals for the Federal Circuit affirmed.

16. Question of Ethics—The IDDR Approach and Doing Business Internationally. Incorporated under Venezuelan law, a subsidiary of U.S.-based Helmerich & Payne International Drilling Co. supplied oil-drilling rigs to entities that were part of the government of Venezuela. The government fell behind in payment on contracts for the use of the rigs. When the overdue amounts topped $100 million, the government nationalized the rigs and took possession.

Helmerich filed a suit in a U.S. federal district court against Venezuela, claiming expropriation of property in violation of international law. Helmerich asserted that the U.S. court had jurisdiction under the Foreign Sovereign Immunities Act (FSIA). [Bolivarian Republic of Venezuela v. Helmerich & Payne International Drilling Co., 581 U.S. __, 137 S.Ct. 1312, 197 L.Ed.2d 663(2017)] (See International Law.) 1.

Venezuela argued that the FSIA did not apply because Helmerich did not have rights in the rigs, which were the subsidiary‘s property. Does that fact make Helmerich‘s claim frivolous and unethical? Explain.

Solution No. Helmerich‘s claim is neither frivolous nor unethical. A claim that is frivolous lacks substance and is not to be taken seriously. Such a claim would be unethical if it were asserted with an intent that matched its lack of substance or had a nefarious purpose.

In this problem, U.S.-based Helmerich incorporated a subsidiary under Venezuelan law that supplied oil-drilling rigs to entities that were part of the government of Venezuela. When the government failed to pay $100 million on its contracts to use the rigs, it nationalized the equipment and took possession. Helmerich filed a suit in a U.S. federal district court against Venezuela, claiming expropriation in violation of international law. Helmerich asserted that the U.S. court had jurisdiction under the Foreign Sovereign Immunities Act (FSIA). Venezuela argued that the FSIA did not apply because the rigs were the property of the subsidiary—a Venezuelan company.

Of course, Helmerich knew that the rigs were the property of its subsidiary. The amounts owed on the contracts were significant, however, and the rigs were presumably valuable. The parent company was obligated to its shareholders—ethically, if not legally—to attempt to achieve a remedy for the taking of the equipment in as favorable a forum as possible. Undoubtedly, Helmerich believed that it was unlikely to obtain adequate relief in a Venezuelan court. So, the company filed a suit against Venezuela in a U.S. court. In sum, Helmerich asserted its claim with a serious intent and an ethical purpose.

(It might be noted that simply arguing in a ―non-frivolous‖ way that property has been taken in violation of international law is not sufficient to confer jurisdiction under the FSIA. If the situation were otherwise, the only limits to bringing a claim under the act would be the bounds of a

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lawyer‘s ―non-frivolous‖ imagination. Such claims could cause friction with other nations, leading to reciprocal actions against the United States.)

In the actual case on which this problem is based, the court rejected the argument that Helmerich had no rights in the subsidiary‘s property and held that the parent‘s claim fell within the jurisdiction of the court under the FSIA. The U.S. Court of Appeals for the District of Columbia Circuit agreed, concluding that Helmerich had asserted its rights in a ―non-frivolous‖ way and that was enough to bring the case within the FSIA‘s scope. The United States Supreme Court vacated this decision and remanded the case. The Court held that a party‘s ―non-frivolous, but ultimately incorrect,‖ argument is not enough to confer FSIA jurisdiction.

2.

Using the IDDR approach, determine whether a company is ethically obligated to become familiar with the political situation before doing business in another country.

Solution Yes. A company is ethically obligated to become familiar with the political situation in another country before doing business there. Politics can affect the success or failure of a business. To satisfy a company‘s stakeholders, local politics should be as thoroughly researched as the sources for the company‘s resources and labor, and the market for its products.

The IDDR approach begins with an Inquiry, which spells out the issue, the stakeholders, and relevant ethical standards. Conducting business legally in another nation requires a familiarity with that nation‘s laws. Doing business successfully in another nation requires a familiarity with that nation‘s business climate. This includes the area‘s capacity to meet the business‘s logistical and infrastructural needs, as well as the regional markets, culture, and economy. Thus, a company has an ethical obligation to acquire that knowledge. And the company has a similar duty to know the country‘s political situation. Those politics can affect business, which impacts a company‘s stakeholders—its owners, employees, suppliers, and customers—and others—its competitors, the larger community of which the business is a part, and global buyers, sellers, and distributors of its products. Relevant ethical standards can include company policies, which undoubtedly cover remaining profitable and might mention a duty to ―do good.‖ The next step of the approach is a Discussion that touches on actions that address the issue.

Factors include the strengths and weaknesses of the actions, including the consequences and the effects on stakeholders. The simplest course to become familiar with a country‘s political situation is to research it. Read about it, talk to experts, and review the country‘s media. The weakness of this action might be the time and expense it adds to the costs of doing business. The strengths might include the confidence that being forewarned can bring to any business setting. If the politics are too untenable, a company might wisely stay out of the local market.

The IDDR approach suggests for its next step a Decision and the reasons. To the question in this problem, the decision seems clear—the political situation in another country should be investigated before business is done there. And the reasons set out above are as convincing as the decision is clear.

Finally, the approach posits a Review to estimate the success or failure of the action to resolve the issue, and satisfy the stakeholders. If a company doing business in another country is successful in that nation, its numerous stakeholders should be satisfied. If, to realize that success, the company first divined the nation‘s politics, its ethical obligation to those stakeholders is likewise met.

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Critical Thinking and Writing Assignments 3.

Time-Limited Group Assignment—Globalization. Assume that you are manufacturing tablet accessories and that your business is becoming more successful. You are now considering expanding operations into another country. (See Doing Business Internationally.)

1.

One group will explore the costs and benefits of advertising internationally on the Internet.

Solution Factors to consider when expanding operations into another country by advertising online include (1) business costs such as website design and maintenance; (2) marketing considerations such as which business model to use; (3) security concerns such as the safety of company and customer information; (4) practical elements such as inventory storage and product shipping; and (5) cultural characteristics such as language and customs. The benefits of Internet advertising include that it is relatively inexpensive to reach a vast market, compared to the cost of traditional marketing. And because the operation can be digitized, ―testing the waters‖ of a potential market, as well as tracking consumers and accumulating market data, can be easier and less costly.

1.

Another group will consider whether to take in a partner from a foreign nation and examine the benefits and risks of doing so.

Solution A partnership in another country typically requires local participation—nationals of the other country must own a specific share of the business. Of course, if the partnership dissolves, the firm‘s technology and other expertise may fall into in the hands of a foreign competitor. The domestic firm that initiated the partnership may have little recourse in the foreign country against their former partner‘s use of this expertise.

Thus, to take in a partner in a foreign nation, a domestic business firm should define each party‘s duties and risks in a written contract, including the object or subject of the partnership, the assets that each party contributes to the firm, what is expected of each party with respect to the firm‘s intellectual property, and the sharing of profits and losses. Important provisions would also cover forum selection, choice of law, choice of language, and the resolution of disputes, as well as remedies and the division of assets on the firm‘s dissolution.

2. A third group will discuss what problems may arise if you want to manufacture in a foreign location.

Solution Problems that may arise when a domestic business company decides to manufacture its products in a foreign location include the costs and other considerations in obtaining and using foreign labor, shipping, and raw materials. There may also be different cultural, economic, legal, political, and social conditions to take into account.

Solution and Answer Guide Miller, The Legal Environment Today 10e, 9780357635582; Chapter 08: Intellectual Property Rights

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Table of Contents Critical Thinking Questions in Features .................................................................................................................. 9 Adapting the Law to the Online Environment ........................................................................................... 9 Critical Thinking Questions in Cases ..................................................................................................................... 10 Case 8.1 ................................................................................................................................................... 10 Case 8.2 ................................................................................................................................................... 10 Case 8.3 ................................................................................................................................................... 11 Chapter Review ............................................................................................................................................................. 11 Practice and Review ................................................................................................................................ 11 Practice and Review: Debate This ........................................................................................................... 12 Issue Spotters .......................................................................................................................................... 13 Business Scenarios and Case Problems ................................................................................................... 13 Critical Thinking and Writing Assignments .............................................................................................. 19

Critical Thinking Questions in Features Managerial Strategy—Business Questions 102.

The U.S. Patent and Trademark Office requires that a registered trademark or service mark be put into commercial use within six months. Extensions can be granted but the mark must be put into commercial use within three years after the application has been approved. Why do you think the federal government established this requirement?

Solution In the online world, there is something called cybersquatting. Someone registers a domain name that a large company might want to use in the future in this situation. The owner then ―squats‖ on this domain Internet address until offered a large enough price to transfer it to a company that can actually make use of it.

The U.S. Patent and Trademark Office clearly is trying to prevent what we could call trademark squatting and service mark squatting. In other words, the federal government wants to make sure that once a trademark or service mark is created, the owner has either to ―use it or lose it.‖ This ―use it or lose it‖ regulation avoids lawsuits in the future, sometimes in the distant future, when someone else creates the same or a similar trademark or service mark. If a registered trademark or service mark is never put into commerce, it is difficult for others to determine that it exists.

They might inadvertently use a trademark or service mark that is similar and then face a lawsuit.

This would be an inefficient use of resources, particularly for our judicial system.

103.

Should trademark protection apply to similarities between non-competing products?

Why or why not?

Solution As shown in the text‘s coverage of this topic, one of the overriding goals of trademark protection law is to avoid consumer confusion between the nature of two products. If the trademark owner

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and the party alleged to have infringed on the trademark compete in the same market for goods and services, the court will rarely look beyond the trademark or service mark itself. Cases where the goods or services of the plaintiff and the defendant do not directly compete are more difficult to assess. In general, the court will look at the nature of the goods or services and the context in which they are marketed and sold to determine the likelihood of confusion. Some factors that courts take in account are (1) the strength of the plaintiff‘s mark, (2) the intent of the defendant in adopting the mark, (3) the relationship in consumer‘s minds between the goods and services, and, of course (4) evidence of any actual confusion on the part of consumers

Adapting the Law to the Online Environment 104.

Beyoncé also used footage from a 2013 documentary called That B.E.A.T. Why might international entertainment stars choose to use sampled words and sampled video footage without permission of the copyright holders?

Solution For one thing, the risk of a lawsuit might be seen as small. In many situations, copyright holders choose not to sue for copyright infringement. In other situations, they may sue but not have the financial resources necessary to continue a lawsuit through trial and appeals. In such cases, they may settle for small sums of money. Finally, celebrities who do sample just a few words may truly believe that their actions fall under the fair use doctrine.

Critical Thinking Questions in Cases Case 8.1 105.

Suppose that Coca-Cola had been trying to make the public believe that its product contained cocaine. Would the result in the case likely have been different? Explain your answer.

Solution Yes. The product in this case did not actually contain cocaine. To advertise that it did would be to commit fraud. A court will refuse to grant relief to a complaining party who commits fraud.

Case 8.2 106.

Accompanying LEGO‘s registration of its copyright are images depicting ―Basic Minifigures.‖ Rather than these images, the district court compared ZURU‘s Action Figures to actual LEGO Minifigures, which differ in facial expression and jacket color. Was this, as ZURU alleged, an improper comparison? Why or why not?

Solution No, the court‘s comparison of ZURU‘s Action Figures to actual LEGO Minifigures, instead of the ―Basic Minifigures‖ images that accompanied LEGO‘s registration of its copyright, was not an improper comparison.

ZURU charged that the court compared allegedly infringing works—the ZURU Action Figures—to unregistered ―derivative works.‖ A derivative work incorporates some or all of a preexisting copyrighted work and adds new original, copyrightable elements to it.

But the translation of a copyrighted work to a different medium, such as creating a plastic version of a cast metal coin bank, is not sufficiently original to require additional copyright protection.

Applying these principles in the LEGO case, the district court found that the actual LEGO

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Minifigures were not derivative works. Each image of a ―Basic Minifigure‖ appearing with the copyright registration was, in the court‘s words, ―just that—a basic minifigure wearing a jacket.‖ And the copyrightable elements of the Minifigures in the images and the actual sculptured Minifigures were the same—―apart from the medium in which they are conveyed, there are no material differences between the LEGO Minifigure sculptures and the corresponding copyright images.‖ In other words, although the Minifigure sculptures examined by the court differed from the Minifigure images accompanying the copyright registration in facial expression and jacket color, the court found that the differences were not material. The court‘s comparison of the two toy makers‘ products, therefore, was not improper.

107.

On the eve of the trial, ZURU promised to recall its Action Figures from Walmart‘s stores in an effort to defeat LEGO‘s request for an injunction. Could this promise be considered ethical?

Explain.

Solution From ZURU‘s perspective, the issue could be framed as whether to continue marketing its Action Figures. Stakeholders would include all parties depending on ZURU to stay in business—its directors, employees, shareholders, suppliers, and customers, and members of the broader community relying on those parties—as well as the families related to individuals in these categories. Applicable ethical standards could be as minimal as the short-term bottom line and as maximal as the best long-term interests of as many stakeholders as possible.

The choice of action that ZURU‘s decision makers appear to have made initially was to continue selling its allegedly infringing product despite the suit brought against the toymaker by LEGO. This could arguably be in the interest of all stakeholders, at least until an injunction was unavoidable. At the last minute, however, those decision makers may have had a change of heart, as evidenced by their change of strategy, when they pledged to remove their product from Walmart‘s stores. This may have been only a tactic to stay in business, albeit without the sales of their Action Figures in the stores, and,= had it worked, it might have satisfied most of their stakeholders.

What was not promised in the facts stated in the question, however, was a commitment to remove the Action Figures from Walmart‘s website. This was not overlooked by LEGO, which proceeded with their cause despite ZURU‘s late promise. Ultimately, ZURU expended funds and effort in a futile attempt to keep its product on the market. This did not likely come to a satisfying end for any of the defendant‘s stakeholders.

Case 8.3 1.

Rimini argued that Oracle was misusing the copyright in its proprietary software to stifle competition. Do you agree? Explain.

Solution Of course, the owner of a copyright should not be allowed to leverage the monopoly granted to them by the copyright to control of areas outside the monopoly. In other words, the owner might control the use of the copyright material, but it cannot impose conditions on the use that stifles competition. In the context of the Oracle case, for example, a licensor cannot impose a license agreement that prevents a licensee from using a competing product.

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Here, Rimini framed Oracle‘s position as foreclosing competition in the market for third-party maintenance. ―It would limit copies made by third parties to those made only for archival and emergency backup purposes and . . . the software could not be serviced simply by making exact copies.‖ Oracle countered that the licenses ―do not preclude third parties from developing competing software or providing competing support services.‖ And the court concluded that the licenses did not preclude Rimini from creating development environments for a licensee for various purposes, including the testing of updates, ―after that licensee has become a customer of Rimini.‖ 2.

Suppose that Rimini had bought one of Oracle‘s licenses for itself. Would the result have been different? Why or why not?

Solution No, if Rimini had purchased one of Oracle‘s licenses for its own use, the result would not have been different.

The terms of the license would have been the same. It would have permitted Rimini, as the licensee, to maintain the software and make copies of it for this purpose. But it would not have allowed Rimini to use the software to make and modify copies for other customers, or unknown, future customers. Just as in the Oracle case, this use of the software would have violated the exclusive right Oracle enjoyed as the owner of the software copyright to copy or modify it.

Chapter Review Practice and Review Two computer science majors, Trent and Xavier, have an idea for a new video game, which they propose to call ―Hallowed.‖ They form a business and begin developing their idea. Several months later, Trent and Xavier run into a problem with their design and consult with a friend, Brad, who is an expert in creating computer source codes. After the software is completed but before Hallowed is marketed, a video game called Halo 2 is released for both the Xbox and the PlayStation 3 systems.

Halo 2 uses source codes similar to those of Hallowed and imitates Hallowed‘s overall look and feel, although not all the features are alike. Using the information presented in the chapter, answer the following questions.

108.

Would the name Hallowed receive protection as a trademark or as trade dress?

Solution The video game, ―Hallowed,‖ would not receive protection as either a trademark or trade dress because game had not been released to the general public for use. The law protects only trademarks that are in use. Trade dress applies to a product‘s distinct image and appearance, but only once the distinctiveness of a product‘s appearance has been established.

109.

If Trent and Xavier had obtained a business process patent on Hallowed, would the release of Halo 2 infringe on their patent? Why or why not?

Solution No, because all steps of a patented process must be copied to constitute infringement and these two games contain different features. For infringement of a business process patent to exist, all

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steps or their equivalent must be copied. In this scenario, while Halo 2 uses some of the same source codes as Hallowed, not all features alike, so it does not infringe on Hallowed‘s patent.

110.

Based only on the facts presented above, could Trent and Xavier sue the makers of Halo 2 for copyright infringement? Why or why not?

Solution Yes, because Halo 2 copies the source codes of Hallowed. Whenever the form or expression of an idea is copied, an infringement of copyright occurs. The courts generally hold that copying the source codes of copyrighted software is infringement. Because Halo 2 used similar source codes as Hallowed, Trent and Xavier can sue for copyright infringement.

111.

Suppose that Trent and Xavier discover that Brad took the idea of Hallowed and sold it to the company that produced Halo 2. Which type of intellectual property issue does this raise?

Solution The fact that Brad took and sold Trent and Xavier‘s idea to another company raises a trade secret issue, because Brad wrongfully disclosed the idea of a new video game to a competing company.

Unlike copyright and trademark protection, protection of trade secrets extends both to ideas and their expression.

Practice and Review: Debate This 112.

Congress has amended the Copyright Act several times. Copyright holders now have protection for many decades. Was Congress justified in extending these copyright time periods?

Why or why not?

Solution Obviously, copyright holders whose copyrights were about to run out benefited from the timeperiod extensions legislated by Congress. Hence, they certainly believe that Congress acted correctly. (It‘s not surprising that major copyright holders such as large movie companies, record labels, and publishing houses did most of the lobbying that led to extensions of copyright protection periods.) In general, one can argue that more effort will go into the creation of intellectual property the longer the period of copyright protection for intellectual property. In other words, for the creation of new original works, the term extension of the copyright protection incentivizes creators of such works to extend more effort.

Not everyone is so enamored of the term extensions for copyright protection. In Article I, Section 8, Clause 8, of the Constitution, Congress is given the task of making laws for the protection of copyrights and patents ―To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.‖ What is a limited time? Today it can last over a hundred years! That hardly seems very limited. Moreover, the term extension for existing works makes no significant contribution to an author‘s economic incentive to create, because the additional compensation was granted after the relevant investment had already been made.

Issue Spotters 113.

Roslyn, a food buyer for Organic Cornucopia Food Company, decides to go into business for herself as Roslyn‘s Kitchen. She contacts Organic‘s suppliers, offering to buy their entire harvest for the next year. She also contacts Organic‘s customers, offering to sell her products for

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less than Organic. Has Roslyn violated any of the intellectual property rights discussed in this chapter? Explain Solution Yes, Roslyn has committed theft of trade secrets. Lists of suppliers and customers cannot be patented, copyrighted, or trademarked, but the information they contain is protected against appropriation by others as trade secrets. Most likely, Roslyn signed a contract agreeing not to use this information outside her employment by Organic. But even without this contract, Organic could make a convincing case against its ex-employee for a theft of trade secrets.

114.

Global Products develops, patents, and markets software. World Copies, Inc., sells Global‘s software without the maker‘s permission. Is this patent infringement? If so, how might Global save the cost of suing World for infringement and at the same time profit from World‘s sales?

Solution This is patent infringement. A software maker in this situation might best protect its product, save litigation costs, and profit from its patent by the use of a license. In the context of this problem, a license would grant permission to sell a patented item. (A license can be limited to certain purposes and to the licensee only.)

Business Scenarios and Case Problems 115.

Patent Infringement. John and Andrew Doney invented a hard-bearing device for balancing rotors. Although they obtained a patent for their invention from the U.S. Patent and Trademark Office, it was never used as an automobile wheel balancer. Some time later, Exetron Corp. produced an automobile wheel balancer that used a hard-bearing device similar to the Doneys‘ device. Given that the Doneys had not used their device for automobile wheel balancing, does Exetron‘s use of a similar device infringe on the Doneys‘ patent? (See Patents.)

Solution Yes. A patent is not deemed useless and therefore invalid simply because it has not been used in a particular application. The Doneys' patent was valid, and Exetron Corp. infringed on the patent.

116.

Fair Use. Professor Wise is teaching a summer seminar in business torts at State University. Several times during the course, he makes copies of relevant sections from business law texts and distributes them to his students. Wise does not realize that the daughter of one of the textbook authors is a member of his seminar. She tells her father about Wise‘s copying activities, which have taken place without her father‘s or his publisher‘s permission. Her father sues Wise for copyright infringement. Wise claims protection under the fair use doctrine. Who will prevail? Explain. (See Copyrights.)

Solution Professor Wise will prevail, as he has not violated federal copyright law. Under Section 107 of the Copyright Act, the reproduction of copyrighted works for teaching purposes (including multiple copies for classroom use) falls under the ―fair use‖ doctrine and is not an infringement of copyright.

117.

Spotlight on Macy’s—Copyright Infringement. United Fabrics International, Inc., bought a fabric design from an Italian designer and registered a copyright to the design with the U.S. Copyright Office. When Macy‘s, Inc., began selling garments with a similar design, United filed a copyright infringement suit against Macy‘s. Macy‘s argued that United did not own a valid

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copyright to the design and so could not claim infringement. Does United have to prove that the copyright is valid to establish infringement? Explain. [United Fabrics International, Inc. v. C & J Wear, Inc., 630 F.3d 1255 (9th Cir. 2011)] (See Copyrights.)

Solution Copyrights can be registered with the U.S. Copyright Office in Washington, D.C. Copyright owners protect themselves by registering their copyrights. This registration is evidence that the copyright is valid. Thus, registering a copyright and showing proof of the registration is sufficient to establish the validity of the copyright. Here, United bought a design and registered it with the U.S. Copyright Office. United does not otherwise have to prove that the copyright is valid. If Macy‘s wants to challenges the validity of United‘s registered copyright, Macy‘s will have to present evidence that the copyright is invalid. In the actual case on which this problem is based, the U.S. Court of Appeals for the Ninth Circuit ruled in United‘s favor.

118.

Copyright Infringement. SilverEdge Systems Software hired Catherine Conrad to perform a singing telegram. Silver-Edge arranged for James Bendewald to record Conrad‘s performance of her copyrighted song to post on the company‘s website. Conrad agreed to wear a microphone to assist in the recording, told Bendewald what to film, and asked for an additional fee only if SilverEdge used the video for a commercial purpose. Later, the company chose to post a video of a different performer‘s singing telegram instead. Conrad filed a suit in a federal district court against SilverEdge and Bendewald for copyright infringement. Are the defendants liable?

Explain. [Conrad v. Bendewald, 500 Fed.Appx. 526 (7th Cir. 2013)] (See Copyrights.)

Solution There is no liability for copyright infringement here. Copyright protects the owner of a creative work, including a ―musical work‖ like a song, from its distribution or public display without the owner‘s permission. To show the work, or even to retain a copy without the owner‘s permission, would constitute infringement.

It is clear from the facts, however, that SilverEdge and Bendewald had Conrad‘s permission to film the performance of her song. She knew that SilverEdge had arranged with Bendewald to record her performance. She agreed to wear a microphone to assist in the recording, told Bendewald what to film, and asked for an additional fee only if SilverEdge used the video for a commercial purpose. Also, it does not appear that Conrad imposed any condition to have the video returned to her if SilverEdge decided not to pay the fee to use it commercially.

In the actual case on which this problem is based, the court issued a judgment against Conrad.

On appeal, the U.S Court of Appeals for the Seventh Circuit affirmed, concluding that ―the defendants had permission to film the performance as a matter of law.‖ 119.

Business Case Problem with Sample Answer—Patents. The U.S. Patent and Trademark Office (PTO) denied Raymond Gianelli‘s application for a patent for a ―Rowing Machine‖—an exercise machine on which a user pulls on handles to perform a rowing motion against a selected resistance. The PTO considered the device obvious in light of a previously patented ―Chest Press Apparatus for Exercising Regions of the Upper Body‖—an exercise machine on which a user pushes on handles to overcome a selected resistance. On what ground might this result be reversed on appeal? Discuss. [In re Gianelli, 739 F.3d 1375 (Fed. Cir. 2014)] (See Patents.)

Solution

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One ground on which the denial of the patent application in this problem could be reversed on appeal is that the design of Raymond Gianelli‘s ―Rowing Machine‖ is not obvious in light of the design of the ―Chest Press Apparatus for Exercising Regions of the Upper Body.‖ To obtain a patent, an applicant must demonstrate to the satisfaction of the U.S. Patent and Trademark Office (PTO) that the invention, discovery, process, or design is novel, useful, and not obvious in light of current technology. In this problem, the PTO denied Gianelli‘s application for a patent for his ―Rowing Machine‖—an exercise machine on which a user pulls on handles to perform a rowing motion against a selected resistance to strengthen the back muscles. The PTO considered the device obvious in light of a patented ―Chest Press Apparatus for Exercising Regions of the Upper Body‖—a chest press exercise machine on which a user pushes on handles to overcome a selected resistance. But it can be easily argued that it is not obvious to modify a machine with handles designed to be pushed into one with handles designed to be pulled. In fact, anyone who has used exercise machines knows that a way to cause injury is to use a machine in a manner not intended by the manufacturer.

In the actual case on which this problem is based, the U.S. Court of Appeals for the Federal Circuit reversed the PTO‘s denial of Gianelli‘s application for a patent, based on the reasoning stated above.

120.

Patents. Rodney Klassen was employed by the U.S. Department of Agriculture (USDA).

Without the USDA‘s authorization, Klassen gave Jim Ludy, a grape grower, plant material for two unreleased varieties of grapes. For almost two years, most of Ludy‘s plantings bore no usable fruit, none of the grapes were sold, and no plant material was given to any other person. The plantings were visible from publicly accessible roads, but none of the vines were labeled, and the variety could not be identified by simply viewing the vines. Under patent law, an applicant may not obtain a patent for an invention that is in public use more than one year before the date of the application. Could the USDA successfully apply for patents on the two varieties given to Ludy?

Explain. [Delano Farms Co. v. California Table Grape Commission, 778 F.3d 1243 (Fed.Cir. 2015)] (See Patents.)

Solution Yes, the USDA can obtain patents on the two varieties of grapes given to Ludy. Almost anything is patentable so long as it is novel, useful and not obvious. Plant material can be patented. But under patent law, an applicant may not obtain a patent for an invention that is in public use more than one year before the date of the application.

In this problem, a U.S. Department of Agriculture (USDA) employee, without the USDA‘s authorization, gave Jim Ludy, a grape grower, plant material for two unreleased varieties of grapes. For almost two years, most of Ludy‘s plantings bore no usable fruit, none of the grapes were sold, and no plant material was given to any other person. The plantings were visible from publicly accessible roads, but none of the vines were labeled, and the variety could not be identified by simply viewing the vines. This use of the unreleased varieties in these circumstances did not constitute a public use sufficient to prevent the USDA from successfully applying for patents on the grapes.

In the actual case on which this problem is based, the USDA obtained patents on the grapes.

Delano Farms Co. and other growers filed a suit in a federal district court against the USDA, seeking to invalidate the patents. The court rejected the challenge. ―If members of the public are

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not informed of, and cannot readily discern, the claimed features of the invention in the allegedly invalidating prior art, the public has not been put in possession of those features.‖ The U.S. Court of Appeals for the Federal Circuit affirmed.

121.

Copyright Infringement. Savant Homes, Inc., is a custom home designer and builder.

Using what it called the Anders Plan, Savant built a model house in Windsor, Colorado. This was a ranch house with two bedrooms on one side and a master suite on the other, separated by a combined family room, dining room, and kitchen. Ron and Tammie Wagner toured the Savant house. The same month, the Wagners hired builder Douglas Collins and his firm, Douglas Consulting, to build a house for them. After it was built, Savant filed a lawsuit in a federal district court against Collins for copyright infringement, alleging that the builder had copied the Anders Plan in the design and construction of the Wagner house. Collins showed that the Anders Plan consisted of standard elements and standard arrangements of elements. In these circumstances, has infringement occurred? Explain. [Savant Homes, Inc. v. Collins, 809 F.3d 1133 (10th Cir. 2016)] (See Copyrights.)

Solution No, in the circumstances of this problem, infringement did not occur. Works that are copyrightable include architectural plans and the products of those plans. The Copyright Act explicitly states that it protects works that fall into this category. Specifically excluded, however, are ideas. The particular way in which an idea is expressed can be protected by copyright law if the expression is original. In other words, one of the key requirements for the protection of a work is originality. If a substantial part of an original expression is copied, infringement has occurred.

Here, Savant Homes, using what it called the ―Anders Plan,‖ built a model house—a ranch house with two bedrooms on one side and a master suite on the other, separated by a combined family room, dining room, and kitchen. The Wagners toured the model and then hired Collins, a different builder, to build a house for them. After it was built, Savant charged that Collins had copied the Anders Plan in designing and constructing the Wagner house. Collins showed that the Anders Plan consisted of standard elements and standard arrangements of elements. Standard content receives no copyright protection.

To establish copyright infringement, a plaintiff must show ―substantial similarity‖ between protectable elements of a work and an allegedly infringing work. Savant apparently failed to show that the Anders Plan included any protectable elements—that is, an original expression of a standard three-bedroom ranch house with the same floor plan.

In the actual case on which this problem is based, the court issued a judgment in Collins‘s favor.

The U.S. Court of Appeals for the Tenth Circuit affirmed this judgment, according to the reasoning stated here.

122.

Patent Infringement. Finjan, Inc., owns a patent—U.S. Patent No. 7,418,731, or ―the ‗731 patent‖—for a system and method that protect computers from malicious software embedded in websites on the Internet. The system consists of a gateway that compares security profiles associated with requested files to the security policies of requesting users. The method includes scanning an incoming file to create the profile, which comprises a list of computer commands the file is programmed to perform. The ‘731 patent required ―a list of computer commands.‖ Blue Coat Systems, Inc., sold a competing product. Blue Coat‘s product scanned an incoming file for

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certain commands and created a new file called Cookie2 that contained a field showing whether, and how often, those commands appeared. Finjan filed a suit against Blue Coat, alleging patent infringement. Blue Coat argued that its profiles did not contain the ‘731 patent‘s required ―list of computer commands.‖ Did Blue Coat‘s product infringe Finjan‘s patent? Explain. [Finjan, Inc. v.

Blue Cost Systems, Inc., 879 F.3d 1299 (Fed. Cir. 2018)] (See Patents.)

Solution Yes, Blue Coat‘s product infringed on Finjan‘s patent. A firm that makes, uses, or sells another‘s patented product or process commits the tort of patent infringement. Infringement may occur even though not all features of the product are copied, but a process cannot be infringed unless all steps or their equivalent are copied.

In this case, Finjan owns a patent—the ‗731 patent—for a system and method that provides computer security from malicious software embedded in outside websites. The system features a gateway that compares a security profile associated with a requested file to the security policies of the requesting user. The method includes scanning the file to create the profile, which comprises a list of computer commands the file is programmed to perform. Under the terms of the patent, such a list was required. Blue Coat sold a competing product. This product scanned an incoming file for certain commands and created a new file called Cookie2 that contained a field showing whether, and how often, those commands appeared. Contrary to Blue Coat‘s argument, this field met the ‘731 patent‘s required ―list of computer commands.‖ The patent was infringed.

In the actual case on which this problem is based, the court entered a judgment in Finjan‘s favor, awarding damages of $6 million. The U.S. Court of Appeals for the Federal Circuit affirmed, on the reasoning stated above.

123.

Copyrights. The ―Jimmy Smith Rap‖ is a copyrighted rap recording asserting the supremacy of jazz over other types of music. Released thirty years later, ―Pound Cake‖ is a hiphop song in which Aubrey Graham and Shawn Carter, professionally known as Drake and Jay-Z, rap about the greatness and authenticity of their work. At the beginning of the seven-minutelong ―Pound Cake‖ is a sampling of thirty-five seconds of the ―Jimmy Smith Rap.‖ Criticizing jazz elitism, ―Pound Cake‖ emphasizes that it is not the genre but the authenticity of the music that matters. The release of ―Pound Cake‖ had no effect on the demand for the ―Jimmy Smith Rap,‖ for which there was no active market at the time. Did Drake and Jay-Z make ―fair use‖ of the ―Jimmy Smith Rap,‖ or were they liable for copyright infringement? Explain. [Estate of Smith v. Graham, 799 FedAppx 36 (2d Cir. 2020)] (See Copyrights.)

Solution Drake and Jay-Z made ―fair use‖ of the ―Jimmy Smith Rap‖—they are not liable for copyright infringement. Whenever the form or expression of an idea is copied, an infringement of copyright occurs. The ―fair use‖ doctrine provides an exception to liability (and in certain cases, without even the payment of royalties) when a work is used for such purposes as criticism or comment. Factors for determining whether a particular use qualifies include the purpose and character of the use, and the effect of the use on the market for the copyrighted work.

In this case, Drake and Jay-Z sampled thirty-five seconds of the ―Jimmy Smith Rap‖ at the beginning of their seven-minute hip-hop song ―Pound Cake.‖ They used the material for a purpose different from that for which it was created. The ―Jimmy Smith Rap‖ asserts the supremacy of jazz to the disparagement of other types of music. ―Pound Cake‖ criticizes such

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jazz-elitism, emphasizing that it is not the genre but the authenticity of the music that matters.

Drake and Jay-Z rap about the greatness and authenticity of their own work. Courts refer to this type of use of a copyrighted work as transformative. As for the effect of the use on the market for the copyrighted work, according to the facts, ―the release of ‗Pound Cake‘ had no effect on the demand for the ‗Jimmy Smith Rap,‘ for which at the time there was no active market.‖ In the actual case on which this problem is based, the owners of the copyright to the ―Jimmy Smith Rap,‖ including Smith‘s estate, filed a suit in a federal district court against Drake and others, alleging copyright infringement. The court granted the defendants‘ motion for summary judgment on the ground of fair use. The U.S. Court of Appeals for the Second Circuit affirmed, in part based on the reasoning stated above.

124.

A Question of Ethics—The IDDR Approach and Copyright Infringement. Usenet is an online bulletin board network. A user gains access to Usenet posts through a commercial service, such as Giganews, Inc. Giganews deletes or blocks posts that contain child pornography.

Otherwise, the service does not monitor content. Perfect 10, Inc., owns the copyrights to tens of thousands of images, many of which have been illegally posted on Usenet through Giganews.

When Perfect 10 notified Giganews of posts that contained infringing images, the service took them down. Despite these efforts, illegal posting continued. Perfect 10 filed a suit in a federal district court against Giganews, alleging copyright infringement. [Perfect 10, Inc. v. Giganews, Inc., 847 F.3d 657 (9th Cir. 2017)] (See Copyrights.)

1. Is Giganews liable for copyright infringement? Do Internet service providers have an ethical duty to do more to prevent infringement? Why or why not?

Solution No, Giganews is not liable for copyright infringement. The Digital Millennium Copyright Act (DMCA) protects the owners of copyrights in digital information. But the DMCA also limits the liability of Internet service providers (ISPs). Under the act, an ISP is not liable for copyright infringement by a subscriber unless the ISP is aware of the violation. An ISP may be liable only if it fails to shut down the subscriber after learning of the violation.

In this problem, Giganews provided its subscribers with access to Usenet, an online bulletin board network. Giganews does not monitor its users‘ posts except to delete or block posts that contain child pornography. Perfect 10, Inc. owns the copyrights to tens of thousands of images. Many of these have been illegally distributed over Usenet through Giganews. When notified of infringing posts, Giganews removed them. But users continued to post infringing content. Perfect 10 filed a suit in a federal district court against Giganews, accusing the service of copyright infringement. In the circumstances, under the DMCA, Giganews is not liable for its users‘ infringement.

ISPs arguably have an ethical duty to do more to prevent copyright infringement. Posting images and other third-party content that a user does not own, or does not have permission to post, is copyright infringement. This is theft. Any party, such as an ISP, that has the capacity to block or delete such posts has an ethical duty to do so. An ISP could at the least clearly notify its users that such posts are violations of the law and maintain a policy that does not tolerate violations.

In the actual case on which this problem is based, the court issued a judgment in Giganews‘s favor. The U.S. Court of Appeals for the Ninth Circuit affirmed the judgment.

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2.

Using the IDDR approach, decide whether a copyright owner has an ethical duty to protect against infringement.

Solution Yes, a copyright owner has an ethical duty to protect against infringement. Arguably, any party that has the capacity to protect personal property, as a copyright owner most likely does, has an ethical duty to do so.

The IDDR approach has four steps, which begin with an Inquiry to express the issue, identify the stakeholders, and indicate potential ethical standards. Here, the question is whether an owner of copyrights has an ethical obligation to attempt to prevent a theft of those rights. The stakeholders include the owner, the creators of other copyrightable work, and the public at large.

Applicable standards may derive from a specific owner‘s situation—the owner of a copyright in music, for example, may license the music and distribute royalties, which would suggest a correlative duty to guard against its unlicensed use.

The second step of the IDDR approach is a Discussion that considers actions to address the issue.

Factors include the strengths and weaknesses of the actions, and the consequences and the effects on the stakeholders. How might the owner of a copyright discourage its theft? Some answers to this question depend on the nature of the copyrighted work. Intellectual property protected by copyright may be stored as data on a server, which can be encrypted, firewalled, password-barred, or disconnected from the Internet to guard against thievery. If, as in this problem, an owner holds thousands of copyrights, some of the protected material might be made freely available to make it less tempting to steal. Or one song on an album might be accessible for playback online with an option to buy the song, or the whole album, for playback through other media. The disadvantage of this action is that of course some copyrighted items are available for free, which undercuts the reason for the protection. But this sort of sampling can acquaint a wider market with the work, which might then be more widely purchased, adding to its value.

The third step of the approach is to come to a Decision and state the reasons. There seems little doubt that the owner of copyright has an ethical obligation to guard against its theft. This protects the existence of copyright as a principle for the protection of property. It enhances its value to those who own it, those who produced it, and those who might be inspired to create more. These outcomes can improve the life of the community at large by adding opportunities to appreciate products of the mind.

The last step of the approach is a Review of the success or failure of the action to resolve the issue, and satisfy the stakeholders. No protective action will be entirely successful, but a failure to take any action will guaranty a failure to protect the interests of the stakeholders. This underscores the ethical obligation of an owner of a copyright to act to protect the property.

Critical Thinking and Writing Assignments 4.

Time-Limited Group Assignment—Patents. After years of research, your company has developed a product that might revolutionize the green (environmentally conscious) building industry. The product is made from relatively inexpensive and widely available materials combined in a unique way that can substantially lower the heating and cooling costs of residential and

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commercial buildings. The company has registered the trademark it intends to use for the product and has filed a patent application with the U.S. Patent and Trademark Office. (See Patents.)

1. One group will provide three reasons why this product does or does not qualify for patent protection.

Solution To obtain a patent, an applicant must show that an invention is novel, useful, and not obvious in light of current technology. Almost anything is patentable—including artistic methods, certain works of art, the structures of storylines, and hybrid or genetically modified plants, microorganisms, and animals—but not the laws of nature, natural phenomena, and abstract ideas.

A product that combines widely available materials with no change in their functions would not be novel or uniquely useful. If a person of ordinary skill in the art would recognize the way in which these materials are combined, then the product is ―obvious in light of current technology.‖ If the materials that are combined are not otherwise modified, they may not qualify for a patent under the exception for ―natural phenomena.”

2.

A second group will develop a four-step plan for how the company can best protect its intellectual property rights (trademark, trade secret, and patent) and prevent domestic and foreign competitors from producing counterfeit goods or cheap knockoffs.

Solution One step that a company can take to fight the theft of its intellectual property rights for the production and sale of counterfeit goods is to seek a court order to shut down the domain names of websites that sell the goods. Shutting down websites, particularly on key shopping days, prevents the sale of some domestic and foreign counterfeit goods. Against those who in bad faith use a domain name that is confusingly similar to a legitimate business‘s name, a plaintiff can collect actual damages and lost profits or statutory damages. Use of a trademark as a meta tag without permission is trademark infringement. Dilution is another possible cause of action (and does not require proof of the likelihood of confusion among consumers).

A second step that a company can take is to seek the criminal prosecution of those who traffic in counterfeit labels, stickers, packaging, and the like, whether or not they are attached to goods.

The legal owner of the rights to the copied trademarks and other intellectual property should insist on the destruction of the counterfeit products and restitution for any losses.

A third possibility to prevent counterfeiting is to license a mark or other property, permitting its use for certain limited purposes. This alternative may be the best choice to realize a return on patented products made and sold in a foreign country because no patent infringement occurs in that circumstance. An injunction, fees and costa, and as much as triple damages may be recouped in a patent infringement suit against domestic violations of patent rights. Damages and criminal penalties may also be available against those who violate copyrights or steal trade secrets.

3.

The third group will list and explain three ways in which the company can utilize licensing.

Solution A license is an agreement permitting the use of a trademark, copyright, patent, or trade secret for certain limited purposes. A licensor might, for example, allow a licensee to use a trademark as part of a company name, or as part of a domain name, but not otherwise use the mark on any products or services. Or the owner of the property might allow a licensee to use the copyrighted, patented, or trademarked property or trade secrets. For example, the Coca-Cola Bottling

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Company licenses firms worldwide to use its secret formula for the syrup used in its soft drink. A licensor can realize a return on the license through the payment of royalties—a percentage of the income gained from the sale of products using the licensed property.

Solution and Answer Guide Miller, The Legal Environment Today 10e, 9780357635582; Chapter 09: Internet Law, Social Media, and Privacy

Table of Contents Critical Thinking Questions in Features .................................................................................................................. 9 Adapting the Law to the Online Environment ........................................................................................... 9 Critical Thinking Questions in Cases ..................................................................................................................... 10 Case 9.1 ................................................................................................................................................... 10 Case 9.2 ................................................................................................................................................... 10 Case 9.3 ................................................................................................................................................... 11 Chapter Review ............................................................................................................................................................. 11 Practice and Review ................................................................................................................................ 11 Practice and Review: Debate This ........................................................................................................... 12 Issue Spotters .......................................................................................................................................... 13 Business Scenarios and Case Problems ................................................................................................... 13 Critical Thinking and Writing Assignments .............................................................................................. 19

Critical Thinking Questions in Features Adapting the Law to the Online Environment 125.

If LoL is free to players, why would a Chinese company want to copy it?

Solution There is usually a charge to download any app. Therefore, copying an extremely popular multiplayer online game can yield a sizable revenue stream from those who download the app.

Additionally, anything on the Internet is open to advertising. Advertising leads to revenue streams.

Critical Thinking Questions in Cases Case 9.1 126.

Suppose that the candyland.com website had not been sexually explicit but had sold candy. Would the result have been the same? Explain.

Solution Probably. In this circumstance, Hasbro could most likely demonstrate a likelihood of prevailing on a claim that the defendant violated the applicable federal and state statutes against trademark

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dilution. The Hasbro trademark is famous, the defendant would presumably be using it without permission, and that use would arguably diminish the quality of the Hasbro mark.

127.

How can companies protect themselves from situations such as the one described in this case? What limits each company‘s ability to be fully protected?

Solution To protect themselves from others who create websites that have similar domain names, companies can be vigilant and act quickly and forcefully to enforce their rights. A company‘s ability to be fully protected is limited chiefly by its resources and by the skill of the persons on whom the company relies to protect it.

Case 9.2 128.

Should an ISP be liable for copyright infringement by its subscribers regardless of whether the ISP is aware of the violation? Why or why not?

Solution No, an ISP should not be liable for the infringement activities of its subscribers unless the ISP is aware of the violations. As under the DMCA, and in the BMG case, an ISP should be liable only if it is aware of the infringement and fails to take reasonably meaningful action to stop it, or at least to terminate the subscriber‘s service.

The importance of intellectual property supports the protection of rights to its ownership.

Prohibiting infringement is a significant component of this protection. Prosecuting violators is a material part of this prohibition.

But the subscribers to ISPs, like the users of other Internet services, can more easily take advantage of those services to engage in illicit conduct, such as copyright infringement, than the providers can quickly police. Those providers should be held liable for failing to discourage such behavior and for failing to act once they know of it. Until they are aware of it, however, it would be unfair to hold them to account.

129.

Could Cox legitimately claim that it had no knowledge of subscribers who infringed BMG‘s copyrights, since the ISP was deleting all of BMG‘s infringement notices? Explain.

Solution No, Cox could not legitimately claim that by deleting all of BMG‘s infringement notices, it was unaware of the activity of those among its subscribers who infringed the sender‘s copyrights. In fact, the decision to delete all such notices would undercut any contention that it was unaware of any infringement by any subscriber.

Of course, in the BMG case, the court reasoned that when Cox decided to delete all infringement notices received from BMG, the ISP dispensed with terminating subscribers who repeatedly infringed BMG‘s copyrights. This was in addition to the ISP‘s general unstated policy to terminate no subscribers for infringement, contrary to its own stated policy. In effect, Cox had no infringement policy.

Case 9.3 3.

Is a violation of an individual‘s right to privacy, without more, enough to sustain a legal cause, or should additional consequences be required to maintain an action? Explain.

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Solution Yes, an intrusion into an individual‘s privacy is sufficient to sustain a legal cause of action. It constitutes a sufficiently concrete injury to support the cause. Additional consequences are not necessary.

Violations of the right to privacy have long been subject to actions at common law. Historically recognized as an ―unreasonable intrusion upon the seclusion of another,‖ the cause has traditionally been extended to incorporate, among other things, ―tapping‖ landline phone wires and opening others‘ mail. Referred to as the invasion of a ―substantive right,‖ the intrusion itself is enough to impose liability.

The Electronic Communications Privacy Act (ECPA), which was the basis for the plaintiffs‘ claim in the Campbell case, codifies privacy torts into a federal statute making the intentional interception of any ―electronic communication‖ a ground for an action. Additional consequences are not required. At common law or under the ECPA, a plaintiff does need not to allege or show any further harm to succeed.

4.

Should Facebook pay the platform‘s users for Facebook‘s use of their private data? Discuss.

Solution Yes, Facebook should pay its users for the use of their private data, particularly when those uses include the facilitation of targeted advertising. Users should be viewed as the owner of their data, and Facebook, which is profiting from its use, should be required to pay for it.

Further, individuals should have control over their data. They should be asked whether they want their data used, whom they would permit to use it, and the uses to which it would be applied. As with any property, the owners should be able to sell or not sell it as they choose.

Conversely, no, Facebook does not need to pay its users for the use of their data. Layers of complexity challenge the categorization of data, such as that collected and used by Facebook, as property subject to the traditional definition of ownership. Its marketability by individual ―owners‖ is doubtful—it is hard for individuals to trade. If it cannot be easily sold, its ownership is arguably incomplete.

Chapter Review Practice and Review While he was in high school, Joel Gibb downloaded numerous songs to his smartphone from an unlicensed file-sharing service. He used portions of the copyrighted songs when he recorded his own band and posted videos on YouTube and Facebook. He also used BitTorrent to download several movies from the Internet. Now Gibb has applied to Boston University. The admissions office has requested access to his Facebook password, and he has complied. Using the information presented in the chapter, answer the following questions.

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130.

What laws, if any, did Gibb violate by downloading music and videos from the Internet?

Solution Technology has vastly increased the potential for copyright infringement. Generally, whenever a party downloads music into a computer‘s random access memory, or RAM, without authorization, a copyright is infringed. Thus, when file-sharing is used to download others‘ stored music files, copyright issues arise. Recording artists and their labels stand to lose large amounts of royalties and revenues if relatively few digital downloads or CDs are purchased and then made available on distributed networks.

131.

Was Gibb‘s use of portions of copyrighted songs in his own music illegal? Explain.

Solution At least one federal court has held that sampling a copyrighted sound recording of any length constitutes copyright infringement. Some other federal courts have not found that digital sampling is always illegal. Some courts have allowed the defense of fair use, while others have not.

132. not?

Can individuals legally post copyrighted content on their Facebook pages? Why or why

Solution Piracy of copyrighted materials online can occur even if posting the materials is ―altruistic‖ in nature—unauthorized copies are posted simply to be shared with others. The law extends criminal liability for the piracy of copyrighted materials to persons who exchange unauthorized copies of copyrighted works without realizing a profit.

133.

Did Boston University violate any laws when it asked Joel to provide his Facebook password? Explain.

Solution Many states have enacted legislation to protect individuals from having to disclose their social media passwords. The federal government is also considering legislation that would prohibit employers and schools from demanding passwords to social media accounts. If, at the time of the application, however, Massachusetts was not covered by any of these statutes, Boston University would not have violated any law by asking for Gibbs‘s password, which he then voluntarily divulged.

Practice and Review: Debate This 134.

Internet service providers should be subject to the same defamation laws as newspapers, magazines, and television and radio stations.

Solution Those who support this position argue that it is not fair to those who are defamed by others on the Internet to not have recourse against the ISP. After all, there should be no difference between traditional media outlets and the Internet. Those who are against applying similar defamation law to all media argue that ISPs cannot become censors. They point out the technological inability of ISPs to monitor all of the statements that go through their servers.

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Issue Spotters 135.

Karl self-publishes a cookbook titled Hole Foods, in which he sets out recipes for donuts, Bundt cakes, tortellini, and other foods with holes. To publicize the book, Karl designs the website holefoods.com. Karl appropriates the key words of other cooking and cookbook sites with more frequent hits so that holefoods.com will appear in the same search engine results as the more popular sites. Has Karl done anything wrong? Explain.

Solution Karl may have committed trademark infringement. Search engines compile their results by looking through websites‘ key-word fields. A site that appropriates the key words of other sites with more frequent hits will appear in the same search engine results as the more popular sites.

But using another‘s trademark as a key word without the owner‘s permission normally constitutes trademark infringement. Of course, some uses of another‘s trademark as a meta tag may be permissible if the use is reasonably necessary and does not suggest that the owner authorized or sponsored the use.

136.

Eagle Corporation began marketing software in 2010 under the mark ―Eagle.‖ In 2019, Eagle.com, Inc., a different company selling different products, begins to use eagle as part of its URL and registers it as a domain name. Can Eagle Corporation stop this use of eagle? If so, what must the company show?

Solution Yes. This may be an instance of trademark dilution. Dilution occurs when a trademark is used, without permission, in a way that diminishes the distinctive quality of the mark. Dilution does not require proof that consumers are likely to be confused by the use of the unauthorized mark. The products involved do not have to be similar. Dilution does require, however, that a mark be famous when the dilution occurs.

Business Scenarios and Case Problems 137.

Privacy. See You, Inc., is an online social network. SeeYou‘s members develop personalized profiles to share information— photos, videos, stories, activity updates, and other items—with other members. Members post the information that they want to share and decide with whom they want to share it. SeeYou launched a program to allow members to share with others what they do elsewhere online. For example, if a member rents a movie through Netflix, SeeYou will broadcast that information to everyone in the member‘s online network. How can SeeYou avoid complaints that this program violates its members‘ privacy? (See Privacy.)

Solution Initially, SeeYou‘s best option in this situation might be to give members the opportunity to prevent the broadcast of any private information by requiring their consent. Otherwise, the members could legitimately complain that the new program was causing publication of private information without their permission. Or SeeYou might allow members to affirmatively opt out of the program altogether. Of course, SeeYou might also discontinue the program. And if any of the members decide to file a suit against SeeYou for violations of federal or state privacy statutes, the firm might offer to settle to avoid further complaints and negative publicity.

138.

Copyrights in Digital Information. When she was in college, Jammie Thomas-Rasset wrote a case study on Napster, an online peer-to-peer (P2P) file-sharing network, and knew that it had been shut down because it was illegal. Later, Capitol Records, Inc., which owns the copyrights

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to a large number of music recordings, discovered that ―tereastarr‖—a user name associated with Thomas-Rasset‘s Internet protocol address— had made twenty-four songs available for distribution on KaZaA, another P2P network. Capitol notified Thomas-Rasset that she had been identified as engaging in the unauthorized trading of music. She replaced the hard drive on her computer with a new drive that did not contain the songs in dispute. Is Thomas-Rasset liable for copyright infringement? Explain. [Capitol Records, Inc. v. Thomas-Rasset, 692 F.3d 899 (8th Cir. 2012)] (See Copyrights in Digital Information.)

Solution Yes, Thomas-Rasset is liable for copyright infringement. File-sharing is accomplished through peer-to-peer (P2P) networking. When file-sharing is used to download others‘ stored music files, copyright issues arise. The issue of infringement in file-sharing has been a subject of debate since the cases against Napster, Inc. and Grokster, Ltd., two companies that created software used to share files in infringement of others‘ copyrights. Napster operated a website with free software that enabled users to copy and transfer MP3 files via the Internet. Firms in the recording industry sued Napster. Ultimately, the court held Napster liable for copyright infringement.

Here, Thomas-Rasset willfully infringed Capitol‘s intellectual property rights under the Copyright Act by making twenty-four songs available for distribution on an online peer-to-peer network.

Her subsequent effort to conceal her actions by changing the hard drive on her computer showed a proclivity for unlawful conduct. This would support imposing an injunction on Thomas-Rasset against making songs or any recordings available for distribution to the public through a P2P or any other online media distribution system.

In the actual case on which this problem is based, Capitol filed a suit in a federal district court against Thomas-Rasset, who was found liable for copyright infringement and assessed damages of $54,000. On appeal, the U.S. Court of Appeals for the Eighth Circuit vacated the lower court's judgment, concluding that it should have assessed statutory damages of at least $222,000 and should have enjoined Thomas-Rasset from making copyrighted works available to the public. The appellate court remanded the case with directions to enter a judgment that included those remedies.

139.

Privacy. Using special software, South Dakota law enforcement officers found a person who appeared to possess child pornography at a specific Internet protocol address. The officers subpoenaed Midcontinent Communications, the service that assigned the address, for the personal information of its subscriber. With this information, the officers obtained a search warrant for the residence of John Rolfe, where they found a laptop that contained child pornography. Rolfe argued that the subpoenas violated his ―expectation of privacy.‖ Did Rolfe have a privacy interest in the information obtained by the subpoenas issued to Midcontinent?

Discuss. [State of South Dakota v. Rolfe, 825 N.W.2d 901 (S.Dak. 2013)] (See Privacy.)

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Solution No, Rolfe did not have a privacy interest in the information obtained by the subpoenas issued to Midcontinent Communications. The courts have held that the right to privacy is guaranteed by the U.S. Constitution‘s Bill of Rights, and some state constitutions contain an explicit guarantee of the right. A person must have a reasonable expectation of privacy, though, to maintain a suit or to assert a successful defense for an invasion of privacy.

People clearly have a reasonable expectation of privacy when they enter their personal banking or credit card information online. They also have a reasonable expectation that online companies will follow their own privacy policies. But people do not a reasonable expectation of privacy in statements made on Twitter and other data that they publicly disseminate. In other words, there is no violation of a subscriber‘s right to privacy when a third-party Internet provider receives a subpoena and discloses the subscriber‘s information.

Here, Rolfe supplied his e-mail address and other personal information, including his Internet protocol address, to Midcontinent. In other words, Rolfe publicly disseminated this information.

Law enforcement officers obtained this information from Midcontinent through the subpoenas issued by the South Dakota state court. Rolfe provided his information to Midcontinent—he has no legitimate expectation of privacy in that information.

In the actual case on which this problem is based, Rolfe was charged with, and convicted of, possessing, manufacturing, and distributing child pornography, as well as other crimes. As part of the proceedings, the court found that Rolfe had no expectation of privacy in the information that he made available to Midcontinent. On appeal, the South Dakota Supreme Court upheld the conviction.

140.

File-Sharing. Dartmouth College professor M. Eric Johnson, in collaboration with Tiversa, Inc., a company that monitors peer-to-peer networks to provide security services, wrote an article titled ―Data Hemorrhages in the Health-Care Sector.‖ In preparing the article, Johnson and Tiversa searched the networks for data that could be used to commit medical or financial identity theft.

They found a document that contained the Social Security numbers, insurance information, and treatment codes for patients of LabMD, Inc. Tiversa notified LabMD of the find in order to solicit its business. Instead of hiring Tiversa, however, LabMD filed a suit in a federal district court against the company, alleging trespass, conversion, and violations of federal statutes. What do these facts indicate about the security of private information? Explain. How should the court rule?

[LabMD, Inc. v. Tiversa, Inc., 2013 WL 425983 (11th Cir. 2013)] (See Copyrights in Digital Information.)

Solution The facts of this case indicate that the security of private information in any database accessible from the Web is weak. And this information can be easily shared with others through peer-topeer networks, which allow users to place shared computer files in folders that are open for other users to search.

As part of the research for their article, Johnson and Tiversa searched the networks for data that could be used to commit medical or financial identity theft. On one of them, they found a document that contained the Social Security numbers, insurance information, and treatment codes for patients of LabMD, Inc. Tiversa notified LabMD of the find. LabMD appeared not to

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have willingly revealed this information because on learning of its exposure, the company filed a suit against Tiversa.

In the actual case on which this problem is based, the court dismissed the suit for lack of personal jurisdiction over Tiversa. On appeal, the U.S Court of Appeals for the Eleventh Circuit affirmed.

LabMD asserted jurisdiction under a long-arm statute of Georgia. But Tiversa was not registered to do business in Georgia, had no employees or customers in Georgia, derived no revenue from business activities in Georgia, owned no Georgia property, and paid no Georgia taxes.

Furthermore, although accessible in Georgia, Tiversa‘s website merely advertised its services, and did not offer products or services for purchase online. Tiversa's entire contact with Georgia consisted of one phone call and nine e-mails to LabMD. This was not sufficient.

141.

Business Case Problem with Sample Answer—Social Media. Mohammad Omar Aly Hassan and nine others were indicted in a federal district court on charges of conspiring to advance violent jihad (holy war against enemies of Islam) and other offenses related to terrorism.

The evidence at Hassan‘s trial included postings he made on Facebook concerning his adherence to violent jihadist ideology. Convicted, Hassan appealed, contending that the Facebook items had not been properly authenticated (established as his own comments). How might the government show the connection between postings on Facebook and those who post them? Discuss. [United States v. Hassan, 742 F.3d 104 (4th Cir. 2014)] (See Social Media.) —For a sample answer to Problem 8–5, go to Appendix E. Solution As stated in the text, law enforcement can use social media to detect and prosecute suspected criminals. But there must be an authenticated connection between the suspects and the posts. To make this connection, law enforcement officials can present the testimony or certification of authoritative representatives of the social media site or other experts. The posts can be traced from the pages on which they are displayed and the accounts of the ―owners‖ of the pages to the posters through Internet Protocol (IP) addresses. An IP address can reveal the e-mail address, and even the mailing address, of an otherwise anonymous poster.

The custodians of Facebook, for example, can verify Facebook pages and posts because they maintain those items as business records in the course of regularly conducted business activities.

From those sources, the prosecution in Hassan‘s case could have tracked the IP address to discover his identity.

In the actual case on which this problem is based, on Hassan‘s appeal of his conviction, the U.S. Court of Appeals for the Fourth Circuit affirmed.

142.

Social Media. Kenneth Wheeler was angry at certain police officers in Grand Junction, Colorado, because of a driving-under- the-influence arrest that he viewed as unjust. While in Italy, Wheeler posted a statement to his Facebook page urging his ―religious followers‖ to ―kill cops, drown them in the blood of their children, hunt them down and kill their entire bloodlines‖ and provided names. Later, Wheeler added a post to ―commit a massacre in the Stepping Stones Preschool and day care, just walk in and kill everybody.‖ Could a reasonable person conclude that Wheeler‘s posts were true threats? How might law enforcement officers use Wheeler‘s posts?

Explain. [United States v. Wheeler, 776 F.3d 736 (10th Cir. 2015)] (See Social Media.)

Solution

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Yes, a reasonable person could conclude that Wheeler‘s posts were ―true‖ threats. Law enforcement uses social media to detect and prosecute criminals. Police may also use social media to help them to locate a particular suspect or to determine the suspect‘s identity.

In this problem, Kenneth Wheeler was angry at police officers in Grand Junction, Colorado, due to a driving-under-the-influence arrest that he viewed as a set-up. While in Italy, Wheeler posted a statement to his Facebook page urging his ―religious followers‖ to ―kill cops, drown them in the blood of their children, hunt them down and kill their entire bloodlines‖ and provided names.

Later, Wheeler added a post to ―commit a massacre in the stepping stones preschool and day care, just walk in and kill everybody.‖ In determining whether a ―true‖ threat has been made, a court asks whether those who hear or read the threat reasonably consider that an actual threat has been made. Exhortations to unspecified others to commit violence can amount to true threats, so as to support a criminal prosecution based on those threats, especially if a reasonable person might believe the individuals ordered to take violent action are subject to the will of the threatening party. Law enforcement officers might use Wheeler‘s posts to detect, investigate, and prosecute any crimes. Police may also use the posts to help them to determine Wheeler‘s identity and his location.

In the actual case on which this problem is based, Wheeler was convicted of transmitting a threat and sentenced to forty months' imprisonment. On appeal, the U.S. Court of Appeals for the Tenth Circuit held that a reasonable person could interpret Wheeler‘s statements to be ―true‖ threats.

The court remanded the case for a new trial on other grounds.

143.

Social Media. Irvin Smith was charged in a Georgia state court with burglary and theft.

Before the trial, during the selection of the jury, the state prosecutor asked the prospective jurors whether they knew Smith. No one responded affirmatively. Jurors were chosen and sworn in, without objection. After the trial, during deliberations, the jurors indicated to the court that they were deadlocked. The court charged them to try again. Meanwhile, the prosecutor learned that ―Juror 4‖ appeared as a friend on the defendant‘s Facebook page and filed a motion to dismiss her. The court replaced Juror 4 with an alternate. Was this an appropriate action, or was it an ―abuse of discretion‖? Should the court have admitted evidence that Facebook friends do not always actually know each other? Discuss. [Smith v. State of Georgia, 335 Ga.App. 497, 782 S.E.2d 305 (2016)] (See Social Media.)

Solution The action by the court in replacing Juror 4 with an alternate was not an abuse of discretion. Nor did the court err in not admitting evidence that in general Facebook friends do not always actually know each other.

In this problem, Smith was charged with burglary and theft by taking a motor vehicle. Before the trial, during voir dire—the selection of the jury panel— the state prosecutor asked the prospective jurors, whether they knew Smith. No one indicated that they did. Jurors were chosen and sworn in, without objection. After the trial, during deliberations, the prosecutor learned that ―Juror 4‖ appeared as a friend on Smith‘s Facebook page and filed a motion to dismiss her from the jury.

The court granted the motion and replaced Juror 4 with an alternate. This was not an abuse of the court‘s discretion because Juror 4 was connected to Smith in some way and her failure to disclose the connection during voir dire placed in doubt her ability to determine his guilt or innocence impartially.

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As for whether evidence should be admitted to the effect that Facebook friends might not actually know each other, it would not be abuse of discretion to exclude it. Such evidence would not relevant to Juror 4‘s unique situation, her ―personal style‖—that is, whether she actually knew the defendant and if so, in what way.

In the actual case on which this problem is based, after the juror was replaced with an alternate, the jury returned a guilty verdict. A state intermediate appellate court affirmed this result, after a review of the issues focused on here.

144.

Internet Law. Jason Smathers, an employee of America Online (AOL), misappropriated an AOL customer list with 92 million screen names. He sold the list for $28,000 to Sean Dunaway, who sold it to Braden Bournival. Bournival used it to send AOL customers more than 3 billion unsolicited, deceptive e-mail ads. AOL estimated the cost of processing the ads to be at least $300,000. Convicted of conspiring to relay deceptive e-mail in violation of federal law, Smathers was ordered to pay AOL restitution of $84,000 (treble the amount for which he had sold the AOL customer list). Smathers appealed, seeking to reduce the amount. He cited a judgment in a civil suit for a different offense against Bournival and others for which AOL had collected $95,000.

Smathers also argued that his obligation should be reduced by restitution payments made by Dunaway. Which federal law did Smathers violate? Should the amount of his restitution be reduced? Explain. [United States v. Smathers, 879 F.3d 453 (2d. Cir. 2018)] (See Internet Law.) Solution Smathers was charged with, and convicted of, violating the federal CAN-SPAM Act. This law applies to the sending of unsolicited ―junk‖ e-mail, prohibiting the use of false, misleading, or deceptive information.

Smathers, an employee of America Online (AOL), misappropriated an AOL customer list with 92 million screen names. He sold the list for $28,000 to Sean Dunaway, who sold it to Braden Bournival. Bournival used it to send AOL customers more than 3 billion unsolicited, deceptive email ads. AOL estimated the cost of processing the ads to be at least $300,000. Smathers was convicted of conspiring to relay deceptive e-mail in violation of the CAN-SPAM Act, which applied to the sending of the ads.

Smathers was ordered to pay AOL restitution of $84,000. He sought to reduce this amount by citing a judgment in a civil suit against Bournival and others for which AOL had collected $95,000.

He also argued that the amount should be reduced by restitution payments made by Dunaway.

As indicated by the facts, however, he was not a party to the Bournival litigation, which involved a different offense. And AOL‘s total loss was at least $300,000. Payments by Smathers and Dunaway together are not likely to reach that figure, much less the $84,000 that Smathers was ordered to pay.

In the actual case on which this problem is based, the U.S. Court of Appeals for the Second Circuit affirmed the restitution order, concluding that Smathers‘s contentions were ―without merit.‖ 145.

A Question of Ethics—The IDDR Approach and Social Media. One August morning, around 6:30 a.m., a fire occurred at Ray and Christine Nixon‘s home in West Monroe, Louisiana.

The Nixons told Detective Gary Gilley of the Ouachita Parish Sheriff‘s Department that they believed the fire was deliberately set by Matthew Alexander, a former employee of Ray‘s company. Ray gave Alexander‘s phone number to Gilley, who contacted the number‘s service

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provider, Verizon Wireless Services, L.L.C. Gilley said that he was investigating a house fire that had been started with the victims inside the dwelling, and wanted to know where the number‘s subscriber had been that day. He did not present a warrant, but he did certify that Verizon‘s response would be considered an ―emergency disclosure.‖ [Alexander v. Verizon Wireless Services, L.L.C., 875 F.3d 243 (5th Cir. 2017)] (See Social Media.)

1.

Using the Inquiry and Discussion steps in the IDDR approach, identify the ethical dilemma that Verizon faced in this situation and actions that the company might have taken to resolve that issue.

Solution The ethical dilemma that Verizon faced in this case is whether to provide a police officer with the information that he asked for. With no warrant or other court order, Verizon had a substantial legal basis to refuse. If disclosure had been legally required, however, would the company have had an ethical basis to refuse? Or, did the company have an ethical obligation to respond, regardless of whether it was legally required to do so?

The IDDR approach begins with an Inquiry that sets out the ethical dilemma and identifies the stakeholders and the relevant ethical standards in a set of facts. The Discussion step covers actions to address the issue, the actions‘ strengths and weaknesses, and their consequences and effects.

Here, Ray and Christine Nixon told Sheriff‘s Detective Gary Gilley that they believed a fire in their home had been set by Matthew Alexander. Ray gave Alexander‘s phone number to Gilley, who contacted the number‘s service provider, Verizon. Gilley said that he was investigating a house fire that may have intentionally started with the victims inside, and wanted to know where the number‘s subscriber had been that day. He did not present a warrant, but he did certify that Verizon‘s response would be considered an ―emergency disclosure.‖ The stakeholders in this situation include all of the immediate parties—the Nixons, Alexander, Gilley, and Verizon—as well as other police officers, service providers, the public generally, and most importantly other potential victims if in the fact the fire had been arson.

Verizon can choose to reveal all of its information concerning its subscriber, none of the data, or some part of it. This choice might be affected by the company‘s guidelines on what information to reveal, whom it may be disclosed to, and when it should be released. It might also be influenced by an altruistic motive to help others in distress (the NIxons), in need (the police), or in harm‘s way (unwitting potential victims). There may also be a perceived overriding ethical duty to protect privacy rights.

The strengths and weaknesses of the actions exist in their consequences. Refusing to disclose the information could protect the privacy of Verizon‘s subscribers, and ultimately, contribute to the protection of the privacy for all. But it would impede a police investigation of a possible crime, which could result in the Nixons or others being further victimized. Disclosing all, or at least some, of the information could prevent the negative consequences of revealing none of it. Relying on the detective‘s ―certification‖ that this response would be considered an ―emergency disclosure‖ would lend moral, and possibly legal, support to this decision. Finally, revealing only where the subscriber had been that day, without disclosing content (no texts, e-mails, or conversations), could arguably protect privacy rights.

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2.

Suppose that Verizon gave Gilley the requested information, and that later Alexander filed a suit against the provider, alleging a violation of the Stored Communications Act. Could Verizon successfully plead ―good faith‖ in its defense?

Solution Yes, if Verizon gave Gilley the requested information, and later Alexander filed a suit against the company, under the Stored Communications Act (SCA), the defendant could successfully plead ―good faith‖ in its defense.

The SCA prohibits the intentional and unauthorized access to stored electronic communications.

The act also prevents providers of communications services from disclosing private communications to certain entities and individuals. There are civil sanctions for violations. Thus, in the circumstances of this case, as a provider, Verizon might violate the act by responding to Gilley‘s request with the information that he sought—where the subscriber to a certain phone number had been that day.

Gilley did not present Verizon with a warrant, but he stated the purpose for his request and certified that the provider‘s response would be considered an ―emergency disclosure.‖ The company could believe in good faith, then, that an emergency involving a risk of serious injury or other harm to a person mandated the disclosure of the data. This would most likely serve as a sufficient legal defense to a suit by the party whose information was disclosed.

In ethical terms, as related in the answer to the question above, there are also significant altruistic and other moralistic reasons to support the disclosure of the information.

In the actual case on which this problem is based, Verizon provided Gilley with the information.

Alexander was charged in a Louisiana state court with arson. The court suppressed the records obtained from Verizon, finding no exigent circumstances to justify Gilley acting without a warrant.

Alexander filed a suit in a federal district court against Verizon, alleging a violation of the SCA. The court dismissed the suit. The U.S. Court of Appeals for the Fifth Circuit affirmed the dismissal. ―Verizon acted reasonably in concluding that there was an emergency . . . that required Verizon to act without delay.‖

Critical Thinking and Writing Assignments 5.

Time-Limited Group Assignment—File-Sharing. James, Chang, and Braden are roommates.

They are music fans and frequently listen to the same artists and songs. They regularly exchange MP3 music files that contain songs from their favorite artists. (See Copyrights in Digital Information.)

4. One group of students will decide whether the fact that the roommates are transferring files among themselves for no monetary benefit protects them from being subject to copyright law.

Solution Just because the three roommates are not profiting from their file-sharing actions does not mean that they wouldn‘t be subject to copyright law. A copyright violation can occur in the absences of any monetary benefit. Congress extended liability under copyright law to persons who exchange unauthorized copyrighted words without realizing a profit.

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5.

The second group will consider whether it would be legal for each roommate to buy music on CD and then, after downloading a copy on to their hard drive, give the CD to the other roommates to do the same. Does this violate copyright law? Is it the same as file-sharing digital music? Explain.

Solution The purchaser of a CD has the right to loan or sell that CD to anyone else. If the roommates each rip the CD to their own hard drives, generally, there will be no copyright violation.

6.

A third group will consider streaming music services. If one roommate subscribes to a streaming service and the other roommates use the service for free, would this violate copyright law? Why or why not?

Solution If one roommate subscribes to a streaming service and the other roommates use the service for free, this would violate copyright law if it violates the terms of the service agreement or the service‘s policy.

Copyright is the most important form of intellectual property protection on the Internet. Because most, if not all, of the material is copyrighted, simply transferring it online is copying it in violation of copyright law. Thus, sharing the stored music files of others, especially those of the owner of the copyright to the music, raises copyright issues. Some companies have aggressively pursued who shared the firms‘ property. Others have not, perhaps to avoid bad publicity or to attract new customers.

If the streaming service in the question opposes the sharing of its service, then doing so clearly infringes on the company‘s copyrights. This is both a criminal and a civil violation of copyright law. Penalties and sanctions include damages and injunctions. A user might argue the innocent infringer defense—being unaware that the actions constituted copyright infringement. The application of these principles is for the determination of a court.

Of course, if a steaming service turns a blind eye to the sharing of its material, there are not likely to be negative consequences to those who do it.

Solution and Answer Guide Miller, The Legal Environment Today 10e, 9780357635582; Chapter 10: The Formation of Traditional and E-Contracts

Table of Contents Critical Thinking Questions in Features ............................................................................................................. 117 Digital Update........................................................................................................................................ 117 Managerial Strategy .............................................................................................................................. 118 Critical Thinking Questions in Cases ................................................................................................................... 118 Case 10.1 ............................................................................................................................................... 118

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Case 10.2 ............................................................................................................................................... 119 Case 10.3 ............................................................................................................................................... 120 Chapter Review ........................................................................................................................................................... 120 Practice and Review .............................................................................................................................. 120 Practice and Review: Debate This ......................................................................................................... 121 Issue Spotters ........................................................................................................................................ 122 Business Scenarios and Case Problems ................................................................................................. 122 Critical Thinking and Writing Assignments ............................................................................................ 131

Critical Thinking Questions in Features Digital Update 146.

How can a company structure e-mail negotiations to avoid ―accidentally‖ forming a contract?

Solution The company should make sure that all e-mail conversations explicitly indicate that they are subject to any relevant conditions and that they are subject to further review and comment by the senders‘ clients or colleagues. All negotiations via e-mail should include appropriate disclaimers such as ―This e-mail is not an offer capable of acceptance.‖ or ―This e-mail does not evidence an intention to enter into an agreement.‖ or ―This e-mail has no operative effect until a definitive agreement is signed in writing by both parties.‖ Another possibility is to indicate that ―No party should act in reliance on this e-mail until a definitive contract is signed in writing by both parties.‖

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Managerial Strategy 2.

What would be your strategy regarding liability waivers if you were managing a business that relied on minors engaging in inherently dangerous activities?

Solution Initially, a manager would need to become well-versed in the applicable state law. The majority of states, through case law or legislative action, will not enforce parental waivers signed on behalf of children. Managers of trampoline parks—or other businesses that place minors at risk such as paintball or laser tag courses or go-kart tracks—in these states need to take precautions such as purchasing sufficient insurance and training employees to diffuse particularly dangerous situations immediately.

Managers should also avoid the situation discussed in this feature, where House of Boom relied on the parent‘s signature alone to relieve it of liability for her daughter‘s injury. Employees should verbally encourage parents to read and understand the implications of any liability waivers.

Employees should also be made available to answer any questions parents might have about liability waivers. Furthermore, parents and the children should be explicitly warned of the risks of the activity in which they are about to engage. Generally speaking, the more information a business explicitly provides concerning a liability waiver, the more likely a court will be to find the waiver is enforceable.

3.

Under what circumstances would you, as a business owner, choose to aggressively defend your business against a customer‘s liability lawsuit?

Solution Business owners choose to aggressively defend liability lawsuits when they are certain that the customer was 100 percent negligent and that the lawsuit has nothing to do with the negligence of the business. Also, some large corporations choose to aggressively defend ―nuisance‖ lawsuits in order to deter the filing of such lawsuits in the future, or at least reduce the potential number.

Critical Thinking Questions in Cases Case 10.1 147.

As a principle of contract interpretation, courts consistently strive to interpret contracts in accord with common sense. Does the application of this principle to the facts in this case support or undercut the decision of the Maryland Court of Appeals? Explain.

Solution Applying the principle that a contract should accord with common sense supports the decision of the Maryland Court of Appeals in the Credible case. Interpreting the promissory note to require repayment only if an employee quits, as the lower courts did, defies common sense.

The lower courts‘ interpretation of the repayment term of the note, making its repayment dependent on whether an employee was fired or quit, would result in disparate treatment. In those courts‘ view, an employee fired by Credible would not be required to repay the loan, while an employee who quits would be required to repay. There is no reason why, with respect to repayment of the loan, an employee who is fired should be treated more favorably than one who quits. In the words of the Maryland Court of Appeals, this interpretation ―strains credulity, * * * is untenable and runs contrary to common sense.‖

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In addition to according with common sense, the interpretation of the state‘s highest court of the two provisions referred to in the ―Reason‖ section of the case brief aligns the meaning and substance of those provisions, showing clearly that the parties intended the loan to be repaid regardless of whether an employee quits or is fired.

148.

What consequences might Credible have suffered if the Maryland Court of Appeals had interpreted the terms of the note to require repayment only when an employee quit employment, not when the employee was fired? Discuss.

Solution In the Credible case, Credible argues that the terms of the promissory note memorializing an agreement between the employer and its employee, as part of the employer‘s tuition loan program, requires repayment regardless of whether the employee quits or is fired. According to the note, this is the intent of the parties—Credible and the employee—who agree to those terms.

The Maryland Court of Appeals holds that this contention is a reasonable interpretation, in contrast to the argument of Credible‘s employee-borrower, Emmanuel Johnson, who posits that the terms of the note requires repayment only if an employee quits the job.

If the court had agreed with Johnson, however, the consequences to Credible might have begun with the way in which its other employees subsequently regarded their employment and its termination. An involuntary discharge could mean that a fired employee would reap a windfall in terms of the repayment of a tuition loan. This circumstance would seem to encourage employees to obtain the loans and, when they wished to change their employment or desired simply to avoid repayment of what, given the cost of tuition, could be a substantial amount (plus interest), act in a manner so as to be fired. The result would not only be the cost to Credible of the loss of the amount of the loan, but havoc in the workplace, due to the employee‘s effort to get fired. This sort of misconduct would create disharmony in the workplace, lowering productivity, and undermining the economic and social objectives of the business.

Case 10.2 149.

Suppose that the day after Lucy signed the agreement, he decided that he did not want the farm after all, and that Zehmer sued Lucy to perform the contract. Would this change in the facts alter the court‘s decision? Why or why not?

Solution No. In fact, this would likely support the court‘s determination that there was an enforceable contract between the parties. In this circumstance, unless Lucy attempted to void the contract on the ground of intoxication, the court might not have addressed the issue at all.

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Case 10.3 150.

Fans sometimes catch and keep baseballs hit into the stands. How do these actions differ from the situation described in this case, in which fans were promised and received promotional items for attending games? Does this distinction support or undercut the court‘s ruling?

Solution The difference between the promise and receipt of a promotional item for attending a game and a fan‘s catching and keeping a ball hit into the stands is the unexpected, gratuitous nature of the catch of a ball.

The promotional items at issue in this case are distinct from unanticipated, generally ―free‖ items that fans might receive when attending a game. When a fan catches and brings home a ball hit by a player—or a t-shirt or other personal item tossed into the stands—the fan has no expectation of receiving the item, nor did the fan buy a ticket assuming that such an item would be provided by the team.

In the Cincinnati Reds case, the fans did not receive the promotional items unexpectedly or by chance. Instead, the items were an explicit part of the bargain, along with the right to attend the game, the fans obtained in exchange for buying the ticket.

151.

What effect does the decision in this case have the state‘s collection of revenue? Discuss.

Solution Obviously, the decision in the Cincinnati Reds case affects the state of Ohio‘s collection of revenue on the distribution of promotional items at the Reds‘ baseball games. If the decision serves as precedent for other sports events for which tickets are sold and promotional items are advertised and distributed, then of course the state could be prevented from collecting revenue on any of those items.

Depending on the number of such events, the amount of lost revenue could be significant. The state legislature might change this situation by amending the tax code. Sports teams might react to such a change by increasing ticket prices to cover the cost of the tax. This might affect attendance at sports events, and if the tax is large enough and well publicized, the members of the legislature who favored it might be voted out.

Chapter Review Practice and Review Shane Durbin wanted to have a recording studio custom-built in his home. He sent invitations to a number of local contractors to submit bids on the project. Rory Amstel submitted the lowest bid, which was $20,000 less than any of the other bids Durbin received. Durbin called Amstel to ascertain the type and quality of the materials that were included in the bid and to find out if he could substitute a superior brand of acoustic tiles for the same bid price. Amstel said he would have to check into the price difference. The parties also discussed a possible start date for construction. Two weeks later, Durbin changed his mind and decided not to go forward with his plan to build a recording studio. Amstel filed a suit against Durbin for breach of contract. Using the information presented in the chapter, answer the following questions.

152.

Did Amstel‘s bid meet the requirements of an offer? Explain.

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Solution Yes. A bid can be an offer if it contains all of the requisite elements: a serious, objective intent on the part of the offeror and an offer communicated to the offeree in certain, definite terms comprehensible to both parties. Amstel‘s bid met these requirements. His intent appeared to be that of a serious, reasonable offeree; the terms were sufficiently definite; and the bid was communicated to Durbin. If the price, materials, and start date were left open, these factors might be sufficient to question the status of the bid as an offer.

153.

Was there an acceptance of the offer? Why or why not?

Solution To create a contract, an offer must be accepted unequivocally. Durbin questioned the materials included in the bid and asked about the possibility of substituting different acoustic tiles and discussed a starting date. Although this does not constitute an acceptance of the offer, neither is it a rejection. His questions were inquiries, not a rejection of the bid. Durbin‘s later call to say that he had changed his mind, however, was a rejection.

154.

How is an offer terminated? Assuming that Durbin did not inform Amstel that he was rejecting the offer, was the offer terminated at any time described here? Explain.

Solution Yes. Durbin asked about better quality tiles; until that issue was settled, because it likely changed the price, a contract was never formed, so Durbin had the right to cancel the deal. The contract was still being negotiated because Amstel wanted information about alternative materials, which affected the price. Failure to settle that matter means the offer was never accepted and either party had the right to walk away.

Practice and Review: Debate This 155.

The terms and conditions in click-on agreements are so long and detailed that no one ever reads one. Therefore, the act of clicking on ―I agree‖ is not really an acceptance.

Solution The terms and conditions included in click-on agreements have become so detailed, confusing, and most importantly, long, that no one would ever take the time to read one. Knowing, though, that one is unable to purchase or license a product or service purchased on the Internet without clicking ―yes‖ means that everyone just clicks ―yes.‖ That is far from what we normally believe is voluntary assent. Indeed, the choice is all or nothing—accept all terms and conditions or do not buy from us.

There appears to be no acceptable alternative to click-on agreements when buying a good or service on the Internet. No company would ever eliminate the click-on agreement from its ecommerce system because it would be exposing itself to even more potential lawsuits. The reason such click-on terms and conditions are so numerous is specifically to avoid frivolous and expensive lawsuits. As a result, ultimately, overall costs are lower for e-commerce, and therefore consumers pay lower prices in general.

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Issue Spotters 5.

Applied Products, Inc., does business with Beltway Distributors, Inc., online. Under the Uniform Electronic Transactions Act, what determines the effect of the electronic documents evidencing the parties‘ deal? Explain.

Solution First, it might be noted that the Uniform Electronic Transactions Act (UETA) does not apply unless the parties to a contract agree to use e-commerce in their transaction. In this deal, of course, the parties used e-commerce. The UETA removes barriers to e-commerce by giving the same legal effect to e-records and e-signatures as to paper documents and signatures. The UETA does not include rules for those transactions, however.

6.

Joan, who is sixteen years old, moves out of her parents‘ home and signs a one-year lease for an apartment at Kenwood Circle. Joan‘s parents tell her that she can return to live with them at any time. Unable to pay the rent, Joan moves back to her parents‘ home two months later. Can Kenwood enforce the lease against Joan? Why or why not?

Solution No. Joan may disaffirm this contract. Because the apartment was a necessary, however, she remains liable for the reasonable value of her occupancy of the apartment.

Business Scenarios and Case Problems 18. Implied Contract. Janine was hospitalized with severe abdominal pain and placed in an intensive care unit. Her doctor told the hospital staff to order around-the-clock nursing care for Janine. At the hospital‘s request, Nursing Services Unlimited provided two weeks of in-hospital care and, after Janine was sent home, an additional two weeks of at-home care. During the at-home period of care, Janine was fully aware that she was receiving the benefit of the nursing services. Nursing Services later billed Janine $4,000 for the at-home nursing care, but Janine refused to pay. She claimed that she had never contracted—either orally or in writing—for those services. Because no express contract was ever formed, can Nursing Services recover the $4,000 from Janine? If so, under what legal theory? Discuss. (See An Overview of Contract Law.) Solution According to the question, Janine was apparently unconscious or otherwise unable to agree to a contract for the nursing services she received while she was in the hospital. As you read in the chapter, however, sometimes the law will create a fictional contract in order to prevent one party from unjustly receiving a benefit at the expense of another. This is known as a quasi contract and provides a basis for Nursing Services to recover the value of the services it provided while Janine was in the hospital.

As for the at-home services that were provided to Janine, because Janine was aware that those services were being provided for her, Nursing Services can recover for those services under an implied contract. Under this type of contract, the conduct of the parties creates and defines the terms. Janine‘s acceptance of the services constitutes her agreement to form a contract, and she will probably be required to pay Nursing Services in full.

19. Online Acceptances. Heather Reasonover opted to try Internet service from Clearwire Corp.

Clearwire sent her a confirmation e-mail and a modem. When Reasonover plugged in the modem, an ―I accept terms‖ box appeared. Without clicking on the box, Reasonover quit the

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page. She had not seen Clearwire‘s ―Terms of Service,‖ accessible only through its website.

Although the e-mail she received and the printed materials included with the modem included URLs to the company‘s website, neither URL gave direct access to the ―Terms of Service.‖ A clause in the ―Terms of Service‖ required subscribers to submit any dispute to arbitration. Is Reasonover bound to this clause? Why or why not? [Kwan v. Clearwire Corp., 2012 WL 32380 (W.D.Wash.

2012)] (See E-Contracts.)

Solution No. A shrink-wrap agreement is an agreement whose terms are expressed inside the box in which the goods are packaged. Parties who open the box may be informed that they agree to the terms by keeping whatever is in the box. In many cases, the courts have enforced the terms of shrinkwrap agreements just as they enforce the terms of other contracts. But not all of the terms presented in shrink-wrap agreements have been enforced by the courts. One important consideration is whether the buyer had adequate notice of the terms.

A click-on agreement is formed when a buyer, completing a transaction on a computer, is required to indicate assent to be bound by the terms of an offer by clicking on a button that says, for example, ―I agree.‖ In Reasonover‘s situation, no such agreement was formed with respect to Clearwire‘s ―Terms of Service‖ (TOS). The e-mail did not give notice of the TOS. It did not contain a direct link to the terms—accessing them required clicks on further links through the firm‘s homepage. The written, shrink-wrap materials accompanying the modem did not provide adequate notice of the TOS. There was only a reference to Clearwire‘s website in small print at the bottom of one page. Similarly, Reasonover‘s access to an ―I accept terms‖ box did not establish notice of the terms. She did not click on the box but quit the page. Even if any of these references was sufficient notice, Reasonover kept the modem only because Clearwire told her that she could not return it.

In the actual case on which this problem is based, the court refused to compel arbitration on the basis of the clause in Clearwire‘s TOS. 20. Spotlight on Kansas City Chiefs—Consideration. On Brenda Sniezek‘s first day of work for the Kansas City Chiefs Football Club, she signed a document that purported to compel arbitration of any disputes that she might have with the Chiefs. In the document, Sniezek agreed to comply at all times with and be bound by the constitution and bylaws of the National Football League (NFL).

She agreed to refer all disputes to the NFL commissioner for a binding decision. On the commissioner‘s decision, she agreed to release the Chiefs and others from any related claims.

Nowhere in the document did the Chiefs agree to do anything. Was there consideration for the arbitration provision? Explain. [Sniezek v. Kansas City Chiefs Football Club, 402 S.W.3d 580 (Mo.App. W.D. 2013)] (See Consideration.)

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Solution No. There was no consideration for the arbitration provision. Consideration is required to create a bilateral contract. Consideration is something of legally sufficient value given in return for a promise. The ―something of legally sufficient value‖ may consist of either a promise to do or refrain from doing something or a transfer of something of value.

In this problem, the arbitration ―agreement‖ contains promises made only by Sniezek. Only Sniezek agrees to comply at all times with and be bound by the constitution and bylaws of the National Football League (NFL). Only Sniezek agrees to refer all disputes to the NFL Commissioner for a binding decision. Only Sniezek agrees to release the Chiefs from any related claims on the Commissioner's decision. Nowhere in the document do the Chiefs agree to do anything. Thus, the document does not contain any promises by the Chiefs to constitute sufficient consideration for Sniezek's promise to forgo her right of access to the courts and arbitrate her claims against them.

The Chiefs might argue that the ―agreement‖ was a condition of Sniezek's keeping her employment, which the Chiefs had already offered her and she had already accepted. But the document did not alter the nature of her employment relationship—no employment contract was created, no additional compensation or other benefit was offered. Consequently, allowing Sniezek to stay on the job was not sufficient consideration to support a promise to arbitrate.

In the actual case on which this problem is based, Sniezek filed a charge of age discrimination against the Chiefs in a Missouri state court, and the Chiefs filed a motion to compel arbitration.

The court denied the motion, and a state intermediate appellate court affirmed the denial for the reasons stated above.

21. Minors. D.V.G. (a minor) was injured in a one-car auto accident in Hoover, Alabama. The vehicle was covered by an insurance policy issued by Nationwide Mutual Insurance Co. Stan Brobston, D.V.G.‘s attorney, accepted Nationwide‘s offer of $50,000 on D.V.G.‘s behalf. Before the settlement could be submitted to an Alabama state court for approval, D.V.G. died from injuries received in a second, unrelated auto accident. Nationwide argued that it was not bound to the settlement because a minor lacks the capacity to contract and so cannot enter into a binding settlement without court approval. Should Nationwide be bound by the settlement? Why or why not?

[Nationwide Mutual Insurance Co. v. Wood, 121 So.3d 982 (Ala. 2013)] (See Contractual Capacity.)

Solution No. Minors do not so lack the capacity to contract that they cannot enter into a binding settlement without court approval. The general rule is that a minor can enter into any contract an adult can, unless the contract is prohibited by law for minors (for example, the sale of tobacco or alcoholic beverages). A contract entered into by a minor, however, is voidable at the option of that minor. An adult who enters into a contract with a minor cannot avoid any contractual duties on the ground that the minor can. Unless the minor exercises the option to disaffirm the contract, the adult party normally is bound by it.

In this problem, it is clear that a contract existed at the time of D.V.G.‘s death. As a minor, she did not lack the capacity to enter into a binding settlement of her potential claims. She would not have been liable on the contract, however, if she had chosen to avoid the deal. But she was the only party to the settlement that had this option. At the time that the settlement was agreed to, the contract was binding on Nationwide, notwithstanding that it was voidable at D.V.G.‘s option.

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In the actual case on which this problem is based, Nationwide asked a federal district court to declare that there was no settlement. The question was certified to the Alabama Supreme Court, which held that Nationwide was bound to the agreement.

22. Business Case Problem with Sample Answer— Requirements of the Offer. Technical Consumer Products, Inc. (TCP), makes and distributes energy- efficient lighting products. Emily Bahr was TCP‘s district sales manager in Minnesota, North Dakota, and South Dakota when the company announced the details of a bonus plan. District sales managers who achieved 100 percent yearover- year sales growth and a 42 percent gross margin would earn 200 percent of their base salaries as a bonus. TCP retained absolute discretion to modify the plan. Bahr‘s base salary was $42,500. Her final sales results for the year showed 113 percent year-over-year sales growth and a 42 percent gross margin. She anticipated a bonus of $85,945, but TCP could not afford to pay the bonuses as planned, and Bahr received only $34,229. In response to Bahr‘s claim for breach of contract, TCP argued that the bonus plan was too indefinite to be an offer. Is TCP correct? Explain. [Bahr v. Technical Consumer Products, Inc., 601 Fed. Appx. 359 (6th Cir. 2015)] (See Agreement.)

— For a sample answer to Problem 10–5, go to Appendix D. Solution No. TCP is wrong—the bonus plan was not too indefinite to be an offer. One of the requirements for an effective offer is that its terms must be reasonably definite. This is so a court can determine whether a breach has occurred and award an appropriate remedy. Generally, these terms include an identification of the parties and the object or subject of the contract, the consideration to be paid, and the time of performance.

In this problem, TCP provided its employees, including Bahr, with the details of a bonus plan. A district sales manager, such as Bahr, who achieved 100 percent year-over-year sales growth and a 42 percent gross margin would earn 200 percent of their base salary. TCP added that it retained absolute discretion to modify the plan. Bahr exceeded the goal and expected a bonus commensurate with her performance. TCP paid her less than half what its plan promised, however. In the ensuing litigation, TCP claimed that the bonus plan was too indefinite to constitute an offer, but this was not in fact the case. Clear criteria applied to determine an employee‘s eligibility for a certain amount within a specific deadline. A court asked to apply the plan would have little or no doubt as to the amount an employee would be entitled to. The term that reserved discretion to TCP to modify the plan did not sufficiently undercut the clarity of the offer to prevent the formation of a contract.

In the actual case on which this problem is based, the court concluded that the reservation of discretion to revoke a plan makes an offer too indefinite and issued a judgment in TCP‘s favor. A state intermediate appellate court reversed this judgment, holding that TCP‘s plan was a sufficiently definite offer.

23. Exculpatory Clauses. Sue Ann Apolinar hired a guide through Arkansas Valley Adventures, LLC, for a rafting excursion on the Arkansas River. At the outfitter‘s office, Apolinar signed a release that detailed potential hazards and risks, including ―overturning,‖ ―unpredictable currents,‖ ―obstacles‖ in the water, and ―drowning.‖ (A release is an agreement in which one party gives up the right to pursue a legal claim against another party.) The release clearly stated that her signature discharged Arkansas Valley from liability for all claims arising in connection with the trip.

On the river, while attempting to maneuver around a rapid, the raft capsized. The current swept

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Apolinar into a logjam where, despite efforts to save her, she drowned. Her son, Jesus Espinoza, Jr., filed a suit in a federal district court against the rafting company, alleging negligence. What are the arguments for and against enforcing the release that Apolinar signed? Discuss. [Espinoza v. Arkansas Valley Adventures, LLC, 809 F.3d 1150 (10th Cir. 2016)] (See Legality.)

Solution

An exculpatory clause releases a party from liability for injury or damage. A court may refuse to enforce an exculpatory clause when the parties are seen to possess unequal bargaining power—in a case involving an employment contract, for example. A business that offers non-essential services is not considered to be at a relative advantage in bargaining strength, so anyone contracting for its services is thought to do so voluntarily, making an exculpatory clause potentially enforceable as a part of the deal. This is especially likely if the clause is unambiguous and conspicuous.

In this problem, Apolinar hired a guide through Arkansas Valley Adventures for a rafting trip on the Arkansas River. She signed a document that purported to release Arkansas Valley from liability for claims arising in connection with the trip. On a rapid on the river, the raft capsized. Apolinar was swept by the current into a logjam where she drowned. Her son filed a suit in a federal district court against the rafting company, alleging negligence.

In support of enforcing the release in this set of circumstances, Arkansas Valley was engaged in non-essential services—recreational rafting on the Arkansas River. This indicated that the company had no relative advantage in bargaining over the exculpatory clause. The release set out some of the risks and hazards, and clearly stated a signature discharged the business from liability for all claims arising in connection with the trip. Against the enforcement of the release, it might be argued that the clause was not sufficiently clear or conspicuous, and that Apolinar had no choice but to agree to it or forego the trip.

In the actual case on which this problem is based, the rafting company filed a motion for summary judgment, arguing that the release Apolinar signed shielded it from liability. The court granted the motion. The U.S. Court of Appeals for the Tenth Circuit affirmed. ―Colorado allows private parties to assume some of the risks associated with their recreational pursuits.‖ And the release ―was fairly entered into and clear in its terms.‖

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24. Agreements That Lack Consideration. Arkansas-Missouri Forest Products, LLC (Ark-Mo), sells supplies to make wood pallets. Blue Chip Manufacturing (BCM) makes pallets. Mark Garnett, an owner of Ark-Mo, and Stuart Lerner, an owner of BCM, went into business together. Garnett and Lerner agreed that Ark-Mo would have a 30-percent ownership interest in their future projects.

When Lerner formed Blue Chip Recycling, LLC (BCR), to manage a pallet repair facility in California, however, he allocated only a 5-percent interest to Ark-Mo. Garnett objected. In a ―Telephone Deal,‖ Lerner then promised Garnett that Ark-Mo would receive a 30-percent interest in their future projects in the Midwest, and Garnett agreed to forgo an ownership interest in BCR. But when Blue Chip III, LLC (BC III), was formed to operate a repair facility in the Midwest, Lerner told Garnett that he ―was not getting anything.‖ Ark-Mo filed a suit in a Missouri state court against Lerner, alleging breach of contract. Was there consideration to support the Telephone Deal?

Explain. [Arkansas-Missouri Forest Products, LLC v. Lerner, 486 S.W.3d 438 (Mo.App. 2016)] (See Consideration.)

Solution Yes. There was consideration to support the Telephone Deal. Consideration can consist of a promise, a performance, or forbearance (refraining from an action that one has a legal right to undertake).

In this problem, Mark Garnett, an owner of Arkansas–Missouri Forest Products, LLC (Ark-Mo), and Stuart Lerner, an owner of Blue Chip Manufacturing (BCM), agreed to go into wood-pallet enterprises together, with Ark-Mo to have a 30-percent ownership interest in their future projects.

When Lerner formed Blue Chip Recycling, LLC (BCR) to manage a pallet repair facility in California, however, he allocated only a 5-percent interest to Ark-Mo. Garnett objected. In a ―Telephone Deal,‖ Lerner promised that Ark-Mo would receive a 30-percent interest in their future projects in the Midwest. Garnett then agreed to forego an ownership interest in BCR. Acting on Ark-Mo‘s behalf, Garnett could have accepted the 5-percent allocation in BCR, but he refrained from doing so. Instead, he accepted Lerner‘s promise of a 30-percent share in their future projects in the Midwest and made no more demand regarding BCR. In other words, Garnett forwent the opportunity to have an ownership interest in BCR in exchange for Lerner‘s agreement that Ark–Mo would have a 30-percent ownership interest in certain future projects.

In the actual case on which this problem is based, Ark-Mo filed a suit in a Missouri state court against Lerner, alleging breach of contract. The court issued a judgment in Lerner‘s favor. A state intermediate appellate court reversed, in part on the reasoning stated here. ―Valid legal consideration supported the Telephone Deal.‖ 25. Online Acceptances. Airbnb, Inc., maintains a website that lists, advertises, and takes fees or commissions for property rentals posted on the site. To offer or book accommodations on the site, a person must register and create an account. Airbnb‘s sign-up Web page states that by clicking on the ―Sign Up‖ button, a user confirms acceptance of the site‘s ―Terms of Service‖ (TOS).

The TOS, which are hyperlinked, include a mandatory arbitration provision. One day, Francesco Plazza registered with Airbnb and created an account, but she did not read the TOS. Later, Plazza filed a suit in a federal district court against Airbnb, alleging that the defendant was acting as an unlicensed real estate broker and committing deceptive trade practices in violation of New York state law. Airbnb filed a motion to compel arbitration, pursuant to the TOS. Can Plazza avoid arbitration? Explain. [Plazza v. Airbnb, Inc., 289 F.Supp.3d 537 (S.D.N.Y. 2018)] (See E-Contracts.)

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Solution Plazza can avoid arbitration only if Airbnb agrees. Otherwise, the court can compel Plazza to engage in arbitration according to Airbnb‘s TOS, in response to the defendant‘s motion.

Parties can agree to a contract by any means, including action. In the language of the UCC, a contract ―may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.‖ Thus, for example, online, clicking on an ―I agree‖ box can indicate acceptance. This is enough to bind a party to the terms, which online may be accessible via a hyperlink. A party does not need to have read all of the terms for them to be effective.

Here, Airbnb operates a website that features property rentals. To offer or accept a rental posted on the site, a user must register and create an account. The sign-up screen states, ―By clicking ‗Sign Up‘ . . . . you confirm that you accept the Terms of Service‖ (TOS). The TOS are hyperlinked, and include a mandatory arbitration provision. Francesco Plazza registered with Airbnb and created an account, but did not read the TOS. Later, in response to Plazza‘s suit against Airbnb, alleging deceptive trade practices and other violations of New York state law, Airbnb filed a motion to compel arbitration. When Plazza created an account, he agreed to the TOS, whether or not he actually read them.

In the actual case on which this problem is based, the court granted Airbnb‘s motion. With respect to ―the terms of the arbitration provision . . . Plazza‘s actions in signing up . . . manifested assent.‖ The court further stayed the suit, pending the outcome of the arbitration.

26. Contracts Contrary to Public Policy P.M. and C.M. are married (the ―Ms‖) and live in Iowa.

Unable to conceive their own child, they signed a contract with T.B., who, in exchange for $13,000 and medical expenses, agreed to be impregnated with embryos fertilized with P.M.‘s sperm and the ova (eggs) of an anonymous donor. T.B., as a surrogate, agreed to carry the pregnancy to term, and she and her spouse, D.B. (the ―Bs‖), promised to hand over the baby at birth to the Ms. During the pregnancy, the relations between the parties deteriorated. When the baby was born, T.B. refused to honor the agreement to give up the child. Meanwhile, genetic testing excluded the Bs as the biological parents and established P.M. as the biological father. Iowa exempts ―surrogacy‖ from a state criminal statute that prohibits selling babies. There is no other state law on point. Was the contract between the Ms and the Bs enforceable? Discuss. [P.M. v. T.B., 907 N.W.2d 522 (Iowa 2018)] (See Legality.)

Solution Yes. The contract between the two couples was enforceable. Some contracts between private parties are not enforceable because of a perceived negative impact on society. These contracts are considered contrary to public policy. One example would a contract to sell a child.

In this problem, P.M. and C.M. were unable to conceive their own child. They signed a contract with T.B., who, in exchange for the payment of her medical expenses and an additional $13,000, agreed to carry embryos fertilized with P.M.‘s sperm and the ova of an anonymous donor to term.

T.B. and her spouse D.B. promised to deliver the baby at birth to P.M. and C.M. After the baby was born, genetic testing excluded T.B. and D.B. as the biological parents, and established P.M. as the father, but T.B. refused to honor the agreement to give up the child.

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The facts note that there is no Iowa state statute or other law under which the contract is prohibited or could be considered against public policy. To the contrary, Iowa exempts surrogacy arrangements from potential criminal liability for selling children. This indicates that the state allows such agreements. Besides, the contract in the P.M. case was for gestational services, not for the sale of a child. And arguably, surrogacy contracts are favored by public policy—banning such contracts would deprive infertile couples of perhaps the only way to conceive and gestate their own biological children, and would limit the contractual rights of willing surrogates.

In the actual case on which this problem is based, the Ms filed a suit in an Iowa state court against the Bs to enforce their agreement. The court ruled that the contract was enforceable, and awarded the Ms permanent legal and physical custody of the child. The Iowa Supreme Court affirmed. With respect to public policy, the court concluded, ―Gestational surrogacy agreements promote families by enabling infertile couples to raise their own children and help bring new life into this world through willing surrogate mothers.‖ 27. The IDDR Approach and Contract Requirements. Mark Carpenter, a certified financial planner, contracted to recruit investors for GetMoni.com, which owned a defunct gold mine in Arizona.

Carpenter then contracted with clients to invest their funds, sending more than $2 million to GetMoni .com. Only about 20 percent of the money went to developing the mine. The rest was used to run a Ponzi scheme. Carpenter collected another $1 million, but instead of sending it to GetMoni.com, he deposited it into his own account. A federal investigation unraveled the scheme.

Carpenter was charged with two counts of fraud—one for his deal with GetMoni.com and one for his misrepresentations to clients after he stopped dealing with GetMoni.com. [United States v.

Carpenter, 676 Fed.Appx. 397 (6th Cir. 2017)] (See An Overview of Contract Law.) 1.

Which elements do Carpenter‘s contracts lack, preventing them from being enforced? Can he argue successfully that he acted ethically? Discuss.

Solution The elements that these contracts lack are legality and voluntary consent. Legality is one of the four requirements that must be met for a contract to be valid. A contract‘s purpose must be to accomplish a goal that is legal. Among the defenses to a contract that might otherwise be enforceable is voluntary consent—the consent of both parties must be voluntary. If a contract is formed as a result of fraud, the contract may not be enforceable.

Mark Carpenter contracted to recruit investors for GetMoni.com, which owned a defunct gold mine in Arizona. Carpenter further contracted with clients to invest their funds in the mine, collecting more than $2 million that he sent to GetMoni.com. He collected another $1 million from the investors, but deposited the money into his own accounts rather than sending it to GetMoni.com. None of the contracts was for a legal purpose. Instead, their purpose was to defraud investors and spend the ill-gotten proceeds other than as represented. And there was no voluntary consent. Carpenter entered into all of the contracts with fraudulent intent, keeping investors‘ funds for himself.

When investigators uncovered the scheme, Carpenter was charged with two counts of fraud—one for his deal with GetMoni.com and one for his misrepresentations to clients after he stopped dealing with GetMoni.com. With regard to the latter situation, he might argue that he continued to accept client funds without passing them on to GetMoni.com in order to repay some of the investors, not to defraud them. This is the closest contention that he might

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have to an argument he acted ethically. But it would fail. Even if it were true, he acted with fraudulent intent. Under most standards of ethics, one‘s ultimate motivation is irrelevant.

In the actual case on which this problem is based, the court convicted Carpenter of the charges. The U.S. Court of Appeals for the Sixth Circuit affirmed the convictions 2.

Using the IDDR approach, discuss whether a certified financial planner has an ethical obligation to contract in the best interests of his or her clients.

Solution A certified financial planner (CFP) should have an ethical obligation to contract in the best interests of clients. As with other ethical duties, this may not be enforceable at law. But it should be part of a CFP‘s job description.

The IDDR approach starts with an Inquiry to identify the issue, the stakeholders, and the ethical standards. The issue is phrased in the question: Does a CFP have an ethical obligation to contract in the best interests of clients? The stakeholders include the planner, the planner‘s clients, other planners, and the larger investment and business communities, as well as the public generally. There may be ethical codes issued by trade and business associations to which a CFP belongs that stipulate the obligation. Religious and philosophical sources include maxims to act in the interest of others.

The following step of the IDDR approach is a Discussion to suggest actions that might resolve the issue. The strengths and weaknesses of the actions, and the consequences and the effects on the stakeholders, should also be considered. The facts of the Carpenter case indicate that CFPs who would act in the best interests of their clients would not recommend an investment in fraudulent schemes. Further, the CFP should be forthcoming and truthful about the nature of any investment—particularly its risk and whether there exists any conflict of interest, such as a commission payable to the CFP for selling it. Such advice could erode a CFP‘s income by dissuading clients from choosing investments that might be more profitable to the planner.

Ultimately, however, this could increase the level of trust among all of the parties and attract more clients, leading to greater income.

The next step of the approach is to state a Decision and its reasons. It appears that if CFPs were to observe an ethical obligation to contract in the best interests of their clients, benefits could be realized by the planners, their clients, other planners, the investment and business communities, and the public. The planners could obtain more business. Other planners might similarly benefit from the enhanced ethics of their occupation. Their clients might invest more funds with more confidence. The investment and business communities would clearly be enriched by an increase in the number of investors and dollars. The public would benefit from an improved business climate and economic growth.

The final step of the approach is a Review of the success or failure of the action to resolve the issue, and satisfy the stakeholders. A CFP who is forthcoming and truthful about the nature of any investment with clients would likely fulfill an ethical obligation to act in their best interests. This could also satisfy the other stakeholders.

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Critical Thinking and Writing Assignments 1.

Preexisting Duty. Melissa Faraj owns a property lot and wants to build a house according to a particular set of plans and specifications. She solicits bids from building contractors and receives three bids: one from Carlton for $160,000, one from Feldberg for $158,000, and one from Siegel for $153,000. She accepts Siegel‘s bid. One month after beginning construction of the house, Siegel contacts Faraj and tells her that because of inflation and a recent price hike for materials, his costs have increased. He says he will not finish the house unless Faraj agrees to pay an extra $13,000. Faraj reluctantly agrees to pay the additional sum. (See Consideration.)

1.

One team will evaluate whether a contractor can ever raise the price of completing construction because of inflation and the rising cost of materials.

Solution The legal issue deals with the preexisting duty rule, which basically states that a promise to do what one already has a legal or contractual duty to do does not constitute consideration, and thus a promise based on a preexisting duty is unenforceable. One of the purposes of this general rule is to prevent commercial blackmail. There are four basic exceptions to this rule. If any of these applied, a contractor might successfully raise the price of completing construction based on inflation and the rising cost of materials. (a) If the duties of Siegel are modified, for example, by changes made by Faraj in the specifications, these changes can constitute consideration and bind Faraj to pay the additional $13,000. (b) Rescission and new contract theory could be applied, by which the old contract of $153,000 would mutually be canceled and a new contract for $166,000 would be made.

Most courts would not apply this theory unless there was a clear intent to cancel the original contract. It appears here that the intent to cancel the $153,000 contract is lacking (there is merely an intent to modify), so this exception would not apply.

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(c) A few states have statutes that allow any modification to be enforceable if it is in writing.

The facts stated give no evidence that Faraj‘s agreement to the additional $13,000 is in writing, but, if it is, Faraj is bound in those states. (d) The unforeseen difficulty or hardship rule could be argued. This rule, however, applies only to unknown risks not ordinarily assumed in business transactions. Because inflation and price rises are risks ordinarily assumed in business, this exception cannot be used by Siegel.

2.

A second team will assume that after the house is finished, Faraj refuses to pay the extra $13,000. This team will decide whether Faraj is legally required to pay this additional amount.

Solution In this problem, Siegel was required contractually to build a house according to a specific set of plans for $153,000, and Faraj‘s later agreed to pay an additional $13,000 for exactly what Siegel was required to do for $153,000. Under the preexisting duty rule, this agreement is without consideration and unenforceable. Thus, Faraj is not legally required to pay this additional amount.

3.

A third team will determine the types of extraordinary difficulties that could arise during construction that would justify a contractor‘s charging more than the original bid.

Solution The preexisting duty rule states that a promise to do what one already has a legal or contractual duty to do does not constitute consideration, and thus a promise based on a preexisting duty is unenforceable. One of the purposes of this general rule is to prevent commercial blackmail. One of the exceptions to this rule concerns an unforeseen difficulty or hardship. This exception applies only to unknown risks not ordinarily assumed in business transactions. Because inflation and price rises are risks ordinarily assumed in business, this exception cannot be used by Siegel in this problem. The types of extraordinary difficulties that could arise during construction to justify a contractor charging more than an original bid include unexpected infrastructure and subsurface problems.

4.

A fourth team will consider what would have happened if Faraj and Siegel had rescinded the initial contract and entered into a new construction contract that included the extra $13,000.

An issue here is whether a court would have found that there was no consideration because of a preexisting duty.

Solution If Faraj and Siegel had rescinded the initial contract and entered into a new contract that included the extra $13,000, a court could be likely to find that there was no consideration for the new deal—i.e., that it could not be enforced for lack of consideration because of a preexisting duty.

A promise to do what one has a legal duty to do is not legally sufficient consideration for a new contract. But two parties can mutually agree to rescind their contract, at least the extent that it is executory. By rescinding the deal, they return to the positions they were in before they made it. They are then free to enter into a new contract. If rescission and the new agreement occur at the same time, as was the circumstance indicated in the facts of this question, it may not be clear that there was consideration for the new contract. Thus, if Faraj

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were to refuse to comply with the new terms, a court might determine that there was no consideration for it because of a preexisting duty, and the new contract would be adjudged invalid.

Solution and Answer Guide Miller, The Legal Environment Today 10e, 9780357635582; Chapter 11: Contract Performance, Breach, and Remedies

Table of Contents Critical Thinking Questions in Features ............................................................................................................. 133 Cybersecurity and the Law .................................................................................................................... 133 Critical Thinking Questions in Cases ................................................................................................................... 134 Case 11.1 ............................................................................................................................................... 134 Case 11.2 ............................................................................................................................................... 134 Case 11.3 ............................................................................................................................................... 135 Chapter Review ........................................................................................................................................................... 136 Practice and Review .............................................................................................................................. 136 Practice and Review: Debate This ......................................................................................................... 137 Issue Spotters ........................................................................................................................................ 137 Business Scenarios and Case Problems ................................................................................................. 138 Critical Thinking and Writing Assignments ............................................................................................ 146

Critical Thinking Questions in Features Cybersecurity and the Law 156.

Suppose a court rules that Arby‘s weak point-of-sale security system does constitute a breach of its contract. What might be some of the compensatory damages due to Arby‘s customers who had their credit card information stolen by hackers?

Solution The goal of compensatory damages is to ―make whole‖ the party who has suffered a breach of contract. Therefore, in this case, the plaintiffs would attempt to be compensated for any economic hardship they suffered because of the breach. Such hardships could include (1) unauthorized charges to the hacked credit card that were not reimbursed by the credit card company; (2) losses arising from the theft of financial and personal information; (3) losses arising from the inability to use a suspended credit card account; (4) the loss of productivity and enjoyment caused by the time spent reporting and rectifying the data breach; and (5) the dollar amount of any Arby‘s products that would not have been purchased using a credit card had the customer known about the unreasonably high possibility of a data breach.

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Critical Thinking Questions in Cases Case 11.1 157.

The New York Court of Appeals found that Jacob & Youngs had substantially performed the contract. To what, if any, remedy was Kent entitled?

Solution Kent is entitled to be compensated for the difference between the value of the ―Reading manufacture‖ pipe specified in the contract and the pipe that was actually installed.

Case 11.2 158.

The lease between RRE and Chalk Supply required a security deposit to cover any default on a month‘s rent by the tenant. Chalk Supply did not pay the deposit. Should the court have ruled that this breach prevented Chalk Supply from prevailing on its claim against RRE? Discuss.

Solution No, the court should not have ruled that a tenant‘s failure to pay a security deposit required under a lease constituted a breach sufficient to prevent the tenant from prevailing on a claim against the landlord in the circumstances of the Chalk Supply case.

Of course, a party who breaches a contract cannot base an action for breach against the other party on a subsequent breach or refusal to perform. But to prevent an action for a later breach, the first breach must be substantial. As a consequence, the non-breaching party must not have obtained the benefit reasonably expected under the contract.

In the typical sequence of events under a lease, a tenant‘s failure to pay a security deposit is likely to precede the landlord‘s repudiation of a duty owed under the contract. In the Chalk Supply case, Chalk Supply failed to pay the security deposit before RRE balked at its duty to pay the initial cost for a fire suppression system.

But the failure to pay the deposit was not a substantial breach. The purpose of the deposit was to cover a default on the payment of a month‘s rent by the tenant. Chalk Supply paid most of the rent in advance. With this advance, RRE clearly obtained the benefit it reasonably expected under the lease.

159.

Suppose that RRE had received an estimate of the cost of the fire suppression system before the parties executed the lease and had then insisted on conditioning its payment on a longer term. Would the result in this case have been different? Explain.

Solution Yes, the result in the Chalk Supply case would have been different if the landlord had received an estimate of the cost of the system before the parties signed the lease and had at that time insisted on negotiating a longer term.

RRE‘s duty to pay for the initial cost of the fire suppression system was a provision in its contract to lease a warehouse to Chalk Supply. The landlord received an estimate of the cost after the parties executed their agreement and then notified the tenant that it was repudiating its duty to pay that price without a longer lease term.

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If, however, RRE had insisted on the condition of a longer term during the parties‘ original negotiations over the provisions of the lease, the proposal would not have been a repudiation of its duty. The landlord‘s refusal to otherwise pay for the fire suppression system would not have been a legitimate basis for the tenant to bring an action for material breach, and the result in the Chalk Supply case would have been different.

Case 11.3 160.

What might explain the difference between Razack‘s estimate and the district court‘s award of Red Square‘s lost profits for the delay in the delivery of the truck? Discuss.

Solution The difference between Razack‘s estimate of Red Square‘s lost profits for the delay in the delivery of the truck and the district court‘s award could be explained by a number of factors.

These might include the court‘s estimation of the witness‘s credibility, for example, or the reasonableness, in the court‘s view, of the amount of the claim compared to the past profits of the company. Credibility or reasonableness could be based on the witness‘s position within the company and personal knowledge of its business, as well whatever documents, such as company invoices, are available under the circumstances. Evidence of unfulfilled ad contracts or service agreements for the period of the delay could also affect the amount of the award.

In this case, during the trial, Razack, Red Square‘s sales manager, testified that the company lost $12,000 per month in profits from ad contracts that it was unable to execute because of HDAV‘s ―untimely‖ work. The court awarded Red Square $10,000 damages per month for lost profits (a total of $45,000 for the four and a half months between the promised and actual delivery dates).

On appeal, the state court of appeals affirmed the award of lost profits. As to the amount, the court acknowledged that the trial court reduced the amount of the plaintiff‘s claim, but added that a court can ―adjust past profits where appropriate in determining lost profits.‖ The appellate concluded, therefore, ―The district court‘s award of lost-profit damages in the amount of $45,000, or $10,000 per month for four and one-half months, was not an abuse of discretion.‖ 161.

Instead of being awarded as consequential damages, should ―lost profits‖ be considered a risk in the change of value to the object of a contract assumed by the non-breaching party?

Why or why not?

Solution No, instead of being awarded as consequential damages, ―lost profits‖ should not be viewed as a risk in the change of value to the object of a contract assumed by the non-breaching party.

Of course, a change in the value of the object of a contract is a risk that any contracting party takes on entering into an agreement. An unfavorable drop in value, even to the point of affecting a loss of profit on the transaction, will not support a suit for breach by the disappointed, or ―mistaken,‖ party.

That one of the parties to a contract will not perform their part of the deal is not a risk for which the non-breaching party should be held to account. To the contrary, the party that caused the breach should pay for the other party‘s resulting damages. Profits lost as a consequence of the breach can be part of an award of the damages if the consequence was reasonably foreseeable at

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the time of the contract. To hold otherwise would be to support a breach of contract whenever a party could switch to a more profitable deal with the same subject matter, without regard to the effect on the non-breaching party. This would encourage breaking promises, not fulfilling them.

Chapter Review Practice and Review Val‘s Foods signs a contract to buy 1,500 pounds of basil from Sun Farms, a small organic herb grower, as long as an independent organization inspects the crop and certifies that it contains no pesticide or herbicide residue. Val‘s has a contract with several restaurant chains to supply pesto and intends to use Sun Farms‘ basil in the pesto to fulfill these contracts. While Sun Farms is preparing to harvest the basil, an unexpected hailstorm destroys half the crop. Sun Farms attempts to purchase additional basil from other farms, but it is late in the season, and the price is twice the normal market price. Sun Farms is too small to absorb this cost and immediately notifies Val‘s that it will not fulfill the contract. Using the information presented in the chapter, answer the following questions.

162.

Suppose that the basil does not pass the chemical-residue inspection. Which concept discussed in the chapter might allow Val‘s to refuse to perform the contract in this situation?

Solution The appropriate concept would be discharge by failure of a condition. Under the contract, Val‘s does not have to perform (pay) unless the basil meets the stated condition (that it pass an independent inspection for chemical residue). Because the basil did not pass inspection, Val‘s is not obligated to perform. This condition of the contract would be precedent rather than subsequent or concurrent: the basil must pass the inspection before Val‘s is obligated to buy.

163.

Under which legal theory or theories might Sun Farms claim that its obligation under the contract has been discharged by operation of law? Discuss fully.

Solution The theory of commercial impracticability can excuse parties from their performance obligations when the performance becomes much more difficult or expensive than originally contemplated at the time the contract was formed. For this doctrine to be invoked, the anticipated performance must be extremely difficult or costly. Sun Farms‘ inability to purchase basil from other sources at twice the normal market price meets this requirement: doing so would bankrupt Sun Farms.

164.

Suppose that Sun Farms contacts every basil grower in the country and buys the last remaining chemical-free basil anywhere. Nevertheless, Sun Farms is able to ship only 1,475 pounds to Val‘s. Would this fulfill Sun Farms‘ obligations to Val‘s? Why or why not?

Solution Substantial performance is good faith performance that does not vary greatly from the contract and confers the same benefits as promised in the contract. Sun Farms acted in good faith and shipped as much chemical-free basil as it could obtain, which was only 25 pounds less than the contracted amount. A court would likely find that it had substantially performed its obligation to Val‘s.

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165.

Now suppose that Sun Farms sells its operations to Happy Valley Farms. As a part of the sale, all three parties agree that Happy Valley will provide the basil as stated under the original contract. What is this type of agreement called?

Solution This is a novation—an agreement between the contracting parties to substitute a third party for one of the original parties. Under a novation, the new contract extinguishes the old contract and discharges the obligations of the prior party to the contract.

Practice and Review: Debate This 166.

The doctrine of commercial impracticability should be abolished.

Solution Contracts are not made to be broken, even if that is a popular saying. Contracts are made to be respected. Those who seek to avoid their contractual obligations by using the excuse of commercial impracticability, if successful, reduce the certain of contractual obligations and end up hurting the commercial society in which we all live.

Sometimes, a contract cannot be fulfilled through no fault of one of the parties. That is why the principle of commercial impracticability was created. If one party, usual a seller of goods or services, cannot perform because in so doing, that party would lose large sums and maybe go out of business, the courts should step in an allow that party to avoid the contract.

Issue Spotters 7.

Simmons finds a stone in his pasture that he believes to be quartz. Jenson, who also believes that the stone is quartz, contracts to purchase it for $10. Just before delivery, the stone is discovered to be a diamond worth $1,000. Is the contract enforceable? Why or why not?

Solution Simmons and Jenson have made a bilateral mistake. No. The contract can be avoided because Simmons and Jenson have made a bilateral mistake. The issue is whether the mistake involves the identity of the stone (quartz versus diamond) or the value of the stone ($10 versus $1,000).

Because both parties were mistaken as to the true character of the subject matter, either party can rescind the contract. Had either party known that the stone was some type of gem, then even though its exact nature was unknown (diamond), the mistake would be one of value, not fact, and the contract would not be rescindable.

8.

C&D Services contracts with Ace Concessions, Inc., to service Ace‘s vending machines. Later, C&D wants Dean Vending Services to assume the duties under a new contract. Ace consents. What type of agreement is this? Are Ace‘s obligations discharged? Why or why not?

Solution Novation substitutes a new party for an original party, by agreement of all the parties. The requirements are a previous valid obligation, an agreement of all the parties to a new contract, extinguishment of the old obligation, and a new, valid contract. Novation revokes and discharges the previous obligation.

Here, C&D delegated its duties under its contract with Ace to Dean, with Ace‘s consent. Ace‘s obligation to pay C&D for the execution of those duties is discharged, but its obligation under the

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new contract to pay Dean for those services will not be discharged until Dean is paid. The novation did, however, discharge C&D‘s obligation under the contract.

Business Scenarios and Case Problems 28. Voluntary Consent. Jerome is an elderly man who lives with his nephew, Philip. Jerome is totally dependent on Philip‘s support. Philip tells Jerome that unless Jerome transfers a tract of land he owns to Philip for a price 30 percent below market value, Philip will no longer support and take care of him. Jerome enters into the contract. Discuss fully whether Jerome can set aside this contract. (See Duress.)

Solution Undue influence arises from a relationship in which one party can, through unfair persuasion, greatly influence or overcome the free will of another. Any contract entered into under excessive or undue influence lacks genuine assent and is therefore voidable. Here, the influence of Philip over his Uncle Jerome is greatly enhanced by Jerome‘s reliance on Philip for his support. Although Jerome cannot claim duress, the domination of Philip over Jerome‘s decisions results in undue influence. The contract is primarily for the benefit of Philip, and Philip used unfair persuasion in securing the contract from Jerome. Jerome can have the contract set aside.

29. Impossibility of Performance. In the following situations, certain events take place after the contracts are formed. Discuss which of these contracts are discharged because the events render the contracts impossible to perform. (See Performance and Discharge.)

Solution Normally, events that take place after the formation of the contract and that make performance of the contract more difficult or burdensome do not render the contract impossible to perform and do not discharge a party‘s liability for failure to fully perform. If such events make performance so extremely difficult or burdensome that it is, in effect, impossible, impractical, or unreasonably expensive to perform, however, the contract is discharged. The basic problem is determining when this degree of difficulty or burdensomeness is reached.

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1.

Jimenez, a famous singer, contracts to perform in your nightclub. He dies prior to performance.

Solution Jimenez‘s contract is personal, requiring his services for full performance of the contract. His death makes performance totally impossible, thereby discharging his estate from liability.

2.

Raglione contracts to sell you her land. Just before title is to be transferred, she dies.

Solution The passage of title to this land can be by Raglione or any person so authorized. Therefore, the death of Raglione does not render the contract impossible to perform, because a representative of her estate can perform it in her place. The contract is not discharged.

3.

Oppenheim contracts to sell you one thousand bushels of apples from her orchard in the state of Washington. Because of a severe frost, she is unable to deliver the apples.

Solution The contract called for apples to come from a specific orchard. Through no fault of Oppenheim‘s, the specific subject matter of the contract is destroyed by the frost. Therefore, Oppenheim cannot deliver the apples called for in the contract, rendering the contract impossible to perform.

4.

Maxwell contracts to lease a service station for ten years. His principal income is from the sale of gasoline. Because of an oil embargo by foreign oil-producing nations, gasoline is rationed, cutting sharply into Maxwell‘s gasoline sales. He cannot make his lease payments.

Solution Major discussion should center on the doctrine of commercial impracticability or frustration of commercial purpose. For the doctrine to be applied, most courts would need proof that either the rationing frustrated the very purpose both parties had in mind in making the contract, or that there was an implied condition that the premises were to be used for the sole purpose of selling products no longer available, or that the events rendered the anticipated performance extremely difficult or costly. In cases involving rationing during World War II, some courts held that the rationing merely created a hardship, not an absolute prohibition, and the lease contracts were enforced even though performance was more burdensome.

30. Liquidated Damages. Cuesport Properties, LLC, sold a condominium in Anne Arundel County, Maryland, to Critical Developments, LLC. As part of the sale, Cuesport agreed to build a wall between Critical Developments‘ unit and an adjacent unit within thirty days of closing. If Cuesport failed to do so, it was to pay $126 per day until completion. This was an estimate of the amount of rent that Critical Developments would lose until the wall was finished and the unit could be rented. Actual damages were otherwise difficult to estimate at the time of the contract. The wall was built on time, but without a county permit, and it did not comply with the county building code. Critical Developments did not modify the wall to comply with the code until 260 days after the date of the contract deadline for completion of the wall. Does Cuesport have to pay Critical Developments $126 for each of the 260 days? Explain. [Cuesport Properties, LLC v. Critical Developments, LLC, 209 Md.App. 607, 61 A.3d 91 (2013)] (See Damages.)

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Solution Yes. Cuesport has to pay Critical Developments $126 for each of the 260 days that elapsed between the contract deadline and the date of the completion of the wall. A liquidated damages provision in a contract specifies a certain dollar amount to be paid in the event of a future default or breach of contract. A penalty provision also specifies a certain amount to be paid in the event of a default or breach of contract but is designed to penalize the breaching party. Liquidated damages provisions are usually enforceable. A provision that calls for a penalty, however, will not be enforced—recovery will be limited to actual damages. To determine if a provision is for liquidated damages or a penalty, a court asks when the contract was agreed to (1) was it apparent that damages would be difficult to estimate in the event of a breach and (2) was the amount set as damages a reasonable estimate and not excessive? If the answers to both questions are yes, the provision normally will be enforced. If either answer is no, the provision usually will not be enforced.

In this problem, the contract that required the construction of the wall provided a $126-per-day payment for Cuesport‘s failure to complete the wall within thirty days. This was a valid liquidated damages clause, rather than an invalid penalty. It was an estimate of the amount of rent that Critical Developments would lose until the wall was finished and the unit could be rented. Actual damages were otherwise difficult to estimate at the time of the contract. In other words, in these circumstances, the answers to both of the questions above are yes.

In the actual case on which this problem is based, Critical Developments filed a suit in a Maryland state court against Cuesport for breach. The court awarded the liquidated damages stipulated in the parties‘ contract. On Cuesport‘s appeal, a state intermediate appellate court affirmed.

31. Limitation-of-Liability Clauses. Mia Eriksson was a seventeen- year-old competitor in horseback-riding events. Her riding coach was Kristi Nunnink. Eriksson signed an agreement that released Nunnink from all liability except for damages caused by Nunnink‘s ―direct, willful and wanton negligence.‖ During an event at Galway Downs in Temecula, California, Eriksson‘s horse struck a hurdle. She fell from the horse and the horse fell on her, causing her death. Her parents, Karan and Stan Eriksson, filed a suit in a California state court against Nunnink for wrongful death.

Is the limitation-of-liability agreement that Eriksson signed likely to be enforced in her parents‘ case? If so, how will it affect their claim? Explain. [Eriksson v. Nunnink, 233 Cal.App.4th 708, 183 Cal.Rptr.3d 234 (4 Dist. 2015)] (See Damages.)

Solution Yes. The limitation-of-liability agreement that Eriksson signed is likely to be enforced in her parents‘ suit against Nunnink, their daughter‘s riding coach. And this would likely result in a judgment against them unless they can establish Nunnink's ―direct, willful and wanton negligence.‖ A limitation-of-liability clause affects the availability of certain remedies. Under basic contract principles, to be enforceable, these clauses must be clear and unambiguous.

In this problem, Eriksson, a young equestrian event competitor, signed an agreement that released Nunnink from all liability except for damages caused by Nunnink's ―direct, willful and wanton negligence.‖ During an event, Eriksson‘s horse struck a hurdle, causing her to fall from the horse. The horse fell on her, resulting in her death. Her parents filed a suit against Nunnink for wrongful death. The limitation-of-liability clause expressly released Nunnink from liability for all of Eriksson‘s equestrian activities related to Nunnink's services except for those caused by Nunnink's ―direct, willful and wanton negligence.‖ The clause is straightforward, clear, and unambiguous,

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and therefore enforceable. Nunnink would be liable only if Eriksson‘s death was caused by Nunnink's gross negligence. The facts do not state that Eriksson‘s parents proved Nunnink was grossly negligent.

In the actual case on which this problem is based, the court issued a judgment in Nunnink‘s favor.

A state intermediate appellate court affirmed the judgment, on the basis expressed here.

32. Business Case Problem with Sample Answer— Conditions. H&J Ditching & Excavating, Inc., was hired by JRSF, LLC, to perform excavating and grading work on Terra Firma, a residential construction project in West Knox County, Tennessee. Cornerstone Community Bank financed the project with a loan to JRSF. As the work progressed, H&J received payments totaling 90 percent of the price on its contract. JRSF then defaulted on the loan from Cornerstone, and Cornerstone foreclosed and took possession of the property. H&J filed a suit in a Tennessee state court against the bank to recover the final payment on its contract. The bank responded that H&J had not received its payment because it had failed to obtain an engineer‘s certificate of final completion, a condition under its contract with JRSF. H&J responded that it had completed all the work it had contracted to do. What type of contract condition does obtaining the engineer‘s certificate represent? Is H&J entitled to the final payment? Discuss. [H&J Ditching & Excavating, Inc. v.

Cornerstone Community Bank, 2016 WL 675554 (Tenn.Ct.App. 2016)] (See Performance and Discharge.)

—For a sample answer to Problem 11–5, go to Appendix D. Solution

The requirement that the contractor obtain an engineer‘s certificate of final completion before the final payment will be made under the contract is a condition precedent. In most contracts, promises of performance are not expressly conditioned—they are absolute and must be performed to avoid a breach of the contract. In some situations, however, performance is contingent on the occurrence of a certain event. If the condition is not satisfied, the obligations of the parties are discharged. A condition that must be fulfilled before a party‘s performance can be required is a condition precedent.

In this problem, H&J was hired to excavate and grade land for a residential construction project.

Cornerstone Community Bank financed the project. As the work progressed, H&J received payments totaling 90 percent of the price on its contract. But the last payment was not forthcoming when H&J believed it was due. The contractor filed a suit in a Tennessee state court against the bank to recover the final payment. The bank responded that H&J did not receive the payment because it failed to obtain an engineer‘s certificate of final completion, a condition under its contract. H&J argued that it completed all the work it contracted to do.

H&J is not entitled to the final payment on the contract because it did not comply with the condition to obtain the engineer‘s certificate. This condition preceded the obligation under the contract to make the final payment. Even assuming that H&J ―completed all the work it contracted to do,‖ the final payment is not subject to disbursal without the certificate.

In the actual case on which this problem is based, the court issued a judgment in the bank‘s favor.

A state intermediate appellate court affirmed. ―No certificate of substantial completion was ever issued, a condition precedent to final payment.‖ 33. Damages. Robert Morris was a licensed insurance agent working for his father‘s independent insurance agency when he contacted Farmers Insurance Exchange in Alabama about becoming a

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Farmers agent. According to Farmers‘ company policy, Morris was an unsuitable candidate due to his relationship with his father‘s agency. But no Farmers representative told Morris of this policy, and none of the documents that he signed expressed it. Farmers trained Morris and appointed him its agent. About three years later, however, Farmers terminated the appointment for ―a conflict of interest because his father was in the insurance business.‖ Morris filed a suit in an Alabama state court against Farmers, claiming that he had been fraudulently induced to leave his father‘s agency to work for Farmers. If Morris was successful, what type of damages was he most likely awarded? What was the measure of damages? Discuss. [Farmers Insurance Exchange v.

Morris, 228 So.3d 971 (Ala. 2016)] (See Damages.)

Solution

If Morris succeeds in the action against his former employer for fraudulently inducement, he is most likely to be awarded compensatory damages. Plaintiffs are awarded compensatory damages to compensate for actual losses. The goal is to make the plaintiffs whole and place them in the same positions that they would have been in if the damage had not occurred.

In this problem, Morris was working for his father‘s insurance agency when he contacted Farmers Insurance Exchange about becoming its agent. Farmers trained Morris and gave him an appointment as an agent. But three years later, Farmers terminated the appointment for ―a conflict of interest because his father was in the insurance business.‖ Farmers had never informed Morris that according to its company policy he was unsuitable to serve as its agent due to his relationship with his father‘s agency. These circumstances constitute a case of fraud—the company‘s silence on its policy was an intentional misrepresentation of a material fact on which Morris reasonably relied to his detriment.

Morris‘s injury consisted of the ―opportunities‖ that he had lost by becoming an agent for Farmers—selling insurance policies out of his father‘s agency—and this would be the measure of the damages to which he is entitled. He might prove the amount of the lost commissions on those sales by showing what he sold during that same period for Farmers.

In the actual case on which this problem is based, a jury awarded Morris $600,000 in compensatory damages, and the court entered a judgment on the verdict. The Alabama Supreme Court affirmed. Morris‘s measure of damages was based on ―the opportunities he had lost by becoming a Farmers agent.‖ 34. Commercial Impracticability. Lisa Goldstein reserved space for a wedding in a building owned

by Orensanz Events, LLC, in New York City. The rental agreement provided that on cancellation of the event ―for any reason beyond‖ Orensanz‘s control, the client‘s sole remedy was another date for the event or a refund. Shortly before the wedding, the New York City Department of Buildings found Orensanz‘s building to be structurally unstable and ordered it vacated. Orensanz closed the building and told Goldstein to find another venue. Goldstein filed a lawsuit in a New York state court against Orensanz for breach of contract, arguing that the city‘s order had specified a cause within the defendant‘s control. Was the commercial building‘s structural issue a foreseeable difficulty, thus making Goldstein‘s claim valid? Explain your answer. [Goldstein v. Orensanz Events, LLC, 146 A.D.3d 492, 44 N.Y.S.3d 437 (2017)] (See Performance and Discharge.)

Solution

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Yes. The owner of a commercial building is under an ethical duty to keep it structurally sound, at least to the extent the owner is legally obligated to its occupants. That legal obligation, which may arise from a contract, is subject to a standard of foreseeability and hence something within the owner‘s control.

In this problem, Lisa Goldstein rented space for a wedding in a building owned by Orensanz Events. The rental agreement provided that if the event was canceled ―for any reason beyond Owner‘s control,‖ Goldstein‘s sole remedy was another date or a refund. Just before the wedding, the city found the building to be structurally unstable and ordered it vacated. Orensanz closed it and told Goldstein to find another venue. She filed a suit against Orensanz, arguing that the city‘s order had been for a cause within the defendant‘s control.

A party may sometimes be excused from performing a contract under the doctrine of commercial impracticability. Performance is commercially impracticable when it is significantly more difficult than anticipated. The difficulty must have been unforeseeable at the time the contract was made or due to forces the party could not control. Here, if the lack of structural integrity of Orensanz‘s building had been unforeseeable, it would have been beyond the owner‘s control. This would satisfy the legal standard of excuse for contract performance.

In the actual case on which this problem is based, the court issued a summary judgment dismissing Goldstein‘s complaint. A state intermediate appellate court reversed the dismissal. The appellate court cited ―issues of fact whether the failure was foreseeable or within defendants‘ control.‖ 35. Reformation. Dr. John Holm signed a two-year employment agreement with Gateway Anesthesia Associates. During negotiations for the agreement, Gateway‘s president, Dr. Jon Nottingham, told Holm that on completion of the contract he would become a partner in the firm, and during the term, he would be paid ―like a partner.‖ The written agreement did not reflect this promise, however. The actual contract read that Holm would be paid based on ―net collections‖ for his services, and it did not state that he would become a partner at the end of the term. Later, Gateway told Holm that it did not intend to make him a partner. Holm filed a complaint in an Arizona state court against Gateway, alleging breach of contract. Before the trial, Holm filed a motion to reform the contract to express what he had been told. Nottingham did not dispute Holm‘s account. What is the basis for the reformation of a contract? Is it appropriate in this case?

Why or why not? [Holm v. Gateway Anesthesia Associates, 2018 WL 770503 (Ariz.App. 2018)] (See Equitable Remedies.)

Solution Yes. Reformation is appropriate in the circumstances of this case. Reformation is an equitable remedy used when the parties to an agreement have imperfectly expressed it in writing. A court applies this remedy to rewrite the contract to reflect the parties‘ true intentions. Courts often order reformation when a mutual mistake exists.

In this problem, during negotiations for an employment agreement, the employer‘s president Nottingham told the potential employee Holm that at the end of the contract‘s term Holm would become a partner in the firm. Nottingham also told Holm that during the term he would be paid ―like a partner.‖ The written expression did not reflect this exchange—it explained that Holm‘s compensation would be based on ―net collections‖ for his services and did not state that he

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would become a partner. When the firm refused to offer Holm a partnership, he filed a suit for breach and sought to reform the contract.

Nottingham‘s telling Holm that during the term of the deal Holm would be paid ―like a partner‖ supports a conclusion that he would be compensated as he was told. And Nottingham did not dispute that this is what he told Holm. Thus, there does not appear to be a genuine issue of material fact regarding a mistake in the written expression of the parties‘ agreement. The purpose of reformation is to correct a mistake that occurs when, as here, the parties‘ intent does not accord with its written expression.

In the actual case on which this problem is based, the court granted Holm‘s motion for reformation. A state intermediate appellate court affirmed. Holm did ―not seek to alter the agreement in the sense of changing what the parties agreed to, but rather to bring it in conformity with what the parties actually agreed.‖ 36. The IDDR Approach and Fraudulent Misrepresentation. Data Consulting Group contracted with Weston Medsurg Center, a health-care facility in Charlotte, North Carolina, to install, maintain, and manage Weston‘s computers and software. At about the same time, Ginger Blackwood began to work for Weston as a medical billing and coding specialist. Soon, she was submitting false time reports and converting Weston documents and data to her own purposes.

On her request, Data Consulting‘s manager Nasko Dinev removed evidence of her actions from her work computer. [Weston Medsurg Center v. Blackwood, 795 S.E.2d 829 (2017)] (See Voluntary Consent.)

1.

What should Weston do when it learns of these activities? With respect to this situation, identify and consider the firm‘s primary ethical dilemma using the IDDR approach.

Solution When Weston discovers the conduct identified in the facts, it might choose to fire Blackwood, stop paying Data Consulting, and file a suit against Blackwood, Data Consulting, and Dinev.

Weston‘s primary ethical dilemma with respect to this situation is in deciding which legal steps to take.

When an innocent party consents to a contract with fraudulent terms, the contract can be avoided because the innocent party did not voluntarily consent to the terms. Among the elements required to prove fraud, one party must intend to deceive the other by means of a misrepresentation of a material fact. The innocent party must justifiably rely on the misrepresentation and, to recover damages, suffer harm.

In this problem, Weston contracted with Data Consulting to install, maintain, and manage Weston‘s computers and software. At the same time, Blackwood, a Weston medical billing and coding specialist, submitted false time reports and converted her employer‘s data for her own purposes. Dinev, a Data Consulting manager, helped her remove evidence of her transgressions from her work computer.

Weston‘s discovery of these activities could prompt the company to terminate Blackwood, stop paying Data Consulting, and bring an action against Blackwood, Data Consulting, and Dinev for breach of contract and fraud. The first step of the IDDR approach requires a statement of the ethical issue and an identification of the stakeholders and the relevant

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ethical standards. From an ethical perspective, Weston‘s chief dilemma is to decide which of the actions to take. Stakeholders include Weston‘s owners and employees, including Blackwood, and its suppliers and others with whom it contracts, such as Data Consulting. But perhaps the most important stakeholders are Weston‘s patients, whose privacy and confidentiality might be at risk depending on what data has been converted or lost. Ethical standards to which Weston might adhere include its statements of policy to its owners, employees, and patients.

The second step of the IDDR approach is a Discussion of actions that might resolve the issue.

If Weston were to proceed with all of the possible actions stated above, from a legal perspective, the company is likely to prevail against any challenge to a decision to discharge Blackwood. She clearly breached her employment contract. Weston might not prevail against a claim by Data Consulting to recover any amount owed on its contract, however, absent proof that Data Consulting colluded with Blackwood and Dinev to commit fraud. Weston could succeed in a fraud claim against Blackwood and Dinev if the firm could prove an injury.

Stakeholders include Weston‘s owners and employees, including Blackwood, and its suppliers and others with whom it contracts, such as Data Consulting. But perhaps the most important stakeholders are Weston‘s patients, whose privacy and confidentiality might be at risk depending on what data has been converted or lost. The disadvantages of the actions arise from their expense, such as the cost of litigation and any payment that might yet have to be made to Data Consulting. If Weston were not to take any of these actions, however, its loss of credibility among its owners, employees, and patients, with a consequent loss of investment, productive work, and business revenue, could more than exceed this expense.

The third step of the IDDR approach is to state a Decision and its reasons. Here, Weston would seem to have only one clear decision—to discharge Blackwood and initiate legal action against her and the others. The reasons are set out in the paragraphs above. Withholding payment from Data Consulting might also be advisable under the circumstances—it could heighten the contractor‘s awareness of its manager‘s part in Blackwood‘s fraud and motivate that company to consider its own ethical practices. But Weston should be prepared to eventually pay what may be owed under its contract with Data Consulting—there is no indication that the contractor is liable for fraud or a contract breach.

The last step of the approach is a Review of the success or failure of the proposed actions to resolve the issue, and satisfy the stakeholders. If Weston were to take the suggested legal actions, it could embolden its owners, employees, and patients to continue their investments, work efforts, and trust in the medical center. This would clearly be a success.

2.

Suppose that despite Dinev‘s efforts, Weston is later able to recover the data that were removed from Blackwood‘s work computer. How might this affect Weston‘s choices? Discuss.

Solution If Weston were able to recover all of the deleted data—through the efforts of other Data Consulting employees, for example—it might thereby be able to recoup overpayments to Blackwood based on her false time reports. If she were to make restitution, this might mitigate what Weston could otherwise recover in a suit. Similarly, Data Consulting‘s undoing what its manager did might limit what Weston might otherwise recover against the contractor.

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In the actual case on which this problem is based, Weston learned of Blackwood and Dinev‘s activities and stopped paying Data Consulting. Data Consulting filed a claim in a North Carolina state court against Weston, and was awarded $5,441.60 for services rendered and unpaid. Weston filed claims of fraud against Blackwood and Dinev. At the same time, the firm was able to recover the data that had been removed from its computer. A jury ruled in the defendants‘ favor but denied them attorneys‘ fees. A state intermediate appellate court affirmed these results.

Critical Thinking and Writing Assignments 1.

Fraudulent Misrepresentation. Radiah Givens was involved romantically with Joseph Rosenzweig. She moved into an apartment on which he made the down payment. She signed the mortgage, but he made the payments and paid household expenses. They later married. Givens had the marriage annulled, however, when she learned that Rosenzweig was already married to someone else. Rosenzweig then filed a lawsuit against Givens to collect on the mortgage. (See Voluntary Consent.)

1.

The first team should decide whether Rosenzweig committed fraud.

Solution Yes. Rosenzweig could have committed fraud against Givens. Fraud requires (a) a misrepresentation of a material fact, (b) an intent to deceive, (c) an innocent party‘s justifiable reliance on the misrepresentation, and (d) the innocent party‘s injury.

Rosenzweig misrepresented to Givens, with whom he was romantically involved, that he was not married. Of course, he knew that the truth was otherwise. This meets the first two requirements for a finding of fraud. Agreements between spouses involve a fiduciary relationship that requires the utmost good faith. A similar fiduciary relationship may have existed between Givens and Rosenzweig. Givens justifiably relied on this relationship when she believed Rosenzweig‘s misrepresentation, signed the mortgage, and married him. As for injury, besides the mental and emotional anguish that these circumstances undoubtedly inflicted on Givens, she may have suffered other losses—giving up educational or employment opportunities, for example.

2.

The second team should evaluate whether Rosenzweig‘s conduct was deceitful, and if so, whether his deceitfulness should affect the decision in this case.

Solution Yes. Rosenzweig‘s conduct was deceitful. Rosenzweig certainly appears to have suffered from some deficiencies of character and he likely would be subject to sanctions by the state attorneys‘ professional responsibility organization. But a desire to see a scoundrel punished should not motivate the application of the legal principles in this, or any other, case.

Here, Rosenzweig‘s deceit did not concern the mortgage contract, and thus it should not affect the outcome. But Rosenzweig is not the mortgagor and does not appear to be the mortgagee, so unless there is a different contract between Givens and Rosenzweig, there is no basis for a decision in his favor.

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3.

The third team should consider how fraud is related to ethics. Can a contracting party act ethically and still commit fraud? If so, how?

Solution It might be possible to act ethically and still commit fraud. For example, if fraud were committed in the service of an ethical duty or directed towards an ethical end—such as perpetrating fraud to subvert a greater evil by deceiving a party into foregoing a wrong—it could be interpreted as an ethical act.

Solution and Answer Guide Miller, The Legal Environment Today 10e, 9780357635582; Chapter 12: Sales and Lease Law

Table of Contents Critical Thinking Questions in Features ............................................................................................................. 147 Digital Update........................................................................................................................................ 147 Critical Thinking Questions in Cases ................................................................................................................... 148 Case 12.1 ............................................................................................................................................... 148 Case 12.2 ............................................................................................................................................... 148 Case 12.3 ............................................................................................................................................... 149 Chapter Review ........................................................................................................................................................... 149 Practice and Review .............................................................................................................................. 149 Practice and Review: Debate This ......................................................................................................... 150 Issue Spotters ........................................................................................................................................ 151 Business Scenarios and Case Problems ................................................................................................. 151 Critical Thinking and Writing Assignments ............................................................................................ 157

Critical Thinking Questions in Features Digital Update 167.

Does the Supreme Court‘s decision in South Dakota v. Wayfair, Inc., make it more or less likely that Congress will enact legislation that requires out-of-state corporations to collect and pay taxes to states for online sales?

Solution Congress is probably more likely to pass legislation aimed at taxing online sales in the aftermath of the Supreme Court‘s holding to clarify the states‘ power to impose taxes on Internet sales.

Although legislation had been proposed before this case was decided, it has been difficult for Congress to come to a consensus because there are so many taxing jurisdictions involved (some estimate nearly twelve thousand, including states, cities, and counties).

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168.

How does a third party extended auto warranty differ from a warranty that is included in the price of a used car purchased from a dealership selling that particular brand of car?

Solution When a dealership sells a used car with a twelve-month warranty, the dealership—often in partnership with the manufacturer of the car—includes the cost of the warranty in the resale price of the car. And because of the intense competition in the sale of used cars, charging an inflated price for the twelve-month warranty would put the dealership at a disadvantage in the used-car market.

Critical Thinking Questions in Cases Case 12.1 169.

Suppose that the parties admitted that they had agreed Kastalon would store the rolls for up to one year. How would this have affected the court‘s decision on breach of contract?

Solution If the parties had admitted to an agreement for Kastalon to store the rolls for up to one year, then a court would likely have held that there was an enforceable contract. The terms would have been sufficiently definite for the court to enforce the agreement and determine a remedy for breach.

The end result may not have been much different for Toll Processing, however, since the facts of this case indicate that Kastalon stored the rolls for more than two years. Thus, even if the storage agreement for one year were enforceable, a court would likely have decided that Kastalon did not breach the contract by getting rid of the rolls two years later. Kastalon did not promise to store the rolls indefinitely, and it would be unreasonable for a court to require it to store the rolls an entire year past the time specified in the contract.

170.

Was it unethical for Kastalon to scrap the rolls without attempting to contact Toll Processing? Explain.

Solution Probably not. Kastalon had agreed to move and store the rolls for Toll Processing at no cost because it anticipated getting a contract to refurbish the rolls for Toll Processing. It took Kastalon three months to move the rolls to its own facility, and the company incurred costs for labor and transportation, as well as the burden of storing fifty-seven pickle rolls. It was Toll Processing‘s responsibility to contact Kastalon about the rolls that were in its possession, more than it was Kastalon‘s duty to contact Toll Processing. If Toll Processing had informed Kastalon what was happening with the pickle rolls and that it still intended to use them, the whole dispute could have been avoided. Nevertheless, even if it were not an ethical breach, it would have been a prudent business practice for Kastalon to contact Toll Processing before scraping the rolls.

Case 12.2 171.

Why would the seller‘s knowledge of the buyers‘ limited resources support a finding of unconscionability?

Solution It may be that the court viewed the sellers‘ knowledge of the buyers‘ limited resources as evidence that the defendant‘s approach to the transaction was knowingly exploitative and overreaching.

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Case 12.3 172.

Suppose that Fitl and Strek had included in their deal a written clause requiring Fitl to give notice of any defect in the card within ―7 days to 1 month‖ of its receipt. Would the result have been different? Why or why not?

Solution Possibly. The parties to a sale of lease contract can insert such a provision, which can be enforceable. Of course, in that situation, Fitl might have acted quicker, and the defect might then have been discovered sooner.

173. case?

What might a court award to a buyer who prevails in a dispute such as the one in this

Solution Fitl paid Strek $17,750 for a 1952 Mickey Mantle Topps baseball card. In the suit against Strek, Fitl asked for damages in the amount of ―the current fair market value of an unaltered version of the same card.‖ The trial court awarded Fitl the contract price of the card—$17,750—and the costs to maintain the suit. The state supreme court affirmed the amount of this award on appeal.

Chapter Review Practice and Review Guy Holcomb owns and operates Oasis Goodtime Emporium, an adult entertainment establishment.

Holcomb wanted to create an adult Internet system for Oasis that would offer customers adult-theme videos and ―live‖ chat room programs using performers at the club. On May 10, Holcomb signed a work order authorizing Thomas Consulting Group (TCG) ―to deliver a working prototype of a customer chat system, demonstrating the integration of live video and chatting in a Web browser.‖ In exchange for creating the prototype, Holcomb agreed to pay TCG $64,697. On May 20, Holcomb signed an additional work order in the amount of $12,943 for TCG to install a customized firewall system. The work orders stated that Holcomb would make monthly installment payments to TCG, and both parties expected the work would be finished by September.

Due to unforeseen problems largely attributable to system configuration and software incompatibility, the project required more time than anticipated. By the end of the summer, the website was still not ready, and Holcomb had fallen behind in his payments to TCG. TCG threatened to cease work and file a suit for breach of contract unless the bill was paid. Rather than make further payments, Holcomb wanted to abandon the website project. Using the information presented in the chapter, answer the following questions.

174.

Would a court be likely to decide that the transaction between Holcomb and TCG was covered by the Uniform Commercial Code (UCC)? Why or why not?

Solution The key factor is whether the transaction between Holcomb and TCG was for a good or a service, because the UCC covers only goods. Most goods require some related service—their design, assembly, installation, or manufacture—but the effort and expertise to make a good does not mean that the buyer is buying the service instead of the good. The focus is on the buyer‘s objective. Does the buyer want a good or a service? To fall under the UCC, the service must be incidental to the buyer‘s purpose. Here, a court would most likely conclude that the service TCG is

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providing (customizing software) is incidental to Holcomb‘s goal (acquiring an operational website).

175. not?

Would a court be likely to consider Holcomb a merchant under the UCC? Why or why

Solution Under the UCC, a merchant is a person who deals in goods of the kind involved in the sales contract. A merchant for one type of goods is not necessarily a merchant for another type. Here, the goods in the contract between Holcomb and TCG consist of a website, for which Holcomb may not be a merchant because his business is adult entertainment (arguably a service), not technology.

176.

Did the parties have a valid contract under the UCC? Were any terms left open in the contract? If so, which terms? How would a court deal with open terms?

Solution The contract between TCG and Holcomb is a valid contract. It sets out all of the essential terms— price, payment, delivery, duration, and quantity—in a signed writing. Had some terms been left open, the UCC would likely have allowed the court to fill the gaps.

177.

Suppose that Holcomb and TCG meet in October in an attempt to resolve their problems.

At that time, the parties reach an oral agreement that TCG will continue to work without demanding full payment of the past due amounts and Holcomb will pay TCG $5,000 per week.

Assuming the contract falls under the UCC, is the oral agreement enforceable? Why or why not?

Solution This oral agreement would not be enforceable, because its amount, which is over $500, would bring it within the Statute of Frauds. The Statute of Frauds requires that sales contracts for goods priced over $500 be in writing to be enforceable.

Practice and Review: Debate This 178.

The UCC should require the same degree of definiteness of terms, especially with respect to price and quantity, as contract law does.

Solution Contract law requires definiteness sufficient for the parties to ascertain the contract‘s essential terms when it is accepted. The UCC, in its quest to encourage more commerce, went overboard by removing this definiteness requirement. In so doing, the UCC opened up too many possibilities for fraud and unethical behavior on the part of one of the parties to a sales contract. Simply requiring that the parties‘ actions show an intent to enter into a contract seems like an awfully weak standard.

The UCC was created to make sure that parties to sales agreements carried out those agreements.

The UCC creates a sales contracting environment that promotes exchange rather than one that encourages parties to find ways to back out of sales agreements. Sometimes, parties to a sales contract truly wish to reach an agreement but do not specify certain elements to the sales contract. That does not necessarily mean that they weren‘t serious about entering into the agreement.

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Issue Spotters 9.

E-Design, Inc., orders 150 computer desks. Fav-O-Rite Supplies, Inc., ships 150 printer stands. Is this an acceptance of the offer or a counteroffer? If it is an acceptance, is it a breach of the contract? What if Fav-O-Rite told E-Design it was sending the printer stands as ―an accommodation‖?

Solution A shipment of nonconforming goods constitutes an acceptance and a breach, unless the seller seasonably notifies the buyer that the nonconforming shipment does not constitute an acceptance and is offered only as an accommodation. Without the notification, the shipment is an acceptance and a breach. Thus, here the shipment was both an acceptance and a breach.

10. Truck Parts, Inc. (TPI), often sells supplies to United Fix-It Company (UFC), which services trucks.

Over the phone, they negotiate for the sale of eighty-four sets of tires. TPI sends a letter to UFC detailing the terms and two weeks later ships the tires. Is there an enforceable contract between them? Why or why not?

Solution Yes. In a transaction between merchants, the requirement of a writing is satisfied if one of them sends to the other a signed written confirmation that indicates the terms of the agreement, and the merchant receiving it has reason to know of its contents. If the merchant who receives the confirmation does not object in writing within ten days after receipt, the writing will be enforceable even though the merchant has not signed anything.

Business Scenarios and Case Problems 37. Merchant’s Firm Offer. On May 1, Jennings, a car dealer, e-mails Wheeler and says, ―I have a 1955 Thunderbird convertible in mint condition that I will sell you for $13,500 at any time before June 9. [Signed] Peter Jennings.‖ By May 15, having heard nothing from Wheeler, Jennings sells the car to another. On May 29, Wheeler accepts Jennings‘s offer and tenders $13,500. When told Jennings has sold the car to another, Wheeler claims Jennings has breached their contract. Is Jennings in breach? Explain. (See Formation of Sales and Lease Contracts.)

Solution Yes. Under UCC 2–205, a merchant offeror, who in a signed writing gives assurance that an offer will remain open, creates an irrevocable offer (without payment of consideration) for the time period stated in the assurance up to a three-month period. Jennings, as a merchant ( a car dealer), was obliged to hold the offer (which had been made in a signed writing—the e-mail) open until June 9. Wheeler‘s acceptance of the offer before June 9 created a valid contract. When Jennings sold the 1955 Thunderbird to a third party before June 9, he breached the contract.

38. Anticipatory Repudiation. Moore contracted in writing to sell her Hyundai Santa Fe to Hammer for $16,500. Moore agreed to deliver the car on Wednesday, and Hammer promised to pay the $16,500 on the following Friday. On Tuesday, Hammer informed Moore that he would not be buying the car after all. By Friday, Hammer had changed his mind again and tendered $16,500 to Moore. Moore, although she had not sold the car to another party, refused the tender and refused to deliver. Hammer claimed that Moore had breached their contract. Moore contended that Hammer‘s repudiation released her from her duty to perform under the contract. Who is correct, and why? (See Performance.)

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Solution Hammer is correct. Moore‘s refusal to deliver the car to Hammer on Friday, when Hammer tendered the $16,500 to Moore, constituted a breach of their contract. Moore could have canceled the contract on Hammer‘s anticipatory breach [UCC 2–610] but did not do so and did not change her position in any way as a result of Hammer‘s anticipatory breach. Hammer could retract his anticipatory repudiation of the contract at any time prior to the time performance was due [UCC 2–611]. Because Hammer did retract his repudiation and decided to buy the car at the time performance was due (and not later), Moore was obligated to abide by the terms of the contract.

39. Spotlight on Apple—Implied Warranties. Alan Vitt purchased an iBook G4 laptop computer from Apple, Inc. Shortly after the one-year warranty expired, the laptop stopped working due to a weakness in the product manufacture. Vitt sued Apple, arguing that the laptop should have lasted ―at least a couple of years,‖ which Vitt believed was a reasonable consumer expectation for a laptop. Vitt claimed that Apple‘s descriptions of the laptop as ― durable,‖ ―rugged,‖ ―reliable,‖ and ―high performance‖ were affirmative statements concerning the quality and performance of the laptop, which Apple did not meet. How should the court rule? Why? [Vitt v. Apple Computer, Inc., 469 Fed.Appx. 605 (9th Cir. 2012)] (See Warranties.)

Solution The court should rule in favor of Apple. Apple‘s statements are generalized and nonactionable puffery because there are vague and generalized terms and not factual representations about a particular standard of quality. Apple‘s statements do not imply that the laptop would last a certain period of years. For example, a ―durable‖ laptop might imply that it is resistant to problems with being dropped and not that its lifespan would significantly exceed the warranty. The consumer bears the risk that a product will not match his economic expectations unless the manufacturer specifically agrees that it will do so.

40. The Statute of Frauds. Kendall Gardner agreed to buy from B&C Shavings a specially built shaving mill to produce wood shavings for poultry processors. B&C faxed an invoice to Gardner reflecting a purchase price of $86,200, with a 30 percent down payment and the ―balance due before shipment.‖ Gardner paid the down payment. B&C finished the mill and wrote Gardner a letter telling him to ―pay the balance due or you will lose the down payment.‖ By then, Gardner had lost his customers for the wood shavings, could not pay the balance due, and asked for the return of his down payment. Did these parties have an enforceable contract under the Statute of Frauds? Explain. [Bowen v. Gardner, 2013 Ark.App. 52, 425 S.W.3d 875 (2013)] (See Formation of Sales and Lease Contracts.)

Solution Yes. Gardner and B&C Shavings had a contract enforceable under the Statute of Frauds. The Statute of Frauds applies to contracts for the sales of goods for more than $500. Those contracts must be in writing to be enforceable. A writing satisfies the Statute of Frauds as long as it indicates that the parties intended to form a contract and is signed by the party against whom enforcement is sought. An oral contract for the sale of goods priced at $500 or more will be enforceable despite the absence of a writing if goods are specially manufactured for a particular buyer, are not suitable for resale to others in the ordinary course of the seller's business, and the seller has substantially started to manufacture the goods.

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In this problem, Gardner agreed to buy a special-order shaving mill from B&C for $86,200, which is clearly more than $500. Thus, the Statute of Frauds applied. B&C agreed to make and deliver the product according to Gardner‘s specifications, and faxed an invoice to Gardner reflecting the purchase price, with a 30-percent down payment and the ―balance due before shipment.‖ The faxed invoice did not contain all of the provisions of the deal—for example, and important to the circumstances in this case, after finishing the mill B&C wrote Gardner a letter telling him to ―pay the balance due or you will lose the down payment.‖ But the order could be enforceable as a contract under the specially made goods exception (B&C specially made the mill for Gardner according to his specifications) provided it is not suitable for resale to others without further modifications.

In the actual case on which this problem is based, B&C filed a suit in an Arkansas state court against Gardner to recover the rest of the price. On Gardner‘s appeal from a judgment in B&C‘s favor, a state intermediate appellate court affirmed.

41. Business Case Problem with Sample Answer— Goods and Services Combined. Allied Shelving and Equipment, Inc., sells and installs shelving systems. National Deli, LLC, contracted with Allied to provide and install a parallel rack system (a series of large shelves) in National‘s warehouse.

Both parties were dissatisfied with the result. National filed a suit in a Florida state court against Allied, which filed a counterclaim. Each contended that the other had materially breached the contract. The court applied common law contract principles to rule in National‘s favor on both claims. Allied appealed, arguing that the court should have applied the Uniform Commercial Code (UCC). When does a court apply common law principles to a contract that involves both goods and services? In this case, why might an appellate court rule that the UCC should be applied instead? Explain. [Allied Shelving and Equipment, Inc. v. National Deli, LLC, 40 Fla.L.Weekly D145, 154 So.3d 482 (2015)] (See The Scope of Articles 2 and 2A.) — For a sample answer to Problem 12–5, go to Appendix D. Solution A court applies common law principles to a dispute over contract that involves both goods and services when the court finds the services to be the dominant feature of the agreement. An appellate court, or any court, would rule that the UCC should be applied instead of the common law when the court finds the goods to be the dominant aspect of the deal. In either situation, the applicable law covers both the goods and services parts of the contract.

In this problem, because the court applied common law contract principles to rule in National‘s favor on both parties‘ claims, the court must have concluded that the services part of the contract was the dominant aspect.

In the actual case on which this problem is based, a state intermediate appellate court affirmed the lower court‘s ruling in National‘s favor. The appellate court recognized that the contract was a hybrid involving goods ands services and reasoned that the lower court must have determined the services portion of the agreement to be the dominant factor. But the parties did not provide a trial transcript or a copy of the contract, so the appellate court could only affirm the lower court‘s order.

42. Acceptance. New England Precision Grinding, Inc. (NEPG), sells precision medical parts in Massachusetts. NEPG agreed to supply Kyphon, Inc., with certain medical parts. NEPG contracted with Simply Surgical, LLC, to obtain the parts from Iscon Surgicals, Ltd. The contract did not

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mention Kyphon or require Kyphon‘s acceptance of the parts. Before shipping, Iscon would certify that the parts conformed to NEPG‘s specifications. On receiving the parts, NEPG would certify that they conformed to Kyphon‘s specifications. On delivery, Kyphon would also inspect the parts.

After about half a dozen transactions, NEPG‘s payments to Simply Surgical lagged, and the seller refused to make further deliveries. NEPG filed a suit in a Massachusetts state court against Simply Surgical, alleging breach of contract. NEPG claimed that Kyphon had rejected some of the parts, which gave NEPG the right not to pay for them. Do the UCC‘s rules with respect to acceptance support or undercut the parties‘ actions? Discuss. [New England Precision Grinding, Inc. v. Simply Surgical, LLC, 89 Mass.App.Ct.176, 46 N.E.3d 590 (2016)] (See Formation of Sales and Lease Contracts.)

Solution The UCC‘s rules with respect to acceptance support the decision of Simply Surgical to refuse deliveries, and those principles undercut the decision of NEPG to withhold payment. Under the UCC, acceptance of an offer to buy or sell goods may be made in any reasonable manner and by any reasonable means. The UCC permits acceptance of an offer to buy goods ―either by a prompt promise to ship or by the prompt or current shipment of conforming or nonconforming goods‖ Conforming goods, of course, are in accord with the terms of the parties‘ contract, and nonconforming goods are not. The prompt shipment of nonconforming goods constitutes both an acceptance, which creates a contract, and a breach of a contract for their sale.

In this problem, the facts indicate that the goods provided by Simply Surgical were conforming and that NEPG accepted them within the meaning of the UCC. NEPG ordered parts from Simply Surgical that Iscon manufactured according to NEPG‘s specifications, and each party in the chain of distribution certified that the parts conformed to those specifications. NEPG did its own inspection before accepting the parts, and sent the parts to Kyphon with a certification that they conformed to Kyphon‘s specifications. Kyphon also inspected the parts, but this was not a requirement of the contract between NEPG and Simply Surgical. In fact, there is no indication that NEPG even mentioned Kyphon‘s acceptance or rejection of the parts to Simply Surgical.

In the actual case on which this problem is based, the court issued a judgment in favor of Simply Surgical. A state intermediate appellate court affirmed, in part, on the facts and reasoning stated here.

43. Express Warranties. George Gregory, a competitive shotgun shooter, sent his Winchester Model 21 to Connecticut Shotgun Manufacturing Company (CSM) for repairs. While CSM was working on the Model 21, Gregory contacted Lou Frutuoso, one of CSM‘s salespersons. Gregory wanted to purchase two Grand American shotguns—a 12-gauge and a 28-gauge—that matched the specifications of his Model 21. Gregory received an order confirmation and terms and conditions for the sale of the two shotguns from CSM. The confirmations included specifications for the guns but did not state in writing that they would match the specifications of Gregory‘s Model 21. When the shotguns were delivered, their weights and dimensions were incorrect, according to Gregory, and they did not match the Model 21 specifications. Gregory filed a suit in a Texas state court against CSM, alleging breach of warranty. Because Gregory‘s claims about matching specifications contradicted the express terms of the order confirmation, however, the court ruled in CSM‘s favor.

Did CSM breach an express warranty? Explain your reasoning. [Gregory v. Connecticut Shotgun Manufacturing Co., 2017 WL 511222 (Tex. App.—Tyler 2017)] (See Warranties.)

Solution

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No. CSM did not breach an express warranty in its transaction with Gregory—to the contrary, Gregory‘s claims contradicted the express terms of CSM‘s order confirmation.

This is clear from the facts of this problem. Gregory ordered a pair of shotguns from CSM. The gun maker responded with an order confirmation that included the specifications for each gun.

According to Gregory, however, the guns as delivered were not the correct weight or dimensions, were painful to shoot, and did not aim correctly. He further claimed that they did not match the specifications of the Winchester Model 21 that he had sent to CSM for repair. Because these claims contradicted the express terms of the order confirmation, his suit against CSM, for breach of warranty, ended in a decision in favor of the defendant.

In the actual case on which this problem is based, Gregory appealed, and a state intermediate appellate court affirmed the decision in CSM‘s favor. This result does not mean that Gregory‘s claims were baseless, however. CSM‘s sales staff might have misled its customer—through puffery or other legal means—to believe that the specifications of his order would match those of the gun that he sent CSM for repairs. If so, they acted unethically. To avoid future lawsuits, negative publicity, and unhappy customers, CSM might remind its sales staff to make certain that its customers clearly understand the terms of a deal.

44. Implied Warranties. Harold Moore bought a barrel-racing horse named Clear Boggy from Betty Roper, who appraises barrel-racing horses, for his daughter. (Barrel racing is a timed rodeo event in which a horse and rider attempt to complete a cloverleaf pattern around preset barrels.) Clear Boggy was promoted for sale as a competitive barrel-racing horse. Roper represented that Clear Boggy did not have any performance issues or medical problems. Shortly after the purchase, Clear Boggy began exhibiting significant performance problems, including nervousness, unwillingness to practice, and stalling at the first barrel during runs. Roper then disclosed that the horse had been given shoulder injections before the sale and had previously stalled in competition. A veterinarian told Moore the horse suffered from arthritis, impinged vertebrae, foot problems, and a right hind leg fracture. Moore paid for a surgery to repair the fracture, but Clear Boggy remained unfit for competition. Moore also discovered that the horse had been scratched from competition before the sale because of injuries. Can Moore prevail in a lawsuit against Roper for breach of the implied warranty of fitness for a particular purpose? Why or why not? [Moore v.

Roper, ___ F.Supp.3d ___, 2018 WL 1123868 (E.D.Okla. 2018)] (See Warranties.)

Solution Yes. Moore most likely could prevail in a claim for breach of the implied warranty of fitness for a particular purpose. Moore must show that Roper knows both (1) the particular purpose for which a Moore will use the horse, and (2) that Moore was relying on the skill and judgment of the seller to select suitable goods.

Based on the facts of this problem, both of these elements appear to be satisfied. Roper knew that Moore was looking for a barrel-racing horse for his daughter to use in competitions. Roper was also an appraiser of competitive barrel racing horses, so she had special skill in assessing their value (including medical condition, treatments, and performance history). She marketed Clear Boggy as a competitive barrel racing horse and the horse had previously raced in competitions.

Even when the buyer had specifically inquired about the horse‘s medical condition and performance, Roper did not disclose a fractured hind leg, shoulder injections, or previous performance issues.

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In the actual case on which this problem is based, Roper filed a motion to dismiss Moore‘s implied warranty of fitness claim. The court reviewed the requirements and facts stated above, and concluded that Moore had adequately pled a claim for breach of implied warranty of fitness for a particular purpose. The court allowed Moore‘s claim to go forward to trial.

45. The IDDR Approach and Sales and Lease Contracts. Camal Terry signed a ―Sales Contract‖ to buy a 1995 BMW 3 Series from Robin Drive Auto, a car dealership in Delaware. Terry agreed to pay $4,995 and Robin Drive agreed to hold the BMW for him in contemplation of a sale within twenty-one days. Also specified were a down payment of $1,200 and the timing of other payments. The payment schedule, however, exceeded the sale date by three weeks. In addition, the contract provided that the payments were fees for storage and ―prep‖ and were not deductible from the car‘s price. Terry paid more than $1,000 before asking Robin Drive to refund it. When the dealership refused, Terry filed a suit in a Delaware state court against Robin Drive.

Testimony about the mismatched contract terms was conflicting. [Terry v. Robin Drive Auto, 2017 WL 65842 (Del.Com.Pl. 2017)] (See Formation of Sales and Lease Contracts.)

1.

Ethically, what is wrong with this deal? Explain.

Solution From an ethical (and legal) perspective, what is wrong with this deal for a BMW is the lack of clarity in the written ―Sales Contract,‖ the discrepancy among its terms, and the parties‘ conflicting testimony about their agreement. The situation could have been fixed by an expression of definite terms or by terms of sufficient clarity that a court could supply whatever was missing and fashion a remedy. This fix would have protected the rights of the deal‘s stakeholders—Robin Drive Auto and Camal Terry.

From a legal (and ethical) perspective, the Uniform Commercial Code (UCC) governs the creation, interpretation, and enforcement of this sales contract—it involves a merchant selling goods to a consumer. The UCC imposes an obligation of good faith into every sales contract.

In the case of a merchant, good faith means honesty in fact and the observance of reasonable commercial standards of fair dealing.

The UCC provides open-term provisions that can be used to fill the gaps in a contract. All that is necessary to prove the existence of a contract is an indication that there is a contract.

Missing terms can be proved by evidence, or it will be presumed that what the parties intended was whatever is reasonable.

In this problem, however, the agreement contained ambiguities and contradictions in its terms for the price of the goods and the date for full payment. With regard to the merchant seller, this likely violated the UCC‘s requirement of good faith. In Terry‘s suit, the court would have been unable to determine the parties‘ intent from their ―Sales Contract‖ and conflicting testimony. The court may have had no choice but to hold the contract void from the outset.

If the contract were held to be void, Terry could not use it as a basis to recover from Robin Drive. But this would have the effect of unjustly enriching the auto dealer by the amount of Terry‘s payments. In the actual case on which this problem is based, the court rendered a decision from which Terry appealed. A state intermediate appellate court awarded Terry damages, on the basis of unjust enrichment, in the amount of the payments that he could prove had been made.

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2.

Using the IDDR approach, consider whether Robin Drive has an ethical obligation to use a different contract in its sales to consumers.

Solution To be more successful, Robin Drive has an ethical obligation to redraft its contract to use with its sales to consumers. In the Terry case, the contract could have been fixed by an expression of definite terms or by terms of sufficient clarity that a court could supply whatever was missing and fashion a remedy. This draft would have satisfied the auto dealer‘s ethical duty in subsequent deals.

The IDDR approach has four steps, starting with an Inquiry to set out the issue, list the stakeholders, and identify applicable ethical standards. The issue here is whether Robin Drive has an ethical obligation to use, in its sales to consumers, a contract that is different from the one at the center of the Terry case. Stakeholders include the dealer‘s owners and employees, including its salespersons, its customers, other auto dealers, and the general public.

The IDDR approach‘s next step is a Discussion that considers actions to address the issue. The strengths and weaknesses of the actions, and the consequences and the effects on the stakeholders, are factors to consider. Why should Robin Drive redraft its contract? Making changes could avoid future litigation and, perhaps more importantly, effectively thwart bad reviews related to the current contract. What should such changes consist of? As recognized in the answer to the previous question, the problems with the auto dealer‘s contract include its lack of clarity and the discrepancy among its terms. Those terms could be made consistent and clear, with phrasing in ―plain language.‖ The weaknesses might include the expense of having the contract rewritten and the loss of business from any consumers who would balk at the terms once they are clear. The cost of a redraft could be small compared to an increase in sales to consumers who understand their deals. And some terms could be negotiated with buyers who would otherwise ―walk.‖ The approach‘s third step is to arrive at a Decision and state the reasons. The decision here would seem to be to rewrite the contract. To do nothing would have the obvious effect of changing nothing—no potential increase in business, for example, among consumers who want their deals to be clear. Reasons in support of this decision are stated above—avoiding litigation, thwarting bad reviews, and enhancing the dealer‘s reputation among the general public. Other results might be more confident salespersons and trusting customers, which could affect competition in the local market among other auto dealers.

The approach‘s final step is a Review of the success or failure of the action to resolve the issue, and satisfy the stakeholders. If the issue were phrased as a question about the ethical obligation of the dealer to redraft its contract, then doing so would resolve the issue. Such a fix could have the added value of meeting a merchant‘s good faith obligation under the law, and could lead to more business. This would seem to be a win-win-win situation for Robin Drive.

Critical Thinking and Writing Assignments 1.

Warranties. Milan purchased saffron extract that was marketed online by Dr. Chen as ―America‘s Hottest New Way to a Flat Belly.‖ Dr. Chen‘s website stated that recently published studies

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showed a significant weight loss (more than 25 percent) for people who had used pure saffron extract as a supplement without diet or exercise. Dr. Chen stated that the saffron suppresses appetite by increasing levels of serotonin, which reduces emotional eating. Milan took the extract as directed without any resulting weight loss. (See Warranties.)

1.

The first team will determine whether Dr. Chen‘s website made any express warranty on the saffron extract or its effectiveness in causing weight loss.

Solution A seller can create an express warranty by making representations concerning the quality, condition, description, or performance potential of the goods. An express warranty arises when a seller or lessor indicates that the goods conform to (1) any affirmation of fact or promise that the seller makes to the buyer about the goods, (2) any description of the goods, and (3) any sample or model of the goods shown to the buyer. Express warranties can be found in a seller‘s ad, brochure, or other promotional materials, in addition to being made orally or in a written contract. The buyer must rely on the representation at the time of entering into the agreement, and the reliance must be reasonable.

In this problem, Chen‘s website stated that studies showed a significant weight loss (over 25 percent) for people who used Chen‘s product without diet and exercise. This would seem to be an express warranty—an affirmation of fact or a promise as to what a buyer could expect of the goods.

2.

The second team will discuss whether the implied warranty of merchantability applies to the purchase of weight-loss supplements.

Solution Every sale of goods made by a merchant who deals in goods of the kind sold automatically gives rise to an implied warranty of merchantability. Weight loss supplements are not services, real estate, or securities—they are goods. Thus, the implied warranty of merchantability applies to the purchase of weight loss supplements.

3.

The third team will decide if Dr. Chen‘s sale of saffron extract breached the implied warranty of fitness for a particular purpose.

Solution The implied warranty of fitness for a particular purpose arises in the sale of goods when a seller knows the particular purpose for which a buyer will use the goods and that the buyer is relying on the skill and judgment of the seller to select suitable goods. A seller need not have actual knowledge of the buyer‘s particular purpose. It is sufficient if a seller has reason to know the purpose.

In this problem, Chen promoted and sold his product as a weight loss supplement. This would give him reason to know a buyer‘s particular purpose in purchasing the product was to lose weight. Milan bought the product from Chen. Its failure to fulfill its advertised promise would seem to breach the implied warranty of fitness for a particular purpose.

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Table of Contents Critical Thinking Questions in Cases ................................................................................................................... 159 Case 13.1 ............................................................................................................................................... 159 Case 13.2 ............................................................................................................................................... 159 Case 13.3 ............................................................................................................................................... 161 Chapter Review ........................................................................................................................................................... 161 Practice and Review .............................................................................................................................. 161 Practice and Review: Debate This ......................................................................................................... 163 Issue Spotters ........................................................................................................................................ 163 Business Scenarios and Case Problems ................................................................................................. 163 Critical Thinking and Writing Assignments ............................................................................................ 172

Critical Thinking Questions in Cases Case 13.1 179.

Do the principles applied to a written guaranty in this case also govern electronically recorded agreements and contracts entered into online? Why or why not?

Solution Yes. Electronically recorded agreements and contracts entered into online are governed by the principles applied in this case to a written guaranty. The chief principle applied here is that a court will enforce a fully negotiated and voluntarily signed agreement that sets out precisely and unambiguously the rights and obligations of two sophisticated parties. There is nothing in the language, reasoning, or application of this principle by the court that indicates this would not equally apply to electronically recorded agreements and contracts entered into online.

180. Suppose that O‘Neill had alleged a history of performance with HSBC that would have made his reliance on the complained-of representations reasonable. Could this have changed the result?

Solution In the HSBC case, the court upheld a fully negotiated and voluntarily signed guaranty agreement, determining that its provisions ―put the kibosh‖ on the fraud claim of the ―primary obligor.‖ But if a creditor fraudulently induces a party to act as a guarantor on a debt, the guarantor may successfully assert fraud as a defense. Thus, if O‘Neill had alleged a history of performance with HSBC that would have made his reliance on the complained-of fraud reasonable, and O‘Neill could have proved the fraud, the result would likely have been different.

Case 13.2 1.

In determining whether a debtor‘s failure to keep adequate records was justified, the Bankruptcy Code requires a determination based on all the circumstances of the case. What factors might a court weigh in making this determination?

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Solution To determine whether a debtor‘s record keeping is adequate and therefore justified, to support a discharge in bankruptcy, the Bankruptcy Code requires the court to make a determination based on ―all the circumstances of the case.‖ Factors that the court might weigh in making this determination include, in particular, the debtor‘s education, experience, and sophistication. Of course, the number and complexity of the transactions, and their relation to the debtor‘s financial situation, are paramount considerations. The court should also decide what records someone in the debtor‘s circumstances would keep.

In the Dykes‘s bankruptcy proceeding, for example, the debtors did not have the same duty to create, preserve, and provide records of their financial transactions as a debtor operating a business. But Dykes was, in the court‘s estimation, ―a well-educated and sophisticated collector of highly valuable watches and jewelry.‖ And even in the circumstance of a consumer bankruptcy, a debtor has a duty to keep records of ―a sudden and large dissipation of assets.‖.

2.

How might the Dykes have established, or at least indicated, the fair market value of the watches and jewelry at the time of their return in order to avoid the result in this case? Explain.

Solution Under the Bankruptcy Code, the test of the adequacy of financial records to avoid denial of discharge is whether the documentation is sufficient to determine the debtor‘s financial condition.

The records should cover a debtor‘s business and other transactions for a reasonable period. The debtor should take such steps as fair dealing and common sense would suggest. In addition to the court, creditors should also be able to learn what has taken place.

In the Dykes‘ case, the debtors could have matched each watch and piece of jewelry with an invoice in their possession, they could have noted the purchase price of each item charged by the jeweler, and they could have insisted that the jeweler further document the amount each returned item reduced their debt. These records might have provided the court with sufficient information to assess the debtors‘ situation and prevent denial of discharge on the ground that the records were inadequate. The information would also have allowed the debtors to challenge the jeweler‘s claim against their estate, if necessary.

Of course, the Dykes did not provide such records, leaving serious, unanswered questions as to their financial condition, as well as the legitimacy of the jeweler‘s claim.

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Case 13.3 181.

Maryland law arguably does not include post-secondary education expenses in the definition of ―child support.‖ Should this state law have governed the court‘s conclusion? Why or why not?

Solution No. Maryland state law should not have determined the court‘s conclusion in the Chamberlain case. The Bankruptcy Code is federal law. In the context of a bankruptcy proceeding, the characterization of an obligation to pay for children‘s college education, or any other debt ascribed at the time of a divorce, as a ―domestic-support obligation‖ would be a question of federal law.

In other words, a debt may qualify as ―support‖ for the purpose of a federal bankruptcy proceeding even if that obligation does not fit the definition of ―support‖ under state law.

182.

Suppose that the marital settlement agreement had obligated Stephen to assume the mortgage debt on the family home. If all other facts were the same, would the result have been different? Explain.

Solution No. The result in the Chamberlain case would not likely have been different if the marital settlement agreement had obligated Stephen to take on the mortgage debt of the family home Assuming all of the other facts were the same—particularly the couple‘s relative financial circumstances—the reasons that led the court to conclude the obligation to pay the children‘s college education was ―in the nature of support‖ would have contributed to the same conclusion about a promise to pay the mortgage debt. Most likely, the couple would have viewed a home as a significant part of their children‘s upbringing, they would have intended to provide such a home, and Stephen would have been the parent most able to assume the debt to pay for it.

Chapter Review Practice and Review Three months ago, Janet Hart‘s husband of twenty years died of cancer. Although he had medical insurance, he left Janet with outstanding medical bills of more than $50,000. Janet has worked at the local library for the past ten years, earning $1,500 per month. Since her husband‘s death, Janet has also received $1,500 in Social Security benefits and $1,100 in life insurance proceeds every month, for a total monthly income of $4,100. After she makes the mortgage payment of $1,500 and pays the amounts due on other debts, Janet has barely enough left to buy groceries for her family (she has two teenage daughters at home). She decides to file for Chapter 7 bankruptcy, hoping for a fresh start. Using the information presented in the chapter, answer the following questions.

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183.

What must Janet do before filing a petition for relief under Chapter 7?

Solution All debtors must receive credit counseling from an approved nonprofit agency within the 180-day period preceding the date of filing a petition in bankruptcy. Therefore, before Janet can file her petition, she needs to attend either an individual or group briefing from an approved creditcounseling agency.

184.

How much time does Janet have after filing the bankruptcy petition to submit the required schedules? What happens if Janet does not meet the deadline?

Solution Janet must file the required schedules within 45 days after filing her petition—unless she gets an extension of up to 45 days. If she does not meet the deadline, then her case is automatically dismissed.

185.

Assume that Janet files a petition under Chapter 7. Further assume that the median family income in the geographic area in which Janet lives is $49,300. What steps would a court take to determine whether Janet‘s petition is presumed to be ―substantial abuse‖ using the means test?

Solution To determine whether Janet‘s petition is presumed to be ―substantial abuse,‖ the court would calculate Janet‘s average monthly income for recent months (less certain allowed expenses). If Janet‘s income exceeds the state‘s median family income, further calculations are made to determine whether she has sufficient disposable income to repay at least some of her unsecured debts.

In making these calculations, the debtor‘s recent monthly income is presumed to continue for the next sixty months, and allowable living expenses and secured debt payments (such as mortgage payments) are deducted. Once the debtor‘s future disposable income has been estimated, that amount is used to determine whether the debtor will have income that could be applied to unsecured debts.

186.

Suppose that the court determines that no presumption of substantial abuse applies in Janet‘s case. Nevertheless, the court finds that Janet does have the ability to pay at least a portion of the medical bills out of her disposable income. What would the court likely order in that situation?

Solution If a court found that Janet had an ability to pay a portion of her deceased husband‘s medical bills, a court would convert her bankruptcy case to a Chapter 13, individual repayment plan.

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Practice and Review: Debate This 187.

Rather than being allowed to file Chapter 7 bankruptcy petitions, individuals and couples should always be forced to make an effort to pay off their debts through Chapter 13.

Solution Every time consumers deprive creditors of repayment by successfully obtaining Chapter 7 protection, the creditors‘ costs rise. Consequently, all business that extend credit must raise the interest rates they charge to all borrowers to cover these increased costs. Therefore, allowing consumers to simply walk away from bone fide debts imposes extra burdens on all other borrowers.

Not all borrowers default on their debt repayments just because they borrowed ―too‖ much.

Sometimes, unplanned events occur, such as illness, infirmity, and protracted unemployment. It would not only be unfair, but unrealistic to think that everyone could repay even part of what was owned through use of a Chapter 13 plan. No one wants Chapter 7 to be abused, but means testing at least partially takes care of the problem of abuse in filing Chapter 7 plans.

Issue Spotters 11. Jorge contracts with Larry of Midwest Roofing to fix Jorge‘s roof. Jorge pays half of the contract price in advance. Larry and Midwest complete the job, but Jorge refuses to pay the rest of the price. What can Larry and Midwest do?

Solution Each of the parties can place a mechanic‘s lien on the debtor‘s property. If the debtor does not pay what is owed, the property can be sold to satisfy the debt. The only requirements are that the lien be filed within a specific time from the time of the work, depending on the state statute, and notice of the foreclosure and sale must be given to the debtor in advance.

12. After graduating from college, Tina works briefly as a salesperson before filing for bankruptcy. As part of her petition, Tina reveals her only debts are student loans, taxes accruing within the last year, and a claim against her based on her misuse of customers‘ funds during her employment.

Are these debts dischargeable in bankruptcy? Explain.

Solution No. Besides the claims listed in this problem, the debts that cannot be discharged in bankruptcy include amounts borrowed to pay back taxes, goods obtained by fraud, debts that were not listed in the petition, domestic-support obligations, certain cash advances, and others.

Business Scenarios and Case Problems 46. Liens. Nabil is the owner of a relatively old home valued at $105,000. The home‘s electrical system is failing, and the wiring needs to be replaced. He contracts with Kandhari Electrical to replace the electrical system. Kandhari performs the repairs, and on June 1 submits a bill of $10,000 to Nabil. Because of financial difficulties, Nabil does not pay the bill. Nabil‘s only asset is his home. His state‘s homestead exemption is $60,000. Discuss fully Kandhari‘s remedies in this situation. (See Laws Assisting Creditors.)

Solution Kandahari‘s has basically two remedies in this situation. The best remedy would be to file a mechanic‘s lien on the home of Nabil. When a person furnishes labor and materials to improve

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the realty of the owner and does not receive payment, that person can file a mechanic‘s lien against the property. The filing must take place within a statutory period (usually 60 to 120 days), measured in most states from the last day the materials or labor were furnished. Failure by Nabil to pay the debt after the filing allows lienholder Kandahari‘s to foreclose on the real estate to satisfy the debt. Notice of foreclosure must be given to Nabil. From the proceeds of the sale, all costs to Kandahari‘s and the debt of $10,000 will be deducted, with the remainder paid to Nabil.

Homestead exemptions cannot be applied to foreclosure under mechanic‘s liens.

The second remedy would be to reduce the $10,000 debt to judgment and then obtain a writ of execution (levy) on Nabil‘s property. Nabil‘s only property is his homestead and its contents. In this state, the homestead is exempt up to an amount of $60,000. Because the value of the homestead exceeds this amount, Kandahari‘s could exercise the writ by having the homestead sold at public auction. If the sale proceeds exceed $60,000 ($60,000 must be paid to Nabil), the excess can be used by Kandahari‘s to cover the foreclosure costs incurred and the debt, with any surplus returned to Nabil. Should the proceeds exceed $60,000 but not cover the costs incurred and the debt, Kandahari‘s is entitled to a deficiency judgment that allows her to go after other nonexempt property owned by Nabil. In this case, however, there is none.

47. Voluntary versus Involuntary Bankruptcy. Burke has been a rancher all her life, raising cattle and crops. Her ranch is valued at $500,000, almost all of which is exempt under state law. Burke has eight creditors and a total indebtedness of $70,000. Two of her largest creditors are Oman ($30,000 owed) and Sneed ($25,000 owed). The other six creditors have claims of less than $5,000 each. A drought has ruined all of Burke‘s crops and forced her to sell many of her cattle at a loss.

She cannot pay off her creditors. (See Chapter 7—Liquidation.)

1.

Under the Bankruptcy Code, can Burke, with a $500,000 ranch, voluntarily petition herself into bankruptcy? Explain.

Solution Any person, including a rancher or farmer, can voluntarily petition himself or herself into bankruptcy. The person has only to be a debtor. This includes partnerships and corporations that are liable on a claim held by a creditor, as well as individuals. The debtor does not have to be insolvent to file a petition. Under the Code, debtors are presumed to be insolvent when their debts exceed the fair market value of nonexempt assets. Thus, even though Burke owns a $500,000 ranch and has debts of only $70,000, she can voluntarily petition herself into bankruptcy.

2.

Could either Oman or Sneed force Burke into involuntary bankruptcy? Explain.

Solution Neither Oman nor Sneed—nor any combination of Burke‘s creditors—can involuntarily petition Burke into bankruptcy. The Code provides that involuntary bankruptcy proceedings cannot be commenced against a farmer. The definition of a farmer includes persons who receive 50 percent of their gross income from farming operations such as tilling the soil, ranching, or the production or raising of crops or livestock. Because Burke obviously fits the definition of a farmer, no creditor can force her into bankruptcy.

48. Guaranty. Timothy Martinez, owner of Koenig & Vits, Inc. (K&V), guaranteed K&V‘s debt to Community Bank & Trust. The guaranty stated that the bank was not required to seek payment of

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the debt from any other source before enforcing the guaranty. K&V defaulted. Through a Wisconsin state court, the bank sought payment of $536,739.40, plus interest at the contract rate of 7.5 percent, from Martinez. Martinez argued that the bank could not enforce his guaranty while other funds were available to satisfy K&V‘s debt. For example, the debt might be paid out of the proceeds of a sale of corporate assets. Is this an effective defense to a guaranty? Why or why not?

[Community Bank & Trust v. Koenig & Vits, Inc., 346 Wis.2d 279 (Wis.App. 2013)] (See Laws Assisting Creditors.)

Solution No. Martinez‘s argument that the bank could not enforce his guaranty while other funds were available to satisfy K&V's debt—for example, that the debt might be paid out of the proceeds of a sale of corporate assets—is not an effective defense to the guaranty in the Community case. The guaranty contract terms determine the extent and time of the guarantor‘s liability. Thus, a defense such as Martinez asserted might be defeated by the language of the guaranty—for example, it might state or indicate that payment is ―unconditionally guaranteed‖ or that the creditor ―is not required to seek payment of the principal‘s debt from any other source to enforce the guaranty.‖ In this problem, Timothy Martinez, owner of Koenig & Vits, Inc. (K&V), guaranteed the firm‘s debt to Community Bank & Trust. When K&V defaulted, the bank sought payment of the debt from Martinez. Martinez made the argument stated above. But the guaranty expressly stated that the bank was not required to seek payment of the debt from any other source before enforcing the guaranty. This language is sufficient to support the rejection of Martinez‘s argument.

In the actual case on which this problem is based, in the bank‘s suit in a Wisconsin state court against Martinez to recover the amount of the debt, the court ruled in the bank‘s favor. A state intermediate appellate court affirmed. ―The terms of the guaranty compel us to reject all permutations of this argument. * * * It is no defense to the guaranty that other funds may be available [now or] in the future to be applied to the bank's debt.‖ 49. Discharge. Michael and Dianne Shankle divorced. An Arkansas state court ordered Michael to pay Dianne alimony and child support, as well as half of the $184,000 the couple had in investment accounts. Instead, he withdrew more than half of the investment funds and spent them. Over the next several years, the court repeatedly held Michael in contempt for failing to pay Dianne. Six years later, Michael filed for Chapter 7 bankruptcy, including in the petition‘s schedule the debt to Dianne of unpaid alimony, child support, and investment funds. Is Michael entitled to a discharge of this debt? Why or why not? [In re Shankle, 554 Fed.Appx. 264 (5th Cir. 2014)] (See Chapter 7— Liquidation.)

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Solution No. Michael is not entitled to a discharge of the debt to Dianne of half of the amount in the investment accounts or the unpaid alimony and child support. The debt qualifies as an exception to discharge. As far as a debtor is concerned, the primary purpose of a liquidation proceeding is to obtain a fresh start through a discharge of debts. But certain debts are not dischargeable in bankruptcy. Claims that are not dischargeable in bankruptcy include domestic-support obligations and property settlements provided for in a divorce decree and claims based on willful or malicious conduct by the debtor toward another.

In this problem, on Michael and Dianne‘s divorce, a court ordered Michael to pay alimony and child support and to tender half of the couple‘s $184,000 in their investment accounts to Dianne.

Michael did not comply with this order, but withdrew half of the investment funds and spent them on himself. Meanwhile, the court repeatedly held him in contempt for failing to pay Dianne alimony, child support, and half of the investment funds. These items are nondischargeable because they are domestic-support obligations and part of the property settlement provided for in the parties‘ divorce decree. The unpaid investment funds also constitute a claim based on Michael‘s willful and malicious conduct towards Dianne. Michael deliberately defied multiple contempt orders to leave Dianne uncompensated, thereby certain to inflict harm on her.

In the actual case on which this problem is based, the court concluded that Michael's conduct was willful and malicious and that therefore the debt to Dianne listed in the petition‘s schedule was nondischargeable. On Michael‘s appeal, the U.S. Court of Appeals for the Fifth Circuit affirmed.

50. Business Case Problem with Sample Answer— Liens. Daniel and Katherine Balk asked Jirak Construction, LLC, to remodel their farmhouse in Lawler, Iowa. Jirak provided the Balks with an initial estimate of $45,975 for the cost. Over the course of the work, the Balks made significant changes to the plan. Jirak agreed to the changes and regularly advised the Balks about the increasing costs. In mid-project, Jirak provided an itemized breakdown at their request. The Balks paid Jirak $67,000, but refused to pay more. Jirak claimed that they still owed $55,000 in labor and materials. Jirak filed a suit in an Iowa state court against the Balks to collect. Which of the liens discussed in this chapter would be most helpful to Jirak in its attempt to collect? How does that type of lien work? Is the court likely to enforce it in this case? Explain. [Jirak Construction, LLC v.

Balk, 863 N.W.2d 35 (Iowa App. 2015)] (See Laws Assisting Creditors.)

—For a sample answer to Problem 13–5, go to Appendix D. Solution Among the liens discussed in this chapter, a mechanic‘s lien would likely be most effective to Jirak in its attempt to collect the unpaid cost of its work for the Balks. A creditor can place a mechanic‘s lien on the real property of a debtor who has contracted for improvements to the property and has not paid the price. When a creditor obtains a mechanic‘s lien, the debtor‘s real estate becomes security for the debt. If the debtor does not pay, the creditor can foreclose on the property and sell it to collect the amount due.

In this problem, the Balks contracted with Jirak for the remodel of their farmhouse. Due to the Balks‘ changes to the project during the course of the work, the costs exceeded the amount of Jirak‘s original estimate. Although Jirak regularly advised the Balks about the increasing costs and provided an itemized breakdown at their request, they refused to pay the price. The use of a mechanic‘s lien is likely the best way for Jirak to collect the unpaid amount.

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In the actual case on which this problem is based, Jirak filed a suit in an Iowa state court against the Balks to foreclose on their property by way of a mechanic‘s lien and collect the unpaid amount. The court entered a judgment in Jirak‘s favor and enforced the lien. A state intermediate appellate court affirmed the judgment.

51. Discharge under Chapter 13. James Thomas and Jennifer Clark married and had two children.

They bought a home in Ironton, Ohio, with a loan secured by a mortgage. Later, they took out a second mortgage. On their divorce, the court gave Clark custody of the children and required Clark to pay the first mortgage. The divorce decree also required Thomas and Clark to make equal payments on the second mortgage and provided that Clark would receive all proceeds on the sale of the home. Thomas failed to make any payments, and Clark sold the home. At that point, she learned that Auto Now had a lien on the home because Thomas had not made payments on his car. Clark used all the sale proceeds to pay off the lien and the mortgages. When Thomas filed a petition for a Chapter 13 bankruptcy in a federal bankruptcy court, Clark filed a proof of claim for the mortgage and lien debts. Clark claimed that Thomas should not be able to discharge these debts because they were part of his domestic-support obligations. Are these debts dischargeable?

Explain. [In re Thomas, 591 Fed.Appx. 443 (6th Cir. 2015)] (See Bankruptcy Relief under Chapter 12 and Chapter 13.)

Solution No. Thomas‘s mortgage and lien debts are not dischargeable in a Chapter 13 bankruptcy case.

Domestic-support obligations, such as child support and alimony, are excepted from the automatic stay provision and from discharge under most, if not all, circumstances on a bankruptcy petition, including one filed under Chapter 13. And claims for domestic-support obligations have the highest priority among unsecured claims, so these debts must be paid first.

Here, when Clark and Thomas divorced, the decree gave Clark custody of their children, required Clark to pay their first mortgage, required Thomas and Clark to make equal payments on a second mortgage, and provided that Clark would receive all proceeds on the sale of the home.

Thomas failed to make any payments, and Clark sold the home. She then learned that Auto Now had a lien on the home because Thomas had not made payments on his car. Clark used all the sale proceeds to pay off the lien and the mortgages. When Thomas filed a petition for a Chapter 13 bankruptcy, Clark filed a proof of claim to collect on the mortgage and lien debts. These debts could be construed as non-dischargeable domestic-support obligations. At the time of the divorce, the parties and the court most likely intended the mortgage debt to serve as a support obligation and in fact the debt actually provided support.

In the actual case on which this problem is based, Thomas filed a petition for a Chapter 13 bankruptcy in a federal bankruptcy court. Clark filed a proof of claim for the mortgage and lien debts. Over Thomas‘s objection, the court ruled that the debts were non-dischargeable domesticsupport obligations. The U.S. Court of Appeals for the Sixth Circuit affirmed this ruling.

52. Garnishment. Grand Harbour Condominium Owners Association, Inc., obtained a judgment in an Ohio state court against Gene and Nancy Grogg for $45,458.86. To satisfy the judgment, Grand Harbour filed a notice of garnishment with the court, seeking funds held by the Groggs in various banks. The Groggs disputed Grand Harbour‘s right to garnish the funds. They claimed that the funds were exempt Social Security and pension proceeds, but they offered no proof of this claim.

The banks responded by depositing $23,911.97 with the court. These funds were delivered to Grand Harbour. Later, the Groggs filed a petition for bankruptcy in a federal bankruptcy court.

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After they were granted a discharge, they filed a ―motion to return funds to debtors‖ but provided no evidence that their debt to Grand Harbour had been included in the discharge. What is Grand Harbour‘s best argument in response to the Groggs‘ motion? [Grand Harbour Condominium Owners Association, Inc. v. Grogg, 2016-Ohio-1386 (Ohio App. 2016)] (See Laws Assisting Creditors.)

Solution In response to the Groggs‘ motion, Grand Harbour can successfully argue any or all of the following: 1.

2.

3.

The Groggs did not provide any evidence to support their claim that the funds garnished from their bank accounts and delivered to Grand Harbour represented exempt Social Security and pension proceeds.

The funds in those accounts were attached before the Groggs filed for bankruptcy.

There is no evidence that the discharge in the Groggs‘ bankruptcy included Grand Harbour‘s judgment.

Grand Harbour might also assert that under the circumstances only the bankruptcy trustee (a party who has authority over a debtor‘s assets during a bankruptcy proceeding) could avoid the transfer of the funds from the banks.

In any case, with garnishment, a creditor can obtain a debtor‘s funds or other property in the possession of a third party. A proceeding for garnishment of property, other than personal earnings, may be commenced. After a creditor obtains a judgment on a debt, that creditor can commence a garnishment proceeding by filing written notice with the appropriate court. The debtor is then given an opportunity for a hearing at which the right to garnish can be disputed. If the debtor does not respond, waives the hearing, or does not appear, the right to garnish can be upheld. The garnishee is notified and the garnishment can proceed.

These steps occurred in this case. Grand Harbour was the creditor, the Groggs were the debtors, an Ohio state court was the appropriate court for the garnishment notice, the Groggs‘ banks were garnishees, and the garnishment proceeded. The result was a disbursement of the debtors‘ funds to the creditor. The Groggs later filed for bankruptcy in a federal court, giving rise to the events set out in the facts of the problem.

In the actual case on which this problem is based, the court in which the Groggs filed their ―motion for return of funds to debtors‖ denied the motion. A state intermediate appellate court affirmed, based on the arguments noted here. In addition, the Groggs cited no authority to support their claim for a return of the funds.

53. Liquidation Proceedings. Jeffrey Krueger and Michael Torres, shareholders of Cru Energy, Inc., were embroiled in litigation in a Texas state court. Both claimed to act on Cru‘s behalf, and each charged the other with attempting to obtain control of Cru through fraud and other misconduct.

Temporarily prohibited from participating in Cru‘s business, Krueger formed Kru, a company with the same business plan and many of the same shareholders as Cru. Meanwhile, to delay state court proceedings, Krueger filed a petition for Chapter 7 liquidation in a federal bankruptcy court.

He did not reveal his interest in Kru to the bankruptcy court. Ownership of Krueger‘s Cru shares passed to the bankruptcy trustee, but Krueger ignored this. He called a meeting of Cru‘s shareholders— except Torres—and voted those shares to remove Torres from the board and elect

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himself chairman, president, chief executive officer, and treasurer. The Cru board then dismissed all of Cru‘s claims against Krueger in his suit with Torres. Are there sufficient grounds for the bankruptcy court to dismiss Krueger‘s bankruptcy petition? Discuss. [In re Krueger, 812 F.3d 365 (5th Cir. 2016)] (See Chapter 7—Liquidation.)

Solution Yes. There are sufficient grounds for the bankruptcy court to dismiss Krueger‘s petition for a Chapter 7 liquidation, Bad faith conduct is the basis for the court to dismiss the petition. Good faith is implicitly required for the commencement, prosecution, and confirmation of bankruptcy proceedings—a prerequisite for an honest debtor to obtain a fresh start. Acting in bad faith can serve as a ground for a bankruptcy court to dismiss a case, after notice and a hearing, for cause.

In this problem, Krueger and Torres, shareholders of Cru Energy, were suing each other in a state court, both claiming to act on Cru‘s behalf and charging each other with fraud and other misconduct. Ordered not to participate in Cru‘s business, Krueger formed Kru, with the same business plan and many of the same shareholders as Cru. Meanwhile, he filed a petition for a Chapter 7 liquidation in a federal bankruptcy court to delay the state court proceedings. He did not tell the court of his interest in Kru. Although ownership of his Cru shares had passed to the bankruptcy trustee, he called a meeting of Cru‘s shareholders—except Torres—and voted those shares to remove Torres from the board and elect himself chairman, president, chief executive officer, and treasurer. The Cru board then dismissed all of Cru‘s claims against Krueger in his suit with Torres.

Here, Krueger misled the courts and filed his bankruptcy petition for an illegitimate purpose. He sought to use the bankruptcy process as a shield against the state court‘s actions to restrain his behavior and as a sword to take control of Cru. His primary reason for filing the bankruptcy petition was not to obtain a fresh start, as an honest debtor, but to delay the state court proceedings in his litigation with Torres over control of Cru. Furthermore, he failed to inform the bankruptcy court of his interest in Kru, the formation of which was likely a violation of the state court‘s order to stay out of Cru‘s business. He violated the automatic stay imposed through his bankruptcy petition when he voted his Cru shares at the meeting of its shareholders.

In the actual case on which this problem is based, the bankruptcy court dismissed Krueger‘s case, on Torres‘s motion, for all of the reasons stated above, and more. The U.S. Court of Appeals for the Fifth Circuit affirmed this action.

54. The Reorganization Plan. Under the ―plain language‖ of the Bankruptcy Code, at least one class of creditors must accept a Chapter 11 reorganization plan for it to be confirmed. Transwest Resort Properties, Inc., and four related companies filed a petition for bankruptcy under Chapter 11. The five debtors filed a joint reorganization plan. Several classes of their creditors approved the plan.

Grasslawn Lodging, LLC, filed a claim based on its loan to two of the companies and objected to the plan. Grasslawn further asserted that the Code‘s confirmation requirement applied on a ―per debtor‖ (not a ―per plan‖) basis, and because Grasslawn was the only class member for two of the debtors, the plan did not meet the test. Can the court order a ―cram-down‖? Why or why not? [In the Matter of Transwest Resort Properties, Inc., 881 F.3d 724 (9th Cir. 2018)] (See Chapter 11— Reorganization.)

Solution

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Yes. The court in the Transwest case can order a cramdown. Under the Bankruptcy Code‘s cramdown provision, a bankruptcy court can confirm a Chapter 11 plan over the objections of one or more of the creditors if at least one class of creditors has accepted the plan. This is possible if it is demonstrated that the plan is fair and equitable.

In this problem, five related companies filed for bankruptcy under Chapter 11. The five debtors filed a joint reorganization plan. Some of their creditors approved the plan. Grasslawn Lodging was the only creditor of two of the companies. Grasslawn argued that the Code‘s confirmation requirement applied on a ―per debtor,‖ not a ―per plan,‖ basis. This plan did not meet the test, because Grasslawn was the only class member for two of the debtors, and it objected to the plan.

According to the stated facts, the Code does make a distinction concerning the creditors of different debtors under the plan, nor does it distinguish between single-debtor and multi-debtor plans. Under the ―plain language‖ of the statute, once a single class of creditors accepts a plan, the requirement for its confirmation is met.

In the actual case on which this problem is based, the court approved the plan despite Grasslawn‘s objection. The U.S. Court of Appeals for the Ninth Circuit affirmed. ―The plain language of the statute contemplates a ‗per plan‘ approach.‖ 55. The IDDR Approach and Defenses of the Guarantor. Woodsmill Park Limited Partnership borrowed $6.2 million secured by real property in Chicago, Illinois. Bill and Brian Bruce, and Matthew O‘Malley signed guaranties to meet Woodsmill‘s obligation on the loan. Woodsmill defaulted on the payments. Northbrook Bank & Trust Company filed an action in an Illinois state court against Woodsmill and the Bruces to foreclose on the property. The defendants agreed to modify the contract to resolve the claim. In exchange for Northbrook not pursuing foreclosure proceedings, the defendants promised to pay the difference between the value of the property and the unpaid amount of the loan. As part of the contract modification, the parties also stipulated, ―Nothing in this Agreement shall release or reduce O‘Malley‘s obligations under O‘Malley‘s Guaranty.‖ [Northbrook Bank & Trust Co. v. O’Malley, 2017 IL App (1st) 160438-U (2017)] (See Laws Assisting Creditors.)

1.

What is the effect on O‘Malley‘s guaranty of the agreement between Northbrook, Woodsmill, and the Bruces? Explain.

Solution The effect of the agreement between Northbrook, Woodsmill, and the Bruces on O‘Malley‘s guaranty is to relieve O‘Malley of liability. Any material change made in the terms of the original contract between the principal debtor and the creditor, including the awarding of a binding extension of time for making payment without first obtaining the consent of the surety or guarantor will discharge the surety or guarantor either completely or to the extent that the surety or guarantor suffers a loss.

In this problem, Woodsmill (a partnership) took out a loan secured by certain real property.

Bill and Brian Bruce, and Matthew O‘Malley signed guaranties on the loan. When the partnership defaulted. Northbrook Bank & Trust filed an action against the debtor and the Bruces to foreclose on the property. The defendants agreed to resolve the claim in exchange for a deed and a promise to pay the deficiency. These parties stipulated, ―Nothing in this Agreement shall release or reduce O‘Malley‘s obligations.‖ But there is no indication in the

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facts that this stipulation was agreed to with O‘Malley‘s consent or knowledge. Thus, the principles stated above apply to relieve O‘Malley of his obligation on the guaranty.

In the actual case on which this problem is based, the court issued a summary judgment in favor of O‘Malley, relieving him of liability on the guaranty. A state intermediate appellate court affirmed.

2.

Using the IDDR approach, evaluate the ethics of Northbrook, Woodsmill, and the Bruces in agreeing to the stipulation concerning O‘Malley.

Solution For O‘Malley, it was not ethical for the other parties to the loan to agree to change its terms without his consent. The law also recognizes this conclusion by permitting guarantors to assert the modification of loan contracts without their consent to discharge them.

The IDDR approach opens with an Inquiry stating the issue, the stakeholders, and the ethical standards. The issue is framed in the question: Was it ethical of Northbrook, Woodsmill, and the Bruces to agree to resolve their dispute over Woodsmill‘s debt in part by continuing O‘Malley‘s obligation for the debt according to his previously-signed guaranty? This was accomplished without O‘Malley‘s consent. The principal stakeholders are the parties to the deal that created the debt, any third parties who stand to benefit from a resolution of these parties‘ dispute, and potential borrowers and investors aware of it. Ethical standards include a duty to contract honestly and in good faith.

The IDDR approach next involves a Discussion of actions to address the issue. The strengths and weaknesses of these actions, and any consequences and effects on the stakeholders, are also considered. Here, possible actions include informing O‘Malley of the agreement before its conclusion—the stipulation of his continuing liability could then be included or excluded, depending on his response. Or the parties might have finalized an agreement that did not contain the stipulation. If the other facts in the case remained the same, taking either of these actions might result in a loss to the lender. But the parties would meet the obligation to act honestly and in good faith—their consciences with respect to O‘Malley could be clear.

The IDDR approach also requires a Decision with a statement of the reasons. The decision here would be to take either of the actions suggested above. The chief reason for taking these actions is to satisfy the parties‘ ethical duty. A more practical result might be to avoid further litigation in this case, and provide a basis for avoiding disputes in similar circumstances.

The IDDR approach has a final step—a Review of the success or failure of the actions to resolve the issue, and satisfy the stakeholders. From the perspective of the Bruces and Northbrook, it likely made sense to resolve their dispute in exchange for a deed and a promise to pay the difference between the value of the deeded property and the amount of the loan. The agreement efficiently disposed of Northbrook‘s suit, which would have cost every party additional time and money. The agreement also provided an opportunity to renegotiate the loan. For O‘Malley, however, it was not ethical for the other parties to the loan to agree to change its terms without his consent. Taking either of the actions suggested above would meet this duty, and thereby satisfy all of the stakeholders, by acting honestly and in good faith with O‘Malley while preserving the resolution of the dispute.

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Critical Thinking and Writing Assignments 1.

Discharge in Bankruptcy. Cathy Coleman took out loans to complete her college education.

After graduation, Coleman was irregularly employed as a teacher before filing a petition in a federal bankruptcy court under Chapter 13. The court confirmed a five-year plan under which Coleman was required to commit all of her disposable income to paying the student loans.

188.

Less than a year later, when Coleman was laid off, she still owed more than $100,000 to Educational Credit Management Corp. Coleman asked the court to discharge the debt on the ground that it would be an undue hardship for her to pay it. (See Bankruptcy Relief under Chapter 12 and Chapter 13.)

1.

The first team will explain when a debtor normally is entitled to a discharge under Chapter 13.

Solution Debtors who seek Chapter 13 relief commit to a three-to five-year period of repayment, after which their remaining debts are discharged. Unlike Chapter 7 debtors, who are entitled to a discharge of debt as soon as their estate is liquidated and distributed, Chapter 13 debtors are not entitled to a discharge of debts unless and until they complete payments to creditors under the repayment plan.

2.

The second team will discuss whether student loans are dischargeable and when ―undue hardship‖ is a legitimate ground for an exception to the general rule.

Solution Student loans are exempted from discharge unless the debtor can show ―undue hardship.‖

3.

The third team will outline the goals of bankruptcy law and make an argument, based on these facts and principles, in support of Coleman‘s request.

Solution A fundamental goal of bankruptcy is to protect the debtor by providing a fresh start free from debt. It could be argued that a debtor who is burdened by student loans will not emerge from bankruptcy with a ―fresh start‖ if the debt is not discharged. According to the facts in the question, Coleman is less than one year into a five-year plan. She would not normally be entitled to a discharge of any of her debts until she completed the plan and of course would not be entitled to discharge her student loans unless she could show ―undue hardship.‖ Here, the hardship to Coleman arguably consists of the commitment of five years of disposable income to payments without any guarantee that the student loans will be discharged at the end of the period. This suggests that the court might at least agree to a discharge of the student loan debt on the completion of the plan.

Solution and Answer Guide Miller, The Legal Environment Today 10e, 9780357635582; Chapter 14: Agency Relationships

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Table of Contents Critical Thinking Questions in Features ............................................................................................................. 173 Ethics Today .......................................................................................................................................... 173 Critical Thinking Questions in Cases ................................................................................................................... 173 Case 14.1 ............................................................................................................................................... 173 Case 14.2 ............................................................................................................................................... 174 Case 14.3 ............................................................................................................................................... 175 Chapter Review ........................................................................................................................................................... 176 Practice and Review .............................................................................................................................. 176 Practice and Review: Debate This ......................................................................................................... 177 Issue Spotters ........................................................................................................................................ 177 Business Scenarios and Case Problems ................................................................................................. 178 Critical Thinking and Writing Assignments ............................................................................................ 186

Critical Thinking Questions in Features Ethics Today 189.

Does the gig economy take advantage of independent contractors? Discuss your reasons.

Solution The gig economy offers a number of attractive features for independent contractors, such as the freedom to choose one‘s hours, the lack of a hierarchical work culture (that is, no bosses), and the ability to balance work with other life responsibilities or passions. The drawbacks of being an independent contractor are primarily financial—lower pay, no health or retirement benefits, and no withholding of income tax or Social Security taxes from regular paychecks.

Financial considerations also make independent contractors attractive to employers. That is, a company does not have to pay a portion of a ―gig‖ worker‘s taxes or provide that worker with health or retirement benefits. As a result, companies that participate in the gig economy generally prefer to have their workers legally designated as independent contractors rather than full-time employees. Whether this means that independent contactors are being ―taken advantage of‖ depends on the circumstances.

If the independent contractor is willing to trade a certain amount of economic security for the freedoms of gig work, then that worker is likely being managed fairly. If, however, the employer is treating the gig worker as a full-time employee while using the ―independent contractor‖ label to avoid its financial (and social and ethical) responsibilities, then charges of exploitation may be justified.

Critical Thinking Questions in Cases Case 14.1 190.

Did Ward breach any duties owed to his employer in addition to his alleged breach of the duty of loyalty? Discuss.

Solution

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In the Taser case, if Taser can prove its case, Ward was in breach of the agent‘s duty of loyalty.

Taser might also allege that Ward breached the agent‘s duty of notification. Under the duty of loyalty, an agent has the duty to act solely for the benefit of the agent‘s principal. Under the duty of notification, an agent is required to notify the principal of all matters that come to the agent‘s attention concerning the subject matter of the agency. ―Assuming Taser was engaged in the research and development of a recording device during Ward's employment, assuming Ward knew or should have known of those efforts, and assuming Taser's device would compete with Ward's concept, substantial design and development efforts by Ward during his employment‖ without informing Taser would constitute a violation of the duty of notification.

Under the duty of obedience, when acting on behalf of the principal, an agent has a duty to follow all lawful and clearly stated instructions of the principal. Any deviation from such instructions is a violation of the duty. Depending on the scope of Ward‘s employment—what he was instructed to do—he might also have violated this duty. And under the duty of accounting, an agent has a duty to keep and make available to the principal an account of all property and funds received and paid out on behalf of the principal. If Ward expended any of Taser‘s resources on research and development of his own projects, he might also have violated this duty.

191.

Suppose that Ward‘s pre-termination activities focused on a product that was not designed to compete with Taser‘s products. Would these efforts have breached his duty of loyalty? Why or why not?

Solution In these circumstances, assuming that Ward‘s activities did not involve the improper use any of Taser‘s resources (including Ward‘s work time), there would be no basis for concluding that Ward had breached his duty of loyalty to his employer by planning a new and noncompetitive business venture.

Case 14.2 3.

Normally, modification of the association‘s bylaws requires the approval of two-thirds of the unit owners. Could Makki have successfully argued that the actions of the board members who violated the bylaws modified them in accord with the freedom to contract? Explain.

Solution No, Makki could not have successfully argued that the actions of the board members who violated the bylaws effectively modified those restrictions in accord with the freedom to contract.

In asserting this contention, Makki might have posited that the bylaws are a contract, that parties are free to contract, and that the actions of the parties, in light of their oral or written representations, amounted to a waiver of the leasing restrictions. Of course, contracting parties are free to modify the terms of their deal. But in the Makki case, the parties to the bylaws are all of the Association‘s members, not just the members who violated the leasing restrictions in the bylaws.

By buying a unit in the project, an owner agrees to follow the bylaws. This confines the parties‘ freedom to contract within the parameters established by those bylaws. Unit owners are free to modify the bylaws, but only in accord with the prescribed procedures for modification, including the approval of two-thirds of the owners. The improper conduct of some of the board members would not effectively modify the bylaws.

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4.

Why might a condominium complex‘s bylaws impose restrictions on individual owners‘ leasing of their units? Why might some of those owners opt to violate the restrictions? Discuss.

Solution The most likely and obvious answer to this question is provided by its heading. A condominium complex‘s bylaws might impose restrictions on individual owners‘ leasing of their units, and some of those owners might opt to violate the restrictions, for economic reasons.

When a unit is bought, payments must be made on the mortgage loan that financed its purchase.

And an owner might buy more than one unit for investment purposes—that is, to sell once the market price has increased. In the meantime, a vacant unit could prove less costly, and even profitable, by leasing it. These circumstances could motivate an owner to violate any leasing restrictions in the complex‘s bylaws.

The complex might have imposed those restrictions to avoid the habitation of the units by parties who had little or no interest in maintaining or contributing to the value of the property.

Case 14.3 192.

If the appellate court had upheld the trial court‘s finding that Doughty was an independent contractor, would he have been liable to Simon? Explain.

Solution Yes, Doughty would most likely have been liable to Simon if the appellate court had affirmed the trial court‘s finding that Doughty was an independent contractor.

The term independent contractor connotes a freedom of action and choice with respect to the work or other performance on a job and a legal responsibility on the part of the contractor for discrepancies and deviations. A principal is not generally liable for the negligence of an independent contractor. Like an employee, an independent contractor may be engaged in an activity for the benefit of an employer, but it is the latter‘s freedom from control that relieves the employer of liability.

193.

Suppose that the accident had happened during Doughty‘s drive home after he had dropped off the supplies. Would the result have been different? Discuss.

Solution Yes, if Doughty had been involved in the accident during his drive home after he had dropped of the supplies, the result in the Simon case would likely have been different. In that circumstance, Doughty would not have been at work at the time but on a commute, or a personal pursuit.

The key to determining liability for an agent or employee‘s negligence, or other tort, is whether the act is committed within the scope or course of employment. Factors that affect this determination include the time of the act, the extent of the involvement of the worker‘s private interests, and whether the employer provided the means by which the tort was committed. The time that an employee spends commuting to or from work is normally considered outside the scope of employment.

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In the facts of the question, Doughty‘s commute would have been outside the time of employment. He was driving home. And he was using his own vehicle to make the trip.

Chapter Review Practice and Review Lynne Meyer, on her way to a business meeting and in a hurry, stopped by a Buy-Mart store for a new car charger for her smartphone. There was a long line at one of the checkout counters, but a cashier, Valerie Watts, opened another counter and began loading the cash drawer. Meyer told Watts that she was in a hurry and asked Watts to work faster. Watts, however, only slowed her pace. At this point, Meyer hit Watts.

It is not clear whether Meyer hit Watts intentionally or, in an attempt to retrieve the car charger, hit her inadvertently. In response, Watts grabbed Meyer by the hair and hit her repeatedly in the back of the head, while Meyer screamed for help. Management personnel separated the two women and questioned them about the incident. Watts was immediately fired for violating the store‘s no-fighting policy. Meyer subsequently sued Buy-Mart, alleging that the store was liable for the tort (assault and battery) committed by its employee. Using the information presented in the chapter, answer the following questions.

194.

Under what doctrine discussed in this chapter might Buy-Mart be held liable for the tort committed by Watts?

Solution The doctrine of respondeat superior, under which employers may be held liable for the actions of their agents or employees, may apply in this situation. The concept of respondeat superior is based on the assumption that employers are usually in a better position to absorb the costs that may result from agents‘ or employees‘ torts.

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195.

What is the key factor in determining whether Buy-Mart is liable under this doctrine?

Solution Under the doctrine of respondeat superior, an employer is responsible for torts committed by agents or employees in the course and scope of their employment.

196.

Did Watts‘s behavior constitute an intentional tort or a tort of negligence? How would this difference affect Buy-Mart‘s potential liability?

Solution It seems clear that Watt‘s behavior constituted an intentional tort. In any event, because Watts‘ actions took place in the scope of employment, the employer in this problem may be liable in either situation under the doctrine of respondeat superior.

197.

Suppose that when Watts applied for the job at Buy-Mart, she disclosed in her application that she had previously been convicted of felony assault and battery. Nevertheless, Buy-Mart hired Watts as a cashier. How might this fact affect Buy-Mart‘s liability for Watts‘s actions?

Solution This circumstance would support an assessment of liability on the employer under the theory that the employee acted with the employer‘s knowledge of a propensity for tortious behavior.

Practice and Review: Debate This 198.

The doctrine of respondeat superior should be modified to make agents solely liable for some of their tortious (wrongful) acts.

Solution Because of the doctrine of respondeat superior, some agents may act more recklessly because they know that the principal will pay all damages for their irresponsible behavior. If all agents knew that they would be financially liable for at least some of the damages their tortious conduct caused, they would behave in a more responsible manner.

Business owners and other principals take out sufficient insurance to cover damages owed due to their agents‘ tortious acts. It would be unfair to impose any liability on agents, who, in general, are not in a financial position to pay for any part of a damage award as a result of their tortious acts.

Issue Spotters 13. Dimka Corporation wants to build a new mall on a specific tract of land. Dimka contracts with Nadine to act as its agent in buying the property. When Nadine learns of the difference between the price that Dimka is willing to pay and the price at which the owner is willing to sell, she wants to buy the land and sell it to Dimka herself. Can she do this? Discuss.

Solution No. Nadine, as an agent, is prohibited from taking advantage of the agency relationship to obtain property that the principal (Dimka Corporation) wants to purchase. This is the duty of loyalty that arises with every agency relationship.

14. Davis contracts with Estee to buy a certain horse on her behalf. Estee asks Davis not to reveal her identity. Davis makes a deal with Farmland Stables, the owner of the horse, and makes a down

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payment. Estee does not pay the rest of the price. Farmland Stables sues Davis for breach of contract. Can Davis hold Estee liable for whatever damages he has to pay? Why or why not?

Solution Yes. A principal has a duty to indemnify (reimburse) an agent for liabilities incurred because of authorized and lawful acts and transactions and for losses suffered because of the principal‘s failure to properly perform any duties.

Business Scenarios and Case Problems 56. Ratification by Principal. Springer, who was running for Congress, instructed his campaign staff not to purchase any campaign materials without his explicit authorization. In spite of these instructions, one of his campaign workers contracted with Dubychek Printing Co. to print some promotional materials for Springer‘s campaign. When the printed materials arrived, Springer did not return them but instead used them during his campaign.

199.

200.

When Springer failed to pay for the materials, Dubychek sued for recovery of the price.

Springer contended that he was not liable on the sales contract because he had not authorized his agent to purchase the printing services. Dubychek argued that the campaign worker was Springer‘s agent and that the worker had authority to make the printing contract. Additionally, Dubychek claimed that even if the purchase was unauthorized, Springer‘s use of the materials constituted ratification of his agent‘s unauthorized purchase. Is Dubychek correct? Explain. (See Formation of an Agency.)

Solution Dubychek may very well be correct in his claim. Implied ratification by a principal of an agent‘s unauthorized action occurs when a principal accepts the benefits of the unauthorized transaction and/or does not object to or repudiate the action within a reasonable time. It is essential, however, that the principal be aware of all material facts; otherwise, the ratification will not be effective.

If Springer knew that the printed materials had been ordered by his campaign workers without his authorization and used the materials in spite of this knowledge, such use would constitute ratification of the unauthorized purchase agreement. In such a case, Dubychek could successfully sue to recover the purchase price of the campaign materials.

If Springer were unaware that the materials had been purchased without his authorization, his use of the materials would not constitute ratification. A good point for discussion is whether the campaign worker was impliedly authorized or had apparent authority to contract for the printing of the promotional material. There is no question that there was no express authorization.

Springer‘s prohibition, unknown to Dubychek, may not relieve Springer of liability, however. If the campaign worker is one who is placed in a position of a person who usually orders campaign printing, or if this campaign worker had previously ordered campaign materials from Dubychek, Dubychek can claim that the campaign worker had either implied authority to act or that previous conduct led Dubychek to believe that the worker had (apparent) authority to contract for the printing. If either is applicable, ratification is not necessary, as the worker‘s contract is authorized, and the principal, Springer, is liable.

57. Employee versus Independent Contractor. Stephen Hemmerling was a driver for the Happy Cab Co. Hemmerling paid certain fixed expenses and abided by a variety of rules relating to the

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use of the cab, the hours that could be worked, and the solicitation of fares, among other things.

Rates were set by the state. Happy Cab did not withhold taxes from Hemmerling‘s pay. While driving the cab, Hemmerling was injured in an accident and filed a claim against Happy Cab in a Nebraska state court for workers‘ compensation benefits. Such benefits are not available to independent contractors. On what basis might the court hold that Hemmerling is an employee?

Explain. (See Agency Law.) Solution A court might hold that Hemmerling and Happy Cab have an employment relationship primarily on the basis of control. Happy Cab clearly has the right to control the methods or means used by Hemmerling in the course of operating the taxicab by virtue of its exclusive control over the taxicab. Happy Cab exercises its control by establishing and enforcing a variety of rules relating to the use of the cab, solicitation of fares, and so on. Other factors supporting the existence of an employment relationship include that Hemmerling was not engaged in a distinct occupation or business from that of Happy Cab, and the type of work is that which can be done by employees rather than specially skilled independent contractors. Also, Happy Cab supplied the instrumentality of the trade (the cab), and given that the rates were set by the state, Hemmerling‘s ability to control his profit was limited. The only factor that supports an independent contractor relationship is that Happy Cab did not withhold taxes.

58. Liability for Contracts. Thomas Huskin and his wife entered into a contract to have their home remodeled by House Medic Handyman Service. Todd Hall signed the contract as an authorized representative of House Medic. It turned out that House Medic was a fictitious name for Hall Hauling, Ltd. The contract did not indicate this, however, and Hall did not inform the Huskins about Hall Hauling. When a contract dispute later arose, the Huskins sued Todd Hall personally for breach of contract. Can Hall be held personally liable? Why or why not? [Huskin v. Hall, 2012 Ohio- 653 (Ohio Ct.App. 2012)] (See Liability in Agency Relationships.)

Solution Hall may be held personally liable. Hall could not be an agent for House Medic because it was a fictitious name and not a real entity. Moreover, when the contract was formed, Hall did not disclose his true principal, which was Hall Hauling, Ltd. Thus, Hall may be held personally liable as a party to the contract.

59. Agent’s Authority. Basic Research, LLC, advertised its products on television networks owned by Rainbow Media Holdings, Inc., through an ad agency, Icebox Advertising, Inc. As Basic‘s agent, Icebox had the express authority to buy ads from Rainbow on Basic‘s behalf, but the authority was limited to buying ads with cash in advance. Despite this limit, Rainbow sold ads to Basic through Icebox on credit. Basic paid Icebox for the ads, but Icebox did not pass all of the payments on to Rainbow. Icebox filed for bankruptcy. Can Rainbow recoup the unpaid amounts from Basic?

Explain. [American Movie Classics v. Rainbow Media Holdings, 508 Fed.Appx. 826 (10th Cir. 2013)] (See Agent’s Authority.)

Solution No. Rainbow cannot recoup the unpaid amounts from Basic. Express authority is authority declared in clear, direct, and definite terms. Express authority can be given orally or in writing. In most states, if the contract being executed is or must be in writing, then the agent‘s authority must also be in writing. Otherwise, the contract may be avoided (or ratified) by the principal. If it is ratified, the ratification must be in writing. An agent has the implied authority to do what is

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reasonably necessary to carry out express authority. For example, authority to manage a business implies authority to do what is reasonably required to operate the business. But an agent‘s implied authority cannot contradict that agent‘s express authority. Thus, if a principal has limited an agent‘s express authority, then the fact that the agent customarily would have such authority is irrelevant.

In this problem, Basic Research advertised its products on television networks owned by Rainbow Media Holdings through an ad agency, Icebox Advertising. Basic paid Icebox for the ads, but Icebox did not make all of the payments to Rainbow. Icebox filed for bankruptcy. Rainbow cannot recover what it was owed from Basic. As Basic's agent, Icebox had the express authority to buy ads from Rainbow on Basic's behalf, but that authority was limited to purchasing ads with cash in advance. Thus, Icebox did not have the authority—express or implied—to buy ads on Basic's credit. And Basic did not ratify the contracts that represented purchases on credit.

In the actual case on which this problem is based, on Basic‘s appeal from a judgment in Rainbow‘s favor, the U.S. Court of Appeals for the Tenth Circuit reversed that judgment and ruled in Basic‘s favor.

60. Business Case Problem with Sample Answer— Determining Employee Status. Nelson Ovalles worked as a cable installer for Cox Rhode Island Telecom, LLC, under an agreement with a third party, M&M Communications, Inc. The agreement stated that no employer-employee relationship existed between Cox and M&M‘s technicians, including Ovalles. Ovalles was required to designate his affiliation with Cox on his work van, clothing, and identification badge, but Cox had minimal contact with him and limited power to control the manner in which he performed his duties. Cox supplied cable wire and similar items, but the equipment was delivered to M&M, not to Ovalles.

On a workday, while Ovalles was fulfilling a work order, his van rear-ended a car driven by Barbara Cayer. Is Cox liable to Cayer? Explain. [Cayer v. Cox Rhode Island Telecom, LLC, 85 A.3d 1140 (R.I. 2014)] (See Agency Law.) —For a sample answer to Problem 14–5, go to Appendix D. Solution No. Cox is not liable to Cayer for the injuries or damage that she sustained in the accident with Ovalles. Generally, an employer is not liable for physical harm caused to a third person by the negligent act of an independent contractor in the performance of a contract. This is be cause the employer does not have the right to control the details of the performance. In determining whether a worker has the status of an independent contractor, how much control the employer can exercise over the details of the work is the most important factor weighed by the courts.

In this problem, Ovalles worked as a cable installer for Cox under an agreement with M&M. The agreement disavowed any employer-employee relationship between Cox and M&M‘s installers.

Ovalles was required to designate his affiliation with Cox on his van, clothing, and an ID badge.

But Cox had minimal contact with Ovalles and limited power to control the manner in which he performed his work. Cox supplied cable wire and other equipment, but these items were delivered to M&M, not Ovalles. These facts indicate that Ovalles was an independent contractor, not an employee. Thus, Cox was not liable to Cayer for the harm caused to her by Ovalles when his van rear-ended Cayer‘s car.

In the actual case on which this problem is based, the court issued a judgment in Cox's favor. The Rhode Island Supreme Court affirmed, applying the principles stated above to arrive at the same conclusion.

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61. Agent’s Authority. Terry Holden‘s stepmother, Rosie, was diagnosed with amyotrophic lateral sclerosis (ALS), and Terry‘s wife, Susan, became Rosie‘s primary caregiver. Rosie executed a durable power of attorney appointing Susan as her agent. Susan opened a joint bank account with Rosie at Bank of America, depositing $9,643.62 of Rosie‘s funds. Susan used some of the money to pay for ―household expenses to keep us going while we were taking care of her.‖ Rosie died three months later. Terry‘s father, Charles, as executor of Rosie‘s estate, filed a petition in a Texas state court against Susan for an accounting. What general duty did Susan owe Rosie as her agent? What does an agent‘s duty of accounting require? Did Susan breach either of these duties? Explain. [Holden v. Holden, 456 S.W.3d 642 (Tex.App.—Tyler 2015)] (See Agent’s Authority.)

Solution As Rosie‘s agent, Susan owed her a fiduciary duty to act in the utmost good faith on Rosie‘s behalf and in her best interest. An agent‘s duty of accounting requires an agent to keep and make available to the principal an account of all property and funds received and paid out on the principal‘s behalf. The agent has a duty to maintain separate accounts for the principal‘s funds and for the agent‘s personal funds, and the agent must not intermingle these accounts. Susan violated both of these duties.

In this problem, Rosie executed a durable power of attorney appointing Susan as her agent. Susan opened a joint bank account with Rosie at Bank of America and deposited Rosie‘s funds into the account. Susan used some of the money to pay for ―household expenses.‖ The facts indicate that Susan did not account to Rosie for this use of her funds. After Rosie‘s death, Charles, the executor of Rosie‘s estate, filed a suit against Susan for an accounting. Susan breached her fiduciary duty to Rosie by spending Rosie‘s funds for Susan‘s own expenses. Susan breached the agent‘s duty to account to the principal by not informing Rosie of the transactions involving her funds.

In the actual case on which this problem is based, in Charles‘s suit against Susan for an accounting, the court ordered Susan to provide bank account summaries and transaction information. After review, the court ordered Susan to return all of Rosie‘s funds deposited into their joint account to Rosie‘s estate. A state intermediate appellate court affirmed the order.

62. Agency Relationships. Standard Oil of Connecticut, Inc., sells home heating, cooling, and security systems. Standard schedules installation and service appointments with its customers and then contracts with installers and technicians to do the work. The company requires an installer or technician to complete a project by a certain time but to otherwise ―exercise independent judgment and control in the execution of any work.‖ The installers and technicians are licensed and certified by the state. Standard does not train them, provide instruction manuals, supervise them at customers‘ homes, or inspect their work. The installers and technicians use their own equipment and tools, and they can choose which days they work. Standard pays a set rate per project. According to criteria used by the courts, are these installers and technicians independent contractors or employees? Why? [Standard Oil of Connecticut, Inc. v. Administrator, Unemployment Compensation Act, 320 Conn. 611, 134 A.3d 581 (2016)] (See Agency Law.) Solution According to criteria used by the courts, the installers and technicians who contract with Standard to install and service the company‘s products in its customers‘ homes are classified as independent contractors. In deciding whether a worker is an employee or an independent contractor, courts consider a number of factors, including the following.

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1.

2.

3.

4.

5.

6.

7.

The degree of control that the employer exercises over the work.

Whether the worker is engaged in an occupation distinct from the business of the employer.

The amount of supervision that the employer imposes.

Who supplies the tools.

The duration of employment.

The timeframe of payment for the work (periodically or per-project).

The degree of skill required of the work.

The degree of control is the most important factor.

Standard sold home heating, cooling, and security systems, scheduled appointments with its customers for installation and service, and contracted with installers and technicians to do the work. The company required an installer or technician to finish by a certain time, but otherwise encouraged each individual to ―exercise independent judgment and control in the execution of any work.‖ The installers and technicians were licensed and certified by the state. Standard did not provide training, instruction manuals, supervision at customers‘ homes, or inspection of the work. The workers used their own equipment and tools, and chose which days to work (if at all—they were free to accept or reject any assignment). Standard paid a set rate per project. These facts indicate that the installers and technicians should be categorized as independent contractors, not employees.

In the actual case on which this problem is based, Standard classified the workers as independent contractors. The state ruled that they should have been classified as employees, and assessed $41,501.38 in unpaid unemployment contribution taxes, plus interest. From adverse state agency and court decisions, Standard appealed. The Connecticut Supreme Court reversed and remanded.

On proof of the facts in this case set out above, Standard ―satisfied its burden of showing that the installers/technicians were free from its control and direction.‖ 63. Scope of Agent’s Authority. Kindred Nursing Centers East, LLC, owns and operates Whitesburg Gardens, a long-term care and rehabilitation facility in Huntsville, Alabama. Lorene Jones was admitted to the facility following knee-replacement surgery. Jones‘s daughter, Yvonne Barbour, signed the admission forms required by Whitesburg Gardens as her mother‘s representative in her presence. Jones did not object. The forms included an ―Alternative Dispute Resolution Agreement,‖ which provided for binding arbitration in the event of a dispute between ―the Resident‖ (Jones) and ―the Facility‖ (Whitesburg Gardens). Six days later, Jones was transferred to a different facility. After recovering from the surgery, she filed a suit in an Alabama state court against Kindred, alleging substandard care on a claim of negligence. Can Jones be compelled to submit her claim to arbitration? Explain. [Kindred Nursing Centers East, LLC v. Jones, 201 So.3d 1146 (Ala. 2016)] (See Agent’s Authority.)

Solution Yes. Jones can be compelled to submit her claim against Kindred (Whitesburg Gardens) to arbitration. The liability of a principal to third parties with whom an agent contracted depends on whether the agent had the authority to enter into a legally binding contract on the principal‘s behalf. This authority can be actual (express or implied) or apparent. Apparent authority arises when a principal causes a third party reasonably to believe that an agent has the authority to act.

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In this problem, Kindred operates Whitesburg Gardens, a rehabilitation facility to which Jones was admitted following knee-replacement surgery. Jones‘s daughter Yvonne Barbour signed the admission forms as her mother‘s representative in her presence and without objection by Jones.

The forms included an ―Alternative Dispute Resolution Agreement‖ (ADR Agreement), which provided for binding arbitration in the event of a dispute between Jones and Whitesburg Gardens. Later, Jones filed a suit against Kindred claiming negligence. The question is whether, under the ADR Agreement, this dispute could be submitted to binding arbitration.

The answer depends on whether Barbour had the apparent authority to sign the admission forms, including the ADR Agreement with its arbitration provision, on Jones‘s behalf. According to the facts, she did. Barbour signed the forms in Jones‘s presence, with no objection by Jones. By her passive acquiescence, Jones caused Whitesburg Gardens reasonably to believe that Barbour had the authority to act on Jones‘s behalf.

In the actual case on which this problem is based, the court denied Kindred‘s motion to compel arbitration. The Alabama Supreme Court reversed. The decision turned in part on whether Jones was mentally competent at the time of her admission to Whitesburg Gardens—the court concluded that she was—and, as in this problem, whether Barbour had the apparent authority to sign the admission forms on Jones‘s behalf. The court concluded that she did. ―Jones passively permitted Barbour to act on her behalf in signing the admission forms.‖ 64. Agency Relationships. Jane Westmas was killed when a tree branch cut by Creekside Tree Service, Inc., fell on her while she was walking on a public path through the private property of Conference Point Center on the shore of Lake Geneva in Wisconsin. Conference Point had contracted with Creekside to trim and remove trees from its property, but the owner had no control of (and no right to control) the details of Creekside‘s work. Jane‘s husband, John, and her son, Jason, filed a suit in a Wisconsin state court against Creekside, alleging that the service‘s negligence caused her death. Creekside contended it was immune from the suit under a state statute that provides ―no . . . agent of an owner is liable for the death of . . . a person engaging in a recreational activity on the owner‘s property.‖ Could Creekside be held liable for Jane‘s death?

Why or why not? [Westmas v. Creekside Tree Service, Inc., 2018 WI 12, 379 Wis.2d 471, 907 N.W.2d 68 (2018)] (See Agency Law.) Solution Yes. Creekside could be held liable for Jane‘s death. An employer normally is not responsible for the actions of an independent contractor because the employer does not control the independent contractor‘s work. Whether an independent contractor is the employer‘s agent can affect the employer‘s liability. The most important factor in determining whether an independent contractor is also an agent is the employer‘s degree of control over the details of the work. If an employer exercises considerable control over the work, the contractor is more likely to be construed as an agent.

In this problem, Conference Point contracted with Creekside to trim and remove trees from Conference Point‘s property, but the employer had no control over, nor the right to control, the details of the contractor‘s work. Jane Westmas was killed when a tree branch cut by Creekside fell on her while she was walking on a public path on the property. In response to a suit alleging that the service‘s negligence caused her death, Creekside cited a state statute that provides ―no . . . agent of an owner is liable for the death of . . . a person engaging in a recreational activity on the

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owner‘s property.‖ Because Conference Point had no control of, nor the right to control, the details of Creekside‘s work, the contractor would not qualify as the employer‘s agent. Thus, Creekside would not be immune from liability for Jane‘s death under the state statute.

In the actual case on which this problem is based, the court issued a judgment in Creekside‘s favor. A state intermediate appellate court reversed. The Wisconsin Supreme Court affirmed the appellate decision, based on the reasoning set out here.

65. The IDDR Approach and Agent’s Authority. Devin Fink was the manager of Precision Tune Auto Care in Charlotte, North Carolina. Randall Stywall brought her car to the shop to replace the rear shocks. Fink filled out the service order with an estimate of the cost. Later, Stywall returned to pick up her car, and Fink collected payment for the work. When Stywall started to drive away, however, the car bounced as if the shocks had not been replaced. A complaint to Precision‘s corporate office resulted in the discovery that in fact the work had not been done and Fink had kept the payment. He was charged with larceny against his employer. He argued that he had not committed this crime because the victim was Stywall, not Precision. [State of North Carolina v.

Fink, 798 S.E.2d 537 (N.C.App. 2017)] (See Agent’s Authority.)

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1.

Which agency principles support the charge against Fink? Explain.

Solution An agent may have the authority to enter into contracts on the principal‘s behalf. An agent‘s authority may be actual or apparent. Express authority is embodied in what the principal engages the agent to do. An agent has the implied authority to do what is reasonably necessary to carry out the express authority. Authority can also be inferred from the agent‘s position.

These principles support the charges against Fink. He was the manager of an auto repair shop to which Stywall brought her car to have the shocks replaced. Fink‘s authority to manage the shop implied the authority to do what was reasonably required to operate the business. As his employer‘s agent, it is reasonable to imply that he had the authority to collect Stywall‘s payment for the work on her car. At that point, the funds became the property of Fink‘s principal, his employer. By keeping those funds for himself, Fink committed the crime of larceny against his employer.

2.

Using the IDDR approach, determine whether Fink had an ethical duty to offer a defense to the crime with which he was charged. What does Fink‘s stated defense suggest about his ethics?

Solution Fink may have had an ethical duty to offer a defense to the crime with which he was charged.

But such a defense should be as ethical as the duty. Here it is not, making it likewise unethical to offer it.

The first step of the IDDR approach is an Inquiry to state the issue, the stakeholders, and the ethical standards. The issue is whether Fink had an ethical duty to offer a defense to the crime with which he was charged. Stakeholders would include those who depend on Fink to avoid criminal penalties—his immediate family, for instance, who might need his income to maintain their living standard, his presence to remain stable (a parent‘s imprisonment can emotionally affect a child, for example), and his freedom to live their own lives more fully. His co-workers and his employer‘s customers might feel justified in their having trusted Fink in other circumstances. Other criminal defendants familiar with Fink‘s case might gain confidence to plead their defenses.

The second step of the IDDR approach is a Discussion of actions to address the issue, the strengths and weaknesses of the actions, and consequences and effects on the stakeholders.

Offering a legitimate, truthful defense to the charge would meet the duty. The other chief strength of this action could be a finding of no liability to the charges. This conclusion would obviously satisfy all of the identified stakeholders.

The third step of the IDDR approach is a Decision on the action and a statement of its reasons. The decision on the issue seems clear, given the potentially positive outcome.

Without offering a defense, Fink is not likely to avoid being found guilty as charged. The negative effects of this result on the stakeholders only add to the reasons to plead.

The fourth and final step of the IDDR approach is a Review of the success or failure of the actions to resolve the issue, and satisfy the stakeholders. Success in these circumstances can

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only occur if a defense is pleaded, but if the defense is successful, the stakeholders will be satisfied.

In Fink‘s case, he argued that he had not committed the charged crime because the victim was the customer, not the employer. This defense suggests both ethical honesty and deceit.

Honesty is suggested by Fink‘s appearance to face the charge and offer a defense, and by his confession to keeping the funds. Deceit is suggested by the false impression of sincerity created by the offered defense in the face of clear agency principles to the contrary. The sum of these impressions betrays a general lack of ethics.

In the actual case on which this problem is based, Fink was convicted of the larceny charge in a North Carolina state court. A state intermediate appellate court affirmed the conviction.

Critical Thinking and Writing Assignments 1.

Liability for Independent Contractor’s Torts. Dean Brothers Corp. owns and operates a steeldrum manufacturing plant. Lowell Wyden, the plant superintendent, hired Best Security Patrol, Inc. (BSP), a security company, to guard the property and ―deter thieves and vandals.‖ Some BSP security guards, as Wyden knew, carried firearms. Pete Sidell, a BSP security guard, was not certified as an armed guard but nevertheless took his gun to work. While working at the Dean plant on October 31, Sidell fired his gun at Tyrone Gaines, in the belief that Gaines was an intruder. The bullet struck and killed Gaines. Gaines‘s mother filed a lawsuit claiming that her son‘s death was the result of BSP‘s negligence, for which Dean was responsible. (See Liability in Agency Relationships.)

1.

The first team will determine what the plaintiff‘s best argument is to establish that Dean is responsible for BSP‘s actions.

Solution The plaintiff‘s best argument that Dean is responsible for BSP‘s actions may be that work such as BSP was hired to perform creates a peculiar risk of harm to others. When armed guards are hired to deter vandals and thieves it is foreseeable that someone might be injured by the inappropriate use of a weapon if proper precautions are not taken. Thus, in this case, such an injury is one that might have been anticipated as a direct or probable consequence of the performance of the work contracted for, if reasonable care had not been taken in its performance. Also, the risk created is not a normal, routine matter of customary human activity, such as driving an automobile, but is instead a special danger arising out of the particular situation created and calling for special precautions. Under this reasoning, the plaintiff would argue that Dean could be liable even though the guard responsible was an employee of an independent contractor.

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2.

The second team will discuss Dean‘s best defense and formulate arguments in support of it.

Solution To the plaintiff‘s best argument set out in the previous answer, Dean might respond that hiring armed guards to protect property does not create a peculiar risk of harm to others and, therefore, is not inherently dangerous work. On this conclusion, even if Gaines‘s death were the result of BSP‘s negligence, Dean would not be liable because BSP was an independent contractor and an employer is not generally liable for the negligent acts of its independent contractor.

3.

The third team will consider slightly different facts. Suppose that Dean Brothers had an express policy that prohibited all security guards from carrying firearms on its property, which Wyden had conveyed to BSP. Despite knowing about this policy, Sidell had brought his weapon to work, and then fired it, killing Gaines. Could Dean be held responsible for negligence in that situation? Explain.

Solution No. Most likely, Dean could not be held liable for negligence under the slightly different facts provided in this question. The reason and conclusion are similar to the reason and conclusion in the answer to the previous question—Dean would not be liable because BSP was an independent contractor whose employee was clearly acting outside the scope of employment. In the circumstances of the different facts in this question, BSP or its employee might arguably be negligent, but their employer Dean would not be generally liable for their negligent acts.

Solution and Answer Guide Miller, The Legal Environment Today 10e, 9780357635582; Chapter 15: Employment, Immigration and Labor Law

Table of Contents Critical Thinking Questions in Features ............................................................................................................. 188 Adapting the Law to the Online Environment ....................................................................................... 188 Managerial Strategy .............................................................................................................................. 188 Critical Thinking Questions in Cases ................................................................................................................... 188 Case 15.1 ............................................................................................................................................... 188 Case 15.2 ............................................................................................................................................... 190 Case 15.3 ............................................................................................................................................... 190 Chapter Review ........................................................................................................................................................... 192 Practice and Review .............................................................................................................................. 192 Practice and Review: Debate This ......................................................................................................... 194 Issue Spotters ........................................................................................................................................ 194 Business Scenarios and Case Problems ................................................................................................. 194 Critical Thinking and Writing Assignments ............................................................................................ 201

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Critical Thinking Questions in Features Adapting the Law to the Online Environment 201.

What problems might arise if data from an internal social media system are stored on third party servers?

Solution Some corporations have internal rules that prohibit storing any company information outside a company‘s firewall. Additionally, if the third party servers are hacked, confidential company information could be compromised. Intellectual property rights could be inadvertently shared with others. Private information about individual employees might be transmitted throughout the Internet.

Managerial Strategy 202.

Employees meeting around the water cooler or coffee machine have always had the right to discuss work-related matters. Is an employer-provided e-mail system or social media outlet simply a digital water cooler? Why or why not?

Solution Many businesspersons argue that the analogy is false. An actual water-cooler or coffee-machine discussion only involves a few individual employees. Social media sites, in contrast, are accessible by all employees, all suppliers, and perhaps more importantly, by all actual or potential customers.

203.

Why might the nondiscrimination component of the NLRB‘s latest ruling make a ban on union-related e-mails difficult for managers to enforce?

Solution In theory, if a manager wants to prohibit union-related e-mails on the company‘s computer system, the NLRB ruling requires the manager to ban all e-mails that are not strictly work-related.

Otherwise, employees or union representatives could argue that the policy wrongly discriminates again union organizing via e-mail. This means, to stay within the bounds of the NLRB guidelines, the manager would have to prohibit non-work-related e-mails about a wide variety of subjects such as ―What time to do you want to get together for lunch?‖ and ―Who is in for the softball game on Saturday?‖ etc. Frankly, this would take more time and effort than most managers are willing to expend on the subject. As one observer asks, ―How do you enforce a policy like that in a non-discriminatory way?‖

Critical Thinking Questions in Cases Case 15.1 204.

The salesmen, mechanics, and partsmen identified in the FLSA exemption work irregular hours, sometimes away from their principal work site. Service advisors typically work ordinary, fixed schedules on-site. Should the Court have considered these attributes in making its decision in the Encino case? Discuss.

Solution Common features of the three jobs enumerated in the FLSA exemption from the overtime-pay requirement—salesmen, mechanics, and partsmen—that make them unsuitable for overtime pay

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include that those who fill them work irregular hours, including nights and weekends. This renders their time more difficult to track. It could also be noted that the FLSA overtime rules encourage employers to hire more individuals who work forty-hour weeks rather than to maintain a staff of fewer employees who consistently work longer hours. If a position‘s working hours ebb and flow, it does not make sense to encourage employers to hire more workers for that position—hence, salesmen, mechanics, and partsmen are exempt from the overtime-pay requirement.

Some of these workers‘ tasks may be done away from the principal work site. Salesmen, for example, often put in unusual hours, sometimes off site, trying to earn commissions. Similarly, mechanics may put in irregular hours, particularly in rural areas. The job of partsman, too, can involve off-site searching for and delivering parts. This feature can complicate the difficulty of tracking these workers‘ time.

Furthermore, for all of these occupations, business can vary substantially from season to season.

This is because the exemption extends to salesmen, mechanics, and partsmen at dealerships selling farm implements and trucks, not just autos. In the farm equipment business, for example, farmers, during planting, cultivating and harvesting seasons, may call on their dealers for parts at any time during the day or evening and on weekends.

The Court, of course, can consider and weigh a variety of factors in making its decisions. In the Encino case, the Court relied primarily on a simple, though somewhat extended definition, of the job of service advisors to place those workers within the FLSA exemption. Had the Court considered more fully the features noted above the result might have been otherwise.

205.

Suppose that the FLSA exemption covered ―any salesman or mechanic primarily engaged in selling or servicing automobiles‖ but not ―any partsman.‖ Would the result have been different?

Explain.

Solution Yes. The result in the Encino case would likely have been different if the FLSA exemption covered ―any salesman or mechanic primarily engaged in selling or servicing automobiles‖ but not ―any partsman.‖ The Court stated that ―service advisors are also primarily engaged in . . . servicing automobiles.‖ Partsmen, too, are ―primarily engaged in . . . servicing automobiles.‖ And like service advisors, partsmen did not spend most of their time under the hoods of cars. Instead, these employees obtain vehicle parts and provide them to the mechanics. Thus, reasoned the Court, the phrase ―primarily engaged in . . . servicing automobiles‖ must include some individuals who do not repair vehicles but who are integrally involved in the ―servicing process.‖ ―That description applies to partsmen and service advisors alike.‖ Without the inclusion of ―partsmen‖ in the FLSA, the Court could not have supported its decision with this reasoning. Under the more limited occupational coverage suggested in the question, service advisors would clearly fit within the exemption. Only a ―salesman‖ primarily engaged in ―selling‖ automobiles and a ―mechanic‖ primarily engaged in ―servicing‖ them would fall outside the exemption. Service advisors, whom the Court defined as ―salesmen primarily engaged in the selling of services,‖ would not fit in either category.

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Case 15.2 206.

As a defense to the citation for an OSHA violation, Packers argued that the injured employee violated the proximity rule. Was this defense relevant to the question before the court?

Discuss. Explain.

Solution No, Packers‘ argument in defense to the citation for the OSHA violation that the employee violated the two-foot rule, in effect attempting to blame the employee for the injury, was not relevant to the issue before the court in this case. The departure from OSHA standards, not the worker‘s injury, was the violation. The relevant inquiry, on a contention shifting responsibility to an employee, would have been whether the employee caused the violation, not whether the employee could have avoided injury despite the employer‘s violation. To be relevant, the defense would assert that the employee caused the violation.

In the circumstances of this case, to establish as a defense that the employee‘s violation of a workplace rule caused the OSHA violation, Packers would have had to show that it had rules designed to prevent the violation, communicated those rules to the employees, took steps to discover violations of the rules, and enforced the rules when violations occurred.

For example, an assertion of employee misconduct might have been a successful defense here if Packers had shown that it imposed a rule requiring the use of machine guards to clean a quill puller, told the employees about the rule, directed a supervisor to check the puller before each cleaning to be sure the guards were in use, and employees had been disciplined for violating the rule.

207.

Suppose that in this case, no accident had taken place. Instead, the employee had refused to clean the unguarded quill puller, and Packers had discharged him. Would the result have been different? Explain.

Solution No, the result would not have been different in this case if the employee had refused to clean the unguarded quill puller, and Packers had discharged him, before the accident took place. Packers would have been cited for a different OSHA violation, but it is not likely that any defense the employer asserted against that citation would have succeeded.

Under OSHA, an employer cannot discharge an employee who, in good faith, refuses to work in a high-risk area if bodily harm, or death, might occur as a consequence. Terminating the employee in that circumstance would of course be a violation of the act, and prompt an OSHA investigation, a workplace inspection, and a citation.

Case 15.3 208.

What might the dealership have asserted in defense to the charge that its actions violated its employees‘ rights?

Solution The primary defense of the dealership to the charge that its actions violated its employees‘ rights to organize under the National Labor Relations Act would have been a denial supported by testimony regarding the managers‘ intent and evidence that its actions did not have a chilling effect on its employees or their union.

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For example, with respect to the exchanges between Grobler and Cazoria, the employer might have asserted that at the time its employees and their union activities were not under surveillance, the dealership was not aware such activities were occurring, Grobler‘s comments were innocuous and misconstrued by Cazoria, and that despite what Cazoria might have inferred, he attended the meeting and later voted for the union, which won the election.

The employer‘s chief obstacle to success with such a contention is the fact that it is the employer.

Thus, in the circumstances of Berryhill‘s purported ―coercive interrogation‖ of employees in the presence of the service director, when Berryhill called each employee individually into his office to ask about union activity, the administrative law judge found that ―the setting of the meetings in Berryhill‘s office, Berryhill‘s and the director‘s positions of authority, and the fact that each technician was alone and outnumbered by managers all support the finding of coercion.‖ There would seem to be almost no argument that could overcome this finding.

Similarly, once a vice president of AutoNation, the employer‘s owner, visited the dealership and began to question employees individually about union support, and the dealership began to hold group meetings to announce that positive changes in employment conditions were forthcoming, a finding of unfair labor practices would seem nearly inevitable. The employer‘s conduct might have been far more egregious, as has happened in many cases, but that would not have excused the conduct that occurred in the Contemporary Cars case.

209.

Suppose that the dealership had taken no steps to change any of the terms or conditions of employment until well after the union election. Would the result have been different in this case? Explain.

Solution Yes. If the dealership had taken no steps to change any of the terms or conditions of employment until well after the union election, the result would have been different. The NLRB, and the court, would have had nothing on which to base its conclusion of unfair labor practices in violation of the National Labor Relations Act (NLRA).

Thus, what the employer in the Contemporary Cars case could have done to avoid the charge of committing unfair labor practices in violation of its employees‘ rights under the NLRA would have been to refrain from engaging in the conduct on which the administrative law judge based his findings and conclusions that such violations occurred.

In other words, the dealership could have avoided the charge by not ―coercively creating an impression of surveillance of union activity, interrogating employees about union activity, and soliciting and promising to remedy employee grievances.‖ During the time leading up to the union election, the employer might have refrained from the following actions: 1. Berryhill, Davis, Grobler, and other managers‘ commenting to the employees—the technicians and all others on the dealership‘s staff—about the union.

2. The managers‘ questioning of the technicians about union activities and support.

3. Calling individual and group meetings to ostensibly address employment terms and conditions.

4. Promising changes to remedy grievances and solve workplace problems.

5. Promulgating a policy to prohibit any solicitation on any AutoNation property at any time.

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6.

Firing Roberts.

Chapter Review Practice and Review Rick Saldona began working as a traveling salesperson for Aimer Winery in 2009. Sales constituted 90 percent of Saldona‘s work time. Saldona worked an average of fifty hours per week but received no overtime pay. In June 2019, Saldona‘s new supervisor, Caesar Braxton, claimed that Saldona had been inflating his reported sales calls and required Saldona to submit to a polygraph test. Saldona reported Braxton to the U.S. Department of Labor, which prohibited Aimer from requiring Saldona to take a polygraph test for this purpose. In August 2019, Saldona‘s wife, Venita, fell from a ladder and sustained a head injury while employed as a full-time agricultural harvester. Saldona delivered to Aimer‘s human resources department a letter from his wife‘s physician indicating that she would need daily care for several months, and Saldona took leave until December 2019. Aimer had sixty-three employees at that time. When Saldona returned to Aimer, he was informed that his position had been eliminated because his sales territory had been combined with an adjacent territory. Using the information presented in the chapter, answer the following questions.

210.

Would Saldona have been legally entitled to receive overtime pay at a higher rate? Why or why not?

Solution No, because he is exempt from the overtime rules. Over 90 percent of Saldona‘s time was spent on sales. As an outside salesperson, Saldona is exempt from the overtime rules established by the Fair Labor Standards Act. 211.

What is the maximum length of time Saldona would have been allowed to take leave to care for his injured spouse?

Solution The Family and Medical Leave Act (FMLA) applied to Saldona‘s employer, Aimer Winery, because Aimer had over fifty employees. Under the FMLA, Saldona would have been entitled to up to twelve weeks of unpaid medical leave to care for his injured wife.

212.

Under what circumstances would Aimer have been allowed to require an employee to take a liedetector test?

Solution The Employee Polygraph Protection Act generally prohibits employers from requiring applicants or employees to take lie-detector tests. The only time employers are permitted to use polygraph tests under the act, is when investigating losses attributable to theft, including embezzlement or theft of trade secrets. Therefore, if Aimer had suffered losses due to theft, such as embezzlement or theft of trade secrets, and was attempting to investigate such losses, it could use polygraphs as part of its investigation.

213.

Would Aimer likely be able to avoid reinstating Saldona under the key employee exception? Why or why not?

Solution

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An important exception to the FMLA allows an employer to avoid reinstating a key employee— defined as an employee whose pay falls within the top 10 percent of the firm‘s workforce. Thus, if Saldona falls within that group of Aimer‘s employees, Aimer could avoid reinstating him.

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Practice and Review: Debate This 214.

The U.S. labor market is highly competitive, so state and federal laws that require overtime pay are unnecessary and should be abolished.

Solution In a competitive market, arrangements for overtime pay would be dictated by the forces of supply and demand for labor. There is no need for the government to step in to regulate this market.

Most employees have little bargaining power in the labor market. Consequently, without government regulations with respect to overtime pay, employers would exploit the weakest employees, the ones that cannot seek alternative employment.

Issue Spotters 215.

Erin, an employee of Fine Print Shop, is injured on the job. For Erin to obtain workers‘ compensation, does her injury have to have been caused by Fine Print‘s negligence? Does it matter whether the action causing the injury was intentional? Explain.

Solution Workers‘ compensation laws establish a procedure for compensating workers who are injured on the job. Instead of suing to collect benefits, an injured worker notifies the employer of an injury and files a claim with the appropriate state agency. The right to recover is normally determined without regard to negligence or fault, but intentionally inflicted injuries are not covered. Unlike the potential for recovery in a lawsuit based on negligence or fault, recovery under a workers‘ compensation statute is limited to the specific amount designated in the statute for the employee‘s injury.

216.

Onyx applies for work with Precision Design Company, which tells her that it requires union membership as a condition of employment. She applies for work with Quality Engineering, Inc., which does not require union membership as a condition of employment but requires employees to join a union after six months on the job. Are these conditions legal? Why or why not?

Solution No. A closed shop (a company that requires union membership as a condition of employment) is illegal. A union shop (a company that does not require union membership as a condition of employment but requires workers to join the union after a certain time on the job) is illegal in a state with a right-to-work law, which makes it illegal to require union membership for continued employment.

Business Scenarios and Case Problems 217.

Unfair Labor Practices. Consolidated Stores is undergoing a unionization campaign.

Prior to the union election, management states that the union is unnecessary to protect workers.

Management also provides bonuses and wage increases to the workers during this period. The employees reject the union. Union organizers protest that the wage increases during the election campaign unfairly prejudiced the vote. Should these wage increases be regarded as an unfair labor practice? Discuss. (See Labor Law.)

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Solution The NLRB has consistently been suspicious of companies that grant added benefits during election campaigns. These benefits will be considered as an unfair labor practice that biases elections, unless the employer can demonstrate that the benefits were unrelated to the unionization.

218.

Wrongful Discharge. Denton and Carlo were employed at an appliance plant. Their job required them to do occasional maintenance work while standing on a wire mesh twenty feet above the plant floor. Other employees had fallen through the mesh, and one was killed by the fall. When Denton and Carlo were asked by their supervisor to do work that would likely require them to walk on the mesh, they refused due to their fear of bodily harm or death. Because of their refusal to do the requested work, the two employees were fired. Was their discharge wrongful? If so, under what federal employment law? To what federal agency or department should they turn for assistance? (See Employment at Will.)

Solution The Occupational Safety and Health Act requires employers to provide safe working conditions for employees. The act prohibits employers from discharging or discriminating against any employee who refuses to work when the employee believes in good faith that undertaking the employment activity will bring about a risk of death or great bodily harm. Denton and Carlo had sufficient reason to believe that the maintenance job required of them by their employer involved great risk. Therefore, under the act, their discharge was wrongful. Denton and Carlo can turn to the Occupational Safety and Health Administration, which is part of the U.S. Department of Labor, for assistance.

219.

Exceptions to the Employment-at-Will Doctrine. Li Li worked for Packard Bioscience, and Mark Schmeizl was her supervisor. In March 2000, Schmeizl told Li Li to call Packard‘s competitors, pretend to be a potential customer, and request ―pricing information and literature.‖ Li Li refused to perform the assignment. She told Schmeizl that she thought the work was illegal and recommended that he contact Packard‘s legal department. Although a lawyer recommended against the practice, Schmeizl insisted that Li Li perform the calls. Moreover, he later wrote negative performance reviews because she was unable to get the requested information when she called competitors and identified herself as a Packard employee. On June 1, 2000, Li Li was terminated on Schmeizl‘s recommendation. Can Li Li bring a claim for wrongful discharge? Why or why not? [Li Li v. Canberra Industries, 134 Conn.App. 448, 39 A.3d 789 (2012)] (See Employment at Will.)

Solution Li can bring a wrongful discharge claim. Ordinarily, an employer may terminate an employment relationship at will. Courts provide an exception, however, when an employer‘s conduct violates public policy. In this case, Li has evidence that Packard retaliated against her because she refused to deceive Packard‘s competitors. Li also arguably engaged in whistleblowing by recommending that her supervisor contact the company‘s legal department.

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220.

Collective Bargaining. SDBC Holdings, Inc., acquired Stella D‘oro Biscuit Co., a bakery in New York City. At the time, a collective bargaining agreement existed between Stella D‘oro and Local 50 of the Bakery, Confectionary, Tobacco Workers and Grain Millers International Union.

During negotiations to renew the agreement, Stella D‘oro allowed Local 50 to examine and take notes on the company‘s financial statement but would not give Local 50 a copy of the statement.

Did Stella D‘oro engage in an unfair labor practice? Discuss. [SDBC Holdings, Inc. v. National Labor Relations Board, 711 F.3d 281 (2d Cir. 2013)] (See Labor Law.) Solution No. Stella D'oro did not engage in an unfair labor practice. In collective bargaining, both the employer and the union must negotiate in good faith and make a reasonable effort to come to an agreement. Good faith is a matter of subjective intent, but a party‘s actions can be used to evaluate the party‘s good or bad faith. Excessive delaying tactics may be proof of bad faith, as is insistence on obviously unreasonable contract terms. Other factors include rejecting a proposal without offering a counterproposal, engaging in a campaign among workers to undermine the union, unilaterally changing wages or terms and conditions of employment during the bargaining process, constantly shifting positions on disputed contract terms, and sending bargainers who lack authority to commit the company to a contract. An employer or a union that refuses to bargain in good faith without justification commits an unfair labor practice.

In this problem, Stella D'oro Biscuit Co., a bakery in New York City, entered into collective bargaining with Local 50, Bakery, Confectionary, Tobacco Workers and Grain Millers International Union. During negotiations, Stella D'oro allowed Local 50 to examine and take notes on the company‘s financial statement and offered the union an opportunity to make its own copy, but Stella D'oro would not give Local 50 a copy. The employer‘s refusal to give the union a copy of its financial statement was not an unfair labor practice in light of the opportunity the union had to examine the statement and make its own copy. None of the factors listed above existed here.

In the actual case on which this problem is based, the National Labor Relations Board concluded that Stella D'oro committed an unfair labor practice by declining to permit the union to keep a copy of the statement. On the employer‘s appeal, the U.S. Court of Appeals for the Second Circuit reversed. The court held that the employer was not required to permit the union to retain a copy of the company's audited financial statement, and that the employer satisfied any obligation it did have by affording the union many opportunities to examine the statement, or even to make its own copy.

221.

Business Case Problem with Sample Answer— Unemployment Compensation. Fior Ramirez worked as a housekeeper for Remington Lodging & Hospitality, a hotel in Atlantic Beach, Florida. After her father in the Dominican Republic suffered a stroke, she asked her employer for time off to be with him. Ramirez‘s manager, Katie Berkowski, refused the request. Two days later, Berkowski received a call from Ramirez to say that she was with her father. He died about a week later, and Ramirez returned to work, but Berkowski told her that she had abandoned her position.

Ramirez applied for unemployment compensation. Under the applicable state statute, ―an employee is disqualified from receiving benefits if he or she voluntarily left work without good cause.‖ Does Ramirez qualify for benefits? Explain. [Ramirez v. Reemployment Assistance Appeals Commission, 135 So.3d 408 (Fla.App. 1 Dist. 2014)] (See Health, Safety, Income Security, and Privacy.)

—For a sample answer to Problem 15–5, go to Appendix E.

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Solution Yes. Ramirez qualifies for unemployment compensation. Generally, to be eligible for unemployment compensation, a worker must be willing and able to work. Workers who have been fired for misconduct or who have voluntarily left their jobs are not eligible for benefits. In the facts of this problem, the applicable state statute disqualifies an employee from receiving benefits if that employee voluntarily leaves work without ―good cause.‖ The issue is whether Ramirez left her job for ―good cause.‖ When her father in the Dominican Republic had a stroke, she asked her employer for time off to be with him. Her employer refused the request. But Ramirez left to be with her father and called to inform her employer. It seems likely that this family emergency would constitute ―good cause,‖ and Ramirez‘s call and return to work after her father‘s death indicated that she did not disregard her employer‘s interests.

In the actual case on which this problem is based, the state of Florida denied Ramirez unemployment compensation. On Ramirez‘s appeal, a state intermediate appellate court reversed, on the reasoning stated above.

222.

Labor Unions. Carol Garcia and Pedro Salgado, bus drivers for Latino Express, Inc., a transportation company, began soliciting signatures from other drivers to certify the Teamsters Local Union No. 777 as the official representative of the employees. Latino Express fired Garcia and Salgado. The two drivers filed a claim with the National Labor Relations Board (NLRB) alleging that the employer had committed an unfair labor practice. Which employer practice defined by the National Labor Relations Act did the plaintiffs most likely charge Latino Express with committing? Is the employer‘s discharge of Garcia and Salgado likely to be construed as a legitimate act in opposition to union solicitation? If a violation is found, what can the NLRB do?

Discuss. [Ohr v. Latino Express, Inc., 776 F.3d 469 (7th Cir. 2015)] (See Labor Law.) Solution The National Labor Relations Act (NLRA) defines a number of employer practices as unfair to labor. Most likely to be charged by the plaintiffs in this case is the ban on an employer‘s Interference with the efforts of employees to form, join, or assist labor organizations. Garcia and Salgado, who were bus drivers for Latino Express, had begun soliciting signatures from other drivers to certify a Teamsters local union as the employees‘ official representative. Latino Express fired Garcia and Salgado.

The employer‘s discharge of Garcia and Salgado is not likely to be construed as a legitimate act in opposition to union solicitation. Generally, an employer has control over unionizing activities that take place on company property during working hours. An employer can limit the campaign activities of union supporters for a legitimate business reason. An employer can also reasonably limit the times and places that union solicitation takes place. An employer can campaign among its workers against the union. But an employer cannot issue threats or engage in other coercive conduct. Discharging union supporters is likely to be perceived as coercive.

If a violation is found in these circumstances, the NLRB can issue a cease-and-desist order compelling the employer to stop engaging in the unfair practice. A U.S. court of appeals can enforce the order.

In the actual case on which this problem is based, Peter Ohr, regional director of the NLRB, asked a federal district court to enjoin Latino Express from engaging in specific acts prohibited by the NLRA and to reinstate the terminated drivers. The court issued the injunction. Latino Express did

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not comply. The court held the employer in contempt. The U.S. Court of Appeals for the Seventh Circuit affirmed.

223.

Income Security. Jefferson Partners LP entered into a collective bargaining agreement (CBA) with the Amalgamated Transit Union. Under the CBA, drivers had to either join the union or pay a fair share—85 percent—of union dues, which were used to pay for administrative costs incurred by the union. An employee who refused to pay was subject to discharge. Jefferson hired Tiffany Thompson to work as a bus driver. When told of the CBA requirement, she said that she thought it was unfair. She asserted that it was illegal to compel her to join the union and that it would be illegal to discharge her for not complying. She refused either to join the union or to pay the dues. More than two years later, she was fired on the ground that her continued refusal constituted misconduct. Is Thompson eligible for unemployment compensation? Explain.

[Thompson v. Jefferson Partners LP, 2016 WL 953038 (Minn. App. 2016)] (See Health, Safety, Income Security, and Privacy.)

Solution No. Thompson is not eligible for unemployment compensation. Under the Federal Unemployment Tax Act, a state-administered system provides unemployment compensation to eligible individuals who have lost their jobs. To be eligible for unemployment compensation, a worker must be willing and able to work. Workers are not eligible for benefits if they voluntarily left their jobs or were fired for misconduct.

Here, Jefferson hired Thompson to work as a bus driver. Thompson was informed of the CBA provision that stipulated a non-union employee‘s payment of 85 percent of the amount of union dues paid by an employee who is a member of the union. She was also told of the possible consequence for non-compliance of a termination of employment. She complained that this requirement was unfair. She argued that she thought it was illegal to compel her to join the union and it would be illegal to discharge her for not complying with the CBA. At any rate, she refused to join the union or to pay the dues. Two years later, Jefferson terminated her on the ground that her continued refusal constituted misconduct. This ―misconduct‖ serves as a basis for the state‘s denial of unemployment benefits.

In the actual case on which this problem is based, the Minnesota Department of Employment and Economic Development denied Thompson‘s claim for benefits. Thompson appealed to a Minnesota state intermediate appellate court. The court defined employment misconduct to include ―a serious violation of the standards of behavior the employer has the right to reasonably expect of the employee.‖ The court held that Thompson‘s failure to comply with the CBA was ―a significant violation of Jefferson‘s reasonable policy. Accordingly, Thompson committed employment misconduct and she is ineligible to receive unemployment benefits.‖ 224.

Family and Medical Leave. To qualify for leave under the Family and Medical Leave Act (FMLA), an employee must comply with the employer‘s usual and customary notice requirements, including call-in policies. Robert Stein, an employee of Atlas Industries, Inc., suffered a knee injury at work. Stein took medical leave to have surgery on the knee. Ten weeks into his recovery, Stein‘s doctor notified Atlas that Stein could return to work with light-duty restrictions in two days. Stein, however, thought he was on leave for several more weeks. Atlas company policy provided that employees who missed three workdays without notification were subject to automatic termination. Stein did not return to work or call in as Atlas expected. Four days later, he was fired.

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Did Stein‘s discharge violate the FMLA? Discuss. [Stein v. Atlas Industries, Inc., 730 Fed.Appx. 313, (6th Cir. 2018)] (See Wages, Hours, and Leave.)

Solution No. Atlas‘s discharge of Stein did not violate the Family and Medical Leave Act (FMLA). The FMLA requires employers with fifty or more employees to provide them with up to twelve weeks of unpaid family or medical leave during any twelve-month period. Legitimate reasons for the leave include a serious health condition that renders the employee unable to perform the essential functions of his or he job.

But the FMLA does not grant an unconditional right to leave. As stated at the beginning of the problem, to qualify for leave, an employee must comply with his employer‘s notice requirements, including any call-in policies. When an employee fails to do so, the employer is within its rights to terminate him—even if the days the employee failed to call in were otherwise FMLA-protected.

Here, Stein, an Atlas employee, took medical leave from his job to have surgery. Ten weeks into recovery, Stein‘s doctor notified Atlas that Stein could return to work in two days. Stein, however, thought he was on leave for several more weeks. Atlas company policy provided that employees who missed three workdays without notice were subject to automatic termination. Stein did not return to work or call in as Atlas expected. Four days later, he was fired. Atlas was fully within its rights as an employer in the circumstances to take this step.

In the actual case on which this problem is based, the court issued a judgment in Atlas‘s favor.

The U.S. Court of Appeals for the Sixth Circuit affirmed, based on the reasoning set out here.

225.

A Question of Ethics—The IDDR Approach and Immigration Law. Split Rail Fence Company sells and installs fencing materials in Colorado. U.S. Immigration and Customs Enforcement (ICE) sent Split Rail a list of the company‘s employees whose documentation did not satisfy the Form I-9 employment eligibility verification requirements. The list included long-term workers who had been involved in company activities, parties, and picnics. They had bank accounts, driver‘s licenses, cars, homes, and mortgages. At Split Rail‘s request, the employees orally verified that they were eligible to work in the United States. Unwilling to accept the oral verifications, ICE filed a complaint against Split Rail for its continued employment of the individuals. [Split Rail Fence Co. v. United States, 852 F.3d 1228 (10th Cir. 2017)] (See Immigration Law.) 226.

Using the IDDR approach, identify Split Rail‘s ethical dilemma. What steps might the company take to resolve it? Explain.

Solution Split Rail‘s ethical dilemma is how to satisfy the demands of the government, and the needs and expectations of the company‘s employees. One way to resolve this dilemma is to comply with the government‘s demands while assuring the employees of the security of their employment.

The first step of the IDDR approach is an Inquiry to state the issue, the stakeholders, and the ethical standards. The issue is stated in the previous paragraph above. The stakeholders include Split Rail, its employees and their families, the government, and members of the

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larger community, including especially those who would work for Split Rail but for the company‘s employment of persons who do not satisfy the Form I-9 requirements.

The second step of the IDDR approach is a Discussion of actions to address the issue, the strengths and weaknesses of the actions, and consequences and effects on the stakeholders.

The Immigration Reform and Control Act (IRCA) makes it illegal to employ someone not authorized to work in the United States. To comply with the IRCA, an employer must complete Form I-9 (―Employment Eligibility Verification‖). The employer must review and verify documents establishing each worker‘s eligibility for employment in this country.

In this problem, U.S. Immigration and Customs Enforcement (ICE) sent Split Rail a list of its employees whose documentation did not satisfy the Form I-9 requirements. To meet the government‘s demands, Split Rail would need to review acceptable documentation to verify the eligibility status of the listed employees or discharge them.

The ICE list included long-term employees who had been involved in company activities, parties, and picnics. They had bank accounts, driver‘s licenses, cars, homes, and mortgages. To meet the needs and expectations of the employees, Split Rail should sufficiently verify their status to legitimately continue their employment.

At Split Rail‘s request, the employees orally verified that they were eligible to work in the United States. Unwilling to accept the oral verifications, ICE filed a complaint against Split Rail for its continued employment of these individuals. Split Rail is in violation of the IRCA provisions requiring the review and verification of documents. Consequently, the employer is also in violation for continuing to employ the individuals whose status is in question. These actions clearly do not meet the demands of the government or the needs and expectations of the workers.

The third step of the IDDR approach is a Decision on the action and a statement of its reasons. Here, Split Rail should decide to make a more concerted effort to comply strictly with the government‘s demands. To meet the needs and expectations of the workers, Split Rail should assure the employees that, on compliance with the government‘s requirements, their employment is secure. These seem like relatively uncomplicated steps to take to resolve the company‘s ethical dilemma.

The fourth and final step of the IDDR approach is a Review of the success or failure of the actions to resolve the issue, and satisfy the stakeholders. The suggested actions have the potential to accomplish success in this case. This may be Split Rail‘s best choice—almost any other action could lead to legal penalties, on the one hand, and a decimated workforce, on the other, with the remaining employees losing faith and trust in their employer.

In the actual case on which this problem is based, an administrative law judge imposed civil penalties on Split Rail for continuing to employ ―unauthorized aliens in the United States‖ in violation of the IRCA. The U.S. Court of Appeals for the Tenth Circuit denied Split Rail‘s petition for review.

227.

Is penalizing employers the best approach to take in attempting to curb illegal immigration? Discuss.

Solution

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Yes, penalizing employers is the best approach to take in attempting to reduce illegal immigration. Employment is the primary motivation for those who would immigrate illegally.

Why else would anyone voluntarily leave their home to live where they know nearly no one, likely do not speak the language or understand much of the culture, would be unable to participate in the government, and may be subject to arrest and deportation? Sanctioning those who would employ illegal immigrants would reduce the employers‘ willingness to hire the immigrants, thus eliminating the reason for the immigration.

Immigration should be curtailed and restricted because a nation might otherwise find itself overwhelmed. There could be too many persons seeking too few jobs, for example, or too many persons fleeing a temporarily discomfiting situation. There might be a movement of too many persons hostile to a nation, or its government, into its borders. There might be a large number of criminals who would seek refuge across international borders with too much ease.

No, penalizing employers is not the best approach to take in attempting to reduce illegal immigration. Penalizing employers puts the onus on those who are only taking economic advantage of a situation not of their own making. In some cases, those employers might not be able to fill the jobs that they have available.

Immigrants can revitalize nations and their economies, as well as enrich their cultures.

Employed immigrants pay taxes, which help fund government programs, such as Social Security. Without immigration, in many countries, including the United States, the populations would grow increasingly older, resulting in, among other things, fewer workers to support those who are retired. Immigrants contribute to economies in other ways, too, often doing work that citizens reject, for example. Immigrants are often responsible for a disproportionate number of the innovations, inventions, and other achievements that can improve a nation‘s life. Immigrants often follow different customs, or religions, or artistic traditions, which can enhance and diversify a nation‘s culture.

Critical Thinking and Writing Assignments 228. Time-Limited Group Assignment—Immigration. Nicole Tipton and Sadik Seferi owned and operated a restaurant in Iowa. Acting on a tip from the local police, agents of Immigration and Customs Enforcement executed search warrants at the restaurant and at an apartment where some restaurant workers lived. The agents discovered six undocumented aliens working at the restaurant and living together. When the I-9 forms for the restaurant‘s employees were reviewed, none were found for the six aliens. They were paid in cash while other employees were paid by check.

Tipton and Seferi were charged with hiring and harboring illegal aliens. (See Immigration Law.) 229.

The first group will develop an argument that Tipton and Seferi were guilty of hiring and harboring illegal aliens.

Solution Tipton and Seferi were guilty of hiring and harboring illegal aliens, and should be convicted and be given prison terms. The evidence was sufficient to support the convictions for hiring and harboring illegal aliens. Given the way the restaurant was run and the differential treatment of employees, it was clear the defendants knew I-9 forms were required as they kept them for most employees, but not for the undocumented workers. They also paid them

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in cash and did not pay taxes on behalf of those workers. They also maintained an apartment for those workers only. Separate accounts were maintained for the undocumented workers.

230.

The second group will assess whether Tipton and Seferi can assert a defense by claiming that they did not know that the workers were unauthorized aliens.

Solution It is not likely that Tipton and Seferi can successfully assert a defense by claiming that they did not know that the workers were unauthorized aliens. It is clear from the evidence set out in detail in the answer to the previous question that Tipton and Seferi knew the workers were illegal and they did not comply with employment verification procedures and other employment law requirements.

231.

The third group will determine the potential penalties that Tipton and Seferi could face for violating the Immigration Reform and Control Act by hiring six unauthorized workers.

Solution The employer can be fined up to $2,200 for each unauthorized employee for a first offense.

Assuming this is their first offense, Tipton and Seferi could be fined up to $13,200 for employing the six undocumented workers.

Solution and Answer Guide Miller, The Legal Environment Today 10e, 9780357635582; Chapter 16: Employment Discrimination

Table of Contents Critical Thinking Questions in Features ............................................................................................................. 203 Adapting the Law to the Online Environment ................................................................................ 203 Critical Thinking Questions in Cases ................................................................................................................... 203 Case 16.1 ............................................................................................................................................... 203 Case 16.2 ............................................................................................................................................... 203 Case 16.3 ............................................................................................................................................... 204 Chapter Review ........................................................................................................................................................... 205 Practice and Review .............................................................................................................................. 205 Practice and Review: Debate This ......................................................................................................... 206 Issue Spotters ........................................................................................................................................ 207 Business Scenarios and Case Problems ................................................................................................. 207 Critical Thinking and Writing Assignments ............................................................................................ 214

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Critical Thinking Questions in Features Adapting the Law to the Online Environment 232.

Can you think of a way a company could use information from an applicant‘s social media posts without running the risk of being accused of hiring discrimination?

Solution The EEOC has recommended the use of a third party to conduct social media screenings of applicants. In this way, the perspective employer will not receive any information about an applicant‘s protected characteristics. A third-party report can be created without disclosing the applicant‘s race, age, disability status, or other protected characteristics.

Critical Thinking Questions in Cases Case 16.1 233.

Could UPS have succeeded in this case if it had claimed simply that it would be more expensive or less convenient to include pregnant women among those whom it accommodates?

Explain.

Solution No. UPS could not have succeeded in this case if it had claimed that it would be more expensive or less convenient to include pregnant women among those whom it accommodates.

After an employee has made a prima facie showing that the employer‘s denial of an accommodation constituted disparate treatment under the Pregnancy Discrimination Act, an employer can attempt to justify its refusal to accommodate by offering legitimate, nondiscriminatory reasons for denying the accommodation. But a simple claim that it would be more expensive or less convenient to accommodate pregnant women while accommodating others subject to similar limitations would not be sufficiently strong to overcome the burden imposed on those women by the denial of accommodation.

Case 16.2 234.

Because of the constant harassment, Franchina had to be placed on injured-on-duty status. Later, diagnosed with severe post-traumatic stress disorder and unable to work again as a rescue lieutenant, she ―retired.‖ What is the appropriate measure of damages for this result?

Discuss.

Solution Damages, of course, are purposed, in part, to make a plaintiff whole for injuries suffered as a result of misconduct by a defendant. Damages for the harm visited upon Franchina should include at least what is termed ―front pay‖—the wages and benefits that the injured party would have earned had the wrongful conduct not occurred. The amount is at the equitable discretion of the court. It can be speculative and uncertain. Its calculation requires a prediction of what might have transpired without the harm. The court might consider the plaintiff‘s age and length of employment, the pay and benefits that she was receiving, the likelihood that the employment would have continued, the raises and promotions that might have occurred, her ability to work, and other factors. To arrive at a final figure, the court might apply the effects of inflation, the rate of return on an investment of the award, and a discount for the uncertainty.

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Here, the court might review Franchina‘s earnings, her disability pay, the quality of her career, how long she might have been employed based on the longevity of other similarly situated employees, and her lost pension benefits. The calculated figure should be reduced to present value.

Also appropriate would be damages for the emotional harm that Franchina suffered and punitive damages to deter the department, other city agencies, and other employers and employees, from engaging in similar misconduct. Punitive damages may not be available in this case, however.

235.

What steps might an employer take to avoid the circumstances that occurred in the Franchina case?

Solution Steps that an employer could take to avoid the circumstances and unfortunate result in the Franchina case are suggested by the facts. The Providence fire department appears to have a protocol for accepting and considering discrimination complaints. The department may further have a procedure for adjudicating the complaints. Absent was action on the part of the agency to enforce policies that discourage discriminatory comments and conduct. There could—and should—have been disciplinary action taken on each of Franchina‘s complaints. The department‘s tolerance of discriminatory remarks and misbehavior effectively encouraged more wrongful conduct.

To avoid similar circumstances, any employer should take the same steps—protocol, procedure, and punishment—and publicize their existence among employees.

Case 16.3 236.

Could Synovus have successfully claimed that Kassa‘s short breaks created an undue hardship? Explain.

Solution Probably not. An employer can avoid providing a reasonable accommodation for the known physical or mental limitations of an employee if it would impose an undue hardship on the employer. The test is whether the specific accommodation is significantly difficult or expensive in light of the employer‘s resources.

In Kassa‘s case, when he worked for Synovus in the company‘s Network Operation Center (NOC), his supervisor knew about his disorders, and granted his request to take short breaks when he got frustrated. This was subject to two conditions—to take a break, Kassa‘s area in the NOC must be covered and he must be available to be reached if necessary. In these circumstances, it does not appear that granting Kassa‘s request for short breaks was significantly difficult or expensive for Synovus.

There is no indication that after Kassa‘s transfer to the ATM team, his request to take short breaks would have somehow imposed an undue hardship on Synovus. The request could have been granted subject to the same conditions in the NOC. His new supervisor simply refused the request.

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237.

Suppose that instead of asking to take a short break whenever he had an episode, Kassa had asked if he could take customer service calls only from technicians, work nights, or work from home. Would the result have been different? Discuss.

Solution Yes, if, instead of asking to take a short break whenever he had an episode, Kassa had asked to take customer service calls only from technicians, work nights, or work from home, the result in this case would likely have been different.

If an employee with a disability can perform essential functions of the job with a reasonable accommodation, the employer must make it. But an employer is not required to transform a position into different job by eliminating an essential function in order to accommodate the needs of the employee.

Answering customer service calls constituted an ―essential function‖ of Kassa‘s position on the ATM team. A request to be exempted from answering all or some of those calls would have transformed the job, and therefore would not have been reasonable. This would have been demonstrably true if, for example, Synovus‘s phone system would not enable calls to be routed to off-site employees or no night shift position existed on the ATM team.

Chapter Review Practice and Review Amaani Lyle, an African American woman, took a job as a scriptwriters‘ assistant at Warner Brothers Television Productions. She worked for the writers of Friends, a popular, adult-oriented television series. One of her essential job duties was to type detailed notes for the scriptwriters during brainstorming sessions in which they discussed jokes, dialogue, and story lines. The writers then combed through Lyle‘s notes after the meetings for script material.

During the meetings, the three male scriptwriters told lewd and vulgar jokes and made sexually explicit comments and gestures. They often talked about their personal sexual experiences and fantasies, and some of these conversations were later used in episodes of Friends. During the meetings, Lyle never complained that she found the writers‘ conduct offensive.

After four months, Lyle was fired because she could not type fast enough to keep up with the writers‘ conversations during the meetings. She filed a suit against Warner Brothers alleging sexual harassment and claiming that her termination was based on racial discrimination. Using the information presented in the chapter, answer the following questions.

238.

Would Lyle‘s claim of racial discrimination be for intentional (disparate-treatment) or unintentional (disparate-impact) discrimination? Explain.

Solution Because Lyle has no direct evidence of discriminatory intent, her claim would likely be for unintentional, disparate impact discrimination. She could argue that the employer‘s requirement that she type as fast as the writers of typing speed disproportionately affected those in a protected class using the EEOC‘s ―four-fifths‖ rule.

239.

Can Lyle establish a prima facie case of racial discrimination? Why or why not?

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Solution It is unlikely that Lyle could establish a prima facie case of unintentional discrimination. To do so, she would have to prove that the employer‘s typing speed requirement had a discriminatory effect, excluding members of a protected class at a substantially higher rate than nonmembers.

Under the EEOC‘s ―four-fifths‖ rule, she would have to show that the selection (or retention) rate for members of a protected class was less than four-fifths, or 80 percent, of the selection rate for nonmembers. This would be difficult to show given these facts.

240.

When she was hired, Lyle was told that typing speed was extremely important to her position. At the time, she maintained that she could type eighty words per minute, so she was not given a typing test. It later turned out that Lyle could type only fifty words per minute. What impact might typing speed have on Lyle‘s lawsuit?

Solution Evidence that Lyle had misrepresented how fast she could type at the time of her interview would not substantially impact her claim of racial discrimination, because it would be considered afteracquired evidence of employee misconduct. The United States Supreme Court has held that such evidence cannot shield an employer entirely from liability for discrimination. It could, however, be used to limit the amount of damages that she could obtain if she was successful in her lawsuit.

241.

Lyle‘s sexual harassment claim was based on the hostile work environment created by the writers‘ sexually offensive conduct at meetings that she was required to attend. The writers, however, argued that their behavior was essential to the ―creative process‖ of writing Friends, a show that routinely contained sexual innuendos and adult humor. Which defense discussed in the chapter might Warner Brothers assert using this argument?

Solution Warner Brothers can assert the writer‘s sexually explicit conduct during the meetings was a business necessity, because it was necessary for the writers to freely discuss plot ideas and themes in creating the script for Friends. The television series has been popular largely because of its adult humor and sexual innuendos, and without those elements, the show would not be the same. Thus, some sexually explicit banter is necessary to write the script and Warner Brothers would be able to claim this in their defense.

Practice and Review: Debate This 242.

Members of minority groups and women no longer need special legislation to protect them from employment discrimination.

Solution There is little doubt that minorities and women suffered discrimination in the U.S. labor market for decades, if not longer. Today, in contrast, this country has seen much growth in the average incomes of all American, regardless of race or gender. The labor market is competitive, so employers who discriminate against minorities and women end up suffering from higher costs compared to nondiscriminating employers.

Certainly there is less discrimination against minorities and women than there was one hundred years ago. That does not mean, though, that we should scrap all legislation that protects these groups. More progress needs to be made to create a color-. age-, race-, and gender-blind

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employment market. Without existing anti-discrimination laws, those who suffer discrimination would have no place to term for redress of their grievances.

Issue Spotters 243.

Ruth is a supervisor for Subs & Suds, a restaurant. Tim is a Subs & Suds employee. The owner announces that some employees will be discharged. Ruth tells Tim that if he has sex with her, he can keep his job. Is this sexual harassment? Why or why not?

Solution Yes. One type of sexual harassment occurs when a request for sexual favors is a condition of employment, and the person making the request is a supervisor or acts with the authority of the employer. A tangible employment action, such as continued employment, may also lead to the employer‘s liability for the supervisor‘s conduct. That the injured employee is a male and the supervisor a female, instead of the other way around, would not affect the outcome. Samegender harassment is also actionable.

244.

Koko, a person with a disability, applies for a job at Lively Sales Corporation for which she is well qualified, but she is rejected. Lively continues to seek applicants and eventually fills the position with a person who does not have a disability. Could Koko succeed in a suit against Lively for discrimination? Explain.

Solution Yes. Koko can succeed in a discrimination suit if she can show that she was not hired solely because of her disability. The other elements for a discrimination suit based on a disability are that the plaintiff (1) has a disability and (2) is otherwise qualified for the job. Both of these elements appear to be satisfied in this scenario.

Business Scenarios and Case Problems 245.

Title VII Violations. Discuss fully whether either of the following actions would constitute a violation of Title VII of the Civil Rights Act. 1. Tennington, Inc., is a consulting firm with ten employees. These employees travel on consulting jobs in seven states. Tennington has an employment record of hiring only white males. (See Title VII of the Civil Rights Act.) Solution Only employers with fifteen or more employees who are engaged in an activity that affects interstate commerce come under the Civil Rights Act, Title VII. Tennington, Inc., has only ten employees, and thus its employment of only white males is not a federal civil rights violation.

Tennington could be in violation of state law, however, depending on the requirements of the state statute.

2.

Novo Films, Inc., is making a film about Africa and needs to employ approximately one hundred extras for this picture. To hire these extras, Novo advertises in all major newspapers in Southern California. The ad states that only African Americans need apply. (See Defenses to Employment Discrimination.)

Solution The 1964 Civil Rights Act, Title VII, as amended, prohibits discrimination at any stage of employment on the basis of race, color, religion, sex, or national origin. The advertisement,

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which clearly restricts employment applicants to African Americans, is in violation of the law.

The Civil Rights Act does provide that it is not illegal to discriminate when such discrimination is necessary as a bona fide occupational qualification; however, race or color cannot be used as a bona fide occupational defense. Therefore, even though the film is about Africa, Novo Films cannot advertise solely for African Americans.

246.

Religious Discrimination. Gina Gomez, a devout Roman Catholic, worked for Sam‘s Department Stores, Inc., in Phoenix, Arizona. Sam‘s considered Gomez a productive employee because her sales exceeded $200,000 per year. The store gave its managers the discretion to grant unpaid leave to employees but prohibited vacations or leave during the holiday season— October through December. Gomez felt that she had a ―calling‖ to go on a ―pilgrimage‖ in October to a location in Bosnia where some persons claimed to have had visions of the Virgin Mary. The Catholic Church had not designated the site an official pilgrimage site, the visions were not expected to be stronger in October, and tours were available at other times. The store managers denied Gomez‘s request for leave, but she had a nonrefundable ticket and left anyway.

Sam‘s terminated her employment, and she could not find another job. Can Gomez establish a prima facie case of religious discrimination? Explain. (See Title VII of the Civil Rights Act.) Solution Gomez cannot establish a prima facie case of religious discrimination. The facts show only a bona fide religious belief that she needs to go to Medjugorje at some time, not at a particular time.

When an employee claims that religious beliefs require a particular pilgrimage, or some other duty, the employee must prove that this mandate is part of a bona fide religious belief. Otherwise, an employer would be forced to accommodate the employee‘s personal preference (in this problem, the timing of the trip). If the visions of the Virgin Mary were expected to be more intense in October, for example, or the Catholic Church urged her to go at that time, she would have a stronger case. But without such factors, she cannot satisfy a crucial element of a prima facie case: a conflict between her religious belief and her employment duties.

247.

Spotlight on Dress Code Policies—Discrimination Based on Gender. Burlington Coat Factory Warehouse, Inc., had a dress code that required male sales clerks to wear business attire consisting of slacks, shirt, and necktie. Female sales clerks, by contrast, were required to wear a smock so that customers could readily identify them. Karen O‘Donnell and other female employees refused to wear the smock. Instead, they reported to work in business attire and were suspended. After numerous suspensions, the female employees were fired for violating Burlington‘s dress code policy. All other conditions of employment, including salary, hours, and benefits, were the same for female and male employees. Was the dress code policy discriminatory? Why or why not? [O’Donnell v. Burlington Coat Factory Warehouse, Inc., 656 F.Supp. 263 (S.D.Ohio 1987)] (See Title VII of the Civil Rights Act.) Solution Yes. The dress code policy was illegal discrimination based upon gender. Unlike hair and grooming codes, which are based on well-established social expectations, there is no justifiable basis for women to wear smocks in the workplace. There is a natural tendency to believe that uniformed women wearing smocks have lower professional status than their male colleagues in business attire. The smock requirement thus perpetuated sexual stereotypes of inferiority.

Therefore, the dress code policy violated Title VII of the Civil Rights Act.

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248.

Age Discrimination. Beginning in 1986, Paul Rangel was a sales professional for pharmaceutical company Sanofi- Aventis U.S., LLC (S-A). Rangel had satisfactory performance reviews until 2006, when S-A issued new expectations guidelines with sales call quotas and other standards that he failed to meet. After two years of negative performance reviews, Rangel—who was then more than forty years old— was terminated as part of a nationwide reduction of sales professionals who had not met the expectations guidelines. This sales force reduction also included younger workers. Did S-A engage in age discrimination? Discuss. [Rangel v. Sanofi Aventis U.S. LLC, 507 Fed.Appx. 782 (10th Cir. 2013)] (See Discrimination Based on Age, Disability, or Military Status.)

Solution No. Sanofi-Aventis U.S. LLC (S-A) does not appear to have engaged in age discrimination. The Age Discrimination in Employment Act (ADEA) prohibits employment discrimination on the basis of age against individuals forty years of age or older. For the act to apply, an employer must have twenty or more employees, and the employer‘s business activities must affect interstate commerce.

To establish a prima facie case, plaintiffs must show that they were (1) members of the protected age group, (2) qualified for the position from which they were discharged, and (3) discharged because of age discrimination. If the employer offers a legitimate reason for its action, the plaintiff must show that the stated reason is only a pretext.

In this problem, Rangel was over forty years old. But he also had negative sales performance reviews for more than two years before he was terminated as part of S-A‘s nationwide reduction in force of all sales professionals who had not met the ―Expectations‖ guidelines, including younger workers. The facts do not indicate that a person younger than Rangel replaced him or that S-A intended to discriminate against him on the basis of age. Based on these facts, Rangel could not establish a prima facie case of age discrimination on the part of S-A. In the actual case on which this problem is based, in Rangel‘s suit against S-A under the ADEA, alleging age discrimination, a federal district court issued a judgment in S-A‘s favor. On Rangel‘s appeal, the U.S. Court of Appeals for the Tenth Circuit affirmed, according to the reasoning stated above.

249.

Discrimination Based on Disability. Cynthia Horn worked for Knight Facilities Management–GM, Inc., in Detroit, Michigan, as a janitor. When Horn developed a sensitivity to cleaning products, her physician gave her a ―no exposure to cleaning solutions‖ restriction. Knight discussed possible accommodations with Horn. She suggested that restrooms be eliminated from her cleaning route or that she be provided with a respirator. Knight explained that she would be exposed to cleaning solutions in any situation and concluded that there was no work available within her physician‘s restriction. Has Knight violated the Americans with Disabilities Act by failing to provide Horn with the requested accommodations? Explain. [Horn v. Knight Facilities Management–GM, Inc., 556 Fed.Appx. 452 (6th Cir. 2014)] (See Discrimination Based on Age, Disability, or Military Status.)

Solution No. Knight has not violated the Americans with Disabilities Act (ADA) by failing to provide Horn‘s requested accommodations. The ADA requires that certain employers ―reasonably accommodate‖

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the needs of persons with disabilities unless to do so would cause the employer to suffer ―undue hardship.‖ Thus, if an employee with a disability, with reasonable accommodation, can perform essential job functions, the employer must make the accommodation. Generally, employers should give primary consideration to employees‘ preferences in deciding what accommodations to make. But the ADA does not require that employers accommodate the needs of employees with disabilities who are not otherwise qualified to do the work.

In the facts of this problem, Horn worked as a janitor for Knight. When she developed sensitivity to cleaning products, her physician gave her a ―no exposure to cleaning solutions‖ restriction. She suggested to her employer that restrooms be eliminated from her route or that she be provided with a respirator as an accommodation to allow her to continue to work. Knight explained that she would be exposed to cleaning solutions in any situation because they were airborne, and concluded that there was no work available within her restriction. In other words, Horn‘s suggested accommodations were not reasonable because neither one complied with her restriction. Further, it appears that Knight could not in any other way reasonably accommodate the restriction.

In the actual case on which this problem is based, Horn filed a suit against Knight. The court dismissed her claim. The U.S. Court of Appeals for the Sixth Circuit affirmed, according to the reasoning set out above.

250.

Business Case Problem with Sample Answer— Sexual Harassment. Jamel Blanton, a male employee at a Pizza Hut restaurant operated by Newton Associates, Inc., in San Antonio, Texas, was subjected to sexual and racial harassment by the general manager, who was female.

Newton had a clear, straightforward antidiscrimination policy and complaint procedure. The policy provided that in such a situation, an employee should complain to the harasser‘s supervisor. Blanton alerted a shift leader and an assistant manager about the harassment, but they were subordinate to the general manager and did not report the harassment to higher-level management. When Blanton finally complained to a manager with authority over the general manager, the employer investigated and fired the general manager within four days. Blanton filed a suit in a federal district court against Newton, seeking to impose liability on the employer for the general manager‘s actions. What is Newton‘s best defense? Discuss. [Blanton v. Newton Associates, Inc., 593 Fed.Appx. 389 (5th Cir. 2015)] (See Title VII of the Civil Rights Act.) —For a sample answer to Problem 16–6, go to Appendix E. Solution Newton‘s best defense to Blanton‘s assertion of liability against the employer for its general manager‘s actions is the ―Ellerth/Faragher affirmative defense.‖ To establish this defense, an employer must show that it has taken reasonable care to prevent and promptly correct any sexually harassing behavior and that the plaintiff unreasonably failed to take advantage of any opportunity provided by the employer to avoid the harm.

In this problem, Blanton was subjected to sexual harassment by the general manager at their place of employment, a Pizza Hut restaurant operated by Newton. Blanton alerted low-level supervisors about the harassment, but they, like Blanton, were subordinate to the general manager and had no authority over her. Newton had a clear, straightforward anti-discrimination policy and complaint procedure that provided an employee should complain to the harasser's supervisor in such a situation. Once Blanton finally complained to a manager with authority over the general manager, their employer promptly and effectively responded to Blanton's proper

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complaint. His delay in reporting the harassment to the appropriate authority can be construed as an unreasonable failure to take advantage of the opportunity provided by the employer to avoid the harm.

In the actual case on which this problem is based, in Blanton‘s suit against Newton, a jury found that the plaintiff was harassed as he claimed, but also that the defendant proved the Ellerth/Faragher affirmative defense, and the court issued a judgment in the employer‘s favor. The U.S. Court of Appeals for the Fifth Circuit affirmed.

251.

Discrimination Based on Disability. Dennis Wallace was a deputy sheriff for Stanislaus County, California, when he injured his left knee. After surgery, he was subject to limits on prolonged standing, walking, and running. The county assigned him to work as a bailiff. The sergeants who supervised him rated his performance above average. Less than a year later, without consulting those supervisors, the county placed him on an unpaid leave of absence, under the mistaken belief that he could not safely perform the essential functions of the job.

Wallace filed an action in a California state court against the county, alleging discrimination based on disability. Under state law, discriminatory intent is shown by evidence that an actual or perceived disability was a ―substantial motivating factor or reason‖ for an employer‘s adverse employment action. An employee is not required to show that the action was motivated by animosity or ill will. Could Wallace likely prove the ―substantial motivating factor or reason‖ element? Explain. [Wallace v. County of Stanislaus, 245 Cal.App.4th 109, 199 Cal.Rptr.3d 462 (5 Dist. 2016)] (See Discrimination Based on Age, Disability, or Military Status.)

Solution Yes. Based on the facts, Wallace could likely prove the ―substantial motivating factor or reason‖ element of the state‘s disability discrimination law. As stated in the problem, under that law, discriminatory intent can be shown by evidence that an actual or perceived disability was a ―substantial motivating factor or reason‖ for an employer‘s adverse employment action. A showing of an employer‘s animosity of ill will is not required.

Wallace was a county deputy sheriff in California, when he suffered an injury to his knee that limited prolonged standing, walking, and running. Sometime after his return to work following surgery, he was assigned to the position of bailiff. His supervisors evaluated his performance in that capacity as above average. Despite this review, and without consulting the supervisors, the county removed Wallace from the bailiff position and forced him to take an unpaid administrative leave. In Wallace‘s subsequent suit in a California state court against the county, he alleged discrimination based on disability.

In these circumstances, Wallace could prove the requisite discriminatory intent by showing his actual or perceived disability was a ―substantial motivating factor or reason‖ for the county‘s decision to remove him from his job as bailiff and place him on the unpaid leave of absence.

In the actual case on which this problem is based, in Wallace‘s action against the county, the court instructed the jury that animus or ill will was a requirement of his cause. The jury found that Wallace proved his claim but for this requirement. The court issued a judgment in the county‘s favor. A state intermediate appellate court reversed, holding that the lower court‘s instruction was erroneous. With the element of animus or ill will eliminated, the jury‘s findings favored Wallace.

The appellate court remanded the case for a retrial on the issue of damages only.

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252.

Discrimination Based on Gender. The Fresno County Office of Education hired Aileen Rizo as a math consultant. She had previously worked as a middle and high school math teacher, earning about $50,000 a year. Fresno based the salary of its new hires on the individual‘s prior salary, according to the county‘s Standard Operating Procedure (SOP). When Rizo learned that she was being paid less than comparable male employees for the same work, she filed a complaint. The county responded that all salaries were set under the SOP. Rizo filed a suit against Jim Yovino, the Fresno superintendent, claiming a violation of the Equal Pay Act. She asserted that under the Equal Pay Act, an employer should not be able to justify a wage differential between men and women on the basis of prior salary. Yovino argued that basing pay on a prior salary was permissible under an exception in the act for ―any factor other than gender.‖ Did the county violate the Equal Pay Act? Discuss. [Rizo v. Yovino, 887 F.3d 453 (9th Cir. 2018)] (See Title VII of the Civil Rights Act.) Solution Yes. The county violated the Equal Pay Act. This act requires equal pay for male and female employees doing similar work at the same establishment. If the wage differential is due to ―any factor other than gender,‖ then it does not violate the act. Otherwise, it might.

In this problem, Fresno County hired Aileen Rizo as a math consultant. The county based her initial salary on her prior salary, as a middle and high school math teacher, according to the county‘s Standard Operating Procedure. When Rizo learned that she was being paid less than comparable male employees for the same work, she filed a suit against Jim Yovino, the Fresno superintendent, claiming a violation of the Equal Pay Act. Yovino argued that basing pay on a prior salary was permissible under the act‘s exception for ―any factor other than gender.‖ ―Factors other than gender‖ include seniority and merit systems, and an individual‘s experience, educational background, ability, and prior job performance. In other words, a ―factor other than gender‖ must be a legitimate, job-related factor. A female‘s prior salary does not justify the current and future payment of a lower wage to her. To conclude otherwise be to allow an employer to capitalize on a gender-based wage gap and continue it forever. This would be contrary to the purpose of the Equal Pay Act. In the actual case on which this problem is based, Yovino filed a motion for summary judgment, which the court denied. The U.S. Court of Appeals for the Ninth Circuit affirmed and remanded. ―To accept the County‘s argument would be to perpetuate rather than eliminate the pervasive discrimination at which the Act was aimed.‖ 253.

A Question of Ethics—The IDDR Approach and Unintentional Discrimination.

McLane Company is a supply-chain services company that distributes goods to retailers. McLane requires employees with physically demanding jobs to have physical evaluations, both when they start work and when they return after medical leave. After working in a physically demanding job for McLane for eight years, Damiana Ochoa took maternity leave. When she returned to work, she failed the physical evaluation and was fired. She filed a discrimination complaint with the Equal Employment Opportunity Commission (EEOC). The agency issued a subpoena—an order to appear in court—seeking the names and contact information of McLane employees who had been asked to have evaluations throughout the company‘s national operations. [McLane Co. v.

E.E.O.C., 581 U.S.___, 137 S.Ct. 1159, 197 L.Ed.2d 500 (2017)] (See Title VII of the Civil Rights Act.) 1. On what legal ground might McLane legitimately refuse to comply with the EEOC‘s subpoena? What practical factors could affect the choice not to comply? Discuss.

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Solution A business has a legal obligation to comply with a subpoena unless compliance would be ―unduly burdensome.‖ On this ground, McLane might legitimately refuse to comply with the subpoena issued by the Equal Employment Opportunity Commission (EEOC).

Title VII of the Civil Rights Act prohibits unintentional discrimination. This can occur when a protected group of people is adversely affected by an employer‘s test, even though it does not appear to be discriminatory. To succeed on a claim of unintentional discrimination, it must be shown statistically that the employer‘s test is discriminatory in effect.

A statistical showing requires hard data. Accurate information about the effect of a specific test can be obtained from the employer who imposes it. This may require a subpoena. The EEOC monitors compliance with Title VII. Before filing a suit, a person who alleges discrimination must file a claim with the EEOC, which can issue a subpoena as part of its investigation into the facts.

In this problem, Ochoa held a physically demanding job with McLane. McLane requires employees with such jobs to take physical evaluations. When Ochoa failed the evaluation, McLane fired her. She filed a claim with the EEOC, which issued a subpoena, seeking the personal information of other McLane employees who took the evaluation.

Responding to a subpoena can be ―unduly burdensome.‖ The most important factor is the requested information‘s relevance—the relationship between the material sought and the matter under investigation. This might include access to virtually anything that casts light on an allegation against an employer. But a request that is for an illegitimate purpose, or that is too indefinite, overbroad, arbitrary, or capricious is likely also overly burdensome. Privacy interests can be a factor. The difficulty of producing the requested materials is certainly a prime concern of the party who is asked to provide them.

In the actual case on which this problem is based, McLane refused to comply. A federal district court quashed the subpoena. The U.S. Court of Appeals for the Ninth Circuit reviewed this decision de novo and reversed. On appeal, the United States Supreme Court reversed the appellate court‘s judgment and remanded the case, holding that the appropriate standard for review was abuse of discretion, not de novo.

2.

Using the IDDR approach, consider whether McLane has an ethical duty to comply with the subpoena.

Solution Yes. McLane has an ethical duty to comply with the EEOC‘s subpoena, at least to the extent of its legitimacy. Of course, the company does not violate this duty by initially attempting to resist the subpoena. Both actions should satisfy the stakeholders.

Use of the IDDR approach requires an Inquiry to identify the issue, the stakeholders, and the ethical standards. The ethical issue for McLane is whether to comply with the EEOC‘s subpoena. The stakeholders include Ochoa, McLane‘s other employees, and the company‘s owners, suppliers, and customers, as well as the society at large, especially third parties affected through the other stakeholders and potential employees. Applicable ethical standards include at a minimum McLane‘s legal obligation to comply and the company‘s expressed or implied policy to generally act in compliance with the law.

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The IDDR approach also requires a Discussion of actions to address the issue, the strengths and weaknesses of the actions, and the consequences and effects on stakeholders. McLane can stubbornly refuse to comply without proffering a reason, but this might result in significant penalties, to the benefit of none of the stakeholders. Instead, McLane can object to the subpoena and offer a reasoned defense. Or the company might choose to fully comply without objection. Either of these actions would recognize the interests of all of the stakeholders by avoiding the appearance of impropriety and illegality, and the onus of sanctions.

A Decision on the action and a statement of its reasons is the next step in the IDDR approach.

It seems clear that McLane should not baldly refuse to comply with the subpoena, but should fully comply or offer a defense, for the reasons stated in the preceding paragraph. Among likely defenses, for example, whether responding to a subpoena is ―unduly burdensome‖ can help to determine the ethics of compliance. For the purpose of weighing an ethical duty to comply, an important factor might be the privacy interests of the employees. McLane could also assert that the request for information is overbroad and that the data sought is not relevant.

The last step of the IDDR approach is a Review of the success or failure of the actions to resolve the issue, and satisfy the stakeholders. Either full compliance or objection to compliance on a legitimate basis should reassure stakeholders of the company‘s lawful conduct and the soundness of its policies and procedures. This should positively resolve the ethical issue.

Critical Thinking and Writing Assignments 254.

Critical Legal Thinking. Why has the federal government limited the application of the statutes discussed in this chapter to firms with a specified number of employees, such as fifteen or twenty? Should these laws apply to all employers regardless of size? Why or why not? (See Title VII of the Civil Rights Act.) Solution The application of any statute can be limited by the legislative body that enacts the statute. In the case of federal antidiscrimination legislation, Congress sets the number of employees that a firm may have without being subject to the federal laws. For example, in 1972 Congress reduced the number of employees that an employer could have and still avoid liability for violation of Title VII of the Civil Rights Act of 1964. Why does Congress set these numbers at the levels that it does?

The reasons are as varied as the times in which the laws are passed. Most likely the reasons are political: constituents who feel strongly about being subject to the laws, or who oppose exempting employers, or who favor employee protection against discrimination, for example.

These reasons may be founded on economic projections about the cost of employer compliance, the cost of government enforcement, or the cost not to comply or not to enforce. Sometimes limits are part of a compromise. Whether all antidiscrimination laws should apply to all employers regardless of their size can be argued on the basis of ―fairness:‖ why should an employer with fourteen full-time permanent employees be exempt from a statute that applies to an employer with fifteen employees who work no more than twenty weeks every two years? The question can be debated on the issue of social effect: the policies of an employer with a few jobs through which pass many employees on an informal basis may have less effect in a community than the policies of an employer who maintains formally a larger, permanent staff. The numbers can be

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drawn according to the bottom line: whether a small business with only a few employees can afford the cost of compliance, whether a large business with many employees can afford not to comply, and whether the government can afford the cost of enforcement.

255.

Time-Limited Group Assignment—Discrimination Based on Race. Two African American plaintiffs sued the producers of the reality television series The Bachelor and The Bachelorette for racial discrimination. The plaintiffs claimed that the shows had never featured a person of color in the lead role. Plaintiffs also alleged that the producers had failed to provide people of color who auditioned for lead roles with the same opportunities to compete as white people who auditioned. (See Title VII of the Civil Rights Act.) 1.

The first group will assess whether the plaintiffs can establish a prima facie case of disparatetreatment discrimination.

Solution To succeed on a claim of disparate-treatment discrimination in hiring, plaintiffs must show that (1) they are a member of a protected class, (2) they applied for and were qualified for the job in question, (3) they were rejected by the employer, and (4) the employer continued to seek applicants for the position or filled the position with a person not in a protected class. If the plaintiff can meet these relatively easy requirements, that individual has made out a prima facie case of illegal discrimination. This means that the plaintiff has met the initial burden of proof and will win in the absence of a legally acceptable employer defense. In this problem, a prima facie case could likely be established if people of color who auditioned for lead roles were not given the same opportunities to compete as white people who auditioned.

2.

The second group will consider what the plaintiffs would have to show to establish disparateimpact discrimination.

Solution In a disparate-impact discrimination case, the complaining party must first show statistically that the employer‘s practices, procedures, or tests are discriminatory in effect. Once the plaintiff has made out a prima facie case, the burden of proof shifts to the employer to show that the practices or procedures in question were justified. A plaintiff can prove a disparate impact by comparing the employer‘s workforce to the pool of qualified individuals available in the local labor market. The plaintiff must show that (1) as a result of educational or other job requirements or hiring procedures, (2) the percentage of nonwhites, women, or members of other protected classes in the employer‘s workforce (3) does not reflect the percentage of that group in the pool of qualified applicants. A plaintiff can also prove disparate-impact discrimination by comparing the selection rates of whites and nonwhites (or members of another protected class). When a job requirement or hiring procedure excludes members of a protected class from an employer‘s workforce at a substantially higher rate than nonmembers, discrimination occurs. In this problem, to consider the validity of the plaintiffs‘ claim requires consideration of the requirements to appear on the shows and the numbers and races of the applicants. If, however, the shows have never featured a person of color in a lead role, it seems likely that there is discrimination.

3.

The third group will assume that the plaintiffs established a prima facie case and that the burden has shifted to the employer to articulate a legal reason for not hiring the plaintiffs.

What legitimate reasons might the employer assert for not hiring the plaintiffs in this

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situation? Should the law require television producers to hire persons of color for lead roles in reality television shows? Explain your answer.

Solution Despite the assumption in the facts that the plaintiffs can establish a prima facie case, the employer‘s best defenses most likely relate to the elements of such a case. For example, if few persons of color applied for the lead roles, the disposition of their applications would have little statistical significance in a disparate-impact discrimination case. And those who did apply may not have met the shows‘ criteria for the lead roles, undercutting a claim of disparate-treatment discrimination in hiring. Of the other defenses discussed in the text, the employer might argue that whatever criterion the rejected applicants failed to meet is a business necessity—necessary for the performance of the role. There is no indication that color is a bona fide occupational qualification (BFOQ) for the role, and in any circumstance there is little likelihood it would be an acceptable BFOQ. In an analogy to a fair seniority system, in which persons with more years of service are promoted first, the employer might assert that the lead roles are filled on a first-to-apply, first-to-be-cast basis.

Solution and Answer Guide Miller, The Legal Environment Today 10e, 9780357635582; Chapter 17: Business Organizations

Table of Contents Critical Thinking Questions in Features ............................................................................................................. 217 Digital Update ..................................................................................................................................... 217 Cybersecurity and the Law ................................................................................................................ 218 Critical Thinking Questions in Cases ................................................................................................................... 218 Case 17.1 ............................................................................................................................................... 218 Case 17.2 ............................................................................................................................................... 219 Case 17.3 ............................................................................................................................................... 220 Chapter Review ........................................................................................................................................................... 221 Practice and Review .............................................................................................................................. 221 Practice and Review: Debate This ......................................................................................................... 222 Issue Spotters ........................................................................................................................................ 222 Business Scenarios and Case Problems ................................................................................................. 223 Critical Thinking and Writing Assignments ............................................................................................ 231

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Critical Thinking Questions in Features Digital Update 256.

After filing (often online) a DBA or FBN, the sole proprietor must publish the statement in a newspaper to notify the public. For the most part, online DBA notification is not available.

Should it be? Explain your answer.

Solution The goal of the legal notice requirement for DBAs is to inform the general public that the trade name of a sole proprietorship or other business is different from its legal name or the name of its owner. This notice usually must be published in a newspaper with a daily or weekly circulation, and for several consecutive days or weeks. Given the extent to which business transactions have moved online, these rules seem highly anachronistic. If the goal of the legal notice requirement is to generate awareness and transparency, then relying on print newspapers hardly seems the most practical method of doing so.

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Cybersecurity and the Law 1. Suppose a franchisor has two choices when it comes to cybersecurity provisions in its FDD. The franchisor can either (a) assume control and responsibility for a franchisee‘s privacy security system, or (b) avoid this control and responsibility, leaving point-of-sale security in the hands of the franchisee. Which is the better choice? Why? Solution The temptation for franchisors to cede cybersecurity control and responsibility to franchisees in the FDD is easy to understand. If the franchisor is only minimally involved in the franchisee‘s privacy and security policies, then it can hope to avoid liability if those policies prove insufficient to protect against a data breach. The reality, however, is that it is very difficult for the franchisor to escape responsibility when a franchisee is hacked, regardless of the terms of the FDD. As noted in the feature, plaintiff‘s lawyers will almost always focus their attention on the franchisor, and consumers are generally unaware of the difference between franchisors and franchisees. So, if a single Subway franchise is hacked, consumers will be wary of all the Sunway franchises, ultimately damaging the franchisor‘s bottom line.

Consequently, franchisors are generally better served to assume control of IT security in an FDD. As part of this strategy, the franchisor should centralize and standardize each franchisee‘s practices when it comes to point-of-sale system security and have quality control protocols in place to make sure these security systems are functioning properly. Ideally, the franchisor should also provide data-protection training to managers and employees of each franchise. Each of these steps will provide a layer of liability protection should a franchisee experience a data breach.

Critical Thinking Questions in Cases Case 17.1 257.

The trial court ruled that Wagner could have been an agent for ―the business.‖ Why, in the view of the appellate court, did this ruling make no sense?

Solution The appellate court concluded that ―the business,‖ Northwest Cabinets & Furniture, a sole proprietorship, was inseparable from Misenar. In other words, Misenar and the sole proprietorship were indistinguishable. The court also concluded that, as Misenar‘s spouse, Wagner had a community property interest in the business. In this context, Wagner, had he been construed to act in the capacity of an agent, as the trial court suggested, would have been acting as an agent for himself.

In the words of the trial court, ―this business is [Misenar‘s] separate property * * * . Now [Wagner] can be an agent. And she could have authorized him to do anything * * * . He can sign checks. He can work in the shop. He can make contracts. He can do all these things. * * * But him having that authority and stuff does not * * * give him the standing to make the claim * * * . He‘s simply acting as her agent.‖ To this statement, the appellate court responded, ―The trial court‘s ruling suggests that Wagner was an agent for the business, but he cannot be. This ruling would only make sense if the court believed that the business is a separate legal entity, but it is not.‖

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258.

Suppose that instead of Wagner, Misenar had pursued the claim in the case against Port Orchard. Would the result have been different? Discuss.

Solution No, if, instead of Wagner, Misenar had pursued the claim in the case against Port Orchard, the result would not likely have been different. As a sole proprietorship, the business was inseparable, or indistinguishable, from Misenar, its owner.

Misenar bought the business from Wagner, whom she later married. Even if they had not married, however, as the sole proprietor of Northwest Cabinets & Furniture, Misenar could have filed the claim for breach in this case. And if she had not bought the business from Wagner, she would still have had standing to bring such a claim. In the interpretation of the appellate court, whichever spouse was the owner of the sole proprietorship, the business would have constituted community property. ―And a community property interest is a sufficiently real interest to confer standing.‖

Case 17.2 5.

Could the partnership in this case have avoided the liquidation of its assets during the winding up process? Explain.

Solution Yes, the partnership in this case could have avoided the liquidation of its assets during the winding up process if the partners had agreed on a different method for the distribution.

Under Idaho partnership statutes, during the judicial dissolution and winding up of a partnership‘s business, the entity‘s assets must be sold and the cash realized on their sale distributed to the firm‘s creditors and partners—unless the partners agree to an alternate method for the distribution. In other words, the statutory requirements are default provisions.

A partnership agreement cannot change the requirements that a dissolved partnership must be wound up, its liabilities discharged, and its assets marshaled and distributed. But an agreement can alter the default provisions of the Idaho statutes for the distribution of the assets. Partners who agree not to liquidate the assets can take a different course. One partner might buy out another‘s interest, for example, and continue the business.

Guenther and Ryerson formed a partnership to buy land on Lost Sage Lane in Boise, Idaho, and develop a vineyard and build a house on the property. After expending considerable funds and effort in pursuit of the project, they agreed to dissolve the partnership. Guenther filed a suit in an Idaho state court for a judicial dissolution. In the Guenther case, of course, the parties initially did not, and later could not, agree on the method of distribution. This triggered the application of the Idaho default provisions.

6.

How should the lower court, on remand, structure the sale of the partnership‘s Lost Sage Lane property? Discuss.

Solution In winding up the business of a partnership, in a judicial dissolution under Idaho‘s partnership statutes, a court should seek to sell the entity‘s assets at their fair market value. Fair market value is the amount that a willing buyer, who desires to buy but is under no obligation to buy, would pay a willing seller, who desires to sell but is under no obligation to sell. To obtain fair market

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value, property should be sold at the highest price the market will bear. Thus, in the Guenther case, on remand, the court should order the Lost Sage Lane property to be sold on the open market at its fair market value.

After all of the partnership‘s assets have been sold, the costs of the sale have been paid from its proceeds, and the firm‘s obligations to its creditors have been satisfied, the court can determine the amount of each partner‘s capital contribution. If the remaining proceeds are not enough to reimburse the partners for their uncompensated contributions, each partner should be paid a pro rata share based on that partner‘s contribution. If the proceeds are sufficient to compensate the partners for their contributions, on the payment of those contributions, any remaining amount should be distributed based on each partner‘s right to share in the partnership‘s profits. In this case, because there was no partnership agreement, under Idaho partnership law, Guenther and Ryerson have a right to share equally in the partnership‘s profits

Case 17.3 259.

Besides the ―exceptional circumstances‖ noted by the court in the Nesset case, in what situations might an LLC‘s member or manager be personally liable for the liability of the company? Explain.

Solution Under most circumstances, a member of manager of a limited liability company is not liable for a debt, obligation, or other liability of the firm. Situations in which piercing the veil of an LLC might be warranted include, as noted by the court in the Nesset case, that the company is undercapitalized, lacks separate books or finances, promotes a fraud or illegality, or is otherwise ―merely a sham.‖ Although ―sham‖ can encompass considerable potential grounds for the personal liability of an LLC‘s member or manager in the context of the firm‘s obligations, this list is not exhaustive.

A member or manager may be liable for the breach of a professional duty. A licensed engineer, for example, might be personally liable for the harm caused by the faulty design of a product marketed by the LLC to an injured plaintiff. Some other negligent or wrongful act might also serve as the predicate for personal liability when a member or manager owed a duty of care to a plaintiff beyond the LLC‘s contractual obligations.

A statute can impose personal liability. For example, personal liability might be ascribed to a member or manager who is assumed under a state‘s tax code to be responsible for the collection and remittance of the tax. Of course, a member or manager of an LLC is personally liable for their own torts or crimes, for which, depending on the circumstances, the company might also be held to account.

260.

Why does the law allow—and even encourage—limits on the liability of a business organization‘s owners and managers for the firm‘s actions? Discuss.

Solution The law allows, and encourages, limits to the liability of a business organization‘s owners and managers for the firm‘s actions in order to facilitate business investment, which contributes to a more thriving economy. Imposing personal liability in all circumstances on the owners and

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operators would tend to discourage investment by providing a disincentive to going into business at all.

Of course, as noted in the court‘s opinion in the Nesset case, there are exceptions. Particularly when a business form is used to perpetrate fraud or commit other wrongdoing, personal liability may be assessed. But in situations that do not fall within the exceptions, a party who claims injury, damage, or loss through the actions of a business firm must normally seek relief through the assets of the firm, not those of its owners and managers.

Chapter Review Practice and Review A bridge on a prominent public roadway in the city of Papagos, Arizona, was deteriorating and in need of repair. The city posted notices seeking proposals for an artistic bridge design and reconstruction. Davidson Masonry, LLC, which was owned and managed by Carl Davidson and his wife, Marilyn Rowe, submitted a bid for a decorative concrete project that incorporated artistic metalwork. They contacted Shana Lafayette, a local sculptor who specialized in large-scale metal forms, to help them design the bridge. The city selected their bridge design and awarded them the contract for a commission of $184,000. Davidson Masonry and Lafayette then entered into an agreement to work together on the bridge project. Davidson Masonry agreed to install and pay for concrete and structural work, and Lafayette agreed to install the metalwork at her expense. They agreed that overall profits would be split, with 25 percent going to Lafayette and 75 percent going to Davidson Masonry. Lafayette designed numerous metal sculptures of salmon that were incorporated into colorful decorative concrete forms designed by Rowe, while Davidson performed the structural engineering. Using the information presented in the chapter, answer the following questions.

261.

Would Davidson Masonry automatically be taxed as a partnership or a corporation?

Explain.

Solution This limited liability company (LLC) would be taxed as a partnership unless it opted to be taxed as a corporation. With a few exceptions, any LLC with at least two members can choose whether to be taxed as a partnership or a corporation. (A one-member LLC is taxed as a sole proprietorship unless it chooses to be taxed as a corporation.) If a firm prefers to be taxed as a corporation, it can check a box on a federal tax form to indicate this choice. Taxed as a partnership, an LLC would pay no taxes; its profits would be ―passed through‖ to its members, who would, however, pay taxes on the profits. The corporate taxing option might be preferable to LLC members who want to reinvest the profits in the business, because corporate tax rates are often lower than personal tax rates.

262.

Is Davidson Masonry a member-managed or manager-managed LLC? Explain.

Solution The LLC in this problem is a member-managed firm—the owners are the managers. In a membermanaged LLC, all members participate in management, and decisions are made by majority vote.

In a manager-managed firm, the members designate managers, who may or may not be members of the firm.

263.

Suppose that during construction, Lafayette entered into an agreement to rent space in a warehouse that was close to the bridge so that she could work on her sculptures near the site where they would be installed. She entered into the contract without the knowledge or consent of

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Davidson Masonry. In this situation, would a court be likely to hold that Davidson Masonry was bound by the contract that Lafayette entered? Why or why not?

Solution Depending on the terms of the operating agreement, all members of the LLC have a right to manage. If Lafayette‘s agreement were not approved by the majority of the members, it may not be binding upon the LLC. 264.

Now suppose that Rowe has an argument with her husband and wants to withdraw from being a member of Davidson Masonry. What is the term for such a withdrawal, and what effect does it have on the LLC? Solution When a member disassociates from an LLC, that member loses the right to participate in management and act as an agent for the LLC. However, the disassociated member has no right to force the LLC to dissolve, and the remaining members can opt to continue or dissolve the business of their own volition.

Practice and Review: Debate This 265.

All franchisors should be required by law to provide a comprehensive estimate of the profitability of a prospective franchise based on the experiences of their existing franchisees.

Solution Because many franchisors seem only to survive by selling more franchises—rather than from current operations—they tend to exaggerate the potential profits than can be made. Those seeking to buy a new franchise are therefore often provided with little hard evidence about how much profit they can expect to make. To prevent individuals from succumbing to franchisors‘ exaggerated sales pitches, government should require that verifiable estimates of profitability be provided. These should be available in print and on the Web and be current.

The profitability of any given franchise depends on many factors, including the business acumen of the franchisee. Even if franchisors provided accurate estimates of potential profitability for the average franchisee, there would be no guarantee that a new franchisee could earn the average profits so estimated. Hence, if franchisors were required to provide profitability estimates to prospective franchisees, the former would end up defending numerous lawsuits from franchisees whose business abilities turned out to be poor.

Issue Spotters 15. Gabriel, Harry, and Ida are members of Jeweled Watches, LLC. What are their options with respect to the management of their firm?

Solution The members of a limited liability company (LLC) may designate a group to run their firm—then, the firm is considered a manager-managed LLC. The group may include only members, only nonmembers, or members and nonmembers. If, instead, all members participate in management, the firm is a member-managed LLC. In fact, unless the members agree otherwise, all members are considered to participate in the management of the firm.

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16. Anchor Bottling Company and U.S. Beverages, Inc. (USB), enter into a franchise agreement that states that the franchise may be terminated at any time ―for cause.‖ Anchor fails to meet USB‘s specified sales quota. Does this constitute ―cause‖ for termination? Why or why not?

Solution Yes. Failing to meet a specified sales quota can constitute a breach of a franchise agreement. If the franchisor is acting in good faith, ―cause‖ may also include the death or disability of the franchisee, the insolvency of the franchisee, and a breach of another term of the franchise agreement.

Business Scenarios and Case Problems 66. Limited Liability Companies. John, Lesa, and Tabir form a limited liability company. John contributes 60 percent of the capital, and Lesa and Tabir each contribute 20 percent. Nothing is decided about how profits will be divided. John assumes that he will be entitled to 60 percent of the profits, in accordance with his contribution. Lesa and Tabir, however, assume that the profits will be divided equally. A dispute over the question arises, and ultimately a court has to decide the issue. What law will the court apply? In most states, what will result? How could this dispute have been avoided in the first place? Discuss fully. (See Limited Liability Companies.)

Solution Limited liability company (LLC) operating agreements typically state how profits will be divided.

An operating agreement is not necessary for the formation of an LLC, and even if there is an operating agreement, it does need not to be in writing. Generally, though, members protect their interests by signing a written operating agreement that spells out the terms of their LLC, including a division of profits and losses.

If there is no agreement covering how profits will be divided, the applicable state LLC statute will govern. Most LLC statutes provide that if members do not specify how profits are to be divided, they will be divided equally. If there is no operating agreement or LLC statute addressing the particular issue, the principles of partnership law apply. Those principles also indicate that profits are divided equally among the owners of a firm unless specified otherwise.

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67. Partnership Formation. Daniel is the owner of a chain of shoe stores. He hires Rubya to be the manager of a new store, which is to open in Grand Rapids, Michigan. Daniel, by written contract, agrees to pay Rubya a monthly salary and 20 percent of the profits. Without Daniel‘s knowledge, Rubya represents himself to Classen as Daniel‘s partner, showing Classen the agreement to share profits. Classen extends credit to Rubya. Rubya defaults. Discuss whether Classen can hold Daniel liable as a partner. (See Partnerships.)

Solution Classen cannot hold Daniel liable as a partner, because a true partnership never existed; nor is Daniel liable under a theory of partnership by estoppel. A partnership is defined as an association of two or more persons to conduct, as co-owners, a business for profit [UPA 101(6)].

To determine that a partnership was created, the court must look for a sharing of profits and a joint ownership of the business, with each party having an equal right to manage the business.

When specific evidence that this situation existed is lacking, some guidelines are applied. First, the sharing of profits from a business is prima facie evidence of the existence of a partnership, unless such sharing is by means of one party receiving wages as an employee [UPA 202(c)(3)]. Rubya is not a co-owner of the business and his share of profits is partially the means of paying his salary.

Therefore, a partnership is not created, and Daniel is not liable as a partner.

To be liable as a partner by estoppel, Daniel must either have represented himself to Classen as Rubya‘s partner or have impliedly (or expressly) consented to Rubya‘s representing himself as a partner. Because Daniel did not even know of Rubya‘s assertions and did nothing to lead Classen to believe he was Rubya‘s partner, Classen can look only to Rubya for payment of the debt. No partnership by estoppel was created.

68. Spotlight on Liberty Tax—Franchise Regulation. JTH Tax, Inc., doing business as Liberty Tax Service, provides tax preparation and related loan services through company-owned and franchised stores. Liberty‘s agreement with its franchisees reserved the right to control their ads.

In operations manuals, Liberty provided stepby- step instructions, directions, and limitations regarding the franchisees‘ ads and retained the right to unilaterally modify the steps at any time.

The California attorney general filed a suit in a California state court against Liberty, alleging that its franchisees had used misleading or deceptive ads regarding refund anticipation loans and erefund checks. Can Liberty be held liable? Discuss. [People v. JTH Tax, Inc., 212 Cal.App.4th 1219, 151 Cal.Rptr.3d 728 (1 Dist. 2013)] (See Franchises.)

Solution Yes. Liberty can be held liable for the statements in its franchisees‘ ads. The validity of a provision permitting the franchisor to establish and enforce certain quality standards is unquestioned. The franchisor has a legitimate interest in maintaining the quality of the product or service to protect its name and reputation. If a franchisor exercises too much control over the operations of its franchisees, however, the franchisor risks potential liability. A franchisor may occasionally be held liable under the doctrine of respondeat superior for the tortious acts of a franchisee or the franchisees‘ employees.

In this problem, Liberty‘s agreement with its franchisees reserved the right to control their ads. In operations manuals, Liberty provided step-by-step instructions, directions, and limitations to its franchisees regarding their ads and retained the right to unilaterally modify the steps at any time.

This seems to give the franchisor a great deal of control over its franchisees‘ marketing, which

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under the principles stated above, points to the franchisor‘s liability for the franchisees‘ misleading or deceptive ads.

In the actual case on which this problem is based, the court issued a judgment in California‘s favor. Liberty appealed. A state intermediate appellate court affirmed. ―Liberty retained the right to control, and in fact did seek to control, its franchisees' advertising and other marketing activities beyond that necessary to protect its marks and goodwill.‖ 69. Partnerships. Karyl Paxton asked Christopher Sacco to work with her interior design business, Pierce Paxton Collections, in New Orleans. At the time, they were in a romantic relationship. Sacco was involved in every aspect of the business— bookkeeping, marketing, and design—but was not paid a salary. He was reimbursed, however, for expenses charged to his personal credit card, which Paxton also used. Sacco took no profits from the firm, saying that he wanted to ―grow the business‖ and ―build sweat equity.‖ When Paxton and Sacco‘s personal relationship soured, she fired him. Sacco objected, claiming that they were partners. Is Sacco entitled to 50 percent of the profits of Pierce Paxton Collections? Explain. [Sacco v. Paxton, 133 So.3d 213 (La.App. 4th Cir. 2014)] (See Partnerships.)

Solution Yes. Sacco is entitled to 50 percent of the profits of Pierce Paxton Collections, PPDS, and KPD. The requirements for establishing a partnership are (1) a sharing of profits and losses, (2) a joint ownership of the business, and (3) an equal right to be involved in the management of the business.

The effort and time that Sacco expended in the business constituted a sharing of losses, and his proprietary interest in the assets of the partnership consisted of his share of the profits, which he had expressly left in the business to ―grow the company‖ and ―build sweat equity‖ for the future.

He was involved in every aspect of the business. Although he was not paid a salary, he was reimbursed for business expenses charged to his personal credit card, which Paxton also used.

These facts arguably meet the requirements for establishing a partnership.

In the actual case on which this problem is based, Sacco filed a suit in a Louisiana state court against Paxton, and the court awarded Sacco 50 percent of the profits. A state intermediate appellate court affirmed, based generally on the reasoning stated above.

70. Business Case Problem with Sample Answer— Jurisdictional Requirements in LLCs. Siloam Springs Hotel, LLC, operates a Hampton Inn in Siloam Springs, Arkansas. Siloam bought insurance from Century Surety Company to cover the hotel. When guests suffered injuries due to a leak of carbon monoxide from the heating element of an indoor swimming pool, Siloam filed a claim with Century. Century denied coverage, which Siloam disputed. Century asked a federal district court to resolve the dispute. In asserting that the federal court had jurisdiction, Century noted that the amount in controversy exceeded $75,000 and that the parties had complete diversity of citizenship. Century is ―a corporation organized under the laws of Ohio, with its principal place of business in Michigan,‖ and Siloam is ―a corporation organized under the laws of Oklahoma, with its principal place of business in Arkansas.‖ Can the court exercise diversity jurisdiction in this case? Discuss. [Siloam Springs Hotel, LLC v. Century Surety Co., 781 F.3d 1233 (10th Cir. 2015)] (See Limited Liability Companies.) —For a sample answer to Problem 17–5, go to Appendix D. Solution

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No, based on the facts provided in the problem, the trial court cannot exercise diversity jurisdiction in the Siloam case—at least, not yet. When the parties to a suit are from different states, a federal court can exercise diversity jurisdiction if the amount in controversy exceeds $75,000. Total diversity of citizenship must exist, however. An LLC‘s citizenship is determined by reference to the citizenship of each and every one of its members.

Siloam Springs Hotel, LLC, operates a Hampton Inn. When Siloam‘s insurer Century Surety Co. denied coverage for a certain claim, Siloam disputed the denial. Century asked a federal district court to resolve the dispute. The plaintiff asserted as the basis for jurisdiction an amount in controversy exceeding $75,000 and complete diversity of citizenship—Century is ―a corporation organized under the laws of Ohio, with its principal place of business in Michigan,‖ and Siloam is ―a corporation organized under the laws of Oklahoma, with its principal place of business in Arkansas.‖ The amount in controversy meets the requirement for diversity. Siloam, however, is not a corporation—it is an LLC. But the facts stated here do not reveal whether there was complete diversity between the parties.

In the actual case on which this problem is based, the court issued a summary judgment in Century‘s favor. The U.S. Court of Appeals for the Tenth Circuit reversed this judgment for the reasons above. The court remanded the case for the lower court to determine whether complete diversity existed at the time of the complaint.

71. Partnership Formation and Operation. FS Partners is a general partnership whose partners are Jerry Stahlman, a professional engineer, and Fitz & Smith, Inc., a corporation in the business of excavating and paving. Timothy Smith signed the partnership agreement on Fitz & Smith‘s behalf and deals with FS matters on Fitz & Smith‘s behalf. Stahlman handles the payment of FS‘s bills, including its tax bills, and is the designated partner on FS‘s federal tax return. FS was formed to buy and develop twenty acres of unoccupied, wooded land in York County, Pennsylvania. The deed to the property lists the owner as ―FS Partners, a general partnership.‖ When the taxes on the real estate were not paid, the York County Tax Claim Bureau published notice that the property would be sold at a tax sale. The bureau also mailed a notice to FS‘s address of record and posted a notice on the land. Is this sufficient notice of the tax sale? Discuss. [FS Partners v.

York County Tax Claim Bureau, 132 A.3d 577 (Pa. 2016)] (See Partnerships.)

Solution Yes. The notice published by the York County Tax Bureau, mailed to FS‘s address of record, and posted on the partnership‘s land, declaring that it would be sold at a sale for unpaid taxes, was sufficient. Property acquired by a partnership is the property of the partnership and not of the partners individually. This includes property that was acquired by the partnership or in the partnership‘s name after its formation. A partner is not a co-owner of partnership property and has no right to sell, mortgage, or transfer it to another.

Here, FS Partners is a general partnership. The partners are Stahlman and Fitz & Smith, Inc. Timothy Smith represents Fitz & Smith in FS matters. Stahlman handles the payment of FS‘s bills, including its tax bills, and is the designated partner on FS‘s federal tax return. FS was formed to buy and develop certain land in York County, Pennsylvania. The deed lists the owner as ―FS Partners, a general partnership.‖ When the taxes on the land were not paid, the York County Tax Claim Bureau published, mailed, and posted notice that the property would be sold at a tax sale.

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This is sufficient notice—the individual partners do not need to be notified separately. A general partnership can hold title to property in its own name. Although one partner in a general partnership does not have the authority to bind the partnership to a sale of the partnership‘s property, a notice with respect to that property does not need to be sent to all of the partners. In fact, notice to the partnership, or to any partner in the partnership, concerning partnership affairs, is sufficient.

In the actual case on which this problem is based, the land was sold at a tax sale. Later, FS filed a petition to set aside the sale, challenging the sufficiency of the notice. The court confirmed the sale. On the reasoning stated here, a state intermediate appellate court affirmed.

72. Franchise Termination. Executive Home Care Franchising, LLC, sells in-home health-care franchises. Clint, Massare, and Greer Marshall entered into a franchise agreement with Executive Home Care. The agreement provided that the franchisees‘ failure to comply with the agreement‘s terms would likely cause irreparable harm to the franchisor, entitling it to an injunction. About two years later, the Marshalls gave up their franchise. They returned thirteen boxes of documents, stationery, operating manuals, marketing materials, and other items—everything in their possession that featured Executive Home Care trademarks. They quit operating out of the franchised location. They transferred the phone number back to the franchisor and informed their clients that they were no longer associated with Executive Home Care. They continued to engage in the home health-care business, however, under the name ―Well-Being Home Care Corp.‖ Is Executive Home Care entitled to an injunction against the Marshalls and their new company?

Discuss. [Executive Home Care Franchising, LLC v. Marshall Health Corp., 642 Fed.Appx. 181 (3d Cir. 2016)] (See Franchises.)

Solution No. Executive Care is not entitled to an injunction against the Marshals and their new company.

An injunction is an extraordinary remedy. To obtain an injunction before a suit is resolved, or arbitration or other alternative dispute resolution procedure is undertaken and completed, a party must establish that it will suffer irreparable harm if the injunction is denied.

In the facts of this problem, the Marshalls entered into a franchise agreement with Executive Care to operate a home healthcare franchise. The agreement provided that the franchisees‘ failure to comply with the terms would likely cause irreparable harm to the franchisor, thereby entitling it to an injunction. When the Marshalls gave up their franchise, presumably before the end of its term under the franchise agreement, they returned everything in their possession with Executive Care trademarks. They quit operating out of the franchised location. They transferred the phone number back to Executive Care and informed their clients that they were no longer associated with that firm. Although he Marshalls continued to operate a home healthcare business, they did so under the name ―Well–Being Home Care Corp.‖ There is nothing in these facts to establish that Executive Care is entitled to a preliminary injunction on the basis of irreparable harm. There appears to be little else the Marshalls might have done to prevent such harm to the franchisor.

In the actual case on which this problem is based, Executive Care filed a suit in a federal district court against the Marshalls and asked the court to issue a preliminary injunction. The court denied the request. On the reasoning stated here, the U.S. Court of Appeals for the Third Circuit affirmed.

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73. Limited Liability of LLC Members. Vision Metals, Inc., owned and operated a pipemanufacturing facility that caused groundwater contamination. The Texas Commission on Environmental Quality (TCEQ) issued a plan that obligated Vision to treat the water and monitor the treatment. Later, Vision sold the property to White Lion Holdings, LLC. Bernard Morello, the sole member of White Lion, knew of the environmental obligations accompanying the property.

When White Lion failed to comply with the TCEQ plan, the agency filed a suit in a Texas state court against Morello, asserting violations of the state‘s environmental rules. Morello was charged with personally removing the facility‘s treatment plant and monitoring system. Considering the nature of an LLC, what is Morello‘s best argument that he is not liable? Is this argument likely to succeed? Explain. [State of Texas v. Morello, 61 Tex.Sup.Ct.J. 381, 547 S.W.3d 881 (2018)] (See Limited Liability Companies.)

Solution Morello‘s best argument that he is not liable for his personal violations of the state‘s environmental rules is a member of an LLC is not liable for a debt, obligation, or liability of the company. But this argument is not likely to succeed.

Like shareholders of a corporation, the members of an LLC enjoy limited liability. That is, a key advantage of the LLC form of business organization is that the liability of its members for the debts, obligations, and liability of the firm is limited to the amount of the members‘ investment in the company. The LLC as an entity can be held liable for harm caused by the wrongful acts of its members, but the members themselves are not generally personally liable.

But a member may be subject to personal liability for the results caused by the member‘s own negligent or wrongful act. This requires, however, that the member owe a duty beyond the duties owed by the LLC to the plaintiff.

In this problem, a manufacturing facility owned by White Lion Holdings, L.L.C. was subject to a plan issued by the Texas Commission on Environmental Quality (TCEQ) that required the LLC to treat the facility‘s contaminated groundwater and monitor the treatment. Morello, White Lion‘s sole member, knew of the environmental obligations. When White Lion failed to comply with the plan, the TCEQ filed a suit in a Texas state court against Morello, charging him with personally removing the facility‘s treatment plant and monitoring system. If Morello were to make the argument stated above, it would not likely succeed as a defense because the charge was based on his personal actions, not on the company‘s liability.

In the actual case on which this problem is based, Morello made the claim stated above. The court issued a judgment in the state‘s favor. A state intermediate appellate court reversed. The Texas Supreme Court reversed the appellate decision, reasoning that Morello was liable ―because of his own actions and liability . . . , not because of the company‘s liability.‖ 74. Territorial Rights. Chrysler, LLC, awarded a Chrysler-Jeep franchise in Billings, Montana, to Lithia Motors, Inc. Lithia exceeded the sales goals and other expectations expressed in the franchise agreement. Later, Chrysler approved an application by Rimrock Chrysler, Inc., to open an additional Chrysler- Jeep franchise less than a mile from Lithia‘s location. Lithia‘s agreement was silent on the issue of territorial rights, but the dealer protested Chrysler‘s approval of Rimrock‘s application. Could Chrysler‘s actions be considered a breach of the franchisor‘s deal with Lithia?

Discuss. [Rimrock Chrysler, Inc. v. State of Montana Department of Justice, Motor Vehicle Division, 390 Mont. 235, 411 P.3d 1278 (2018)] (See Franchises.)

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Solution Yes. Chrysler‘s approval of Rimrock‘s application could be considered a breach of the franchisor‘s deal with Lithia. In franchise disputes over territorial rights, the implied covenant of good faith and fair dealing often comes into play. If a franchise agreement does not grant exclusive territorial rights to a franchisee, and the franchisor allows a competing franchise to be established nearby, the existing franchisee may suffer a significant loss in profits. The franchisor‘s actions could thereby be held to breach an implied covenant of good faith and fair dealing.

In this problem, Chrysler awarded a Chrysler-Jeep franchise in Billings, Montana, to Lithia Motors.

Lithia exceeded its contractual expectations. Later, Chrysler approved Rimrock‘s application to open an additional Chrysler-Jeep franchise less than a mile from Lithia‘s location. Lithia protested.

Establishing a competing franchise nearby would likely reduce Lithia‘s profits. Its franchise agreement was silent on the issue of territorial rights, but Chrysler‘s actions could nevertheless constitute a breach of an implied covenant of good faith and fair dealing.

In the actual case on which this problem is based, Lithia protested to the Montana Department of Justice, Motor Vehicle Division. Under the Montana Dealer Act, to open a new dealership near an existing franchise for the same line, a franchisor must show that there is ―good cause‖ for the new franchise. At a hearing on the dispute, Chrysler‘s witness testified that Lithia was exceeding its contractual expectations. The agency ruled in Lithia‘s favor. Rimrock filed a petition in a state court for review. The court upheld the agency‘s decision. The Montana Supreme Court affirmed. ―Chrysler‘s failure to . . . show good cause to establish an additional franchise is dispositive.‖

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75. The IDDR Approach and Sole Proprietorships. Tom George was the sole owner of Turbine Component Super Market, LLC (TCSM), when its existence was terminated by the state of Texas. A TCSM creditor, Turbine Resources Unlimited, won a suit in a Texas state court against George for breach of contract. Turbine sought to collect the amount of the judgment through a sale of George‘s property. Instead of turning his assets over to the court, however, George tried to hide them by reforming TCSM. Without telling the court, he paid an unrelated debt with $100,000 of TCSM‘s funds. George claimed that the funds were a loan and that he was merely an employee of TCSM. [Mitchell v. Turbine Resources Unlimited, Inc., 523 S.W.3d 189 (Tex.App.— Houston [14th Dist.] 2017)] (See Sole Proprietorships.)

1.

Is it more likely that the court will recognize TCSM as an LLC or a sole proprietorship? Explain your answer.

Solution It is more likely that the court will see through Tom George‘s subterfuge and hold that TCSM is a sole proprietorship. In a sole proprietorship, the owner is the business. Anyone who does business without creating a separate organization has a sole proprietorship. A limited liability company (LLC) must be formed and operated in compliance with state law.

A court has several methods to divine the truth in the circumstances of a case. Not the least of these is the ability of the judge to carefully weigh the testimony of a witness and correctly determine that witness‘s credibility. This determination may be supported by the judge‘s experience with litigants in many cases, and by the physical evidence in the case at hand. For example, in George‘s case, his demeanor would likely have betrayed the truth. Or there may have been state-issued documents that reveal the actual status of his businesses and their assets.

Here, when George lost a suit, the court ordered his assets sold to pay the judgment. Instead of tendering those assets to the court, however, George attempted to hide his assets within Turbine Component Super Market, LLC (TCSM). This firm had earlier been terminated by the state of Texas. George claimed to be TCSM‘s employee, but he was its sole owner. And there was little or no distinction between the two, as evidenced by TCSM‘s ―loan‖ to George of $100,000. In other words, TCSM was in fact a sole proprietorship, not an LLC.

2.

Using the Discussion step of the IDDR approach, consider whether the owner of a business has an ethical obligation to represent the character and purpose of the organization truthfully.

Solution The owner of a business has an ethical obligation to represent the character and purpose of a business organization truthfully. At the very least, the obligation is owed by the owner to himself or herself in order to avoid the inevitable consequences. As in this problem, for example, misrepresentation is likely to be discovered by a court. The avoidance of liability or other negative results is likely to be short-term only.

The IDDR approach consists of four steps. The first step is an Inquiry to identify the issue, the stakeholders, and the ethical standards in a given situation. In this problem, for example, George was presented with the dilemma of whether to represent the status of TCSM truthfully, and thereby lose certain assets, or misrepresent its status in an attempt to avoid

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that loss. The stakeholders included George and the party from whom he wished to hide those assets (as well as the state court in which George would misrepresent his firm‘s status).

The ethical standards include honesty and integrity, both generally and specifically in the oath George would be required to follow by the court (which has its own ethical code to follow).

The second step is the Discussion of actions to address the issue, the strengths and weaknesses of the actions, and the consequences and effects on stakeholders. So, here, George has to decide whether to misrepresent the true status of his business firm. By misrepresenting it, George might effectively retain assets that could otherwise be forfeited to satisfy a judgment. But he would sacrifice honesty in the process. This could wear on his conscience and, more practically, form the basis for a later fraud suit. By presenting the status of his firm truthfully, George would lose the assets, but retain his integrity and could avoid further litigation.

The third step is to make a Decision and express the reasons for it. In this case, the decision seems clear—George should not have misrepresented his firm as a limited liability company.

Instead, he should have confessed to its status as a sole proprietorship and suffered the inevitable consequences. This would have preserved his honesty and integrity, and avoided later regret and litigation.

The final step is a Review of the success or failure of the actions to resolve the issue, and satisfy the stakeholders. George‘s decision to attempt to defraud the court and his opposing party did not succeed, and would not have satisfied the stakeholders if it had. A decision to act truthfully would have worked to the ultimate satisfaction of the issue and the stakeholders.

In the actual case on which this problem is based, on an appeal from the court-ordered sale of George‘s property (by Jennifer Mitchell, George‘s girlfriend, who claimed an interest in the property), a state intermediate appellate court affirmed the order for the sale.

Critical Thinking and Writing Assignments 1.

Franchise Termination. Walid Elkhatib, an Arab American, bought a Dunkin‘ Donuts franchise in Illinois. Ten years later, Dunkin‘ Donuts began offering breakfast sandwiches with bacon, ham, or sausage through its franchises. Elkhatib refused to sell these items at his store on the ground that his religion forbade the handling of pork. Elkhatib then opened a second franchise, at which he also refused to sell pork products. The next year, at both locations, Elkhatib began selling meatless sandwiches. He also opened a third franchise. When he proposed to relocate this franchise, Dunkin‘ Donuts refused to approve the new location. The company also informed him that it would not renew any of his franchise agreements because he did not carry the full sandwich line. Elkhatib filed a lawsuit against Dunkin‘ Donuts. (See Franchises.)

1.

The first team will argue on behalf of Elkhatib that Dunkin‘ Donuts wrongfully terminated his franchises.

Solution Elkhatib‘s refusal to offer breakfast sandwiches containing pork at his franchise locations was based on his religious beliefs. When he sought to relocate one of the franchises, Dunkin‘ Doughnuts (the franchisor) notified him that it would not allow relocation and furthermore would not renew his franchise agreement. The court should grant the franchisee a remedy.

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Dunkin‘ Doughnuts acted unfairly and wrongfully. The dietary restrictions Elkhatib observed are associated with his religion. Both Islamic and Jewish law prohibits the handling and consumption of pork.

2.

The second team will take the side of Dunkin‘ Donuts and justify its decision to terminate the franchises.

Solution Dunkin‘ Doughnuts (the franchisor) has a right to require franchisees to offer a uniform menu to protect its name and reputation. Quality standards are particularly important in chain-style business operations. Dunkin Doughnuts acted fairly and honestly when it notified Elkhatib that it would not allow relocation and would not renew his franchise agreement. Its reasons were not arbitrary. The court should issue a judgment in the defendants‘ favor.

3.

The third team will assess whether Dunkin‘ Donuts acted in good faith in its relationship with Elkhatib. Consider whether Dunkin‘ Donuts should be required to accommodate Elkhatib‘s religious beliefs and allow him to not serve pork in these three locations.

Solution Elkhatib‘s obligations under his current franchise agreement presumably requires all franchisees to carry the full food product line of Dunkin‘ Donuts. Because Elkhatib failed to carry the full line of food products, the franchisor would not extend his current franchise agreement or allow the relocation of his store. In determining whether a franchisor has acted in good faith when terminating a franchise agreement, the courts generally try to balance the rights of both parties. If the court perceives that the franchisor acted arbitrarily or unfairly, the court will grant the franchisee a remedy. In this situation, the court would consider the fact that the franchisee‘s refusal to offer breakfast sandwiches containing pork was based on his religious beliefs.

Nonetheless, the court would balance this against the fact that the Dunkin‘ Doughnuts has a right to require its franchisees to offer a uniform menu to protect its name and reputation.

Dunkin‘ Doughnuts acted in good faith. As for the franchisor‘s refusal to allow its franchisee‘s relocation, it is within a franchisor‘s rights to determine the location of a franchise.

Solution and Answer Guide Miller, The Legal Environment Today 10e, 9780357635582; Chapter 18: Corporations

Table of Contents Critical Thinking Questions in Features ............................................................................................................. 233 Cybersecurity and the Law ................................................................................................................ 233 Critical Thinking Questions in Cases ................................................................................................................... 233 Case 18.1 ............................................................................................................................................... 233 Case 18.2 ............................................................................................................................................... 234 Case 18.3 ............................................................................................................................................... 236

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Chapter Review ........................................................................................................................................................... 236 Practice and Review .............................................................................................................................. 236 Practice and Review: Debate This ......................................................................................................... 238 Issue Spotters ........................................................................................................................................ 238 Business Scenarios and Case Problems ................................................................................................. 238 Critical Thinking and Writing Assignments ............................................................................................ 246

Critical Thinking Questions in Features Cybersecurity and the Law 266.

What type of American businesses are impacted by the CLOUD Act? What steps should these businesses take in response to the CLOUD Act? Solution The CLOUD Act impacts cloud service providers (CSPs) such as Amazon, Apple, Facebook, Google, and Microsoft, as well as any other business that uses a CSP to store its data or the data of its clients on the cloud. In theory, any business that stores data in any capacity could be subject to a CLOUD Act request by an American law enforcement agency at any time.

To protect this data, the company must make sure that it is encrypted, meaning that it can be unlocked and accessed only by someone who has the proper authorization, usually via a password. The key to unlocking encrypted data must remain with the client, or with the entity that wishes to control the data being stored in the cloud. Importantly, the CSP must not have access to the encryption password, meaning that the CSP cannot access the cloud-based data without the permission of the business or person that owns and controls that data. That way, if a government agency requests access to the encrypted data from the CSP, the CSP will not be able to comply without first alerting its client.

Critical Thinking Questions in Cases Case 18.1 267.

What are the issues of fact that need to resolved concerning Wulf‘s claim for Bravo Brio to be held liable under the doctrine of respondeat superior? Discuss.

Solution To establish negligence, a party must show the existence of a duty, a breach of that duty, causation, and damages. Under the doctrine of respondeat superior, an employer is liable for an employee‘s negligence during the performance of the employee‘s work in the course of employment.

Wulf did not claim that Bravo Brio was negligent in maintaining the restaurant, nor did he complain of any conditions on the property, such as a hidden step, cracked flooring, or a broken handrail. Wulf claimed that he was injured as a result of the negligence of a Bravo Brio employee, a waitress, backing into him, causing him to fall.

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The trial court issued a summary judgment in Bravo Brio‘s favor, finding that Wulf was unable to prove his claim chiefly due to his failure to specifically identify the waitress.

On appeal, Wulf argued that there was a genuine issue of material fact as to whether his fall and injuries were caused by the negligence of the waitress employed by Bravo Brio, and thus, whether Bravo Brio was liable under the doctrine of respondeat superior. He asserted that the specific identification of the waitress was not necessary if he established that she was negligent in the course of her employment. The appellate court agreed with this position. But the court also found, ―in light of all of the foregoing, and construing the inferences to be drawn from the underlying facts * * * in a light most favorable to Wulf,‖ that there were genuine issues of material fact to be resolved on remand.

For Bravo Brio to be held liable for its employee‘s negligence under the doctrine of respondeat superior, one fact to be established is whether the person wearing a Bravo uniform who apologized to Wulf after the incident was a Bravo Brio employee. Other factual issues include whether the waitress had a duty to protect against colliding with patrons while performing her job responsibilities. There is the issue of whether she failed to look out before she bumped into Wulf, and the question of whether Wulf did not see her coming because he was not looking or was simply too close to avoid her. The resolution of these issues is needed to determine whether Bravo Brio is liable under the doctrine of respondeat superior.

268.

Why should a corporation be held liable for torts committed by its employees during the course of their employment?

Solution Liability is imposed on a corporate employer for a tort committed by its employee under the doctrine of respondeat superior only if the employee was acting within the course of employment.

In other words, the employer can be liable if the incident occurred when the employee was acting on the employer's behalf by doing the employee‘s job, or otherwise carrying out the company‘s business.

The reasoning underlying the application of this doctrine is that employers direct the conduct of their employees on the job and thereby realize the results, whether those results are good or bad.

An employer is legally entitled to profit from an employee's labor. The employer, however, is also legally liable if that same behavior causes harm.

Another consideration is the goal of the legal system to compensate the victim for the cost of the harm suffered. Holding an employer responsible for an employee‘s tort committed within the course of employment is more likely to accomplish this goal. The employer is likely more capable of assuming the cost, by obtaining insurance or by pricing goods or services to spread the risk.

Of course, if the employee acted independently or out of a personal motive, solely for the employee‘s own benefit, the employer might not be liable.

Case 18.2 269.

Did the STR ban adopted by the association comport with or contravene its status as a benefit corporation? Discuss.

Solution As in most cases, arguments can be made in support of both sides of this question.

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A benefit corporation is a for-profit corporation that seeks to have a material positive impact on society and the environment. Its purpose is to benefit the public as a whole rather than to solely enhance shareholder value. In this case, by adopting the STR ban, the association claimed to be acting to reduce parking, noise, and trash. Relieving these problems would seem to benefit the public in general and some of the residential members of the association in particular. But other homeowners, especially those who made their property available for STRs, would not realize a material benefit from the ban.

The California Coastal Act intends to ―maximize public access . . . and . . . recreational opportunities to the coastal zone consistent with sound . . . conservation principles and constitutionally protected right of private property owners.‖ The association‘s ban may have been in pursuit of ―sound . . . conservation principles,‖ as it was meant to curtail potential air, noise, and water pollution. But this arguably ignored the other two goals expressed in the statute—the greatest possible public access and opportunity for recreation on the coast, and the rights of private property owners. Thus, the ban benefited some members of the public while it harmed others. The association may not have sufficiently considered the impact of its decision on society, which is one of the requirements for a benefit corporation.

Of course, as the court held, under the act, the association did not have the authority as a private homeowners‘ association to impose an STR ban. The issue was to be decided by the city government and the state‘s Coastal Commission. In this circumstance, the association was not acting in the best interest of the public or of its members. After expending funds in defense of the ban, the association was foreseeably subject to the sanction of an injunction—which is exactly what occurred.

The members (shareholders) of a benefit corporation have a right of action, called a benefit enforcement proceeding, to sue the corporation if it fails to pursue public benefit. The Greenfields may exercise this right. Ultimately, then, whether the association complied with or contradicted its status as a benefit corporation would be decided by a court.

270.

Suppose that instead of adopting an STR ban on its own, the association had petitioned the city and the Coastal Commission to impose one. Would the result have been different?

Explain.

Solution Yes. If, instead of adopting an STR ban, the association had asked the city and the Coastal Commission to impose it, the result would likely have been different.

In the situation stated in the question, the association would have been acting in compliance with state law rather than in violation of it. The Greenfields would have had a much tougher case to make—their best argument might have been that the association was not acting in pursuit of a public benefit—and they would have had to make it in proceedings before the city and the Coastal Commission, not in court.

Because the association would not have imposed the ban, a court would not have had that basis to sanction the organization with an injunction. The Greenfields‘ complaint against the association would likely have been dismissed. Of course, the city or the state coastal agency might have been

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enjoined from enforcing such a ban. But that would have required different proceedings and arguments against those parties, not the association.

Case 18.3 271.

Suppose that Loft‘s board of directors had approved Pepsi-Cola‘s use of its personnel and equipment. Would the court‘s decision have been different? Discuss.

Solution Possibly. Guth contended that the Loft board had approved Pepsi‘s use of Loft‘s personnel and facilities, but there were no board minutes, no contract, and no other record or anything else in writing to prove the directors‘ consent. The court found, among other things, that ―Guth's use of Loft's money, credit, facilities and personnel in the furtherance of the Pepsi venture was without the knowledge or authorization of Loft's directors.‖ The court also pointed out that Guth had selected the members of the board and that their livelihoods were dependent on him, intimating that even if he had sought their consent, it could be construed as coerced.

Chapter Review Practice and Review William Sharp was the sole shareholder and manager of Chickasaw Club, Inc., an S corporation that operated a popular nightclub of the same name in Columbus, Georgia. Sharp maintained a corporate checking account but paid the club‘s employees, suppliers, and entertainers in cash out of the club‘s proceeds. Sharp owned the property on which the club was located. He rented it to the club but made mortgage payments out of the club‘s proceeds and often paid other personal expenses with Chickasaw corporate funds.

At 12:45 a.m. on July 31, eighteen-year-old Aubrey Lynn Pursley, who was already intoxicated, entered the Chickasaw Club. Chickasaw employees did not check Pursley‘s identification to verify her age, as required by a city ordinance. Pursley drank more alcohol at Chickasaw and was visibly intoxicated when she left the club at 3:00 a.m. with a beer in her hand. Shortly afterward, Pursley lost control of her car, struck a tree, and was killed. Joseph Dancause, Pursley‘s stepfather, filed a tort lawsuit against Chickasaw Club and William Sharp. Using the information presented in the chapter, answer the following questions.

272.

Under what theory might the court in this case make an exception to the limited liability of shareholders and hold Sharp personally liable for the damages? What factors would be relevant to the court‘s decision?

Solution The court would be likely to pierce the veil of the corporation and hold Sharp personally liable.

Because he commingled personal funds with corporate funds and generally treated the business as his alter ego, as one would treat a proprietorship, the limited liability that accompanies corporate status could be lost.

273.

Suppose that Chickasaw‘s articles of incorporation failed to describe the corporation‘s purpose or management structure as required by state law. Would the court be likely to rule that Sharp is personally liable to Dancause on that basis? Why or why not?

Solution

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Sharp is likely to be personally liable based on piercing the corporate veil due to ignoring the corporate form. Technical details in the articles of incorporation alone would not be likely to result in liability being imposed; the fact that the entire operation ignored the corporate status matters more in losing the liability shield.

274.

Suppose that the club extended credit to its regular patrons in an effort to maintain a loyal clientele, although neither the articles of incorporation nor the corporate bylaws authorized this practice. Would the corporation likely have the power to engage in this activity? Explain.

Solution Extending credit to customers is a normal business activity and is not improper. Such details need not be discussed in the articles of incorporation or the bylaws, which generally concern the purpose of the business itself and basic ownership structure issues.

275.

How would the court classify Chickasaw Club, Inc.—domestic or foreign, public or private?

Solution The corporation was formed and operated in Georgia, so it is a domestic corporation. One person owns the corporation, so it is private; its stock is not traded, so it is also a close corporation.

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Practice and Review: Debate This 276.

Sole shareholders of S corporations should not be able to avoid liability for the torts of their employees.

Solution Perhaps it makes sense to allow individuals to use business organization forms that allow them to pass through profits to their personal tax returns, but it makes little sense to allow them to escape liability with such structures when their employees or agents commit torts. Normally, employees do not have liability insurance or even assets that could pay for tort judgments against them.

Those who suffer from these torts would therefore end up with nothing, even if they win at trial.

It should make no difference whether an S corporation is owned by one person or by many persons. A major benefit of all corporations, whatever form they take, has been to shield shareholders from liability. Therefore, if a shareholder of an S corporation knows that limited liability is not available, there is less reason to use the S corporation structure. Its use will decrease as a result.

Issue Spotters 277.

Name Brand, Inc., is a small business. Twelve members of a single family own all of its stock. Ordinarily, corporate income is taxed at the corporate and shareholder levels. How can Name Brand avoid this double taxation of income?

Solution Small businesses that meet certain requirements can qualify as S corporations, created specifically to permit small businesses to avoid double taxation. The six requirements of an S corporation are (1) the firm must be a domestic corporation; (2) the firm must not be a member of an affiliated group of corporations; (3) the firm must have fewer than a certain number of shareholders; (4) the shareholders must be individuals, estates, or qualified trusts (or corporations in some cases); (5) there can be only one class of stock; and (6) no shareholder can be a nonresident alien.

278.

Wonder Corporation has an opportunity to buy stock in XL, Inc. The directors decide that, instead of buying the stock in the name of the corporation, they will buy it for themselves. Yvon, a Wonder shareholder, learns of the purchase and wants to sue the directors on Wonder‘s behalf.

Can she do it? Explain.

Solution Yes. A shareholder can bring a derivative suit on behalf of a corporation if some wrong is done to the corporation. Normally, any damages recovered go into the corporate treasury.

Business Scenarios and Case Problems 279.

Preincorporation. Cummings, Okawa, and Taft are recent college graduates who want to form a corporation to manufacture and sell personal computers. Peterson tells them he will set in motion the formation of their corporation. First, Peterson makes a contract with Owens for the purchase of a piece of land for $20,000. Owens does not know of the prospective corporate formation at the time the contract is signed. Second, Peterson makes a contract with Babcock to build a small plant on the property being purchased. Babcock‘s contract is conditional on the corporation‘s formation. Peterson secures all necessary capitalization and files the articles of incorporation. Discuss whether the newly formed corporation, Peterson, or both are liable on the

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contracts with Owens and Babcock. Is the corporation automatically liable to Babcock on formation? Explain. (See Formation and Powers.)

Solution As a general rule, a promoter is personally liable for all pre-incorporation contracts made by the promoter. The basic theory behind such liability is that the promoter cannot be an agent for a nonexistent principal (a corporation not yet formed). It is immaterial whether the contracting party knows of the prospective existence of the corporation, and the general rule of promoter liability continues even after the corporation is formed. Three basic exceptions to promoter liability are: (1) The promoter‘s contract with a third party can stipulate that the third party will look only to the new corporation, not to the promoter, for performance and liability.

(2) The third party can release the promoter from liability.

(3) After formation, the corporation can assume the contractual obligations and liability by novation. (If it is by adoption, most courts hold that the promoter is still personally liable.)

Peterson is therefore personally liable on both contracts, because (1) neither Owens nor Babcock has released him from liability, (2) the corporation has not assumed contractual responsibility by novation, and (3) Peterson‘s contract with Babcock did not limit Babcock to holding only the corporation liable. (Peterson‘s liability was conditioned only on the corporation‘s formation, which did occur.)

Incorporation in and of itself does not make the newly formed corporation liable for pre-incorporation contracts. Until the newly formed corporation assumes Peterson‘s contracts by novation (releasing Peterson from personal liability) or by adoption (undertaking to perform Peterson‘s contracts, which makes both the corporation and Peterson liable), Babcock cannot enforce Peterson‘s contract against the corporation.

280.

Conflicts of Interest. Oxy Corp. is negotiating with the Wick Construction Co. for the renovation of the Oxy corporate headquarters. Wick, the owner of the Wick Construction Co., is also one of the five members of Oxy‘s board of directors. The contract terms are standard for this type of contract. Wick has previously informed two of the other directors of his interest in the construction company. Oxy‘s board approves the contract by a three-to-two vote, with Wick voting with the majority. Discuss whether this contract is binding on the corporation. (See Directors and Officers.)

Solution Various state statutes contain different standards for contracts made between two corporations when a director of one corporation has a material interest in the other. In general, however, the courts will uphold these contracts providing that: (1) The contract was fair and reasonable to the corporation at the time the contract was entered into.

(2) The director with conflicting interests gave a full disclosure of such interests to the other directors.

(3) The contract was approved by a majority of the disinterested directors or shareholders.

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In the case of Wick and Oxy Corp., the contract may be set aside for two reasons. First, the conflict-of-interest transaction was not fully disclosed to all members of the board; and second, the contract was not approved by a majority of disinterested directors. Thus, Wick has breached his fiduciary duties to Oxy, and Oxy can set aside the contract.

281.

Spotlight on Smart Inventions—Piercing the Corporate Veil. Thomas Persson and Jon Nokes founded Smart Inventions, Inc., to market household consumer products. The success of their first product, the Smart Mop, continued with later products, which were sold through infomercials. Persson and Nokes were the firm‘s officers and equal shareholders, with Persson responsible for product development and Nokes in charge of day-to-day activities. By 1998, they had become dissatisfied with each other‘s efforts. Nokes represented the firm as financially ―dying,‖ and ―in a grim state, . . . worse than ever.‖ He offered to buy all of Persson‘s shares for $1.6 million, and Persson accepted. On the day that they signed the agreement to transfer the shares, Smart Inventions began marketing a new product— the Tap Light. It was an instant success, generating millions of dollars in revenues. In negotiating with Persson, Nokes had intentionally kept the Tap Light a secret. Persson sued Smart Inventions, asserting fraud and other claims. Under what principle might Smart Inventions be liable for Nokes‘s fraud? Is Smart Inventions liable in this case? Explain. [Persson v. Smart Inventions, Inc., 125 Cal.App.4th 1141, 23 Cal.Rptr.3d 335 (2 Dist. 2005)] (See Formation and Powers.)

Solution As stated in the text, the doctrine of respondeat superior applies to agents of corporations. Under this doctrine, a corporation is liable for torts (or crimes) committed by its agents or officers within the course and scope of employment. Thus, if Nokes was an agent acting in the scope of his employment, then Smart Inventions can be liable for Nokes‘ fraud.

Because Nokes and Persson founded the company and were the only two shareholders and officers, Smart Inventions was most likely a close corporation. When Nokes negotiated to purchase of all of Persson‘s shares, Nokes would have been acting on behalf the corporation (since he was the only remaining officer and corporate representative). Nokes intentionally lied about the financial condition of the corporation and the withheld information about a new product that he suspected would be successful. In these circumstances, Smart Inventions should be liable for Note‘s fraud.

Indeed, the court that heard the case ruled that Nokes was acting on behalf of Smart Inventions and awarded nearly $720,000 in damages, fees, and costs to Persson. On appeal, a state intermediate appellate court affirmed the award of damages against Smart Inventions. The court explained that ―Nokes possessed the information about the Tap Light and could have disclosed it at any time before the execution of the Stock Redemption Agreement. Even if . . . Nokes acted only in his individual capacity during the . . . negotiations between him and Persson, he was clearly acting for Smart Inventions by the time the agreement was executed, as his signature on behalf of Smart Inventions demonstrates. Accordingly, his continued concealment of the Tap Light was an ‗act or omission‘ of an officer of Smart Inventions within the scope of his employment and, as a matter of law, the act or omission of Smart Inventions.‖ 282.

Business Case Problem with Sample Answer—Piercing the Corporate Veil. Scott Snapp contracted with Castlebrook Builders, Inc., which was owned by Stephen Kappeler, to remodel a house. Kappeler estimated that the remodeling would cost around $500,000.

Eventually, however, Snapp paid Kappeler more than $1.3 million. Snapp filed a suit in an Ohio

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state court against Castlebrook, alleging breach of contract and fraud, among other things.

During the trial, it was revealed that Castlebrook had issued no shares of stock and had commingled personal and corporate funds. The minutes of the corporate meetings all looked exactly the same. In addition, Kappeler could not provide an accounting for the Snapp project. In particular, he could not explain evidence of double and triple billing nor demonstrate that the amount Snapp paid had actually been spent on the remodeling project. Are these sufficient grounds to pierce the corporate veil? Explain. [Snapp v. Castlebrook Builders, Inc., 2014-Ohio-163, 7 N.E.3d 574 (2014)] (See Formation and Powers.)

—For a sample answer to Problem 18–4, go to Appendix E. Solution Yes. There are sufficient grounds in the facts of this problem to support piercing the corporate veil and holding Kappeler personally liable to Snapp. First, in a case in which a plaintiff seeks to pierce a corporate veil, there must be a fraud or other injustice to be remedied. In that situation, the factors that a court will consider in determining whether to pierce the corporate veil include (1) a party is tricked or misled into dealing with the corporation rather than the individual, (2) the corporation has insufficient capital to meet its prospective debts or other potential liabilities, (3) corporate formalities, such as holding required corporate meetings, are not followed, and (4) personal and corporate interests are commingled.

In this problem, the amount that Snapp ultimately paid the builder exceeded the original estimate by nearly $1 million—and the project was still unfinished. Kappeler could not provide an accounting for the Snapp project—he could not explain double and triple charges nor whether the amount that Snapp paid had actually been spent on the project. These facts support a conclusion of fraud. And they also indicate that Kappeler may have tricked or misled Snapp into dealing with the corporation rather than with Kappeler as an individual. Castlebrook had issued no shares of stock, which indicates insufficient capitalization. The minutes of the corporate meetings ―all looked exactly the same,‖ indicating that in fact the required corporate meetings had not been held. And Kappeler had commingled personal and corporate funds.

In the actual case on which this problem is based, in Snapp‘s suit against the builder, the court pierced the corporate veil and held Kappeler personally liable. A state intermediate appellate court affirmed.

283.

Torts. Jennifer Hoffman took her cell phone to a store owned by R&K Trading, Inc., for repairs. Later, Hoffman filed a suit in a New York state court against R&K, Verizon Wireless, Inc., and others, seeking to recover damages for a variety of torts, including infliction of emotional distress and negligent hiring and supervision. She alleged that an R&K employee, Keith Press, had examined her phone in a back room, accessed private photos of her stored on her phone, and disseminated the photos to the public. Hoffman testified that ―after the incident, she learned from another R&K employee that personal information and pictures had been removed from the phones of other customers.‖ Can R&K be held liable for the torts of its employees? Explain.

[Hoffman v. Verizon Wireless, Inc., 5 N.Y.S.3d 123, 125 A.D.3d 806 (2015)] (See Nature and Classification.)

Solution Yes. R&K can be held liable for the torts of its employees. A corporation is liable for the torts committed by its agents or officers within the course and scope of their employment. The

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doctrine of respondeat superior applies to corporations in the same way as it does to other agency relationships.

In the facts of this problem, Jennifer Hoffman took her cell phone to a store owned by R&K for repairs. She believed that R&K‘s employee Keith Press examined her phone in a back room, accessed private photos of her stored on the phone, and disseminated the photos to the public.

After the incident, Hoffman learned from another R&K employee that personal information and pictures had been removed from the phones of other customers. Hoffman filed a suit against R&K and others, seeking to recover damages for several torts, including infliction of emotional distress and negligent hiring and supervision. In this situation, the doctrine of respondeat superior applies to R&K. The corporation can be held liable for the torts committed by its employees within the course and scope of their employment. This can include Press‘s hiring and his unauthorized accessing of private data on customers‘ phones.

In the actual case on which this problem is based, R&K filed a motion for summary judgment. The court denied the motion. A state intermediate appellate court affirmed the denial. In light of Hoffman‘s testimony, R&K ―failed to eliminate all triable issues of fact as to those causes of action . . . premised upon the theory of respondeat superior‖ and those alleging negligent hiring and supervision.

284.

Piercing the Corporate Veil. In New York City, 2406-12 Amsterdam Associates, LLC, brought an action in a New York state court against Alianza Dominicana and Alianza, LLC, to recover unpaid rent. The plaintiff asserted cause to pierce the corporate veil, alleging that Alianza Dominicana had made promises to pay its rent while discreetly forming Alianza, LLC, to avoid liability for it. According to 2406-12, Alianza, LLC, was 90 percent owned by Alianza Dominicana, had no employees, and had no function but to hold Alianza Dominicana‘s assets away from its creditors. The defendants filed a motion to dismiss the plaintiff‘s claim. Assuming that 2406-12‘s allegations are true, are there sufficient grounds to pierce Alianza, LLC‘s corporate veil? Discuss.

[2406-12 Amsterdam Associates, LLC v. Alianza, LLC, 136 A.D.3d 512, 25 N.Y.S.2d 167 (1 Dept.

2016)] (See Formation and Powers.)

Solution Yes. Assuming that 2406–12‘s allegations are true, there are sufficient grounds to pierce Alianza LLC‘s corporate veil. When the owners of a corporation, or as in this case, an LLC, use the entity to perpetrate a fraud, circumvent the law, or in some other way accomplish an illegitimate objective, a court can ignore the business structure and pierce the corporate veil to expose the owners to liability for the harm.

One of the circumstances in which a court will pierce the shell of a business entity to hold its owners liable occurs when the entity was formed to evade an existing legal obligation.

In this problem, 2406–12 Amsterdam Associates LLC—a landlord and the plaintiff in the suit— alleged that its tenant Alianza Dominicana had made promises to pay its rent while discreetly forming Alianza LLC to avoid liability for it. 2406–12 argued that Alianza LLC was 90 percent owned by Alianza Dominicana, had no employees, and had no function but to hold Alianza Dominicana‘s assets away from its creditors—in particular 2406–12. These alleged facts would be sufficient to overcome the defendant tenant‘s motion to dismiss and, if proven, could serve as a sufficient basis to pierce the LLC‘s veil.

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In the actual case on which this problem is based, in 2406–12‘s action against its tenant and the associated entity to recover the amount of the unpaid rent, the court denied the defendants‘ motion to dismiss. A state intermediate appellate court affirmed.

285.

Rights of Shareholders. FCR Realty, LLC, and Clifford B. Green & Sons, Inc., were coowned by three brothers— Frederick, Clifford Jr., and Richard Green. Each brother was a shareholder of the corporation. Frederick was a controlling shareholder, as well as president. Each brother owned a onethird interest in the LLC. Clifford believed that Frederick had misused LLC and corporate funds to pay nonexistent debts and liabilities and had diverted LLC assets to the corporation. He also contended that Frederick had disbursed about $1.8 million in corporate funds to Frederick‘s own separate business. Clifford hired an attorney and filed an action on behalf of the two companies against Frederick for a breach of fiduciary duty. Frederick argued that Clifford lacked the knowledge necessary to adequately represent the companies‘ interest because he did not understand financial statements. Can Clifford maintain the action against Frederick? If so, and if the suit is successful, who recovers the damages? Explain. [FCR Realty, LLC v. Green, 2016 WL 571449 (Conn.Super. 2016)] (See Shareholders.)

Solution Clifford can pursue his action on the companies‘ behalf against Frederick. When a corporation is harmed by the actions of a director or officer, the other directors can bring a suit in the name of the company against that party. If the directors do not bring a suit, the shareholders can do so filing what is known as a shareholder‘s derivative suit.

Any damages recovered in Clifford‘s action will go into the appropriate company treasury. When shareholders bring a derivative suit, they are not pursuing rights or benefits for themselves personally but are acting as guardians of the corporate entity. Thus, if the suit is successful, any damages recovered go into the corporate treasury, not to the shareholders personally.

Here, two firms—one a limited liability company (LLC), the other a corporation—are owned by three brothers, including Frederick and Clifford. Frederick is a controlling shareholder, and the president, of the corporation. Clifford believed that Frederick had been misusing the companies‘ funds to pay non-existent debts, divert LLC assets to the corporation, and disburse about $1.8 million in corporate funds to his separate business. Clifford hired an attorney and filed an action on behalf of the two companies against Frederick. This action qualifies as a shareholder‘s derivative. Under these facts, any damages recovered should be paid to the companies.

Frederick‘s contention that a shareholder who lacks the knowledge necessary to adequately represent a corporation‘s interest because that shareholder does not understand financial statements may be a factor that helps defeat a frivolous suit or an action driven by an outside party. But in this case, Clifford demonstrated the requisite knowledge required to represent the firms‘ interests even if he did not know the details of the companies‘ financial documents—the action was filed on his instigation, he clearly understood the allegations, and he hired an attorney on whom he could rely to represent the companies‘ interests.

In the actual case on which this problem is based, Frederick filed a motion to dismiss based on the argument that Clifford lacked standing to bring the suit because he was the wrong party to represent the companies. The court denied the motion in part on the reasoning stated above.

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286.

Certificate of Authority. Armour Pipe Line Company assigned leases to its existing oil wells in Texas to Sandel Energy, Inc. The assignment included royalties for the oil produced from the wells. Armour specified that the assignment ―does not pertain to production attributable to these leases from any new wells,‖ reserving for itself an interest in those royalties. Later, Armour— a foreign corporation in Texas—forfeited its certificate of authority to do business in the state.

More than three years later, the certificate was reissued. Meanwhile, new wells were drilled on the leases. Sandel filed a suit in a Texas state court against Armour, claiming that the reservation of a royalty interest in those wells was ―ineffective‖ because of the temporary forfeiture. When and why does a corporation need a certificate of authority? Is Armour entitled to the royalties from the new wells? Discuss. [Armour Pipeline Co. v. Sandel Energy, Inc., 546 S.W.3d 455 (Tex.App.— Houston (14th Dist.) 2018)] (See Nature and Classification.)

Solution Arguably, yes. Armour is entitled to the royalties from the new wells. A corporation needs a certificate of authority to do business in a state outside its state of incorporation. Once a certificate is obtained, the corporation can generally exercise in that state all of the powers conferred on it by its home state. If a foreign corporation does business in a state without a certificate of authority, the state can impose sanctions, such as fines.

In this problem, Armour assigned leases to existing wells to Sandel. The assignment reserved to Armour an interest in royalties from any new wells. Armour, a foreign corporation, forfeited its certificate of authority to do business in the state, however. Later, the certificate was reissued.

Meanwhile, new wells were drilled. Sandel filed a suit against Armour, claiming that the reservation of the royalties was ―ineffective‖ because of the temporary forfeiture.

Armour had its certificate of authority when it assigned the leases to Sandel, reserving the royalty interest. The temporary forfeiture of the certificate could not have terminated the existence of the firm, which was not incorporated in the state. Depending on state law, a sanction might be imposed, but this appears unlikely in the circumstance of a temporary forfeiture of a certificate.

In the actual case on which this problem is based, the court issued a summary judgment in Sandel‘s favor, declaring that Armour‘s reservation ―is of no legal force nor effect.‖ A state intermediate appellate court held that Armour‘s claim was not extinguished by any applicable Texas statute or case, and reversed and remanded.

287.

A Question of Ethics—The IDDR Approach and Duties of Directors and Officers.

Hewlett-Packard Company (HP) hired detectives to secretly monitor the phones and e-mail accounts of its directors to find the sources of leaks of company information to the media. When the government learned of the monitoring, criminal charges were brought against HP‘s thenchairwoman and general counsel. Mark Hurd, HP‘s chief executive officer, was found free of wrongdoing. The scandal had the effect of bolstering Hurd‘s reputation for integrity, and he became both chairman and CEO. In congressional testimony, press releases, and investor briefings, Hurd proclaimed HP‘s integrity and its intent to enforce violations of its corporate code of ethics, the Standards of Business Conduct (SBC). Hurd‘s statements concerning HP‘s commitment to ethics and compliance with the SBC reassured investors and the public, and kept HP‘s stock prices from falling. Meanwhile, an independent contractor for HP accused Hurd of sexual harassment. An investigation by HP‘s board found no harassment, but revealed that Hurd had lied about his personal relationship with the woman and falsified expense reports to cover it up. Hurd resigned, causing the price of HP stock to drop. A group of shareholders sued HP claiming that Hurd‘s unethical behavior while promoting HP‘s commitment to ethics constituted

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fraud. [Retail Wholesale and Department Store Union Local 338 Retirement Fund v. HewlettPackard Co., 845 F.3d 1268 (9th Cir. 2017)] (See Directors and Officers.)

1.

Using the Discussion step of the IDDR approach, consider whether Hurd‘s conduct constituted an ethical violation against HP and its shareholders.

Solution

By Hurd‘s conduct, he committed an ethical violation against Hewlett-Packard Co. (HP) and its shareholders.

The IDDR approach consists of four steps. The first is an Inquiry to identify the issue, stakeholders, and ethical standards. The issue for Hurd was whether to lie as part of an effort to bolster HP‘s damaged reputation for transparency and ethics. The stakeholders included Hurd, HP, and the firm‘s directors, employees, shareholders, and third parties with which it does business. Applicable ethical standards included the company‘s code and perhaps the general prescription to ―do what is right‖ underlying every set of ethical principles.

The second step is a Discussion, in question here, of actions on the issue, the strengths and weaknesses of the actions, and the consequences and effects on the stakeholders. In this problem, Hurd could publicly misrepresent HP and himself as consistently ethical, free of engaging in questionable acts. Or he could present the firm and himself as generally ethical but subject to recent lapses—monitoring the directors, in HP‘s case, and lying about businessrelated behavior, in Hurd‘s situation.

Officers are fiduciaries of their corporation. Their duties include the duty of care and the duty of loyalty. Officers must be honest and use prudent business judgment in the conduct of corporate affairs. They must exercise the degree of care that reasonably prudent people use in conducting their personal affairs. Officers can be held to answer to the corporation and its shareholders for breaching the duty of care.

The duty of loyalty requires officers to subordinate their personal interests to the corporation‘s welfare. They cannot use corporate funds for personal advantage.

HP and its shareholders may have had a cause against Hurd based on his apparent violation of an officer‘s fiduciary duties. He was not honest with the board, and this was clearly not reasonably prudent. Further, he used corporate funds for personal advantage (false expense reports). The seriousness of these transgressions would determine Hurd‘s liability in an action against him.

Counterarguments to the assertion of an ethical violation include that the promotion of ethical conduct at HP did not suggest there would be no violations of its code. Hurd did not appear to guaranty that he personally complied with the company‘s code in all circumstances. And neither he nor his misconduct had any relation to the earlier monitoring scandal.

The last steps of the IDDR approach include a Decision and its Review. In this case, of course, Hurd decided to misrepresent the truth. A review of the failure of this decision to resolve Hurd‘s ethical dilemma and its negative effect on the stakeholders clearly exposes this decision to have been a mistake.

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2.

Using the Review step of the IDDR approach, evaluate HP‘s decision to monitor its directors‘ phones.

Solution HP‘s decision to monitor its directors‘ phones was ethically wrong. In this problem, a scandal erupted at HP when the company monitored the phones of its directors. Criminal charges resulted. HP‘s chief executive officer (CEO) publicly touted the firm‘s high standards for ethics and its code, the Standards of Business Conduct (SBC). A conflict between this promotion of the SBC and the CEO‘s behavior arose when he lied about his personal relationship with a contractor and falsified related expense reports. The CEO resigned, causing the price of HP stock to drop.

The IDDR approach consists of four steps, the final of which is a Review of the success or failure of an action to resolve a particular ethical issue, and satisfy the issue‘s stakeholders.

Here, the issue was whether to monitor the directors‘ phones. The stakeholders included HP and the firm‘s CEO, directors, employees, shareholders, and third parties with which it does business. The most relevant ethical standard was the SBC. When HP chose to monitor the phones, it violated the SBC and threatened the stakeholders‘ trust in the firm to behave ethically. This decision may have immediately resolved the issue, but it was not successful in the long run and would not satisfy the stakeholders. To regain their confidence, HP would need to conduct itself ethically in accord with its own SBC for a reasonable period, avoiding even the appearance of impropriety.

In the actual case on which this problem is based, HP shareholders filed a suit against the CEO and the company, alleging securities fraud. The court issued a judgment in the defendants‘ favor. The U.S. Court of Appeals for the Ninth Circuit affirmed, holding that the plaintiffs failed to allege that the defendants‘ representations about ethics were materially misleading.

Critical Thinking and Writing Assignments 288.

Time-Limited Group Assignment—Shareholders’ Duties. Milena Weintraub and Larry Griffith were shareholders in Grand Casino, Inc., which operated a casino in South Dakota. Griffith owned 51 percent of the stock and Weintraub 49 percent. Weintraub managed the casino, which Griffith typically visited once a week. At the end of 2012, an accounting audit showed that the cash on hand was less than the amount posted in the casino‘s books. Later, more shortfalls were discovered. In October 2014, Griffith did a complete audit. Weintraub was unable to account for $200,500 in missing cash. Griffith kept all of the casino‘s most recent profits, including Weintraub‘s $90,447.20 share, and, without telling Weintraub, sold the casino for $400,000 and kept all of the proceeds. Weintraub filed a suit against Griffith, asserting a breach of fiduciary duty. Griffith countered with evidence of Weintraub‘s misappropriation of corporate cash. (See Shareholders.)

1.

The first group will discuss the duties that these parties owed to each other and determine whether Weintraub or Griffith, or both, breached those duties.

Solution These parties owed fiduciary duties to each other, which they breached by withholding cash from each other. Weintraub misappropriated corporate cash and Griffith kept all of the proceeds from the sale of the casino.

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2.

The second group will decide how this dispute should be resolved and who should pay what to whom to reconcile the finances.

Solution Griffith owed $58,447.20 to Weintraub for his 49 percent share of the proceeds from the casino‘s sale and its profits. Weintraub owed Griffith $68,850 as his share of the cash that Weintraub took from the casino.

3. The third group will discuss whether Weintraub or Griffin violated any ethical duties to each other or to the corporation.

Solution Of course, Weintraub violated his ethical duties to Griffith and to their corporation by misappropriating corporate cash. Griffith violated his ethical duties by intentionally withholding Weintraub‘s portion of the corporate assets on the sale of the casino. In both cases, it would be inequitable for the parties to enjoy the full benefits of the sale and profits of the corporation without also being responsible for the money they each withheld from the other.

Solution and Answer Guide Miller, The Legal Environment Today 10e, 9780357635582; Chapter 19: Investor Protection, Insider Trading, and Corporate Governance

Table of Contents Critical Thinking Questions in Features ............................................................................................................. 248 Adapting the Law to the Online Environment ................................................................................ 248 Critical Thinking Questions in Cases ................................................................................................................... 248 Case 19.1 ............................................................................................................................................... 248 Case 19.2 ............................................................................................................................................... 249 Case 19.3 ............................................................................................................................................... 249 Chapter Review ........................................................................................................................................................... 249 Practice and Review .............................................................................................................................. 249 Practice and Review: Debate This ......................................................................................................... 250 Issue Spotters ........................................................................................................................................ 251 Business Scenarios and Case Problems ................................................................................................. 251 Critical Thinking and Writing Assignments ............................................................................................ 260

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Critical Thinking Questions in Features Adapting the Law to the Online Environment 289.

What alternatives are there to crowdfunding for a start-up business?

Solution A start-up can obtain funding via loans from friends and family. Owners of start-ups often take out second mortgages on their homes to obtain financing. Start-ups can go to venture capitalists to request funding. Occasionally, start-ups can obtain bank financing. Usually, though, banks require that all members of the start-up sign personal guarantees for any funds loaned.

Critical Thinking Questions in Cases Case 19.1 290.

Scoville argued that Adpacks were not investment contracts because there was no guarantee that buyers would receive a return on their investment. Should the court have ruled in Scoville‘s favor based on this argument? Explain.

Solution No. Very few investments guarantee a return. To qualify as an investment contract, the investor, or buyer, only has to have a reasonable expectation of profits. As long as a transaction satisfies the Howey test for an investment contract, it is immaterial whether the investment is speculative.

Scoville argued that Adpacks were not investment contracts because Traffic Monsoon‘s obligation to share its revenue was contingent on there being revenue to share with no guarantee this would happen. In fact, Traffic Monsoon‘s website stated that there was no guarantee there would be revenue for Adpack buyers to share.

But based on Scoville‘s other representations, including the touted high rates of return, the Adpack buyers had a reasonable expectation of obtaining a share of Traffic Monsoon‘s revenue.

And this was enough to meet the requirements of the test set out in the Howey case (in which the investors were likewise not guaranteed a return on their investment).

291.

The return on an investment in an Adpack was not based on any underlying business activity. Instead, money from new investors was used pay earlier investors. Is this a legitimate business model? Discuss.

Solution No. The Adpack business model—using money from new investors to generate returns for earlier investors—was likely to be established at trial as what is known as a Ponzi scheme. This sort of set-up is not legitimate because it is deceptive, generating a false appearance of profitability.

The central characteristic of a Ponzi scheme is that returns are not based on any underlying business activity. Instead, as in this case, money from new investors is used to pay earlier investors. And often, as also appears to have occurred in this case, the money contributed by later investors generates artificially high dividends for the earlier investors. This may attract even more investors.

Traffic Monsoon misrepresented the source of the revenue shared with Adpack investors.

Although the company realized some income from its other advertising services, there was

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essentially no business activity generating the revenue shared with Adpack buyers except the amounts received from the sales of new Adpacks. This deception made the business illegitimate and likely that it would be established as a Ponzi scheme.

Case 19.2 292.

Suppose that further drilling revealed that there was not enough ore at this site to be mined commercially. Would the defendants still have been liable for violating SEC Rule 10b-5?

Why or why not?

Solution Assuming all of the other circumstances are as they are stated in the case, the answer to this question is most probably yes, because the defendants‘ trading was based on their possession of inside information of a material fact without its public disclosure, which is a violation of SEC Rule 10b-5. Depending on subsequent events in this hypothetical situation, however, there may not have been any injury for which a private party could recover (that is, the defendants might have lost money on their trading rather than profiting at the expense of uninformed stock sellers).

Case 19.3 293.

In documents available to the public, TransS1 included general warnings about ―the risks of regulatory scrutiny and litigation.‖ Did this satisfy the company‘s duty to disclose its allegedly fraudulent scheme? Why or why not?

Solution No. The ―general warnings‖ about ―the risks of regulatory scrutiny and litigation‖ did not satisfy TranS1‘s duty to disclose its allegedly fraudulent scheme.

The misrepresentation element of a securities fraud action under Section 10(b) requires a deceptive, material misstatement or omission by a defendant with a duty to disclose. Once that duty is established, a generic warning of a general risk will not meet that requirement if there are undisclosed, more specific material facts that would affect a reasonable investor‘s decision whether to buy or sell the security.

Another example of a failure to satisfy that duty is a company‘s public disclosure of a risk of fire in its facility and the installation of a sprinkler system to reduce the danger, but an omission of the fact that the system is inoperable.

294.

If the plaintiffs can prove the elements of their claim, what should be the measure of their damages? Explain.

Solution In a case alleging fraud, if the plaintiffs can prove the elements of their claim, the measure of their damages should be the amount of their loss. In the circumstances of this case, that could be the difference between the price of TranS1‘s stock before the company revealed the fact of the government‘s investigation and its value after that revelation.

Chapter Review Practice and Review Dale Emerson served as the chief financial officer for Reliant Electric Company, a distributor of electricity serving portions of Montana and North Dakota. Reliant was in the final stages of planning a

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takeover of Dakota Gasworks, Inc., a natural gas distributor that operated solely within North Dakota.

On a weekend fishing trip with his uncle, Ernest Wallace, Emerson mentioned that he had been putting in a lot of extra hours at the office planning a takeover of Dakota Gasworks. When he returned from the fishing trip, Wallace purchased $20,000 worth of Reliant stock. Three weeks later, Reliant made a tender offer to Dakota Gasworks stockholders and purchased 57 percent of Dakota Gasworks stock. Over the next two weeks, the price of Reliant stock rose 72 percent before leveling out. Wallace sold his Reliant stock for a gross profit of $14,400. Using the information presented in the chapter, answer the following questions.

295. not?

Would registration with the SEC be required for Dakota Gasworks securities? Why or why

Solution No, because the securities were not newly issued or offered to the public. In this scenario, Dakota Gasworks was the target company in a successful takeover, it did not issue new securities to raise capital or offer any securities to the public. Therefore, it would not have been required to register with the SEC. 296.

Did Emerson violate Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5? Why or why not?

Solution No, because Emerson did not fail to disclose a material fact in connection with the purchase and sale of securities, nor did he intend to defraud or have knowledge of his misconduct. Emerson did not fail to disclose a material fact in connection with the purchase or sale of securities. What he did do was use bad judgment and breach a fiduciary duty by mentioning the planned takeover to his uncle, who then took the information and used it to his advantage. There is no indication in the facts that Emerson intended to do anything wrong or knew that his uncle would use this information to trade on the information (that he should not have disclosed).

297.

What theory or theories might a court use to hold Wallace liable for insider trading?

Solution Because Wallace acquired inside information as a result of Emerson‘s breach of his fiduciary duty, Wallace could be held liable for insider trading under the tipper/tippee theory. Wallace would have to have known that the information came from a breach of the fiduciary duty.

298.

Under the Sarbanes-Oxley Act, who would be required to certify the accuracy of the financial statements Reliant filed with the SEC? Solution Under the Sarbanes-Oxley Act, the chief executive officers and the chief financial officers are required to certify the financial statements.

Practice and Review: Debate This 299.

Inside trading should be legalized.

Solution The more quickly information about publicly held companies gets into the hands of the public, the more efficient the stock market becomes. Therefore, insider trading should be made legal

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because both good and bad company information will be made completely public more quickly. Those in publicly held companies who profit from having access to such inside information will end up with lower salaries because of competition in the labor market, even for managers.

Laws against insider trading were put in place to prevent insiders—usually highly paid upper-level managers—from undeservedly benefiting from their positions in the publicly head companies. If insider trading were no longer illegal, insiders would stand to make fortunes from buying the companies‘ stock before good news is released. If the inside news is bad, insiders can make fortunes selling short the companies‘ stocks.

Issue Spotters 300.

When a corporation wishes to issue certain securities, it must provide sufficient information for an unsophisticated investor to evaluate the financial risk involved. Specifically, the law imposes liability for making a false statement or omission that is ―material.‖ What sort of information would an investor consider material?

Solution The average investor is concerned not with minor inaccuracies but with facts that if disclosed would tend to deter that individual from buying the securities. These include material facts that have an important bearing on the condition of the issuer and its business—such as liabilities, loans to officers and directors, customer delinquencies, and pending lawsuits.

301.

Lee is an officer of Magma Oil, Inc. Lee knows that a Magma geologist has just discovered a new deposit of oil. Can Lee take advantage of this information to buy and sell Magma stock?

Why or why not?

Solution No. The Securities Exchange Act of 1934 extends liability to officers and directors in their personal transactions for taking advantage of inside information when they know it is unavailable to the persons with whom they are dealing.

Business Scenarios and Case Problems 302.

Registration Requirements. Langley Brothers, Inc., a corporation incorporated and doing business in Kansas, decides to sell common stock worth $1 million to the public. The stock will be sold only within the state of Kansas. Joseph Langley, the chair of the board, says the offering need not be registered with the Securities and Exchange Commission. His brother, Harry, disagrees. Who is right? Explain. (See Securities Act of 1933.)

Solution Joseph is right. Under Regulation A, securities issued by an issuer that has offered less than $50 million in securities in any twelve-month period are exempt from registration. With respect to the amount of the offering in this problem, the issue would also fall under Rule 504 of Regulation D, which exempts noninvestment company offerings up to $5 million in any twelve-month period.

Rule 506 exempts private, noninvestment company offerings in unlimited amounts if these offerings are not generally solicited or advertised. This exemption is often referred to as the private placement exemption because it exempts ―transactions not involving any public offering.‖ The offering can involve an unlimited number of accredited investors and no more than thirty-five

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unaccredited investors. The issuer must believe that each unaccredited investor has sufficient knowledge or experience in financial matters to be capable of evaluating the investment‘s merits and risks. The private placement exemption is perhaps most important to firms that want to raise funds through the sale of securities without registering them.

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303.

Insider Trading. David Gain is the chief executive officer (CEO) of Forest Media Corp., which is interested in acquiring RS Communications, Inc. To initiate negotiations, Gain meets with RS‘s CEO, Gill Raz, on Friday, July 12. Two days later, Gain phones his brother, Mark, who buys 3,800 shares of RS stock on the following Monday. Mark discusses the deal with their father, Jordan, who buys 20,000 RS shares on Thursday. On July 25, the day before the RS bid is due, Gain phones his parents‘ home, and Mark buys another 3,200 RS shares. Over the next few days, Gain periodically phones Mark and Jordan, both of whom continued to buy RS shares. On August 5, RS refuses Forest‘s bid and announces that it is merging with another company. The price of RS stock rises 30 percent, increasing the value of Mark‘s and Jordan‘s shares by nearly $660,000 and $400,000, respectively. Is Gain guilty of insider trading? What is required to impose sanctions for this offense? Could a court hold Gain liable? Why or why not? (See Securities Exchange Act of 1934.)

Solution There is likely enough evidence in the facts of this problem to find that David violated the law because there was a clear pattern—every time David called his brother or father, Mark or Jordan bought more RS stock. Establishing liability under Section 10(b) and SEC Rule 10b-5 requires proof of an intent to defraud or knowledge of misconduct with respect, in this case, to a failure to disclose material facts used at the time of a trade. People generally buy when they believe the price of a stock is going up and sell when they believe it is going down. Insider trading can be established when it can be inferred that the most likely source of that belief was an insider. For example, a stock purchase or sale‘s proximity in time to a phone conversation between a trader and one with inside information provides a reasonable basis for inferring an exchange of that information. Thus, in this problem, on this basis, a court could hold David liable for insider trading.

304.

Violations of the 1934 Act. Matrixx Initiatives, Inc., makes and sells over-the-counter pharmaceutical products. Its core brand is Zicam, which accounts for 70 percent of its sales.

Matrixx received reports that some consumers had lost their sense of smell (a condition called anosmia) after using Zicam Cold Remedy. Four product liability suits were filed against Matrixx, seeking damages for anosmia. In public statements relating to revenues and product safety, however, Matrixx did not reveal this information.

James Siracusano and other Matrixx investors filed a suit in a federal district court against the company and its executives under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, claiming that the statements were misleading because they did not disclose the information about the product liability suits. Matrixx argued that to be material, information must consist of a statistically significant number of adverse events that require disclosure. Because Siracusano‘s claim did not allege that Matrixx knew of a statistically significant number of adverse events, the company contended that the claim should be dismissed. What is the standard for materiality in this context? Should Siracusano‘s claim be dismissed? Explain. [Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 131 S.Ct. 1309, 179 L.Ed.2d 398 (2011)] (See Securities Exchange Act of 1934.)

Solution An omission or misrepresentation of a material fact in connection with the purchase or sale of a security may violate Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. The key question is whether the omitted or misrepresented information is material. A fact, by itself, is not automatically material. A fact will be regarded as material only if it is significant enough that it would likely affect an investor‘s decision as to whether to buy or sell the company‘s securities. For

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example, a company‘s potential liability in a product liability suit and the financial consequences to the firm are material facts that must be disclosed because they are significant enough to affect an investor‘s decision as to whether to buy stock in the company.

In this case, the plaintiffs‘ claim should not be dismissed. To prevail on their claim that the defendants made material omissions in violation of Section 10(b) and SEC Rule 10-5, the plaintiffs must prove that the omission was material. Their complaint alleged the omission of information linking Zicam and anosmia (a loss of the sense of smell) and plausibly suggested that reasonable investors would have viewed this information as material. Zicam products account for 70 percent of Matrixx‘s sales. Matrixx received reports of consumers who suffered anosmia after using Zicam Cold Remedy.

In public statements discussing revenues and product safety, Matrixx did not disclose this information. But the information was significant enough to likely affect a consumer‘s decision to use the product, and this would affect revenue and ultimately the commercial viability of the product. The information was therefore significant enough to likely affect an investor‘s decision whether to buy or sell Matrixx‘s stock, and this would affect the stock price. Thus, the plaintiffs‘ allegations were sufficient. Contrary to the defendants‘ assertion, statistical sampling is not required to show materiality—reasonable investors could view reports of adverse events as material even if the reports did not provide statistically significant evidence.

305. Business Case Problem with Sample Answer— Disclosure under SEC Rule 10b-5. Dodona I,

LLC, invested $4 million in two securities offerings from Goldman, Sachs & Co. The investments were in collateralized debt obligations (CDOs). Their value depended on residential mortgagebacked securities (RMBSs), whose value in turn depended on the performance of subprime residential mortgages. Before marketing the CDOs, Goldman had noticed several ―red flags‖ relating to investments in the subprime market, in which it had invested heavily.

To limit its risk, Goldman began betting against subprime mortgages, RMBSs, and CDOs, including the CDOs it had sold to Dodona. In other words, Goldman made investments based on the assumption that subprime mortgages and the securities instruments built upon them would decrease in value. In an internal e-mail, one Goldman official commented that the company had managed to ―make some lemonade from some big old lemons.‖ Nevertheless, Goldman‘s marketing materials provided only boilerplate statements about the risks of investing in the securities. The CDOs were later downgraded to junk status, and Dodona suffered a major loss while Goldman profited. Assuming that Goldman did not affirmatively misrepresent any facts about the CDOs, can Dodona still recover under SEC Rule 10b-5? If so, how? [Dodona I, LLC v.

Goldman, Sachs & Co., 847 F.Supp.2d 624 (S.D.N.Y. 2012)] (See Securities Exchange Act of 1934.)

—For a sample answer to Problem 30–4, go to Appendix E.

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Solution Yes. Even if Goldman did not affirmatively misrepresent any facts about the CDOs, Dodona can recover if Goldman failed to disclose material facts. An omission is regarded as material if it is significant enough that it would have affected an investor‘s decision concerning the securities.

Here, Dodona might recover by showing that Goldman did not fully disclose the risks of investing in the CDOs. Goldman may have misled Dodona by providing only boilerplate statements about investments that it knew were particularly risky.

306.

Violations of the 1933 Act. Three shareholders of iStorage sought to sell their stock through World Trade Financial Corp. The shares were restricted securities—that is, securities acquired in an unregistered, private sale. Restricted securities typically bear a ―restrictive‖ legend clearly stating that they cannot be resold in the public marketplace. This legend had been wrongly removed from the iStorage shares, however. Information about the company that was publicly available included the fact that, despite a ten-year life, it had no operating history or earnings. In addition, it had net losses of about $200,000, and its stock was thinly traded. Without investigating the company or the status of its stock, World Trade sold more than 2.3 million shares to the public on behalf of the three customers. Did World Trade violate the Securities Act of 1933? Discuss. [World Trade Financial Corp. v. Securities and Exchange Commission, 739 F.3d 1243 (9th Cir. 2014)] (See Securities Act of 1933.)

Solution Yes. World Trade violated the Securities Act of 1933. It is a violation of this act to sell securities without registration unless they qualify for an exemption. It is also a violation of the act to sell securities without registration under an exemption for which they do not qualify. Most securities can be resold without registration. Resales of restricted securities, however, trigger the registration requirements unless the securities fall under the ―safe harbor‖ exceptions of Rule 144 or Rule 144A. In this problem, the facts state that the securities were restricted. There is no indication that they fell under any of the ―safe harbor‖ exceptions of Rule 144 or Rule 144A. Thus, they could not be resold without registration unless they otherwise qualified for an exemption. And there is nothing expressed in the facts to show that these securities qualified for an exemption. In fact, it is pointed out that the securities‘ certificates included a statement disqualifying them for resale without registration. The statement had been wrongly removed. But there are a number of publicly available facts noted in the problem that should have triggered World Trade‘s inquiry into the status of the company and its stock—its lack of an operating history or earnings, its net losses, and the thin trading of its shares. The broker‘s failure to make this inquiry is likely a violation of an important duty. And of course, World Trade‘s sale of the stock without registration was a violation of the Securities Act of 1933.

In the actual case on which this problem is based, the Financial Industry Regulatory Authority imposed fines and other sanctions on World Trade for its sales of the iStorage stock, and these penalties were upheld on appeal by the Securities and Exchange Commission and the U.S. Court of Appeals for the Ninth Circuit.

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307.

Securities Act of 1933. Big Apple Consulting USA, Inc., provided small publicly traded companies with a variety of services, including marketing, business planning, and website development and maintenance. CyberKey Corp. sold customizable USB drives. CyberKey falsely informed Big Apple that CyberKey had been awarded a $25 million contract with the Department of Homeland Security (DHS). Big Apple used this information in aggressively promoting CyberKey‘s stock and was compensated for the effort in the form of CyberKey shares. When the Securities and Exchange Commission (SEC) began to investigate, Big Apple sold its shares for $7.8 million. The SEC filed an action in a federal district court against Big Apple, alleging a violation of the Securities Act of 1933. Can liability be imposed on a seller for a false statement that was made by someone else? Explain. [U.S. Securities and Exchange Commission v. Big Apple Consulting USA, Inc., 783 F.3d 786 (11th Cir. 2015)] (See Securities Act of 1933.)

Solution Yes. Liability under the Securities Act of 1933 can be imposed on a seller for a false statement that was made by someone else. It is a violation of the Securities Act to intentionally defraud investors by misrepresenting or omitting facts in a connection with the purchase or sale of securities.

Liability is also imposed on those who are negligent for not discovering the fraud.

In this problem, CyberKey falsely informed Big Apple that CyberKey had been awarded a $25 million contract with the Department of Homeland Security (DHS). Big Apple, a public relations firm, aggressively promoted CyberKey‘s stock and was compensated for these efforts in the form of CyberKey shares. When the Securities and Exchange Commission (SEC) began to investigate the assertions, Big Apple sold the stock for $7.8 million. In these circumstances, Big Apple may have known that CyberKey‘s representation about the DHS contract was false, in which case Big Apple might be liable for fraud. Or Big Apple may have been reckless in failing to exercise due diligence and thereby discover CyberKey‘s fraud, in which situation Big Apple could be liable for negligence.

In the actual case on which this problem is based, the SEC alleged that Big Apple ―knew, or [was] severely reckless in not knowing‖ that CyberKey did not have a contract with DHS. The court issued a summary judgment in favor of the SEC‘ and against Big Apple. The U.S. Court of Appeals for the Eleventh Circuit affirmed.

308.

The Securities Exchange Act of 1934. Dilean Reyes-Rivera was the president of Global Reach Trading (GRT), a corporation registered in Puerto Rico. His brother Jeffrey was the firm‘s accountant. Along with GRT sales agents and other promoters, the brothers solicited funds from individuals by promising to invest the funds in low-risk, short-term, highyield securities. The investors were guaranteed a rate of return of up to 20 percent. Through this arrangement, more than 230 persons provided the brothers with about $22 million. This money was not actually invested. Instead, the funds received from later investors were used to pay ―returns‖ to earlier investors. The Reyes-Riveras spent $4.6 million of the proceeds to buy luxury vehicles, houses, furniture, jewelry, and trips for themselves. What is this type of scheme called? What are the potential consequences? Discuss. [United States v. Reyes-Rivera, 812 F.3d 79 (1st Cir. 2016)] (See Securities Exchange Act of 1934 .)

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Solution The scheme perpetrated by the Reyes-Rivera brothers—a fraudulent investment operation that paid returns to investors from new capital paid to the fraudsters rather than from a legitimate investment—is known as a Ponzi scheme.

The potential consequences of such a scheme include the later investors‘ loss of their funds. In some cases, many—if not most, or even all—of the investors suffer the loss of their invested capital. What is not returned as ostensible profit to investors is often stolen or spent by a defrauding party who, like the Reyes-Rivera brothers, runs the scheme.

In some circumstances, whatever assets remain in the possession of a perpetrator can be returned to investors through a court order for criminal restitution or an assessment of civil damages.

Perpetrators can also be convicted of securities fraud and other violations of the law and be made to suffer appropriate sanctions. For example, the Securities and Exchange Commission has brought numerous enforcement actions against individuals and entities for carrying out Ponzi schemes.

In the actual case on which this problem is based, the scheme was uncovered, and the ReyesRivera brothers were indicted. Eventually, Dilean pled guilty to conspiracy to commit wire fraud and bank fraud. He was sentenced to concurrent terms of imprisonment of 60 months on the wire fraud conspiracy count and 242 months on the bank fraud count. Restitution was also ordered in the amount of $10,629,021.01. Jeffrey pled guilty to the wire fraud charge and was sentenced to 48 months of imprisonment. On Dilean‘s appeal, the U.S. Court of Appeals for the First Circuit affirmed the sentences over Dilean‘s arguments about their wide disparity ―because the district court provided a plausible and sensible rationale for the sentence it imposed.‖ 309.

Securities Fraud. First Solar, Inc., is one of the world‘s largest producers of photovoltaic solar panel modules. When First Solar revealed to the market that the company had discovered defects in its products, the price of the company‘s stock fell, causing the shareholders to suffer an economic loss. Mineworkers‘ Pension Scheme and other First Solar shareholders filed a suit in a federal district court against the firm and its officers, alleging a violation of Section 10(b). The plaintiffs contended that for more than two years, First Solar had wrongfully concealed its discovery, misrepresented the cost and scope of the defects, and reported false information on financial statements. On these facts, can the plaintiffs successfully plead the causation element of a securities fraud action under Section 10(b)? Explain. [Mineworkers’ Pension Scheme. v. First Solar Inc., 881 F.3d 750 (9th Cir. 2018)] (See Securities Exchange Act of 1934.)

Solution Yes. The plaintiffs in the Mineworkers case can successfully plead the causation element of a securities fraud action under Section 10(b) on the facts presented in the problem. Section 10(b) proscribes the use of deception in violation of the rules of the Securities and Exchange Commission. Among those rules is Rule 10b-5, which prohibits fraud in connection with the purchase or sale of any security. The basic elements of a securities fraud action include causation, meaning that there is a causal connection between the fraud and the loss.

In this problem, First Solar publicly disclosed that it had discovered defects in its products. There was a subsequent drop in the price of the company‘s stock fell, causing shareholders to suffer economic losses. The shareholders filed a suit against the firm and its officers, alleging securities fraud. The plaintiffs contended that for more than two years, First Solar had wrongfully concealed

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its discovery, misrepresented the cost and scope of the defects, and reported false information on financial statements.

As pleaded, these facts, if established by evidence, could satisfy the causation test. The issue is whether the defendants‘ misrepresentation, as opposed to some other fact, foreseeably caused the plaintiffs‘ loss.

In the actual case on which this problem is based, the court held that ―a plaintiff can satisfy . . . causation by showing that the defendant misrepresented or omitted the very facts that were a substantial factor in causing the plaintiff‘s economic loss.‖ The U.S. Court of Appeals for the Ninth Circuit affirmed.

310.

A Question of Ethics—The IDDR Approach and InsiderTrading. Nan Huang was a senior data analyst for Capital One Financial Corporation. In violation of the company‘s confidentiality policies, Huang downloaded and analyzed confidential information regarding purchases made with Capital One credit cards at more than 200 consumer retail companies and used that information to conduct more than 2,000 trades in the securities of those companies.

Capital One terminated Huang due to his violation of the company‘s policies. The next day, Huang boarded a flight to his home country of China. Four days later, the Securities and Exchange Commission filed a complaint against Huang, alleging violations of Section 10(b) and Rule 10b-5.

[Securities and Exchange Commission v. Huang, 684 Fed. Appx. 167 (3d Cir. 2017)] (See Securities Exchange Act of 1934.)

1.

Evaluate the ethics of Huang‘s actions, as an employee of Capital One, using the IDDR approach.

Solution Huang‘s ethical obligations included duties to follow Capital One‘s company policies and to obey the insider trading laws.

The IDDR approach begins with an Inquiry that sets out the ethical dilemma, and identifies the stakeholders and the applicable ethical standards. Huang‘s initial ethical dilemma was whether to take surreptitious advantage of his position as a data analyst for Capital One, a credit-card company, to access data on consumer retail transactions. Applicable ethical standards included company policy and, of course, federal law. The stakeholders included Huang, Capital One, the company‘s other employees, its customers whose transactions Huang analyzed, and many others, such as consumers and stock traders. When a law is violated, the justice system might also be said to be a stakeholder.

The Discussion and Decision steps of the IDDR approach cover actions to address the dilemma, the strengths and weaknesses, their consequences and effects, and a selection among the choices.

Huang gave in to temptation. He used the data to project the profitability of the firms and its effect on their share prices. He used these projections to buy and sell those shares—i.e., Huang used information that was not publicly available to profit on stock trades, in violation of Section 10(b) and Rule 10b-5 of the federal securities laws. No doubt that all of these actions also violated Capital One‘s company policy. Discovered, Huang could guess that a criminal indictment was forthcoming.

Instead of facing the situation, however, he chose to flee. When eventually confronted in court with evidence of his crime, rather than confess and testify, Huang refused to cooperate. By making the choices he did, Huang broke ethical obligations of trust to all of these parties. By itself, this shows

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the weakness of his actions and points to the consequences and effects.

The final step of the IDDR approach is a Review of the success or failure of the actions to resolve the issue and satisfy the stakeholders. Huang might have admitted to his wrongs, confessed his missteps to the court, and made restitution to his victims. The results of these actions would have included resetting Huang‘s moral compass with an emerging resumption of his integrity and a clearing of his conscience. He and others might have been dissuaded from similar future conduct. Instead, he chose to do none of these things, thereby adding to the list of his unethical behavior and increasing the dissatisfaction of his stakeholders. Perhaps Capital One could at least claim vindication—the employer terminated Huang immediately on learning of his misbehavior.

2.

When Capital One learned what Huang had done, was the company ethically obligated to terminate him? Explain.

Solution When Capital One, a credit-card company, discovered what its employee Huang had done, the company was ethically obligated to terminate him.

The Capital One database contained the confidential credit-card activity of its customers.

Employed as a data analyst, Huang could access cardholder transactions. He downloaded and analyzed confidential information regarding purchases made with Capital One credit cards at consumer retail companies. This violated the company‘s confidentiality policy. Huang then used that information to conduct trades in the securities of those companies.

On learning of these activities, Capital One had to determine how to approach and deal with the situation. The stakeholders to this dilemma included Capital One‘s customers, employees, job applicants, and owners, as well as the companies that accepted Capital One cards, and the owners of the firms whose stock Huang traded. Expressed or implied company policy would have been an applicable standard. But the terms of Huang‘s employment contract (if any), the principles of the governing law, and the personal ethics of his superiors could also influence a decision.

Capital One could have chosen to take no action, to keep Huang employed subject to discipline, or to discharge him. Taking no action might have kept Huang‘s activities secret, preventing or at least postponing any negative effects to the company from a public exposure of his actions. Once Huang‘s violations were made known, however, if it was apparent that Capital One had done nothing in response, the company could suffer copycat conduct by other employees, and also lose clients and cardholders. There could be similar consequences if Huang remained in the company‘s employ, even if he were otherwise disciplined. The only reasonable choice would be Huang‘s discharge.

And Capital One did terminate Huang. This action was likely sanctioned by the company‘s policy. It was probably in line with any employment contract—after all, Huang‘s breach of Capital One‘s confidentiality principle would have also been a breach of the contract. Nor does it seem probable that any law or the personal standards of his superiors would have required Huang‘s continued employment. All of the stakeholders, with the possible exception of Huang, would also have been gratified with this result. Perhaps the only outcome more satisfying would be Huang‘s conviction on the charges against him and an order of restitution to those with whom he traded securities.

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In the actual case on which this problem is based, the jury was asked simply whether Huang had committed insider trading. Their answer was an equally simple, ―Yes.‖ Among other penalties, the court ordered Huang to fully disgorge the profits that he had made on the illegal trades. The U.S. Court of Appeals for the Third Circuit affirmed.

Critical Thinking and Writing Assignments 311.

Time-Limited Group Assignment—Violations of Securities Laws. Karel Svoboda, a credit officer for Rogue Bank, evaluated and approved his employer‘s extensions of credit to clients. These responsibilities gave Svoboda access to nonpublic information about the clients‘ earnings, performance, acquisitions, and business plans from confidential memos, e-mail, and other sources. Svoboda devised a scheme with Alena Robles, an independent accountant, to use this information to trade securities. Pursuant to their scheme, Robles traded in the securities of more than twenty different companies and profited by more than $2 million. Svoboda also executed trades for his own profit of more than $800,000, despite their agreement that Robles would do all of the trading. Aware that their scheme violated Rogue Bank‘s policy, they attempted to conduct their trades in such a way as to avoid suspicion. When the bank questioned Svoboda about his actions, he lied, refused to cooperate, and was fired. (See Securities Exchange Act of 1934.)

1. The first group will determine whether Svoboda or Robles committed any crimes.

Solution Svoboda and Robles committed fraud when they traded securities using the nonpublic information that Svoboda had access to. Criminal charges could be filed against them under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission (SEC) Rule 10b-5, which generally prohibit fraud in connection with the purchase or sale of securities. Penalties could include extended incarceration and significant fines.

A person commits fraud under Section 10(b) and Rule 10b-5 when that person misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information. If this person tips another individual, the tippee also is liable for trading on the information if the tipper's breach of duty is established and the tippee was aware of the breach. The tipper must act with scienter—an intent to deceive, manipulate, or defraud, or at least knowing misconduct. The information must be material, which occurs if there is a substantial likelihood that a reasonable investor would view it as significantly altering the total mix of information. It must also be nonpublic, which means generally that persons trading in the stock must not have known it.

In this problem, Svoboda breached fiduciary duties owed to Rogue Bank and its clients by passing along confidential information to Robles for trading purposes and by personally trading on the information. Robles is liable as a tippee because of Robles' awareness of Svoboda‘s breaches of duty, as shown by Robles' agreement to execute all of the trades. These parties acted with scienter. Their scheme involved repeated acts of fraud and steps to conceal the illegal activity. And the information on which they based their trades was material and nonpublic.

2. The second group will decide whether Svoboda or Robles is subject to civil liability. If so, who could file a suit and on what ground? What are the possible sanctions?

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Solution Svoboda and Robles are also subject to civil liability for their actions. The SEC could file a civil suit in a federal district court against them for their insider-trading violations. Possible sanctions include permanent injunctions against violating the securities laws, hefty civil fines, and disgorgement of their profit, plus interest. Svoboda might be assessed with joint and several liability for Robles‘s portion.

3. A third group will identify any defenses that Svoboda or Robles could raise and determine whether the defenses would be likely to succeed.

Solution Svoboda‘s might defend against the civil charges by arguing that he had been ―punished enough‖—he had been caught, indicted on criminal charges, convicted, fined, and sentenced to incarceration. This defense is not likely to succeed.

Solution and Answer Guide Miller, The Legal Environment Today 10e, 9780357635582; Chapter 20: Administrative Law

Table of Contents Critical Thinking Questions in Cases ................................................................................................................... 261 Case 20.1 ............................................................................................................................................... 261 Case 20.2 ............................................................................................................................................... 262 Case 20.3 ............................................................................................................................................... 263 Chapter Review ........................................................................................................................................................... 264 Practice and Review .............................................................................................................................. 264 Practice and Review: Debate This ......................................................................................................... 265 Issue Spotters ........................................................................................................................................ 265 Business Scenarios and Case Problems ................................................................................................. 265 Critical Thinking and Writing Assignments ............................................................................................ 272

Critical Thinking Questions in Cases Case 20.1 312.

Why would an owner of land that falls within the boundaries of a wild and scenic river area challenge those boundaries?

Solution The chief reason an owner of land that falls within the boundaries of a wild and scenic river would challenge those boundaries is most likely a belief that the value and use of the land has been, or will be, negatively affected. Some owners fear that the government will subsequently forcibly acquire the land or regulate it out of viable use.

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Despite these fears, there is no evidence that the designation of land to be within the boundaries of a wild and scenic river has a significant effect on property values. The purpose of the designation is to protect the quality of the river‘s environment. By law, there can be no impact on existing water rights. No new privileges are granted to the public. Current uses of the land within the designated boundaries can continue.

No new hydro or power projects can be licensed. But federal administering agencies do not generally have the authority to control the public use of private land. A local, county, or regional planning or zoning commission, however, may impose physical and use limits on the land.

313.

Suppose that instead of establishing the boundaries of the NSRA to protect ORVs, the NPS had drawn the boundaries to maintain the area‘s acreage at a certain number. Would the result in this case have been different? Explain.

Solution Yes. If the NPS had drawn the boundaries of the NSRA to maintain the area‘s acreage at a certain number, instead of establishing the boundaries to protect ORVs, the result in this case would have been different. The NPS‘s action would have been ruled to be arbitrary and capricious. This is because the Niobrara Scenic River Designation Act required the NPS to focus on protecting the ORVs—that is, scenic, recreational, geologic, fish and wildlife, and paleontological factors. One of the bases for holding an agency action to be arbitrary and capricious is failing to consider relevant factors. No factor is more relevant than one referred by statute.

Case 20.2 7.

Could a willful violation of a safety regulation be established if an employer did not know of the rule‘s requirements? Explain.

Solution Yes, an employer could be found to have willfully violated a safety regulation even if the employer was not aware of its requirement.

Generally, in this context, the definition of willful is an intentional disregard of, or plain indifference to, regulatory requirements. As indicated by this definition, and the reasoning of the court in the Edwin Taylor case, a willful violation can be established with proof either that (1) An employer knew of the standard prohibiting the conduct or condition and consciously disregarded it, or (2) An employer did not know of the standard, but exhibited such reckless disregard for employee safety or legal requirements generally that it could be inferred the employer would not have cared if the conduct or condition violated the standard.

In other words, ignorance of a regulation‘s requirements will not excuse its violation.

8.

Suppose that one of the superintendents of Edwin Taylor‘s worksite had told Hernandez‘s workers to put up the railings, but they had refused. Would the result have been different? Discuss.

Solution No, if an Edwin Taylor superintendent at the construction site had told Hernandez‘s workers to erect guardrails, but they had refused, the result in this case would not have been different.

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Edwin Taylor had general supervisory authority at the build site. This included authority over the employees of its subcontractors, including Hernandez. OSHA‘s safety standards applied to the operations at the site. Edwin Taylor‘s supervisors were tasked with identifying existing and predictable hazards. Thus, the builder had the authority both to correct safety violations and to require Hernandez‘s workers to correct the violations at the site.

In general, Edwin Taylor‘s superintendents should have acted to detect and prevent violations of OSHA‘s fall protection standards at the condominium worksite. This required railings at the sides and edges of decking on a build above six feet. If a superintendent had told a subcontractor‘s workers to install the railings, and they had refused, the workers should have been told to stay off the decking, or to leave the site. Other workers might have then been instructed to add the guardrails.

If, however, the superintendent had accepted the refusal, or otherwise not cautioned the workers to stay off the decking, as indicated by the facts of the case and the question, and a worker had fallen to his death, Edwin Taylor would have been no less liable for the safety standard violation

Case 20.3 314.

What impact did the Vara Declaration have on the court‘s ruling in this case?

Solution The Vara Declaration made clear that Alberto Olivares‘s (Petitioner‘s) record ―raised concerns that Petitioner might use his flight training to advance the interests of a criminal enterprise, which could include an enterprise that seeks to do harm to the United States.‖ That perspective supported the agency‘s action to deny Olivares‘s application to attend a Federal Aviation Administration (FAA)-certified flight school in France and likewise lent support to the court‘s conclusion to defer to the agency‘s decision. Olivares is a foreign alien from Venezuela. He applied to attend flight school in France to obtain a pilot certification to fly large, U.S.-registered aircraft. After a background check, the Transportation Security Administration (TSA) determined that Olivares was a risk to national security and denied his application. Olivares sought a court‘s review of the agency‘s denial.

The TSA provided the court with internal agency materials that included the findings of the background investigation. The TSA also provided a testimonial declaration by Andrea Vara, the official who denied Olivares‘s application. The declaration explained the grounds supporting the agency‘s determination that Olivares was a risk to national security. To the court, Vara‘s declaration confirmed, with the internal agency materials, that the agency had a reasonable explanation for its action.

Because the court had this written statement explaining the grounds and rationale for the TSA‘s action—and because the declaration supported a finding that the agency‘s action on Olivares‘s application was not arbitrary, capricious, an abuse of discretion, or otherwise not in accord with law—the court concluded that there was no need to further review the case or to remand it for other considerations. The court denied the petition for review.‖

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Chapter Review Practice and Review Assume that the Securities and Exchange Commission (SEC) has a rule under which it enforces statutory provisions prohibiting insider trading only when the insiders make monetary profits for themselves. Then the SEC makes a new rule, declaring that it has the statutory authority to bring enforcement actions against individuals even if they did not personally profit from the insider trading. The SEC simply announces the new rule without conducting a rulemaking proceeding. A stock brokerage firm objects and says that the new rule was unlawfully developed without opportunity for public comment. The brokerage firm challenges the rule in an action that ultimately is reviewed by a federal appellate court. Using the information presented in the chapter, answer the following questions.

315.

Is the SEC an executive agency or an independent regulatory agency? Does it matter to the outcome of this dispute? Explain.

Solution The SEC is an independent regulatory agency, because the president does not have the power to appoint and remove federal officers at the SEC. Because federal officers at the SEC are not appointed by the president, serve for a fixed term, and cannot be removed from their positions without just cause, the SEC is an independent regulatory agency. Whether the SEC is an executive or independent regulatory agency has no bearing on the outcome of this dispute, though.

316.

Suppose that the SEC asserts that it has always had the statutory authority to pursue persons for insider trading regardless of whether they personally profited from the transaction.

This is the only argument the SEC makes to justify changing its enforcement rules. Would a court be likely to find that the SEC‘s action was arbitrary and capricious under the Administrative Procedure Act (APA)? Why or why not?

Solution The new rule is likely arbitrary and capricious because little rationale was provided for a major change in a rule that should have been subject to notice-and-comment proceedings.

317.

Would a court be likely to give Chevron deference to the SEC‘s interpretation of the law on insider trading? Why or why not?

Solution The SEC will probably not get Chevron deference and the courts will give careful review to the new regulation. The new rule is a major expansion of regulatory power and it is not clear it was the intent of Congress to go this far.

318.

Now assume that a court finds that the new rule is merely ―interpretive.‖ What effect would this determination have on whether the SEC had to follow the APA‘s rulemaking procedures?

Solution Interpretive rules are not subject to the same level of judicial review as are new substantive rules.

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Practice and Review: Debate This 319.

Because an administrative law judge (ALJ) acts as both judge and jury, there should always be at least three ALJs in each administrative hearing.

Solution It is unfair to give an ALJ so much power within any administrative agency. After all, each ALJ works for the administrative agency that they are supposed to judge in any dispute. How can we assume that an ALJ will be unbiased? There will always be a tenancy for ALJs to favor the actions of administrative agencies. There is at least a chance of more unbiased decisions if at least three ALJs hear each case.

The system of ALJs has worked well for decades, so now is not the time to change it. In any event, ALJs frequently rule against the agencies for whom they work. Besides, when a party to an ALJ‘s decision doesn‘t like the outcome, that party can always appeal the decision in federal court, which happens quite often. Finally, the cost of tripling the number of ALJs would be prohibitive, especially with the federal government running such huge budget deficits.

Issue Spotters 17. The U.S. Department of Transportation (DOT) sometimes hears an appeal from a party whose contract with the DOT has been canceled. An administrative law judge (ALJ), who works for the DOT, hears this appeal. What safeguards promote the ALJ‘s fairness?

Solution Under the Administrative Procedure Act (APA), the administrative law judge (ALJ) must be separate from the agency‘s investigative and prosecutorial staff. Ex parte communications between the ALJ and a party to a proceeding are prohibited. Under the APA, an ALJ is exempt from agency discipline except on a showing of good cause.

18. Techplate Corporation learns that a federal administrative agency is considering a rule that will have a negative impact on the firm‘s ability to do business. Does the firm have any opportunity to express its opinion about the pending rule? Explain.

Solution Yes. Administrative rulemaking starts with the publication of a notice of the rulemaking in the Federal Register. Among other details, this notice states where and when the proceedings, such as a public hearing, will be held. Proponents and opponents can offer their comments and concerns regarding the pending rule. After the agency reviews all the comments from the proceedings, it considers what was presented and drafts the final rule.

Business Scenarios and Case Problems 76. Rulemaking. For decades, the Federal Trade Commission (FTC) resolved fair trade and advertising disputes through individual adjudications. In the 1960s, the FTC began setting forth rules that defined unfair trade practices. In cases involving violations of these rules, the due process rights of participants were more limited and did not include cross-examination. This was because, although anyone found violating a rule would receive a full adjudication, the legitimacy of the rule itself could not be challenged in the adjudication. Any party charged with violating a rule was almost certain to lose the adjudication. Affected parties complained to a court, arguing that their rights before the FTC were unduly limited by the new rules. What will the court examine to determine whether to uphold the new rules? (See The Administrative Process.)

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Solution The court will examine first whether the agency followed the procedures prescribed in the Administrative Procedure Act (APA). If so, the Federal Trade Commission (FTC) rules will likely be held legal. As long as an agency has both rulemaking and adjudicatory powers, the agency has great discretion in its choice of which power to use. Courts will not second-guess agencies on their choice of proceeding through rulemaking and adjudication. As long as the FTC followed prescribed rulemaking procedures, with notice and comment, the rules and subsequent adjudications will be legal.

77. Informal Rulemaking. Assume that the Food and Drug Administration (FDA), using proper procedures, adopts a rule describing its future investigations. This new rule covers all future circumstances in which the FDA wants to regulate food additives. Under the new rule, the FDA is not to regulate food additives without giving food companies an opportunity to cross-examine witnesses. Some time later, the FDA wants to regulate methylisocyanate, a food additive. After conducting an informal rulemaking procedure, without cross-examination, the FDA regulates methylisocyanate. Producers protest, saying that the FDA promised them the opportunity for cross-examination. The FDA responds that the Administrative Procedure Act does not require such cross-examination and that it is free to withdraw the promise made in its new rule. If the producers challenge the FDA in court, on what basis would the court rule in their favor? (See The Administrative Process.)

Solution The court will consider first whether the agency followed the procedures prescribed in the Administrative Procedure Act (APA). Ordinarily, courts will not require agencies to use procedures beyond those of the APA. Courts will, however, compel agencies to follow their own rules. If an agency has adopted a rule granting extra procedures, the agency must provide those extra procedures, at least until the rule is formally rescinded. Ultimately, in this case, the court will most likely rule for the food producers.

78. Spotlight on the Environmental Protection Agency—Powers of the Agency. A welldocumented rise in global temperatures has coincided with a significant increase in the concentration of carbon dioxide in the atmosphere. Many scientists believe that the two trends are related, because when carbon dioxide is released into the atmosphere, it produces a greenhouse effect, trapping solar heat. Under the Clean Air Act (CAA), the Environmental Protection Agency (EPA) is authorized to regulate ―any‖ air pollutants ―emitted into . . . the ambient air‖ that in its ―judgment cause, or contribute to, air pollution.‖ A group of private organizations asked the EPA to regulate carbon dioxide and other ―greenhouse gas‖ emissions from new motor vehicles. The EPA refused, stating that Congress last amended the CAA in 1990 without authorizing new, binding limits on auto emissions. Nineteen states, including Massachusetts, asked a district court to review the EPA‘s denial. Did the EPA have the authority to regulate greenhouse gas emissions from new motor vehicles? If so, was its stated reason for refusing to do so consistent with that authority? Discuss. [Massachusetts v. Environmental Protection Agency, 549 U.S. 497, 127 S.Ct. 1438, 167 L.Ed.2d 248 (2007)] (See Agency Creation and Powers.)

Solution The United States Supreme Court held that greenhouse gases fit within the Clean Air Act‘s (CAA‘s) definition of ―air pollutant.‖ Thus, the Environmental Protection Agency (EPA) has the authority under that statute to regulate the emission of such gases from new motor vehicles. According to

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the Court, the definition, which includes ―any‖ air pollutant, embraces all airborne compounds ―of whatever stripe.‖ The EPA's focus on Congress‘s 1990 amendments (or their lack) indicates nothing about the original intent behind the statute (and its amendments before 1990). Nothing in the statute suggests that Congress meant to curtail the agency‘s power to treat greenhouse gases as air pollutants. In other words, the agency has a pre-existing mandate to regulate ―any air pollutant‖ that may endanger the public welfare.

The EPA also argued that, even if it had the authority to regulate greenhouse gases, the agency would not exercise that authority because any regulation would conflict with other administration priorities. The Court acknowledged that the CAA conditions EPA action on the agency‘s formation of a ―judgment,‖ but explained that judgment must relate to whether a pollutant ―cause[s], or contribute[s] to, air pollution which may reasonably be anticipated to endanger public health or welfare.‖ Thus, the EPA can avoid issuing regulations only if the agency determines that greenhouse gases do not contribute to climate change (or if the agency reasonably explains why it cannot or will not determine whether they do). The EPA‘s refusal to regulate was thus ―arbitrary, capricious, or otherwise not in accordance with law,‖ The Court remanded the case for the EPA to ―ground its reasons for action or inaction in the statute.‖ 79. Judicial Deference. After Dave Conley died of lung cancer, his widow filed for benefits under the Black Lung Benefits Act. To qualify for benefits under the act, she had to show that exposure to coal dust was a substantial contributing factor to her husband‘s death. Conley had been a coal miner, but he had also been a longtime smoker. At the benefits hearing, a physician testified that coal dust was a substantial factor in Conley‘s death. No evidence was presented to support this conclusion, however. The administrative law judge awarded benefits. On appeal, should a court defer to this decision? Discuss. [Conley v. National Mines Corp., 595 F.3d 297 (6th Cir. 2010)] (See Judicial Deference to Agency Decisions.)

Solution A court of appeals reviews the legal issues raised in an administrative appeal but accords deference to relevant factual finding. An ALJ‘s factual determinations must be upheld if they are supported by substantial evidence in the administrative record, and the decision as a whole must be affirmed if the ALJ‘s decision was rational, supported by substantial evidence on the record, and consistent with controlling law. When an ALJ has improperly characterized the evidence or failed to take into account relevant material, however, deference is inappropriate and remand is required. A failure by the ALJ to apply the correct legal standard presents a legal question over which the BRB and the court of appeals have plenary (unlimited) review. The appeals court reviews the BRB‘s decision reversing the ALJ, not the ALJ‘s decision itself. The question is if the BRB correctly concluded that the ALJ‘s decision was not supported by sufficient evidence based on established legal standards. Since the medical record did not support the conclusion that coal dust exposure hastened death from lung cancer caused by cigarette smoking, the reversal by the BRB was correct.

80. Business Case Problem with Sample Answer—Arbitrary and Capricious Test. Michael Manin, an airline pilot, was twice convicted of disorderly conduct, a minor misdemeanor. To renew his flight certification with the National Transportation Safety Board (NTSB), Manin filed an application that asked him about his criminal history. He did not disclose his two convictions.

When these came to light more than ten years later, Manin argued that he had not known that he was required to report convictions for minor misdemeanors. The NTSB‘s policy was to consider an applicant‘s understanding of what information a question sought before determining whether an

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answer was false. But without explanation, the agency departed from this policy, refused to consider Manin‘s argument, and revoked his certification. Was this action arbitrary or capricious?

Explain. [Manin v. National Transportation Safety Board, 627 F.3d 1239 (D.C.Cir. 2011)] (See Agency Creation and Powers.) —For a sample answer to Problem 20–5, go to Appendix D. Solution Yes. The agency‘s decision to revoke Manin‘s certification was arbitrary and capricious. When reviewing an agency decision, a court considers whether the agency‘s actions were arbitrary, capricious, or an abuse of discretion. An action is arbitrary or capricious if, for example, the agency changed its prior policy without justification or entirely failed to consider a relevant factor.

When an agency‘s action is arbitrary or capricious, a court can hold it to be unlawful and set it aside.

In this problem, the agency departed from its prior policy without explanation. That policy was to consider an applicant‘s understanding of what information a question was asking for before determining whether the applicant‘s answer was false. Manin argued that he had not known he was required to report convictions for minor misdemeanors. For policy reasons, the agency should have allowed him to present evidence that he did not know the statements he made on his application were false. But the agency refused to consider this argument and revoked his certification.

In the actual case on which this problem is based, the court held that the agency‘s action had been arbitrary and capricious.

81. Adjudication. Mechanics replaced a brake assembly on the landing gear of a CRJ–700 plane operated by GoJet Airlines, LLC. The mechanics installed gear pins to lock the assembly in place during the repair, but failed to remove one of the pins after they had finished. On the plane‘s next flight, a warning light alerted the pilots that the landing gear would not retract after takeoff. There was a potential for danger, but the pilots flew the plane safely back to the departure airport. No one was injured, and no property was damaged. The Federal Aviation Administration (FAA) cited GoJet for violating FAA regulations by ―carelessly or recklessly operating an unairworthy airplane.‖ GoJet objected to the citation. To which court can GoJet appeal for review? On what ground might that court decline to review the case? [GoJet Airlines, LLC v. F.A.A., 743 F.3d 1168 (8th Cir. 2014)] (See The Administrative Process.)

Solution GoJet can appeal the decision of the Federal Aviation Administration (FAA) to the appropriate federal court of appeals. After a hearing before an administrative law judge (ALJ), the ALJ issues an initial order. Any party to the case can appeal this decision to the board or commission that governs the agency. If any party is further dissatisfied with the governing body‘s ruling, the party can appeal the decision to a federal appellate court. If the party appeals and a review is denied, the order of the ALJ or the governing body becomes the final order in the case. If the party appeals and the case is accepted for review, the final order will come from the reviewing court.

In this problem, after the initial order in GoJet‘s case, the airline can appeal to the FAA‘s governing board or commission and, if further appeal is sought, to a federal appellate court. On the facts, GoJet might base its appeal from an adverse ruling on the pilots‘ successful attempt to avoid injury or damage—a warning light alerted that the landing gear would not retract, and the pilots safely flew the aircraft back to the departure airport. A ground on which the court might

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deny review is that regardless of what actually occurred, the potential for danger and harm existed—one of the gear pins was not removed, and the landing gear would not retract after the plane had taken off. This is on its face a violation of FAA regulations by ―carelessly or recklessly operating an unairworthy airplane.‖ In the actual case on which this problem is based, the FAA imposed a civil penalty. GoJet petitioned the U.S. Court of Appeals for the Eighth Circuit for review. The court denied the petition. The court held that proof of actual danger is not required for the FAA‘s citation and imposition of a penalty—―the potential for danger is enough.‖ 82. Judicial Deference to Agency Decisions. Knox Creek Coal Corporation operates coal mines in West Virginia. The U.S. Department of Labor charged Knox‘s Tiller No. 1 Mine with ―significant and substantial‖ (S&S) violations of the Federal Mine Safety and Health Act. According to the charges, inadequately sealed enclosures of electrical equipment in the mine created the potential for an explosion. The Mine Act designates a violation as S&S when it ―could significantly and substantially contribute to the cause and effect of a coal or other mine safety or health hazard.‖ Challenging the S&S determination, Knox filed a suit against the secretary of labor. The secretary argued that ―could‖ means ―merely possible‖—if there is a violation, the existence of a hazard is assumed. This position was consistent with agency and judicial precedent and the Mine Act‘s history and purpose. Knox argued that ―could‖ requires proof of the likelihood of a hazard. When does a court defer to an agency‘s interpretation of law? Do those circumstances exist in this case?

Discuss. [Knox Creek Coal Corp. v. Secretary of Labor, 811 F.3d 148 (4th Cir. 2016)] (See Judicial Deference to Agency Decisions.)

Solution Yes. The court can defer to the Secretary‘s interpretation of the language in the Mine Act, but only if the court decides that the interpretation is reasonable. A court generally defers to an agency‘s analysis of facts that pertain to its area of expertise. A court also generally defers to an agency‘s interpretation of a statute if the interpretation is reasonable. Reasonableness is particularly important when the statute‘s language is ambiguous. An interpretation that meets the standards for notice-and-comment rulemaking is assured of deference.

The Federal Mine Safety and Health Act—the statute at the center of this problem—designates a violation as ―significant and substantial‖ (S&S) when it ―could significantly and substantially contribute to the cause and effect of a coal or other mine safety or health hazard.‖ The U.S. Department of Labor charged Knox with violations of the Mine Act that were determined to be S&S. In Knox‘s challenge to this determination in a federal court, the Labor Secretary contended that the statute‘s language (―could‖) meant ―merely possible.‖ Knox argued that the statute required evidence of at least some ―threshold level of probability.‖ Thus, in the citing of Knox‘s mine for violations of the Mine Act, as to whether the reasonable likelihood of an explosion was required to determine that the violations were S&S, there were at least two plausible interpretations of the statutory language. As a result, the language can be considered ambiguous, and the court can determine whether the Secretary‘s interpretation is reasonable.

As distinguished from an interpretation that results through notice-and-comment rulemaking, a position taken in the context of litigation does not arise out of a formal procedure intended to

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foster ―fairness and deliberation,‖ and is not binding and precedential. Thus, it is owed deference to the extent that it has the ―power to persuade‖—i.e., that it is reasonable.

Because the Secretary‘s position is consistent with agency and judicial precedent and the Mine Act‘s history and purpose, the court will likely conclude that it is persuasive and defer to it.

In the actual case on which this problem is based, the court determined that the Secretary‘s position in the context of the litigation was not entitled to ―full Chevron‖ deference. But the court concluded that the position was persuasive—in part for the reasons noted here—deferred to it, and denied Knox‘s petition for review.

83. The Arbitrary and Capricious Test. The Sikh Cultural Society, Inc. (SCS), petitioned the United States Citizenship and Immigration Services (USCIS) for a special immigrant religious worker visa for Birender Singh. The USCIS denied the request for several reasons. Despite certain statutory requirements, there were discrepancies or inadequate evidence as to Singh‘s compensation, housing, and employment history. The SCS did not provide all of the requested information. In addition, the SCS did not show that Singh had worked continuously for the previous two years.

The SCS filed a suit in a federal district court against the USCIS, arguing that the denial was arbitrary and capricious. In applying the arbitrary and capricious standard, what agency actions or omissions does a court typically consider? Does the denial of Singh‘s visa pass the test? Explain.

[Sikh Cultural Society, Inc. v. United States Citizenship and Immigration Services, 720 Fed.Appx. 649 (2018)] (See Agency Creation and Powers.)

Solution Yes. The denial of Singh‘s visa passes the arbitrary-and-capricious test. The Administrative Procedure Act provides that courts should set aside agency actions that are contrary to the law or so irrational as to be arbitrary or capricious. On a party‘s challenge to an action on this basis, a court may consider whether the agency did the following: • • • • •

Failed to provide a rational explanation for its action.

Changed a prior policy without justification.

Considered legally inappropriate factors.

Failed to consider a relevant factor.

Acted plainly contrary to the evidence.

In this problem, the Sikh Cultural Society (SCS) asked the United States Citizenship and Immigration Services (USCIS) for a special immigrant religious worker visa for Birender Singh. The USCIS denied the request. The SCS filed a suit in a federal district court against the USCIS, challenging the denial as arbitrary and capricious. As noted in the facts, despite certain statutory requirements, there were discrepancies or the evidence was inadequate as to Singh‘s compensation, housing, and employment history. The SCS did not provide all of the requested information. Additionally, the SCS did not show that Singh had worked continuously for the previous two years. The USCIS‘s review of these factors demonstrates that its action was not arbitrary or capricious.

In the actual case on which this problem is based, the court issued a judgment in the agency‘s favor. The U.S. Court of Appeals for the Second Circuit affirmed.

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84. The IDDR Approach and the Arbitrary and Capricious Test. The Delaware River Port Authority (DRPA) solicited bids to repaint the Commodore Barry Bridge, a mile-long structure spanning the Delaware River between New Jersey and Pennsylvania. Alpha Painting & Construction Company, an experienced contractor that had previously worked for the DRPA, submitted the lowest bid.

Under DRPA guidelines, a ―responsible‖ contractor has the ―capacity‖ and ―capability‖ to do a certain job. A ―responsive‖ contractor includes all required documents with its bid. Alpha‘s bid did not include certain required accident and insurance data. For this reason, and without checking further, the DRPA declared that Alpha was ―not responsible‖ and awarded the contract to the second-lowest bidder. [Alpha Painting & Construction Co. v. Delaware River Port Authority, 853 F.3d 671 (3d Cir. 2017)] (See Agency Creation and Powers.)

1.

Using the Inquiry step of the IDDR approach, identify the ethical issue the DRPA faced when deciding whether to accept or reject Alpha‘s bid.

Solution The ethical issue the Delaware River Port Authority (DRPA) faced when deciding whether to accept or reject a bid by Alpha Painting and Construction Company concerned the extent to which the agency would follow its own guidelines in making this decision.

The IDDR approach consists of four steps. The first is an Inquiry to identify the ethical issue, stakeholders, and governing standards. In this problem, the stakeholders included the Delaware River Port Authority (DRPA), the bidders on a DRPA contract to repaint a certain bridge, the taxpayers whose funds the DRPA would spend on the contract, and members of the public who use the bridge. Ethical standards included the DRPA‘s guidelines. The ethical issue focused on the degree to which the agency would follow its guidelines in awarding the contract.

Under the DRPA‘s guidelines, a responsible contractor has the ―capacity‖ and ―capability‖ to do a certain job. A responsive contractor includes all required documents with its bid. In response to the DRPA‘s solicitation of bids to repaint a bridge, Alpha submitted the lowest bid. Alpha‘s bid omitted required accident and insurance data. Under the strictest interpretation of the DRPA‘s guidelines, this omission would define Alpha as unresponsive.

This conclusion could serve as a ground to reject the painter‘s bid.

But Alpha was an experienced contractor who had done previous work for the DRPA. Perhaps the omission was an unintentional oversight. With this in mind, the agency might have given the bidder an opportunity to supplement its bid. Or, the contractor might have believed that the government had the information, either as a consequence of the painter‘s previous work or as a result of other state-mandated filings (tax returns, or license or bonding requirements, for example). The DRPA could have searched its own files or asked other agencies for the missing information.

In any event, the government, the taxpayers, and the public would benefit from an experienced painter doing contract work for the least amount of funds.

2.

Using the Discussion step of the IDDR approach, consider whether the DRPA‘s rejection of Alpha was ethical.

Solution

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The DRPA acted unethically in rejecting Alpha. The second step of the IDDR approach is a Discussion of possible actions to take to resolve an ethical issue, the strengths and weaknesses of those actions, and the consequences and effects on the stakeholders. The ethical issue here involved the extent to which a government agency would follow its guidelines in deciding which bid to accept for a certain contract.

An ethical person, business, or government agency will set standards and follow them. This is not only good from an ethical perspective—the predictability engendered by adherence to principles is good for doing business and good for governing. In this case, however, the agency—the Delaware River Port Authority (DRPA)—did not adhere to its own standards.

Under the DRPA‘s guidelines, a responsible contractor has the ―capacity‖ and ―capability‖ to do a certain job. A responsive contractor includes all required documents with its bid. In response to the DRPA‘s solicitation of bids to repaint a bridge, Alpha Painting and Construction Company submitted the lowest bid. Alpha‘s bid did not include required accident and insurance data. For this reason, and without checking further, the agency declared that the painter was not responsible and rejected its bid.

The DRPA faulted the ―responsiveness‖ of Alpha and relied on the contractor‘s failure to provide certain information to reject Alpha as not ―responsible.‖ But under the DRPA‘s own guidelines, the agency could reject a bidder as not ―responsible‖ only if the bidder did not have the ―capacity‖ or ―capability‖ to do the work. There does not seem to be any justifiable doubt about Alpha‘s ―capability‖ or ―capacity‖ to perform the job on which it bid—Alpha had previously worked for the DRPA and was an experienced contractor. The agency‘s faulty rejection of the contractor is underscored by its failure to seek clarification on the issue of the unremitted information. (The agency might have undertaken a public records review or a general online search, or might simply have asked the contractor.)

In the actual case on which this problem is based, Alpha filed a suit in a federal district court against the DRPA. The court concluded that the agency acted arbitrarily and capriciously. The U.S. Court of Appeals for the Third Circuit affirmed this ruling.

Critical Thinking and Writing Assignments 1.

Investigation. Maureen Droge was a flight attendant for United Air Lines, Inc. (UAL). After being assigned to work in Paris, France, she became pregnant. Because UAL does not allow its flight attendants to fly during their third trimester of pregnancy, Droge was placed on involuntary leave.

She applied for temporary disability benefits through the French social security system. Her request was denied because UAL does not contribute to the French system on behalf of its U.S.based flight attendants. Droge filed a charge of discrimination with the U.S. Equal Employment Opportunity Commission (EEOC), alleging that UAL had discriminated against her and other Americans. The EEOC issued a subpoena, asking UAL to detail all benefits received by all UAL employees living outside the United States. UAL refused to provide the information on the ground that it was irrelevant and that compliance would be unduly burdensome. The EEOC filed a suit in a federal district court against UAL. (See The Administrative Process.)

1.

The first team will decide whether the court should enforce the subpoena and explain why.

Solution

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The court should not order UAL to comply with the subpoena. The information sought goes far beyond an inquiry into whether and for whom UAL makes French social security payments.

It is not limited to individuals who may be considered similarly situated to Droge either by position (flight attendant) or by location (France). The subpoena requires extensive information with respect to all UAL employees residing abroad. Much of this information has little or no relevance to resolving Droge‘s charge against UAL. And even if it were relevant to the charge in some tangential way, the request is overly burdensome. The financial and administrative demand placed on UAL to comply would be significant and, in light of the tangential need for the information, an undue burden.

2.

The second team will discuss whether the EEOC should be able to force a U.S. company operating overseas to provide the same disability benefits to employees located there as it does to employees in the United States.

Solution The Equal Employment Opportunity Commission (EEOC) does not have the authority to force a U.S. company that is operating oversees to provide the same (disability) benefits to employees located there as it does to employees in the United States.

The major U.S. law regulating employment discrimination—Title VII of the Civil Rights Act of 1964—applies extraterritorially to all U.S. employees working for U.S. employers abroad.

Generally, U.S. employers must abide by U.S. discrimination laws unless to do so would violate the laws of the country where their workplaces are located.

3.

The EEOC monitors compliance with Title VII. An employee who alleges discrimination must file a claim with the EEOC before a lawsuit can be brought against the employer. The EEOC may investigate the dispute and attempt to obtain the parties‘ voluntary consent to an outof-court settlement. If a voluntary agreement cannot be reached, the EEOC may file a suit against the employer on the employee‘s behalf, but the agency itself cannot order a certain result.

The third team should determine whether UAL should be required to contribute to the French social security system for employees who reside in France and explain why or why not.

Solution As for whether UAL should be required to contribute to the French social security system for employees who reside in France, relevant factors include UAL‘s ―U.S.-based‖ and foreign assignment distinctions, which tax and social benefit system its overseas employees are subject to, and the requirements of French law with respect to such contributions.

Solution and Answer Guide Miller, The Legal Environment Today 10e, 9780357635582; Chapter 21: Consumer Protection

Table of Contents Critical Thinking Questions in Cases ................................................................................................................... 274 Case 21.1 ............................................................................................................................................... 274 Case 21.2 ............................................................................................................................................... 275

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Case 21.3 ............................................................................................................................................... 275 Chapter Review ........................................................................................................................................................... 277 Practice and Review .............................................................................................................................. 277 Practice and Review: Debate This ......................................................................................................... 278 Issue Spotters ........................................................................................................................................ 278 Business Scenarios and Case Problems ................................................................................................. 279 Critical Thinking and Writing Assignments ............................................................................................ 285

Critical Thinking Questions in Cases Case 21.1 320.

POM claimed that, for unethical reasons, RCTs should not be required to substantiate disease-related claims about food products. It argued that, for instance, ―doctors cannot . . . ethically deprive a control group of patients of all Vitamin C for a decade to determine whether Vitamin C helps prevent cancer.‖ Is this a valid argument? Why or why not?

Solution No. POM‘s argument that it is unethical to require RCTs to substantiate disease-related claims about food products because it is impossible to create a zero intake group for nutrients in an ethical manner is not a valid challenge to the FTC‘s findings, conclusion, and order in this case.

There is no need for a study participant to undergo a decade-long deprivation of an essential nutrient. An ad can make a claim about the short-term benefits of consuming a certain product.

This ad can be based on a short-term study. And whether or not it may be unethical to tell patients in a control group to stop consuming Vitamin C, there is no apparent reason to believe that it would be unethical to create a zero intake group for pomegranate juice.

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Case 21.2 9.

A fraud injury can be measured in two ways. As a loss of the benefit of the bargain, damages consist of the difference between the value of what was promised and the value of what was received. Under the out-of-pocket rule, the measure is the difference between the price paid and the market value of what was received. If Haywood had established her claim, which of these methods would have applied, and why?

Solution If Haywood had established her claim under the ICFA, the applicable measure of damages would have been the benefit-of-the-bargain method. Under this measure, her damages would have consisted of the difference between the value of what was promised and the value of what was received. Massage Envy promised a one-hour (sixty-minute) massage. Haywood did not receive the benefit of her bargain—she received a fifty-minute massage. According to the relative lengths of time, the value of what was promised was greater than the value of what was received.

Applying the out-of-pocket rule to Haywood‘s claim would not show an injury. Under this method, the measure would have been the difference between the price Haywood paid and the market value of what she received. In her complaint, Haywood did not assert that she overpaid for a fifty-minute massage.

10. Suppose that reliance was not an element of a consumer-fraud claim under the ICFA. Would the result in this case have been different? Explain.

Solution Yes. It is likely that the result in this case would have been different on the facts stated in the question. In the Haywood case, the court found that she failed to allege Massage Envy‘s promise of a one-hour massage induced her to make her appointment. This finding was fatal to her claim.

If reliance were not an element of a consumer fraud claim under the ICFA, however, whether Haywood actually relied on Massage Envy‘s deceptive promise when she booked her massage would have been irrelevant. Or, in other words, it would not have been necessary for Haywood to prove that Massage Envy‘s allegedly deceptive promise induced her to buy a massage. It would have been sufficient to allege the following: 1.

2.

3.

Massage Envy‘s website was deceptive (because it advertised a one-hour massage on one page and ―hid‖ through a link to another page that a one-hour session consisted of less than sixty minutes of massage time).

Haywood viewed the website with the deceptive ad before making her appointment.

Massage Envy gave her something less (fifty minutes of massage time) than what she expected.

These are the elements that Haywood alleged in her complaint. (The court pointed out, ―There is no allegation in the complaint that her belief about the length of the massage caused Haywood to make the appointment.‖) In effect, she would have made her case.

Case 21.3 321.

How might Merchants have phrased its debt collection letters to meet the standards of the FDCPA? Explain.

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Solution Merchants might have avoided the result in the Manuel case simply by adding a sentence to inform the debtor that there was a statute of limitations.

For example, in Texas, after the facts and the lower court‘s decision in the Manuel case, the state began to require that all first collection letters sent by debt buyers, on debt for which the limitations period has run, must contain one of three variations of the following notice: THE LAW LIMITS HOW LONG YOU CAN BE SUED ON A DEBT. BECAUSE OF THE AGE OF YOUR DEBT, WE WILL NOT SUE YOU FOR IT. THIS NOTICE IS REQUIRED BY LAW. Other states requiring similar notices include California, Connecticut, Massachusetts, New Mexico, New York, North Carolina, Vermont, and West Virginia.

The U.S. Court of Appeals for the Ninth Circuit, in Stimpson v. Midland Credit Management, Inc., 944 F.3d 1190 (9th Cir. 2019), reversed a grant of summary judgment to the plaintiffs for a letter that included the following warning: The law limits how long you can be sued on a debt and how long a debt can appear on your credit report. Due to the age of this debt, we will not sue you for it or report payment or nonpayment of it to a credit bureau.

In 2020, the Consumer Financial Protection Bureau issued a proposed rule that would require a debt collector ―who knows or should know that a debt is time barred when the debt collector makes the initial communication‖ to clearly and conspicuously disclose (1) that the law limits how long the consumer can be sued for a debt and that, because of the age of the debt, the debt collector will not sue the consumer to collect it and (2) if, under applicable law, the debt collector‘s right to bring a legal action against the consumer can be revived, the fact that revival can occur and the circumstances in which it can occur.

A model form included in the proposed rule would provide: The law limits how long you can be sued for a debt. If you do nothing or speak to us about this debt, we will not sue you to collect it. This is because the debt is too old. BUT if you acknowledge in writing that you owe this debt, then we can sue you to collect it.

322.

Why would a debt collector use carefully crafted, ambiguous language in an attempt to collect an old debt? Discuss.

Solution In the Manuel case, the U.S Court of Appeals for the Fifth Circuit stated, ―The only reason to use such carefully ambiguous language is the expectation that at least some unsophisticated debtors will misunderstand and will choose to pay on the ancient, time-barred debts because they fear the consequences of not doing so.‖ Of course, some persons might consider full debt repayment to be a moral obligation, even though the legal remedy for the debt has been extinguished under a statute of limitations.

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But in the view of the Federal Trade Commission and Consumer Financial Protection Bureau, most consumers do not understand their legal rights regarding time-barred debt. A gullible consumer who makes a partial payment on an old debt could inadvertently reset a limitations period and thereby make herself or himself vulnerable to a suit on the full amount.

Chapter Review Practice and Review Leota Sage saw a local motorcycle dealer‘s newspaper advertisement offering a MetroRider EZ electric scooter for $1,699. When she went to the dealership, however, she learned that the EZ model had been sold out. The salesperson told Sage that he still had the higher-end MetroRider FX model in stock for $2,199 and would sell her one for $1,999. Sage was disappointed but decided to purchase the FX model.

When Sage said that she wished to purchase the scooter on credit, she was directed to the dealer‘s credit department. As she filled out the credit forms, the clerk told Sage, who is an Asian American, that she would need a cosigner to obtain a loan. Sage could not understand why she would need a cosigner and asked to speak to the store manager. The manager apologized, told her that the clerk was mistaken, and said that he would ―speak to‖ the clerk. The manager completed Sage‘s credit application, and Sage then rode the scooter home. Seven months later, Sage received a letter from the manufacturer informing her that a flaw had been discovered in the scooter‘s braking system and that the model had been recalled.

Using the information presented in the chapter, answer the following questions.

323.

Did the dealer engage in deceptive advertising? Why or why not?

Solution The advertising would mislead a reasonable consumer who would show up at the store expecting the advertised item to be available. This is a classic example of bait and switch advertising—luring a customer in with a low priced item (the MetroRider EZ, the bait), then switching that customer‘s interest to a more expensive item (the MetroRider FX).

324.

Suppose that Sage had ordered the scooter through the dealer‘s website but the dealer was unable to deliver it by the date promised. What would the FTC have required the merchant to do in that situation?

Solution Under the FTC‘s Mail or Telephone Order Merchandise Rule, as amended to include online sales, the dealer would be required to notify Sage when the order cannot be shipped on time. If Sage chooses to cancel her order, then the dealer is required to issue a refund within a specific period of time.

325.

Assuming that the clerk required a cosigner based on Sage‘s race or gender, what act prohibits such credit discrimination?

Solution The Equal Credit Opportunity Act prohibits the denial of credit solely on the basis of race, religion, national origin, color, gender, marital status, or age. If the clerk required a cosigner on Sage‘s loan because of her race or gender, a court would likely find that the dealer violated this act.

326.

What organization has the authority to ban the sale of scooters based on safety concerns?

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Solution The CPSC is the Consumer Product Safety Commission, the organization responsible for setting safety standards for consumer products. The CPSC has the authority to ban the sale of products, such as scooters, that it deems potentially hazardous to consumers.

Practice and Review: Debate This 327.

Laws against bait-and-switch advertising should be abolished because no consumer is ever forced to buy anything.

Solution Just because an advertised item is not available when a consumer goes to buy it does not mean that sellers should be prevented from ―up-selling.‖ That is to say, sellers should be free to offer higher-priced version of unavailable lower-priced advertised items. After all, in a free society, consumers can just say no.

If sellers want to dupe consumers, they can always offer low-priced items but only have in stock higher-priced versions of the same items. Consumers take time to visit stores that advertise items so once in the stores these consumers may end up paying for higher-priced versions of the same products. Retailers must be prevented from using such unethical tactics.

Issue Spotters 19. United Pharmaceuticals, Inc., has developed a new drug that will be effective in the treatment patients with AIDS. The drug has had only limited testing, but United wants to make the drug widely available as soon as possible. To market the drug, what must United prove to the U.S. Food and Drug Administration?

Solution Under an extensive set of procedures established by the U.S. Food and Drug Administration, which administers the federal Food, Drug and Cosmetic Act, drugs must be shown to be effective as well as safe before they may be marketed to the public. In general, manufacturers are responsible for ensuring that the drugs they offer for sale are free of any substances that could injure consumers.

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20. Gert buys a notebook computer from EZ Electronics. She pays for it with her credit card. When the computer proves defective, she asks EZ to repair or replace it, but EZ refuses. What can Gert do?

Solution Under the Truth-in-Lending Act, a buyer who wishes to withhold payment for a faulty product purchased with a credit card must follow specific procedures to settle the dispute. The credit card issuer then must intervene and attempt to settle the dispute.

Business Scenarios and Case Problems 85. Unsolicited Merchandise. Andrew, a resident of California, received an advertising circular in the U.S. mail announcing a new line of regional cookbooks distributed by the Every-Kind Cookbook Co. Andrew didn‘t want any books and threw the circular away. Two days later, Andrew received in the mail an introductory cookbook entitled Lower Mongolian Regional Cookbook, as announced in the circular, on a ―trial basis‖ from Every-Kind. Andrew was not interested but did not go to the trouble to return the cookbook. Every-Kind demanded payment of $20.95 for the Lower Mongolian Regional Cookbook. Discuss whether Andrew can be required to pay for the book. (See Advertising, Marketing, and Sales.)

Solution Andrew will not be required to pay for the cookbook because of federal consumer protection law.

The federal Postal Reorganization Act allows Andrew to retain or discard the cookbook without incurring any obligation, because it was unsolicited merchandise. The mailing of this unordered cookbook could also be considered an unfair trade practice. (As a California resident, Andrew is also protected by the California Civil Code, which permits consumers to keep unsolicited goods.)

86. Credit-Card Rules. Maria Ochoa receives two new credit cards on May 1. She has solicited one of them from Midtown Department Store, and the other arrives unsolicited from High-Flying Airlines. During the month of May, Ochoa makes numerous credit-card purchases from Midtown Department Store, but she does not use the High-Flying Airlines card. On May 31, a burglar breaks into Ochoa‘s home and steals both credit cards, along with other items. Ochoa notifies the Midtown Department Store of the theft on June 2, but she fails to notify High-Flying Airlines.

Using the Midtown credit card, the burglar makes a $500 purchase on June 1 and a $200 purchase on June 3. The burglar then charges a vacation flight on the High-Flying Airlines card for $1,000 on June 5. Ochoa receives the bills for these charges and refuses to pay them. Discuss Ochoa‘s liability for the charges. (See Credit Protection.)

Solution The Truth-in-Lending Act (TILA) deals specifically with lost, stolen, and the unauthorized use of credit cards. For credit cards solicited by the cardholder and then lost or stolen, the act limits the liability of the cardholder to $50 for unauthorized charges made prior to the time the creditor is notified. There is no liability for any unauthorized charges made after the date of notice. In the case of the Midtown Department Store credit card stolen on May 31, the $500 charge made on June 1, which is prior to Ochoa‘s notice, causes Ochoa to be liable for the $50 limit. For the June 3 charge of $200 made after the notification, Ochoa has no liability.

TILA also deals with unsolicited credit cards. Unless a credit cardholder accepts an unsolicited card (such as by using it), the cardholder is not liable for any unauthorized charges. Moreover, the act prohibits the issuance of unsolicited credit cards. No notice by the credit cardholder of an unsolicited, unaccepted card is required to absolve the cardholder from liability for unauthorized

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charges. Therefore, Ochoa owes $50 to the Midtown Department Store and nothing to HighFlying Airlines.

87. Spotlight on McDonald’s—Food Labeling. McDonald‘s Happy Meal® meal selection consists of an entrée, a small order of french fries, a small drink, and a toy. In the early 1990s, McDonald‘s Corp. began to aim its Happy Meal marketing at children aged one to three. In 1995, McDonald‘s began making nutritional information for its food products available in documents known as ―McDonald‘s Nutrition Facts.‖ The documents list the food items that the restaurant serves and provide a nutritional breakdown of each, but the Happy Meal is not included. Marc Cohen filed a suit in an Illinois state court against McDonald‘s. Cohen alleged among other things, that McDonald‘s had violated a state law prohibiting consumer fraud and deceptive business practices by failing to follow the Nutrition Labeling and Education Act (NLEA). The NLEA generally requires that standard nutrition facts be listed on food labels. The act, however, sets out different, less detailed requirements for products specifically intended for children under the age of four. Does it make sense to have different requirements for children of this age? Why or why not? Should a state court impose such regulations when the NLEA has not done so? Explain. [Cohen v.

McDonald’s Corp., 347 Ill.App.3d 627, 808 N.E.2d 1, 283 Ill.Dec. 451 (1 Dist. 2004)] (See Labeling and Packaging.)

Solution Parents are often aware that doses of medicine are smaller for young children and that portion sizes of restaurant items, as well as clothing and other things, are differently sized for children. It may be only common sense to conclude that daily nutritional requirements would be different, too, especially for children under four. With that in mind, it could be argued that it would be unethical not to post the requirements differently for children under four.

A consumer who is not familiar with nutrition standards, however, would likely not understand the NLEA‘s different percentage requirements for products specifically intended for children under the age of four, because if such a consumer is not familiar with the standards, that individual will not understand why they are different in different circumstances. A state court should not impose regulations under the NLEA for establishing nutritional requirements for children under four. A state cannot impose obligations that are different from those mandated by federal law, because non-uniformity among the states would result. In this case, too, the plaintiff was asking a state court to interpret a federal statute, which the court did not have the authority to do.

88. Deceptive Advertising. Brian Cleary and Rita Burke filed a suit against cigarette maker Philip Morris USA, Inc., seeking class-action status for a claim of deceptive advertising. Cleary and Burke claimed that ―light‖ cigarettes, such as Marlboro Lights, were advertised as safer than regular cigarettes, even though the health effects are the same. They contended that the tobacco companies concealed the true nature of light cigarettes. Philip Morris claimed that it was authorized by the government to advertise cigarettes, including light cigarettes. Assuming that is true, should the plaintiffs still be able to bring a deceptive advertising claim against the tobacco company? Why or why not? [Cleary v. Philip Morris USA, Inc., 683 F.Supp.2d 730 (N.D.Ill. 2010)] (See Advertising, Marketing, and Sales.)

Solution Yes. The court rejected the motion by the tobacco companies for judgment on the pleadings.

Under Illinois law, the plaintiffs‘ claim that the tobacco companies were unjustly enriched by deceptive claim that light cigarettes were healthier than regular cigarettes may proceed. The fact

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that the cigarette makers are allowed by the federal government to advertise their products does not mean that there is a right to engage in deceptive advertising. Hence, the plaintiffs may proceed to establish a class to be represented in litigation.

89. Business Case Problem with Sample Answer— Fair Debt Collection Practices Act. Bank of America hired Atlantic Resource Management, LLC, to collect a debt from Michael E. Engler.

Atlantic called Engler‘s employer and asked his supervisor about the company‘s policy concerning the execution of warrants. The caller then told the supervisor that, to stop process of the warrant, Engler needed to call Atlantic about ―Case Number 37291 NY0969‖ during the first three hours of his next shift. When Engler‘s supervisor told him about the call, Engler feared that he might be arrested, and he experienced discomfort, embarrassment, and emotional distress at work. Can Engler recover under the Fair Debt Collection Practices Act? Why or why not? [Engler v. Atlantic Resource Management, LLC, 2012 WL 464728 (W.D.N.Y. 2012)] (See Credit Protection.)

—For a sample answer to Problem 21–5, go to Appendix D. Solution Engler may recover under the Fair Debt Collection Practices Act (FDCPA). Atlantic is subject to the FDCPA because it is a debt-collection agency and it was attempting to collect a debt on behalf of Bank of America. Atlantic also used offensive tactics to collect from Engler. After all, Atlantic gave Engler‘s employer the false impression that Engler was a criminal, had a pending case, and was about to be arrested. Finally, Engler suffered harm because he experienced discomfort, embarrassment, and distress as a result of Atlantic‘s abusive conduct. Engler may recover actual damages, statutory damages, and attorneys‘ fees from Atlantic.

90. Deceptive Advertising. Innovative Marketing, Inc. (IMI), sold ―scareware‖—computer security software. IMI‘s Internet ads redirected consumers to sites where they were told that a scan of their computers had detected dangerous files—viruses, spyware, and ―illegal‖ pornography. In fact, no scans were conducted. Kristy Ross, an IMI cofounder and vice president, reviewed and edited the ads. She was also aware of the many complaints that consumers had made about them. An individual can be held liable under the Federal Trade Commission Act‘s prohibition of deceptive acts or practices if the person (1) participated directly in the deceptive practices or had the authority to control them, and (2) had or should have had knowledge of them. Were IMI‘s ads deceptive? If so, can Ross be held liable? Explain. [Federal Trade Commission v. Ross, Inc., 743 F.3d 886 (4th Cir. 2014)] (See Advertising, Marketing, and Sales.)

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Solution Yes. Ross can be held personally liable for a violation of the Federal Trade Commission (FTC) Act‘s prohibition of deceptive acts or practices. Generally, deceptive advertising occurs if a reasonable consumer would be misled by the advertising claim. Advertising that appears to be based on factual evidence but that in fact cannot be supported will be deemed deceptive. An individual can be held personally liable under the FTC Act if the person (1) participated directly in the deceptive practices or had the authority to control them, and (2) had or should have had knowledge of them.

In this problem, the facts indicate that IMI‘s ads were deceptive. Consumers were misled by the ads that appeared to be based on factual evidence but were not actually supportable—the ads claimed that a scan of the consumers‘ computers had detected dangerous files, such as viruses, when in fact no scans were conducted. The issue is whether Ross can be held individually liable for these violations. She was an IMI co-founder and vice president, reviewed and edited the ads, and was aware of the many complaints about them. Thus, under the FTC Act, Ross met the standard for personal liability—she knew of the deceptive practices, she had the authority to control them, and she participated directly in them.

In the actual case on which this problem is based, in the FTC‘s suit against Ross, a federal district court held her jointly and severally liable. On her appeal, the U.S. Court of Appeals for the Fourth Circuit affirmed.

91. False Advertising. Rainbow School, Inc., operated a childcare facility in Fayetteville, North Carolina, for more than twenty years. In addition to using the word rainbow in its name, the school also used rainbow imagery on its logo. Rainbow Early Education Holding, LLC, operated child-care facilities in several states. Early Education opened a branch in Fayetteville near the school under the name, Rainbow Child Care Center, which also used rainbow imagery on its logo.

The school filed a suit in a federal district court against Early Education, alleging a violation of the Lanham Act. The parties entered into a settlement agreement that required Early Education to stop using the word rainbow in connection with its Fayetteville facility. The court issued an injunction to enforce the agreement. Early Education, however, continued to use the word rainbow in domain names, links, and meta tags associated with its Fayetteville facility‘s website.

Rainbow imagery was also used in a mailer inviting residents to the ―nearest Rainbow Child Care Center.‖ Did Early Education violate the Lanham Act? Explain. [Rainbow School, Inc. v. Rainbow Early Education Holding, LLC, 887 F.3d 610 (4th Cir. 2018)] (See Advertising, Marketing, and Sales.)

Solution Yes. The conduct of Early Education violates the Lanham Act. This act covers trademark infringement, as well as false advertising claims. To state a successful claim for false advertising under the act, a business must prove the following: 1.

2.

3.

An injury to a commercial interest in reputation or sales.

Direct causation of the injury by false or deceptive advertising.

A loss of business from buyers who were deceived by the advertising.

In this problem, Early Education opened a ―Rainbow Child Care Center‖ in Fayetteville that used rainbow imagery on its logo. This facility was located near a childcare facility that had been operated by Rainbow School for more than twenty years. The School had long used the word ―rainbow‖ and rainbow imagery on its logo. To avoid a suit involving a claim for false advertising

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under the Lanham Act, Early Education agreed to stop using the word ―rainbow‖ in connection with its facility. A court issued an injunction to enforce the agreement. Nevertheless, Early Education continued to use the word ―rainbow‖ in domain names, links, and meta tags associated with its facility‘s website, and rainbow imagery in a mailer inviting residents to the ―nearest Rainbow Child Care Center.‖ On these facts, an injury to the School‘s commercial interest would consist of a loss of childcare clients. The direct cause of this injury could be attributed to Early Education‘s advertising and online use of the word ―rainbow‖ and use of rainbow imagery on its logo. These uses would have confused and thereby deceived buyers. By entering into the settlement agreement to avoid litigation, Early Education admitted its initial violation. By breaching this agreement, Early Education also violated the injunction.

In the actual case on which this problem is based, the School filed a motion with the court, asserting that Early Education violated the injunction. The court held Early Education in contempt.

The U.S. Court of Appeals for the Fourth Circuit affirmed.

92. Debt Collection. Zakia Mashiri owns a home in San Diego, California. She is a member of the Westwood Club Homeowners‘ Association (HOA), which charges each member an annual fee.

When Mashiri failed to pay the fee, the law firm of Epsten Grinnell & Howell sent her a letter demanding payment. The letter read, ―Failure to pay your . . . account in full within thirty- five days from the date of this letter will result in a lien . . . against your property.‖ Mashiri asked for validation of the debt. Within two weeks of receiving it, she sent HOA a check for the fee.

Meanwhile, the law firm filed a lien against her property. Mashiri filed a lawsuit in a federal district court against the law firm, alleging a violation of the Fair Debt Collection Practices Act. On what provision of the act did Mashiri likely base her allegation? Will she succeed in her lawsuit against the law firm? Explain your answer. [Mashiri v. Epsten Grinnell & Howell, 845 F.3d 984 (9th Cir. 2017)] (See Credit Protection.)

Solution The Fair Debt Collection Practices Act (FDCPA) requires debt collection agencies to include a validation notice whenever they initially contact a debtor for payment of a debt or within five days of that initial contact. The notice must state that the debtor has thirty days within which to dispute the debt and to request a written verification of the debt from the collection agency.

These are the provisions of the act on which Mashiri most likely based her allegation.

In this problem, homeowner Zakia Mashiri owed a homeowners‘ association (HOA) an annual fee.

When she failed to pay it, the law firm of Epsten Grinnell & Howell sent her a letter demanding payment. The letter stated, ―Failure to pay your . . . account in full within thirty-five (35) days from the date of this letter will result in a lien . . . against your property.‖ Mashiri later received validation of the debt and, within two weeks, sent HOA a check. Meanwhile, however, Epsten Grinnell filed a lien against her property. Mashiri filed a suit in a federal district court against the Epsten Grinnell, alleging a violation of the FDCPA. Epsten Grinnell is a debt collection agency. The letter demanding payment within thirty-five days of its date violates a debtor‘s right to dispute a debt within thirty days of receipt of the letter. By the time a debtor receives the letter, there may be fewer than thirty days before payment is due.

This infringement of the debtor‘s right to thirty days in which to dispute the debt violates the FDCPA‘s notice and validation provision.

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In the actual case on which this problem is based, the court dismissed Mashiri‘s complaint. On appeal, the U.S. Court of Appeals for the Ninth Circuit reversed the dismissal and remanded the case, in part on the reasoning stated above.

93. The IDDR Approach and Consumer Protection. In Richland, Washington, Robert Ingersoll planned his wedding to include about a hundred guests, a photographer, a caterer, a wedding cake, and flowers. Ingersoll had been a customer of Arlene‘s Flowers and Gifts for more than nine years and had spent several thousand dollars at the shop. When he approached Arlene‘s owner, Baronelle Stutzman, to buy flowers for his wedding, she refused because Ingersoll and his fiancé, Curt Freed, were a same-sex couple. Deeply offended, Ingersoll and Freed dropped their wedding plans and married in a modest ceremony. [Arlene’s Flowers, Inc. v. State of Washington, __ U.S. __, 138 S.Ct. 2671, 201 L.Ed.2d 1067 (2018)] (See Advertising, Marketing, and Sales.)

1.

Federal and state laws attempt to protect consumers from unfair trade practices, including discriminatory requirements, related to consumer transactions. Using the Review step of the IDDR approach, consider whether it would be ethically fair to hold Stutzman personally liable for a violation of these laws.

Solution Yes. In the circumstances, it would be ethically fair to hold Stutzman personally liable for a violation of consumer protection law. Federal and state laws attempt to protect consumers from unfair trade practices, including discriminatory requirements, in consumer transactions.

Consumer protection statutes generally authorize actions against ―any person‖ for violations, with ―person‖ defined to include business entities and ―natural‖ persons.

Here, Stutzman owned Arlene‘s Flowers and Gifts. Ingersoll had been a customer of Arlene‘s for more than nine years and had spent several thousand dollars at the shop. Through Stutzman, however, Arlene‘s refused to sell wedding flowers to Ingersoll because his betrothed, Freed, was a man. Offended by Stutzman‘s refusal, the couple dropped their wedding plans and married in a modest ceremony.

The ethical focus is on whom to fairly sanction to punish and deter an ―unfair practice.‖ Individuals may be personally liable for a violation of a law if they participate in the wrongful conduct, or knowingly approve of it. This is not only legal, of course, but ethical, and would be more likely to resolve the issue with success than not holding violators personally liable. It would be unethical, and fail to successfully address the issue, to allow a business owner to avoid liability for such conduct behind the veil of a business entity. This is especially true here, when Stutzman, the owner of Arlene‘s, committed the violation herself.

If such unfair practices were effectively deterred, the stakeholders—Ingersoll, Freed, and other consumers—would benefit. Other business owners, and the American public, generally, could also benefit from a more open market.

2.

Using the Discussion step of the IDDR approach, consider actions that Ingersoll and Freed as consumers might take in response to Stutzman‘s discriminatory rejection of their offer to do business.

Solution

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Actions that Ingersoll and Freed as consumers might take in response to Arlene‘s— Stutzman‘s—discriminatory rejection of their offer to do business include filing complaints with private and government agencies, filing a suit, and doing nothing.

A Discussion is the second step in the IDDR approach, after an Inquiry to define the ethical issue. In this question, the issue is whether Ingersoll and Freed should act in response to Stutzman‘s conduct. The stakeholders include Ingersoll and Freed‘s relatives and others with a personal interest in their lives, as well as other consumers—especially those who might be refused products or services on the basis of any bias by any merchant—other businesses, and society generally.

The Discussion step posits actions to address the issue, their strengths and weaknesses, and consequences and effects. As stated above, Ingersoll and Freed might opt to do nothing. This would have the advantage of putting the incident quickly behind them. If it satisfies them, it would also likely satisfy their friends and families. But other consumers could be similarly discriminated against with immediate impunity by Arlene‘s and other merchants. This would not benefit those stakeholders nor society generally.

Ingersoll and Freed might choose to file complaints with private and government agencies or to file a suit against Arlene‘s and its owner. Either of these actions could vindicate the couple‘s rights and those of other consumers to engage in commerce free of the discrimination practiced by Stutzman. A successful suit could deter other merchants from discrimination.

This could contribute to a more vibrant and prosperous economy, which would ultimately inure to the profit of society generally.

In the actual case on which this problem is based, Ingersoll and Freed filed a suit in a Washington state court against Stutzman, alleging a violation of the state‘s Consumer Protection Act (CPA). The CPA prohibits ―unfair practices,‖ which include discriminating against customers on the basis of their sexual orientation. The court granted a summary judgment and awarded damages to the plaintiffs, holding Stutzman personally liable. The Washington Supreme Court affirmed the rulings.

On a petition for a writ of certiorari, however, the United States Supreme Court vacated the judgment and remanded the case for further consideration. By this action, the Court directed the state supreme court to take into consideration Stutzman‘s religious objections to samesex marriage.

Critical Thinking and Writing Assignments 1.

Consumer Protection. Many states have enacted consumer protection laws that go beyond federal laws. Suppose that Florida enacts a new consumer protection law that forces all apartment and homeowners who offer short-term rentals through Airbnb to comply with certain regulations.

A property owner must obtain a business license to list a property on Airbnb. The owner must also register with the local housing office in the relevant county or city and file a state income tax form created especially for Airbnb rentals. In addition, the property must pass an annual fire inspection, for which the owner must pay. (See Advertising, Marketing, and Sales.)

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1.

The first team will compare an unregulated Airbnb situation with the newly created regulated Airbnb situation. The team will determine whether the expected number of Airbnb rentals offered by apartment and home owners will stay the same, fall, or increase.

Solution The number of Airbnb rentals offered by apartment and homeowners in the newly regulated jurisdiction will likely remain the same as before the regulation, and the number may actually increase.

The regulation may eliminate those who rarely rent their homes, and especially homeowners who offer only short-term (less than thirty-day) rentals. It may have no impact on the number of listings of units available for more than thirty days, or on hosts renting out multiple units, or even the owner of a single home that is rented frequently.

Why? Because the economic benefits to those hosts are greater than the costs imposed by the regulation. The costs to obtain a business license, register with a local housing office, file a state tax form, and pass an annual fire inspection are no more burdensome than those assumed by almost any business to do business in almost any jurisdiction. And the hosts can, like other businesses, spread those costs across the rates charged to their customers.

2.

The second team will look at the burden placed on local governments by the new regulation.

Solution The burden placed on local governments by the regulation may be greater than the effects of the regulation on Airbnb or its hosts. Additional staff time, or at least added staff time, will be needed to handle the local administrative licenses and registrations, the state tax filings, and possibly the inspections. Greater than any of these, however, might be the cost of the additional personnel to enforce the regulation. Most likely, local authorities will be tasked with monitoring the listings and the compliance of the hosts with the statutory requirements.

Obtaining Airbnb‘s cooperation in enforcing the regulation might ameliorate these costs.

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3.

The third team will list of all of the benefits of the regulation.

Solution The regulation may reduce increases in the cost of long-term housing by reducing the number of properties converted to short-term accommodations. If a tax is added to the regulation, of course the state may realize enhanced tax revenues. There may be a reduction in the effects on the hosts‘ neighbors of such factors as noise, traffic, and the use of shared building facilities.

From the perspective of Airbnb and its hosts, regulation can lend an image of stability to the platform. To be regulated is to be recognized and legitimized.

4.

The fourth team will outline who will incur the costs of the regulation.

Solution The regulation appears to impose its costs on the hosts. But the state and local governments will bear some of the burden, in monitoring the regulated parties‘ compliance. And those who rent the properties may also bear some of the costs in terms of increased rental prices.

Solution and Answer Guide Miller, The Legal Environment Today 10e, 9780357635582; Chapter 22: Environmental Law

Table of Contents Critical Thinking Questions in Cases ................................................................................................................... 287 Case 21.1 ............................................................................................................................................... 287 Case 22.2 ............................................................................................................................................... 288 Case 22.3 ............................................................................................................................................... 289 Chapter Review ........................................................................................................................................................... 290 Practice and Review .............................................................................................................................. 290 Practice and Review: Debate This ......................................................................................................... 291 Issue Spotters ........................................................................................................................................ 292 Business Scenarios and Case Problems ................................................................................................. 292 Critical Thinking and Writing Assignments ............................................................................................ 298

Critical Thinking Questions in Cases Case 21.1 328.

Suppose that O‘Malley had been licensed to remove the asbestos. Would the result have been different? Why or why not?

Solution

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No. If O‘Malley had been licensed to remove asbestos, it is not likely that the result in this case would have been substantially different. O‘Malley was hired to remove and dispose of the asbestos insulating the pipes in Pinski‘s building. Regardless of whether the removal and transport of the asbestos was done properly—the facts in the case indicate that it was not—the disposal of the material in an abandoned farmhouse, a dumpster, and a vacant lot, was clearly in violation of the Clean Air Act. O‘Malley was convicted of removing, transporting, and dumping asbestos in violation of the Clean Air Act. Had he been licensed to remove the asbestos, his acts would most likely have been held to be in violation of the terms of the license. In any circumstance, his conviction for dumping the hazardous waste would likely have stood.

329.

Did O‘Malley‘s violation of environmental laws also violate any standards of ethics?

Discuss.

Solution Ethics focuses on morality and the way in which moral principles are derived and applied to one‘s conduct—that is, what constitutes right or wrong behavior. Crimes and their consequences can be avoided if the perpetrators engage in ethical decision making beforehand and then act ethically.

In a business context, ethical behavior can result in the long-run viability of a company, and the well being of its owners, operators, and employees. Unethical behavior can negatively affect the business‘s participants, as well as its suppliers, customers, and community, and society as a whole.

The minimum acceptable standard for ethical business behavior is considered to be compliance with the law. And the converse is also true—noncompliance with the law is prima facie a failure to engage in ethical business behavior. An individual‘s violation of the law, including those that protect the environment, is concurrently a violation of ethical standards.

Case 22.2 11. Fox introduced into evidence two receipts showing that he properly disposed of oily water on shore and indicated that he had more. Should Fox have been exonerated on the basis of these receipts? Why or why not?

Solution No, Fox should not have been exonerated on the basis of receipts showing that he properly disposed of oily water on shore. Regardless of the number of receipts for proper disposal that he might have been able to provide, they would not have contradicted the evidence of his improper disposal of oily water in the circumstances of this case.

There might have been many times that Fox did not violate the Clean Water Act (although since the defendant did not offer more receipts into evidence, there was little proof). But the charge here followed an inspection of Fox‘s boat Native Sun by the U.S. Coast Guard, presumably during a different time frame than the dates of the receipts. The conviction was based on the testimony of the Native Sun’s crew and others. The jury was ―rational‖ to be skeptical of Fox‘s contradictory suggestion of where the oily water in the vessel‘s bilge had gone.

12. Was it ethical for Fox to attempt to avoid responsibility for the violation of the Clean Water Act by blaming his crew? Discuss.

Solution No, it was not ethical for Fox to attempt to avoid responsibility for the violation of the Clean Water Act by blaming his crew.

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According to the vessel‘s log, Fox knew of the leaking oil in the engine room and of the crew‘s unsuccessful efforts to clean it up. The oil contaminated the bilge water. This water was sucked through a submersible pump lacking an oil-water separator and discharged overboard. Fox bought an enzyme-based detergent to disperse the sheen created by the discharged oily water.

An inspection of the boat by the U.S. Coast Guard, and the testimony at trial of the boat‘s crew, supported the jury‘s verdict that Fox was guilty of the charge. As the appellate court stated, ―a rational jury could conclude that Fox, knowing that there was excessive oil in the bilge and that regular pumping of the bilge was occurring without an oil-water-separator, knowingly directed his crew to discharge oily bilge water.‖ Fox‘s attempt to avoid the conviction by assigning blame for the violation to his crew could have had a negative impact on the members of the crew, as well as on their dependents—their families and others—and the community of fishing boat crews generally. If the defense had succeeded, mistrust among those negatively impacted toward boat owners and operators would have been only the first effect. The mistrust could have seriously damaged the economies of the crew‘s families and others. Fox‘s success might have influenced other boat owners and operators to avoid liability for any infraction or unfortunate circumstance by blaming their crews. This would have caused only more discontent.

Case 22.3 330.

Should a no-fault owner of a hazardous waste site be liable for any of the cleanup costs?

Why or why not?

Solution Yes, a so-called ―no-fault‖ owner of a hazardous waste site should be held liable for a portion of the cleanup costs in some circumstances.

Factors supporting the imposition of this liability include that the owner has actual control over, and responsibility for, the site. The owner may be best able to bear the costs through insurance or an increase in the price of its products or services spread over time and charged to its customers.

A cleanup can increase the market value of the property—if the government contributes to the costs of the cleanup, the owner of the property obtains the benefit of the increased value.

Otherwise, taxpayers will have to bear the costs. Taxpayers have in fact paid about 90 percent of the costs to clean up hazardous waste sites. (Note, however, that CERCLA created a trust fund to pay for the remedial costs at certain sites, and the tax supporting that trust fund comes from a levy on the industries historically associated with many of the hazardous disposal sites.)

No, a ―no-fault‖ owner of a hazardous waste site should not be held liable for any of the cleanup costs. To impose liability, more should be required than simple ownership and the general authority to control that comes with it. At a minimum there should be active involvement in the disposal activity. This position encourages the redevelopment of such sites.

Thus, liability should not be imposed when an owner has done due diligence before purchasing a site and does not know, or have reason to know, at the time of acquisition of any contamination.

Liability can reasonably be avoided by providing in a contract with the previous owner for its indemnity, or the acquisition of government funds or insurance to cover cleanup costs. Simple

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investment in a business without authority or control over its operations or the decisions relating to waste disposal should absolve the investor unless piercing the veil is warranted. And liability might be avoided in such circumstances as an act of God or war, or an act by a third party with no connection to the owner.

Of course, those responsible for problems caused by the disposal of hazardous waste should bear the costs and responsibility for remedying the harm. CERCLA imposes strict liability on past and present owners and operators of facilities where hazardous substances have been disposed, as well as on the generators and the transporters of the waste who participated in the selection of the disposal site.

331.

Before purchasing the mill, Valbruna obtained $500,000 in government funds to cover some of the cleanup costs. Should this sum be applied to reduce the amount of its recovery from Joslyn? Explain.

Solution Yes, the sum that Valbruna obtained from the government to cover some of the cleanup costs at the steel mill should be applied to reduce the amount of Valbruna‘s recovery from Joslyn. Not reducing the recovery amount would inequitably permit a ―double recovery‖ for Valbruna of the sum represented by the government funds.

Valbruna, as a rational buyer, likely discounted the potential value of the steel mill site by the amount that the company would need to cover the cleanup costs. This expected liability would reduce the price for the property that the buyer was willing to pay. Valbruna‘s pre-purchase negotiation for government funds to cover some of the costs indicates that the potential buyer factored the amount into the price for the property. Thus, the government funds could be considered part of the price for the site.

Chapter Review Practice and Review Residents of Lake Caliopa, Minnesota, began noticing an unusually high number of lung ailments among the local population. Several concerned citizens pooled their resources and commissioned a study to compare the frequency of these health conditions in Lake Caliopa with national averages. The study concluded that residents of Lake Caliopa experienced four to seven times the rate of frequency of asthma, bronchitis, and emphysema as the population nationwide.

During the study period, citizens began expressing concerns about the large volume of smog emitted by the Cotton Design apparel manufacturing plant on the outskirts of town. The plant was located two miles east of town beside the Tawakoni River and employed seventy workers.

Just downstream on the Tawakoni River, the city of Lake Caliopa operated a public waterworks facility, which supplied all city residents with water.

The Minnesota Pollution Control Agency ordered Cotton Design to install new equipment to control air and water pollution. Later, citizens brought a lawsuit in a Minnesota state court against Cotton Design alleging that various respiratory ailments were caused or compounded by smog from Cotton Design‘s factory. Using the information presented in the chapter, answer the following questions.

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332.

Under the common law, what would each plaintiff be required to identify in order to be given relief by the court?

Solution To establish a common law cause of action for nuisance, each plaintiff would have to identify a distinct harm caused by the pollution that was separate from that affecting the general public. In other words, they would need to show how each of them was individually harmed by Cotton Design‘s emissions.

333.

What standard for limiting emissions into the air does Cotton Design‘s pollution-control equipment have to meet?

Solution Major stationary sources of air pollution are required to use the maximum achievable control technology to reduce emissions. The EPA issues guidelines as to what equipment meets this standard, and the guidelines may vary depending on whether the source is new or existing and whether the area is clean or polluted.

334.

If Cotton Design‘s emissions violated the Clean Air Act, how much can the EPA assess in fines per day?

Solution For violations of the Clean Air Act in these circumstances, the EPA can assess fines of about $100,000 per day.

335.

What information must the city send to every household that it supplies with water?

Solution Under the Safe Drinking Water Act, as amended, suppliers of drinking water are required to send an annual statement describing the source of its water, the level of contaminants contained in the water, and any possible health concerns associated with the contaminants. Thus, the city must send a statement that includes this information every year to every household it provides with water.

Practice and Review: Debate This 336.

The courts should reject all cases in which the wetlands in question do not consist of actual bodies of water during the entire year.

Solution The Army Corps of Engineers brings numerous cases to court each year that involve areas that are not ―wet‖ part of the year. Some are only wet during storms. Congress never created wetlands legislation to protect such areas. The U.S. is a huge country such that the U.S. Army Corps of Engineers should spend its scarce resources protecting real wetlands—bodies of water that are wet all year long.

If the government were restricted to protecting just bodies of water that were wet all year long, it would be forced to allow development in fragile animal habitats. Because the United States is so big, developers do not need to encroach on areas that the U.S. Army Corps of Engineers has

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deemed wetlands. They have plenty of other locations for development. All wetlands legislation has as its goal to protect our environment.

Issue Spotters 21. Resource Refining Company‘s plant emits smoke and fumes. Resource‘s operation includes a short railway system, and trucks enter and exit the grounds continuously. Constant vibrations from the trains and trucks rattle nearby residential neighborhoods. The residents sue Resource.

Are there any reasons why the court might refuse to issue an injunction against Resource‘s operation? Explain.

Solution Yes. On the ground that the hardships that would be imposed on the polluter and on the community are greater than the hardships suffered by the residents, the court might deny an injunction. If the plant is the core of the local economy, for instance, the residents may be awarded only damages.

22. ChemCorp generates hazardous wastes from its operations. Disposal Trucking Company transports those wastes to Eliminators, Inc., which owns a site for hazardous waste-disposal.

Eliminators sells the property on which the disposal site is located to Fluid Properties, Inc. If the Environmental Protection Agency cleans up the site, from whom can it recover the cost?

Solution The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 regulates the cleanup of hazardous waste disposal sites. Any potentially responsible party can be charged with the entire cost of cleaning up a site. Potentially responsible parties include the person that generated the waste (ChemCorp), the person that transported the waste to the site (Disposal), the person that owned or operated the site at the time of the disposal (Eliminators), and the current owner or operator of the site (Fluid). A party held responsible for the entire cost may be able to recoup some of it in a lawsuit against other potentially responsible parties.

Business Scenarios and Case Problems 94. Clean Air Act. Current scientific knowledge indicates that there is no safe level of exposure to a cancer-causing agent. In theory, even one molecule of such a substance has the potential for causing cancer. Section 112 of the Clean Air Act requires that all cancer-causing substances be regulated to ensure a margin of safety. Some environmental groups have argued that all emissions of such substances must be eliminated if a margin of safety is to be reached. Such a total elimination would likely shut down many major U.S. industries. Should the Environmental Protection Agency totally eliminate all emissions of cancer-causing chemicals? Discuss. (See Air Pollution.)

Solution The courts have held that ―safe‖ does not mean absolutely risk-free. Some small level of risk of cancer might be permitted under the Clean Air Act. Consequently, the EPA has not eliminated all emissions of such cancer-causing substances. Rather, the EPA has regulated such substances so that the average risk of cancer from emissions is no greater than 1 in 100,000 or 1 in 1,000,000, depending on the relevant statute, economic feasibility, and other factors.

95. Environmental Laws. Fruitade, Inc., is a processor of a soft drink called Freshen Up. Fruitade uses returnable bottles, which it cleans with a special acid to allow for further beverage processing. The

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acid is diluted with water and then allowed to pass into a navigable stream. Fruitade crushes its broken bottles and throws the crushed glass into the stream. Discuss fully any environmental laws that Fruitade may have violated. (See Water Pollution.)

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Solution Fruitade has violated a number of federal environmental laws if such actions are being taken without a permit. First, because the dumping is in a navigable waterway, the River and Harbor Act of 1886, as amended, has been violated. Second, the Clean Water Act of 1972, as amended, has been violated. This act is designed to make the waters safe for swimming, to protect fish and wildlife, and to eliminate discharge of pollutants into the water. Both the crushed glass and the acid violate this act. Third, the Toxic Substances Control Act of 1976 was passed to regulate chemicals that are known to be toxic and could have an effect on human health and the environment. The acid in the cleaning fluid or compound could come under this act.

96. Spotlight on the Grand Canyon—Environmental Impact Statement. The U.S. National Park Service (NPS) manages the Grand Canyon National Park in Arizona under a management plan that is subject to periodic review. In 2006, after nine years of background work and the completion of a comprehensive environmental impact statement, the NPS issued a new management plan for the park. The plan allowed for the continued use of rafts on the Colorado River, which runs through the Grand Canyon. The number of rafts was limited, however. Several environmental groups criticized the plan because they felt that it still allowed too many rafts on the river. The groups asked a federal appellate court to overturn the plan, claiming that it violated the wilderness status of the national park. When can a federal court overturn a determination by an agency such as the NPS? Explain. [River Runners for Wilderness v. Martin, 593 F.3d 1064 (9th Cir. 2010)] (See Government Regulations.)

Solution When an agency acts in an arbitrary and capricious manner, then the court has grounds for intervention. Otherwise, the court defers to the expertise of the agency, as revealed in the record.

Here, the environmental impact statement (EIS) was comprehensive and the National Park Service (NPS) had credible reason to believe that the use of rafts on the river did not damage the wilderness status of portions of the Park. Since the NPS acted within its statutory guidelines and followed proper procedure in its decision-making, the court would not intervene in the decision of the agency. The appellate court found that the plaintiffs had failed to establish that the NPS acted in an arbitrary and capricious manner when it adopted the plan.

97. Superfund. A by-product of phosphate fertilizer production is pyrite waste, which contains arsenic and lead. From 1884 to 1906, seven phosphate fertilizer plants operated on a forty-threeacre site in Charleston, South Carolina. Planters Fertilizer & Phosphate Co. bought the site in 1906 and continued to make fertilizer. In 1966, Planters sold the site to Columbia Nitrogen Corp. (CNC), which also operated the fertilizer plants. In 1985, CNC sold the site to James Holcombe and J. Henry Fair. Holcombe and Fair subdivided and sold the site to Allwaste Tank Cleaning Inc., Robin Hood Container Express, the city of Charleston, and Ashley II of Charleston, Inc. Ashley spent almost $200,000 cleaning up the contaminated soil. Who can be held liable for the cost? Why? [PCS Nitrogen Inc. v. Ashley II of Charleston LLC, 714 F.3d 161 (4th Cir. 2013)] (See Toxic Chemicals and Hazardous Wastes.)

Solution All of the parties are potentially liable for the costs to clean up the site. Under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), also known as Superfund, when a release or a threatened release of hazardous chemicals occurs at a site, persons who may be held liable for the cost of cleaning up the site include the person who generated the wastes disposed of at the site, the person who transported the waste to the site, the person who owned

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or operated the site at the time of the disposal, and the current owner or operator. These are referred to as potentially responsible parties. Liability cannot be avoided through transfer of ownership. Thus, selling a site does not relieve the seller of liability, and the buyer also becomes liable. Liability also extends to those that merge with or buy corporations that have violated CERCLA. Liability under Superfund is usually joint and several. CERCLA authorizes a party who has incurred cleanup costs to bring a contribution action against any other person who is liable or potentially liable for a percentage of the costs.

In this problem, persons who generated the wastes disposed of at the site include the original seven phosphate fertilizer plants, Planters Fertilizer & Phosphate Co., and Columbia Nitrogen Corp. The current owners or operators of the site include Allwaste Tank Cleaning Inc., Robin Hood Container Express, the city of Charleston, and Ashley II of Charleston, Inc. Under the principles stated above, liability extends to all of these parties for at least a portion of the cleanup costs.

Because liability cannot be avoided through transfer of ownership, Holcombe and Fair may also be liable. Ashley could bring an action against any or all of these parties to recover.

In the actual case on which this problem is based, on Ashley‘s claim to recover the costs from PCS Nitrogen Inc. (CNC‘s successor after a series of mergers) and PCS‘s claims for contribution against the other parties, the court found PCS a potentially responsible party jointly and severally liable.

The court found the other parties, including Ashley, potentially responsible parties, each liable for an allocated portion of the costs. The U.S. Court of Appeals for the Fourth Circuit affirmed.

98. Business Case Problem with Sample Answer— Environmental Impact Statements. The U.S. Forest Service (USFS) proposed a travel management plan (TMP) for the Beartooth Ranger District in the Pryor and Absaroka Mountains in the Custer National Forest of southern Montana. The TMP would convert unauthorized user-created routes within the wilderness to routes authorized for motor vehicle use and would permit off-road ―dispersed vehicle camping‖ within 300 feet of the routes, with some seasonal restrictions. The TMP would ban cross-country motorized travel outside the designated routes. Is an environmental impact statement required before the USFS implements the TMP? If so, what aspects of the environment should the USFS consider in preparing it? Discuss. [Pryors Coalition v. Weldon, 551 Fed.Appx. 426 (9th Cir. 2014)] (See Government Regulations.)

— For a sample answer to Problem 22–5, go to Appendix D. Solution Yes. An environmental impact statement (EIS) is required before the U.S. Forest Service (USFS) implements its proposed travel management plan (TMP). An EIS must be prepared for every major federal action that significantly affects the quality of the environment. An action is ―major‖ if it involves a substantial commitment of resources. An action is ―federal‖ if a federal agency has the power to control it. An EIS must analyze (1) the impact on the environment that the action will have, (2) any adverse effects on the environment and alternative actions that might be taken, and (3) irreversible effects that the action might generate.

Here, the resources committed to the implementation of the USFS‘s TMP could include the resources within the wilderness and the time and effort dedicated by the agency. The wilderness resources would include the soil, the vegetation, the wildlife, the wildlife habitat, any threatened or endangered species, and other natural assets impacted by the TMP. The agency‘s resources would include its funds and its staff—to design, map, maintain, and enforce the TMP. These

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resources seem substantial. Of course, the implementation of the TMP is federal because the USFS has the power to control it.

As for the aspects of the environment that the agency might consider in preparing the EIS, some of the important factors are listed above—the soil, vegetation, wildlife, wildlife habitat, and threatened or endangered species. Other aspects of the environment impacted by the TMP might include cultural resources, historical resources, and wilderness suitability, and on other authorized uses of the wilderness. There is a potential for impact by every route that is designed to be part of the system, as well as the ―dispersed vehicle camping‖ to be permitted on the terrain.

In the actual case on which this problem is based, the USFS considered all of the factors listed above. The agency then issued an EIS and a decision implementing the TMR. On a challenge to the EIS, a federal district court issued a judgment in the USFS‘s favor. The U.S. Court of Appeals for the Ninth Circuit affirmed. ―The Forest Service took the requisite hard look at the environmental impacts.‖ 99. The Clean Water Act. ICG Hazard, LLC, operates the Thunder Ridge surface coal mine in Leslie County, Kentucky, under a National Pollutant Discharge Elimination System permit issued by the Kentucky Division of Water (KDOW). As part of the operation, ICG discharges selenium into the surrounding water. Selenium is a naturally occurring element that endangers aquatic life at a certain concentration. KDOW knew when it issued the permit that mines in the area may produce selenium but did not specify discharge limits for the element in ICG‘s permit. Instead, the agency imposed a one-time monitoring requirement, which ICG met. Does ICG‘s discharge of selenium violate the Clean Water Act? Explain. [Sierra Club v. ICG Hazard, LLC, 781 F.3d 281 (6th Cir. 2015)] (See Water Pollution.)

Solution No. ICG‘s discharge of selenium into the water surrounding ICG‘s coal mining operation does not violate the Clean Water Act (CWA). The CWA established a permit system—the National Pollutant Discharge Elimination System (NPDES)—to regulate discharges from point sources of pollution.

Under the NPDES system, a polluter must obtain a permit before discharging wastes into surface waters. An authorized state agency can issue an NPDES permit for a discharge that will not violate water-quality standards.

In this problem, KDOW, an authorized state agency, issued an NPDES permit to ICG for the operation of a surface coal mine. KDOW knew when it issued the permit that mines in the area could produce selenium but did not specify effluent limits for the element in ICG‘s permit. Instead, the agency included a one-time monitoring requirement, which ICG met. In these circumstances, ICG obtained the required permit from an authorized agency before discharging selenium and complied with the permit‘s monitoring condition, which qualifies as a ―water-quality standard.‖ In the actual case on which this problem is based, Sierra Club filed a suit in a federal district court against ICG, alleging that the discharge of selenium violated the CWA. The court issued a judgment in ICG‘s favor. The U.S. Court of Appeals for the Sixth Circuit affirmed. ICG‘s permit shielded the company from liability for the discharge.

100.

The IDDR Approach and Superfund. Sevenson Environmental Services was hired to clean up a Superfund site in Manville, New Jersey, where the soil was contaminated with creosote.

(Creosote is a flammable oily mixture of chemical compounds often used for preserving wood or

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as a pesticide.) The Environmental Protection Agency (EPA) funded the effort. Sevenson‘s project manager was Gordon McDonald, whose responsibilities included hiring subcontractors through a bidding process. McDonald made the contamination look as severe as possible to pressure rival bidders to bid higher. He showed the bids to one of the competitors, John Bennett, and permitted him to submit a new ―lowest‖ bid in exchange for a kickback of $13.50 per ton of cleaned soil.

Bennett won the contract, which (because of McDonald‘s manipulation of the bidding process) covered the amount of the kickback. The scheme was eventually discovered, and Bennett was charged with criminal fraud. [United States v. Bennett, 688 Fed. Appx. 169 (3d Cir. 2017)] (See Toxic Chemicals and Hazardous Wastes.)

1.

What was Bennett‘s ethical dilemma in this case? Using the IDDR approach, discuss and evaluate the actions he chose to resolve it.

Solution Bennett‘s chief ethical dilemma in this case was whether to agree to McDonald‘s kickback scheme or forego the Sevenson contract. Bennett‘s choice to participate in the scheme was not successful, in terms of its impact on the stakeholders.

In this problem, Sevenson was hired to clean up a Superfund site in Manville, New Jersey. The Environmental Protection Agency (EPA) paid for the work. McDonald, Sevenson‘s bid and project manager, exaggerated the contamination of the site to pressure the bidders to bid more. He showed the bids to Bennett and allowed him to submit a second lower bid in exchange for a kickback. Bennett thereby won the contract. But the scheme was eventually revealed, and he was charged with criminal fraud.

Those stakeholders included Bennett, his company, and its owners, employees, and customers. Other stakeholders were Sevenson and its personnel, and the families of those persons, as well as the Environmental Protection Agency (EPA) and taxpayers whose funds cover the EPA‘s contracts. Bennett might have required the deal to meet the needs of some of the stakeholders. By engaging in the conspiracy with Sevenson‘s representative McDonald, Bennett guaranteed that he would win the contract. Of course, the scheme violated whatever legal and ethical standards could be brought to bear on it. These included the civil and criminal violation provisions of Superfund and other federal and state laws, as well as government and professional ethical codes. Also applicable would be personal standards of integrity, honesty, and trust.

Bennett could have chosen instead to expose the scheme to the EPA, which would have met the applicable legal and ethical standards. He might have chosen simply to refuse to participate, which would have achieved at least the appearance of compliance. Neither choice is likely to have won his company the Manville site contract. But either choice would not have as fully disappointed the stakeholders as the decision to become complicit.

Bennett‘s decision to agree to pay the bribes won him the contract, and thus satisfied at least some of the stakeholders in the short term. But the scheme‘s eventual unraveling came with a heavy price. As part of the sanctions, Bennett could be ordered to disgorge all profits, including amounts representing kickback payments. He and his company could also be enjoined from all future EPA projects. And he could be imprisoned. These results would not likely satisfy any of the stakeholders. The government and taxpayers might feel vindicated, however.

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In the actual case on which this problem is based, Bennett was convicted, sentenced to sixtythree months in prison, fined, and ordered to pay restitution of more than $3.8 million. The U.S. Court of Appeals for the Third Circuit affirmed the conviction and the punishment.

2.

Suppose that Bennett had refused the kickback scheme, had won the contract with an honest low bid, and had been paid for the work, but that he had not actually performed his part of the deal. Would this situation have been ethically distinct from the true facts? Explain.

Solution The question poses a situation in which Bennett refuses the kickback scheme, wins the contract with an honest low bid, and is paid for the work. But he does not actually perform his part of the deal. This situation would not have been ethically distinct from the true facts.

As set out in the answer to the previous question, Bennett was offered the contract to clean up a contaminated Superfund site in exchange for his company‘s participation in a kickback scheme. The scheme violated all of the legal and ethical standards that applied. These included provisions of Superfund and other laws, government and professional ethical codes, and personal standards of integrity, honesty, and trust.

Ultimately, this decision worked to the satisfaction of none of the stakeholders. The scheme was discovered. Bennett was charged, convicted, and sentenced in a federal court for his part in the conspiracy. A federal appellate court upheld this outcome.

Had Bennett chosen not to participate in the scheme and won the contract honestly, but failed to do the work, for which he had nonetheless been paid, the ethical effect would have been the same. The payment would have been sought and accepted on false pretenses, as false as the deceitful kickback conspiracy undertaken in the actual facts. In other words, it would have violated all of the same legal and ethical standards.

The stakeholders, too, would have been the same. And on the inevitable discovery of the nonperformance, the outcome would have worked to the satisfaction of none of them. The partial exception would have been again, of course, the government and taxpayers.

Critical Thinking and Writing Assignments 1.

Environmental Laws. Moonbay is a home-building corporation that primarily develops retirement communities. Farmtex, Inc., owns a number of livestock feedlots in Sunny Valley, where animals are fattened up before being slaughtered. Moonbay purchased 20,000 acres of farmland in the same area and began building and selling homes on this acreage. In the meantime, Farmtex continued to expand its feedlot business. Eventually, only five hundred feet separated the two operations. Because of the odor and flies from the feedlots, Moonbay found it difficult to sell the homes in its development. (See Common Law Actions, Air Pollution, and Water Pollution.)

1.

The first team will decide what common law theory Moonbay could use to seek an injunction to prevent Farmtex from operating its feedlot in the vicinity of the retirement home development. Would a court be likely to grant an injunction?

Solution As a general rule, property owners are free to use their property in any manner desired so long as such use is not in violation of any statute or does not interfere with the property

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rights of others. When a use interferes with another‘s property rights, an action for an injunction may be brought on the common law theory of the tort of nuisance. In a nuisance case, the court tries to balance the interests of the parties.

In this problem, in a presumably undeveloped rural area, Farmtex owned and operated livestock feedlots. Moonbay bought adjacent or nearby land on which to build and sell houses. Because of the odor and flies from the feedlots, Moonbay found it difficult to sell the houses. To enjoin Farmtex from operating its feedlots in the vicinity of the houses, Moonbay could file a nuisance suit.

A court hearing this case would be likely to grant an injunction in Moonbay‘s favor—at least to the extent of ordering Farmtex to move its operation further from the houses—because that would allow both parties (and the buyers of the houses) to continue to enjoy their property.

2.

The second team will determine if Farmtex has violated any federal environmental laws pertaining to air pollution. Consider that the air in a feedlot environment is often saturated with ammonia and methane gas (which are released from animal wastes).

Solution Under the Clean Air Act, the Environmental Protection Act lists regulated hazardous air pollutants that are emitted from stationary sources. These include substances that are known to cause harm to humans. Major sources of air pollution are required to use maximum achievable control technology to reduce emissions.

In this question, Farmtex owns and operates livestock feedlots. According to the facts, a feedlot environment is often saturated with ammonia and methane gas. If the presence or release of these wastes in the Farmtex operations violates federal (or state) environmental law, the operator could be required to use maximum achievable control technology to reduce emissions.

In the circumstance of a feedlot, this technology can consist of relatively simple, inexpensive abatement measures. Water sprinkling, surface mulch (such as wheat straw or sawdust), and frequent manure harvesting, for example, can mitigate the concentrations of wastes and their emissions.

3.

The third team will analyze whether the runoff from Farmtex‘s feedlot violates the Clean Water Act because it frequently contains antibiotics, ammonia, and other chemicals. What pollution-control equipment standard would apply to Farmtex?

Solution Under the Clean Water Act, point sources of pollution are required to obtain permits before discharging waste into navigable waters. Discharges of various wastes are based on the technology available or controlling them. The equipment standard is the best practical control technology, with a timetable for its installation.

Here, Farmtex owns and operates livestock feedlots. According to the facts, the operation frequently contains antibiotics, ammonia, and other chemicals. If the feedlot is not managed

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properly, of course, runoff from its operation can pollute public water, threatening wildlife and undercutting its use for recreation and drinking.

The Clean Water Act requires proper management practices to control the runoff. The use of settling basins or filter systems can the amount of waste in runoff from entering surface and ground water.

4.

The fourth team will look at the competing interests of the feedlot operators and the builders in this dispute. Is there any solution to the problem that will satisfy both sides? Explain your answer.

Solution As a general rule, property owners are free to use their property in any manner desired so long as such use is not in violation of any statute or does not interfere with the property rights of others. When such use interferes with another‘s property rights, an action may be brought as a tort of nuisance. In such a case, the court would try to balance the interests of both parties.

In the dispute framed by this problem, Farmtex owns and operates livestock feedlots. Near these feedlots, Moonbay bought land on which to build and sell houses. Because of the odor and flies from the feedlots, however, Moonbay finds it difficult to sell the houses.

If Moonbay were to sue Farmtex on the same ground, a court hearing this case would be likely to enjoin the operator. In a nuisance suit involving a similar issue, the court enjoined a feedlot operator from continuing its operation near a residential development but required the developer to pay damages to the operator to cover the costs of moving or shutting down.

This resolution might be imposed in Moonbay‘s case. And government enforcement of environmental laws against Farmtex could include requiring such mitigation measures as those noted in the answers to the previous questions. These steps could also add to the effect of satisfying both sides to this dispute.

Solution and Answer Guide Miller, The Legal Environment Today 10e, 9780357635582; Chapter 23: Real and Personal Property

Table of Contents Critical Thinking Questions in Features ............................................................................................................. 301 Ethics Today ........................................................................................................................................ 301 Digital Update ..................................................................................................................................... 301 Critical Thinking Questions in Cases ................................................................................................................... 301 Case 23.1 ............................................................................................................................................... 301 Case 23.2 ............................................................................................................................................... 302 Case 23.3 ............................................................................................................................................... 302 Chapter Review ........................................................................................................................................................... 303

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Practice and Review .............................................................................................................................. 303 Practice and Review: Debate This ......................................................................................................... 305 Issue Spotters ........................................................................................................................................ 305 Business Scenarios and Case Problems ................................................................................................. 305 Critical Thinking and Writing Assignments ............................................................................................ 313

Critical Thinking Questions in Features Ethics Today 337.

At what point might the predicted benefits of a new private commercial endeavor outweigh the constitutional requirement of a taking only for public use?

Solution Some people would say never—that the predicted benefits of a commercial endeavor never justify the taking of real property owned by individuals when it is not truly for public use. Others would say that if the predicted benefits were large enough, taking for private development is justified.

Digital Update 1. How might a couple who enjoy purchasing virtual and digital goods together avoid property division issues in the event of a divorce?

Solution Couples can specify in prenuptial agreements which person gets what if divorce occurs. As they add new virtual and digital property, they can create addenda to their existing agreements.

Critical Thinking Questions in Cases Case 23.1 1.

In not disclosing the house‘s reputation to Stambovsky, was Ackley‘s behavior unethical? If so, was it unethical because she knew something he did not, or was it unethical because of the nature of the information she omitted? What if Ackley had failed to mention that the roof leaked or that the well was dry—conditions that a buyer would normally investigate? Explain your answer.

Solution Yes, her behavior was unethical. Using a values-based ethical approach, it would be wrong for Ackley to withhold information that she knew—or should have known—would potentially impact Stambovsky‘s decision to purchase the house. Ethically, a party should disclose all material facts to the other party in negotiating contracts. [This answer could go either way depending on the ethical models and theories discussed in class.]

2.

Why did the court decide that applying the strict rule of caveat emptor was inappropriate in this case? How would applying this doctrine increase costs for the purchaser?

Solution

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The court ruled that applying the rule of caveat emptor was inappropriate in this case because it would be very difficult for a buyer from out of town to learn that a house was supposedly haunted, even though the seller had publicized the nature of the home. Placing the burden on the buyer to discover paranormal problems with a home would force the buyer to undertake a searching and costly review to determine whether the home and its reputation were free of ghosts.

Case 23.2 13. Could the city have argued in support of its notice to vacate that there is nothing arbitrary or unreasonable about holding a landlord accountable for ensuring the use of its property complies with the law? Explain.

Solution Yes, the city might have effectively argued to support its notice to vacate that there is nothing arbitrary or unreasonable about holding a landlord accountable for ensuring the use of its property complies with the law.

The court characterized the city‘s zoning ordinance as ―clearly arbitrary and unreasonable‖ because ―UJ-Eighty took no affirmative action to violate [it].‖ Contrary to this view, however, the case can be seen to have arisen because UJ-Eighty chose to rent its property to tenants who did not meet the requirements of the ordinance. There would arguably be nothing arbitrary or unreasonable in adopting this perspective as the holding.

In the ordinance, the definition of a fraternity or sorority house includes whether Indiana University—like the city, an arm of the state—sanctioned the fraternity or sorority. In line with substantive due process, this is a measurable standard. Additionally, the city ultimately determines whether there is compliance with the standard, and in line with procedural due process, there are procedures for a challenge to the city‘s determination of non-compliance.

14. Why are zoning ordinances that grant unrestricted power to neighbors to withhold consent for a particular property use generally held to be unconstitutional? Discuss.

Solution Zoning ordinances that grant unrestricted power to neighbors to withhold consent for a particular property use are generally held to be unconstitutional in part because they lack procedures for reviewing and overturning the neighbors‘ decision. Such regulations might also fail to impose standards for granting or withholding consent and, indeed, for government control of the decision in any way. This would also likely be held unconstitutional as an improperly unlawful delegation of government authority.

Case 23.3 338.

Suppose someone else‘s snow blower is left in your garage for an extended period of time. Under the statute applied in the Zephier case, could you become the owner of the snow blower? Explain.

Solution Yes, under the Minnesota statute applied in the Zephier case, you could become the owner of a snow blower that is left in your garage for an extended period by its original owner. To obtain the ownership rights, you would have to meet the requirements of the statute.

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As the appellate court stated in the case, Minnesota Statutes Section 345.75 ―lays out a clear, concise process to obtain ownership of abandoned tangible personal property.‖ It specifies that six months must pass before property may be deemed abandoned. The possessor of the property must give its owner thirty days‘ notice before the rights to ownership can transfer to the possessor. And the notice must be personal service or certified.

By following these steps, you could obtain the ownership rights to the snow blower. In the Zelphier case, of course, Agate, Oliver‘s possessor, did not provide the requisite notice to Zelphier, Oliver‘s owner, which led the appellate court to conclude that she could reclaim the dog.

339.

Why is a possessor of abandoned property allowed to obtain ownership rights to it?

Discuss.

Solution Property is a fiscal resource. Its use has economic benefits. These facts provide the policy to support the transfer of ownership rights to abandoned property from its prior owner to its possessor.

By transferring the ownership rights to abandoned property, its possessor can put it to use, in contrast to the apparent disuse or non-use by its prior owner. If this use generates income, the transfer of rights may also support the collection of revenue by the state in the form of taxes from an ascertainable, asserted, and locatable owner. Or its new owner may sell the property, which is another way to generate income (and taxes). And if there is no declared owner, the state can acquire the property and sell it.

For example, if the ownership rights to an abandoned car were transferred to its possessor, the new owner could drive it or sell it. Either activity would likely result in income to the state, in the form of personal property, gas, or sales taxes. And if the state became the possessor, and subsequent owner, the car could be sold with the proceeds going into the state‘s coffers.

Chapter Review Practice and Review Vern Shoepke purchased a two-story home from Walter and Eliza Bruster in the town of Roche, Maine. The warranty deed did not specify what covenants would be included in the conveyance.

The property was adjacent to a public park that included a popular Frisbee golf course. (Frisbee golf is a sport similar to golf but using Frisbees.) Wayakichi Creek ran along the north end of the park and along Shoepke‘s property. The deed allowed Roche citizens to walk across a five-footwide section of the lot beside Wayakichi Creek as part of a two-mile public trail system. Teenagers regularly threw Frisbee golf discs from the walking path behind Shoepke‘s property over his yard to the adjacent park. Shoepke habitually shouted and cursed at the teenagers, demanding that they not throw objects over his yard. Using the information presented in the chapter, answer the following questions.

340.

What is the term for the right of Roche citizens to walk across Shoepke‘s land on the trail?

Solution Here, the right conveyed by the deed is nonpossessory and gives citizens a limited right to travel on a trail over Shoepke‘s land. Therefore, it is an easement.

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341.

What covenants would most courts infer were included in the warranty deed that was used in the property transfer from the Brusters to Shoepke?

Solution A warranty deed conveys the most covenants, or promises, of any other deed. The seller promises to have title to the property, the power to convey it, that there are no encumbrances against the property, and that the buyer‘s possession will not be disturbed (i.e., quiet enjoyment).

342.

Suppose that Shoepke wants to file a trespass lawsuit against some teenagers who continually throw Frisbees over his land. Shoepke discovers, however, that when the city put in the Frisbee golf course, the neighborhood homeowners signed an agreement that limited their right to complain about errant Frisbees. What is this type of promise or agreement called in real property law?

Solution A promise between a group of landowners protecting the interests of individuals who come onto the land and the interests of the owners of nearby land is called a restrictive covenant. The agreement may ―run with the land‖ even if Shoepke was not a party to it.

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Practice and Review: Debate This 343.

Under no circumstances should a local government be able to condemn property in order to sell it later to real estate developers for private use.

Solution The Constitution‘s Fifth Amendment is clear about giving the power of condemnation to government. Such power can only be used to take private property for public use (and with appropriate compensation, of course). When a local government uses this taking power to condemn property that it later sells to private developers for a shopping mall development or nicer houses and apartments, that government is acting in violation of the U.S. Constitution.

Sometimes, local governments face tough economics times and must do what they can to raise more taxes. If a blighted area is never going to ―upgrade‖ itself, then local governments should be able to step in and speed up the process by a taking, as provided for in the Fifth Amendment to the U.S. Constitution. The public good will be served in two ways: the blighted area will be transformed for the better and the local government will obtain more taxes revenues from the businesses located in this area.

Issue Spotters 23. Bernie sells his house to Consuela under a warranty deed. Later, Delmira appears, holding a title to the house that is better than Consuela‘s. Delmira wants Consuela off the property. What can Consuela do?

Solution This is a breach of the warranty deed‘s covenant of quiet enjoyment. Consuela can sue Bernie and recover the purchase price of the house, plus any damages.

24. Grey owns a commercial building in fee simple. Grey transfers temporary possession of the building to Haven Corporation. Can Grey enter the building without Haven Corporation‘s permission? Explain.

Solution Yes. An owner of a fee simple has the most rights possible—the owner can give the property away, sell it, transfer it by will, use it for almost any purpose, possess it to the exclusion of all the world, or, as in this case, transfer possession for any period of time. The party to whom possession is transferred can also transfer its interest (usually only with the owner‘s permission) for any lesser period of time.

Business Scenarios and Case Problems 101.

Eminent Domain. Some Catholic organizations proposed to build a private independent middle school in a run-down neighborhood in Philadelphia, Pennsylvania. They asked the Redevelopment Authority of the City of Philadelphia to acquire specific land for the project and sell it to them for a nominal price. The land included a house on North Eighth Street owned by Mary Smith, whose daughter Veronica lived there with her family. The Authority offered Smith $12,000 for the house and initiated a taking of the property. Smith filed a suit in state court against the Authority, admitting that the house was a ―substandard structure in a blighted area,‖ but arguing that the taking was unconstitutional because its beneficiary was private. The Authority asserted that only the public purpose of the taking should be considered, not the status of the property‘s developer. On what basis can a government entity use the power of eminent

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domain to take property? What are the limits to this power? How should the court rule? Why? (See Limitations on Property Rights.)

Solution Under the U.S. Constitution, the government has the right to acquire possession of real property for public use. The power of eminent domain is limited to the taking of property for public use, though the United States Supreme Court (in the Kelo decision) has allowed the taking of private property to further economic development in blighted, or distressed, areas. The idea is that allowing the government to take private property and give it to private developers benefits the public by revitalizing the community. Since the Kelo case, however, there has been a lot of controversy and backlash over this use of the government‘s power of eminent domain. Many people and courts feel that it is unfair for the government to take one person‘s property and give it to another.

In this problem, although Smith admitted that the property was substandard and in a distressed area, the government intended to take the property to be used to develop a private religious school, which is not in the public interest. Moreover, a government taking of private property to support or develop a religious school may be an unconstitutional violation of the Constitution‘s establishment clause. Smith therefore has a strong argument that the taking was not for a public purpose at all, and the court should rule in Smith‘s favor on the issue.

102.

Zoning. The county intends to rezone an area from industrial use to residential use. Land within the affected area is largely undeveloped, but nonetheless it is expected that the proposed action will reduce the market value of the affected land by as much as 50 percent. Will the landowners be successful in suing to have the action declared a taking of their property, entitling them to just compensation? Why or why not? (See Limitations on Property Rights.)

Solution Because all land use regulations necessarily limit the ways in which property may be used, a regulation by itself will not generally be considered a compensable taking. Compensation will be required only if the regulation itself is found to be overly burdensome and thus subject to the requirement that just compensation be paid. Rezoning the land from industrial use to commercial use—despite the expected reduction in its market value—would probably not be considered a compensable taking because it would not prevent the owner from using the land for any reasonable income-producing or private purpose.

103.

Duties of the Bailee. Atka owns a valuable speedboat. She is going on vacation and asks her neighbor, Regina, to store the boat in one stall of Regina‘s double garage. Regina consents, and the boat is moved into the garage. Regina, in need of some grocery items for dinner, drives to the store. She leaves the garage door open, as is her custom. While she is at the store, the speedboat is stolen. What standard of care is required in this situation? Has Regina breached that duty? (See Personal Property.)

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Solution This bailment was created primarily for the benefit of the bailor. Under these circumstances the bailee can be expected to use only slight care in the protection of the bailed property from loss or damage. Because the bailee‘s custom was to leave the garage door open on short trips, her failure to close and lock the garage door might not necessarily be a breach of the care required here.

Thus, the bailee may have no liability to the bailor. One could reasonably argue, however, that the bailee should have at least closed her garage door so as not to make the bailor‘s boat obvious to any potential thief who walked by.

104.

Gifts. Jennifer Koerner adopted a dog—called The Stig— from the Anti-Cruelty Society in Chicago, Illinois, for $95. Koerner wrote a poem and presented it to Kent Nielsen, her live-in boyfriend. In the poem, she expressed her intent to give The Stig to him as a gift. While Koerner and Nielsen lived together, they were both involved in The Stig‘s day-to-day care. They ended their relationship a year later, and Nielsen agreed to leave their shared residence. Can Nielsen take The Stig with him, or is Koerner The Stig‘s rightful owner? Explain. [Koerner v. Nielsen, 2014 ILL App 122980, 8 N.E.3d 161 (1 Dist. 2014)] (See Personal Property.)

Solution Nielsen can take the Stig with him—Koerner is not the Stig's rightful owner. A gift is a means of transferring the ownership of personal property. A gift is a voluntary transfer of property ownership. There are three requirements for an effective gift—(1) donative intent on the donor‘s part, (2) delivery, and (3) acceptance by the donee.

In this problem, Koerner adopted a dog, the Stig. She apparently brought the Stig to the residence she shared with Nielsen, her live-in boyfriend. She wrote and presented to Nielsen a poem in which she expressed her intent to give the Stig to Nielsen as a gift. When the relationship between Koerner and Nielsen ended, Nielsen agreed to move out. He may have indicated that he intended to take Stig with him, or he may have actually taken the dog. In either circumstance, he is entitled to possession—the facts show Koerner‘s donative intent (the poem), delivery (Stig‘s presence in their shared residence), and acceptance (Nielsen sharing the Stig‘s care and expressing an intent to keep the dog).

In the actual case on which this problem is based, Koerner filed a suit in an Illinois state court against Nielsen to establish ownership of the Stig. From a judgment in Nielsen‘s favor, Koerner appealed. A state intermediate appellate court affirmed the lower court‘s judgment, holding that the evidence supported the finding of a gift of the dog.

105.

Business Case Problem with Sample Answer— Ownership and Other Interests in Real Property. Arthur and Diana Ebanks owned three properties in the Cayman Islands in joint tenancy. With respect to joint tenancies, Cayman law is the same as U.S. law. When the Ebanks divorced, the decree did not change the tenancy in which the properties were held. On the same day as the divorce filing, Arthur executed a will providing that ―any property in my name and that of another as joint tenants . . . will pass to the survivor, and I instruct my Personal Representative to make no claim thereto.‖ Four years later, Arthur died. His brother Curtis, the personal representative of his estate, asserted that Arthur‘s interest in the Cayman properties was part of the estate. Diana said that the sole interest in the properties was hers. Who do the Cayman properties belong to? Why? [Ebanks v. Ebanks, 41 Fla. L. Weekly D291, 198 So.3d 716 (2 Dist.

2016)] (See Ownership and Other Interests in Real Property.)

— For a sample answer to Problem 23–5, go to Appendix D.

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Solution Under the law of the Cayman Islands, and according to Arthur‘s will, the three disputed Cayman properties became Diana‘s sole property when Arthur died. In a joint tenancy, each of two or more persons owns an undivided interest in the property. A deceased joint tenant‘s interest passes to the surviving joint tenant or tenants. The right of a surviving joint tenant to inherit a deceased joint tenant‘s ownership interest is referred to as a right of survivorship.

In this problem, Arthur and Diana owned three properties in the Cayman Islands in a joint tenancy. (For this purpose, Cayman law is the same as U.S. law.) When the couple divorced, the decree did not change the tenancy. Later, Arthur died. His will provided that any property he held in joint tenancy ―will pass to the survivor, and I instruct my Personal Representative to make no claim thereto.‖ Despite this provision, his brother Curtis, personal representative of his estate, asserted that Arthur‘s interest in the properties were part of the estate. Diana said that the properties were entirely hers. Clearly, Diana is correct. Under the applicable principles of ownership of property by joint tenancy, as the sole surviving joint tenant, Arthur‘s interest in the properties passed to her. And under the terms of Arthur‘s will, his interest passed to her (and Curtis was ―to make no claim thereto.‖) Joint tenants can transfer their rights to the property without the consent of the other joint tenants. The new owner becomes a tenant in common, however, not a joint tenant. Or a joint tenant‘s interest can be levied against to satisfy the tenant‘s judgment creditors. In either case, the joint tenancy terminates, and the remaining owners hold the property as tenants in common.

Neither of these situations occurred in the facts of this problem, however.

In the actual case on which this problem is based, Curtis asked the Florida state court that issued the couple‘s divorce to declare that Arthur‘s interest in the Cayman properties were part of his estate. The court ruled in the estate‘s favor and ordered Diana to sell the properties or buy Arthur‘s interest in them. A state intermediate appellate court reversed the order.

106.

Eminent Domain. In Tarrytown, New York, Citibank operated a branch that included a building and a parking lot with thirty-six spaces. Tarrytown leased twenty-one of the spaces from Citibank for use as public parking. When Citibank closed the branch and decided to sell the building, the public was denied access to the parking lot. After a public hearing, the city concluded that it should exercise its power of eminent domain to acquire the twenty-one spaces to provide public parking. Is this an appropriate use of the power of eminent domain? Suppose that Citibank opposes the plan and alternative sites are available. Should Tarrytown be required to acquire those sites instead of Citibank‘s property? In any event, what is Tarrytown‘s next step?

Explain. [Citibank, N.A. v. Village of Tarrytown, 149 A.D.3d 931, 52 N.Y.S.3d 398 (2 Dept. 2017)] (See Limitations on Property Rights.)

Solution Yes. It is an appropriate use of the power of eminent domain for Tarrytown to acquire property to provide public parking. If the property owner objects, and alternate sites are available, Tarrytown is not required to acquire those sites instead. Tarrytown‘s next step is to bring a condemnation proceeding to obtain title to the property. In a second proceeding, a court will determine the fair value of the land.

The government can exercise its right of eminent domain to take land. After the government determines that a particular parcel of land is necessary for public use—property may be taken

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only for public use—a judicial condemnation proceeding is brought to obtain title to the land. In another proceeding, the court determines the land‘s fair value (generally equal to its market value).

Here, Citibank owned land that included a building and a parking lot with thirty-six parking spaces. Tarrytown leased twenty-one of the spaces for use as public parking. When Citibank decided to sell the building, the public was denied access to the parking lot. After a public hearing, Tarrytown concluded that it should exercise its power of eminent domain to acquire the twenty-one spaces to provide public parking. The determination to take, or condemn, a portion of Citibank‘s property is rationally related to the stated public purpose. That other sites may be available is not basis to stop the taking—the government has broad discretion to decide which land fulfills its purpose.

In the actual case on which this problem is based, Citibank filed a suit in a New York state court against Tarrytown, seeking a review of the determination to take Citibank‘s property. The court confirmed the determination.

107.

Bailor’s Duty to Reveal Defects. Anastasio Guerra agreed to loan his pickup truck to Gina Mandujano so that she could go grocery shopping in exchange for her making him lunch.

When Mandujano drove out of the store‘s parking lot, the truck‘s power steering failed. Her wrist was caught in the spokes of the steering wheel, and she was severely injured. Guerra knew that there was a problem with his truck‘s steering, but he thought he had fixed the problem by replenishing the steering fluid. He did not believe that the issue was dangerous and did not tell Mandujano about it. What type of bailment existed between Guerra and Mandujano? What standard of care did the bailor (Guerra) owe the bailee (Mandujano)? Was the duty breached?

Who is liable for the cost of Mandujano‘s injury? Explain. [Mandujano v. Guerra, 2018 WL 1611458 (Mich. App. 2018)] (See Personal Property.)

Solution The bailment of the truck between Guerra and Mandujano was a bailment for the mutual benefit of the parties. As the bailor, Guerra owed a duty to exercise reasonable care in advising Mandujano of the truck‘s defects. He breached this duty and is therefore liable in negligence for the cost of her injury resulting from the breach.

In this problem, Guerra agreed to loan his truck to Mandujano for her shopping in exchange for his lunch. While Mandujano was driving the truck, its power steering failed, causing her to be injured. Guerra knew that there was a problem with the steering, but he had not told Mandujano.

There are three types of ordinary bailments, distinguished by who receives a benefit from the bailment. This distinction determines the rights and liabilities of the parties, and the standard of care required of each.

Guerra might argue that the bailment of his truck to Mandujano was an arrangement for the sole benefit of the bailee. There was no promise to pay cash or even to buy gas to borrow the truck to go shopping. But Mandujano said that she would make Guerra lunch in exchange for the use of his truck. This categorizes the trade as a bailment for the mutual benefit of both parties.

In a mutual-benefit bailment, the bailee owes a duty to exercise a reasonable degree of care towards the bailed property. If the property is returned damaged, the bailee‘s failure to have exercised appropriate care can result in tort liability. This obligation is excused if the property is

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damaged through no fault of the bailee—i.e., if the bailee shows that she exercised due care. In this problem, assuming that the truck was returned damaged, Guerra might contend that Mandujano failed to drive it with appropriate care and that consequently her injury was her fault.

By showing that the truck was damaged as a consequence of the defective steering, Mandujano could refute this contention.

A bailor has the duty to provide property that is free of known defects that could cause injury to the bailee. In a mutual-benefit bailment, the bailor must reveal all of the property‘s known defects, which include defects the bailor could have discovered with reasonable diligence. A bailor who fails to give this notice can be liable in negligence to the bailee for resulting injuries. Here, Guerra did not tell Mandujano about the truck‘s defective power steering. Thus, he is likely liable in negligence for her resulting injuries.

In the actual case on which this problem is based, Mandujano filed a suit in a Michigan state court against Guerra to recover for her injury. The court denied Guerra‘s motion for summary judgment.

A state intermediate appellate court affirmed the denial because ―there is a triable issue regarding whether defendant fulfilled his duty to warn plaintiff of any known defects.‖ 108.

Transfer of Ownership. Craig and Sue Shaffer divided their real property into two lots.

They enclosed one lot with a fence and sold it to the Murdocks. The other lot was sold to the Cromwells. All of the parties orally agreed that the fence marked the property line. Over the next three decades, each lot was sold three more times. Houses were built, and the lots were landscaped, including lilac bushes planted against the fence. Later, one of the owners removed the fence, and another built a shed next to where it had been. On the lot with the shed, the Talbots erected a carport abutting the lilac bushes. The Nielsons bought the adjacent lot from the Parkers and measured it according to the legal description in the deed. They discovered that the Talbots‘ carport encroached on the Nielsons‘ property by about thirteen feet. Are the Nielsons entitled to damages for their ―loss‖ of this property from any party? Explain. [Nielson v. Talbot, 163 Idaho 480, 415 P.3d 348 (2018)] (See Transfer of Real Property Ownership.)

Solution The Nielsons might be entitled to damages from the Parkers. A sale of real estate involves a transfer of ownership, often with specific warranties. Possession and title to land are passed from person to person by means of a deed. A deed must include a legally sufficient description of the land. Different types of deeds provide different levels of protection against defects of title, such as occurs when a third person has an interest in the property.

In this problem, the Shaffers divided their property into two lots, enclosed one with a fence, and sold both. The Shaffers and their buyers orally agreed that the fence marked the property line.

Over the next three decades, through successive owners, houses were built on the lots, and landscaping was added, including lilac bushes planted against the fence. One owner removed the fence. Another built a shed next to where it had been. On the lot with the shed, the Talbots erected a carport abutting the lilac bushes. The Nielsons bought the lot with the bushes from the Parkers and measured it, following the legal description in the deed. This revealed that the Talbots‘ carport encroached on the Nielsons‘ property by about thirteen feet.

The Shaffers and their buyers intended the fence—which was later replaced by the lilac bushes, and still later by the shed and carport—to be the boundary line of the lots. All of the ensuing owners maintained this line. Under these circumstances, it would have been unreasonable for

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buyers to assume that they were purchasing part of a shed or a carport on a neighbor‘s lot. In other words, the original oral agreement about the property line came to be evidenced by landmarks on the ground, and the landmarks provided the subsequent buyers with notice of the location of the line. Thus, the Nielsons would not be entitled to damages from the Talbots for the encroachment of the carport onto the Nielsons‘ lot.

Of course, as part of each sale, a legal description was included in the deed, which the sellers and buyers believed reflected the fence or landscaping line as the property line. There was a discrepancy between the descriptions and the beliefs, however, which the Nielsons discovered when they measured their lot. This discrepancy could serve as the basis for a breach of warranty claim against the Parkers, from whom the Nielsons bought their lot.

In the actual case on which this problem is based, the Nielsons filed a suit in an Idaho state court against the Talbots and the Parkers to recover the value of the property ―lost.‖ The court issued a summary judgment in favor of the Talbots, and ordered them to prepare new and accurate legal descriptions of both lots. The Idaho Supreme Court affirmed the judgment and order, and remanded the case for a determination of the Nielsons‘ breach of warranty claim against the Parkers.

109.

The IDDR Approach and Abandoned Property. Mansoor Akhtar lived rent-free in the basement of Anila Dairkee‘s duplex in Minneapolis, Minnesota, for more than a year. When Dairkee asked Akhtar to move out, he refused. She changed the locks and advised him to remove his property from the duplex. But he did not. About a year later, while Dairkee was staying in New York, her father had the basement cleaned out. When Dairkee returned four months later, she learned that her father had disposed of Akhtar‘s property. Akhtar filed a suit in a Minnesota state court against Dairkee, alleging that she had wrongfully disposed of his property. [Akhtar v Dairkee, 2017 WL 1210140 (Minn.App. 2017)] (See Personal Property.)

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1.

Dairkee contended that Akhtar had abandoned his property. Is she correct? Explain.

Solution Yes. Anila Dairkee is correct that Mansoor Akhtar had abandoned his property. Property that has been discarded by its true owner, who has no intention of reclaiming title to it, is abandoned property. Someone who finds abandoned property acquires title to it, and this title is good against the whole world, including the original owner. An owner of property who shows no attempt to claim it can be held to have abandoned it.

In this problem, Akhtar lived in the basement of Dairkee‘s duplex. She asked him to move out, but he refused. She changed the locks on the duplex and told him to remove his property. He did not. About a year later, while she was gone, her father had the basement cleaned without her knowledge or consent. Months later, Akhtar filed a suit against Dairkee, alleging that she had wrongfully disposed of his property. She responded that he had abandoned it.

Here, Dairkee notified Akhtar to remove his property before she exercised rights of ownership over it. He did not reclaim it within a reasonable time. The property could justifiably be considered abandoned. Dairkee‘s father disposed of it, arguably on her behalf and in her best interest. Akhtar does not have a supportable claim against her.

In the actual case on which this problem is based, the court concluded that Akhtar had abandoned his property and therefore was not entitled to damages. A state intermediate appellate court affirmed this judgment.

2.

Using the Review step of the IDDR approach, consider whether Dairkee‘s handling of Akhtar‘s property was ethical.

Solution Anila Dairkee acted ethically with respect to Mansoor Akhtar‘s property. Property that has been discarded by its true owner, who has no intention of reclaiming title to it, is abandoned property. Someone who finds abandoned property acquires title to it, and this title is good against the whole world, including the original owner.

The IDDR approach begins with an Inquiry to identify the ethical dilemma, the stakeholders, and the relevant standards in a set of facts. Dairkee‘s dilemma was what to do with Akhtar‘s property. He lived in her duplex until she asked him to move out. He refused. She changed the locks and asked him to remove his property. He did not—in fact, for about a year, he also made no claim to it. The stakeholders included Dairkee, Akhtar, and potential tenants or buyers of Dairkee‘s duplex. The relevant standard might be identified as a duty to take reasonable care of the property.

In the IDDR approach, the Inquiry is followed with a Discussion of actions to address the issue, the actions‘ strengths and weaknesses, and their consequences and effects. Dairkee might have left the property locked in her duplex indefinitely. She might have removed it immediately. Or she might have disposed of it after a reasonable time that would have evidenced Akhtar‘s abandonment of it. The first action would have inconvenienced all of the stakeholders, except perhaps Akhtar who, however, appeared to have abandoned his property. To be rid of the property immediately would have ignored the possibility that Akhtar might yet soon retrieve it. This would have been in complete derogation of any

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standard of care. Disposing of the property after a reasonable time would give due consideration to the interests of all of the stakeholders.

The IDDR step after the Discussion is a Decision on the actions and a statement of its reasons.

About a year after Akhtar was locked out of the duplex, Dairkee‘s father removed Akhtar‘s property. By that time, Akhtar could reasonably be thought to have abandoned the property.

Dairkee‘s father acted without her knowledge or consent, but likely on her behalf and in her interest.

The final step of the IDDR approach is a Review of the success or failure of the actions to resolve the issue, and satisfy the stakeholders. Because Dairkee notified Akhtar to remove his property, and kept it available for his retrieval for about a year, her conduct with respect to the property was unquestionably ethical. Once the property was removed, she regained full use of her duplex, which could also be enjoyed by any other stakeholders.

Critical Thinking and Writing Assignments 1.

Adverse Possession. The Wallen family owned a cabin on Lummi Island in the state of Washington. A driveway ran from the cabin across their property to South Nugent Road. Floyd Massey bought the adjacent lot and built a cabin on it in 1985. To gain access to his property, Massey used a bulldozer to extend the driveway, without the Wallens‘ permission but also without their objection. In 2010, the Wallens sold their property to Wright Fish Company. Massey continued to use and maintain the driveway without permission or objection.

344.

345.

In 2016, Massey sold his property to Robert Drake. Drake and his employees continued to use and maintain the driveway without permission or objection, although Drake knew it was located largely on Wright‘s property. In 2018, Wright sold its lot to Robert Smersh. The next year, Smersh told Drake to stop using the driveway. Drake filed a suit against Smersh, claiming an easement by prescription (which is created by meeting the same requirements as adverse possession). (See Transfer of Real Property Ownership.)

1.

The first team will decide whether Drake‘s use of the driveway meets all of the requirements for adverse possession (easement by prescription).

Solution An easement arises by prescription when one person exercises an easement, such as a rightof-way, on another person‘s land without the landowner‘s consent, and the use is apparent and continues for the length of time required by the applicable statute of limitations. In much the same way, title to property may be obtained by adverse possession. The requirements are that the possession of the property must be actual and exclusive—sole occupancy or use, for example—the possession must be open, notorious, and visible—not secret—and the possession must be continuous and peaceable for a required period of time. In this problem, Drake‘s use of the driveway meets all of the requirements for either easement by prescription or adverse possession. Drake‘s use was open and notorious, over a uniform route, and continuous and uninterrupted for a ten-year period. And the permission of the owners was not sought when the driveway was extended, nor did they object to the extension.

2.

The second team will determine how the court should rule in this case and why. Does it matter that Drake knew that the driveway was located largely on Wright‘s (and then Smersh‘s) property? Should it matter? Why or why not?

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Solution The court should rule in favor of Drake, whose use of the driveway satisfied all of the requirements for either easement by prescription or adverse possession, as explained in the answer to the previous question.

3.

The third team will evaluate the underlying policy and fairness of adverse possession laws.

Should the law reward persons who take possession of someone else‘s land for their own use? Does it make sense to punish owners who allow someone else to use their land without complaint? Explain.

Solution As stated in the text, there are a number of public-policy reasons for the adverse possession doctrine. These include society's interest in resolving boundary disputes, determining title when title to property is in question, and ensuring that real property remains in the stream of commerce. More fundamentally, policies behind the doctrine include rewarding possessors for putting land to productive use and punishing owners who sit on their rights too long and do not take action when they see adverse possession.

4.

The fourth team will consider how the laws governing adverse possession (easement by prescription) vary from state to state. To acquire title through adverse possession, a person might be required to possess the property for five years in one state, for instance, and for twenty years in another. Are there any legitimate reasons for such regional differences?

Would it be better if all states had the same requirements? Explain your answers.

Solution The laws governing adverse possession vary from state to state—mostly by the period of time the possession must be adverse to vest title to the property in the adverse possessor.

There are legitimate reasons for such differences, not the least of which is the authority of each state to determine the requirements of adverse possession for itself. The public policy reasons for the doctrine of adverse possession (listed in the text) can also provide grounds for differences among the states. The necessity of resolving boundary disputes, determining title to property when title is in question, and ensuring that real property remains in the stream of commerce can vary in urban, suburban, and rural environments, between sparsely and heavily populated areas, over remote and developed tracts, and so on. Rewarding adverse possessors for putting land to productive use may also have a higher priority in some locations, particularly those with distant, absentee owners.

If all of the states had the same requirements, there would be a consistency and predictability to the law of adverse possession. And such circumstances could lend themselves to crossjurisdictional judicial precedents.

But there does not seem to be a good policy reason for complete uniformity in the requirements of adverse possession. Nor would there be a significant advantage to it—real property cannot generally be physically transferred between jurisdictions, unlike goods and negotiable instruments, the exchange of which benefits from the Uniform Commercial Code adopted in all, or most, of the states. And the policy reasons, stated in the previous paragraph, also provide support for different requirements.

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Solution and Answer Guide Miller, The Legal Environment Today 10e, 9780357635582; Chapter 24: Antitrust Law and Promoting Competition

Table of Contents Critical Thinking Questions in Features ............................................................................................................. 315 Adapting the Law to the Online Environment ....................................................................................... 315 Critical Thinking Questions in Cases ................................................................................................................... 316 Case 24.1 ............................................................................................................................................... 316 Case 24.2 ............................................................................................................................................... 317 Case 24.3 ............................................................................................................................................... 317 Chapter Review ........................................................................................................................................................... 319 Practice and Review .............................................................................................................................. 319 Practice and Review: Debate This ......................................................................................................... 320 Issue Spotters ........................................................................................................................................ 320 Business Scenarios and Case Problems ................................................................................................. 321 Critical Thinking and Writing Assignments ............................................................................................ 327

Critical Thinking Questions in Features Adapting the Law to the Online Environment 346.

Given that consumers seem to benefit from free or low-cost services provided by Big Tech, do you agree that these companies are ―too big‖ and need to have limits placed on them by federal antitrust regulators? Explain your answer.

Solution The arguments against taking drastic antitrust measures against companies such as Apple, Amazon, Facebook, and Google are fairly straightforward. Not only have these companies innovated at a historic pace over the past several decades, but they have also created products and services that are highly valued by consumers. Additionally, these products and services are often free or offered at dramatically lower costs than was the case previously. Therefore, Big Tech should be celebrated for developing such a successful business model rather than punished as a threat to American consumers.

The counterargument, as detailed in the feature, focuses on competition. So, when Facebook, Instagram, and WhatsApp were three distinct entities, they were forced to compete with each other, which stimulates innovation, benefitting the consumer. Also, though it is not always evident, market concentration limits consumer choice. For example, Tile is a small company that makes Bluetooth trackers that help users find lost items such as wallets, keys, or smartphones. To function, the tracker needs to be paired with an app. Like almost every app developer, Tile needs

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to sell its product through the popular Apple app store. Tile also needs to be able to pair its product with Apple‘s iPhone, which dominates the smartphone market.

Apple, however, has its own ―Find My‖ tracking app, which comes preloaded, at no cost, on Apple devices and cannot be deleted. By owning the platform—the Apple app store—and stocking it with its own products, Apple is in an enviable situation when it comes to competitors such as Tile.

In the words of one Tile executive, Apple is like a sports team that owns the ball, the field, the stadium, and the league and can change the rules whenever it pleases.

Critical Thinking Questions in Cases Case 24.1 347.

Could the defendants have successfully argued that their agreement to rig bids and allocate the market for public school bus transportation was reasonable, or that it could be justified on an economic or business basis? Explain.

Solution No, the defendants in this case could not have argued successfully that their conspiracy was reasonable, or justifiable on an economic or business basis.

The defendants‘ scheme involved deciding which company would submit the low bid for a given route. This conspiracy led to specific charges of bid rigging and market allocation. Bid rigging is a form of price fixing. Both price fixing and market allocation are per se violations of Section 1 of the Sherman Act, considered so blatantly anticompetitive as to be inherently illegal. In fact, a bidrigging scheme is sometimes thought to be more harmful than ordinary price fixing because it is easier for the participants to enforce against each other.

To convict on those charges, a jury is not required to assess whether the defendants‘ conduct is somehow reasonable, justifiable, or cost-effective. Evidence of the supposed reasonableness of the conduct is arguably not even relevant. It would thus be within a court‘s discretion to exclude any evidence that, in this case, for example, the defendants‘ activity might not have cost the municipality much money.

348.

Following the discovery of the bid-rigging scheme, Caguas held a presumably fair auction to award new school bus transportation contracts. Could the bids in the second auction provide a benchmark for the restitution amounts? Discuss.

Solution Yes, the bids in the second, presumably fair, auction could provide a basis for setting the amounts of restitution that the defendants were ordered to pay.

Of course, the amount of restitution for an offense must be based on an actual loss, not, for example, on a defendant‘s gain due to the offense. The amount must have a rational basis, but it does not have to be absolutely precise.

In this case, the ostensibly fair prices paid after the second auction is an appropriate benchmark.

Market conditions would have been similar, given the short time between the rigged and fair auctions, assuming there were no intervening events to alter the supply or demand for bus services. The routes and the numbers of students were not likely to have materially different. The

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court could reasonably presume that the two auctions were for approximately the same services in the same market.

Case 24.2 349.

A California statute provides for the waiver of fees at state university campuses for senior citizens. What distinguishes this differential treatment from the discriminatory practice at issue in the Candelore case?

Solution The situation described in the question differs from the discriminatory practice at issue in the Candelore case because the university-fee waiver, and other discounts for senior citizens (and others, in other circumstances) are independently justified by compelling social policy considerations expressed in, or at least evidenced by, legislative enactments.

Many statutes in California and elsewhere provide for differential treatment of senior adults. As in the situation of the fee waiver, some specifically provide for price discounts (such as reduced transit fares). In some instances, the limited earning capacities of seniors are cited as a justification for the price differential, but that, too, may reflect legislative limits on working conditions, hours, or opportunities for seniors.

These statutes reflect the judgment of a legislature to advance certain social policy objectives by treating seniors differently from the rest of the public. This supports the use of class-based criteria in those cases, without requiring a court to generalize about age and income in a way that runs counter to the individual nature of the rights secured to all persons by civil rights statutes.

350.

Instead of personal characteristics such as age, could a business like Tinder use economic distinctions to broaden its user base and increase profits? Discuss.

Solution Yes. A business‘s interest in maximizing profits does not justify discrimination based on such personal characteristics as age. But this does not preclude a business like Tinder from employing economic distinctions to increase its user base and profitability.

Those distinctions must be drawn in such a way that any customer could conceivably meet them, regardless of the customer‘s age or other personal characteristic. For example, Tinder could establish different membership levels for its Tinder Plus service that would allow more budget constrained customers, regardless of age, to access certain premium features at a lower price, while offering additional features to those less budget conscious users who are willing to pay more. Tinder could also offer discounts for buying several months of Tinder Plus in advance that would likewise allow budget constrained users cheaper access to its premium features, without arbitrarily discriminating against older users on the basis of age.

Case 24.3 351.

How would TransWeb‘s injury have been ―shared by all consumers in the relevant markets‖ if TransWeb had not sued until after it had been driven out of those markets by 3M‘s actions?

Solution

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If TransWeb, LLC had not proceeded with its suit until after 3M Innovative Products Co.‘s actions had excluded TransWeb from the relevant markets, TransWeb‘s injury would have been ―shared by all consumers‖ in those markets by the increased prices charged by 3M for its products. As the U.S. Court of Appeals for the Federal Circuit noted, ―TransWeb proved at trial that increased prices for fluorinated filter . . . respirators would have resulted had 3M succeeded in its suit.‖ TransWeb makes respirator filters made of nonwoven fibrous material to be worn at contaminated worksites. At an industry exposition, TransWeb‘s founder handed out samples of its filter material. 3M employees obtained the samples. At the time, 3M was experimenting with filter materials.

Later, 3M obtained patents for its filter products and filed a suit against TransWeb, claiming infringement. 3M claimed that it had not obtained the TransWeb samples until after filing for its patents. The suit was dismissed.

TransWeb filed a suit against 3M, seeking a declaratory judgment of non-infringement. A jury found that 3M obtained its patents through fraud, that its assertion of the patents against TransWeb violated antitrust law, and that TransWeb was entitled to attorney fees as damages. The court trebled TransWeb‘s $7.7 million in fees accrued in defending against 3M‘s infringement suit to $23 million. The U.S. Court of Appeals for the Federal Circuit affirmed the trebled fees award.

3M‘s unlawful act—―the bringing of suit based on a patent known to be fraudulently obtained‖— was ―aimed at reducing competition and would have done so had the suit been successful. . . .

TransWeb‘s attorney fees flow directly from this unlawful aspect of 3M‘s act. . . . The attorney fees are precisely the type of loss that the claimed violations would be likely to cause.‖ Why wasn‘t TransWeb required to wait to bring its suit until after it had been excluded from the market? Because ―the antitrust laws exist to protect competition. If we were to hold that TransWeb can seek antitrust damages only [by] forfeiture of competition, but not [by] defending the anticompetitive suit, then we would be incentivizing the former over the latter. . . . This is not in accord with the purpose of those very same antitrust laws.‖ And, of course, the injury would then have been suffered not by TransWeb alone ―but rather would be shared by all consumers in the relevant markets.‖

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352.

What does 3M‘s conduct suggest about its corporate ethics?

Solution The conduct by 3M Innovative Products Company in the TransWeb case suggests greed and deception in the firm‘s fraudulent use of the patent system and its abuse of the legal system to obtain an unfair market advantage.

TransWeb, LLC, makes respirator filters made of nonwoven fibrous material to be worn at dirty and polluted worksites. At an industry exposition, the company distributed samples of this material. 3M employees obtained some of the samples. At the time, 3M was experimenting with filter materials.

Later, 3M obtained patents for filter products and filed a suit against TransWeb, claiming infringement. 3M claimed that it did not obtain the TransWeb samples until after it applied for its patents. The suit was dismissed.

TransWeb then filed a suit against 3M, seeking a declaratory judgment of non-infringement. A jury found that the defendant obtained its patents through fraud, that its assertion of those patents against TransWeb violated antitrust law, and that the plaintiff was entitled to attorney fees as damages. The U.S. Court of Appeals for the Federal Circuit affirmed the award. ―No assertion of a patent known to be fraudulently obtained can be a proper use of legal process. No successful outcome of that litigation, regardless of how much the patentee subjectively desires it, would save that suit from being improper due to its tainted origin.‖

Chapter Review Practice and Review The Internet Corporation for Assigned Names and Numbers (ICANN) is a nonprofit entity that organizes Internet domain names. It is governed by a board of directors elected by various groups with commercial interests in the Internet. One of ICANN‘s functions is to authorize an entity to serve as a registrar for certain top-level domains (TLDs). ICANN entered into an agreement with VeriSign to provide registry services for the ―.com‖ TLD in accordance with ICANN‘s specifications. VeriSign complained that ICANN was restricting the services that VeriSign could make available as a registrar, blocking new services, imposing unnecessary conditions on those services, and setting the prices at which the services were offered. VeriSign claimed that ICANN‘s control of the registry services for domain names violated Section 1 of the Sherman Act. Using the information presented in the chapter, answer the following questions.

353.

Should ICANN‘s actions be judged under the rule of reason or be deemed a per se violation of Section 1 of the Sherman Act? Explain.

Solution Because ICANN is at a higher level of the distribution process than Verisign, it is imposing a vertical restraint. Since the vertical restraint that Verisign complains of involves restrictions on services that Verisign can offer (customer restrictions) and the setting of prices at which Verisign can sell its services (resale price maintenance agreement), ICANN‘s action should be judged under the rule of reason.

354.

Should ICANN‘s actions be viewed as a horizontal or a vertical restraint of trade? Explain.

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Solution Because ICANN and Verisign are firms at different levels in the distribution of top-level domain names, the actions that Verisign complains of are a vertical restraint. ICANN, which is Verisign‘s superior, is allegedly placing restrictions on what services Verisign can offer, and how much it can charge for its services. This amounts to a vertical restraint.

355.

Does it matter that ICANN‘s directors are chosen by groups with commercial interests in the Internet? Why or why not?

Solution Yes. If ICANN‘s leadership was chosen by those with a commercial interest in the Internet, the directors might represent commercial interests with significant market power and restrain trade in violation of the Sherman Act. 356.

If the dispute is judged under the rule of reason, what might be ICANN‘s defense for having a standardized set of registry services that must be used?

Solution ICANN‘s best defense is to assert that a standardized set of registry services is efficient and has the effect of promoting competition rather than suppressing it. Under the rule of reason, as long as an agreement is merely regulatory and does not unreasonably restrain trade, it should not be considered illegal.

Practice and Review: Debate This 357.

The Internet and the rise of e-commerce have rendered our antitrust concepts and laws obsolete.

Solution When our antitrust laws were written, the possibility of intense nationwide and even global competition was not possible. Today, in contrast, the Internet has increased competition to such a degree that few, if any, sellers of most products can maintain prices that are significantly higher than prices offered by other sellers anywhere in the country. The Internet has brought to the average consumer full information on prices, availability, and facts about most products—and at the speed of light. Also, anticompetitive behavior is readily denounced in blogs, websites, tweets, and social networking sites.

While it may be true that the Internet has increased competitive forces throughout the world, we still need old-fashioned antitrust laws and enforcement of those laws. After all, big companies have become even bigger today. When an industry is highly concentrated, the relatively few sellers can still conspire to raise prices. When companies are worldwide in ownership and scope, they must be monitored to make sure that they are not using their market power to harm consumers with lower quality and/or higher prices. More than two hundred years ago in The Wealth of Nations, Adam Smith pointed out that whenever producers or sellers get together, they inevitably conspire to raise prices.

Issue Spotters 358.

Under what circumstances would Pop‘s Market, a small store in a small, isolated town, be considered a monopolist? If Pop‘s is a monopolist, is it in violation of Section 2 of the Sherman Act? Why or why not?

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Solution Size alone does not determine whether a firm is a monopoly—size in relation to the market is what matters. A small store in a small, isolated town is a monopolist if it is the only store serving that market. Monopoly involves the power to affect prices and output. If a firm has sufficient market power to control prices and exclude competition, that firm has monopoly power.

Monopoly power in itself is not a violation of Section 2 of the Sherman Act. The offense also requires an intent to acquire or maintain that power through anticompetitive means.

359.

Maple Corporation conditions the sale of its syrup on the buyer‘s agreement to buy Maple‘s pancake mix. What factors would a court consider to decide whether this arrangement violates the Clayton Act? Solution This agreement is a tying arrangement. The legality of a tying arrangement depends the purpose of the agreement, the agreement‘s likely effect on competition in the relevant markets (the market for the tying product and the market for the tied product), and other factors. Tying arrangements for commodities are subject to Section 3 of the Clayton Act. Tying arrangements for services can be agreements in restraint of trade in violation of Section 1 of the Sherman Act.

Business Scenarios and Case Problems 360.

Sherman Act. An agreement that is blatantly and substantially anticompetitive is deemed a per se violation of Section 1 of the Sherman Act. Under what rule is an agreement analyzed if it appears to be anticompetitive but is not a per se violation? In making this analysis, what factors will a court consider? (See Section 1 of the Sherman Act.) Solution Under what is called the rule of reason, anticompetitive agreements that allegedly violate Section 1 of the Sherman Act are analyzed with the view that they may, in fact, constitute reasonable restraints on trade. When applying this rule, the court considers the purpose of the arrangement, the powers of the parties to implement the agreement to achieve that purpose, and the effect or potential effect of the agreement on competition. Another possible factor that might be considered is whether the parties could have relied on less restrictive means to achieve their purpose. If the court deems that legitimate competitive benefits outweigh the anticompetitive effects of the agreement, it will be held lawful.

361.

Tying Arrangement. John Sheridan owned a Marathon gas station franchise. He sued Marathon Petroleum Co. under Section 1 of the Sherman Act and Section 3 of the Clayton Act, charging it with illegally tying the processing of credit card sales to the gas station. As a condition of obtaining a Marathon dealership, dealers had to agree to let the franchisor process credit cards. They could not shop around to see if credit card processing could be obtained at a lower price from another source. The district court dismissed the case for failure to state a claim.

Sheridan appealed. Is there a tying arrangement? If so, does it violate the law? (See The Clayton Act.) Solution Yes. There is a tying arrangement, but it is not illegal. To violate the law, the seller of the tying product must have monopoly power. Marathon Petroleum Company has no monopoly power in the retail gasoline market, which is the tying product in this case. Marathon Petroleum Company

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has about 4 percent of the U.S. market. It tied credit-card processing to that, but it had no power in that market either.

362.

Spotlight on Digital Music—Price Fixing. Together, EMI, Sony BMG Music Entertainment, Universal Music Group Recordings, Inc., and Warner Music Group Corp. produced, licensed, and distributed 80 percent of the digital music sold in the United States. The companies formed MusicNet to sell music to online services that sold the songs to consumers. MusicNet required all of the services to sell the songs at the same price and subject to the same restrictions.

Digitization of music became cheaper, but Music- Net did not change its prices. Did MusicNet violate the antitrust laws? Explain. [Starr v. Sony BMG Music Entertainment, 592 F.3d 314 (2d Cir. 2010)] (See Section 1 of the Sherman Act.) Solution The participants in Music Net appear to have engaged in a conspiracy to fix the prices (and terms) under which their music would be sold online. This may have violated the Sherman Act. The antitrust laws, including the Sherman Act, are intended to limit restraints of trade—agreements between firms that have the effect of reducing competition in the marketplace. The underlying assumption of Section 1 of the Sherman Act is that society‘s welfare is harmed if rival firms are permitted to join in an agreement that restrains competition. Not all agreements between rivals, however, unreasonably restrain trade. Under the rule of reason, anticompetitive agreements that may violate the Sherman Act are analyzed with the view that they may, in fact, constitute reasonable restraints of trade. When applying this rule, a court considers the purpose of the arrangement, the powers of the parties, and the effect of their actions in restraining trade.

In this problem, the music companies‘ conduct appeared to be the result of an agreement to fix prices, which would violate the Sherman Act. Parallel conduct—charging all of the online services the same price to obtain the songs in MusicNet‘s catalogs, for example—is not in itself a violation of the Act, but it can be part of a strategy to restrain trade. A rule of reason analysis could determine whether this was an anticompetitive price-fixing agreement among competitors. In other words, the combination formed by the music companies and represented by MusicNet must be shown to have been unreasonable and anticompetitive for it to violate the antitrust laws.

In the actual case on which this problem is based, a coalition of consumers filed a suit against MusicNet‘s participants, alleging that the service violated the Sherman Act. The court ruled that the consumers could attempt to prove their claim.

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363.

Business Case Problem with Sample Answer— Price Discrimination. Dayton Superior Corp. sells its products in interstate commerce to several companies, including Spa Steel Products, Inc. The purchasers often compete directly with each other for customers. From 2005 to 2007, one of Spa Steel‘s customers purchased Dayton Superior‘s products from two of Spa Steel‘s competitors. According to the customer, Spa Steel‘s prices were always 10 to 15 percent higher for the same products. As a result, Spa Steel lost sales to at least that customer and perhaps others. Spa Steel wants to sue Dayton Superior for price discrimination. Which requirements for such a claim under Section 2 of the Clayton Act does Spa Steel satisfy? What additional facts will it need to prove? [Dayton Superior Corp. v. Spa Steel Products, Inc., 2012 WL 113663 (N.D.N.Y. 2012)] (See The Clayton Act.) —For a sample answer to Problem 24–4, go to Appendix E. Solution Spa Steel satisfies most of the requirements for a price discrimination claim under Section 2 of the Clayton Act. Dayton Superior is engaged in interstate commerce, and it sells goods of like grade and quality to at least three purchasers. Moreover, Spa Steel can show that, because it sells Dayton Superior‘s products at a higher price, it lost business and thus suffered an injury. To recover, however, Spa Steel will also need to prove that Dayton Superior charged Spa Steel‘s competitors a lower price for the same product. Spa Steel cannot recover if its prices were higher for reasons related to its own business, such as having a higher overhead or seeking a larger profit.

364.

Section 1 of the Sherman Act. The National Collegiate Athletic Association (NCAA) and the National Federation of State High School Associations (NFHS), in an effort to enhance player safety and reduce technology-driven home runs and other big hits, set a standard for nonwood baseball bats to ensure that aluminum and composite bats performed like wood bats. Marucci Sports, LLC, makes nonwood bats. Under the new standard, four of Marucci‘s eleven products were decertified for use in high school and collegiate games. Marucci filed suit against the NCAA and the NFHS under Section 1 of the Sherman Act. At trial, Marucci‘s evidence focused on injury to its own business. Did the NCAA and NFHS‘s standard restrain trade in violation of the Sherman Act? Explain. [Marucci Sports, LLC v. National Collegiate Athletic Association, 751 F.3d 368 (5th Cir. 2014)] (See Section 1 of the Sherman Act.) Solution No. The standard set by the National Collegiate Athletic Association (NCAA) and the National Federation of State High School Associations (NFHS) for non-wood baseball bats did not violate Section 1 of the Sherman Act. Underlying this section is the assumption that society is harmed if rival firms join in an agreement that restrains competition. Under the rule of reason, the courts analyze anticompetitive agreements that allegedly violate Section 1 of the Sherman Act to determine whether they constitute reasonable—not unreasonable—restraints on trade. The test is whether the agreement ―merely regulates and thereby promotes competition‖ or whether it ―suppresses or even destroys competition.‖ Relevant factors include the purpose of the agreement and the effect of the agreement on competition.

In this problem, the NCAA and NFHS‘s standard for non-wood bats was intended to ensure that aluminum and composite bats performed like wood bats in an effort to enhance player safety and reduce technology-driven homeruns and other big hits in high school and collegiate baseball games. Under this standard, four of the eleven bats made and sold by Marucci were decertified for use in the games. Seven of Marucci‘s products remained available for use, however. And

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Marucci‘s competitors did not drop out of the market, bat prices were not significantly changed, and bat quality was not affected.

In the actual case on which this problem is based, Marucci filed a suit in a federal district court against the NCAA and NFHS, alleging that their standard violated the Sherman Act. The court dismissed the complaint, and the U.S. Court of Appeals for the Fifth Circuit affirmed, based partly on the reasoning stated above.

365.

Mergers. St. Luke‘s Health Systems, Ltd., operated an emergency clinic in Nampa, Idaho.

Saltzer Medical Group, P.A., had thirty-four physicians practicing at its offices in Nampa. Saint Alphonsus Health System, Inc., operated the only hospital in Nampa. St. Luke‘s acquired Saltzer‘s assets and entered into a five-year professional service agreement with the Saltzer physicians. This affiliation resulted in a combined share of two-thirds of the Nampa adult primary care provider market. Together, the two entities could impose a significant increase in the prices charged patients and insurers, and correspondence between the parties indicated that they would. Saint Alphonsus filed a suit against St. Luke‘s to block the merger. Did this affiliation violate antitrust law? Explain. [Saint Alphonsus Medical Center-Nampa Inc. v. St. Luke’s Health System, Ltd., 778 F.3d 775 (9th Cir. 2015)] (See The Clayton Act.) Solution Yes. The affiliation between St. Luke‘s and Saltzer violated antitrust law. Under Section 7 of the Clayton Act, a merger violates antitrust law ―where the effect . . . may be to substantially lessen competition.‖ This can occur when a merger results in a combination‘s obtaining monopoly power in the relevant market. An important consideration is market concentration. When a small number of companies control a large share of the market, the market is concentrated.

A merger between firms that compete with each other in the same market is a horizontal merger.

If a horizontal merger creates an entity with a significant market share, it increases market concentration and may be presumed illegal. But courts also consider other factors, including whether the apparent design of the merger is to establish market power.

Here, in Nampa, Idaho, the market for adult primary care providers was highly concentrated— there are only three providers mentioned in the facts. St Luke‘s emergency clinic acquired the assets of Saltzer Medical Group and entered into a professional service agreement with its physicians. Together, through this horizontal merger, these entities gained a two-thirds share of the Nampa market. This meant that the two could impose a significant increase in the prices charged patients and insurers, and their correspondence indicated that they would. In other words, their combination increased market concentration and could therefore be presumed illegal. And because the entities‘ apparent design of the merger was to establish and use market power to increase prices, their merger violated antitrust law.

In the actual case on which this problem is based, the court found that the ―huge market share‖ of the post-merger entity ―creates a substantial risk of anticompetitive price increases‖ and ordered divestiture. The U.S. Court of Appeals for the Ninth Circuit affirmed the order, based on the reasoning stated above.

366.

Section 1 of the Sherman Act. Manitou North America, Inc., makes and distributes telehandlers (forklifts with extendable telescopic booms) to dealers throughout the United States.

Manitou agreed to make McCormick International, LLC, its exclusive dealer in the state of

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Michigan. Later, Manitou entered into an agreement with Gehi Company, which also makes and sells telehandlers. The companies agreed to allocate territories within Michigan among certain dealers for each manufacturer, limiting the dealers‘ selection of competitive products to certain models. Under this agreement, McCormick was precluded from buying or selling Gehi telehandlers. What type of trade restraint did the agreement between Manitou and Gehi represent? Is this a violation of antitrust law? If so, who was injured, and how were they injured?

Explain. [Manitou North America, Inc. v. McCormick International, LLC, 2016 WL 439354 (2016)] (See Section 1 of the Sherman Act.) Solution The agreement between Manitou North America Inc. and Gehi Co., both makers of telehandlers (a type of forklift), to allocate territories within Michigan among certain dealers for each manufacturer and to limit the dealers‘ selection of competitive products to certain models is a horizontal trade restraint. A territorial or market division such as this agreement is a violation of antirust law. As a result of the agreement, injured parties included the dealers and their customers, who were harmed by the reduced competition.

Competitors who agree to divide territories—a horizontal market division—commit a per se violation of Section 1 of the Sherman Act. To recover for the violation, a party must suffer an injury attributable to it that flows from the anticompetitive aspect of the agreement and reduces competition.

In this problem, the agreement between Manitou and Gehi provided for the division of territories among telehandler dealers at the same level of the market, thereby reducing competition. The agreement barred McCormick (and presumably other dealers) from buying and selling competitive Gehi telehandlers. This part of the agreement limited consumers‘ selection and must have had a negative impact on McCormick‘s sales and thereby its ability to survive in the market.

This is inherently anticompetitive, a per se violation of antitrust law, and constitutes an antitrust injury, resulting in damages.

In the actual case on which this problem is based, McCormick International, LLC, a Manitou dealer, complained about Manitou‘s arrangements with Gehi and other dealers. McCormick terminated its contract with Manitou, which then filed a suit in a Michigan state court against the dealer for breach. McCormick filed a counterclaim against the telehandler maker, alleging a violation of state antitrust law. (The state law and its controlling principles were based on federal antitrust law.) A jury found in favor of McCormick on both claims, and the court awarded $3.85 million in damages on the counterclaim. A state intermediate appellate court affirmed.

367.

Tying Arrangements. PRC-Desoto International, Inc., makes and distributes more than 90 percent of the aerospace sealant used in military and commercial aircraft. Packaging Systems, Inc., buys the sealant in wholesale quantities, repackages it into special injection kits, and sells the kits on the retail market to aircraft maintenance companies. PRC-Desoto bought one of the two main manufacturing companies of injection kits and announced a new policy to prohibit the repackaging of its sealant for resale. Packaging Systems was forced to buy both the sealant and the kits from PRC-Desoto. Due to the anti-repackaging constraint, the reseller could no longer meet its buyers‘ needs for pre-filled injection kits. Does this policy represent an unlawful tying arrangement? Explain. [Packaging Systems, Inc. v. PRCDesoto International, Inc., 2018 WL 735978 (C.D.Cal. 2018)] (See The Clayton Act.)

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Solution Yes. PRC-Desoto International, Inc.‘s new policy is an unlawful tying arrangement. A tying arrangement occurs when a seller conditions the sale of a product on the buyer‘s agreement to buy another product made or distributed by the seller. The legality depends on the purpose of the agreement and its likely effect on competition in the markets for the products. The injury caused by an unlawful tying arrangement is reduced competition in the market for the tied product.

In this problem, PRC-Desoto made and distributed more than 90 percent of the aerospace sealant used in aircraft. Packaging Systems bought the sealant in wholesale quantities, repackaged it into injection kits, and sold the kits on the retail market to aircraft maintenance companies. PRCDesoto bought one of the main makers of the kits and prohibited the repackaging of its sealant for resale. This forced Packaging Systems to buy both the sealant and the kits from PRC-Desoto.

Also, due to the anti-repackaging constraint, the reseller could no longer meet its buyers‘ needs for pre-filled injection kits.

Here, there is a market for wholesale sealant and a separate market for sealant sold in injection kits. PRC-Desoto had significant leverage over its customers to dictate the terms on which they must buy sealant and kits. With its anti-repackaging policy, resellers were compelled to buy the injection kits to obtain the sealant when, without the prohibition, they could have bought the products separately. PRC-Desoto effectively foreclosed competition in the market for sealant sold in injection kits.

In the actual case on which this problem is based, Packaging Systems filed a suit in a federal district court against PRC-Desoto, alleging the facts stated in the problem constituted antitrust violations. The court denied the defendant‘s motion to dismiss the claim. The allegations ―are sufficient to plead harm to competition.‖ 368.

A Question of Ethics—The IDDR Approach and Section 2 of the Sherman Act. Apple, Inc., controls which apps—such as ringtones, instant messaging, and video—can run on iPhone software. Apple‘s App Store is a website where iPhone users can find, buy, and download the apps. Apple prohibits third-party developers from selling iPhone apps through channels other than the App Store, threatening to cut off sales by any developer who violates this prohibition.

Apple also discourages iPhone owners from downloading unapproved apps, threatening to void iPhone warranties if they do. Seven iPhone app buyers filed a complaint in a federal district court against Apple. The plaintiffs alleged that the firm monopolized the market for iPhone apps. [In re Apple iPhone Antitrust Litigation, 846 F.3d 313 (9th Cir. 2017)] (See Section 2 of the Sherman Act.) 369.

Using the Decision step of the IDDR approach, provide reasons why Apple might attempt to protect iPhone software by setting narrow boundaries on the sales of related apps and aggressively enforcing them.

Solution The Decision is the third step of the IDDR approach, following an Inquiry to state the issue and a Discussion of possible actions to resolve it. The issue here is whether it is ethical for Apple to protect iPhone software? The stakeholders include Apple‘s owners, officers, and employees, and the vendors and buyers of iPhones, as well as the designers and distributors of the apps, and those who would create other products for use in all types of markets.

Options to resolve this issue in the interests of all of these stakeholders include Apple‘s choice

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to protect its software by setting narrow boundaries on the sales of related apps and aggressively enforcing those limits. This choice is the focus of the IDDR approach‘s Decision step.

Apple is protecting its technology and intellectual property from theft. Companies that do not set boundaries and protect their property can easily have it copied by competitors, who can use it to gain an unfair advantage. Apple believes that the threat to its products is genuine.

Restricting the sales of iPhone apps is a legitimate step grounded on this honest belief. In fact, Apple also uses other methods to accomplish this goal—suits against makers of competitive products charging patent infringement, for example.

The final step of the IDDR approach is a Review of the success or failure of the action to resolve the issue and satisfy the stakeholders. In this case, were Apple to freely allow the copying or theft of its intellectual property, the company would be robbed of its success in the marketplace, with a consequent loss of market share, revenue, and profits. This result would ultimately satisfy none of the stakeholders.

370.

Explain why Apple‘s actions in this case might be considered unethical.

Solution Arguably, it is not ethical for Apple to protect iPhone software by setting narrow boundaries on the sales of related apps and enforcing them. Apple is being too aggressive. The company is not simply protecting its technology and intellectual property from theft. It is profiting from the efforts of competitors, whom it is casting in a bad light by imposing restrictions on their sales. Presumably, Apple‘s goal is to be the monopolist of its market. In addition, Apple‘s tight hold over its products and secrets could inhibit innovation and thereby eliminate any gain in market share against more open, collaborative competitors.

In the actual case on which this problem is based, the iPhone app buyers filed their complaint under the Clayton Act, which allows a private party to sue based on an alleged violation of any of the antitrust laws except the Federal Trade Commission Act. The complaint alleged violations of the Sherman Act. The court dismissed the complaint on the ground that the plaintiffs lacked standing. The U.S. Court of Appeals for the Ninth Circuit reversed and remanded the case. The appellate court held that the plaintiffs were direct purchasers of the apps from Apple, and therefore had standing to sue.

Critical Thinking and Writing Assignments 371.

Business Law Writing. Write two paragraphs explaining some ways in which antitrust laws might place too great a burden on commerce in the global marketplace. (See Section 2 of the Sherman Act.) Solution In the global marketplace, antitrust laws could arguably inhibit the combination of business firms that might otherwise be able to cooperate to do business in economically efficient ways.

Ultimately, this restriction would make doing business more expensive, which would of course be more expensive to commerce in general than necessary, by shouldering business firms with the

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burden of engaging in transactions in roundabout, needlessly complicated ways. The result would be higher prices in the markets in which consumers shop.

372.

Time-Limited Group Assignment—Antitrust Violations. Residents of the city of Madison, Wisconsin, became concerned about overconsumption of liquor near the campus of the University of Wisconsin (UW). The city took action by imposing conditions on area bars to discourage reduced-price ―specials‖ that were believed to encourage high-volume and dangerous drinking. Later, the city began to draft an ordinance to ban all drink specials. Bar owners responded by announcing that they had ―voluntarily‖ agreed to discontinue drink specials on Friday and Saturday nights after 8:00 p.m. The city put its ordinance on hold. Several UW students filed a lawsuit against the local bar owners‘ association alleging violations of antitrust law. (See Section 1 of the Sherman Act.) 373.

The first group will identify the grounds on which the plaintiffs might base their claim for relief and formulate an argument on behalf of the plaintiffs.

Solution The plaintiffs could base a claim for damages and an injunction on an allegation that the taverns, in agreeing to eliminate drink specials on Friday and Saturday nights after 8:00 p.m., violated antitrust prohibitions against ―conspiracies in restraint of trade.‖ 374.

The second group will determine whether the defendants are exempt from the antitrust laws.

Solution The defendants might contend that they could not be held liable for anticompetitive conduct because their agreement was in direct response to the city's exercise of its legitimate regulatory authority over tavern operations. In other words, they could argue that they acted in response to a clearly articulated policy that was actively supervised by the state (through the city).

375.

The third group will decide how the court should rule in this dispute and provide reasons for its answer.

Solution The court should issue a judgment in the defendants‘ favor. Anticompetitive actions or agreements voluntarily undertaken by private entities can qualify for antitrust immunity if the private conduct is prompted or motivated by governmental regulatory authority and intent.

Where the authority is a municipality, as in this problem, there is little or no danger that it is involved in a private price-fixing arrangement. Private parties who are regulated by a municipality are entitled to immunity as long as the effective decision maker is the municipality and not the private parties. Here, the city of Madison was the effective decision maker with respect to the bar owners‘ agreement to forego drink specials on Fridays and Saturdays after 8:00 p.m. The owners‘ private conduct was pursued under the city's supervision, and the conduct thus qualifies for exemption from the antitrust laws.

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