The Legal Environment of Business, Global Edition, 7E Nancy K. Kubasek Instructor Manual

Type:

Instructor Manual

Resource:

The Legal Environment of Business

Edition:

7th Edition

Author(s):

Nancy K. Kubasek Bartley A. Brennan M. Neil Browne

The Legal Environment of Business: A Critical Thinking Approach

Chapter 1 Fundamentals of Critical Thinking and Reasoning Introduction Chapter One is the most important chapter in the text. This chapter is important because it presents the framework for studying the legal environment of business that not only increases students’ understanding of significant legal ideas, but also promotes critical thinking. This chapter addresses these questions: • • • • •

Why is critical thinking important?

What is the critical thinking model the text asks instructors to apply throughout the book?

What are the various steps involved in the critical thinking process?

How does critical thinking invigorate legal reasoning?

How should the critical thinking approach be used while dealing with cases?

Achieving Teaching Excellence Understanding the Importance of Evaluation Kubasek, Brennan & Browne begin their book by defining critical thinking. They tell instructors that critical thinking means the ability to recognize the structure of an argument and apply a set of evaluative criteria to assess the merits of the argument. This section of the Instructor’s Manual explains how critical thinking relates to Bloom’s Taxonomy of Educational Objectives. This explanation will emphasize the skill of evaluation.

Bloom developed a hierarchy of six cognitive operations. The operation at the higher level subsumes all those levels below. Here is a presentation of Bloom’s Taxonomy, from the lowest level to the highest level: • Knowledge: This is the lowest level of learning and is a prerequisite for all operations to follow. This level relies primarily on the intellectual processes of recall and memory.

• Comprehension: The learner must go beyond knowledge and show understanding. Students can paraphrase or explain something they have heard or read.

• Application: The learner can apply what he or she has comprehended. Students can use information or principles in a specific situation.

• Analysis: The learner can break down into parts the knowledge applied and comprehended.

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The Legal Environment of Business: A Critical Thinking Approach

•

•

Students can show the ability to take apart information to discover the underlying structure and hidden meanings and assumptions.

Synthesis: The learner must be able to creatively combine knowledge analyzed from several domains. Students can reassemble component parts into a new structure not previously apparent.

Evaluation: This is the highest level. The learner must be able to critically appraise the knowledge she has analyzed and synthesized. Students can make critical judgments.

The first three levels are often called lower-order thinking skills. Here are some questions that would encourage students to develop lower-order thinking skills. The questions are related to United States of America v. Martha Stewart and Peter Bacanovic [hereinafter Martha Stewart], the case Chapter One studies.

1.

2.

3.

Was the Martha Stewart case a state or a federal case? [Knowledge] What did the court decide in Martha Stewart? [Comprehension] Given the court’s decision in the Martha Stewart case, what would happen if a witness’s perjured testimony had been a key factor in the conviction of a defendant? [Application]

The last three levels are often called higher-order thinking skills. Here are some questions that encourage students to develop higher-order thinking skills.

1.

2.

3.

Explain why the court discounted Lawrence F. Stewart’s [hereinafter Lawrence] testimony.

[Analysis] Explain how Lawrence’s testimony about the “$60” notation relates to the broader case against the defendants. [Synthesis] Point out inadequacies in the court’s reasoning in the Martha Stewart case. [Evaluation]

How does the critical thinking model Kubasek, Brennan & Browne present in Chapter One relate to Bloom’s taxonomy? Let’s look at the two: Steps 1 through 4 of the critical thinking model correspond to the skills of knowledge, comprehension, application, analysis, and synthesis. Steps 5 through 8 correspond to the highest thinking skill—Evaluation. That means that when instructors ask students to evaluate legal arguments, they are pursuing the highest thinking skill. Critical thinking asks students to evaluate. If students can engage in critical thinking and succeed, they have shown that they have mastered all the skill levels below evaluation in the hierarchy—knowledge, comprehension, application, analysis, and synthesis. Working with students on the highest level of thinking is rewarding. Teaching using a critical thinking approach is also helpful to our students.

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The Legal Environment of Business: A Critical Thinking Approach

The Critical Thinking Model

Bloom’s Taxonomy

The first four help us understand how the court’s argument fits together.

The first three are lower-order thinking skills.

1.

2.

3.

4.

What are the facts?

What is the issue What are the reasons and conclusion?

What are the relevant rules of law?

The last four steps help us evaluate legal arguments.

5.

6.

7.

8.

1.

2.

3.

Knowledge Comprehension Application

The second three are higher-order thinking skills.

4.

5.

Analysis Synthesis

6.

Evaluation

Does the legal argument contain significant ambiguity?

What ethical norms are fundamental to the Court’s reasoning?

How appropriate are the legal analogies?

Is there relevant missing information?

References • • •

Thomas R. McDaniel, “Designing Essay Questions for Different Levels of Learning,” 27 IMPROVING COLLEGE AND UNIVERSITY TEACHING 120 (Summer 1979).

Robert J. Kloss, “Toward Asking the Right Questions,” 61 THE CLEARING HOUSE 245 (1988).

Benjamin S. Bloom, ed., TAXONOMY OF EDUCATIONAL OBJECTIVES (1956).

Chapter Overview, Case Summary and Topic Outline Chapter Overview This chapter begins by defining critical thinking, then explains the critical thinking model used throughout the book. The final section of the chapter parallels the second section, but presents the material in more depth. To prepare well, instructors should make sure to read this last section of the chapter more than once. Encourage students to read it several times. Understanding this material will help instructors use the textbook.

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The Legal Environment of Business: A Critical Thinking Approach

It will be worth the time to study Chapter One more than instructors might have originally planned. Instructors might want to choose an additional case and work on the case in class the way the text authors worked with the critical thinking model using the Cook case.

Topic Outline I. The Importance of Critical Thinking II. A Critical Thinking Model United States of America v. Martha Stewart and Peter Bacanovic III. The Critical Thinking Model: A Quick Reference A. Facts B. Issue C. Reasons and Conclusion D. Rules of Law E. Ambiguity F. Ethical Norms G. Analogies H. Missing Information III. Using Critical Thinking to Make Legal Reasoning Come Alive A. Legal Reasoning IV. Applying the Critical Thinking Approach Summary To extend the critical thinking model to essays, instructors would ask: • What Is the Issue?

• What Are the Reasons and Conclusion?

• Does the Argument Contain Significant Ambiguity?

• What Ethical Norms Are Fundamental to the Author’s Reasoning?

• How Appropriate Are the Analogies? (This step will not always be relevant.)

• Is There Relevant Missing Information?

Remember: An instructor’s goal will be to first understand an argument, then decide whether it can accept the author’s conclusion given the evidence and reasoning the author provides.

Case Summary—United States of America v. Martha Stewart and Peter Bacanovic In this case Martha Stewart and Peter Bacanovic were convicted of conspiracy, making false statements, and obstruction of an agency proceeding after they sold over 3,928 shares of ImClone stock on December 27, 2001. Stewart sold all her stock before Bacanovic, who was Stewart informed Copyright © 2015 Pearson Education Ltd.

The Legal Environment of Business: A Critical Thinking Approach

her that Samuel Waksal had attempted to sell his stocks when the news that the FDA had not approved their drug, Erbitux. Following this an investigation was conducted by the United States Attorney’s Office for the Southern District of New York and the Securities and Exchanges Commission. The court found in favor of the United States of America based on the facts presented in this case.

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The Legal Environment of Business: A Critical Thinking Approach

Chapter 2 What is the Legal Environment of Business?

Introduction To promote an environment in which instructors and the students have a question-asking attitude, instructors should present each chapter as one that address several questions.

Chapter Two addresses these questions: • • • • •

How can legal environment of business be defined?

How can law and jurisprudence be defined? Do alternative definitions of law exist?

Where does law come from?

What are the classifications of law?

What are the global dimensions of the legal environment of business?

Chapter Two is significant because it provides background information that influences the way students think about cases and legal ideas. When instructors teach this chapter, they should emphasize on the significance of considering alternative perspectives.

Achieving Teaching Excellence Creating a Student-Centered Classroom That Promotes Students’ Intellectual Development Instructors can probably choose this textbook over others in part because they wanted to encourage their students to engage in critical thinking about the law. This goal is important. To achieve this goal, instructors will want students and their intellectual development to be the focus of what happens in class.

First, this section explains alternative perspectives on how to conduct class. Second, this section will explain why a specific type of student-centered classroom is likely to help instructors achieve their goal of encouraging their students to engage in critical thinking.

In The University Teacher as Artist, Joseph Axelrod describes different teaching styles.

Axelrod classifies these teaching styles. One major category includes didactic styles. Didactic teaching styles do not encourage inquiry by the student. The other category includes evocative styles. These styles require student inquiry when completing the tasks the instructor has assigned.

Axelrod explains that didactic teaching styles stress either knowledge acquired by Copyright © 2015 Pearson Education Ltd.

The Legal Environment of Business: A Critical Thinking Approach

memorization, or skill mastery through repetition and practice. Evocative modes stress student inquiry and discovery. A teaching style that encourages critical thinking is an evocative style.

Within the category of evocative styles, different teaching styles emphasize different components. Some styles focus on the teacher, some on the learner, and some on the subject matter. A teaching style that stresses critical thinking is an evocative style that focuses on the learner and his or her understanding of course material. Axelrod would call this style a studentcentered style rather than an instructor-centered style. A critical thinking approach assumes the teacher will create a classroom environment in which the students’ intellectual development is the focus of classroom attention. A teacher who uses this approach would be likely to say what a professor in Axelrod’s book says, “I train minds.” Promoting critical thinking is one way to train students’ minds.

Now the question arises as to how instructors will know whether they have created a studentcentered classroom that emphasizes intellectual development. First, they will be talking less and listening to their students more. Second, they will be emphasizing on higher-order thinking skills rather than asking their students to recite principles and facts. Third, instructors will be observing how students are doing at grasping the critical thinking model. They should not be watching instructors to see what a good critical thinker they are. Fourth, class time will be spent working with the material, rather than making sure they have “covered” everything.

Reference: •

Joseph Axelrod, The University Teacher as Artist (Jossey-Bass, Inc., Publishers 1973).

Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview This book is about the legal environment in which the business community operates today.

Although the book concentrates on law and the legal variables that help shape business decisions, it has not overlooked the ethical, political, and economic questions that often arise in business decision making. This chapter is especially concerned with legal variables in the context of critical thinking. In addition, it examines the international dimensions of several areas of law.

Instructors who want to encourage students to work with the material in class sometimes realize they cannot always “cover” all the material in the book. After several years of not covering everything, instructors should be comfortable knowing that the material encourages students to work on in class and is understood by most of them. Instructors can choose parts of each chapter that are especially challenging or confusing. This is the material that deserves the most attention in class. Some chapter material is easy, and students pick it up well on their own.

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The Legal Environment of Business: A Critical Thinking Approach

In Chapter Two, the material that is the most challenging or confusing falls into these subsections: • Definition of Law and Jurisprudence • Classifications of Law After presenting a topic outline for Chapter Two, this section provides discussion questions that help students increase their understanding of the material presented in the two sections listed above.

Topic Outline I. Definition of the Legal Environment of Business II. Definition of Law and Jurisprudence A. Natural Law School B. Positivist School C. Sociological School D. American Realist School E. Critical Legal Studies School F. Feminist School G. Law and Economics School III. Sources of Law A. The Legislature as a Source of Statutory Law B. The Judicial Branch as a Source of Case Law Case Law Precedents and the Internet C. The Executive Branch as a Source of Law Treaty Making Executive Orders D. Administrative Agencies as a Source of Law IV. Classifications of Law A. Criminal Law and Civil Law B. Public and Private Law C. Substantive and Procedural Law Substantive Law Procedural Law D. Cyberlaw V. Global Dimensions of the Legal Environment of Business VI. Summary Discussion Questions for Chapter Two

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The Legal Environment of Business: A Critical Thinking Approach

1.

In answering the question “What is Law?” why is it appropriate to answer, “It depends?”

The question “What is Law?” is not as straightforward as it appears. Most people would give an answer that shows their understanding and acceptance of the positivist school of jurisprudence. However, a person’s answer to the question “What is Law?” depends on which school of jurisprudence the person prefers. For instance, a positivist thinker might say that law is a set of rules created by the legislature that people must follow or they will be punished or fined. A critical legal studies scholar might say law is an institution that protects those in power. Students should notice the difference in those two answers. Given the wide range of beliefs about the definition of law, it is wise to say the answer to the question depends on the school of jurisprudence a person prefers.

2.

How would an individual decide which school of jurisprudence a particular judge prefers?

This question triggers many reminders. First, a judge, legal scholar, or thinker might agree with more than one school of jurisprudence, or with some elements of more than one school of jurisprudence. For instance, feminist legal scholars and critical legal scholars share some beliefs. It could be possible to agree with both of those theories to some extent. Second, judges, legal scholars, and thinkers rarely announce their preferred school of jurisprudence.

(Some might even be confused about the schools of jurisprudence.) To figure out the view a judge prefers, an individual would need to read their legal decisions and scholarly writings carefully. An individual can infer their views from their writings or what they say in public about a particular decision.

3.

Which schools of jurisprudence probably have the fewest followers within the legal community?

Probably, critical legal studies and feminist views of jurisprudence have the fewest followers. Both evaluate the legal system in a structural way; they question the very structure of law as a societal institution. Most followers of these schools are legal scholars rather than judges or practicing attorneys. People engaged in the daily practice of law might want some kind of incremental legal reform, but they are unlikely to question law in a structural way or advocate major changes.

4.

Create a fact situation that could end as both a civil and a criminal lawsuit.

Instructors should encourage students to be creative with this one. For instance, a bank robber was injured while committing a bank robbery. After collecting the money, it exploded in his pockets because a device attached to the money was poorly designed. The robber would be prosecuted for the crime of bank robbery, and could sue the manufacturer of the exploding device under civil law. (This was a real case. The robber sued the manufacturer Copyright © 2015 Pearson Education Ltd.

The Legal Environment of Business: A Critical Thinking Approach

from jail, and lost.) A more realistic and common example would be one in which someone engaged in driving while under the influence of alcohol, caused a car accident, and injured someone. The driver would be prosecuted under criminal law, and the injured parties could sue the driver civilly.

5.

Explain how a court’s decision (case law) might lead to changes in legislation (statutory law). Are there any situations in which this has happened?

A legislature (either state or federal) might be so concerned about a judge’s decision that it will pass a law that in effect reverses the judge’s decision. One example is the Civil Rights Act of 1991, which changed several decisions the U.S. Supreme Court had rendered.

Congress was changing the Supreme Court’s decisions by changing statutory law.

Answers to Critical Thinking about the Law Questions, Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law Questions 1.

Learning about relevant laws regarding business helps one understand what the law is, but does not help one evaluate legal arguments. The critical thinking questions that help one evaluate legal arguments are: • Does the legal argument contain significant ambiguity?

• What ethical norms are fundamental to the Court’s reasoning?

• How appropriate are the legal analogies?

• Is there relevant missing information?

The question about ethical norms most clearly addresses the ethical component of the legal environment of business. Knowing the ethical norms that are fundamental to a court’s reasoning helps one decide whether to accept or reject the court’s conclusion.

2.

Knowing the school of thought the judge prefers helps one critically evaluate a judge’s reasoning because one can determine the assumptions the judge makes. For instance, if one knows the judge prefers the critical legal studies view of jurisprudence, one knows the judge would favor structural change in the legal system—he or she does not have to tell them. One would also know the judge is likely to prefer a definition of justice defined as to treat all humans identically, regardless of class, race, gender, age, and so on. The critical legal studies movement strives to point out how the legal system perpetuates inequality.

3.

One might want to ask the lawyer whether their mutual respect for a particular school of jurisprudence will bring about the action they want. For instance, mutual respect for natural law might yield interesting discussions between people and their attorney, but it will do little to help them pursue the landlord. One would also want to ask the lawyer basic questions Copyright © 2015 Pearson Education Ltd.

The Legal Environment of Business: A Critical Thinking Approach

about competence, the lawyer’s area of expertise, whether the lawyer has time to take on a case of this nature, and the lawyer’s fee.

Answers to Review Questions 2-1.

The source of law is different in the sociological school’s definition of law and that of the feminist school. The source of law for the sociological school of law is contemporary community opinion and customs. In contrast the feminist school is based on jurisprudence that reflects a male-dominated executive, legislative, and judicial system in which women’s perspectives are ignored and women are victimized.

2-2.

The main criticism of them is that the critical legal theorists have not developed concrete strategies to bring about the social and political changes they desire. Essentially, they have constructed only a negative position.

2-3.

The legislative branch (Article I) is the maker or creator of laws and for this reason it is a source of law. In addition to that statutory laws are made by the legislative branch.

2-4.

Statutory law is made by legislatures. Case law is made by judges.

2-5. Steps in the Legislative Process Step 1: A bill is introduced into the U.S. House of Representatives or Senate by a single member or by several members. It is generally referred to the committee of the House or Senate that has jurisdiction over the subject matter of the bill. (In most cases, a bill is simultaneously introduced into the Senate and House. Within each body, committees may vie with each other for jurisdictional priority.)

Step 2: Let’s briefly follow through the House of Representatives a bill proposing to deregulate the trucking industry by doing away with the rate-making power of the Interstate Commerce Commission (ICC). This bill would be referred to the House Committee on Energy and Commerce, which, in turn, would refer it to the appropriate subcommittee.

Step 3: The House subcommittee holds hearings on the bill, listening to testimony from all concerned parties and establishing a hearing record.

Step 4: After hearings, the bill is “marked up” (drafted in precise form) and then referred to the subcommittee for a vote.

Step 5: If the vote is affirmative, the subcommittee forwards the bill to the full House Energy and Commerce committee, which either accepts the subcommittee’s recommendation, puts a hold on the bill, or rejects it. If the House committee votes to accept the bill, it reports the Copyright © 2015 Pearson Education Ltd.

The Legal Environment of Business: A Critical Thinking Approach

bill to the full House of Representatives for a vote by all members.

Step 6: If the bill is passed by the House of Representatives and a similar bill is passed by the Senate, the bills go to a Senate–House Conference Committee to reconcile any differences in content.

After compromise and reconciliation of the two bills, a single bill is reported to the full House and Senate for a vote.

Step 7: If there is a final affirmative vote by both houses of Congress, the bill is forwarded to the president, who may sign it into law or veto it. When the president signs the bill into law, it becomes known as a statute, meaning it is written down and codified in the United States Code. In the event of a presidential veto, a two-thirds vote of the Senate and House membership is required to override the veto. If the president takes no action within 10 days of receiving the bill from Congress, the bill automatically becomes law without the president’s signature.

2-6.

a.

Public law is a classification of law that deals with the relationship of government to individual citizens. Private law is generally concerned with the enforcement of private duties. b.

In criminal law, a prosecutor aims to prove beyond a reasonable doubt that the defendant committed a crime and should be punished. In civil law, a private individual or business tries to show by the preponderance of the evidence that another private individual or business is liable and should have to compensate the plaintiff. c.

Felonies are punishable by incarceration in a state penitentiary. Misdemeanors are usually punishable by shorter periods of imprisonment in a county or city jail.

Answers to Review Problems 2-7.

Justice A belongs to the positivist school of jurisprudence. One knows that because this justice is unwilling to look beyond statutes and case precedents in interpreting the law.

2-8.

Justice B is a natural law thinker. One knows that because this justice is willing to ignore man-made law and rule based upon something higher—the laws of nature.

2-9.

Justice C is a sociological thinker. This justice bases her decision on contemporary community customs or thought.

2-10. A judge who follows the natural law school of thought would hear out the case and based on the evidence presented would make his or her decision. These value judgments would remain unchanged as there is an absolute source of law. Therefore, the decision made in this case would be dependent on the merits of the case.

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The Legal Environment of Business: A Critical Thinking Approach

2-11. Precedent refers to case law courts follow. Judges interpret legislation on a case-by-case basis. These cases establish a line of authoritative cases on a particular subject that must be followed by lower courts. Here, the precedent tells Marshall his legal rights. The attorney can predict that Marshall will win a lawsuit to collect the reasonable value of his work.

2-12. No, the California court does not have to follow decisions from North Dakota and Ohio.

The California appellate court must listen to higher courts in California, but not higher courts in other states. The California court might consider the North Dakota and Ohio case law, but it is not required to do so.

Answers to Case Problems 2-13. Students should note that ethical issues such as the one raised in this case do not get resolved necessarily by exploring the legal issue that brought the case before the court in the first place. Rather than focusing on whether the practices of Myspace qualify as copyright infringement, the court concentrated on whether Myspace’s counsel should be disqualified because of its past association with Universal Music Group. The court ruled that Myspace’s counsel should not be disqualified as long as it met several conditions. In this case, the court focused on which should hold more weight, the current client of the law firm, Myspace’s, right to counsel of its choice or the former client, Universal Music Group’s, right to maintain its confidentiality. Using a sociological approach, the court used California Rules of Professional Conduct Rule 3-310 and decided it was most important to preserve the public’s trust in the integrity of California attorneys and the bar.

The goal of this court was to uphold community customs and assume that the law firm would act ethically. If another school of thought had been used, such as the natural or positivist approach, the verdict may have been different. A judge using natural philosophy might focus on how it is unreasonable or unnatural for a law firm to represent opposing clients, whereas a judge using positivist philosophy might concentrate solely on the words within the law and not on its affects on the public.

2-14. Yes, Vermont’s marriage license law violates same-sex couples’ rights under the Vermont Constitution. The court ruled that the State had failed to provide a reasonable and just basis for excluding same-sex couples from benefits incident to Vermont’s civil marriage license. The court indicated that a parallel “domestic partnership” system would meet Vermont’s constitutional guarantee of “the common benefit, protection, and security of the law.”

2-15. No. The court ruled that Margaret was allowed to sue her husband for damages in the case. In making this ruling, the court overruled the judicially created doctrine that Copyright © 2015 Pearson Education Ltd.

The Legal Environment of Business: A Critical Thinking Approach

prevented one spouse from suing another. The court did so as an act of fairness. They did not want the family to suffer the financial consequences of the accident simply because of the husband’s negligence.

2-16. The Supreme Court ruled in favor of the individual workers. Now, employees have the burden of proof and can therefore argue that there is no “reasonable” factor than age involved in their termination.

2-17. A & M Records won. The works at issue in the case were copyrighted, the plaintiffs would be likely to prove vicarious infringement, and the “safe harbor” provision of the Digital Millennium Copyright Act protects A & M. 2-18. The court ruled that Roommate.com was immune from the Fair Housing Act charges, because of Section 230 of the Communications Decency Act. Section 230 states that “interactive computer services” acting as “service providers” are not responsible for information that has been provided by another “information content provider.” In this case, Roommate.com was seen as both a service provider and an information content provider, but the court emphasized that in close cases, the ruling should be in favor of Section 230 immunity. The court could have focused on Roommate.com being a service provider or an information content provider and based on its interpretation, the verdict would differ. In this case, the court focused on Roommate.com as a service provider and used a broad interpretation of Section 230 immunity. Not all judges would view such a ruling as prudent.

Thinking Critically about Relevant Legal Issues 1.

The issue here is framed in a very optimistic, naturalistic way. In an essay, one would focus on the benefits of this type of thinking and the best way to ensure complete objectivity. The conclusion would contain an account of how many problems and squabbles over objectivity would cease if the naturalistic approach was taken.

2.

The author here seems to value justice, defined as moral absolutes that make clear what is good. The author may also value tradition, as what the author assumes is that what is “good” is what is conventionally right.

3.

Good here means what is conventionally right. Evil means what is wrong. Both of these terms are ambiguous and take away from the argument. Again, the author assumes that all people are thinking the same way and live in the same environment.

4.

Students would probably make a more realistic argument, citing differences in areas across the country in culture, religion, and so on. Sometimes absolute, conventional good is not Copyright © 2015 Pearson Education Ltd.

The Legal Environment of Business: A Critical Thinking Approach

synonymous with right.

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The Legal Environment Of Business: A Critical Thinking Approach

Chapter 3 Legal Frameworks in the U.S. Introduction Chapter Three addresses these questions: • • • • • •

How do people know whether a particular court has jurisdiction over a case, or the power to hear the case?

How do people know which trial court will hear the case?

Who are the major actors in the legal system, what do they do, and how does each actor relate to the business community?

What does it mean to say people have an adversary system in the United States?

What are the steps in the civil litigation process? What role do businesspeople play in this process?

What global considerations are relevant when the structure of the American legal system is considered?

Chapter Three is important because it explains basic principles about the American legal system that students will refer to throughout the course. For instance, it is important for them to understand the nature of an adversary process. If they understand the principles that underlie the adversary system, they will understand why lawyers argue zealously for their clients. This chapter also provides important practical information, such as the steps in civil litigation. Business managers need to recognize these so they will know what is happening when they become involved in litigation.

Achieving Teaching Excellence Recitation and Discussion Most instructors who encourage students to talk in class believe they are promoting class discussion. An article by J.D. Dillon is a reminder that it is difficult to engage in class discussion, and that many instructors are not promoting discussion. Instead, they might be encouraging recitation. This section explains the difference, and shows how instructors know whether they are promoting discussion. This distinction is important because it relates to higher-and lower-order thinking skills.

Dillon explains that recitation means that students “recite” what they know or are coming to know through questioning. Instructors review, drill, and quiz. Dillon writes that discussion means that teachers and students “discuss” what they don’t know. He writes that discussion “involves longer exchanges, exchanges among students and also between teacher and student, and questions Copyright © 2015 Pearson Education Ltd.

The Legal Environment Of Business: A Critical Thinking Approach

soliciting students’ thoughts, not just the right answers.”

Dillon’s distinction between recitation and discussion relates to Bloom’s Taxonomy and critical thinking. If instructors encourage recitation, they are encouraging lower-order thinking skills. When instructors ask, “Did the court rule for or against the plaintiff in the Napster case?” they are asking students to recite, not discuss. Instructors are encouraging students to work on their lower-order thinking skills. When instructors engage in longer exchanges with students to work on what they do not know, they are engaging in discussion. If instructors ask, “Nancy, do you agree with Bart’s evaluation of the court’s use of an analogy in the Harris case?” they are engaging in discussion that asks for evaluation. Instructors are working on higher-order thinking skills (including evaluation), which is the primary purpose of critical thinking.

Think about what instructors do in their own classes and see whether they are discussing material with their students. How will instructors know? Dillon writes that when an instructor engages in discussion, the teacher plans, but students account for 40 percent of the talk. That’s a good place to start. Figure out how much talking instructors are doing compared to the students.

Next, instructors need to look at the kinds of questions they are asking in class.

If instructors would like to read Dillon’s article in full, the cite is J.T. Dillon, “Research on Questioning and Discussion”, 42 EDUCATIONAL LEADERSHIP 50 (November, 1984).

Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview All people are subject to both state and federal laws. Under the United States’ dual court system, all lawsuits must be brought in either the federal or the state court system. In some cases, an action may be brought in either. Thus, it is important that those in the business community understand how the decisions are made as to which court system can resolve their grievances. This chapter first considers the principles that determine which court system has the power to hear various types of cases and then examines in greater detail the structure of the two basic divisions of our dual court system. Next, it focuses on the primary actors who play major roles in our litigation process. Finally, it examines the philosophy behind our American legal system and traces the procedures that must be followed when using one of our courts.

This chapter is a break in terms of its length and level of difficulty compared to Chapters Three and Four. It is a good chapter to work on right before a test because most students comprehend most of the material in Chapter Three, so they can spend extra time going back and reviewing some more difficult ideas in Chapters Three and Four.

Students find the material on the adversary system especially interesting. They also seem Copyright © 2015 Pearson Education Ltd.

The Legal Environment Of Business: A Critical Thinking Approach

interested in learning more about how juries work, and how lawyers fulfill their obligations in the legal system. After presenting the topic outline, the discussion questions give students a chance to work with some more difficult ideas presented throughout the chapter.

Topic Outline I. Jurisdiction A. Original vs. Appellate Jurisdiction B. Jurisdiction over Persons and Property World-Wide Volkswagen Corp. v. Woodson In Rem Jurisdiction C. Subject Matter Jurisdiction State Jurisdiction Exclusive Federal Jurisdiction Concurrent Federal Jurisdiction Hertz Corporation v. Friend II. Venue III. The Structure of the Court System A. The Federal Court System Federal Trial Courts Intermediate Courts of Appeal Court of Last Resort B. State Court Systems State Trial Courts Intermediate Courts of Appeal Courts of Last Resort IV. The Actors in the Legal System and Their Relationship to the Business Community A. The Attorney Attorney–Client Privilege Additional Functions of the Attorney The Judge The Power of Judicial Review B. The Jury Petit Juries Grand Juries V. The Adversary Process A. Criticisms of the Adversary System VI. Steps in Civil Litigation and the Role of Businesspersons A. The Pretrial Stage Informal negotiations Initiation of a legal action Copyright © 2015 Pearson Education Ltd.

The Legal Environment Of Business: A Critical Thinking Approach

Service of process Defendant’s response Pretrial motions Discovery Pretrial conference B. The Trial Jury selection Opening statements Plaintiff’s case Defendant’s case Conference on jury instructions Closing arguments Posttrial motions J.E.B. v. Alabama, ex rel. T.B. C. Appellate Procedure Appeal to the U.S. Supreme Court D. Class Actions VII. Global Dimensions of the American Legal System VIII. Summary Discussion Questions for Chapter Three 1.

Explain relationships between original and appellate jurisdiction.

One relationship between the two is that courts with original jurisdiction do their work before courts of appellate jurisdiction. Another relationship is that courts with appellate jurisdiction review the decisions made by judges who do their work in courts of original jurisdiction.

Another relationship is that trials take place in courts of original jurisdiction. Appellate courts do not hold trials. Instead, appellate courts consider matters of law.

A court of original jurisdiction, usually referred to as a trial court, has the power to initially hear and decide a case. A court with appellate jurisdiction has the power to review a previously made decision to determine whether the trial court erred in making its initial decision.

2.

Explain relationships between in personam jurisdiction and subject matter jurisdiction.

A court must have both kinds of jurisdiction before it has the power to decide a case. Before the court can render a decision affecting a person, the court must have in personam jurisdiction (jurisdiction over the person). In personam jurisdiction is the power to render a decision affecting the specific persons before the court. Usually, a court gets in personam jurisdiction by serving the defendant with a copy of the complaint and summons.

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Subject matter jurisdiction is the power of the court to hear certain kinds of cases. This type of jurisdiction refers to whether the case will be heard in state or federal court, or whether either court could hear the case.

3.

Explain why someone might think this statement is true: Given the subject matter of state and federal courts, it is not surprising that more cases are heard by state courts than federal courts.

The state court system has subject matter jurisdiction over all cases not within the exclusive jurisdiction of the federal court system. Only a very limited number of cases fall within the exclusive jurisdiction of the federal courts. The cases heard under exclusive federal jurisdiction include admiralty cases, bankruptcy cases, copyrights, trademark and patent cases, claims against the United States, claims arising under statutes providing for exclusive federal jurisdiction, and federal criminal prosecutions. Consequently, almost all cases fall within the state court jurisdiction. Suits for breach of contract, product liability actions, and divorces are just a few of the types of cases falling within the state court system’s jurisdiction. The federal courts are reserved for a limited number of cases. State courts thus have a much broader jurisdiction, so they hear more cases.

4.

Explain why someone might think this statement is true: The attorney–client privilege is an important feature of the adversary system.

The attorney can provide effective representation only when he or she knows all the pertinent facts of the case. The businessperson who withholds information from his or her attorney may cause irreparable harm if the hidden facts are revealed by the opposing side in court. To encourage client honesty, the attorney–client privilege was established. This privilege provides that information furnished in confidence to an attorney, in conjunction with a legal matter, may not be revealed by that attorney without permission from the client.

5.

Evaluate this statement: Trial court judges and appellate court judges have very similar job descriptions.

Trial court and appellate judges do not have similar job descriptions.

A trial court judge presides over the trial, making sure the case is heard with reasonable speed; rules on all motions made in the case; and decides all questions of law. One of the most crucial functions of the trial court judge is ruling on whether evidence is admissible.

Appellate judges review the work of trial court judges to determine whether errors of law were committed by the trail court judges. Appellate judges write judicial opinions that present the law, and new interpretations of the law.

6.

Why is the jury an important part of our adversary system?

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The jury is the means by which citizens participate in the judicial system. It is often seen as the hallmark of democracy. Juries are groups of individuals, selected randomly from the geographic area in which the court is located, who will determine questions of fact. For instance, they get to decide whether they think a particular witness is telling the truth.

7.

Evaluate this statement: The adversary system is flawless.

Many people criticize the adversary system and point out its flaws. They argue that because each side is searching only for evidence that supports its position, a proponent who discovers evidence helpful to the other side will not bring such evidence to the attention of the court. This tendency to ignore contrary evidence prevents a fair decision—one based on all the available evidence—from being rendered. Another flaw is that the adversary process is extremely timeconsuming and costly. Two groups of “investigators” are seeking the same evidence. Thus, there is a duplication of effort that lengthens the process and unnecessarily increases the cost. Others argue that the adversary system, as it functions in this country, is unfair. Each party in the adversarial process is represented by an attorney. Having the most skillful attorney is a tremendous advantage. The wealthier a party is, the better the attorney she or he can afford to hire; hence, the system unjustifiably favors the wealthy.

8.

Review the steps in civil litigation. Why is the discovery stage especially important?

Discovery is important because it allows each party to gain knowledge of most of the facts in the case. Once both sides know the facts, it is likely that the parties will be more willing to discuss possible settlement of the case.

Answers to Critical Thinking about the Law Questions, Case Summaries, Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law Questions 1.

One person might be talking about in personam jurisdiction (jurisdiction over the person), whereas the other person might be talking about subject matter jurisdiction (the power of the court to hear different kinds of cases).

2.

Numerous procedural requirements further the value of security. Procedural requirements ensure that no one will interfere with people’s rights. Also, these requirements protect justice, if it defines justice as procedural fairness.

3.

Individualism is furthered by the adversary system. Individualism is the idea that people have what they have based upon desert. No one can take away what people have because they deserve what they have. In the legal system, people are allowed to use whatever resources they have to Copyright © 2015 Pearson Education Ltd.

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further their legal causes. People are allowed to spend as much money as they have, even though doing so gives some of them a distinct advantage over others. For instance, people rarely question the litigant who pays large sums of money to hire consultants to help select a jury.

People think, “It’s your money. You may spend it as you wish.”

Case Summary—World-Wide Volkswagen Corp. V. Woodson This case is in the book to show how long-arm statutes are used to gain in personam jurisdiction when an out of state defendant committed a tort within a state. The case is famous for focusing on the phrase “minimum contacts.”

The issue before the Supreme Court of the United States was whether, consistently with the Due Process Clause of the Fourteenth Amendment, an Oklahoma court may exercise in personam jurisdiction over a nonresident automobile retailer and its wholesale distributor in a products-liability action, when the defendants’ only connection with Oklahoma was the fact that an automobile sold in New York to New York residents became involved in an accident in Oklahoma.

The Court stated the relevant rule of law, which says that a state court may exercise personal jurisdiction over a nonresident defendant only so long as there exist “minimum contacts” between the defendant and the forum State. The court stressed that “foreseeability” alone has never been a sufficient benchmark for personal jurisdiction under the Due Process Clause; that it was foreseeable that the automobile would cause injury is not enough. Here, the Court ruled that the mere “unilateral activity of those who claim some relationship with a nonresident defendant cannot satisfy the requirement of contact with the forum State.”

Case Summary—Hertz Corporation v. Friend This case is in the book to show how corporate citizenship can be determined by applying the “nerve center test.” It established that a corporation is the citizen of the state where its decision making hub is situated.

Plaintiffs, California citizens, sued Hertz Corporation for state law violations in a California State Court. Defendant Hertz filed a motion to remove the case to federal court on diversity of citizenship grounds, claiming that it was not a resident of California, the residence of all the plaintiffs. Plaintiffs argued that Hertz was a California citizen, like themselves, and that, hence, diversity jurisdiction was lacking under § 1332(c)(1), which provides that “a corporation shall be deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business.”

The District Court concluded that it lacked diversity jurisdiction because Hertz was a California citizen under Ninth Circuit precedent, which asks, inter alia, whether the amount of the Copyright © 2015 Pearson Education Ltd.

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corporation’s business activity is “significantly larger” or “substantially predominates” in one State.

Finding that California was Hertz’s “principal place of business” under that test because a plurality of the relevant business activity occurred there, the District Court remanded the case to state court.

The Ninth Circuit affirmed. Hertz appealed to the United States Supreme Court. The Court said, “Petitioner’s unchallenged declaration suggests that Hertz’s center of direction, control, and coordination, its “nerve center,” and its corporate headquarters are one and the same, and they are located in New Jersey, not in California. Because respondents should have a fair opportunity to litigate their case in light of our holding, however, we vacate the Ninth Circuit’s judgment and remand the case for further proceedings consistent with this opinion.”

Suggested Answers to Critical Thinking about the Law Questions 1.

In addition to fairness, Justice Brayer recognized the fact that a perfect test that would satisfy and meet the administrative criteria would be very complex. For this reason, he remanded the case for further proceedings. Therefore, approaching a Federal court would be fair and bias toward the defendant could be ruled out.

2.

There are three aspects that highlight the ambiguity of the nerve center test. It would be difficult to ascertain the portion of business activity in the region as it comprises of a number of factors.

Next, the location of the company’s headquarters and its central leadership has to be considered.

Additionally, the location from which the discharge of executive and administrative functions takes place is important as well. However, it would be a challenge to identify these factors when there are multiple states and factors involved, which would make it more complex and the room for errors would increase.

3.

The reasoning that the light in which a corporate would be seen depends on where the case would be tried. For instance, if the case were to be tried in the city, people would be sympathetic toward the corporate, but it could elicit a different response from people residing in a rural resident. This reasoning can be related to Justice Breyer’s reasons for the nerve center test. Here the fundamental decision of trying this case in a Federal court or a State court based on this reasoning can be raised.

Case Summary—J.E.B. v. Alabama, ex rel. T.B. This case is in the book to present some interesting issues that arise while selecting juries. The specific issue the Court addressed was whether the Equal Protection Clause prohibits gender-based peremptory challenges. The issue arose in a paternity suit when the state used its peremptory challenges to remove male jurors. The defendant removed a male juror, and then an all-female jury found J.E.B. to be the father of T.B.’s baby.

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1.

Justice Blackmun expands the application of Batson (which prohibited race-based peremptory challenges) to gender-based peremptory challenges. He makes the decision because with respect to jury service, African Americans and women share a history of total exclusion. He probably would have been less likely to make this decision in 1950 because then many states still excluded women from jury service, so the issue of exclusion was taken for granted.

2.

Respondent suggests that gender discrimination in this country has never reached the level of discrimination against African Americans, so gender discrimination is tolerable in the courtroom. To compare levels of discrimination, students could start with the number of people affected (women account for more than half the population in the United States), the probability of harm (this is hard to decide), and the extent of the harm. They could also compare the poverty levels, comparing groups based upon both race and gender. They could look at the number of employment discrimination claims filed by these groups, and the outcomes of those cases. They could also look at the employment rates of various groups. They could look at the number of women and minorities who hold positions of power in the government and corporations.

3.

Justice Scalia might have agreed with the majority if the facts had been such that the case focused on excluding women from the jury. Here, men were excluded, so he can’t figure out why there’s such a long discussion of discrimination against women, when it was men who were discriminated against in this case. He also points out the Court’s inconsistent view on whether women are like men, or not. In the present case, the majority assumes women and men are the same. In other cases, the Court has stressed that women bring their own perspectives and values to the jury room. Scalia points out the Court’s confusion on whether women are the same or different.

Answers to Review Questions 3-1.

Jurisdiction is the power of the courts to hear a case and render a decision that is binding on the parties. The following are the different types of jurisdictions: • Original jurisdiction—a court of original jurisdiction, usually referred to as a trial court, has the power to initially hear and decide a case. It is in the court of original jurisdiction that a case originates.

• Appellate jurisdiction—a court with appellate jurisdiction has the power to review a previously made decision to determine whether the trial court erred in making its initial decision.

• In personam jurisdiction—this is the power to render a decision affecting the specific persons before the court.

• In rem jurisdiction—this is the power of a court to render a decision that affects property directly rather than the owner of the property. Such proceedings are often used when the owner of the property cannot be located for personal service.

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•

3-2.

Subject matter jurisdiction—this is the power of a court to hear certain kinds of cases.

Subject matter jurisdiction is extremely important because if a judge renders a decision in a case over which the court does not have subject matter jurisdiction, the decision is void or meaningless. o State jurisdiction—this applies to cases that may be heard only in the state system. Suits for breach of contract, product liability actions, and divorces are just a few of the types of cases falling within the state court system’s jurisdiction. o Exclusive federal jurisdiction—this applies to cases that may be heard only in the federal court system. Cases that fall within the exclusive jurisdiction of the federal courts include such matters as admiralty, bankruptcy, federal criminal prosecutions, claims against the United States, and claims arising under those federal statutes that include a provision for exclusive federal jurisdiction. o Concurrent federal jurisdiction—this applies to cases that may be heard in either the federal or the state court system.

German law is based on a civil-law tradition whereas U.S. law is based on a common-law tradition. The United States has a common-law system, which relies on precedents set by previous cases to rule on current cases, whereas German judges make decisions based on the country’s extensive civil codes, rather than previous decisions. German judges are not elected as many American judges are; instead, most are appointed for life, after a probationary period. German courts are separated by field, whereas most US courts are courts of general jurisdiction, meaning they hear all kinds of cases. Germany does not have any jury trials; all cases are heard by a judge or a panel of judges. Finally, unlike in the US where the lawyers ask almost all the questions during trial, the judges are the primary questioners of witnesses in Germany. Lawyers can question witnesses after the judges have finished.

3-3.

Once it is determined which court system has the power to hear the case, venue determines which of the many trial courts in that system is appropriate. Venue, clearly prescribed by statute in each state, is a matter of geographic location.

3-4.

They are the place where all cases originate. They are the only court where witnesses testify and where evidence is admitted.

3-5.

The attorney–client privilege provides that information furnished by a client to an attorney in confidence, in conjunction with a legal matter, may not be revealed by the attorney without the client’s permission. The rationale for its existence is that the privilege encourages clients to be honest with their attorneys. Then the attorneys are able to develop the best possible defense.

3-6.

The work-product doctrine provides that formal and informal documents prepared by an attorney in conjunction with a client’s case are privileged and may not be revealed by the attorney without the client’s permission. This doctrine is important because it protects

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information attorneys gather from employees and makes corporate employees more likely to be honest with their attorneys.

Answers to Review Problems 3-7.

Hasbro can remove the case if it is one of concurrent jurisdiction. The issue is whether diversity of citizenship can be established. The amount in controversy is more than $75,000.

If Hasbro can show it is from a different state, it will meet the other requirement. Hasbro’s principal place of business is Illinois. It is also incorporated in Illinois. Although Hasbro has a small plant in Michigan, this will not be enough to preclude Hasbro’s diversity claim.

3-8.

In the J.E.B. v. Alabama case, the United States Supreme Court held that intentional discrimination on the basis of gender by state actions violates the Equal Protection Clause.

Here, Bill’s attorney used preemptory challenges in a discriminatory manner.

3-9.

The issue here is whether Marx Corporation has sufficient minimum contacts with the state of Delaware so the state can use a long-arm statute to gain in personam jurisdiction. Marx Corporation will lose. Minimum contacts exist when a corporation takes a state up on the opportunity to incorporate in that state.

3-10. This question is a venue question. The statutory laws in Nevada would need to be looked into to know what rules govern the issue of venue. Stevens should petition the Clark County Court and ask them to apply Nevada’s venue rules to his claim.

3-11. If the lawyer knows that the client is about to commit a crime, the lawyer may reveal confidential information in order to prevent the commission of that crime. Here, Fox knows Davis plans to commit the crime of driving drunk. Fox may call the state highway patrol.

3-12. No, Watson cannot appeal to the U.S. Supreme Court. This case focuses on tort law, which is completely up to each state. The United States Supreme Court will not rule on matters that are up to the states.

Answers to Case Problems 3-13. No, the father’s appeal was not successful. The court determined that they did not have jurisdiction over the case because his motion did not qualify under Rule 60(b).

3-14. In this case, the plaintiff’s appeal was reconsidered and the case was taken forward. The court ruling was made as it affected personal jurisdiction as 25 Missouri residents who were in the dog breeding business viewed the negative information about the plaintiff’s kennel posted on the website. Also, minimum contact was established.

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3-15. The Credit Management Corporation’s appeal was successful and the first court’s ruling was reversed. The bankruptcy court lacked jurisdiction over collection costs and post-petition interest because it lacked the authority to discharge the collection cost and post-petition interest parts of the loan debt.

3-16. The court found that the home county of Porter was incorrect because that is where the injured party lived, not where the accident occurred. The damages were done to property from Porter County, but the accident happened in Dearborn. Therefore, Dearborn County has jurisdiction because it is the sight of the accident and that county would affect any claims.

3-17. The court dismissed all the constitutional claims made by EJS. The U.S. 6th Circuit Court upheld the decision made by the district court. Summary judgments were granted to all the defendants.

3-18. The federal court decided that the case should be heard at the state level because the federal statutes could not be tied with the case. The case needs to be heard at the state level to remain consistent with 28 U.S.C. § § 1331, 1441(b).

3-19. Different answers are possible as long as the student justifies their answers with reasons. The Supreme Court ruled that the federal court still had jurisdiction over the case. Just because there is a registration requirement for filing a claim, that does not prevent a federal court’s subject-matter jurisdiction.

3-20. The Texas Supreme Court’s verdict was overturned by the U.S. Supreme Court. The case was remanded and was taken up by Texas state courts for any further proceedings as this matter was not in the purview of Federal laws.

Thinking Critically about Relevant Legal Issues 1.

The issue would have to be framed in order to determine if in fact elections keep judges who do not care about their constituents off the bench. Also, one would have to determine is “likeability” really relevant when judges need to be fair and impartial.

2.

The author assumes that judges are not looking for personal gain, and that those who are will automatically be thrown off the bench. He is removing the possibility of manipulation. The author appreciates change—the author likes the opposite of tradition, perhaps innovation.

3.

The author gives no other ideas to fix the system and creates the dichotomy—face the people or lose the bench. There is no middle ground.

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4.

The opposition here would be that an election takes away from objectivity and makes a judge make popular decisions, which at times may not be the right one. This essay would explore the idea of catering to the majority and the fact that a popular decision is not always the right decision.

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Chapter 4 Settling Disputes Without Litigation Introduction Chapter Four addresses these questions: • • • • • • • • • •

What are negotiation and settlement?

What is mediation?

What is arbitration?

What are minitrials?

What is early neutral case evaluation?

What are private trials?

What are summary jury trials?

What are the uses of court-annexed alternative dispute resolution?

What is the future of alternative dispute resolution?

What are the global dimensions of alternative dispute resolution?

Chapter Four is significant because it presents information managers need to know so that they can manage dispute resolution within their own companies effectively. This chapter shows managers alternatives to spending time and money involved in civil litigation.

Achieving Teaching Excellence Asking Better Questions in Class In prior chapters, this Teaching Excellence section has presented information that stresses the importance of asking students questions in class. In this chapter, information will be presented about how instructors can ask better questions in class. Two articles are particularly helpful in addressing the question of how to ask better questions in class.

In an article by M. Neil Browne (coauthor of this LEB text) and Stuart M. Keeley, the authors teach an important lesson about how to ask better questions in class—an instructor should ask only those questions that inform him or her what the student is learning. Browne & Keeley remind instructors that the questions they ask in class should require students to apply their assignments or make reasoned judgments about the worth of a particular argument.

Instructors should ask questions that advance students’ understanding of the course material.

According to Browne and Keeley the following is a list of inadequate questions: • Does everyone understand?

• Have I made myself clear?

• Are there any questions?

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Usually, students do not answer these questions. If they do, their answers rarely show instructors what they are learning.

Some questions are not inadequate, but they are still weak. Thomas R. Daniel, in an article on asking better questions, lists questions that are “faulty” or ineffective. The following is Daniel’s list: • The double question “Why did we go to war and what were the consequences?”

• The guessing question “Do you think that Hitler lived to be older than Stalin?”

• The fill-in-the blank question “The common name for the Strategic Arms Limitation ?”

Treaty is • The vague question “What is war all about?”

• The whip-lash question “The author of Mein Kampf is who?”

These questions are faulty because they ask lower-order rather than higher-order questions, ask questions that have just one right answer, or ask questions that students cannot answer based on what they’ve learned. Instructors should strive to find out what their students don’t know.

Instructors should find out what material confuses students so that they can work on this material in class.

Browne and Keeley suggest instructors ask questions that require lengthier, more complex answers. These questions will focus on higher-order thinking skills. They allow instructors to see what their students have and have not learned. Browne and Keeley suggest these questions: • What is your understanding of …?

• How would you evaluate …?

• Why was x included in the text, lecture, or argument?

The critical thinking questions in the Kubasek, Brennan & Browne textbook and the discussion questions in this Instructor’s Manual are the kinds of questions instructors should ask if they want to ask better questions in class. Instructors will be on their way to achieving teaching excellence.

References • •

M. Neil Browne & Stuart M. Keeley, “Achieving Excellence: Advice to New Teachers”, 33 COLLEGE TEACHING 78 (1985).

Thomas R. McDaniel, “A Question of Questions: Can We Ask Better Ones?” THE SOCIAL STUDIES TEACHER 243 (Nov./Dec. 1979).

Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview Copyright © 2015 Pearson Education Ltd.

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This chapter is presents some good cases that give students a chance to work on their critical thinking skills. The cases are also excellent for helping students understand some of the complex situations that have developed from increased use of arbitration. Chapter Four also gives students many chances to practice the skill of synthesis. Instructors will have fun getting students to think of relationships between and among alternative tools of dispute resolution.

After presenting the topic outline for Chapter Four, the discussion questions encourage higher-order thinking skills development on material from throughout the chapter.

Topic Outline I. Negotiation and Settlement II. Mediation A. Selection of a Mediator B. Common Uses of Mediation C. Advantages of Mediation D. Criticisms of Mediation III. Arbitration Hall Street Associates, L.L.C. v. Mattel, Inc. A. Methods of Securing Arbitration Ignazio v. Clear Channel Broadcasting, Inc., et al.

AT&T Mobility LLC v. Concepcion et ux B. Selection of an Arbitrator C. Common Uses of Arbitration D. Problems with Arbitration IV. initrials V. Early Neutral Case Evaluation VI. rivate Trials VII. mmary Jury Trials VIII. rt-Annexed Alternative Dispute Resolution A. Use of Court Annexed ADR in the State and Federal Systems B. Differences between Court-Annexed and Voluntary ADR Arbitration Mediation IX. The Future of Alternative Dispute Resolution X. Global Dimensions of Alternative Dispute Resolution Mitsubishi Motor Corp. v. Soler Chrysler-Plymouth XI. ummary Discussion Questions for Chapter Four

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1.

Explain the differences between negotiation and arbitration.

One difference between negotiation and arbitration is that negotiation is simpler and more informal than arbitration. Negotiation (leading to settlement) is the process by which the parties to a dispute come together informally, with or without their lawyers, to attempt to resolve the dispute. No independent or neutral third party is involved. Arbitration is much more formal. Attorneys are sure to attend, the dispute is more likely to end with a winner or loser, and a neutral third party decides the case.

2.

What are the seven canons of the Arbitrator’s Code of Ethics?

The seven canons of the Arbitrator’s Code of Ethics are: • Canon 1—an arbitrator will uphold the integrity and fairness of the arbitration process.

• Canon 2—if the arbitrator has an interest or relationship that is likely to affect his or her impartiality or that might create an appearance of partiality or bias, it must be disclosed.

• Canon 3—an arbitrator, in communicating with the parties, should avoid impropriety or the appearance of it.

• Canon 4—the arbitrator should conduct the proceedings fairly and diligently.

• Canon 5—the arbitrator should make decisions in a just, independent, and deliberate manner.

• Canon 6—the arbitrator should be faithful to the relationship of trust and confidentiality inherent in that office.

• Canon 7—in a case where there is a board of arbitrators, each party may select an arbitrator. That arbitrator must ensure that he or she follows all the ethical considerations in this type of situation.

3.

Explain the differences between arbitration and mediation.

One difference between mediation and arbitration is that in arbitration the arbitrator makes the final decision, whereas a mediator facilitates communication between disputing parties.

Mediation is more creative and collaborative than arbitration, and parties to a mediation are much more likely to maintain a good relationship after the dispute because there will be no clear winners and losers as under arbitration.

4.

Explain the relationships between minitrials and summary jury trials.

One relationship between the two is that minitrials are older. Minitrials began in 1977, summary jury trials in 1983. Both are ways to resolve disputes more quickly and inexpensively than going to court. Minitrials are unique because although the trial is presided over by a neutral advisor, the people who decide the dispute are the senior executives of the disputing companies. They do that after lawyers for each side present the Copyright © 2015 Pearson Education Ltd.

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strengths and weaknesses of their respective positions. Summary jury trials are short. So are minitrials. In summary jury trials, a real judge is involved. Small juries render advisory verdicts. Both minitrials and summary jury trials render nonbinding decisions.

5.

Explain why someone might say this statement is true: The use of alternative dispute resolution methods is problematic.

The following are some of the reasons why someone may say that the use of alternative dispute resolution methods is problematic: • Some legal scholars are concerned about whether a dispute resolution firm can be truly unbiased when one of the parties to the dispute is a major client of the dispute resolution provider.

• Another issue raised by some critics is whether it is fair for consumers to be coerced into an ADR forum and thereby forced to give up their right to a trial, especially when: o They may be much more likely to get a higher award from a jury than from an arbitrator o They may find themselves having “agreed” to arbitration not really voluntarily but because of a clause stuck in a purchase agreement that they failed to read Furthermore, some think ADR benefits repeat players. They know the arbitrators because they use them frequently. Also, some people question whether we should encourage people to give up their right to a fair trial. Another problem comes from confidentiality. Some question whether it is a good idea to use ADR to hide disputes from the public.

Answers to Critical Thinking about the Law, Case Summaries, and Answers to Review Questions, Review Problems, and Case Problems Suggested Answer to Critical Thinking about the Law 1.

Litigation is unwieldy, time consuming, expensive, generates adverse publicity, reduces confidentiality, and damages relationships between parties. ADR responds to all these problems. ADR is simpler, less time consuming, cheaper, private, and preserves relationships.

2.

The best answer is efficiency. ADR minimizes both costs and time spent resolving disputes.

Instruct students to add to the list of ethical norms.

Case Summary—Hall Street Associates, L.L.C. v. Mattel, Inc. This case is in the book to show the extent of an arbitrator’s decision-making power. The case arose when an arbitrator ruled in favor of Hall Street. However, the court dismissed the arbitration award on the ground that the decision was based on errors of law. Subsequently, the Copyright © 2015 Pearson Education Ltd.

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arbitrator decided in favor of Mattel. A second court reversed the decision as the earlier court did not have the power to dismiss or modify the arbitration award.

Suggested Answers to Critical Thinking Questions 1.

Students’ answers may vary. Many of them may say that the parties in an arbitration case would not take the arbitrator’s decision seriously if they both knew that courts are eager to vacate or modify an arbitration decision. In case the arbitrator’s decision is contrary to law or there was some defect in the arbitration process then the court would be able to vacate or modify an arbitration award. For this reason the Federal Arbitration Act, which is a federal law has been enacted to encourage the use of arbitration. Additionally, it has set forth the four grounds on which the arbitrator’s award may be set aside.

2.

The main aim of creating the FAA was to replace judicial indisposition to arbitration with a national policy favoring and placing arbitration agreements on equal footing with all other contracts. Moreover, the following advantages of arbitration encourage the FAA to limit a court’s power over an arbitration award: • The stringent rules of evidence applicable in a trial are generally relaxed.

• Each side presents its witnesses and evidence and has the opportunity to crossexamine its opponent’s witnesses.

• The settlement rates are higher in arbitration.

• The parties to arbitration have a greater chance of being satisfied with the outcome and manner in which the dispute is resolved.

• The time taken to resolve a dispute through arbitration is less than that of a court trial.

Case Summary—Ignazio v. Clear Channel Broadcasting, Inc., et al.

This case considers whether a clause vacating the right to sue when entering into an employment arbitration agreement is legal. The contract, under section 10B allowed for any disputes to be settled in arbitration. Ignazio sued Clear Channel when she was fired claiming age and sex discrimination, retaliation, and wrongful termination of employment in violation of public policy. The Ohio Supreme Court reversed the decision of the court of appeals, ruling that the dispute did fall under the arbitration agreement, and section 10B did not violate Ohio arbitration laws.

Suggested Answers to Critical Thinking about the Law Questions 1.

It is clear that the court is in favor of arbitration. In fact, the court cites the strong public policy in favor of arbitration. This general view makes it easy for the court to decide that one offending provision in an agreement does not alter an otherwise valid agreement.

2.

If the one provision is severed, the rest of the agreement is intact, making arbitration Copyright © 2015 Pearson Education Ltd.

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mandatory. Here, the court prefers efficiency, for example, arbitration as a dispute resolution tool saves Clear Channel time and money.

Case Summary–AT&T Mobility LLC v. Concepcion et ux Under California law, courts may refuse to enforce any contract found “to have been unconscionable at the time it was made,” or may “limit the application of any unconscionable clause.” …. A finding of unconscionability requires “a ‘procedural’ and a ‘substantive’ element, the former focusing on ‘oppression’ or ‘surprise’ due to unequal bargaining power, the latter on ‘overly harsh’ or ‘one-sided’ results.”

Initially, the District Court denied AT&T’s motion to compel arbitration under the Concepcions’ contract, finding the arbitration provision unconscionable because it disallowed classwide arbitration proceedings. The Ninth Circuit agreed that the provision was unconscionable under California law and held that the Federal Arbitration Act (FAA), which makes arbitration agreements “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract,” did not preempt the lower court’s ruling. AT&T appealed.

The United Sates Supreme Court found that the California rule is an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. Hence, the judgment of the Ninth Circuit was reversed and case was remanded.”

Suggested Answers to Critical Thinking about the Law Questions 1.

Scalia said that class arbitration greatly increased risks to defendants. It is important to understand and grasp what has been stated as it interferes with fundamentals of arbitration and thus it is inconsistent with the norms stipulated by the FAA. In addition to this the risks would increase with the number of number of plaintiffs as it would make the entire process more complex and time consuming.

2.

Scalia could have reasonably justified agreeing with the Ninth Circuit by stating that allowing class-based arbitration would have more negatives than positives as it would work against the numerous advantages presented by the arbitration process. For one, class arbitration would further complicate this process by making it more time consuming and expensive. Since the number of people involved in the process is considerably higher, structure has to be added to the process, which would replace the otherwise informal proceedings. Also, this process would put the defendants at risk as well.

Case Summary—Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth This case considers whether an American court can enforce an agreement to resolve antitrust Copyright © 2015 Pearson Education Ltd.

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claims by arbitration when that agreement arises from international transaction. The Court ruled in favor of enforcing the agreement to arbitrate. The Court stated that “[W]e conclude that concerns of international comity, respect for the capacities of foreign and transnational tribunals, and sensitivity to the need of the international commercial system for predictability in the resolution of disputes require that we enforce the parties’ agreement, even assuming that a contrary result would be forthcoming in a domestic context.”

Answers to Review Questions 4-1.

The use of ADR is increasing because alternative methods are less expensive, less timeconsuming, and the formal hearing times and places can be set to accommodate the parties. Additionally, the use of ADR can prevent adverse publicity, preserve confidentiality, and is less adversarial, which means it is easier to preserve relationships between parties.

4-2.

A judge will overturn an arbitrator’s decision only when there is a clear showing that the arbitrator’s decision is contrary to law or there was some defect in the arbitration process.

4-3.

Arbitration may be secured voluntarily or it may be imposed upon the parties. Voluntary arbitration means it is through a binding arbitration clause in a contract. This kind of clause provides that all or certain disputes arising under the contract are to be settled by arbitration. The parties can also secure arbitration by entering into a submission agreement. In addition to these two voluntary means of acquiring arbitration, some states mandate arbitration for certain types of conflicts. For instance, in some states, public employees must submit collective bargaining disputes to binding arbitration.

4-4.

Some people believe arbitration is problematic because arbitrators lack subject matter expertise in certain areas, especially discrimination. Also, compulsory arbitration in some situations erodes workers’ rights to a public trial, to get an injunction, or to bring a class action suit. Another concern is that many arbitrators are not lawyers. Some people have also pointed out that arbitration is becoming more like litigation. Over time, it might become increasingly expensive and time-consuming.

4-5.

According to the Arbitrator’s Code of Ethics, the basic obligations of an arbitrator are as follows: • The arbitrator will uphold the integrity and fairness of the arbitration process.

• If the arbitrator has an interest or relationship that is likely to affect his or her impartiality or that might create an appearance of partiality or bias, the arbitrator will disclose it.

• The arbitrator will avoid impropriety or the appearance of it while communicating with the parties.

• The arbitrator will conduct the proceedings fairly and diligently.

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• • • 4-6.

The arbitrator will make decisions in a just, independent, and deliberate manner.

The arbitrator will be faithful to the relationship of trust and confidentiality inherent in that office.

That arbitrator will ensure that he or she follows all the ethical considerations.

Mediators make no final decision. They act as facilitators of communication between disputing parties. It is a collaborative and creative process. A disputant would favor mediation if he or she wanted: • To preserve a relationship with the other party or parties • A creative solution • To save time and money

Answers to Review Problems 4-7.

If their contract contains no binding arbitration clause, the parties may secure arbitration by entering into a submission agreement, an example of which is provided in Exhibit 4-2 of Chapter 4. This contract can be entered into at any time. It is a written contract stating that the parties wish to settle their dispute by arbitration. Accordingly, Martha and Bill may be given advice to enter into a submission agreement and then they can refer the dispute to arbitration.

4-8.

The parties can secure arbitration voluntarily by entering into a submission agreement that outlines how the dispute will be resolved.

4-9.

a) Section 5 of the FAA provides that if there is a lapse in the naming of an arbitrator, or arbitrators or umpire, or in filling a vacancy, then upon the application of either party to the controversy the court shall designate and appoint an arbitrator or arbitrators or umpire, as the case may require. On death of an arbitrator, a vacancy is created. Either party, if they want, shall refer the matter of appointment to the court. The court will designate an arbitrator. b) Parties frequently assume that arbitration proceedings are confidential. This assumption is misguided. While arbitration is private, parties are ordinarily under no duty to keep the existence or content of the arbitration proceedings confidential. Few national laws or arbitration rules impose confidentiality duties on the parties. Parties concerned about confidentiality should, therefore, address this issue in their arbitration clause. In doing so, the parties should avoid absolute requirements because disclosure may be required by law, to protect or pursue a legal right or to enforce or challenge an award in subsequent judicial proceedings.

4-10. Eloise will be forced to arbitrate her claims. This is because she signed the employment agreement that has a provision that clearly stated that arbitration was required for any Copyright © 2015 Pearson Education Ltd.

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employment related dispute. Therefore, filing a claim of discrimination in a court of law would not be valid.

4-11. Eberly can probably have the award overturned. The award may be set aside only if one of these four conditions is met: • The award was the result of corruption, fraud, or other “undue means.”

• The arbitrator exhibited bias or corruption.

• The arbitrator refused to postpone the hearing due to sufficient cause, refused to hear evidence pertinent and material to the dispute, or otherwise acted to substantially prejudice the rights of one of the parties.

• The arbitrator exceeded his or her authority or failed to use such authority to make a mutual, final, and definite award.

If Eberly can show that the evidence was pertinent and material to the dispute, he can probably have the award overturned.

4-12. The court will grant S.A. & E.’s motion to dismiss. Marshall will lose because arbitrators are allowed to hear cases involving fraud. If the behavior was egregious enough to constitute a crime, the federal government could bring criminal charges in a different forum.

Answers to Case Problems 4-13. The California Supreme Court vacated the judgment that and thus invalidated the arbitration process in Sonic-Calabasas v. Moreno. This is because it perceived this ruling to be procedurally and substantively unconscionable. It also mentioned that waiving the Berman hearing was a violation of public policy as it infringed the employee’s statutory rights to this hearing.

4-14. The outcome of the appeal was that the appellate court’s decision was reversed. The Court of Appeals held that AGF’s arbitration agreement was lawful. The court considers the arbitration agreement a contract that is applicable to state law, in this case Tennessee.

Tennessee contract law does not conflict with the arbitration agreement.

4-15. The Second Circuit’s decision was vacated by the Supreme Court based on the court’s decision in Stolt-Nielson S.A. v. AnimalFeeds International Corp and remanded the case for further proceedings. In that case the absence of a contractual agreement was not regarded as a reasonable ground for submitting class arbitration. Additionally, the Second Circuit Court arrived at the same judgment that a class-action lawsuit could be ordered but not class-action arbitration.

4-16. The Court of Appeals ruled in favor of Atlantic Video because the company announced Copyright © 2015 Pearson Education Ltd.

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that it planned to waive its enforcement of certain provisions within the arbitration agreement. These waived provisions relate to the three clauses Ragone argued were unconscionable so the court concluded that the modified agreement was lawful.

However, had Ragone brought the entire arbitration agreement forward, rather than just three clauses, the court may have ruled differently.

4-17. The appellate court ruled that the arbitration did not stand because both parties had originally waived it. Because the arbitration had already been lawfully waived, the case had to be litigated. Therefore, the arbitration ruling in favor of Wein was ignored and the lawsuit was reinstated.

4-18. The Court decided that the parties did not have to settle through arbitration. The arbitration agreement was not binding under Kentucky law because the arbitration provision failed to meet Kentucky Revised Statutes when it failed to state that the arbitration had to occur in Kentucky. Because the Court ruled that arbitration was not required, the parties could settle their case in court.

4-19. The Court found that even though the plaintiffs signed the contract that laid out the procedure for arbitration, the contract was unconscionable. This was because the clause was in very small print in the welcome packet, not on the service agreement. It was both unreadable and in an unreasonable place. Lastly, the class-action waiver was invalid in California, as per the Discover Bank case from the California Supreme Court. Therefore the contracts could not be enforced in that state because it was permeated in an unlawful purpose.

4-20. The Court did agree to hear this case because contracts and agreements can have noappeal clauses as long as the intent is clear and unequivocal within the contract. This means that a contract can include a section that makes any initial award in arbitration or trial final: the losing party cannot appeal. The Court found that in this case, as first glance, the clause was valid (fulfilling the above requirements) and the case was dismissed.

Thinking Critically about Relevant Legal Issues 1.

The issue at hand is whether patient care is analogous to employee–employer relationships.

Students would be advised to look up statistics regarding malpractice insurance and the reasons for its rise. A good conclusion would assess the ethical implications of treating patients like employees.

2.

The issue at hand is whether treating patients as employees from a legal standpoint is ethical.

What happens when a patient declines to sign the agreement? Can the doctor refuse care? Is there then a lawsuit? Here, the author seems to prefer efficiency, which is often an ethical norm raised regarding alternative dispute resolution. Doctors would save time and money if Copyright © 2015 Pearson Education Ltd.

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they required arbitration of disputes.

3.

Students may take the stand that this is not an apt analogy. The instructor should ask students why not. It seems that patients have much more at stake than employees. Medical malpractice suits can greatly help a patient who has been greatly harmed. Arbitration may not get them enough money to live with a condition negligence caused.

4. An essay following an opposition to the author would address the questions above. One ethical norm an opposing essay should highlight is justice, defined as fundamental fairness.

Injured patients deserve procedural due process, which means they should be able to have their “day in court” in an effort to hold negligent doctors accountable.

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Chapter 5 The Constitution for Business Managers Introduction Chapter Five addresses these questions: • • • • • •

What is the importance of the Constitution?

How does the idea of federalism affect the government’s structure?

What is “separation of powers,” and what does it mean for the branches of government?

How does the commerce clause affect the legal environment of business?

What are the tax and spending powers of the federal government?

How do the Constitution’s amendments affect the legal environment of business?

Chapter Five is significant because Constitutional provisions affect the daily work of business managers. Business managers need to understand the Constitution not only because it affects their work, but also because it guarantees their individual rights.

Achieving Teaching Excellence Encouraging Better Student Responses to Questions in Class Once instructors learn how to ask good questions in class, instructors need to know how to get their students to give good responses. Instructors also need to know what to do with the responses students give.

One of the best changes a teacher can make to improve student responses to questions is to increase the “wait time” after they ask a question. J.T. Dillon, in his article on research on questioning and discussion, explains the idea of wait time. Wait time refers to the amount of time a teacher pauses after asking a question. Instructors will know wait time is a problem for them if they answer their own questions without giving students time to think, and then respond. Thomas R. McDaniel, in his article on asking better questions in class, mentioned something surprising. He explains that the average amount of time a teacher allows students to respond to a question is ONE SECOND! Dillon cites research on wait time that suggests that waiting only two to three seconds after asking a question, and waiting again before asking another question, increases the amount and quality of student discussion. He writes that “[m]ore students talk, and students talk more; their talk is more relevant to the topic and more elevated in cognitive level.” McDaniel agrees. His article suggests that increasing wait time to three to four seconds after asking a question triggers these significant changes: Students give longer answers, more students volunteer, more questions are Copyright © 2015 Pearson Education Ltd.

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answered, students report that class is more interesting, students ask more questions, and student responses are more analytical. Students are more likely to synthesize, and they are more creative.

Taking into consideration all those benefits, all that the instructors have to do is increase the wait time!

Instructors must try to work on their wait time in classes. The wait time can be increased by instructors by counting (1…2…3…) to themselves and make sure that students have time to think and respond. Instructors would be surprised at how well students can answer the questions when they wait. Instructors often incorrectly assume that students who say “I don’t know this one” have nothing to offer the discussion. Now instructors will know and say, “It’s OK to think about it before you respond.” If instructors wait, student responses are generally good. It is important to develop a classroom atmosphere that not only tolerates, but also encourages silence.

Once students respond to the instructor’s better questions, and give better answers, instructors need to know how to respond to their improved answers. Verbal reinforcements are important, McDaniel says, but instructors have to be careful. They need to use a variety of reinforcements, including nonverbal cues. Also, they have to be careful not to overuse reinforcements. Although telling students all their answers are great might boost their self-esteem in the short run, instructors must let them know that answers differ in quality. They are not all outstanding. Many are poor, and many are wrong. They should stress to students that the purpose of class time is to work with the material, and discover where they are confused. It is okay to make mistakes. That is how students can figure out what they do not know.

McDaniel makes another good suggestion and writes that instructors should use a technique called “suspended judgment.” This technique “keeps the thinking process alive for longer periods.”

McDaniel describes suspended judgment as a technique in which the instructor tries to keep the ball in the student’s court for some time. Instructors should spend a great deal of time “clarifying responses, rephrasing and simplifying answers to questions, synthesizing the best responses into a satisfactory composite answer.”

In summary, instructors can get better responses from students if they give them time to think, reinforce their answers appropriately, and the instructor’s focused attention should be on their answers. When students work on the material in Chapter five, try to increase the wait time, to reinforce their answers appropriately, and use the technique of suspended judgment.

References •

J.T. Dillon, “Research on Questioning and Discussion,” 42 EDUCATIONAL LEADERSHIP 50 (November 1984).

Thomas R. McDaniel, “A Question of Questions: Can We Ask Better Ones?” THE SOCIAL Copyright © 2015 Pearson Education Ltd.

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STUDIES TEACHER 242 (November/December 1979).

Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview Fiercely independent, highly individualistic, and very proud of their country would be a good characterization of Americans. Many say there is no place they would rather live than the United States. Much of their pride stems from a belief that they have a strong Constitution, which secures for all individuals their most fundamental rights. Most people, however, are not aware of precisely what their constitutional rights are or of how to go about enforcing those rights. This chapter provides the future business manager with basic knowledge of the constitutional framework of our country, as well as an overview of the significant impact of some of the constitutional provisions on the legal environment of business.

This chapter is one of the most challenging chapters in the book. It is one that students find especially interesting. This chapter presents an opportunity to work especially hard on critical thinking. Instructors should devote a considerable amount of time and attention to the cases and critical thinking questions.

Instructors should make sure to include a lengthy discussion of the Lucas v. South Carolina Coastal Commission case. Save time for it. Students may also be interested in the Paula Jones case.

Finally, the chapter includes a new section on the taxing and spending powers of the federal government. This section’s focus on taxation of the Internet is especially interesting.

Discussion questions come from throughout the chapter. The numbers of discussion questions have been limited, so instructors can focus their attention on the critical thinking questions that follow the cases.

Topic Outline I. The Constitution II. Federalism A. Supremacy Clause B. Federal Preemption III. Separation of Powers William Jefferson Clinton v. Paula Corbin Jones IV. The Impact of the Commerce Clause on Business A. The Commerce Clause as a Source of Federal Authority Gonzales v. Raich B. The Commerce Clause as a Restriction on State Authority Copyright © 2015 Pearson Education Ltd.

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Nat’l Ass’n of Optometrists & Opticians v. Brown V. The Taxing and Spending Powers of the Federal Government A. Taxation of the Internet?

VI. The Impact of the Amendments on Business A. The First Amendment Corporate Commercial Speech Central Hudson Gas & Electric Corp. v. Public Service Commission of New York Corporate Political Speech B. The Fourth Amendment Florida v. Jardines C. The Fifth Amendment D.A.B.E., Inc. v. City of Toledo D. The Fourteenth Amendment Standard of Review VII. Summary Discussion Questions for Chapter Five 1.

How are the supremacy clause and federal preemption related?

The supremacy clause is found in Article VI of the Constitution which provides that the Constitution, laws, and treaties of the United States constitute the supreme law of the land. It says that any state or local law that directly conflicts with the federal Constitution, laws, or treaties is void. The supremacy clause is the basis for the doctrine of federal preemption. Federal preemption is a doctrine used to strike down a state law that, although does not directly conflict with a federal law, attempts to regulate an area in which federal legislation is so pervasive that it is evident that the U.S. Congress wanted only federal regulation in that general area.

2.

Explain why someone would say it’s true that the Commerce Clause allows Congress to regulate almost anything that happens within states.

Some of the cases presented in the chapter show just how much power Congress has under the Commerce Clause. Almost any activity, even if purely intrastate, can be regulated by the federal government if it substantially affects interstate commerce. This effect may be direct or indirect.

The case of Wickard v. Filburn shows how broad Congress’ power is under the Commerce Clause. In that case, the Court upheld the federal regulation of the production of wheat solely for consumption on the farm. The combination of many small farmers’ activities could have a substantial impact on the national wheat market.

3.

Explain the significance of the issue of Internet taxation.

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Article I, Section 8 of the U.S. Constitution gives the federal government the “Power to lay and collect Taxes, Duties, Imports and Excises.” This same provision also gives the federal government spending power by authorizing it to “pay the Debts and provide for the common Defence and general Welfare of the United States.”

State governments also have the right to impose taxes. Imposing taxes is difficult with regard to e-commerce because state laws impose sales taxes on businesses only when they have a store or distribution center in the state. Currently, more than one regulatory or advisory body (e.g., the Advisory Commission on Electronic Commerce) is studying how both federal and state governments could tax Internet commerce. A significant amount of money is at stake for both federal and state governments. Additionally, the issue is important because one reason why Internet retail sales are robust is the absence of sales tax.

4.

Evaluate this statement: The First Amendment protects all kinds of speech equally.

The First Amendment does not protect all kinds of speech equally. Some kinds of speech are not protected at all, such as speech that incites a riot (yelling “Fire!” in a crowded theater). Nor does one’s right of free speech extend to making false statements about another that would be injurious to that person’s reputation. Other kinds of speech enjoy limited protection.

Commercial speech is less protected than other forms of expression. Commercial expression not only serves the economic interest of the speaker, but also assists consumers and furthers the societal interest in the fullest possible dissemination of information. The protection available for particular commercial expression turns on the nature of both the expression and the government interests served by its regulation. Not all corporate speech is considered commercial speech.

Sometimes, for example, corporations might spend funds to support political candidates or referenda.

5.

Evaluate this statement: The Fourth Amendment applies to individuals, but not corporations.

The Fourth Amendment protects the rights of individuals to be secure in their persons, their home, and their personal property. It prohibits unreasonable searches and seizures. The statement above is inadequate because the Fourth Amendment applies to corporations as well as individuals. Corporations enjoy constitutional protection against unreasonable searches and seizures. For instance, administrative agencies cannot usually conduct warrantless searches. (It depends on whether the industry is so regulated that it should reasonably expect searches.)

6.

Explain relationships between procedural and substantive due process.

One relationship is that both are protected by the Fifth Amendment. They are two types of due process. Procedural due process requires procedural safeguards before there is a taking of an individual’s life, liberty, or property. Substantive due process refers to the basic fairness of laws Copyright © 2015 Pearson Education Ltd.

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that may deprive an individual of his or her liberty or property. Under substantive due process, we would ask, “Is the law fair?” Under procedural due process, we would ask, “Was the life, liberty, or property taken away only after we followed certain procedures?”

Answers to Critical Thinking about the Law, Case Summaries, and Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law Questions 1.

If one branch of government became too strong, it could engage in behavior that would not be in the best interest of citizens. Each branch was made independent of the others and was given a separate sphere of power to prevent any one source from obtaining too much power and consequently dominating the government. Separation of powers is consistent with the ethical norm of security. Citizens are confident that their rights will be protected.

2.

The protection of unrestricted speech to citizens and businesses is consistent with the ethical norm of freedom. Businesses would not have to comply with restrictions on them imposed by others.

3.

The business might suffer because a business manager would not have a full appreciation of his or her rights as a corporate citizen. For instance, business managers need to know the protections they have to engage in free speech. Business managers also need to know the limits of government action. The government is not allowed to violate the rights of a business.

Case Summary—William Jefferson Clinton v. Paula Corbin Jones This case is in the book to show the limits of presidential immunity. In this case, Defendant Clinton sought to use presidential immunity to dismiss Paula Jones’ sexual harassment claim, or, alternatively, to delay the proceedings until his term of office had expired. The U.S. Supreme Court rejected Clinton’s argument. The Court reminded Clinton that the President does not have immunity that extends beyond the scope of any action taken in an official capacity. An official’s absolute immunity extends only to acts in performance of particular functions of his office. The Court also rejected Clinton’s argument under the separation of powers principles. Separation of powers principles would not be violated by allowing the action to proceed. The doctrine of separation of powers does not require federal courts to stay all private actions against the President until he leaves office. The Court reminded Clinton that “we have long held that when the President takes official action, the Court has the authority to determine whether he has acted within the law.” Also, “it is settled that the President is subject to judicial process in appropriate circumstances.”

Case Summary—Gonzales v. Raich

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The case is in the book to show how the U.S. Supreme Court interprets the Commerce Clause.

In particular, the case considers whether medicinal marijuana can be ceased and destroyed by federal authorities.

In this case, to investigate Raich’s and Monson’s use of medical marijuana the authorities seized and destroyed their cannabis plants, even though California law allowed them to possess these. The Court found that the Federal Government was well within its rights because it is very hard to tell where marijuana originates. The Commerce Clause protected this act because Congress has the right to regulate drugs within the country. Therefore, even though it was legal in the state, the federal government still could destroy the plants if they feared they would be used illegally.

Suggested Answers to Critical Thinking about the Law Questions 1.

Wickard is applied here because it deals with farming a product for personal consumption. In both cases, the Commerce Clause regulates it because it can be transported for sale to different states.

2.

The Court acknowledges that illegal drugs are much more of a concern than farmed food. It downplays the idea that the drug was not for sale, but rather for medicinal purposes.

Case Summary—Nat’l Ass’n of Optometrists & Opticians v. Brown This case shows how California had a regulation that prohibited licensed opticians from offering prescription eye-wear in the same city or location where professional eye examinations are provided.

The National Association of Optometrists and Opticians, LensCrafters, Inc., and EyeCare Centers of America, Inc. challenged this California statute, stating that it places a burden on interstate commerce that “excessively outweighs the local benefits of the law.” In this case, the district court granted the State’s motion for summary judgment. The plaintiff companies appealed.

Plaintiffs challenge these laws to the extent they prohibit opticians and optical companies from offering prescription eyewear at the same location in which eye examinations are provided and from advertising that eyewear and eye examinations are available in the same location. The district court denied Plaintiffs’ motion for summary judgment and granted the State’s motion for summary judgment. The court effectively concluded that, based on the facts and the law, there were no genuine issues of material fact. Plaintiffs argued that the challenged laws impermissibly burdened interstate commerce because: 1) the challenged laws preclude an interstate company from offering one-stop shopping, which is the dominant form of eyewear retailing; and 2) interstate firms would incur a great financial loss as a result of the challenged laws.

Case Summary—Central Hudson Gas & Electric Corp. v. Public Service Commission of New York Copyright © 2015 Pearson Education Ltd.

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This case shows how the Supreme Court applies the First Amendment to corporate commercial speech. This case considers the constitutionality of a regulation that completely banned promotional advertising by the utility, but permitted informational ads. The U.S. Supreme Court reversed the lower courts and ruled in favor of Central Hudson. The Court decided that New York’s regulation violated the First Amendment.

Suggested Answers to Critical Thinking about the Law Questions 1.

The primary ethical norm implicit in the requirement that regulations on commercial speech be of the most limited nature possible is freedom. One definition of freedom is “to act without restriction from rules imposed by others.” This nation has a history of protecting freedom of speech, so the Court wants to make sure it does not violate this ethical norm.

2.

The Public Service Commission is concerned because Central Hudson holds a monopoly over the sale of electricity in its service area. It is concerned that their advertising could endanger energy conservation or mislead the public. It would be interesting to find out more about why Central Hudson wants to advertise (given that it has a monopoly) and exact content of its regulations. That information would help students decide how much to regulate Central Hudson.

Case Summary—Florida v. Jardines This case deals with the question of whether it is ethical to conduct searches without a warrant.

A detective received an unverified tip that marijuana was being grown in Jardines’ home. A month later, the Police Department and the Drug Enforcement Administration sent a joint surveillance team to Jardines’ home for investigation. The detective approached Jardines’ home accompanied by a trained canine handler who had just arrived at the scene with his drug-sniffing dog. Jardines cited the Fourth Amendment. He argued that the search could not be admissible in court as evidence since it was gathered unlawfully and unsupported by probable cause.

The Supreme Court ruled that the issue here was not just pertaining to the Fourth Amendment but it extended to the aspect that it was a case of trespassing and invasion of privacy. For this reason the court ruled in the favor of Jardines.

Case Summary—D.A.B.E., Inc. v. City of Toledo This case deals with the Clean Indoor Air Ordinance’s ability to regulate smoking in public places, including restaurants, bars, and so on. A group of bar, restaurant, and bowling alley owners came together as D.A.B.E., Inc., to sue the city of Toledo, citing the Fifth and Fourteenth Amendments. They argued that the act constituted an unfairly regulatory taking of their property.

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The Supreme Court ruled that the ordinance was legal because there was no taking of private property. It did not regulate the property, only the people. Compliance did not create an undue hardship because the owner did not have to spend money to put in a lounge. But even if he or she wanted to, that was not enough to make the ordinance unlawful. Lastly, there was no regulation of smoking in places of public assembly, so the ordinance stood.

Suggested Answers to the Critical Thinking about the Law Questions 1.

Martin relied on the reasoning above: there was no taking of property and there was no hardship on the owners.

2.

It seems Martin is relying on public health and safety. For him, it obviously takes precedent.

Answers to Review Questions 5-1.

5-2.

The Supremacy Clause holds that whenever there is a conflict between a state law and a federal statute, the Constitution or treaty, the federal law is supreme and the state law will be struck down. Therefore, states are unable to pass laws that would conflict with federal law because they recognize that such laws, even if passed, would not be upheld by the courts.

The Commerce Clause provides the basis for most of the federal regulation of business today.

The Commerce Clause allows the federal government to regulate any activity that substantially affects interstate commerce.

5-3.

Police power means the residual powers retained by the state to enact legislation to safeguard the health and welfare of its citizenry.

5-4.

The problem is that the term government is ambiguous in this context. Because the Commerce Clause gives the FEDERAL government the power to pass laws affecting interstate commerce, the clause expands the powers of the FEDERAL government.

However, because the Supremacy Clause makes federal law superior to state law, anything that expands the authority of the federal government necessarily reduces the power of the STATE government. So Jay is correct because he is talking about the federal government, and Ellie is correct because she is talking about the state government.

5-5.

A regulatory taking occurs when a government regulation becomes so onerous as to constitute a taking for which compensation is required. The key is whether a regulation renders the land “valueless.” In (a), there is minimal interference. With (b), the land still has value even if billboards cannot be placed on the land. In (c), compensation would be required if the land became valueless, and Florida Rock Company’s plans were not creating a “noxious use.”

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5-6.

In general, commercial speech enjoys less protection than private speech. That is because it is expression solely related to the economic interests of the speaker and speaker’s audience.

Commercial speech has less value than private speech, so courts are less willing to protect it.

Answers to Review Problems 5-7.

This law will be challenged under the first amendment. The challenge by the tobacco industry will focus on the nature of the expression and the governmental interests served by the regulation. Here, the tobacco industry will not succeed in challenging the law. This case is similar to the case of Central Hudson Gas & Electric Corp. v. Public Service Commission of New York, only the law does not seem more restrictive than is necessary to serve the government’s interests. The law does not ban all advertising and all cash contributions—only specific kinds. (Of course, the facts are ambiguous, and this case can be argued in the opposite way.)

5-8.

Probably not. Ms. Crabtree suffered the loss of her job, but she was given a one year, nontenured contract. Her deprivation was not that great because she had not been assured she’d have a job after a year. Because she was not deprived of much, Students will have low expectations about the procedures the state must follow.

5-9.

The landfill operators will say the state cannot make any law that impairs the obligations of any person under a contract. This law affects their contracts with out-of-state waste generators.

The State will argue that their law is reasonable, so it should be upheld. The State must argue that the law is designed to meet an emergency, that it serves a general societal interest, the relief is appropriate to the emergency, the conditions imposed must be reasonable, and the legislation must be limited to the duration of the emergency.

The State will probably win. The landfills are becoming “too full at too rapid a pace.”

Sounds like an emergency.

5-10. Under Braswell, Chen will have to comply with the subpoena. Because Chen has incorporated, he is acting as a representative of the corporation. Regardless of how small the corporation, Chen cannot claim privilege.

5-11. No. Ricardo will not be able to argue that the regulation is so onerous as to constitute a taking for which just compensation is required. He will still be able to stay in business and use his property. He just has to undertake some additional expenses. That’s the price of progress in America.

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5-12. The plaintiffs would say there has been a regulatory taking. They would be wrong. A law has changed the way the plaintiffs can use the land, but it has not made the property valueless.

Answers to Case Problems 5-13. This case is related to First Amendment rights. The Wilson twins were suspended from school for creating a blog site which contained highly racist and sexually explicit comments about several girls in their high school. Although their freedom of speech was not violated, they are still responsible for posting hate speech on their blog. Therefore, they will have to face the consequences of their actions.

5-14. In this case the plaintiffs argue that they were discriminated against and when they filed a complaint they were discharged from their duties. However, the court held that their freedom of speech was not violated as they addressed private problems and were not public in nature.

Additionally, the internal grievances were redressed due to which this involvement of the court was not necessary.

5-15. The court affirmed the lower court’s ruling. It held that Congress had the authority to pass the Body Armor Act of 2002. The interstate sale and possession of body armor is a sufficient link to the Commerce Clause.

This case is similar to Gonzales v. Raich, because both cases address the issue of how to interpret the Commerce Clause. The clause, like most of the Constitution, is vague enough to be open to various interpretations.

5-16. The court upheld the district court’s decision by ruling in favor of Tennessee Governor Bredesen and the Constitutionality of the new law. The court found that the law was in accordance with the Commerce Clause because regulating the trade of scrap metal does not excessively burden interstate commerce. It also found that the law did not violate the Fifth Amendment because even if holding the metal for ten days deprived scrap dealers of their property, they are still entitled to due process.

5-17. The ordinance to ban pit bulls and other select dog breeds inside the city limits was ruled by the Court to be constitutional. There is no fundamental constitutional right that protects the ownership of dogs. The ownership of dogs is qualified by the safety of society. The Court deemed that the dog breeds listed in the regulation were dangerous and costly to control.

Because there was a rational basis for the ban, it did not violate Due Process or Equal Protection Clause.

5-18. The court’s decision on the appeal was reasonable because the police used the GPS device surpassing the stipulated time frame and geography specified for a warrant. The plaintiff Copyright © 2015 Pearson Education Ltd.

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government agents’ act violates the Fourth Amendment as it constituted an act of trespassing on private property making the search unreasonable.

5-19. The appeals court ruled in favor of Phelps. It decided that the First Amendment protected Phelps’s actions because the statements were a matter of public concern, where not provably false and were only expressed through hyperbolic rhetoric. The statements were not dangerous threats so they were still protected under the First Amendment. The Free Speech Clause can be used as a defense in state tort suits and it was in this case.

5.20.

In this case the plaintiff would not have been able to receive compensation other than monetary payment. This is because there was a reason for which the plaintiff was debarred and it was up to the discretion of the Court to reinstate his license or to revoke it.

Thinking Critically about Relevant Legal Issues 1.

The issue here is that corporations should be given the right to openly endorse a candidate, just as any person can. The conclusion would be that freedom of speech applies to corporations.

2.

There is a case citation and the idea that businesses are protected under the Constitution and therefore have rights, such as freedom of speech.

3.

There are misleading analogies that make it seem as though not allowing corporations to endorse candidates or speak out on political issues will lead to keeping corporations quiet. The author seems to miss the idea that corporations are made up of people with diverse backgrounds.

4.

Corporations should not be allowed to speak about politics because they are not people. They are made up of people with many different viewpoints. The company, to be fair, would have to represent and speak about all political ideas within the company. The problem remains that the CEO would have the last say. Lastly, one could see that if disagreements arise from differences in the “corporate stance” and the stance of employees, unlawful firing of employees could result.

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Chapter 6 Defining White-Collar Crime Introduction Chapter Six addresses these questions: • • • • • • •

What is crime and what is criminal procedure?

What are the distinguishing features of white collar crime?

Which are the common white collar crimes?

How can we prevent white collar crime?

What federal laws are used in the fight against white collar crime?

What state laws are used in the fight against white collar crime?

What are the global dimensions of white collar crime?

Chapter Six is significant because it helps managers become aware of what it means to engage in corporate crime. Not only can managers avoid getting involved in crime, they can also understand why the public’s tolerance for criminal behavior in the corporate world is decreasing.

Managers must be prepared to respond to reduced public confidence.

Achieving Teaching Excellence Adopting a “No Fault” Policy for Grading Attendance/Preparation/Contribution to Class Discussions For those instructors who are willing to reward excellent in-class contributions to discussions, this section urges them to adopt a “no fault” attendance policy. This attendance policy also factors in student preparation, and the quality of student contributions to class discussions.

Instructors get tired of students giving them feedback that said, in essence, “You should not punish me if I cannot attend class for reasons such as a grandparent’s funeral, job interview, and so on.” Instructors disliked that feedback because they were never trying to punish anyone; instructors were, instead, trying to reward those students who came to class, exceptionally well prepared, and made contributions to move discussions forward. Students who did not attend, came unprepared, or did not speak in helpful ways were simply ineligible for the reward.

Instructors also grow weary of students’ idea that they should be allowed to turn in their answers to the discussion questions if they could not come to class. Their goal was to prove their preparation, even though they did not attend or did not contribute. Instructors should make it clear what they are rewarding—attendance combined with preparation and meaningful Copyright © 2015 Pearson Education Ltd.

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contributions to discussions. Plus, instructors should also make it clear that they respect students.

Instructors should make positive assumptions about students when they do not appear in class, prepared, and ready to contribute.

Instructors should always assume a student had a good reason for not attending class, prepared, and ready to contribute. By adopting a “no fault” attendance policy, the instructors’ time is saved because they don’t have to seek doctor’s notes and other documentation proving the student had a valid reason for not attending/preparing/contributing. Instructors should give each student a certain number of “misses” before they drop to a lower range of grading options. Note also that students are eligible for a number of grades within a particular range. Instructors should give themselves much discretion for judging the quality of students’ contributions to the discussions.

Instructors should make sure that their own negligence does not back them into a situation in which they have no choice but to give students high grades for this component of the course, even when they might be marginally prepared. How could this happen? Suppose an instructor starts out a participation policy, which includes a participation sheet and discussion or study questions. Now, suppose instructors find themselves doing more than their share of the talking, they do not really know whether students who are signing the participation sheet are prepared and capable of making contributions to discussions. How do instructors make sure the students are remaining honest about their preparation? The best solution is to call on students frequently and randomly. Another idea is to check their preparation by asking them to turn in an answer to one of the study questions they have prepared for the day. For instance, sometimes an instructor walks into class and says, “Copy what you have written as an answer for study question 2 onto a separate sheet of paper, write your name on it, and turn it in.” Then, the instructor can check to see whether a student’s answer shows good preparation. If it does not, the instructor can remove the student’s name from the participation sheet and warn the student (privately), that they must be honest about signing the participation sheet only when they are prepared. If the student gets caught a second time, the instructor should impose a more serious consequence.

Instructors have found that their clear expectations, combined with no fault attendance/preparation/contribution policy, set the stage for having a full, prepared class that appreciates the rewards instructors offered. It will take vigilance on the instructors’ part to set the stage for success, especially at the beginning of the semester. It will be worth the time and energy to set this stage. Instructors will end up with meaningful, productive in-class interactions.

Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview White-collar crimes—crimes committed in a commercial context—occur every day. Collectively, Copyright © 2015 Pearson Education Ltd.

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these crimes often result in millions of dollars of damages. In recent years, as corporate crimes have become more publicized, people’s attitudes toward corporations and white-collar crime are being affected. The future manager must be prepared to respond to a growing lack of public confidence and avoid becoming a corporate criminal. He or she must find ways to develop a corporate climate that discourages, not encourages, the commission of white-collar crime.

Topic Outline I. Crime and Criminal Procedure A. Crime B. Criminal Procedure The Miranda Warnings Booking and First Appearance Information or Indictment Plea Bargaining Burden of Proof Defenses II. Distinguishing Features of White-Collar Crime A. The Corporation as Criminal B. Arguments in Support of Corporate Liability C. Arguments in Opposition to Corporate Liability D. Imposition of Liability on Corporate Executives United States v. Park E. Imposition of Liability on Lower Level Corporate Criminals F. Factors Encouraging the Commission of White-Collar Crime G. Sentencing of White-Collar Criminals III. mmon White-Collar Crimes A. Bribery B. Violations of Federal Regulations C. Criminal Fraud United States v. Gray D. Larceny E. Embezzlement F. Computer Crimes Destruction of Data Unlawful Appropriation of Data or Services Entering of Fraudulent Records or Data into a Computer System Financial Crimes IV. revention of White-Collar Crime V. Federal Laws Used to Fight White-Collar Crime A. The Racketeer Influenced and Corrupt Organizations Act (RICO) Copyright © 2015 Pearson Education Ltd.

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Boyle v. U. S. B. False Claims Act C. Sarbanes-Oxley Act D. Whistleblower Protection Act VII. ate Laws Used in the Fight Against White-Collar Crime VIII. Global Dimensions of White-Collar Crime IX. ummary Discussion Questions for Chapter Six 1.

How is criminal procedure different from civil procedure?

Criminal procedure is initiated somewhat differently from civil procedure. Both include many steps, but criminal procedure emphasizes protecting the defendant’s rights. From beginning to end, criminal procedure makes sure the defendant knows his or her rights, and requires prosecutors to have enough evidence to move forward to another step. Another difference in procedure is that in civil procedure, the steps encourage settlement of the case.

Recall that discovery makes people aware of the strengths and weaknesses of their claim, so they might settle. In criminal cases, plea bargains are common, but discovery is not as open as in civil cases.

2.

How is the burden of production of evidence related to the burden of persuasion?

One relationship is that both are required in criminal cases. Another is that both burdens fall on the prosecutor. They are different in that the burden of production of evidence means that the prosecutor must prove all of the elements of the crime. The prosecutor must present physical evidence and testimony that prove all elements of the crime. The burden of persuasion means the prosecutor must convince the jury beyond a reasonable doubt that the defendant committed the crime.

3.

Why might someone say this statement is true: White collar crime does not have a precise meaning?

The textbook authors believe this statement is true. They point out more than one definition of white collar crime. Sociologist, Edwin Sutherland’s definition is that white collar crime is a crime committed by a person of respectability and high social status in the course of his occupation. Traditionally, white collar crime has been the classification for those crimes committed in a commercial context by members of the professional and managerial classes.

4.

Why might someone say this statement is true: Liability should be imposed on the corporation for the criminal acts committed by employees of the corporation on behalf of the Copyright © 2015 Pearson Education Ltd.

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corporation?

The following arguments may be presented in favor of the statement: • Imposing liability on a corporation for criminal acts committed by its employees will result in lower dividends for the shareholders, which will make shareholders take a more active role in trying to make sure the corporation behaves legally.

• In situations where crime is a crime of omission, the responsibility for performing the omitted duty is not clearly delegated to any specific party. As the duty rests with no particular individual, there is no one to blame if the corporation cannot be held responsible.

• There are many suspects in a corporation. It is difficult for enforcement agencies to investigate many employees.

• The fact that many corporate decisions are committee decisions makes it difficult to point the finger at specific individuals.

• Corporate personnel are expendable.

• Often the behavior in question resulted from a pattern of behavior common to the whole company, so it is difficult to blame just one or two individuals.

• People do not want shareholders to benefit from illegal activity. This could happen if shareholders get higher dividends because corporate crime costs are lower.

• If an action is taken against the corporation, the criminal act will be linked to the corporation in the public’s mind. Consumers need this information to make informed decisions.

5.

Now evaluate the statement written in question 4.

The following arguments may be presented against corporate liability: • Imposing fines on corporations is a waste of time and effort because the fines are never going to be severe enough to act as a deterrent.

• Some argue it is unfair to allow dividends to be reduced because shareholders cannot control corporate conduct.

• Because criminal prosecutions of corporations are not well publicized, they do not harm the corporation’s public image.

Ask your students to explain the strongest argument for and the strongest argument against imposing criminal liability on corporations.

6.

What factors encourage the commission of white collar crime?

Exhibit 6-6 lists the following factors that encourage the commission of white collar crime: • Societal stress on material success, without equal emphasis on means of achieving success Copyright © 2015 Pearson Education Ltd.

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• • • • • • •

Linkage of corporate rewards of salary and promotion to accomplishing short-term goals Groupthink Ease of rationalizing illegal behavior Dispersion of decision making Retention of status by persons convicted of white-collar crime The lack of an adversarial relationship between the corporation and government regulators Poor personnel policies that leave employees feeling insecure, unappreciated, and underpaid

Ask students to explain one or two of these factors. Also, ask students to add one or two factors to the list.

7.

Why do street criminals usually receive stiffer penalties than white collar criminals?

The following are some of the reasons for street criminals receiving stiffer penalties than white collar criminals: • White collar criminals can often afford superior legal counsel.

• Many white collar criminals use the nolo contendre plea. They then receive minor penalties.

• Victims are not clearly identifiable at the trial. This makes judges less concerned about keeping offenders away from society.

• Judges also consider that the white collar criminal can make restitution if given his or her freedom.

• Also, many judges believe the rehabilitation prison offers will not help white collar criminals because they already have relatively high levels of education and marketable skills.

8.

What kinds of white collar crime are the most common?

Some of the more common white-collar crimes are bribery, violations of federal regulations, criminal fraud, larceny, embezzlement, and computer crimes.

9.

Explain relationships between larceny and embezzlement.

Both larceny and embezzlement are common white collar crimes. Larceny is the secretive and wrongful taking and carrying away of the personal property of another with the intent to permanently deprive the rightful owner of its use or possession. The means of carrying out this crime is stealth. Embezzlement is defined as the wrongful conversion of the property of another by one who is lawfully in possession of that property. Larceny and embezzlement Copyright © 2015 Pearson Education Ltd.

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sometimes overlap.

10. What are the best ways to prevent white collar crime?

The following are some of the best ways to prevent white-collar crime: • One suggestion is to replace state chartering of corporations with federal chartering.

• An even more innovative suggestion, put forward by Christopher Stone, is that each corporation doing more than a certain amount of business be required to have a general public director (GPD).

• Two other proposals are to link the amounts of fines to the benefits obtained by the violations and to increase the amount of both corporate and individual fines.

• Some also suggest elimination of the nolo contendere plea.

• Because it is believed that the courts are unlikely to impose stiff fines on either corporations or convicted executives, the imposition of equity fines has been proposed.

• Another remedy is to increase the operating budgets of the regulatory agencies to allow them to hire more people to monitor corporations and to improve the training of regulatory agency employees.

The above ideas and suggestions are all beyond the direct control of most corporate managers. There are, however, some very practical things that managers can do to reduce the likelihood that their employees or companies will commit white-collar crimes: • Have a well-defined company code of ethics that the employees read and sign • Provide a hotline for anonymous tips • Provide an employee assistance program • Conduct proactive fraud auditing 11. Explain relationships between Racketeer Influenced and Corrupt Organizations Act (RICO) and the False Claims Act. One relationship between RICO and the False Claims Act is that both are federal laws that fight white-collar crime. RICO prohibits persons employed by or associated with an enterprise from engaging in a pattern of racketeering activity. The False Claims Act takes a different approach to fighting white-collar crime. It allows private citizens to sue employers on behalf of the government for fraud against the government.

Answers to Critical Thinking about the Law, Case Summaries, and Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law Questions

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1.

This situation involves a clash between efficiency and security. On the one hand, business managers want efficiency—to minimize costs. The Environmental Protection Agency (EPA) fine would be a cost managers would want to avoid. On the other hand, as a citizen of the community managers count on the EPA to protect their property rights from those who might want to interfere by violating environmental standards. The EPA ensures security for everyone. Also, making sure the EPA does its job shows support for honesty or perhaps justice, depending on how people define justice. People want the EPA to conduct its work free from undue influence by those with enough money to bribe.

2.

When a young woman commits a robbery, usually only the one victim of the robbery suffers.

When a business manager embezzles, there are more victims. The embezzlement could put the whole company in financial jeopardy, which could damage customers, employees, and the community.

3.

One definition of justice is to treat all humans identically, regardless of class, race, gender, age, and so on. Hypothetically, the biggest difference between the embezzler and robber is probably class. Probably, the person who embezzles enjoys a higher standard of living than the robber. The intent behind the crimes is similar. If the judge believes in a definition of justice that stresses treating people identically regardless of class, he or she will give the same sentence to both criminals.

Case Summary—United States v. Park United States v. Park is in the book to show a case in which a court was willing to impose criminal liability on a corporate executive. The case involved a president of a national food-chain corporation who was charged with violating the Federal Food, Drug, and Cosmetic Act by allowing food in the warehouse to be exposed to rodent contamination. Park claimed he had turned over responsibility for sanitation over to dependable subordinates. The trial court found him guilty, the court of appeals reversed, and here the U.S. Supreme Court ruled in favor of the government, not Park.

Suggested Answers to Critical Thinking about the Law Questions 1.

It was very important to the Court that Park had, by reason of his position in the corporation, responsibility and authority to prevent the inappropriate acts in the first instance, or promptly to correct, the violation complained of, and that he failed to do so. He admitted he had received a warning letter from the Food and Drug Administration regarding the unsanitary conditions at one of the company’s warehouses.

2.

Dotterweich was significant because it held that corporate officers could be subject to criminal liability under food and drug legislation. The case held that people could hold Copyright © 2015 Pearson Education Ltd.

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criminally accountable the persons whose failure to exercise authority and supervisory responsibility resulted in violation of the law.

Case Summary—United States v. Gray This case is in the book to present an example of what it takes for a conviction under the mail fraud statute to stick. The appellant, Gray, lost his appeal when he claimed that his fraudulent scheme was so absurd that a person of ordinary prudence would not have believed it.

The court ruled that ‘the mail fraud statute does not require that every representation a defendant utters while executing his scheme must be credible.’ It was enough that Gray’s scheme to defraud ‘involved the use of material, false representations or promises.’

Suggested Answers to Critical Thinking about the Law Questions 1.

The mail fraud statue does not require any particular action or belief on the part of the person being defrauded. Instead, the focus is on the person committing the fraud.

2.

This decision is consistent with the norm of security—victims of mail fraud know the focus will not be on them. Instead, the focus is on the alleged criminal.

Case Summary—Boyle v. U. S. This case is in the book to present an example of what it takes for a conviction under the Racketeer Influenced and Corrupt Organizations Act (RICO) to stick. There was sufficient evidence presented to prove that Boyle and the others had committed the crime. The District Court instructed the jury that to establish a RICO association-in-fact “enterprise.” Boyle was the petitioner who was convicted on 11 of the 12 counts against him, including the RICO counts, and was sentenced to 151 months’ imprisonment and the Second Circuit affirmed. Boyle appealed to the U.S, Supreme Court.

Answers to Review Questions 6-1.

The purpose of criminal law is to punish persons who engage in activities that are harmful to the public health, safety, or welfare.

6-2.

Crimes are generally classified as treason, felony, misdemeanor, or petty crime on the basis of the seriousness of the offense. Treason is engaging in war against the United States or giving aid or comfort to its enemies. Felonies include serious crimes such as murder or rape; felonies are punishable by death or imprisonment in a penitentiary.

Misdemeanors, which are considered less serious crimes, are punishable by a fine or by imprisonment of less than a year in a local jail. In most states, petty crimes are considered Copyright © 2015 Pearson Education Ltd.

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a subcategory of misdemeanors; they are usually punishable by a fine or incarceration for six months or less.

6-3.

The Defendant’s Miranda rights are his rights to have the following statements made to him before any questioning by authorities: 1.

“You have the right to remain silent and refuse to answer any questions.”

2.

“Anything you say may be used against you in a court of law.”

3.

“You have the right to consult an attorney before speaking to the police and have an attorney present during any questioning now or in the future.”

4.

“If you cannot afford an attorney, one will be appointed for you before the questioning begins.”

5.

“If you do not have an attorney available, you have the right to remain silent until you have had an opportunity to consult with one.”

6.

“Now that I have advised you of yourrights, are you willing to answer any questions without an attorney present?”

6-4.

One definition of a white collar crime is crime committed by a person of respectability and high social status over the course of his occupation. Another definition is crimes committed in a commercial context by members of the professional and managerial class.

Students’ examples may vary. One crime that would fit under both definitions is if a bank officer embezzled money from the bank. A crime that would fit under the first definition, but not the second, would be a crime committed as part of a person’s occupation, but not in a commercial context. If the bank manager raped an employee on the work site, this would be white collar crime under the first definition, but not under the second because it would not be a crime in a commercial context.

6-5. The basic rationale for imposing criminal liability on corporations is that the corporation can act as one unit—like an individual—and that it makes more sense to impose liability on the corporation than individual actors within the corporation.

6-6. The primary similarity is that in both countries, the main goal is to encourage people to come forward if they know about wrongdoing. While both countries offer protection at the national level, in the U.S., the primary protections are at the state level. While in the U.S. the primary emphasis is on protecting the whistleblower, in the U.K., the primary emphasis is on finding a way to solve the problem reported by the whistleblower. In the U.K., whistleblowers do not get any financial reward for coming forward, whereas in the U.S., under some statutes, whistleblowers do get monetary rewards.

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6-7.

Matheson could be held liable. He cannot escape liability by announcing the limits of his authority. Individuals in positions of authority can be held liable for violating statutes even when they try to redefine the limits of their authority.

6-8.

No, the defense was not valid. Generally, corporations are liable for their agents, even when they act contrary to general corporate policy. This policy encourages corporations to make sure their agents act properly.

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6-9.

It depends. In United States v. Park, the court did not have much sympathy for Park because he was aware of legal violations. Laffal did not know. However, he will still lose.

Courts expect presidents of corporations to know what goes on in the company. The only way Laffal might win is if he can show his employees make every effort to hide their illegal activity from him. Then a jury would at least feel sorry for Laffal.

6-10. Evans, the loan officer, violated the law. His behavior looks like criminal fraud. He has an intent to defraud, he committed the act (through Docherty), and accomplished the fraud. Docherty is an accomplice to the fraud.

6-11. Defendant engaged in a specific type of fraud—false pretenses. He misrepresented facts to obtain money from Mrs. Russ.

6-12. Mr. Jones is displaying behavior similar to Mr. McGraw’s behavior in State v. McGraw.

We’d have to look at the relevant state statute for theft. Still, if Mr. Jones is in a state such as Indiana, he will be found guilty of theft. Mr. Jones could “test” the product without making any money. If he simply tested it, the behavior would not be a crime.

Here, he is engaging in the crime of theft.

Answers to Case Problems 6-13. The court ruled that charge 3, disclosure of budget deliberations, was lawful because it is not protected under the Whistleblower Protection Act. However, the court found in favor of Chambers with regards to charge 2, concerning issues of public safety. These allegations were substantiated enough to be protected under the Whistleblower Protection Act. The court remanded the Department of the Interior to reconsider Chambers’ penalty based on the reversal of charge 2.

6-14. The appeals court affirmed Kimoto’s conviction by finding him in violation of all counts, including conspiracy, mail fraud, and wire fraud. The government was able to establish that Kimoto had intent to defraud and showed Kimoto’s knowledge of the fraudulent activities within his company. As President of the company, Kimoto was aware that the scripts were deceptive and had told employees the cards had to be sold using that method.

6-15. In this case, the court found that Sam’s Wines & Liquors, Inc. had not properly pled damages under Computer Fraud and Abuse Act (CFAA). The company must allege damages and loss but because they did not properly plead damage under CFAA that motion was dismissed. However, the court also found that Sam’s Wines & Liquors, Inc. still has reasonable probability of jurisdiction over any other sources of damages they may have.

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6-16. The Supreme Court upheld that lower courts verdict. The court stated that Thompson had waived his Miranda rights. This is because he voluntarily and willingly agreed to make a statement to the police.

6-17. Joel Ruben would be guilty of fraud because he deceived the government into thinking that his mother was still receiving the checks. Basically, the government would need to prove that the mother did not gift the money to him and prove that Ruben intended to use the money only for himself and continue to claim to be his mother.

6-18. The court of appeals affirmed the trial court’s decision to convict and sentence Harvey and Kronstein. The government was able to sufficiently establish intent to defraud by showing that Kronstein’s contract proposal identified nine positions but he only filled six.

Kronstein submitted an invoice to bill INSCOM for nine employees and Harvey approved the invoices.

6-19. The appeals court affirmed the trial court’s decision. Terry continuously embezzled gasoline over a period of time. The state had provided him with a timeline of when the embezzlement took place and Terry had access to documents that recorded each individual date. The time frame provided to Terry was deemed sufficient to notify Terry of the charges against him.

6-20. In order to win this case, Robbins’s attorney would have to prove that a constitutional violation was committed by the RICO employees. However, the employees of the Bureau of Land Management could not be held responsible as other forms of relief were available to Robbins. Additionally, even though the negotiations between the two parties were tough, no constitutional violation was committed. For this reason it would be difficult to win this case.

Thinking Critically about Relevant Legal Issues 1.

The main argument here is that managers should not be held accountable for the actions of employees. The author argues that managers have to trust employees to get the job done and when they do not, they fall short in their other duties. The author would conclude that managers need to be seen as overseers, not as extensions of the employees.

2.

A good piece of information here would be what exactly a manager is. How much influence does he or she have over a project? What are his or her duties? Because manager is such a broad term, it needs to be clarified.

3.

Here the author is looking at independence and human nature. It is in one’s nature to make mistakes. He believes that a manager cannot influence an employee in a way to eliminate Copyright © 2015 Pearson Education Ltd.

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mistakes.

An opposite view would rely on the notion that a manager is in charge of a project. If there are any problems along the way, they are his or her responsibility. If that responsibility is forgone, then it is on the manager. A good manager makes sure that his or her employees know exactly what to do and is involved enough so that he or she can check every step of the way to make sure that nothing has gone wrong.

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Chapter 7 Business Ethics and Social Responsibility Introduction Chapter Seven addresses the following questions: • • • • • •

What is business ethics?

What does social responsibility mean?

What are some recognized theories of ethical thought and their application to business problems?

What purposes do codes of ethics serve?

Do people have different perspectives on what a business should do if it wants to be socially responsible?

What are the global dimensions of ethics and social responsibility?

Chapter Seven is significant because issues related to ethics and social responsibility affect every business manager. The effects are both personal and professional. Students are usually interested in the ethics and social responsibility material. The themes of ethics and social responsibility have been used throughout the legal environment of business course. This textbook makes it easy to use these themes because the continual reference to the ethical norms of efficiency, security, justice, and freedom remind students of ideas that fall under the topics of ethics and social responsibility themes.

Achieving Teaching Excellence “Ethics and Me” Exercise If instructors teach students who are employed, then it might be interesting to hear the kinds of ethical dilemmas they face at work. Here’s how to find out in a structured way that allows everyone in the class to participate.

At the beginning of class time that the instructor plans to devote to this chapter, ask students to write down the answer to these questions: 1.

Think of a moment when you discovered that the word “ethics” affected you at your job.

Note: At this point, do not worry that students have not yet read a definition of the word ethics.

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2.

Write for five minutes, answering these questions: What was happening at this moment when you discovered that the word ethics had something to do with your working life?

Who was there? How did you feel about this moment?

Then, after students have written for five minutes, engage in serial testimony.

Instructors should go around the room and ask each student to read some of what they wrote, all of what they wrote, or to pass if they do not want to speak. Give each student a three minute time limit, and stick to it. Instructors may want to participate in the exercise too, sharing a moment of their own.

As instructors go around the room, they should take notes of the moments students shared.

These moments can be used later in discussions of the chapter. Instructors might be surprised at the seriousness of some of their students’ dilemmas, and at their relevance to material in the chapter.

To get a sense of closure after students have shared the real dilemmas they face at work, let them know that in this chapter, they will learn some strategies for responding to ethical dilemmas. They will also get a sense that some of the dilemmas they face are common, and solvable.

Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview This chapter presents material on business ethics in a neutral way. Readers are left to make their own choices about what part ethics should play in business decision making and about whether the business community, the trade groups that represent it, and individual managers should act in a “socially responsible” manner. This chapter includes (1) a broad definition of ethics and social responsibility; (2) some recognized theories of ethical thought and their application to business problems; (3) a discussion of individual, corporate, trade association, and professional ethical codes; and (4) schools of social responsibility as applied to business problems. The chapter ends with a brief discussion of some current trends in the area of ethics and social responsibility, as well as some proposals now being debated, which, if implemented, would change the structure of corporate governance.

This chapter falls in a good place in the book. Just as students are getting the hang of figuring out what ethical norms underlie judicial opinions, they get more information about ethics and social responsibility. The chapter presents basic, clear information about those topics.

The chapter also succeeds in its promise to refrain from being preachy. The cases provide good facts that allow discussions of alternative definitions of ethics and social responsibility.

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Additionally, instructors should try starting class with “ethics and me” serial testimony for a change of pace.

Topic Outline I. Definition of Business Ethics and Social Responsibility A. Business Ethics B. The Social Responsibility of Business In re Exxon Valdez II. Theories of Ethical Thought A. Consequential Theories B. Deontological Theories Bates v. State Bar of Arizona C. Humanist Theories III. Codes of Ethics A. Individual Codes of Ethics B. Corporate Codes of Ethics Corporate Ethics C. Industry Codes of Ethics D. Professional Codes of Ethics Accounting Insurance and Finance Law IV. Schools of Social Responsibility A. Profit-Oriented School B. Managerial School Cooper Industries v. Leatherman Tool Group, Inc. C. Institutional School D. Professional Obligation School E. Regulation School Fog Cutter Capital Group v. Securities and Exchange Commission V. Global Dimensions of Ethics and Social Responsibility A. Code of Conduct for Transnational Corporations VI. Summary Discussion Questions for Chapter Seven 1.

How does ethics as presented in Chapter Seven relate the four primary ethical norms the text authors presented in Chapter One? Focusing on the four primary ethical norms or values (freedom, security, justice, and Copyright © 2015 Pearson Education Ltd.

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efficiency) is one way to discuss ethical issues. The part of the chapter that looks at schools of thought and ethical theories is a different and broader way of looking at ethical issues.

2.

Why do some people call utilitarian thought the “philosophy of business”?

The idea of judging business conduct based upon whether it brings net happiness or pleasure to society underlies a market-based economic system. Under this economic system, the focus is on the maximization of utility (happiness), measured in terms of dollars. Business people are uncomfortable thinking in terms of a duty to follow the moral law, which is part of the Kantian view of ethical thought.

3.

Ask students to read up the case Pavlik v. Lane Ltd./Tobacco Exporters Intern. 135 F.3d 876 (3d Cir. 1998). Ask them how would a utilitarian thinker respond to the Pavlik case?

Both act and rule utilitarians would focus on the consequences of an act. They would judge Justice Becker’s decision to remand the case for a new trial based upon what would maximize the benefits to society. A utilitarian thinker would view Justice Becker’s decision as a good one because the decision protects the interests of individuals who would likely refrain from inhaling butane if they knew it would kill them.

4.

How would a Kantian thinker respond to the Pavlik case?

A Kantian thinker might focus on the behavior of the manufacturers of Zeus (and similar products); say the manufacturer had a duty to follow the moral law. What would the moral law tell us in this case with warning labels? What if all manufacturers used equally weak warning labels? A person/organization ought to engage in acts that he or she could see becoming universal standards. Do people want manufacturers to minimize the dangers of their products? Probably not. Moral law tells us that it would be okay to universalize a rule that has high expectations of manufacturers who make potentially lethal products.

5.

Think of all the reasons you can that corporations enact codes of conduct.

Companies want to make it clear to their employees what they can and cannot do in the workplace. Companies want to make sure that if employees engage in questionable behavior, the company can prove it and employees can be told what they can and cannot do. Corporate codes of conduct also generate good will and good publicity. Have students add to this list.

6.

Why do accountants, lawyers, and life underwriters have codes of ethics, but managers do not?

First, have students discuss whether managers are professionals. Then, explain that the work Copyright © 2015 Pearson Education Ltd.

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managers do varies so much that it would be hard to enact a code that would cover such a diverse group. Ask the class whether managers would want to have a professional code of conduct. What are the advantages and disadvantages?

7.

List and explain the five schools of social responsibility.

Following are the five schools of social responsibility: • Profit-oriented school—the sole purpose of business is to maximize profits for shareholders.

• Managerial school—businesses must create a relationship of trust with constituents both internal and external to the company.

• Institutional school—business entities, like other societal institutions, must act in a manner that benefits all of society.

• Professional obligation school—business managers and members of boards of directors should be certified as professionals before they can assume managerial responsibility.

• Regulation school—business units are accountable to elected public officials.

Answers to Critical Thinking about the Law, Case Summaries, and Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law 1.

Several different definitions of responsibility exist. To be responsible could mean to take the blame. To be responsible could mean to engage in serious reflection before making a decision. To be responsible could mean to look out for the interests of a particular group, such as shareholders.

2.

If security mattered to a person, it would be important to want to stay in business a long time. If you acted in a callous manner toward the Bhopal victims, the public would react negatively, thereby placing the company in financial jeopardy. The company wants to make sure no one steps in and interferes with its property rights. Thus, Union Carbide would want to take voluntary action to respond to the needs of the victims before the government steps in and mandates action.

3.

Immediately, one would ask, “Which kind of responsibility do you mean”? One would want to know whether the person means responsibility to shareholders, responsibility to stakeholders, or responsibility in terms of accepting blame. Responsibility might also mean to engage in a certain kind of decision-making process that shows respect for moral reasoning. These definitions show respect for different ethical norms. For instance, defining responsibility in terms of shareholders shows a preference for efficiency. Focusing on Copyright © 2015 Pearson Education Ltd.

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stakeholders shows more of a preference for justice—employees, customers, and local communities should also be treated with respect.

Case Summary—In re Exxon Valdez This case is part of the aftermath of the Exxon Valdez oil spill. When taken to trial, the company was found guilty and among other penalties, had to pay $5 billion in punitive damages.

This review of the damages ruled that it must be sent down to the lower courts and essentially said that the punitive damages were unreasonably high. The final judgment by the court is a reduction in the punitive damages award is $4.5 billion as the means of resolving the conflict between its conclusion and the directions of the court of appeals.

Case Summary—Bates v. State Bar of Arizona In this case, the State Bar of Arizona asks the U.S. Supreme Court to uphold a disciplinary rule in Arizona that prohibits advertising by lawyers. The Court rules against the State Bar of Arizona and holds that the disciplinary rule violates the First Amendment’s right to freedom of speech.

Suggested Answers to Critical Thinking about the Law Questions 1.

The Court reasons that legal advertising is good because lawyers can reach out and serve the community better. The Court also points out the possibility that consumers might benefit from having more public information about fees. Next, the Court points out the possibility that the quality of legal services could go up if lawyers are able to offer certain standard packages. Finally, the Court does not believe advertising will affect the integrity and honor of the legal profession.

2.

In the last paragraphs of the opinion the Court’s preference for freedom was seen. Freedom is defined as to act without restriction from rules imposed by others. The Court does not want the State Bar of Arizona to place restrictions on lawyers in the area of advertising.

3.

Justice Blackmun’s conclusion would not change, even if evidence were offered that advertising causes the price of legal services to increase. Freedom is important to the Court.

The rules against advertising are a serious infringement on freedom. Freedom is more important than efficiency to the Court, so the Court would not change its mind, even if it thinks it is important to reduce costs to those who seek legal services.

Case Summary—Cooper Industries v. Leatherman Tool Group, Inc. This case is in the book to make clear to students the purpose of punitive damage awards.

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The Supreme Court makes clear that they are “quasi-criminal” and operate as private fines. The purpose of punitive damage awards is to punish the defendant and deter future wrongdoing. The Court in this case was concerned that a punitive damage award might be excessive.

Case Summary—Fog Cutter Capital Group v. Securities and Exchange Commission The reason this case is in the book is to explain the regulation school of thought. In this case, the court found in favor of a regulatory body, the Securities and Exchange Commission, after a company, Fog Cutter Capital Group, was removed from the NASD for keeping their CEO after he was incarcerated and cost the company and its stockholders millions of dollars. With this ruling, the court recognized the need to regulate businesses.

Answers to Review Questions 7-1.

The deontological theory of ethics claims actions that actions can be judged as ethically good or bad based on absolute moral principles arrived at by human reason regardless of the consequences of an action, that is, regardless of whether there is net happiness. From the facts the book lists about Union Carbide, it appears the company acted according to principles unrelated to intelligence, wisdom, and self-restraint. The company appeared to look out for shareholders rather than contribute to inherent human capacities of residents who lived near the Union Carbide plant in India.

7-2.

Milton Friedman adheres to the profit-oriented theory of social responsibility. He believes the one responsibility of business is to maximize profits for the shareholders, while staying within the rules of the game. Holders of this theory argue that business entities are distinct organizations in our society and that their sole purpose is to increase profits for shareholders. Businesses are to be judged solely on criteria of economic efficiency and how well they contribute to growth in productivity and technology.

Robert Krikorian believes in the managerial theory of social responsibility. He argues that businesses, as large institutions, have obligations to stakeholders—shareholders and employees, customers and communities.

Advocates of an institutional school of social responsibility for business argue that business entities have a responsibility to act in a manner that benefits all of society, just as churches, unions, courts, universities, and governments have.

Advocates of a professional obligation school of social responsibility state that business managers and members of boards of directors should be certified as “professionals” before they are allowed to assume managerial responsibility.

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A regulation school of social responsibility sees all business units as accountable to elected public officials. Proponents of this theory argue that, because business managers are responsible only to a board of directors that represents shareholders, the corporation cannot be trusted to act in a socially responsible manner.

7-3.

Groupthink is the tendency of employees to go along with what the other employees say.

If one has a strong individual code of ethics, then, when what the group wants to do conflicts with that code, his commitment to that code will give him the strength to argue against the group, thus not falling victim to groupthink.

7-4.

Following are the characteristics expected of an individual and his or her profession: • Mandatory university educational training before licensing, as well as continuing education requirements • Licensing-examination requirements • A set of written ethical standards that is recognized and continually enforced by the group • A formal association or group that meets regularly • An independent commitment to the public interest • Formal recognition by the public as a professional group

7-5.

1. Respect for national sovereignty in countries where such companies operate.

Often transnational companies operate in developing nations where governments are less stable and more corrupt, making this goal very difficult to achieve.

2. Adherence to sociocultural values. The code seeks to prevent transnational companies from imposing value systems that are detrimental to those of the host country.

3. Respect for human rights. Companies should not discriminate on the basis of race, color, sex, religion, language, or political or other opinion. In developing nations, achievement of this goal is sometimes very difficult when the host country does discriminate on the basis of some of these factors.

4. Abstention from corrupt practices. Transnational corporations shall refrain from the offering, promising, or giving of any payment, gift, or other advantage to a public official or refrain from performing a duty in accordance with a business transaction. Corruption is endemic to many.

Answers to Review Problems 7-6.

The answers to this question would vary depending on which ethical standard is applied by the student. However, a Kantian thinker would follow moral law without thinking Copyright © 2015 Pearson Education Ltd.

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about or no matter what the consequences. It is because, if Pocock gathered information without revealing the fact that she worked for a rival company, it would be an ethical violation. On the other hand, if she refused to gather information she would risk losing her job and limiting her career growth.

7-7.

The conference attended by Wu was sponsored by the company he works for. On winning the prize, Wu should have informed his supervisor. It could become a problem if Wu’s supervisor heard about this from someone else. Therefore, the best option for Wu would be to clear things out with his supervisor as the gift was not given to him by suppliers or company’s clients.

7-8.

C should apply a Kantian standard and engage in behavior that would make a good universal standard. Can there be a universal standard that allows everyone to cheat companies that provide telephone services? No. It would be difficult to live in a culture with such a universal standard.

7-9.

The answers to this question would vary depending on the ethical standard applied. In both situations, the person is lying. Using a Kantian standard, it would be prudent to refrain from hiring anyone who lies. Although you might be missing out on a good hire overall, you would want someone who follows the moral law at all times. A utilitarian standard would be more forgiving, and would probably allow you to hire the manager who lies about his or her prior salary. Lying about the MBA degree seems significant, and unusually deceptive. However, inflating a prior salary might be standard practice in the business world. If one refrains from hiring someone who inflates a prior salary, the choices of potential employees might be a small pool of moralistic managers. One might get a good hire from the pool of salary inflators. One way to handle the situation would be to accept salary inflation figures, and offer a lower, more realistic starting salary.

7-10. The various schools of ethical thought will influence a person’s answer to this question.

Ask students to run through all the possible responses. Realistically, it is hard to imagine someone in business reporting the incident to the salesperson’s superior, especially when no policy demands that kind of reporting. Whether a person reports to his or her own company is more difficult. The situation does involve a gratuity that needs to be reported.

A good exercise might be to ask students to create a company policy that makes the response clear. For example, the policy should define gratuity. Also, the policy should make it clear that the employee must report the behavior. The employee may be relieved to find that there really is no choice.

7-11. Ideally, the lab technician will engage in an ethical decision-making process that considers more than one ethical standard. What decision will benefit the community as a whole? What would the moral law tell the lab technician? How would the lab technician Copyright © 2015 Pearson Education Ltd.

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feel if his or her behavior were detailed in a newspaper, such as The New York Times?

Hopefully, the lab technician will decide not to go along with a plan that puts the public at risk. Ideally, the lab technician will be able to influence change within the organization that encourages the company to continue to look for a treatment that is both safe and effective. This decision reflects the institutional school of social responsibility, which indicates that business entities have a responsibility to act in a manner that benefits all of society.

Answers to Case Problems 7-12. Howard did act unethically as he indulged in a bogus sale that showed an increase in business earnings. This count could account to fraud, which is not indicative of the company’s actual growth. Student’s answer may vary based on the school of thought they use to substantiate their answer.

7-14. In this case, the best way for Johns-Manville to justify declaring bankruptcy is by using a consequentialist theory. The company argues that, by declaring bankruptcy, the company is achieving a result that is desirable for society as a whole, in that the company will continue to exist. The court recognizes this concept when it states that: “In the instant case, not only would liquidation be wasteful and inefficient in destroying the utility of valuable assets of the companies as well as jobs, but, more importantly, liquidation would preclude just compensation of some present asbestos victims and all future asbestos claimants. This unassailable reality represents all the more reason for this Court to adhere to this basic potential liquidation avoidance aim of Chapter 11 and deny the motions to dismiss. Manville must not be required to wait until its economic picture has deteriorated beyond salvation to file for reorganization.” With regard to theories of social responsibility, Johns-Manville can justify its behavior by relying on the managerial school, which requires the company to look out for all stakeholders. Here, JohnsManville can argue that it has a duty to stay in business. Staying in business ultimately benefits employees and local communities.

7-15. Richard Fraser and Nationwide disagree about the extent of an agent’s rights to privacy.

Legally, Nationwide’s case is solid. In fact, Nationwide won the case. However, Richard Fraser could argue that moral law is on his side. Most employees/agents want some guarantee of privacy in the workplace. With regard to social responsibility, Nationwide is looking out for its bottom line. The company prefers the profit-oriented school. That school suggests that Nationwide should do whatever it can (including violate agents’ privacy rights) in the interests of shareholders. By contrast, Fraser prefers the managerial school, which requires companies to look out for the interests of all stakeholders, including agents.

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7-16. Zanford was maximizing his self-interest at the expense of a weak, elderly man. The SEC looks out for people such as Wood (the weak, elderly man), using a duty-based ethics theory. Zanford violated a position of trust, and the SEC acts on behalf of society to reinforce the moral rule that individuals in positions of trust owe the highest duty to their clients.

Thinking Critically about Relevant Legal Issues 1.

The Court is very protective of the professional code of ethics that governs the actions of attorneys. Even though the attorney was working under a misguided president, he had no obligation to do so. Therefore, the court took into account personal accountability and the ability to remove oneself from a potentially dangerous situation.

2.

The fact that when an attorney commits a felony he or she is automatically disbarred is basically the whole argument the Court gives for disbarment.

3.

The Court wants to uphold the image of the profession and stay true to principles that govern all actions. No action is exempt from the rule and the Court wants to make sure that attorneys understand that they represent the entire profession and must make ethical decisions in all aspects of life.

4.

Basically, because he was under the direction of the President, he was obligated to follow his orders. One does not easily refuse the President. He also outlines his impeccable record and vast achievements. He wanted to show that it was an isolated incident, carried out under orders from the highest office in the country.

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Chapter 8 The Global Legal Business Environment Introduction Chapter Eight addresses these questions: • • • • •

What are the dimensions of the international environment of business?

What are the methods through which companies engage in international business?

What are the risks of engaging in international business?

How does legal and economic integration serve as a means of encouraging international business activity?

How are disputes between companies doing business in the global arena resolved?

Chapter Eight is significant because it presents information managers must know to be competitive in a borderless economy. The international arena offers both risks and opportunities.

Managers need to be aware of both.

Achieving Teaching Excellence How to Achieve Teaching Excellence When Your Class Size Is Large Some instructors have probably read this Instructor’s Manual, and said, “Sure. I’d like to improve my teaching skills and move toward teaching excellence, but that would be very difficult for me. I’d like to have a student-centered classroom, encourage discussion, ask better questions in class, and receive better responses from my students, but I teach large classes. I can achieve only so much, and teaching several students in one class reduces my chances for achieving teaching excellence.”

In part, instructors are right. It is more difficult, more challenging, to achieve teaching excellence when the class size is large. However, it is possible to improve and move toward teaching excellence no matter how many students instructors teach during a class session.

First, what is “large”? Instructors usually teach 35 students in a class, and it can be assumed that this number is a medium-size class. Let’s assume that large is some number more than 40 students. Many professors teach classes with 100 or more students in them. What can instructors do to achieve teaching excellence when they lecture large classes?

In an article by Margaret Morganroth Gullette, former assistant director of the Derek Bok Center for Teaching and Learning at Harvard, she explains how to lead discussion in a lecture Copyright ©2015 Pearson Education Ltd.

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course. Gullette explains that a good format for teaching large classes is to use a discussion– lecture format. She suggests the instructor mix mini-lectures with discussion, always searching for a rhythm that matches student attention. Gullette urges instructors to question students, even in large classes. She points out something many instructors know from their law school experiences: “For a student to speak in a lecture class constitutes an event.” She also writes something insightful about discussion in a large class. Gullette writes, “Until a student hears herself expounding or questioning, she may not know what she thinks.” Gullette says that speaking empowers future learning and speaking.

Gullette also presents five maxims for instructors who teach large classes to keep in mind.

Many of these are useful even for teaching in small classes. Her maxims are: 1. No impression without expression. Gullette writes that when instructors speak in class, the fact of an audience magnifies their discourse. When instructors speak in public, their expression comes back to them, and they receive some reactions to what they said. They read their success or failure by reading bystanders’ eyes.

2. No verbal expression without encouragement. She writes that the best discussion leaders are both bright and kind. Gullette suggests instructors wait before they jump in to comment or judge something a student says. Instructors should look interested and thoughtful.

3. No learning without muddle. She explains instructors are bound to have muddle in their classrooms when they engage in discussion because discussion disrupts the simplicity of lectures. Confusion is good.

4. No real discussion—and no engagement—without conflict. Gullette points out what most lawyers know well. “No discussion occurs without some level of conflict, or if you prefer, difference of ideas.”

5. Conflict and focus come through the document. By this, Gullette means that instructors must provide the context in which questioning is interesting. Skillful teachers focus this discussion by giving students a “document.” This can be opening remarks, new background, or reminding them of key factors. In the Kubasek, Brennan & Browne text, the document could be the critical thinking questions, and the discussion questions in this Instructor’s Manual.

Finally, Gullette reminds instructors why encouraging certain kinds of classroom discussions is important, even in large classes. She writes, “It is probably true that a class matters more to everyone if there is some rise in the intellectual temperature at some point, and that dispute sharpens points. A good teacher can plan this rise in temperature.” That is especially true when the teacher encourages his or her students to engage in critical thinking.

As instructors work with their students they should remember to encourage classroom discussion … even if the class is large.

Reference Copyright ©2015 Pearson Education Ltd.

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•

Margaret Morganroth Gullette, “Leading Discussion in a Lecture Course: Some Maxims and an Exhortation,” CHANGE 32 (March/April 1992).

Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview At the outset of Chapter 2, it was noted that U.S. managers can no longer afford to view their firms as doing business on a huge island between the Pacific and the Atlantic Oceans. Existing and pending multilateral trade agreements open vast opportunities to do business in Europe and Asia, throughout the Americas, and indeed throughout the world. If present and future U.S. managers do not become aware of these opportunities, as well as the attendant risks, they and their firms will be at a competitive disadvantage vis-à-vis foreign competitors from all over the world.

Students will find this chapter interesting because many of them are interested in the global economy. The first section of the chapter is especially interesting because it helps students realize the different kinds of law people in other cultures follow. Students will also be interested in the organizations that help bring down tariff barriers and thus encourage companies of all nations to engage in international business.

After the topic outline, discussion questions will encourage students to think about material from throughout the chapter. This manual will place special emphasis on dimensions of the international environment of business, and organizations that help bring down trade barriers.

Topic Outline I. Dimensions of the International Environment of Business A. Political Dimensions B. Economic Dimensions C. Cultural Dimensions D. Corruption and Trade United States v. Kay E. Legal Dimensions National Legal Systems F. Selected National Legal Systems International Law Crosby v. National Foreign Trade Council II. Methods of Engaging in International Business A. Trade Copyright ©2015 Pearson Education Ltd.

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B. International Licensing and Franchising C. Foreign Direct Investment In re Union Carbide Corp. Gas Plant Disaster v. Union Carbide Corp.

III. Risks of Engaging in International Business A. Expropriation of Private Property B. Sovereign Immunity Doctrine Keller v. Central Bank of Nigeria IV. Act-of-State Doctrine Republic of the Philippines v. Ferdinand E. Marcos A. Export and Import Controls Export Controls Import Controls V. Legal and Economic Integration as a Means of Encouraging International Business Activity A. The World Trade Organization Purpose and Terms General Impact Impact on Corporate Investment Decision Making B. The European Union Purpose Structure Impact C. North American Free Trade Agreement Purpose Structure Impact V. Global Dispute Resolution A. Arbitration B. Litigation C. Globalization: Hurts or Helps VI. Summary Discussion Questions for Chapter Eight 1.

Explain why someone might think it’s true that a business manager must do a country analysis before doing business in another nation state.

A country analysis is important because a nation’s economic performance is affected by many factors, including economic growth, inflation, the nation’s budget, and trade deficits.

The text lists additional factors. For instance, it is important in some industries to know how much disposable income citizens in a particular country enjoy. If disposable income is limited, it does not make sense to sell luxury items. Another example is the country’s Copyright ©2015 Pearson Education Ltd.

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infrastructure. A business must know the availability and condition of roads.

2.

Explain relationships between Islamic law and Hindu law.

One relationship between the two is that both are religiously based and govern certain aspects of daily life for individuals. A difference is that Hindu law is followed primarily in India, whereas Islamic law is followed all Muslims in approximately thirty countries.

3.

Explain relationships between common law and Romano-Germanic Civil Law. One major relationship between the two is that common law is based primarily on case law, whereas civil law is based upon codes and statutory law. Another relationship is that civil law countries have inferior public law, whereas common law countries have developed public law. Although it’s unclear from reading the text, it seems that high-income and middle-income countries are more likely to follow civil or common law than other families of law the book describes.

4.

Evaluate this statement: International law comes exclusively from treaties between nations.

The statement is flawed because international law comes from many sources, including treaties. Other sources include custom, judicial decisions of international courts, decisions of national and regional courts, scholarly writing, and international organizations.

5.

Explain relationships between international licensing and foreign direct investment.

International licensing involves a contractual agreement in which a company (licensor) makes intellectual property available to a foreign individual or company (licensee) in return for royalties or other compensation. Foreign direct investment occurs when a company creates a foreign subsidiary in a host company or enters into a joint venture. Foreign direct investment is riskier than international licensing because it involves actually doing business in the host country. Foreign direct investment also requires that the company be restricted by the host country’s governmental restrictions. International licensing also places restrictions, but because the activity itself is limited, so are the kinds of legal restrictions that apply.

6.

Which risk of engaging in international business is the most significant?

It depends. Students would need to look at particular facts of a situation to decide. Possible risks include expropriation of private property by the host foreign nation, the possibility that a firm will claim sovereign immunity, export and import controls, and currency fluctuations.

Expropriation is less likely than currency fluctuations, but if expropriation did happen the loss would probably be larger.

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7.

Why does the text include a discussion of China?

The book discusses China as part of its discussion of import controls. The book uses China as an example of how a country can impose import barriers to retaliate against another country. The United States wanted to use import barriers against China because it had pirated intellectual property, failed to meet WTO tariff standards, and violated the human rights of its citizens. Note that China has recently become a member of the WTO.

8.

Why did NAFTA generate so much controversy before it was passed?

NAFTA eliminated barriers to the flow of goods, services, and investments over a fifteenyear period. Some constituencies believed NAFTA would hurt them, and their concerns triggered controversy. For instance, some American workers believed they would lose their jobs if barriers were removed because goods and services are cheaper if produced outside the United States. Those industries that would have difficulty remaining competitive if trade barriers were removed felt threatened by NAFTA, so they were understandably concerned.

9.

What groups would not be happy about the creation of the WTO? The WTO has the power to enforce a new trade accord. Those countries that are unable to comply with WTO standards will not appreciate the WTO. Additionally, some businesses will have difficulty competing when tariffs are reduced. Those businesses that have benefited from their government’s protection in the past will not appreciate WTO’s efforts toward encouraging reduction of protection. Also, environmentalists and consumer groups are concerned that the WTO will overrule environmental laws of the United States.

10. Explain relationships between the WTO and the European Union (EU).

The WTO and EU are similar as both are committed to achieving free movement of goods and services across borders. Another similarity is that their structures both include councils to make policy decisions, and panels that rule on disputes. One difference is that the EU wants to form a political and economic community with a single currency and common external tariff barriers toward nonmembers. The WTO does not try to create such a community.

Answers to Critical Thinking about the Law, Case Summaries, and Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law Questions

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The Legal Environment of Business: A Critical Thinking Approach

1.

It is difficult enough for people who speak the same language to communicate. It is not uncommon within one’s own country and culture for people to supply different meanings to ambiguous words and phrases. This process is even more complicated when people speak different languages and come from different cultures. International business negotiations are affected by a variety of cultures and languages. These differences make it important to define ambiguous words and phrases.

2.

These questions are important because knowing a country’s primary ethical norms helps people decide what assumptions they can make and what definitions they can supply for ambiguous words or phrases. For instance, if people know a country values security (to be safe from those wishing to interfere with their property rights) they can use this information to interpret an agreement. If they are interacting with a country that values security they know the negotiators will be sensitive to deals that affect property rights.

3.

Those who value freedom (to act without restriction from rules imposed by others) are likely to enter into agreements with foreign companies. Many people believe that free trade benefits consumers by allowing them to have access to goods at lower prices.

Case Summary—United States v. Kay This case deals with bribes and the FCPA, or Foreign Corrupt Practice Act. David Kay and Douglas Murphy ran the company ARI (American Rice, Inc.) in the Republic of Haiti. Both are U.S. citizens. For a four-year period, they and other employees and officers of ARI paid bribes to Haitian customs officials so shipments would be understated and therefore the company would have to pay the duties on bigger shipments. They also bribed other officials to again understate the total of rice so the company would not have to pay more in sales tax. Both Kay and Douglas knew about the bribes and authorized the payment. However, the district court ruled that they did not violate the FCPA because the bribes did not obtain business. The Appellate Court ruled in favor of the United States, pointing to the fact that the FCPA prevents businesses from using bribes to unlawfully forward the profits of their business. In this case, the bribes protected funds that would have otherwise been expended.

Suggested Answers to Critical Thinking about the Law Questions 1.

Unlike bribery, an innocuous payment is one that does not give the business an unfair advantage over all other businesses. Grease payments are only allowed when they speed up the process or prevent unlawful acts. The business cannot avoid payment of money that would otherwise have to spend by all other businesses.

2.

The Court obviously wants the system to be fair and to prevent corruption. They do not want to reward businesses for unethical behavior. Businesses must have a fair shot at business and Copyright ©2015 Pearson Education Ltd.

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if one business is using bribes to hold on to money, then it puts all others at a disadvantage.

Case Summary—Crosby v. National Foreign Trade Council This case deals with state power to enact trade legislation. The state of Massachusetts enacted a law that prevented trading with Burma. The U.S. Government also passed a law placing sanctions on the country. The National Foreign Trade Council sued, citing the fact that Massachusetts unconstitutionally infringed on the federal foreign-affairs power, violated the Foreign Commerce Clause, and was preempted by federal legislation. Two courts sided with the council, but Massachusetts appealed to the Supreme Court. The Court upheld the decisions, citing the Foreign Commerce Clause. Massachusetts cannot make a law that falls under the jurisdiction of the federal government.

Case Summary—In re Union Carbide Corp. Gas Plant Disaster v. Union Carbide Corp.

This case considers a claim by the Government of India (GOI) and several private class action plaintiffs (Indian citizens) against Union Carbide India Limited (UCIL) and the parent corporation, Union Carbide Corporation (UCC) for more than $1 billion following a disaster at a chemical plant operated by UCIL in 1984. A federal district court had granted UCC’s motion to dismiss on the ground that India (not the United States) was the appropriate forum. The U.S. Court of Appeals affirmed, and the case was heard in India rather than the United States. The U.S. Court of Appeals had decided the case should not be heard in the United States because India had a greater ease of access. The court also explained that the plant had been constructed and managed by Indians in India. Americans were rarely even on the property. The court also pointed out that many relevant documents were written in Hindi or other Indian languages. The Indian government regulated UCIL. India had considered the plant to be an Indian one, and the disaster to be an Indian problem.

Suggested Answers to the Critical Thinking about the Law Questions 1.

Dear Judge Mansfield: Before you decide whether to uphold the federal district court’s decision to grant UCC’s motion to dismiss, please review the facts of the case. If you do, you will see that UCC’s involvement in UCIL was extensive, and that the federal district court was incorrect in granting UCC’s motion to dismiss.

First, UCC owns more than half the stock in UCIL. This is not “limited” involvement. Also, UCC provided a summary process design package for construction of the plant. Some of UCC’s technicians monitored the progress of UCIL in detailing the design and erecting the plant.

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Although most people who worked on the plant, then later in the plant, were Indian nationals, UCC has always controlled UCIL, even if UCIL carried out UCC’s plans. UCC’s involvement has been extensive and controlling.

Thank you, and I trust you will overturn the decision of the federal district court.

2.

No. An analogy is judged based on how similar or different one case is to another. The UCC case involved a plant owned primarily by an American Company, but owned and operated

by Indians in India. The hypothetical involves a plant owned by Americans, operated in America, with foreigners (Germans) involved in the engineering. In the UCC case, Mansfield wrote about the convenience of having the trial in India, where records and witnesses were located. In the hypothetical, the records and all the witnesses except the German engineers would be in the United States. It would be more convenient to keep the hypothetical suit in the United States.

The two cases can be compared, but when this is done, it can be seen that Judge Mansfield’s decision would not help the American company in the hypothetical scenario to avoid a lawsuit in the United States.

3.

It would help if the “American” plant were owned in large part by a German company, if company records were written in German, if Germans were in charge of maintaining records, and many employees were German.

Case Summary—Keller v. Central Bank of Nigeria This case focuses on the definition of a commercial activity under the Foreign Sovereign Immunities Act (FSIA). The court looks at how the Nigerian government acted, and considers whether a private party would behave the same way. Here, the court ruled in favor of an American sales representative, Keller (plaintiff). The court ruled that when a foreign government acts like a private player, the government’s acts are “commercial” under the FSIA. Suggested Answers to the Critical Thinking Questions 1.

The most important facts related to the nature of the Nigerian government’s actions— whether they are similar to those of a private party, or whether they are traditional governmental acts.

2.

The case would have had a different ending if the Nigerian government had been acting as a “market regulator.”

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Case Summary—Republic of the Philippines v. Ferdinand E. Marcos In this case, the Marcoses wanted a court of appeals to overturn a lower court’s injunction that precluded them from disposing of their assets except to pay attorney fees, and their living expenses. The Republic of the Philippines sought the injunction because it believed the Marcoses had stolen public money. The U.S. Circuit Court of Appeals failed to overturn the injunction, so the Plaintiff, Republic of the Philippines, won.

Suggested Answers to the Critical Thinking about the Law Questions 1.

A key ambiguity is the phrase “acts of state”. The ambiguity affects the reasoning because the outcome of the case might be different depending on whether the judge views the phrase “minimally” or “maximally”.

2.

The Marcoses offered no evidence at all to support their classification of their acts as “acts of state”, and the burden was on them to provide this evidence.

3.

It can be decided which norm is implicit in the Marcoses’ struggle against the preliminary injunction by process of elimination. Which ones seem inconsistent? The choices are: efficiency, freedom, security, and justice. Efficiency seems inconsistent. The Marcoses do not seem to seek to minimize costs. Justice also seems inconsistent. The injunction does not seem unfair (especially if they stole public money). They are either striving for freedom (e.g., “We should have the freedom to spend our money the way we want.”) or security (e.g., “We want to spend it here to protect our future interests.”)

Answers to Review Questions 8-1.

Although the common law and socialist law are both major families of law, they are very different. One difference is that common law is used in more countries than socialist law.

Another difference is the purpose of the law and legal system. Socialist law is used to preserve the authority of the state over land and all means of production. Common law is used to settle disputes between private individuals and companies.

8-2.

Political, economic, legal, and cultural variables go into this analysis.

8-3.

a.

Expropriation is the risk companies take when they engage in international business, in which the host country government takes their private property for political or economic reasons. b.

Doctrine of sovereign immunity is the risk which allows a government expropriating foreign-owned private property to claim that it is immune from the jurisdiction of Copyright ©2015 Pearson Education Ltd.

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courts in the owner’s country because it is a government rather than a private-sector entity. c.

Act-of-state doctrine holds that each sovereign nation is bound to respect the independence of every other sovereign state, and that the courts of one nation will not sit in judgment on the acts of another done within its own sovereign territory.

d.

Arbitration clause is a clause in a contract that requires parties to resolve their disputes through arbitration rather than through litigation.

e.

Choice of forum clause is a clause included in some contracts that lets parties know what law will govern their dispute and what nation’s courts will be used.

8-4.

The GATT Pact, which created the WTO, is important because it enforces a trade pact in which more than 140 nations agreed to reduce their tariffs by an average of one-third on most goods in the next decade.

8.5.

Arbitration is preferred to litigation because it is often cheaper, faster, and arbitrators who understand the complexity of international business are available to resolve disputes.

Answers to Review Problems 8-6.

Royal Bed should bring suit according to the jurisdiction in Brazil, since contract mentions the Brazilian Civil Code as the law to be applied in the event of any dispute.

Their contract is with the Brazilian manufacturer, so the dispute must be resolved according to terms set out in that contract.

8-7.

X is not correct. If X wanted to require disputes to be resolved in the United States, X needed to change the terms of the contract with C, something X was free to do.

8-8.

No, the U.S. court does not have jurisdiction to decide the dispute. The choice-of-forum clause says the dispute will be decided before the London Court of Justice. This clause should be enforced. The purpose of the clause is to provide certainty about where the dispute should be resolved. If Zapata wanted disputes resolved in the United States, the company should have chosen that forum and put their wishes in the contract.

8-9.

The act-of-state doctrine defense holds that each sovereign nation is bound to respect the independence of every other sovereign state, and the courts of one nation will not sit in judgment on the acts of the courts of another nation done within that nation’s own sovereign territory. One exception is when the foreign government is acting in a commercial capacity. Here, OPEC will lose. OPEC is not a “sovereign nation”. Plus, it is Copyright ©2015 Pearson Education Ltd.

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engaging in commercial activity.

8-10. A variety of factors can be applied to decide whose law should apply. Ask students to relate the Union Carbide facts to this case. Ordinarily, Dr. Pirkey would be bound by the terms of the agreement he made. It will be a challenge to use political factors to change the terms of the agreement.

8-11. The United States will say that as the parent of the subsidiary, the laws of the United States should apply, and it was OK to order the subsidiary to stop delivery of the compressors. Ask students to generate a list of questions about the parent and subsidiary companies that will help them answer this question.

Answers to Case Problems 8-12. The court ruled that the commercial activity exception to sovereign immunity did apply.

In this case, the sovereign defendants stepped into the shoes of a financially troubled “private player,” and, consequently, the defendants’ guarantee of the underlying material contract was commercial activity under the FSIA. Defendants’ motion to dismiss is denied.

8-13. The Court did rule in DaimlerChrysler Corp.’s favor in granting a partial duty exemption.

This is because painting is both decorative and preventative, regarding corrosion and rust.

Because painting is an ambiguous concept in reference to the statute, the Court found that it does qualify. It can be used for practical purposes that help maintain the quality of the vehicle. The levy was wrong.

8-14. No. The court ruled that the manufacturer’s sample and small-quantity home market sales were within the ordinary course of trade. The manufacturer was not entitled to an adjustment.

Thinking Critically about Relevant Legal Issues 1.

One could argue that as long as she was hired in the United States and the United States regulated the company, she could file a claim in the United States. In this case, it seems as though she was hired as a U.S. citizen and therefore has the rights of all U.S. citizens.

Because the company does business in the United States and since she was hired in the United States and then transferred abroad, she can file a claim. The ethical issues would center on a discussion dealing with the legality of her termination.

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Chapter 9 Contract and Sales Law – I Introduction Chapter Nine addresses the following questions: • • • • •

How can we define and classify contract law?

What are the elements of a legally valid contract?

Which contracts must be in writing to be enforceable?

What is the parol evidence rule?

What are third party beneficiary contracts and assignment of rights?

Chapter Nine is significant because business managers work with contracts regularly. They need to understand the basics of contract law so they will understand their legal obligations.

Also, they need to know how to protect their own business interests through the use of contracts.

Achieving Teaching Excellence Encouraging Students to Interact with Peers in Class Chapter Nine continues with the Teaching Excellence theme of improving what happens in the classroom. In addition to focusing on teacher–student interaction in class, this manual encourages instructors to focus on student–student classroom interactions as one way to improve class discussion. For some instructors, this section will serve as a reminder. Instructors know that they could improve students’ intellectual development through carefully planned exercises that ask students to interact with their peers. Yet, it is difficult to follow through and encourage this kind of classroom exchange. It is difficult because the “muddle” increases even more when students interact with one another. Instructors can control the discussion even less. They need more skill to encourage student–student exchanges that are worthwhile. Newer teachers might be reluctant to try techniques that encourage student–student interactions. If questions are carefully designed, this type of interaction can be exciting and rewarding to both the instructor and their students.

Look at the following questions that would promote student–student interactions, but would probably not be very effective: 1.

“Josette, what did you think of Paul’s response to question six?”

Most students will say, “Paul’s response was great.” They do not want to evaluate their Copyright ©2015 Pearson Education Ltd.

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peers. Even worse, if you have not encouraged your students to listen to one another, they are likely to respond, “Could Paul repeat what he said?”

2.

“Samantha, discuss with Devon the principle of estoppel.”

This question is too broad. Instructors probably don’t even want to hear Samantha chat with Devon about estoppel. The class would be more interested in a discussion that requires Samantha to be more precise.

The following questions would probably be more effective: 1.

“Tim, after listening to Ian’s comments about the majority decision in the Sindell case, can one identify which ethical norm Ian prefers?” A good follow-up question might be, “Does Ian prefer the same ethical norm the majority decision prefers?”

2.

“Chauntee, Yukiko has just presented three reasons she agrees with the court in the Harris case. Which of her reasons seems the strongest? Why?”

3.

After instructors have trained their class well, they can ask a riskier question. After they know it is okay to make frequent mistakes, and that the classroom is a place to work on material (not quiz on the material), instructors can ask a question such as this, “Jamie, what is flawed about the argument Chris just made about reforming the product liability system?”

Notice that the better questions encourage higher-order thinking, only between students rather than between professor and student. The questions also help instructors find out what students are learning, although the students are not interacting directly with the instructor.

Instructors must plan questions carefully. The “muddle” this questioning creates is productive muddle. Try encouraging students to interact with one another in class! If instructors do, they’ll be taking another step toward Achieving Teaching Excellence.

Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview It is a fundamental requirement of a free-enterprise economy that entities in the private sector and at all levels of government be able to enter into agreements that are enforceable by courts of law. Without the assurance that business agreements are legally enforceable, everyday commercial dealings would be difficult to carry out. Contract law has evolved to provide enterprises with the predictability and security they need to flourish and to produce quality products.

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This chapter begins with a definition and classification of contract law. It analyzes the six elements of a contract and then explains which contracts must be in writing in order to be enforceable. The parol evidence rule, the nature of third-party beneficiary contracts and the assignment of rights completes Chapter 9.

This edition of the book continues the second edition’s split of the contracts and sales material into two chapters. This split allows students to consider the finer points of laws that govern contracts and sales. In both Chapters Nine and Ten of the seventh edition, students will learn important principles from the cases. The authors did a great job of finding unusually intriguing contract law cases. Instructors will want to spend time on this chapter in class. Most of the legal principles this chapter considers are straightforward, so instructors can move quickly through the chapter. The discussion questions encourage instructors to work on some parts of the chapter more than others.

Topic Outline I. Definition, Sources, and Classifications of Contract Law A. Definition B. Sources of Contract Law Case Law Uniform Commercial Code C. Classifications of Contracts Express and Implied Contracts Fox v. Mountain West Electric Unilateral and Bilateral Contracts Audito v. City of Providence Void, Voidable, and Valid Contracts Executed and Executory Contracts Quasi-Contract II. Elements of a Legal Contract A. Legal Offer Baer v. Chase Methods of Termination of an Offer Rejection by the Offeree Revocation by the Offeror B. Legal Acceptance Intent to Accept Communication of Acceptance The Private Movie Company, Inc. v. Pamela Lee Anderson et al.

Satisfying, or “Mirroring,” the Terms of the Offer Internet and E-Contracts: Acceptance Online Copyright ©2015 Pearson Education Ltd.

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C. Consideration Adequacy of Consideration Preexisting Duty Rule Promises Enforceable without Consideration Liquidated and Unliquidated Debts D. Genuine Assent Fraud Duress Stambovsky v. Ackley and Ellis Realty Undue Influence Mistake E. Competent Parties Minors Insanity Intoxication G. Legal Object Statutory Law Case Law Moore v. Midwest Distribution, Inc. III. Contracts that Must Be in Writing A. Contracts for the Sale of an Interest in Land B. Contracts to Pay the Debts of Another C. Contracts Not Performable in One Year D. Sale of Goods of $500 or More Iacono v. Lyons E. Nonbusiness Contracts IV. Parol Evidence Rule V. Third-Party Beneficiary Contracts and Assignment of Rights A. Types of Third-Party Beneficiary Contracts B. Assignment of Rights VI. Summary Discussion Questions for Chapter Nine Teaching Excellence Reminder: Use follow-up questions that encourage students to interact with their peers!

1.

Explain relationships between express contracts and implied contracts.

An express contract is an exchange, oral or written, which expresses promises between parties that are enforceable in a court of law. An implied contract is one established by the Copyright ©2015 Pearson Education Ltd.

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conduct of a party rather than by his or her words.

One relationship between the two is that the parties to an express contract create less confusion because the contract is stated, either orally or in writing. Implied contracts are more ambiguous. People are likely to disagree about what a party’s behavior suggested he or she should be willing to do under an implied contract.

2.

Explain relationships between unilateral contracts and bilateral contracts.

A unilateral contract is an exchange of a promise for an act. A bilateral contract involves the exchange of one promise for another promise. Thus, they are different in that promises are exchanged for something different—either an act (unilateral) or promise (bilateral).

3.

Explain why someone might think this statement is true: A quasi-contract does not meet the general definition of a contract.

A quasi-contract is an equitable remedy. It is a court imposed agreement to prevent unjust enrichment when the parties have really not agreed to an enforceable agreement. Quasicontract remedies are imposed when the agreement does not meet the general definition of a contract, and the result is inequitable.

4.

Of all the elements of a legal contract, which ones probably trigger the most legal disputes?

Which ones are unlikely to be the focus of many legal disputes? Explain.

This question does not have one right answer. Let students debate this one. Have them look at the cases in the chapter. Have them discuss the elements that triggered the lawsuits in the book. They can look at how typical each lawsuit looks when the facts are considered.

5.

Explain why someone might think this statement is true: The Statute of Frauds prevents lawsuits.

The Statute of Frauds prevents lawsuits because it requires certain contracts to be in writing, which makes it less likely that parties to the contract will argue about the terms of the agreement.

6.

Explain why someone might think this statement is true: The parol evidence rule makes people more careful about writing contracts.

The parol evidence rule says that when parties have executed a written agreement, which is complete on its face, oral agreement made prior to or at the same time as the written agreement that alters, varies, or contradicts it, will not be allowed to be introduced in Copyright ©2015 Pearson Education Ltd.

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evidence by most state courts.

This rule means people cannot go back and explain what they meant, but did not write, in the contract. What is on paper is what the court will rely on. That makes people more careful about the precise terms of the agreement.

Answers to Critical Thinking about the Law Questions, Case Summaries, Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law Questions 1.

What would society gain by holding all people to their agreements? The ethical norm of security would be especially important to someone who wanted to hold people to their agreements. One definition of security is to be safe from those wishing to interfere with an individual’s rights. If people know that their agreements will be held, they do not have to worry about surprise situations in which someone tries to change the terms of the deal, thereby interfering with their rights.

2.

The ethical norm that could make a business seek to encourage courts to be more flexible in enforcing agreements is efficiency. One definition of efficiency is to minimize costs.

Sometimes a business might want to change the terms of an agreement to minimize costs.

For instance, consider that an auto manufacturer agreed to purchase a certain number of parts at a certain price. Then the new government regulations made the manufacturer want to cancel the order for the parts because they were not consistent with new federal regulations.

In such cases, to minimize costs, the business would want courts to be flexible.

Case Summary—Fox v. Mountain West Electric This case is about the breach of a contract for specific services. Fox was contracted by MWE to help build fire alarms for an independent company. Throughout the project, many changes were made between MWE and the independent company. Fox and MWE disagreed on the implementation of the new changes. There were disagreements regarding the compensation for the project and Fox ultimately left after shipping the last parts to MWE, who finished the project with another company. Fox filed a claim to receive compensation for the parts shipped and used, but never paid for. MWE counterclaimed that Fox breached the original contract. The Court ruled that the contract stood because that just because prices kept changing, that did not mean that the original contract between Fox and MWE was invalid. The Court found in favor of MWE. Suggested Answers to Critical Thinking about the Law Questions 1.

The issue in this case is compensation. Because the orders from the original company kept Copyright ©2015 Pearson Education Ltd.

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changing, Fox’s fees were also changed.

2.

If there was a clear meeting of the minds, then MWE would have to hold up their end of the agreement, namely pay for all parts and equipment provided by Fox. But because there was no meeting, MWE was not obligated because Fox was the one to violate the original contract.

Case Summary—Audito v. The City of Providence The City of Providence hired a new class of police officers after all of them took a certain numbers tests and were enrolled in the Police Academy. Those who scored the best were offered a place in the academy in the form of a letter that stated that it was an offer of enrollment.

However, the new police chief changed the hiring policy that caused thirteen people, including Audito to no longer qualify. The Court ruled that those who had been sent the letter had to be allowed to take the medical and psychological tests if they accepted because the letter was a genuine offer of enrollment. It did not guarantee spots; it only was to give those who received it an opportunity to attend the Academy. The federal district court ruled in favor of Audito et al.

Suggested Answers to Critical Thinking about the Law Questions 1.

There must be fairness to the system. If under the old system, some people qualified but not under the new one, they did not apply under the new system. There needs to be consistency in contracts, so one party cannot change the rules whenever it is beneficial.

2.

Here, those who applied under the old system were held to those standards and expected certain things. Those cannot be changed when there is a group who is expecting the old system. Also, once a contract is offered, it cannot be rescinded without good cause. In this case, there was no good cause to rescind the contract of enrollment.

Case Summary—Baer v. Chase This case is in the book to show to the issue of implied-in-fact contract claims between Baer and Chase. Chase, the creator of ‘The Sopranos,’ met Urbancyk and Baer on several occasions to discuss about the concept of the show, which he had in mind. There were several occasions where chase had mentioned of paying compensation to Baer for his services. However, he had rejected all these offers stating that he would accept compensation when the show succeeded.

There was no discussion or agreement as to the meaning of “success” of The Sopranos. The district court rejected Baer’s claim to recover under a theory of implied-in-fact contract as it the agreement was very vague and this unenforceable.

Case Summary—The Private Movie Company, Inc. v. Pamela Lee Anderson Copyright ©2015 Pearson Education Ltd.

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This case focused on whether an agreement had been reached between The Private Movie Company and Pamela Lee Anderson for her to star in a movie called, “Hello, She Lied.” The issue was whether a deal had been made when the parties allegedly had not agreed on certain contract provisions related to nudity and the sexual content of the script. The court looked at issues related to oral and written contracts, especially the consent of the parties. The court said that consent must be mutual. A change in terms of the offer means a rejection of the offer. Also at issue was whether Pamela Lee’s agent/manager could bargain for her. The court ruled in Pamela Lee Anderson’s favor by deciding The Private Movie Company did not prove by a preponderance of the evidence that Lee entered into an oral or written agreement to perform in the movie.

Suggested Answers to Critical Thinking about the Law Questions 1.

Here, one item that was especially important was the concept of consent. The court said that, in determining whether there was mutual consent, it considers the words and conduct of the parties. Additionally, it considers the circumstances under which the words are used and the conduct occurs.

2.

Here, the court ruled that Lee had not entered into an oral or written contract to perform in the movie.

Case Summary—Stambovsky v. Ackley and Ellis Realty This case is in the book to show an action for fraud. The plaintiff, Stambovsky, brought an action for rescission of a contract for the sale of a house. He argued that the reputation of the house (it was possessed by poltergeists) impaired the present value of the property and its resale value. He argued that the failure of the defendants to disclose that the house was haunted was fraudulent. The defendants argued that the principle of caveat emptor applied, and that they had no duty to disclose nonmaterial matter.

The court ruled in favor of Stambovsky. In an amusing opinion, they argued that under the unique facts of the case, the purchaser was entitled to equitable relief. The dissent, which seemed to follow the law more carefully, disagreed and thought the action by the plaintiff should be dismissed.

Suggested Answers to Critical Thinking about the Law Questions 1.

The judge writing the majority opinion prefers the ethical norm of security. This judge wants Stambovsky to be free from psychological harms caused by a haunted house. The defendants were obligated to let Stambovsky know about the ghosts.

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2.

The dissenting judge prefers the ethical norm of freedom—the defendants should not have to rely on others’ opinions about what they need to disclose to buyers.

3.

One key piece of missing information is whether the house is haunted. The potential damage to Stambovsky has not been raised in the context of whether the ghosts were friendly or not.

Case Summary—Moore v. Midwest Distribution, Inc. This case considers the definition of “legal object.” In particular, the case focuses on whether it is reasonable to enforce a contract with a non-compete clause. In this case, the court refused to enforce a contract when it precluded Moore from working in nine states.

Case Summary—Iacono v. Lyons This case deals with contracts that cannot be performed within one year and for goods worth more than $500. Iacono (plaintiff) and Lyons (defendant) went to Las Vegas and agreed to share winnings and losses 50/50. During the course of the night, after the plaintiff begged the defendant to stay, the defendant hit a jackpot of almost $2,000,000 on a machine that the defendant fed the coin in. The defendant proceeded to keep the winning and was sued. The suit was dismissed because the money would not be paid by the casino, in full, within a year. The Court uses the analogy that a smaller winning would have been split because it would have been paid in one year. However, this contract could not be completed because the money would not be received within one year.

Answers to Review Questions 9-1.

A contract is generally defined as a legally enforceable exchange of promises or an exchange of a promise for an act.

9-2.

A void contract is one that at its formation has an illegal object or serious defects, whereas, a voidable contract is one in which one of the parties to a contract has the option of either withdrawing from the contract or enforcing it. An executed contract is one in which all the terms have been performed, whereas an executory contract is one in which all the terms have not been completed or performed. Unilateral is defined as an exchange of a promise for an act, whereas a bilateral contract involves the exchange of one promise for another promise.

9-3.

For an acceptance to be valid, the offeree must show an intent to accept, it must be communicated by proper means, and it must satisfy or mirror the terms of the offer.

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9-4.

For an offer to be valid, the offer must show objective intent to enter into the contract, be definite, and be communicated to the offeree.

9-5.

An offer can be terminated in the following ways: • Lapse of time • Revocation of the offer by the offeror before acceptance by the offeree • Rejection by the offeree • Death of the offeror or offeree • Destruction of the subject matter of the offer

9-6.

A liquidated debt exists when there is no dispute about the amount or other terms of the debt. An unliquidated debt exists when there is a dispute between the parties as to the amount owed by the debtor.

Answers to Review Problems 9-7

Applicable to contract number (1), (2) & (3). It is not applicable to contract number (4) and (5). If the contract is related to sale of goods (i.e., items that are movable) in a commercial setting, the Uniform Commercial Code (UCC) must be applied. UCC applies to sales of goods that involve a merchant.

9-8.

Jack wants to present evidence that shows a subsequent modification of the written contract.

Evidence of a subsequent modification of a contract is an exception to the parol evidence rule and should therefore be admitted. So Jack is correct.

9-9.

Osborne won. There was detriment to him. He agreed not to work for anyone else. That would count as consideration.

10-10. In order to prove fraud more facts are required. Fisher would have to show an intentional misrepresentation on Division West’s part. Also, the fact that Fisher is inexperienced will help his case. Still, it is very difficult to prove fraud.

9-11. The court upheld the agreement by finding that consideration existed to support the contract. “Any damage, or suspension, or forbearance of a right will be sufficient to sustain a promise.” Abandoning tobacco, swearing, and playing cards or billiards for money were sufficient to show consideration.

Answers to Case Problems 9-12. The promissory note did not have to be paid because it was signed under duress. Daigle was going through a divorce and in the middle of the trial; his attorney presented him with a promissory note for payment of fees accrued. Because the attorney told his client Copyright ©2015 Pearson Education Ltd.

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that if he did not sign, he would have to find a new lawyer or continue by himself, he thought he had no choice. Therefore, he was forced to sign it and is invalid because of duress.

9-13. The company and its employees had a unilateral agreement. A unilateral contract is defined as an exchange of a promise for an act. The company promised its employees 5 percent of the value of the sale or merger as long as the employees acted by remaining with the firm. This case is not a bilateral agreement because a bilateral contract is an exchange of a promise for another promise. The employees were not required to promise their allegiance to the company, they were expected to act by staying with the company.

Therefore, the two parties had a unilateral agreement.

9-14. The Court found in favor of the New York University Medical Center for two major reasons. First, the Scalisi parents waited more than three and a half years before they brought an action against the Medical Center. By saying the Medical Center breached its contract, the Scalisi family is, in essence, alleging medical malpractice. A medical malpractice action’s statute of limitation is two and a half years, making the Scalisi family one year late in their allegation. Second, under the parol evidence rule, the written contract is the primary legal document between the Scalisi family and the Medical Center, not the oral agreement. The written document stated that there was no guarantee against autism and, therefore, the oral agreement had no standing in court.

9-15. The appellant court reversed the trial court’s ruling and found in favor of Locke. The appellant court found that Locke was an intended third-party beneficiary of the contract because the contract’s language suggested that a third party was anticipated. Police protection was provided to help with the administration and supervision of the games and umpires are a part of that administration and supervision. Therefore, Locke was protected by the contract and because no police protection was present when he was injured, the court found in his favor.

9-16. The Court found that there was no breach of contract because the NCAA was not arbitrary in the application of its rules. Bloom was a third-party beneficiary because the media deals were not vital to his skiing career. He would only financially benefit, which goes against NCAA rules.

Thinking Critically about Relevant Legal Issues 1.

The issue here is whether a contract must be in writing and if it is not, whether both parties were in agreement of what the icon meant.

2.

The language of the agreement is most ambiguous here. There is no clear-cut way to lay out Copyright ©2015 Pearson Education Ltd.

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an agreement. Article 2 deals with the sale of goods. There needs to be an agreement between the parties, but the medium of that agreement is not specifically spelled out.

3.

There seems to be no account of this e-mail system. To make a full finding, one must find out what this system entails and if it is used elsewhere. More information is needed about sending contracts via e-mail.

4.

Douglas would only need to prove that Megawidget knew what the icon meant. If both had accepted it as a way to agree to contracts, then Megawidget has no case. Douglas could show that this system had been used before and understood as a binding agreement before. As long as there was a meeting of the minds, Douglas would win the case.

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Chapter 10 The Law of Contracts and Sales—II Introduction Chapter Ten addresses the following questions: • • • •

How are contracts discharged?

What are remedies for breaching contracts?

What are e-contracts?

How do global trends affect contract law?

Chapter Ten is a continuation of Chapter Ten’s topic of contract law. This chapter outlines what happens at the end of the contractual relationship.

Achieving Teaching Excellence Peer Observation of Teaching Peer observation of teaching could help instructors get an outside perspective on what is happening in their classroom. In a recent article, information about peer observation of teaching as a true developmental opportunity is provided.

Before instructors use the idea of peer observation of teaching, it should be made sure that they set the stage for success by reviewing the context in which peer evaluation will take place. For instance, invite a colleague whom the instructor can trust and respect to provide feedback on their classroom performance. Second, make sure that the observation will be developmental, rather than evaluative. Third, make sure the observer is as prepared as the students are for the class session.

Finally, the observer should be given specific direction about what the instructor wants them to look for—for example, whether the instructor is asking higher-order thinking questions, whether their wait time is appropriate, or whether their students are interacting with one another during class time.

The person observing the instructor should have some skill in providing feedback. Helpful feedback is feedback the receiver understands, is willing to accept, and is able to change. Once the observer gives them feedback, they should refrain from being defensive. Instructors should also be assertive. They should ask for specific examples if they are unclear about the observer’s comments.

This idea of peer observation is most likely to help instructors if they work in an environment Copyright ©2015 Pearson Education Ltd.

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that encourages freedom, innovation, and cooperation. If so, peer observation will help instructors work toward Teaching Excellence.

References •

Anthony J. Mento and Andrea Giampetro-Meyer, “Peer Observation of Teaching as a True Developmental Opportunity” (submitted to COLLEGE TEACHING).

Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview Chapter Ten is significant because it continues with Chapter Nine’s theme of explaining the importance of making sure contracts are enforceable. In Chapter Ten, the book moves beyond making and interpreting contracts and considers how contracts are discharged and what happens when someone breaches a contract. The chapter also considers certain sections of the Uniform Commercial Code that affect those who operate in the legal environment of business. E-contracts are highlighted and the concepts underlying them are distinguished from traditional contract principles.

This chapter also addresses the international dimensions of contracts and sales agreements.

Topic Outline I. Methods of Discharging a Contract A. Discharge by Performance Plante v. Jacobs Uniform Commercial Code and Performance and Convention on International Sale of Goods B. Discharge by Mutual Agreement C. Discharge by Conditions Precedent and Subsequent Condition Precedent Architectural Systems, Inc. v. Gilbane Building Co. Condition Subsequent D. Discharge by Impossibility of Performance E. Discharge by Commercial Impracticability F. Contracts with the Government and the Sovereign Acts Doctrine Facto v. Pantagis II. Remedies for a Breach of Contract A. Monetary Damages (“Legal” Remedies) Compensatory Damages Punitive Damages Nominal Damages Liquidated Damages Copyright ©2015 Pearson Education Ltd.

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Arrowhead School District No. 75, Park County, Montana v. James A. Klyap, Jr. B. Equitable Remedies Rescission Reformation Specific Performance Injunctions C. Remedies for Breach of a Sales Contract (Goods) Remedies for the Seller Remedies for the Buyer Fitl v. Strek III. E-Contracts A. E-Signatures B. The Uniform Computer Information Transaction Act Scope of the UCITA The Business Community: Criticisms of the UCITA IV. Global Dimensions of Contracts and Sales Law V. Summary Discussion Questions for Chapter Ten 1.

How is the idea of substantial performance related to the idea of conforming goods?

The idea of substantial performance makes it clear that contracts can be discharged even though they have not been fully completed. Substantial performance allows the contract to be discharged as long as nearly all the terms have been completed, there was an honest effort to complete the terms, and there was no willful departure from the terms. This doctrine does not apply to the sale of goods. Instead, courts require the seller to deliver conforming goods. This standard is more demanding than a substantial performance standard. If the goods or tender of delivery do not conform to the contract in any respect, the buyer may reject all the goods, accept all that are tendered, or accept any number of units the buyer chooses to, and reject the rest.

2.

Why does it matter that discharge by impossibility of performance is judged by an objective standard?

It matters because it means an individual can discharge a contract if he or she thinks it is impossible to perform the terms of the agreement. If a subjective standard was used, many more people would try to justify their nonperformance.

3.

Explain relationships between monetary damages and equitable remedies.

Monetary damages include compensatory, punitive, nominal, and liquidated damages. Equitable Copyright ©2015 Pearson Education Ltd.

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remedies include rescission, reformation, specific performance, and injunction. One relationship between the two is that courts impose equitable remedies only when dollar damages are inadequate or impracticable.

4.

Evaluate this statement: If you sued someone, you would rather get nominal damages than punitive damages.

This statement is inadequate because an individual would prefer receiving punitive damages.

Nominal damages are usually only $1. Punitive damages can be thousands, depending on how willful, reckless, wanton, or gross someone’s behavior was in a specific situation.

Answers to Critical Thinking about the Law Questions, Case Summaries, Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law 1.

Here, in the ruling for Jennifer, the court probably prefers the ethical norm of efficiency. The judge does not want to waste resources. If the judge rules for Juan, Jennifer will not be able to use the tickets.

2.

If Juan knew Jennifer was allergic to sunlight and he knew the concert was outside, he induced her unfairly. That would make the judge sympathetic to Jennifer.

3.

Ambiguous words and phrases that might be troublesome are: outdoors, afternoon, and extended periods of time. If the concert is at 5 pm, and the sun goes down at 6 pm, or there is a partial covering of the concert area, then Juan will have an argument that Jennifer could attend the concert and cannot avoid the contract.

Case Summary—Plante v. Jacobs Plante v. Jacobs started when a contractor made mistakes in building a house for Jacobs. The Jacobs refused to pay the balance due to Plante because they were concerned about the misplacement of a wall that caused their living room to be smaller than they wanted. Plante also conceded he failed to finish minor parts of the job. The Jacobs family argued there was a material breach of the contract and no substantial performance. The trial court ruled for Plante, and the appeals court affirmed. The court said that although defendants received a house they were dissatisfied with in many respects, the trial court was not in error in finding the contract was substantially performed.

Suggested Answers to Critical Thinking about the Law Questions 1.

The diminished-value rule was preferred by the court instead of the cost-of-replacement rule as Copyright ©2015 Pearson Education Ltd.

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there was no evidence that the defendants had demanded or requested the replacement of the wall that was specified during the course. Tearing down the wall and rebuilding it would cause additional damage that would lead to economic waste which is unreasonable and unjustified.

2.

The court reasoned that performance of a contract didn’t necessarily mean that each and every detail had to be performed and something less than perfect would be accepted. However, the essence of the contract has to be maintained which was carried out in this case. Additionally, there were no detailed construction plans that were made of the house. Therefore, this cannot be viewed as binding terms or conditions. The ethical norm of efficiency underlies the court’s preference.

Case Summary—Architectural Systems, Inc. v. Gilbane Building Co. This case shows discharge of a contract by a condition precedent. The court has no sympathy for ASI when it signs an agreement that says Gilbane is not obligated to pay ASI until it receives payment by the owner. ASI should not have agreed to the condition precedent.

Case Summary—Facto v. Pantagis This case focuses on the concept of discharge by impossibility of performance. The appellant court ruled that the defendant, Snuffy Pantagis Enterprises, Inc. was not responsible for performance when there was a power failure during the Facto wedding. However, the court also ruled that the power failure also relieved the Factos from their obligation to pay for the entire contract price of the reception.

Case Summary—Arrowhead School District No. 75, Park County, Montana v. James A. Klyap, Jr. This case is about enforcing a contract. Klyap was hired by the school district to teach middle school and to oversee the sports program. He signed a contract for the 1998–1999 school year with a liquidation clause for $4,100. About two weeks before the school year, Klyap resigned. The district was able to find a new, less experienced teacher. They sued Klyap to enforce the liquidation clause.

The Court ruled in favor of the school because the clause was not for too much money and because of the resignation, the school was put at an undue hardship. Therefore, the clause was enforceable.

Suggested Answers to Critical Thinking about the Law Questions 1.

Klyap would have to prove that the liquidation clause was unfair and that he did not know the terms of its enforcement. The contract could have also been proven to violate the laws of the land, and therefore could not be enforceable.

2.

A clause for 40 percent could have been seen as exorbitant and unreasonable. There would be no Copyright ©2015 Pearson Education Ltd.

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way someone could pay 40 percent of his or her salary for breaching an employment contract. It would also be unwise for the school because they would have a harder time hiring employees.

Many teachers could be turned off by that clause because sometimes better opportunities arise.

Many teachers would not sign the contract and so the school would not have enough teachers.

Case Summary—Fitl v. Strek This case deals with recovery of damages for misrepresented merchandise. Strek, a baseball card seller, sold Fitl what he claimed to be a near-mint condition Mickey Mantle Topps basketball card for $17,750. Fitl put the card in a safety deposit box. Later, wanting to sell it, it was appraised as almost worthless because it had been doctored. A second opinion confirmed that. Fitl sued and Strek claimed that there was a window of seven days to one month to return the card. The Court found in favor of Fitl, citing that two years is a reasonable length of time to return the card for the money back because its worth had been misrepresented.

Answers to Review Questions 10-1. Courts consider the following three standards in determining lost profits: • The plaintiff-buyer must show it was reasonably foreseen by the defendant-seller that if it did not deliver the promised goods, the buyer would have no alternative source and, thus lose profits.

• The plaintiff-buyer must show the amount of the damages with reasonable certainty; the buyer cannot just speculate about what this amount is.

• The plaintiff-buyer must show that it did everything possible to mitigate the damages— that is, it looked for other possible sources of the goods.

10-2. The CISG is the Convention on Contracts for the International Sale of Goods. It is important because it strives to provide uniformity in international transactions.

10-3. Compensatory damages are monetary damages awarded for a breach of contract that results in higher costs or lost profits for the injured party. The purpose of compensatory damages is to place the injured (nonbreaching) party to a contract in the position in which that party would have been in had the terms of the contract been performed.

10-4. Rescission is defined as the canceling of a contract. Plaintiffs who wish to be put back in the position they were in before entering into the contract often seek rescission.

10-5. a) Buyer’s remedies include: • The right to obtain specific performance when the goods are unique or remedy at law is inadequate (Section 2-716[1]) • The right to recover damages after cancellation of the contract Copyright ©2015 Pearson Education Ltd.

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• The right to reject the goods if the goods or tender fail to conform to the contract, or the right to keep some goods and reject the others • The right to recover damages for accepted goods if the seller is notified of the breach within a reasonable time (Section 2-714[11]) • The right to revoke an acceptance of goods under certain circumstance b) Seller’s remedies include: • The right to recover the purchase price if the seller is unable to sell or dispose of goods (Section 2-709[1]) • The right to recover damages if the buyer repudiates a contract or refuses to accept the goods (Section 2-708[1])

10-6. Under the CISG, a contract is formed when the seller (offeror) receives the acceptance from the offeree, whereas under the UCC, a contract is formed when the acceptance is mailed or otherwise transmitted.

Secondly, under the CISG, a sales contract of any amount is enforceable if it is oral, whereas the UCC requires a written contract for a sale of goods of $500 or more.

Answers to Review Problems 10-7. According to the Uniform Commercial Code for a sale or lease to take place the seller or lessee has to accept and then pay for the conforming goods. However, the buyer would have to give a notice to the seller in case the goods are defective and give them time to cure the defect. In this case, the seller was not given the time to rectify the problem which made the plaintiffs’ case weak, and they would be likely to lose the case.

10-8. The builder can’t use bad weather or labor shortages as defence for a breach of contract or for delayed performance. Unforeseen events made the contract more onerous than was anticipated and did not frustrate it. He is under obligation to pay damage to aggrieved party for $ 107,000 more than anticipated cost based on principle of quantum meruit.

10-9. The builder can’t use bad weather or labor shortages as defence for a breach of contract or for delayed performance. Unforeseen events made the contract more onerous than was anticipated and did not frustrate it. He is under obligation to pay damage to aggrieved party for $ 107,000 more than anticipated cost based on principle of quantum meruit.

10-10. Kirk did make repeated efforts to get in touch with Doolittle prior to the shipment time.

Apart from that he had sent Doolittle correspondence regarding this in writing, which Doolittle did not respond to. Doolittle probably lost the case against Kirk as he did not give the seller a reasonable opportunity to learn the facts that were necessary for the negotiation.

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10-11 Jack's contract of employment had been frustrated (impossibility to perform due to health reason) in a commercial sense. It was impracticable to engage a stand-in for the three nights a week when Jack could not work, since this involved double rehearsals of the group's music and comedy routines.

10-12. Original contract had been discharged by the publisher’s action (i.e. abandoned the series). It is breach of contract. At the same time, no new contract had been substituted and the author could obtain 50 % as reasonable remuneration on ground of a quantum meruit.

Answers to Case Problems 10-13. American Brass can argue that the Westmin Corporation had assured them that they would test each shipment before selling it to Nufeeds. Apart from that they could also argue that they were experts in animal feed. Another argument that they could use in their defense was the fact that Westmin bough dust from other sources as well. American Brass would probably win the case.

10-14. Shah lost the case because the termination was not a result of the employer, but rather was caused by Shah’s incompetence. He took a 10-week vacation and after returning, he did not do his job. Because of this, Shah did not uphold his side of the contract and was terminated because he breached the contract, not the employer.

10-15. The court ruled that the liquidation clause was not a penalty, but rather to ensure that the payments were made. Because the lessors gave Moore another chance to pay off the debt, they made a good faith effort to allow for payment. Moore signed the contract knowing the terms and therefore was ordered to be held to those terms.

10-16. SoftMan would prevail in this case as it did not assent to the EULA due to which its terms and conditions weren’t binding. Additionally, Adobe would have to establish that it suffered from irreparable injury. The court denied the application for preliminary injunction by Adobe.

10-17. Bechtel is correct. West made no effort to find comparable employment. Consequently, as a matter of law, he failed to mitigate his damages.

Thinking Critically about Relevant Legal Issues 1.

The conclusion is that punitive damages must be awarded in breach of contract cases in order to deter large companies from breaching contracts and paying relatively small amounts. The reasons given are that there are too many breach of contract cases and that large companies can Copyright ©2015 Pearson Education Ltd.

The Legal Environment Of Business: A Critical Thinking Approach

just swallow the costs. The author also cites a survey of 100 first-year business students.

2.

There is no source for this survey. It is not known where it is from or what students were asked.

It is, therefore, not reliable.

3.

There needs to be more details about breach of contract cases to see if there are multiple businesses or just a few. Students would also need to see the outcomes to see if the businesses are made to pay a large sum of money. Lastly, students would need to know more about the survey.

4.

The opposition would argue that many times contracts need to be breached for business reasons, especially if a business can no longer afford to finish the contract. It could also be argued that the judge has no authority to dole out punitive damages. It would be very hard to come up with an amount that is justifiable if the contract breach was for a relatively small amount of money.

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Chapter 11 Tort Law Introduction Chapter Eleven addresses these questions: • • • • • •

Why is tort law important to managers?

What are the goals of tort law?

What kinds of damages can plaintiffs receive in tort cases?

How can we classify torts?

What are the legal definitions of each of the major torts?

What are the global dimensions of tort law?

Chapter Eleven is significant because three out of every four civil jury trials involves tort law. Tort law is one of the areas of law that managers need to understand the most. Managers need to know how to engage in behavior that prevents lawsuits. They also need to know how to minimize the damages they will have to pay if they are involved in a tort case. Managers need to know the definitions of tort law before they become involved in a civil action.

Achieving Teaching Excellence Weak-Sense and Strong-Sense Critical Thinking This chapter of the Instructor’s Manual explains weak-sense and strong-sense critical thinking. These ideas are important because instructors need to encourage their students to become strong-sense critical thinkers. If students become strong-sense critical thinkers, they will develop opinions that are based upon the best available evidence. If instructors can encourage their students to become strong-sense critical thinkers, they will be one-step closer to achieving Teaching Excellence.

M. Neil Browne and Stuart M. Keeley explain weak-sense and strong-sense critical thinking in their book, Asking the Right Questions. Specifically, they explain Professor Richard Paul’s distinction between these two kinds of critical thinking.

Browne and Keeley explain that critical thinking can be used to either defend instructors’ initial beliefs, or evaluate and revise their initial beliefs. People who engage in critical thinking to defend their initial beliefs are engaging in weak-sense critical thinking. They explain that “[t]o use critical thinking in this manner is to be unconcerned with moving toward truth or virtue. The purpose of weak-sense critical thinking is to resist and annihilate opinions and reasoning different Copyright ©2015 Pearson Education Ltd.

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from yours.” Professors Browne, Keeley, and Paul are concerned about weak-sense critical thinking because its purpose is to achieve victory over those who disagree with instructors.

Weak-sense critical thinking “ruins the potentially humane and progressive aspects of critical thinking.”

Strong-sense critical thinking is different. It requires people to apply critical thinking skills to all claims, including their own. Evaluating one’s own claims protects them against self-deception and conformity. Browne and Keeley explain that strong-sense critical thinking does not necessarily force instructors to give up their initial beliefs. “[I]t can provide a basis for strengthening those very beliefs, for understanding through reflection why they do make sense.”

Instructors and their students will be particularly proud of a particular opinion if it is selected from alternative opinions that have been understood and evaluated.

In Chapter Eleven, instructors should explain to students the difference between weak-sense and strong-sense critical thinking. Tell them why the distinction matters. Give them exercises that encourage them to use critical thinking skills to reconsider their initial beliefs about a particular topic. Encourage them to consider alternative perspectives before stating their opinion on a controversial issue.

References •

M. Neil Browne & Stuart M. Keeley, ASKING THE RIGHT QUESTIONS: A GUIDE TO CRITICAL THINKING 8 (1994).

Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview Although a given set of actions may constitute a crime or a wrong against the state and thus may give rise to a criminal prosecution, the same set of actions may also constitute a tort, a civil wrong that gives the injured party the right to bring a lawsuit against the wrongdoer to recover compensation for the injuries. A tort is defined as an injury to another’s person or property.

This chapter and the next one on product liability were especially interesting and fun for students when the first edition of this text was used. The students were especially interested in debating whether and how reforms should be made in the legal system in personal injury cases.

Many of the students had strong opinions, so it was challenging to encourage them to consider alternative perspectives on this topic. Because many think it would be a good idea to reform the legal system, these chapters were great ones for encouraging students to engage in strong-sense critical thinking.

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In terms of the legal content, the tort chapter was one of the easier chapters for students to understand. For this reason, when instructors teach this lesson more class time can be used on critical thinking exercises. The discussion questions that follow the Topic Outline come from throughout the chapter because the chapter was consistent in terms of difficulty.

Topic Outline I. The Goals of Tort Law II. Damages Available in Tort Cases A. Compensatory Damages B. Nominal Damages C. Punitive Damages Young v. Becker & Poliakoff III. assifications of Torts IV. Intentional Torts A. Intentional Torts against Persons Assault and Battery Defenses to Battery Defamation Nemet Chevrolet, Ltd. V. Consumeraffairs.com, Inc. Defenses to Defamation Privacy Torts Ellen Johnston v. One America Productions, Inc. False Imprisonment Intentional Infliction of Emotional Distress B. Intentional Torts against Property C. Intentional Torts against Economic Interests V. Negligent Torts A. Elements of Negligence B. Defenses to Negligence Venkateswarlu Thota, and North Texas Cardiology Center, v. Margaret YOUNG VI. trict Liability Torts VII. Global Dimensions of Tort Law VIII. mary Discussion Questions for Chapter Eleven 1.

Explain why someone might think this statement is true: A plaintiff in a tort case would prefer to receive compensatory and punitive damages over nominal damages.

This statement is true because both compensatory and punitive damage awards have higher Copyright ©2015 Pearson Education Ltd.

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dollar amounts than nominal damage awards. Compensatory damages make the victim whole again, and include money for medical bills, lost wages, property repair bills, and compensation for pain and suffering, that is, to put the victim in the position he or she would have been in had the tort never taken place. Punitive damages can be high. These damages punish the tortfeasor for willfully engaging in extremely harmful conduct, and to deter others from engaging in similar conduct in the future.

Nominal damages are much lower. They are damages in name only, and are likely to be one dollar.

2.

Why does the book devote so much space to punitive damages?

Congress, state legislatures, and courts have all considered limiting punitive damages plaintiffs can receive in personal injury cases. The topic is timely, and of great interest to managers. Managers generally want to see such restrictions on punitive damages because they want to be efficient, and punitive damages make them reluctant to take business risks for fear the cost will be prohibitive if someone sues them successfully.

3.

Explain relationships between intentional and negligent torts.

One relationship between the two is that they differ in terms of the degree of willfulness of each kind of tort. Intentional torts are those wherein the defendant took some purposeful action that he or she knew, or should have known, would harm the plaintiff. Negligent torts involve carelessness on the part of the defendant.

4.

Explain relationships between disparagement and defamation.

Defamation is an intentional publication (communication to a third party) of a false statement that is harmful to the plaintiff’s reputation. Disparagement is a kind of defamation.

Disparagement is defamation of a business product or service.

5.

List the elements a plaintiff must prove in a negligence case. Which would often be the most difficult to prove? Which is usually the easiest to prove?

The elements of negligence are: duty, breach of duty, causation, and damages. Generally, damages and duty are relatively easy to prove. Breach of duty and causation are harder to prove.

Duty is the standard of care the defendant owes the plaintiff. The law establishes what the particular duty is in a case, and usually some kind of duty exists. Damage means a person has a compensable injury. A plaintiff can usually present information about lost wages and Copyright ©2015 Pearson Education Ltd.

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medical bills to prove this part of the claim.

Breach of duty requires the plaintiff to show the defendant’s conduct was not consistent with the duty required by law. It is often hard to show the defendant did not behave like a reasonable person. Causation includes actual cause and proximate cause. Actual cause is a factual matter. Proximate cause is a legal question, and is defined as foreseeability. Cause is often hard to prove. Ask students to give examples of situations in which it would be hard to prove cause.

6.

Explain relationships between negligence and res ipsa loquitur.

One relationship between the two is that res ipsa loquitur makes it easier for plaintiffs to recover in negligence cases when direct proof of the defendant’s negligent conduct does not exist because it was destroyed and there were no witnesses to the negligent act. Res ipsa loquitur allows the judge or jury to infer that the defendant’s negligence was the cause of the plaintiff’s harm when there is no direct evidence of the defendant’s lack of due care. Res ipsa loquitur means “the thing speaks for itself.”

7.

Explain why someone might think this statement is true: Even if a plaintiff proves the elements of negligence, he or she could still lose the case.

A plaintiff who proves the elements of negligence could still lose the case if the defendant can establish any of these defenses: contributory negligence, comparative negligence, and assumption of the risk.

8.

Evaluate this statement: Strict liability torts consider whether a person or company was at fault.

This statement is inadequate because strict liability torts do not consider fault. Under this theory, the defendant is engaged in an activity that is so inherently dangerous under the circumstances that no amount of care can make it safe. People are allowed to engage in such activities, but they are held strictly liable for any damages caused by these activities. Fault is irrelevant.

Answers to Critical Thinking about the Law Questions, Case Summaries, Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law Questions 1.

In the area of tort law, a preference for freedom would mean a judge wants to refrain from restricting people. Suppose the judge wants businesses to work with fewer restrictions, so he Copyright ©2015 Pearson Education Ltd.

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or she makes it difficult for plaintiffs to prove negligence. In this situation plaintiffs would prefer security. They would want the judge to prevent disorder. They would want to achieve the psychological condition of self-confidence, such that, risks are welcomed. People need to trust that businesses will comply with the duty of care they owe customers.

2.

A person who values efficiency would spend a lot of time talking about the alleged litigation explosion and the out-of-control jury system. Efficiency means “to minimize costs,” including costs from lawsuits. Justice means to treat all humans identically, regardless of class. Justice asks businesses to be held accountable when they breach their standard of care.

They put aside the power of the corporation and place an equal emphasis on the rights and needs of stakeholders.

3.

One aspect of the ambiguity is whether the injury must be physical. Some torts respond to psychological injuries. If injury means physical injury, the number of tort cases will go down. If injury includes harm to a person’s sense of well-being, tort cases will go up. The more a person values efficiency, the more he or she will want injury to mean only physical injury. Those who value security or justice will be more likely to allow an expansive definition of injury.

Case Summary—Young v. Becker & Poliakoff In this case, Becker & Poliakoff was hired by Jacquelyn Young to represent her in a lawsuit against her employers. One of the firm’s associates attached the wrong document while filing the suit. As a result, this case was dismissed and they did not re-file the claim with the right documents. After more than a year the firm informed Young that the case had been dismissed and she sued the firm for legal malpractice.

Case Summary—Nemet Chevrolet, Ltd. v. Consumeraffairs.com, Inc. This case considered defamation in the context of Internet communications. The court ruled when a false statement made over the Internet constitutes defamation, and who can be held liable if defamation exists. In this case, the court judged in favor of the defendant, the Internet service provider, Consumeraffairs.com, Inc., because the corporation is protected under the Communications Decency Act of 1996 (CDA).

Suggested Answers to Critical Thinking about the Law Questions 1.

The court concludes that that the defendant, Consumeraffairs.com, Inc., is immune from liability for allowing users to post their opinions about Nemet Chevrolet, Ltd. because of the Communications Decency Act of 1996. Additionally, Nemet Chevrolet failed to prove its claim that Consumeraffairs.com is responsible for the twenty posts about Nemet Chevrolet Copyright ©2015 Pearson Education Ltd.

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on the Web site.

2.

The main reasons provided by the court to support their conclusion are as follows: • The Communications Decency Act (CDA) provides immunity to publishers and distributors.

• Nemet Chevrolet failed to show that Consumeraffairs.com acted with malice.

• Consumeraffairs.com did not contribute to the fraudulent comments and, therefore, was not responsible for them.

• The Court is interested in balance public interest in privacy and free speech.

3.

The court prefers the ethical norm of freedom, for example, to be free from restrictions imposed by others.

Case Summary—Ellen Johnston v. One America Productions, Inc. This case deals with defamation. In the movie Borat, the star goes to a Pentecostal camp and experiences a fake religious experience and speaks in tongues. Johnston is shown in the movie for three seconds, raising her hands in praise for Borat’s “conversion.” She sued on the grounds that she was defamed by unknowingly participating in a mock of her faith. The film company counterclaimed, saying that Johnson failed to state a claim. The Court denied the motion to dismiss, ruling that evidence would need to be gathered during discovery to show, one or the other, if Johnston’s faith could be questioned by viewers. In other words, there needs to be a determination if the film would lead to the questions of the seriousness of her religion.

Suggested Answers to Critical Thinking about the Law Questions 1.

Dismissing cases should be hard because many times, issues are those of fact. If it was easy to dismiss a case, people would not have time to go over alternate theories and many times new, important facts come out in trial. Most decisions about cases should be made when all facts are one the table.

2.

To dismiss the claim, it would have to be obvious to the viewer that those in the fictional film are not actors and are real people. The viewers would also have to understand that the film is fictional and those people in the movie know they are in a film.

Case Summary—Venkateswarlu Thota, and North Texas Cardiology Center, v. Margaret YOUNG This case demonstrates an interesting defense to negligence. Preceding his death, Ronnie additionally suffered from angina, hypertension, a rare blood disorder called polycythemia vera, and coronary artery disease. In 2001, Ronnie went to cardiologist Venkateswarlu Thota for chest Copyright ©2015 Pearson Education Ltd.

The Legal Environment Of Business: A Critical Thinking Approach

pains. Medications did not work and finally Thota recommended a procedure called coronary angiography. Ronnie underwent many surgeries in the following months as a result of Thota’s surgery. Eventually Ronnie died from leukemia that was caused by his struggle with polycythemia vera. Ronnie’s wife brought a lawsuit against the hospital and Thota claiming Thota was negligent due to the following reasons: • Not obtaining Ronnie’s full medical history • Not considering Ronnie’s other medical problems might interfere with Thota’s procedure • Lacerating not only an artery but the wrong artery during the procedure • Not seeing the artery tear before Ronnie was discharged • Not being able to diagnose and treat the artery tear Answers to Review Questions 11-1. Students’ answers may vary. Overall, the availability of punitive damages is good for society. Although some companies suffer, they do so only if their behavior is particularly outrageous or willful. The possibility of punitive damages can serve the role of bringing out the best in corporations. Fear of large damage awards can make companies exhibit careful behavior.

11-2. The two involve different degrees of willfulness. Intentional torts involve more willful behavior than negligence, which focuses on carelessness.

11-3. An assault is the intentional placing of another in fear or apprehension of an immediate, offensive bodily contact. A battery is an intentional, unwanted, offensive bodily contact.

Usually, the two go hand-in-hand. When an assault occurs, so does a battery. An example would be a bar room brawl in which a person knows they are going to get hit, then gets hit. Sometimes, an assault can occur without a battery, and a battery can occur without an assault. Have students give examples to test their understanding of the definitions of these torts.

11-4. A conditional privilege protects the defendant even when he purposefully told a falsehood about the plaintiff, whereas a conditional privilege protects the defendant only if his statement was made without malice.

11-5 a. Public disclosure of private facts: A privacy tort that consists of unwarranted disclosure of a private fact about a person. b. False light: A privacy tort that consists of intentionally taking actions that would lead observers to make false assumptions about the person. c. Appropriation: A privacy tort that consists of using person’s name or likeness for commercial gain without the person’s permission. d. Invasion of privacy A privacy tort that consists of encroaching on the solitude, seclusion, or personal affairs of someone who has the right to expect privacy.

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11-6. This question would also make a good essay question or short paper assignment. Food disparagement laws provide ranchers and farmers a cause of action when someone spreads false information about the safety of a food product. Ranchers and farmers prefer the ethical norm of efficiency. The law protects farmers and ranchers from economic loss.

The clashing ethical norm is freedom. Those who talk about food, such as Oprah Winfrey, want to be free to state their opinions about food. They do not want a law to place restrictions on their ability to talk about food. Students’ answers may vary.

Answers to Review Problems 11-7. On the claim of defamation, Bob will lose. He will lose because he showed the letter to several colleagues, as well as to his boss. He damaged his own reputation. He will lose the intentional infliction of emotional distress claim too. Karen’s behavior was not extreme or outrageous, and Bob’s emotional distress is probably not severe enough for him to succeed on this claim.

11-8. Assumption of risk would not be a valid defense. That defense requires the defendant to show that the plaintiff voluntarily and unreasonably encountered a known risk. The defendant must establish that the harm suffered was indeed the risk assumed. Madeline might have assumed the risk that she would get hurt in the water, but she probably did not expect the risk of an exploding stove.

11-9. If Jones quits, there is a tort. The tort would be intentional interference with contract.

Creative Ads will have to pay damages to Action Advertising. The remedy could include compensatory, nominal, and punitive damages.

11-10. The mill owner is liable to compensate for the loss.

11-11. A single isolated act causing direct damage like striking a person by a cricket ball hit from an adjacent premise can be a nuisance to the house. To support the claim in negligence it must be shown that the club members were under a duty to prevent balls beings hit out of their ground to the danger of persons the adjacent way. As such, the incident of Alan getting hit with a ball out the ground involved a breach of that duty. That is why Alan is entitled to succeed in his claim.

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11-12. Sexual abuse occurred on the employer’s premises whilst the employee was engaged in performing his duties of caring for children. As such, there was a close connection between employment and the abuse so the employer would be vicariously liable. John and Jack will be successful in their claim.

Answers to Case Problems 11-13. The appellant court agreed with the trial court and found that Principal Banks did have probable cause. When Banks walked into his office he observed the women in a physical altercation—yelling, flailing their arms, and pulling each other’s hair. The facts showed that a reasonable person, at that time, could have easily seen all parties as being equally involved in the dispute. Therefore, Banks had probable cause to sign a criminal complaint.

11-14. The court found in favor of Mzamane with regards to the intentional infliction of emotional distress. The damage to Mzamane was sufficient to cause emotional stress and, therefore, it did not matter that no physical injury was inflicted. Mzamane also attempted to sue Winfrey for defamation and false light invasion of privacy but neither of these claims was granted.

11-15. The district court’s decision is affirmed with respect to six of the appellants, reversed with respect to two, and remanded for proceedings consistent with this opinion with respect to the remaining two.

11-16. Branham had to prove that Nazar had a duty to care, that he breached this duty that and as a result, there was injury, and this injury is the proximate cause of Nazar’s failure to care.

Ultimately, the appellant court reversed the trial court’s decision by finding in favor of Branham.

11-17. The court dismissed this case and it was considered to be a landmark judgment. This is because the court ruled that if a person was falsely accused of being gay, bisexual, or lesbian it was no longer considered to be ‘slander per se’ as per New York tort law. The court stated that it was the State’s responsibility to ensure the civil rights of people irrespective of their sexual orientation.

11-18. In a summary judgment the court ruled in favor of the defendants. A suit for negligence was dropped. The court stated that injuries sustained by the plaintiff were a result of the animal wandering off unattended on the highway. Since there was no existence of either vicious or abnormal propensity that caused the accident and according to the law based on this, the defendant was not legally responsible for the accident. However, it is Copyright ©2015 Pearson Education Ltd.

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considered negligent on the defendant’s part for allowing the cow to wander in the roadway in such an hour. So, the court should rule in favor of the plaintiff.

11-19. In this case, liability would not be imposed on the restaurant or the distributor of the alcohol that Montgomery had consumed. Even if the common negligence law or the Dram Shop Act were applied no action would be taken against either of the two parties.

11-20. Yes, Hatfill had to show actual malice because he was a “conditional public figure” and according to the law, those people must prove malice. Hatfill was unable to prove that Kristof acted with actual malice so the appellant court confirmed the trial court’s ruling in favor of Kristof.

Thinking Critically About Relevant Legal Issues 1.

The issue here is whether giving 75 percent of the punitive damages in tort cases to the state to fund needed programs is a good idea for states. The conclusion states that this is a very good idea because it helps the state, the victim, and it still punishes the perpetrator.

2.

One needs more information about the California program. One argument made is that juries will award more in damages because that means more will go to the state. More information is needed about punitive damages in California when the bill was in effect.

3.

The author is focused on public good and punishing those who have done wrong. But the focus is on the public good because that is the main reason for enacting a bill like the one described.

4.

The opposition would argue that punitive damages help the victim. If they get all the damages, then they can remedy the injustice done to them, especially in a personal injury or medical malpractice case. Also, if businesses know that their money will go to help the public, an element of deterrence has been lost because the money is not just going to remedy the injustice they caused, but rather to help all people, including those who hurt the victim/s.

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Chapter 12 Modern Product Liability Law Introduction Chapter Twelve addresses these questions: • • • •

What theories of recovery do plaintiffs assert in product liability cases?

What is market share liability, and how does this theory help plaintiffs?

What is service liability, and who should care about the evolution of this kind of liability?

What are the global dimensions of product liability law?

Chapter Twelve is significant because it helps the student function better as a consumer, and as a businessperson. The chapter helps students understand dangers in products and how to assert their rights if they are injured by a product or service. Also, as managers, students need to know how to ensure their products and services will not end up as liability concerns for the companies that employ them.

Achieving Teaching Excellence How Is the Course Going So Far? By the time instructors and their students start working on Chapter Twelve, they will be so far enough into the term that it would be a good idea to figure out how things are going, and what changes they might want to make to achieve Teaching Excellence. Instructors will want to evaluate their work, see how students are progressing, and see what students think of what’s happening in class so far.

Instructors could start by taking stock of how they think things are going. Most instructors are good at determining how one course is going compared to one they taught last term, or last year. The instructors need to note the aspects of the course that are working well along with the reasons for the same. Apart from that the changes that need to be made must be noted. Instructors shouldn’t promise themselves that they will do better next term. They should make appropriate changes as soon as possible. Here are some questions instructors might want to ask themselves: • How much of class time am I talking compared to the students?

• What kinds of questions do I ask the most? Do these questions promote higher-order or lower-order thinking skills? (Ask one of your colleagues to observe your class and write down the questions you ask.)

• What kinds of questions are my students asking me?

• Are students interacting with their peers in productive ways?

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• • •

Am I encouraging students to engage in critical thinking in class?

Do my assignments promote critical thinking?

Are my students learning the legal content in the course?

Next, the instructor should try to assess how well students are doing in terms of learning critical thinking skills and course content. Instructors should review students’ papers, exams, or whatever assignments that they are given. If instructors are not sure how their students are doing in either of these areas, they might want to go back and look at the assignments given to the students. Perhaps the assignments are not giving instructors a good chance to see what their students are learning. This Instructor’s Manual gives ideas about assignments that promote critical thinking and mastery of course content. Instructors are probably already giving good assignments if they are following the guidance of the textbook authors and the ideas in this Instructor’s Manual. If instructors are not, it is not too late to change what they aspire to do in the course.

Finally, instructors need to know how students think the course is going. Instructors can ask them in more than one way, depending upon why they want to know. If instructors are concerned about the evaluations students will give them at the end of the semester, they should ask students the same questions the school’s course evaluations will ask them at the end of the semester. Then instructors can see which areas of their teaching performance call for change. Probably, many instructors teach at schools where the teaching evaluations do not give them all the information they need to assess their performance in ways that are meaningful to them. The instructors need to make sure that they add questions to their school’s course evaluations that will give instructors the feedback they need to achieve Teaching Excellence.

A better way to figure out what students think of an instructor’s performance is to ask them open-ended questions. The instructors could give the students an almost completely blank sheet of paper. At the top, they could include three columns. One could say START, another could say STOP, and the last could say CONTINUE. The students could be asked to fill out this form.

Instructors could ask students: In this course, the professor should START _____, STOP _____, and CONTINUE _____. Sometimes instructors get responses they never expected, and responses that do not fit neatly into the questions that schools ask instructors to ask students.

After instructors assess how they think they are doing, how their students are doing in terms of learning both critical thinking and course content, and how students think the course is going, they should develop an action plan for necessary changes. Instructors should keep in mind that they are trying to get their students to appreciate them in the long run, not necessarily the short run. Instructors might be unable to make students happy this term. M. Neil Browne and Stuart M. Keeley gave a good reminder. In their article that offered advice to new teachers they wrote: “[R]espect from students is preferable to their immediate approval. Ideally, of course, it is desirable to engender both short-run applause and long-run gratitude from students.”

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References •

M. Neil Browne & Stuart M. Keeley, “Achieving Excellence: Advice to New Teachers,” 33 COLLEGE TEACHING 78 (1985).

Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview If students enjoyed the material Chapter Eleven presented, they will probably enjoy Chapter Twelve even more. This chapter presents interesting cases and legal theories that are important and complex. Students will find parts of this chapter especially challenging. The concepts of privity, the implied warranty of merchantability, and the tests for showing design defects in strict liability cases (consumer expectations test and feasible alternatives test) are especially challenging. After the topic outline, discussion questions will encourage students to work with the more difficult concepts Chapter Twelve presents.

Topic Outline I. Theories of Recovery in Product Liability Cases A. Negligence The Privity Limitation Negligent Failure to Warn Negligent Design Negligence per Se Defenses to a Negligence-Based Product Liability Action Donna S. Riegel v. Medtronic, Inc. B. Strict Liability in Contract for Breach of Warranty Implied Warranty of Merchantability Williams v. Braum Ice Cream Stores, Inc. Implied Warranty of Fitness for a Particular Purpose Express Warranties Defenses to Breach-of-Warranty Actions C. Strict Liability in Tort Welge v. Planters Lifesavers Co. Beard v. Johnson & Johnson, Inc. Impact of the Restatement (Third) of Torts Defenses to a Strict Product Liability Action D. Liability to Bystanders II. Market Share Liability Copyright ©2015 Pearson Education Ltd.

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III. Service Liability A. Accountants’ Liability IV. Global Dimensions of Product Liability Law V. Summary Discussion Questions for Chapter Twelve 1.

Explain relationships among negligence, breach of warranty, and strict product liability.

The most significant relationship among negligence, breach of warranty, and strict product liability is that they are the three theories plaintiffs assert in product liability cases. The first and third (negligence and strict product liability) are tort theories, whereas the second (breach of warranty) is a contract theory.

2.

Explain why someone might say this statement is true: Eradication of the privity requirement has benefited plaintiffs.

This statement is true because privity had limited who could sue in product liability cases.

Originally, courts said that a plaintiff who was not the purchaser of a defective product could not establish a duty of care. This limitation was based on the concept of privity. Privity means that one is a party to a contract. The eradication of privity meant people who were not purchasers of a defective product and were injured by that product could sue in a product liability action.

3.

Explain relationships between negligent failure to warn and negligent design.

Both negligent failure to warn and negligent design are theories a plaintiff can assert in a product liability action. Failure to warn cases arose earlier in history than negligent design cases. Also, manufacturers are concerned about both kinds of cases because both allege something is wrong with all the products, not just that one was made poorly. If a warning is inadequate, it is probably inadequate on all the products. If a design is faulty, it is faulty on every product. Both theories assert significant problems with the behavior of those who developed and marketed a particular product.

4.

Explain why someone might think this statement is true: Manufacturers benefit from the many defenses they can assert in negligence cases.

This statement is true because if defendant manufacturers can assert just one defense successfully, they might not have to pay the plaintiff any damages. Manufacturers can assert the defenses of contributory, modified, or pure comparative negligence, depending upon which defense a particular state has adopted. They can also assert the defenses of assumption Copyright ©2015 Pearson Education Ltd.

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of the risk, misuse of the product, the statute of limitations, the statute of repose, and the state of the art defense.

5.

Explain relationships between the implied warranty of merchantability and the implied warranty of fitness for a particular purpose.

The implied warranty of merchantability goes with every product sold, unless expressly and clearly excluded. It is a more general warranty than the implied warranty of fitness, which goes with a product in very limited circumstances. Both are defined according to the Uniform Commercial Code. The implied warranty of merchantability guarantees that goods are fit for the ordinary purpose for which the goods are used. The implied warranty fitness for a particular purpose arises when a seller knows the purchaser wants to purchase a good for a particular use. The seller tells the consumer that the good can be used for that purpose, and the buyer reasonably relies on the seller’s expertise, and purchases the product. Have students give an example of each kind of warranty.

6.

Explain relationships between implied and express warranties.

One relationship between the two is that both are defined by the UCC. The implied warranty of merchantability goes with almost every product, whereas the implied warranty of fitness for a particular purpose and the express warranty may or may not go with a product. An express warranty is created in one of three ways—by describing the goods, by making a promise or affirmation of fact about the goods, or by providing a model or sample of the good. If the goods fail to the meet the description, fail to do what the seller claimed they would do, or fail to be the same as the model or sample, the seller has breached an express warranty.

7.

How does the strict liability theory explained in Chapter Eleven relate to the strict liability theory in this chapter?

Both definitions rely on the same theory. The difference is that strict product liability is defined by the Restatement of Torts to show how the theory that underlies strict liability should be applied in cases that focus on products. In Chapter Eleven, the strict product liability theory concentrated on dangerous situations, and Chapter Twelve’s definition focuses on dangerous products. Both definitions are reminders of the purpose of strict liability is to insure that the costs of injuries resulting from defective products or dangerous activities are borne by the manufacturer or person who engages in the dangerous activity, rather than the innocent persons who are powerless to protect themselves.

8.

How are the defenses available to manufacturers in strict liability cases different from the defenses available to manufacturers in negligence cases?

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More defenses are available to manufacturers in negligence cases than strict liability cases.

Also, the defenses in strict liability cases are not allowed to focus on anyone’s behavior.

Instead, they must focus on the product itself. Some defenses allowed in negligence cases are not allowed in strict liability cases. Examples are the defenses of contributory negligence and the state of the art defense.

9.

How is the strict liability theory good for plaintiffs?

This theory allows plaintiffs to recover even if the manufacturer was not at fault. It also ignores the behavior of the plaintiff. Instead, this theory focuses on the product itself and whether that product was defective. The evolution of strict liability theory made it easier for plaintiffs to win product liability cases. Plaintiffs often lost in negligence cases because they were contributorily negligent.

10. Why might someone say this statement is true: In strict liability cases, the part of the test that focuses on the “defect” is the most difficult part of the case for plaintiffs to prove.

A defect in manufacture or marketing generally involves a specific product’s not meeting the manufacturer’s specifications. Proof of such a defect is generally provided by experts who testify as to the type of flaw that could have caused the accident that led to the plaintiff’s injury, or evidence of the circumstances surrounding the accident that would lead the jury to infer that the accident must have been caused by a defect in the product. Often it is difficult to meet the plaintiff’s burden of proof, which is that it is more likely than not that the defect caused the plaintiff’s injury.

11. The text lists reasons the evolution of the concept of strict product liability is positive. Have your students identify two major reasons the evolution is negative.

One reason is that strict liability has increased the liability of manufacturers, and they have passed this cost onto the consumers. A particular plaintiff might be successful, but consumers incur higher costs in general. Another negative aspect of strict liability is that this theory discourages innovation and technological advances. Increased expectations about safety and manufacturers’ fears of lawsuits make companies too afraid to develop and market certain kinds of products.

12. Explain relationships between market share liability and service liability.

Both are relatively new areas of law. Market share liability splits liability among manufacturers of a fungible product based on market share at the time the product was produced. Service liability actions occur when someone or someone’s property is harmed as Copyright ©2015 Pearson Education Ltd.

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a result of an inadequately performed service. Courts in the states are considering both kinds of liability and developing new rules and definitions. One major difference is that market share liability considers who should have to pay a judgment, whereas service liability is broader and looks at liability in general.

Answers to Critical Thinking about the Law Questions, Case Summaries, Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law Questions 1.

There are two primary differences between the cases. First, in Katherine’s case, Katherine interacted with the product. She bought the product and removed the cap, whereas the other woman did not buy the product. This fact will give Katherine more theories of recovery than the earlier woman. Specifically, Katherine will be able to sue for breach of an implied warranty of merchantability. Second, Katherine’s injuries were less severe. Katherine recovered, but the other woman lost her eyesight. Katherine will recover damages, but her injuries were different, which will mean her settlement amount will not be as high as the earlier woman’s.

2.

The idea of security is shaping the judge’s thought. The definition of security should be revised and made consistent with thoughts of safety. Consumers should be confident that when they open a product it will not explode. It will help consumers achieve the psychological condition of self-confidence. That is possible when we hold manufacturers responsible even when they have included a warning.

3.

It would be helpful to have the date because the exact cause of the problem can be explored.

Knowing the date might help one see whether the manufacturer has a design defect (are all cans defective no matter when they were manufactured?) or are only some defective (which means something went wrong with a particular batch). Also, one would want to know whether tampering with the product was possible. If so, it is possible the stores or some criminal are to blame, rather than the manufacturer. At this point instructors can explain the Tylenol cases, which showed an innocent manufacturer responding to a problem of someone else tampering with their product.

Case Summary—Donna S. Riegel v. Medtronic, Inc. This case illustrates a defense to a negligence-based product liability case. Charles and Donna Riegel sued Medtronic, Inc. for making a faulty catheter. Medtronic argued that the production of the catheter complied with the Food and Drug Administration’s guidelines and so the company was protected from a product liability suit. The Supreme Court agreed with the district courts and the Second Circuit and found in favor of Medtronic.

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Suggested Answers to Critical Thinking about the Law Questions 1.

No, Justice Scalia sees the general tort duties and the requirements imposed by the FDA review process as demanding the same duties. For the Riegels to argue that their claim was preempted by the MDA, there would have had to be a requirement in place by the MDA that was “different from, or in addition to” a federal law.

2.

The Riegels claimed that the duties underlying their negligence claim was not preempted even if “requirements” were imposed because general common-law duties are not maintained as requirements. Scalia and the rest of the Supreme Court, however, interpreted the MDA differently. The Court found that no state can establish any requirement related to safety or effectiveness that is different than a federal requirement.

Case Summary—Williams v. Braum Ice Cream Stores, Inc. In this case, the court set forth the two tests used in various jurisdictions to decide whether a breach of warranty of merchantability exists. The court explained both the foreign-natural test and reasonable expectations test, then decided to adopt the reasonable expectations test. The case arose after the plaintiff broke a tooth on a cherry pit that was in cherry-pecan ice cream.

Suggested Answers to Critical Thinking about the Law Questions 1.

Under the foreign-natural test, a plaintiff may recover only if the object is foreign to the food served. The rationale behind this test is that it is difficult to separate ingredients in the course of food preparation, and this fact is common knowledge. The reasonable expectations test focuses on what is reasonably fit, and what we expect people to anticipate. The fundamental difference is what is expected of consumers.

2.

The reasonable expectations test is more ambiguous. It will be hard to define precisely whether consumers act in a reasonable manner. It would be much easier to figure out whether a substance in food is foreign to the food (such as a pebble) or natural (such as a cherry pit in cherry-pecan ice cream).

Case Summary—Welge v. Planters Lifesavers Co. This case is in the book to show how a court will analyze a situation in which a glass jar shatters, and no one is quite sure why. The jar in question was a jar of peanuts. The court considers the possibilities that the plaintiff (whose hand was injured when the jar shattered) misused the product, or that someone other than the manufacturer was responsible for the defect. The court even introduces the idea of res ipsa loquitur. Ultimately, the court rules that the plaintiff can pursue a Copyright ©2015 Pearson Education Ltd.

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product liability action even though he failed to exclude possible causes of the accident other than a defect introduced during the manufacturing process.

Case Summary—Beard v. Johnson & Johnson, Inc. This case is about product liability. An ETS-Flex45 Articulating Endoscopic Linear Cutter, or an “endocutter” marketed by Ethicon Endo-Surgery, Inc. was used during Sandra Selepec’s gastric bypass surgery. Selepec experienced pain after the surgery, and her doctors discovered that some of the staples from her bypass had failed. The company argued that risk-utility should not be limited by only one minor use of a product. The Court held that trial courts are not restricted to considering a single use of a multi-use product in design defect, threshold, riskutility balancing. It also declined to disturb the Superior Court’s legal determination as to the appropriate risk-utility calculus. The order of the Superior Court was affirmed.

Suggested Answers to Critical Thinking about the Law Questions 1.

Abstract conclusions are difficult to be drawn and they tend to disturb the balance of riskutility analysis. The Court held that its decision could not be restricted to a single use of the product alone. Additionally, the Court stated that framing the argument should be taken up on a case-by-case basis.

2.

Risk-utility analysis that was conducted by Azzarello did set up rational limits. However, while dealing with technology, it would be difficult to ascertain every risk that a particular instrument can cause. Hence, the claim that there is a defect was present would be a difficult matter to pursue.

Answers to Review Questions 12-1. Originally, courts said a plaintiff could not establish a duty of care and could not recover unless he or she had purchased the product. This limitation was based on the concept of privity. The requirement of privity was abolished in 1916, which meant people who had not purchased products but were injured by them could sue in product liability cases.

12-2. Negligence and strict product liability are the two theories.

12-3. (1) When they sell an imported product that causes injury to a consumer in the United States, and (2) When they manufacture and export a product that causes harm to a consumer in a foreign country.

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12-4. The three kinds of warranties are the express warranty, implied warranty of merchantability, and implied warranty of fitness for a particular purpose. This question gives students an opportunity to review Table 12-3.

12-5. The foreign-natural test is different from the consumer expectations test because it accepts the difficulty of separating ingredients in the course of food preparation. It reduces the likelihood of liability in food cases where the damaging aspect of the food is natural to the food, such as a bone in a fish dish. The consumer expectations test instead asks what consumers should reasonably expect. That is what is keyed to whether food is reasonably fit. If we should not reasonably expect fish bones in a fish dish, we would say the food preparer had breached a warranty of merchantability.

12-6. Defenses available in breach of warranty cases include: • That the purchaser failed to give the seller notice within a reasonable time after he or she knew or should have known of the breach of warranty • The existence of a disclaimer • The statute of limitations Answers to Review Problems 12-7. The primary factor will be whether Clark is in a state that adopted the foreign-natural test or the consumer expectations test. If his state adopted the foreign-natural test, Clark would be much less likely to win than if the state adopted the consumer expectations test.

The chicken bone would be “natural,” yet most consumers would not expect a chicken bone in an enchilada.

12-8. Yes, the decedents’ estates do have a product liability action. The manufacturer needed to put a warning on the gas heater, in addition to the warning in the manual.

12-9. Contributory negligence is a valid defense when the plaintiff failed to act reasonably. This defense would be relevant if the plaintiff failed to act reasonably in using the extinguisher. Certainly, the manufacturer should expect that carelessness causes fires.

That’s the reason behind installing fire extinguishers. The manufacturer cannot turn around and use the plaintiff’s carelessness in causing the fire as a defense.

12-10. Mattie can sue under strict liability breach of warranty and recover damages. A court would find her guarantee unconscionable. The UCC now contains a provision stating that a limitation of consequential damages for injury to a person in the case of consumer goods is prima facie unconscionable.

12-11. Bob will be allowed to bring a strict product liability action against the manufacturer of Copyright ©2015 Pearson Education Ltd.

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the engine. Bystanders are allowed to sue in this kind of case. The focus of the case will not be on fault. Instead, the question will be whether the product was defective and, if so, whether this defect could make the product unreasonably dangerous. Bob will also need to show cause and damages.

12-12. This situation involves service liability. Have the students look back to the First Florida Bank case. The answer depends on which test the state has adopted in service liability cases. The First Florida Bank case outlines the four possible tests. Under some of the tests, the bank cannot bring a cause of action. Under others, the bank could bring a cause of action.

Answers to Case Problems 12-13. The Court affirmed the decision. The warning was adequate. Just because he did not read it did not make it any less legal. Also, the bacteria were not anything added by the restaurant; it is naturally occurring. Therefore there was no negligence in the farming or preparing of the oysters.

12-14. Punishing a defendant for damages to individuals who are not in court is unfair to both the defendant and other victims. The Fourteenth Amendment due process clause protects defendants from having to pay punitive damages for individuals who are not involved in the litigation. Individuals who are not involved have the right to sue the defendant and receive compensation individually. The Supreme Court found that the punitive damages were excessive and should only be granted for the harm done to Williams.

12-15. The court of appeals affirmed, ruling that the risk that milk could cause temporary gas and stomach discomfort to lactose-intolerant individuals who did not yet know of their condition could not support a claim based upon failure to warn.

12-16. The product-liability actions brought against Genentech were dismissed. Marsh claimed that immunity was not applicable since it was preempted by the federal law. However, the court held that the company had immunity since it was under the purview of the Michigan Products Liability Act. 12-17. The claim was not preempted because action by the court did not constitute state action.

Even though they would be forced to change the label, it was not at the behest of the state, rather it was because the label was found to be insufficient by a court of law, not a state governing body. The Court specifically rule that negligence claims could not be preempted because they did not deal with relabeling, but rather the fact that the product was not tested enough or the company did not have enough information to market it the way they did.

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12-18. The defect caused by the manufacturing would not be preempted because it could be proven that it was the cause of the injury. The rest of the claims fell under the umbrella of the federal law, but manufactured defect would not be covered because it referred to the specific device, not the more general concepts regarding all the devices. If one problem with one device caused the injury, then that would not be preempted.

Thinking Critically about Relevant Legal Issues 1.

The issue here is that businesses are not equipped to handle problems that arise from goods made in other countries. Instead of holding the distributors liable, the government should step in and take a hard-line approach to foreign imports. In conclusion, these imports need to be inspected and deemed safe by the United States, not the country in which they were made.

2.

The author uses statistics about how much we import from other countries. He talks about the legal issues, briefly, behind the liability laws and makes an argument why governments should be more concerned with the products coming into our country.

3.

An implementation strategy is missing. The author makes a very valid and intelligent point about government accountability but he fails to finish; namely he does inform the reader exactly what should be done. He should have outlined exactly what he thought the government could and should do about the situation.

4.

One could argue that if the companies want to maximize profits by sending all the work overseas where it is done in much less regulated facilities, then it should be their job to inspect their products. U.S.-made goods do not have the problem of low standards. Because CEOs insist on making hundreds of millions of dollars, companies must be willing to shoulder the blame when products made outside the United States in their name are defective.

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Chapter 13 Real Estate and Property Law Introduction Chapter Thirteen addresses these questions: • • • • • •

What is real property?

What are the various interests in real property, and what is the significance of each?

How can one voluntarily transfer real property?

How is real property transferred involuntarily?

What is personal property?

What are the global dimensions of property law?

Chapter Thirteen is significant because it explains the concept of property, and the ways government rules and judicial decisions allow owners to exclude others.

Achieving Teaching Excellence Encouraging Students to Ask Better Questions The past few chapters of this Instructor’s Manual have encouraged instructors to ask higherorder thinking questions, encourage class discussion, and get students to interact with one another. This chapter reminds instructors to encourage students to ask specific kinds of questions. Just as instructors should ask students certain kinds of questions if they want to achieve teaching excellence, they should also encourage their students to ask interesting, important questions. Here are some questions instructors might want to ask: • What is an uninteresting question? Have you heard any of these?

• The question that lacks precision: “Could you go over Chapter Nine again?”

• The question that asks you, the instructor, to engage in lower-order thinking skills: “What was the definition of real property?”

• The question we all dislike: “Will that material be on the test?”

Most instructors want students to ask questions that are consistent with their goals for them.

Instructors want them to engage in higher-order thinking, and they should insist that not only their comments, but also their questions, move them toward higher-order thinking.

To get started in encouraging students to ask better questions, instructors should notice for a few days the kinds of questions students are asking. Instructors should write down the questions, or ask someone else to observe a class and write down the questions. Second, instructors should Copyright ©2015 Pearson Education Ltd.

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classify the questions according to Bloom’s taxonomy of educational objectives. Then, instructors should develop a plan for improving the quality of questions students ask.

Instructors can get some good ideas on this topic from an article by Susan Beers. Beers wrote an article in which she described how she got her students in a psychology class to raise interesting questions. Beers suggested activities that encouraged her students toward this goal.

Her goals were: “to encourage students to raise questions, to help students become aware of different levels of questioning, and to encourage students to see writing as an integral part of the inquiry process.”

Beers explained her exercise. During each week of the term, she asked students to write three questions that related to class discussion, readings, or independent thinking. Copies of the questions were made available to each student. Beers returned the questions with a handout that listed Bloom’s taxonomy and key words that relate to each category of the taxonomy. For instance, she used these terms: “knowledge—state, list; comprehension—explain, identify; application—apply, demonstrate; analysis—compare, differentiate; synthesis—create, hypothesize; evaluation—judge, revise.”

Next, each student was assigned two questions to classify according to the taxonomy. Beers discussed in class the utility of the taxonomy and the function of different kinds of questions.

Beers noted that students seemed to appreciate that higher-order thinking questions were more interesting. She encouraged students to write higher-order thinking questions.

Students categorized questions four times during the term. Beers stated that students wrote more questions that called for evaluation as the term progressed. By the end of the term, Beers saw several positive outcomes from her exercise. The exercise “made for a livelier class.” Some students “categorized the class as a whole using Bloom’s taxonomy.” She also noted that some students evaluated other courses they were taking at the time according to Bloom’s taxonomy.

Finally, the exercise “helped at least some students to think about the nature of knowledge and learning more explicitly than they had previously.”

Beers concluded her description by presenting this quote by M.T. Moore: “The productive question is more important and often a greater achievement than the solution.”

Why not try Beers’ exercise when instructors and students work on Chapter Thirteen? Beers’ exercise has been simplified in the description, and instructors should be able to do the exercise with just one chapter to see how it works for them and their students. If it works, do it again later in subsequent chapters. Remember that an instructor’s goal is to encourage students to ask questions that show higher-order thinking skills.

References Copyright ©2015 Pearson Education Ltd.

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• •

Susan E. Beers, “Questioning and Peer Collaboration as Techniques for Thinking and Writing about Personality,” 13 TEACHING OF PSYCHOLOGY 75 (1986).

M.T. Moore, “The Relationship between the Originality of Essays and Variables in the Problem-Discovery Process,” 19 RESEARCH IN THE TEACHING OF ENGLISH 84 (1985).

Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview When people hear the word property, they generally think of physical objects—land, houses, cars. Property, however, is a bundle of rights and interests in relation to other persons with reference to a tangible or intangible object. The essence of the concept of property is that the state provides the mechanism to allow the owner to exclude other people.

The cases in this chapter are timely and interesting. Also, students will be interested in the topics in this chapter. The discussion questions that follow the topic outline focus on the skill of synthesis. They encourage students to integrate, or explain relationships between the many concepts Chapter Thirteen explains.

Topic Outline I. Real Property A. Definition of Real Property Fixtures B. Extent of Ownership II. Interests in Real Property A. Fee Simple Absolute B. Conditional Estate C. Life Estate D. Future Interest E. Leasehold Estates F. Easements G. License H. Co-Ownership I. Condominiums and Cooperatives Condominiums Burton Stevens v. Elk Run Homeowners’ Association, Inc. Cooperatives III. Voluntary Transfer of Real Property Copyright ©2015 Pearson Education Ltd.

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A. Execution General Warranty Deed Quitclaim Deed B. Delivery C. Acceptance D. Recording IV. Involuntary Transfer of Real Property A. Adverse Possession B. Condemnation Susette Kelo, et al., Petitioners. v. City of New London, Connecticut, et. al.

V. Restrictions on Land Use A. Restrictive Covenants B. Zoning Emine Bayram V. City of Binghamton and City of Binghamton Zoning Board of Appeals C. Other Statutory Restrictions on Land Use VI. Personal Property A. Voluntary Transfer of Property B. Involuntary Transfers of Personal Property C. Bailments VII. Global Dimensions of Property Law VIII. Summary Discussion Questions for Chapter Thirteen 1.

Explain relationships between real and personal property.

Real property is land and everything permanently attached to it. All property that is not real property is personal property; personal property may be either tangible or intangible. One relationship between the two is that business owners possess both real and personal property.

An example of real property would be the building. An example of personal property would be the manager’s desk.

2.

Explain relationships between a fee simple absolute and life estate.

The fee simple absolute and the life estates are two different interests in real property. The fee simple absolute gives a person all rights to own and possess that land against all others, without conditions. The life estate gives a person the right to own and possess property until one dies. Thus, the fee simple absolute gives a person more rights than the life estate.

4.

Explain relationships between easements and licenses.

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Easements and licenses are both interests in real property, but the interests are different.

Easements are irrevocable rights to use some portion of another’s land for a specific purpose.

The party holding the easement does not own the land, but has the right to use it. A license is a temporary, revocable right to be on someone else’s property. Easements give the holder greater rights than licenses in that easements are not as easily or quickly revocable. It is also true that the two are different enough that a businessperson might need an easement but not a license, or a license but not an easement.

5.

Explain relationships between a quitclaim deed and adverse possession.

A quitclaim deed is one way to voluntarily transfer property, whereas adverse possession is one way to involuntary transfer property. With a quitclaim deed, the grantor simply transfers to the grantee the interest the grantor owns in the property being conveyed, with no additional covenants. Adverse possession is a doctrine that provides that when a person openly treats realty as his or her own, with neither protest nor permission from the real owner, for a statutorily established period of time, ownership is automatically vested in that person.

6.

Explain relationships between restrictive covenants and zoning.

Restrictive covenants and zoning are both restrictions on land use. Restrictive covenants are promises people voluntarily enter into that restrict the ways they will use the land. For instance, a neighborhood community might include restrictive covenants in deeds that place limits on the kind of door a person might have—what color, what style. This type of restrictive covenant encourages uniformity in the neighborhood and helps maintain property values. Zoning is different because it is determined by government regulators. Zoning is the restriction of the use of property to allow for the orderly growth and development of a community and to protect the health, safety, and welfare of its citizens. Zoning restrictions state how land might be used—residential, commercial, industrial, or agricultural.

7.

Explain relationships between gifts and bailments.

One way people voluntarily transfer property is through a gift. Gifts are distinguished from purchases in that there is no consideration for a gift. A bailment is another way people voluntarily transfer property, but the transfer is only of possession, and it is only temporary.

A bailment of personal property involves a bailor, who transfers property to a bailee to be used by the bailee in an agreed-on manner for an agreed-on time.

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Suggested Answers to Critical Thinking about the Law Questions 1.

The ethical norm that is most likely to cause increased protection of property is security.

Security means “to be safe from those wishing to interfere with your property rights.”

2.

The ethical norm that would lead to redistribution of property rights is justice. Justice is defined as, “to treat all humans identically, regardless or race, class, gender, age, and so on.”

Under that definition of justice, people should have a relatively equal distribution of property rights.

3.

Instead of stating, “this property is mine,” nations or individuals in different nations could explain what rights they have over property. What are they allowed to do with the property they are referring to? Can they use it as a security? Do they have the right to sell? Or can they donate it? And what restrictions do they have on their rights to the property? Simply stating, “This property is mine.” is not sufficient because the listener does not know to what degree the property is owned.

Case Summary—Burton Stevens v. Elk Run Homeowners’ Association, Inc. This case deals with the say the owners of a condominium have over their tenants. Stevens put a portable hot tub on the patio of his condo. The Association told him to remove it and he refused. The district court ruled for the Association, so Stevens appealed. On appeal, the Court ruled that the tub had to be removed because it was observable and therefore subject to regulation by the Association.

Suggested Answers to Critical Thinking about the Law Questions 1.

The Court here read that section to be in reference to permanent alterations to the property.

In Stevens’s case, he did not permanently alter his unit because the hot tub was removable.

Because of that, he did not violate that section of his agreement.

2.

If it were out of sight, the Association would have had a harder time proving those sections.

If the tub was out of sight, it would not have been an obstruction and then not regulated by the sections. The problem was that it could be considered an eyesore, and therefore a regulate-able obstruction.

Case Summary—Susette Kelo et al., Petitioners, v. City of New London, Connecticut, et al.

This case deals with condemnation. The city wanted to build a new waterfront area to revitalize the city and create new jobs. This involved taking some pieces of private property.

Those who refused to sell were condemned by the doctrine of eminent domain. The owners Copyright ©2015 Pearson Education Ltd.

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appealed. The Court found that the city could take the property as long as fair market price was given to the owners and the land was to be used solely for the public good, that is, parks and shops.

Case Summary—Emine Bayram v. City Of Binghamton and City of Binghamton Zoning Board of Appeals This case deals with zoning. A single-family residence was leased to seven Binghamton University students by Bayram, for two years. The City of Binghamton received a complaint that the residence was being rented out as a frat house. A Notice of Violation was issued to Bayram advising him the seven students didn’t constitute a factual or functional family. Following a review by the Zoning board and a public hearing the Board decided to evict the tenants. The New York Supreme Court affirmed the judgment in favor of the City.

Answers to Review Questions 13-1. The reason why each of the following is or is not real property is explained below: a. A fence is real property because it is attached to the land, and its removal would cause damage to the property. b. A tree is real property because it is attached to the land, and its removal would cause damage to the property. c. A house trailer is real property, for the same reasons as above. d. A built-in oven is real property. It is a fixture. (Note the exception for trade fixtures.) e. A refrigerator is usually considered a fixture, although it is not usually built in like an oven. Custom is different in different locations where one must leave the refrigerator upon the sale of a house.

13-2. The primary estates in land are the easement, leasehold estate, life estate, conditional estate, and fee simple estate. Have students refer to Exhibit 13-2.

13-3. The circumstances under which each of the following types of ownership would be most desirable are as follows: a. Joint tenancy—a person who wants equal shares, does not mind that creditors can attach their interest, and wants the property to be divided among other joint tenants when he or she dies b. Tenancy in common—a person who wants equal or unequal shares, does not mind that creditors can attach their interest, and wants the property to be transferred to his or her heirs when he or she dies c. Tenancy by the entirety—a person who wants equal shares, does not want creditors to be able to attach their interests, and wants the property to go to his or her surviving spouse when he or she dies Copyright ©2015 Pearson Education Ltd.

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13-4. Restrictive covenants are promises to use or not to use their land in particular ways. They are generally included in the deeds and are binding on the owners as long as the covenants are for lawful acts. They are primarily used today when developers want to maintain certain community standards to preserve the value of property.

13-5. Advantages: It is a way to diversify your investments; when the real estate market falls here, it isn’t necessarily going to fall in a foreign country. Another advantage may be that you may gain certain rights in the country where you buy property. For example, if you purchase property in Dubai, you will automatically receive a visa that will allow you to do business there.

Disadvantages: A huge slide in the value of the currency of the nation where you purchased the property could lead to a significant decline in the value of your asset, especially if you are suddenly forced to sell and the currency has declined since you purchased the property.

Another potential disadvantage is that if the country has political turmoil, a new government could overturn your ownership rights.

Finally, if you don’t carefully investigate the foreign country’s laws, you may end up assuming certain aspect of real estate law are like those in our country and if you are wrong, you may not have the rights you thought you had.

13-6. Condemnation and adverse possession are both involuntary transfers of real property.

Adverse possession provides that when a person openly treats realty as his or her own, without protest or permission from the real owner, for a statutorily established period of time, ownership is automatically vested in that person. Condemnation is a process by which the government acquires the ownership of private property for a public use over the protest of the owner of the property. They are different in that condemnation involves a whole parcel of land, whereas adverse possession usually involves a smaller portion, and in condemnation, the owner asserts his or her interests. Adverse possession assumes a passive landowner who fails to protest another person’s encroachment.

Answers to Review Problems 13-7. The court would most likely grant the injunction because Carlos only owns the land as long as he is alive. After his death, the land is reverted back to the original owner.

Therefore, the land is real property and is subject to the restrictions listed in covenants or placed in a set of CC&Rs. If the future owner did not have a written agreement about what could and could not be done to the property, though, the court may not grant the injunction.

13-8. No, as long as the set of CC&Rs does not contradict a federal or state law, they are binding on the owners. In this case, there is no law demanding the use of artificial grass so the Hortons were not within their legal rights to add artificial grass. The best argument the Hortons could make is that the CC&R’s restriction on artificial grass contradicts state Copyright ©2015 Pearson Education Ltd.

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actions to save water and should, therefore, be changed.

13-9. It would be difficult to win this case as the defense would argue that rezoning was carried out for the greater public good. However, the plaintiff would incur a loss as the economic value of the property would be lost. Therefore, the plaintiff would be entitled to receive just compensation.

13-10. No, building a sports arena would not qualify as condemnation because the city can only declare eminent domain to use the land for a public good. In County of Wayne v.

Hathcock et al., the Michigan Supreme Court ruled that using eminent domain for economic redevelopment is unlawful and a sports arena parking lot would most likely be considered economic redevelopment.

13-11. Judy should win, unless there is evidence that she abandoned the Pepsi. If Judy discarded or abandoned the Pepsi, Cindy would become its owner when she possessed it. From reading the facts, there is no evidence that Judy discarded or abandoned the Pepsi, so Cindy did not become its owner. There is also no evidence that Judy lost or mislaid the Pepsi.

13-12. Bailment benefits both the bailor and bailee, so the bailee, the New Colonial Hotel, is responsible for any damage caused by the bailee’s ordinary or gross negligence. Here, the New Colonial Hotel will be responsible. It was negligent to leave the car in an unsafe lot.

Answers to Case Problems 13-13. The case was remanded because there were issues of fact that the Appellate Court addressed. Nothing regulated Taub above the level of trespasser just because his activities were consistent with the public’s easement. He was not a landlord or tenant, so he had no right to go above the easement.

13-14. The appeals court affirmed the judgment of the trial court by ruling in favor of the individual homeowners. The association’s board was ordered to enforce the trimming of all trees, including palm trees that exceeded the roof of the house and obstructed the view from other lots.

13-15. The rent control ordinance does constitute a taking since the city does have the authority to take up ordinances related to mobilehome rent. These matters are based on legislative policy and discretion. For this reason the city can exercise its discretion and the Courts have dismissed several attempts that have been made by landlords to avoid such procedures.

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13-16. In this case, the court recognized the emotional distress and the loss of companionship that was caused by the pet’s death. However, the Court cannot recognize the sentimental loss of the plaintiff. For this reason the recovery of noneconomic damages cannot be taken into account under the legislative arena.

13-17. The appellant court reversed the trial court’s ruling to award the plaintiff money for his motorcycle. It found that the “Garage Agreement” did not create a bailment. Without a legal binding agreement, the court found that the defendant did not owe the plaintiff anything.

Thinking Critically about Relevant Legal Issues 1.

It would be useful to know what the eminent domain is being used for, how much the community would benefit from a new structure built using eminent domain, which individuals or communities would benefit, and how many land owners would have their land taken away. Knowing the answers to these questions would help shed light on whether the use of eminent domain is beneficial or detrimental to society and would help alleviate the tension between democracy and eminent domain.

2.

One would need to know what properties and how many properties are being seized through eminent domain. One would also need to know what public good or benefit to society the new building would bring, how many people it would benefit and for how long.

3.

If the issue is worded to focus only on the benefits that are brought to society and businesses, it is likely the public with agree with the government’s use of eminent domain. However, if the issue is worded to focus on the loss incurred by the individuals whose property was taken, the public would be much less likely to agree with the government’s use of eminent domain.

4.

One could argue that the issue involves taking property from individuals and that it needs to be clear that a majority of the public agrees with the use of eminent domain in this case. The point of eminent domain is to help society and if less than half of society were benefiting, eminent domain would not be democratic. It is not democratic to only benefit a powerful group who can influence the government; a majority of the people need to be in favor of the new structure.

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Chapter 14 Intellectual Property Rights Introduction Chapter Fourteen addresses these questions: • • • • • •

What is intellectual property?

How are trademarks protected?

How are trade secrets protected?

What do patents protect?

What do copyrights protect?

What are the global dimensions of intellectual property law?

Chapter Fourteen is significant because it explains the concept of intellectual property, a relatively new and ever growing type of property. The chapter details what can be protected as intellectual property, how intellectual property can be protected, and the global protections that are given to intellectual property.

Achieving Teaching Excellence Encouraging Students to Resist Social Pressures to Not Ask Questions The past few chapters of this Instructor’s Manual have encouraged instructors to ask higherorder thinking questions, encourage class discussion, and get students to interact with one another. This chapter reminds instructors to encourage students to understand that they will need to endure a great deal of resistance from other people who do not want them to ask productive questions on a regular basis. Many people in a position of authority prefer others to just listen and obey.

When learners start asking questions on a regular basis, they must be very sensitive to the audience for their questions. They must keep in mind who the questions are being addressed to and how people who listen to them would respond. In the current polarized climate, the temptation is great. Just look at the tactics employed during the American election season—the tactics the Daily Show’s Jon Stewart mocked when he said, “I disagree with you, but I am pretty sure you’re not Hitler.”

In the spirit of this Jon Stewart quote, learners can choose to create an environment in which reasonable people can productively and respectfully disagree—an environment that welcomes discussion and question-asking. Yet, however careful a person is when asking productive Copyright ©2015 Pearson Education Ltd.

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questions, the person asking the questions needs to realize in advance that the idea of searching for clarity and evidence is often not socially smooth.

First, it’s easier to shoot down a hard question than to consider and respond to it. Take a look at the tone and word choice in this review of the 2009 box office success Transformers: Revenge of the Fallen. Popular film critic Roger Ebert suggested, “If you want to save yourself the ticket price, go into the kitchen, cue up a male choir singing the music of hell, and get a kid to start banging pots and pans together. Then close your eyes and use your imagination.” Just try to convince students that they should calm down and reconsider.

Imitating the approach of Ebert cuts people off from the thoughts of those they are trying to communicate with. They shut down conversation. In addition, this method directly conflicts with the values of a critical thinker, namely curiosity, humility, and respect for good reasoning.

Arguing your position with the ferocity and conviction displayed by Ebert closes one off to that important critical thinking question: “Might I be wrong?” Students are moving toward excellence as a learner when they accept that asking questions will sometimes be socially awkward, but that the potential rewards far outweigh any discomfort that might result.

Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview Intellectual property consists of the fruits of one’s mind. The laws of intellectual property protect property that is primarily the result of mental creativity rather than physical effort. This category includes trademarks, trade secrets, patents, and copyrights.

The material in this chapter will be interesting to the students because it is becoming more important to businesses with each passing year. The case in this chapter are timely and involve well know corporations and their technologies. Following Chapter Fourteen’s Topic Outline, the discussion questions center on comparing the different types of intellectual properties and the different ways one can protect his or her intellectual property and even draws on concepts taught in Chapter Thirteen. Comparing these ideas will provide the students with a better understanding of the concepts in Chapter Fourteen and how they relate to Chapter Thirteen because the students must use integration rather than just memorization.

Topic Outline I. Introduction to Intellectual Property II. Trademarks Toys “R” Us, Inc., v. Canarsie Kiddie Shop, Inc. A. Trade Dress Copyright ©2015 Pearson Education Ltd.

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B. Federal Trademark Dilution Act of 1995 Victor Moseley and Kathy Moseley et al., dba Victor’s Little Secret v. V Secret Catalogue, Inc. et al.

III. Trade Secrets IV. Patents Bilski v. Kappos V. Copyrights A. Fair Use Doctrine Zomba Enterprises, Inc.; Zomba Songs, Inc., Plaintiffs-Appellees v. Panorama Records, Inc., Dedendant-Appellant B. Copyrights in the Digital Age Software and the Copyright Act of 1976 The No Electronic Theft Act of 1997 The Digital Millennium Copyright Act File-Sharing Networks and Technologies RealNetworks, Inc. v. DVD Control Copy Association, Inc., et al.

VI. Global Dimensions of Property Law VII. Summary Discussion Questions for Chapter Fourteen 1.

Explain relationships between real and intellectual property.

Real property is land and anything permanently attached to it. Intellectual property includes things created primarily by mental rather than physical processes. One relationship between the two is that real property rules regarding interests in real property are more developed than rules regarding interests in intellectual property. The law is well developed regarding real property. Courts are still developing laws that are related to intellectual property. The cases in the intellectual property section of the chapter show the kinds of issues the courts are currently considering. Ask the students to give examples.

2.

Explain relationships between trademarks and trade secrets.

Trademarks and trade secrets are two kinds of intellectual property. A trademark is a distinctive mark, word, design, picture, or arrangement used by a seller in conjunction with a product and tending to cause the consumer to identify the product with the producer. A trade secret is a process, product, method of operation or compilation of information that gives a businessperson an advantage over his or her competitors.

3.

Explain relationships between patents and copyrights.

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Patents and Copyrights are both used to protect intellectual property. A patent protects a product, process, invention, machine, or plant produced by asexual reproduction, while a copyright protects the expression of creative ideas, such as books, motions pictures, works of art, and computer programs.

4

Explain what the Fair Use Doctrine is and why it causes controversy.

The Fair Use Doctrine is a legal doctrine that provides that a portion of a copyrighted work may be reproduced for purposes of “criticism, comment, news reporting, teaching, scholarships, and research.” This doctrine has caused controversy because the purposes for reproducing a copyrighted work can be interpreted in different ways. There are different ways to define words such as “criticism,” “comment,” and “research.”

5.

Explain how digital copyright laws have developed over time.

Legislators faced a number of problems with the development of computers, software and the Internet. First, legislators had to determine how someone could “copy” from a computer and they determined that copying occurred once the material was downloaded onto a computer’s memory. Then, a law was enacted to protect software with copyrights. In the 1990s, laws were passed to protect copyrighted material from being spread on the Internet and to protect Internet service providers from certain lawsuits.

6.

Explain how intellectual property rights are protected globally.

Treaties and conventions, such as the Trade Related Aspects of International Property Rights (TRIPS), are the best security against intellectual property theft. Global negotiations continue to advance the world protection of intellectual property rights, though. New treaties have been created and old treaties, like TRIPS, have been updated to keep up with our everadvancing technology.

Answers to Critical Thinking about the Law Questions, Case Summaries, Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law Questions 1.

It is more difficult to define what intellectual property is because a lot of it is not tangible.

Real property consists of material someone could touch and see while intellectual property includes ideas and names. It is more difficult to prove the ownership of an idea than a piece of land.

2.

The idea of expecting people to share their mental output comes from valuing collective Copyright ©2015 Pearson Education Ltd.

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responsibility over individual responsibility. If someone possesses an ability that other people lack, he or she should be willing to share it with the group. The ability does not really belong to the individual so it is not fair of him or her to keep it for him or herself.

3.

A person would be more willing to support the intellectual property rights of an individual if they knew he or she had worked hard to create the idea or work. It would be difficult for them to give rights to someone who just came up with an idea in a matter of moments.

Case Summary—Toys ‘R’ Us, Inc. v. Canarsie Kiddie Shop, Inc. This case is a trademark infringement case. In this case, plaintiff Toys “R” Us, Inc., sold children’s clothes in stores across the country from the beginning of 1960. The firm obtained a registered trademark and service mark for Toys “R” Us in 1961 and aggressively advertised and promoted its products using these marks. In the late 1970s, Defendant Canarsie Kiddie Shop, Inc., opened two children’s clothing stores within two miles of a Toys “R” Us shop and contemplated opening a third. Toys ‘R’ Us persuaded the district court to agree with them that a store Kids ‘r’ Us had engaged in trademark infringement. The court made this decision after considering nine classic factors.

Suggested Answers to Critical Thinking about the Law Questions 1.

The “classic factors” come from past cases that considered trademark infringement. The analogy is a correlation to past cases.

2.

The reference of past cases is a crucial piece of information that is missing in this case. It is because without these understanding the background of these cases it would be difficult to see their similarities and differences. Additionally, it would be difficult to understand how the classical factors affected the court’s decision.

Case Summary—Victor Moseley and Kathy Moseley et al., dba Victor’s Little Secret v. V Secret Catalogue, Inc et al.

This case is in the book to show analysis relevant in trademark dilution cases. In this case, a novelty store, “Victor’s Little Secret” did not infringe upon the Victoria’s Secret trademark. The court found no evidence of confusion between the parties’ marks. The Court did, however, find that the trial court needed to gather more evidence regarding trademark dilution, and remanded the case. The Supreme Court indicated that circumstantial evidence could prove a statutory violation.

Case Summary—Bilski v. Kappos

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This case deals with patents. The petitioner had sent in an application to file a patent for their invention. However, the application was rejected on the basis that it was an abstract idea that had been expressed mathematically. Additionally, they stated that it did not pass the “machine-ortransformation test” that determined whether a patient was eligible for a patent or not. The U.S. Supreme Court had agreed to hear an appeal.

Case Summary—Zomba Enterprises, Inc.; Zomba Songs, Inc., Plaintiffs-Appellees v.

Panorama Records, Inc., Defendant-Appelant This case deals with copyrights. Panorama put out karaoke CDs containing the recent hits.

Zomba owned many of the rights to those songs. They agreed to allow Panorama to continue as long as they paid the royalties. The companies entered into an agreement meant to stop Panorama from releasing the material. They did anyway, so Zomba took them to court. The district court awarded summary judgment to Zomba and Panorama appealed. On appeal, the Court ruled that Panorama was in the wrong because they willfully violated the agreement by knowingly selling copyrighted material.

Case Summary—RealNetworks, Inc. v. DVD Control Copy Association, Inc., et al.

This case is in the book to demonstrate how copyright law constantly evolves as new technologies emerge. RealNetworks created a product called RealDVD to copy DVDs as “backups.” These copied DVDs, however, were created without permission from the DVD Control Copy Association of America and could have other uses besides just being a “backup.”

The company sued the DVD Association in pursuit of a declaration that its DVD copying software was legal but the court disagreed. The court ruled that RealNetworks was infringing on the studios’ rights because it was accessing copyright-protected content without permission.

Answers to Review Questions 14-1. Trademark infringement laws protect all trademarks that have been registered with the U.S. Patent Office. However, the potential for consumers to be confused with the two different products is considered in trademark infringement cases. If a consumer seems unlikely to confuse the two products, the trademark will not be protected. Trademark dilution laws, on the other hand, prohibit the use of “distinctive” or “famous” trademarks on all goods, not just related goods. With these laws, famous trademarks are protected regardless of whether a consumer would confuse them with the other product.

14-2. The different types of marks that are protected under the Lanham Act are as follows: • Product trademarks—marks affixed to a good, its packaging or its labeling.

• Service marks—marks used in conjunction with a service.

• Collective marks—marks identifying the producers as belonging to a larger group, Copyright ©2015 Pearson Education Ltd.

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•

such as a trade union.

Certification marks—marks licensed by a group that has established certain criteria for use of the mark.

14-3. Someone would choose patent protection over trade-secret protection if he or she wanted to have exclusive rights to produce, sell and use a product, process, invention, machine or asexually reproduced plant for the next twenty years. The criteria for a patent are that the object should be novel, useful and nonobvious to discover. On the other hand, someone would choose trade-secret protection over patent protection if he or she had a process, product, method of operation, or compilation of information that gave him or her an advantage over his or her competitors. Trade secrets are protected from unlawful appropriation by competitors but if the competitors discover the secret lawfully it is no longer considered a secret and is no longer protected.

14-4. The work must be: • In a fixed form • Original • Creative 14-5. Both tying arrangements and cross-licensing are common illegal uses of patents. A tying arrangement occurs when the patent holder issues a license to use the patented object only if the licensee agrees also to buy some nonpatented product from the holder. Crosslicensing, on the other hand, occurs when two patent holders license each other to use their patents only on the condition that neither licenses anyone else to use his or her patent with the other’s consent.

14-6. TRIPS is the Trade Related Aspects of International Property Rights, and it is the major treaty on intellectual property. It protects patents, copyrights and trademarks registered in member states.

Answers to Review Problems 14-7. If Simon has also been selling donuts in Ohio, he may be infringing on Matt’s rights by using a similar trademark because the trademark would be protected under state common law. If Simon has been selling donuts outside of Ohio, the case would be interstate and Simon would be correct. Matt would have had to register his trademark with the U.S. Patent Office under the Lanham Act. Because Matt did not register his trademark, his signature packaging has no protection.

14-8. An accountant was employed to advise clients. Giving lectures was not part of his normal duties and he had not been instructed by his employer either to give lectures or produce book.

The copyrights in a report written for client as part of the employee’s duties and incorporated Copyright ©2015 Pearson Education Ltd.

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into a part of the book did, however, belong to the employer. If the book is independent to the employment work, copyright belongs to an accountant.

14-9. The plaintiffs won’t be able to win the case. This is because even though the screenplay is copyrighted, the settings are quite different. Even though both screenplays share a basic outline, it is not a substantial claim to prove infringement.

14-10. The injunction will be granted. This case is similar to the Toys “R” Us case. The “Mc” mark is strong. Customers know “Mc” means cheap. Use of the mark by Sleep McCheap is unfair to McDonald’s.

14-11. The Christopher’s will say they discovered the secret by lawful means. They would be allowed to discover the secret by going on public tours and observing. The Christopher’s will lose. They were not on a public tour when they took aerial photographs. They were trespassers.

14-12. The professor will say the “fair use” defense applies because he was using the material for educational purposes. However, the professor will lose. He is not allowed to deprive the journal from the profits it deserves for publishing the journal.

Answers to Case Problems 14-13. The court ruled in favor of Seinfeld. It found that the two cookbooks were decidedly different and could not be easily confused. The similar idea to sneak healthy foods into children’s meals was not protected by a copyright so Lapine had no rights to the idea.

Therefore, Seinfeld was not guilty of plagiarism or copyright infringement.

14-14. Following the trial that award $2 million to Capital Records, the appellant court found that the sum was an excessive award for copyright infringement and changed the award to $54,000 ($2,250 per song). The range for copyright awards is $750 to $150,000 per infringement and the judge found that $80,000 per song was excessive. Capital Records did not have to prove their damages but the judge believed that statutory damages must still bear some relation to actual damages.

Thomas-Rasset refused a $25,000 settlement offer following the court’s decision to award Capital Records $54,000. She refused because Capital Records wanted her to ask the judge to vacate his decision to lessen the award. Capital Records appealed the $54,000 award ruling and a third court awarded Capital Records $1.5 million ($62,000 per song).

14-15. The remand was granted because the Court found that the distributors of the software were guilty of contributory liability because they knew that the software would be used to Copyright ©2015 Pearson Education Ltd.

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infringe copyrights. They had directions on how to use it and did nothing to stop the infringement from happening. They did not warn the users that the software was illegal.

The Court argued that they knew exactly what would happen and did nothing to stop it and in fact facilitated it.

14-16. To be successful, Dippin’ Dots would have to prove three elements: • The trade dress is primarily nonfunctional • The trade dress is inherently distinctive or has acquired a secondary meaning • The alleged infringement creates a likelihood of confusion All three elements are necessary to be successful on a claim of trade dress infringement.

The district court held that Dippin’ Dots trade dress is primarily functional, and because they failed to prove this one element, their claim of trade dress infringement could not be successful.

The district court granted summary judgment in favor of the defendant, Frosty Bites, and Dippin’ Dots appealed. The appellate court affirmed the district court’s findings. The appellate court found that the color of Dippin’ Dots is functional because it signifies the flavor of ice cream, using the industry standard color-to-flavor relationships.

Furthermore, size was also found to be functional in this case, because a larger dot would not produce the same creamy taste. Evidence provided by Dippin’ Dots proves that larger dots would be of an inferior quality, making it functional to have small, spherical dots.

Because any flash-frozen ice cream product would have the same basic features as Dippin’ Dots, the specific features are deemed to be functional; ergo the appellate court affirmed the district court’s decision, finding in favor of Frosty Bites.

14-17 The plaintiff’s case was dismissed by the court based on reasonable grounds. The Court stated that there was no substantial similarity between the two movies. For this reason, it is likely that the appeals court would support the lower court’s judgment, 14-18. The Court found in favor of Veoh because Veoh is protected under the Digital Millennium Copyright Act’s “safe harbor” provisions. These provisions shield Internet providers from liability of infringing material that was stored by users. Veoh was not actively infringing on copyrighted material, they were only allowing their users to store information.

Thinking Critically about Relevant Legal Issues 1.

The issue of the essay is that generic HIV medications have been copied and no compensation has been given to the original manufacturers. They worked hard to develop the Copyright ©2015 Pearson Education Ltd.

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drug and their intellectual property rights should be upheld. The conclusion is that the makers of illegal generic drugs need to be stopped.

2.

The author believes in fair compensation. The author cares about credit for those who put in the effort, money, and time to develop a drug to greatly help other people. Those involved should be rewarded.

3.

A student could ask, “Are intellectual property rights very important in today’s world?” The answer would be, “Yes they are important, especially in pharmaceuticals because they create an incentive to produce better and newer drugs. Without the incentive of compensation and recognition, many scientists would put time into other pursuits.”

4.

One would argue that the company in India is producing the drug to help save many lives. At times, pharmaceutical companies are selfish and tend to hold on to drugs until they know that they will be compensated for them. This company is speeding up the process and after the dust has cleared, they can give the original producers their dues. But if the company believed that the pharmaceutical company is dragging its feet, then it has an ethical obligation to step in and help the situation.

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Chapter Fifteen Agency Relationships Introduction Chapter Fifteen addresses these questions: • • • • • •

What is an agency relationship and what are the types of agency relationships?

How is an agency relationship created?

What are the duties of agents and principals?

When are principals and agents liable to third parties?

How are principal-agency relationships terminated?

What are the global dimensions of agency law?

Chapter Fifteen is significant because both principals and agents need to know their rights and responsibilities. The expansion of the post-industrial economy required the use of agents.

This chapter explains the importance of the principal-agent relationship, and presents information that helps those engaged in business avoid precarious liability situations.

Achieving Teaching Excellence Assignments to Promote Critical Thinking For instructors who want to create assignments that promote critical thinking in the legal environment of business classroom, this section lists several alternatives. Incorporating assignments that promote critical thinking will help students recognize the need to engage in critical thinking in their other college courses, and in their everyday lives. By creating additional assignments that promote critical thinking, instructors will continue on their quest to achieve Teaching Excellence. Here is a list of five critical thinking assignments that instructors can adapt to meet their needs at different times in the semester: • Send students to the library to find two arguments that support a student’s opinion about a specific legal issue. Have them write an essay in which they explain why (from a critical thinking perspective) one argument is better than the other.

• Send students to the library to find two arguments that oppose a student’s opinion abut a specific legal issue. Have students find arguments that are strong from a critical thinking perspective. Ask students to write a short, good essay that presents an argument that conflicts with their own value preferences.

• Ask students to integrate material from the text with material from another identified source, prior learning experiences, social issues, or personal choices.

• Ask students to think like someone other than a lawyer. Choose a case in the book, and ask Copyright ©2015 Pearson Education Ltd.

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•

students to write a memo that responds to the case from the perspective of the CEO of the corporation, the personnel manager, a consumer advocacy or other public interest group.

This exercise will help them see alternative perspectives.

Ask students to generate questions for a particular class session that will keep the conversation going. Remind them that questions that promote higher-order thinking are more likely to keep the conversation going.

References •

•

M. Neil Browne & Stuart M. Keeley, “Getting Started as a Teacher of Critical Thinking.”

Workshop presented July 30, 1995, at the 15th International Conference on Critical Thinking & Educational Reform, Sonoma, California.

Stuart M. Keeley & M. Neil Browne, “Beyond the Term Paper: Assignments That Stimulate Critical Thinking,” JOURNAL OF PROFESSIONAL STUDIES (Winter, 1988).

Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview Agency law has become more prominent in the complex postindustrial society. In an earlier period, when business owners (principals) did most or all of their business on a one-to-one basis with their customers, agents and third parties played a very small role in the business environment. As business entities became larger and conducted far-flung transactions within the United States and worldwide, businesspeople felt a need to hire domestic and foreign agents to represent their interests to potential customers.

Chapter Fifteen has a lot of interesting information. All the information in the chapter is significant. The chapter defines the agency relationship, explains how these relationships are formed, delineates the rights and duties of agents and principals toward each other, outlines the law of contracts and torts as they impact agency relationships, and explores the international dimensions of agency law. Each section is important, so the discussion questions that follow the outline focus on material from across the chapter.

Topic Outline I. Definition and Types of Agency Relationships A. Definition of Agency B. Types of Agency Relationships Principal–Agent Employer–Independent Contractor Alberty-Vélez v. Corporación de Puerto Rico Copyright ©2015 Pearson Education Ltd.

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II. Creation of an Agency Relationship A. Expressed Agency or Agency by Agreement B. Agency by Implied Authority Penthouse International v. Barnes C. Agency through Ratification by Principal D. Agency by Estoppel or Apparent Authority Motorsport Marketing, Inc. v. Wiedmaier, Inc. III. Duties of Agents and Principals A. Principal’s Duties to Agent Duty of Compensation Duty of Reimbursement and Indemnification Duty of Cooperation Duty to Provide Safe Working Conditions B. Agent’s Duties to Principal Duty of Loyalty Cousins v. Realty Ventures, Inc. Duty of Obedience Duty of Accounting Duty of Performance Gossels v. Fleet National Bank IV. Principals’ and Agent’s Liability to Third Parties A. Contractual Liability McBride v. Taxman Corp.

B. E-Commerce: Intelligent Agents C. Liability of Disclosed, Partially Disclosed Principals, and Undisclosed Principals D. Liability of Undisclosed Principal E. Tort Liability F. Tort Liability and Negligence Pennsylvania State Police v. U.S. G. Criminal Liability V. Termination of the Principal-Agency Relationship A. Termination by Agreement B. Termination by Operation of Law Gaddy v. Douglass VI. Global Dimensions of Agency Law A. Japan B. European Union C. U.S. Agents Abroad VII. Summary Discussion Questions for Chapter Fifteen Copyright ©2015 Pearson Education Ltd.

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1.

Explain relationships between respondeat superior and the agency relationship.

An agency is defined as a fiduciary relationship between two persons in which both mutually agree that one person (agent) will act on the behalf of another (principal) and be subject to the latter’s control and consent. The doctrine of respondeat superior says that the master is responsible for the acts of servants while they are acting within the scope of their employment. In modern times, we call this an employer–employee relationship. This relationship is one kind of agency relationship.

2.

Explain why someone might think this statement is true: Employers would prefer to hire independent contractors than employees.

The statement is true if one believes that a primary motive of employers is to lower their expenses. When employers hire independent contractors instead of employees, they escape employment and insurance taxes, as well as medical benefits. Employers who want to retain significant control over the work of their employees will not want independent contractors, even though that relationship would save them money.

3.

Explain relationships between an exclusive agency contract and a power of attorney.

An exclusive agency contract is a type of agreement whereby the principal agrees that it will not employ any other agent for a period of time or until a particular job is completed. A power of attorney is a legal document used to establish an agency relationship. Both are kinds of express agency relationships, also called agencies by agreement.

4.

Explain relationships between agency by ratification by principal and agency by apparent authority.

An agency by ratification is formed when an unauthorized act of an agent is accepted by a principal. An agency by apparent authority of estoppel is formed when a third person is led to believe that a certain agent is acting on behalf of a principal. The principal is estopped from denying the agency relationship. One relationship between the two is that neither is an express or implied relationship. A difference is that the role of a third person is crucial in agencies by apparent authority or estoppel. That third person’s belief is critical in establishing the relationship. Third persons are irrelevant in agencies by ratification.

5.

Agents have legal obligations toward the principals. Which of these duties is the hardest for agents to comply today?

It is becoming increasingly difficult for agents to comply with the duty of loyalty to Copyright ©2015 Pearson Education Ltd.

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principals. When employees are discarded easily, it is hard to expect them to act with utmost loyalty to principals who are not necessarily loyal to them.

6.

Explain why someone might think this statement is true: The doctrine of respondeat superior has important implications for employers.

This doctrine is important to employers because it holds employers liable for the intentional or negligent torts of employees if such acts are committed within the scope of their employment. Have students give examples of acts that would and would not be committed within the scope of employment.

7.

Evaluate this statement: Employers are regularly held responsible for their employees’ crimes.

Usually, employers are not responsible for their employees’ crimes because it is difficult to show the intent of the principal that such crimes require. Usually, employers are not responsible for crimes such as rape and murder. They can be held liable, however, if they direct or participate in the crime, or if they direct a violation of a law.

8.

How does the North American Free Trade Agreement (NAFTA) relate to agency law?

With the signing of NAFTA, foreign agents are much more likely to be hired by firms in the United States. As tariff barriers are generally lowered around the world over a period of years, agents will be needed to export, distribute, and sell goods. The law will develop to define any unique requirements for these kinds of agency relationships.

Answers to Critical Thinking about the Law Questions, Case Summaries, Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law Questions 1.

Probably, the most important ethical norm to a business is efficiency, which means to minimize costs or to get the most from a particular input. Agents are expected to be efficient.

2.

A judge would care about the relationship between the parties trying to figure out whether an agency relationship exists. What is the person called? How is the person presented to other people? What was said to or about the person’s authority? What traditions has that particular employer followed in the past?

3.

When an agent has already performed a task, he or she wants to receive the product of his or her labor. The agent expects to be paid for a task already performed.

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Case Summary—Alberty-Vélez v. Corporación de Puerto Rico This case deals with a contract and discrimination. Alberty worked for a Puerto Rican TV station owned by the Corporación de Puerto Rico. She hosted a show that profiled cities and towns and was contracted on a per show basis. She was paid, but did not receive any benefits.

When she became pregnant, the station stopped contracting her. She sued the company, alleging discrimination based on her pregnancy. The trial court found for the defense, so she appeals. On appeal, the Court ruled in favor of the defense because they determined that Alberty was an independent contractor and therefore was not protected under employee rights.

Suggested Answers to Critical Thinking about the Law Questions 1.

The factors are: • The source of the instrumentalities and tools • The location of the work • The duration of the relationship between the parties • Whether the hiring party has the right to assign additional projects to the hired party • Whether the hiring party is in the business • The provision of employee benefits • The tax treatment of the hired party Alberty highlighted the fact that WIPR controlled the manner of her work. With a different judge, she might have been successful.

2.

Alberty would have been more likely to succeed if WIPR had: • Provided instrumentalities/tools • Assigned additional projects to her • Provided employee benefits • Treated her like an “employee” for tax purposes

Case Summary—Penthouse International v. Barnes In this case, the court explained the extent to which implied authority will be granted to an agent. The case involved Penthouse’s relationship with Dunas, an independent contractor. This independent contractor had made an agreement with Barnes, who posed nude for him, that if her pictures were published, her real name wouldn’t be used. Penthouse wanted to publish Barnes’ photo and use her real name, so the question became whether they were bound by Dunas’ agreement not to publish Barnes’ real name. The court ruled in favor of Barnes and against Penthouse by explaining why they believed Dunas had implied authority to make the agreement with Barnes not to use her real name.

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Suggested Answers to Critical Thinking about the Law Questions 1.

The court agreed with the district court that Dunas was an agent, and that he acted within the scope of his authority by modifying the contract.

2.

The strongest part of the reasoning is that Dunas was indeed an agent. The most questionable part of the reasoning is whether Dunas exceeded his authority when he modified the contract.

Case Summary—Cousins v. Realty Ventures, Inc. This case is about a breach of fiduciary responsibility. Cousins contracted Hodgins of Realty Venture to help him find property. Cousins asked Hodgins to submit an offer to buy an office building. The sale fell through. Later, Hodgins resubmitted the deal after learning that the office building was part of a group of buildings called 4141 Veterans Blvd. Hodgins and his brother set up a company and purchased both the office building and 4141 Veterans. He then offered to sell the building to Cousin’s company for $175,000. Cousins sued and won $1,750,000. The defendant appealed. The Court found for the plaintiff because Hodgins breached his fiduciary responsibility when he failed to notify Cousins about the package sale.

Case Summary—Gossels v. Fleet National Bank In the Gossels case, the court decided whether Fleet National Bank (agent) misrepresented themselves to an investor, Gossels (principal). Gossels invested euros from Germany in the Boston branch of Fleet National Bank. The Fleet bank teller, however, did not inform Gossels that Fleet paid internal checks at a “retail exchange rate” and then misinformed Gossels not to endorse the check. About a month later, Gossels learned that his investment had depreciated several thousand dollars in value, although it could have increased in value if he had invested in a German bank. Gossels sued Fleet and the court found for Gossels on the ground of negligent misrepresentation. Both parties appealed. The appellant court ruled in favor of Gossels. As Gossels’s agent, Fleet was obligated to disclose all the facts material to the transaction. Having failed to do so, the court found that Fleet was liable for negligent misrepresentation for a breach of fiduciary duty.

Case Summary—McBride v. Taxman Corp.

This case deals with contractual liability. Walgreen’s entered into a contract with Taxman to operate a store in a shopping center in which Taxman was the property manager. Part of the contract stipulated swift removal of snow and ice. Taxman contracted out that job to Artic.

McBride, a Walgreen’s employee, slipped and hurt herself on the ice outside the store. She sued Taxman, alleging negligence. Summary judgment came out in favor of Taxman, so McBride Copyright ©2015 Pearson Education Ltd.

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appealed. On appeal, the Court ruled in favor of Taxman because the company legally contracted out snow removal and therefore was not negligent.

Case Summary—Pennsylvania State Police v. U.S. This case deals with harassment. Nancy Drew Suders was hired by the Pennsylvania State Police (PSP) as a police communications operator in March 1998. Her supervisors subjected her to continued harassment while she was employed there. Later, in June 1998, Sunders told the PSP Equal Employment Opportunity Officer, Virginia Smith-Elliot, that she could require some help. Smith-Elliot gave Suders her phone number but never followed up on the conversation.

Then, in August Suders informed Sam-Elliot that she was being harassed. Smith-Elliot told her how to file a complaint but did not tell her how to obtain the necessary form. Suders felt that Sam-Elliot was unhelpful and insensitive and didn’t file a complaint with the PSP. Additionally, there were several other instances where Sunders was harassed. Suders sued PSP for sexual harassment and constructively discharging her in violation of Title VII of the Civil Rights Act. The district court granted PSP’s motion for summary judgment.

Case Summary—Gaddy v. Douglass This case deals with the principle-agent relationship. Gaddy was the doctor of a woman known as Ms. M, who passed away. Douglass is a relative. When Ms. M’s medical condition worsened, Gaddy became her attorney of record and took care of her finances and care. As her dementia and Alzheimer’s worsened, Gaddy made sure that she was well cared for and that her house was in order. The relatives finally came, and took Ms. M to see an attorney. They did not tell the attorney that Ms. M was not of sound mind. There, she signed a document revoking Gaddy’s rights as attorney. Gaddy sued and was awarded attorney-ship because Ms. M was not of sound mind to handle her own affairs and Gaddy was most intimate with her needs.

Suggested Answers to Critical Thinking about the Law Questions 1.

Gaddy showed that he had Ms. M’s wishes in mind because he used her assets wisely and only for her care. He did not use any money for himself and he made sure to keep her house in good shape and when she needed, he took her to a doctor to get evaluated. He made sure to act as if the needs were his own.

2.

Basically, if Gaddy had not been protecting her rights, then he would not have been awarded power of attorney. Also, if fraud was evident in the form of Gaddy using her funds for himself, or if he was completely ignoring her, then he would have been denied attorney-ship.

Answers to Review Questions

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15-1. The doctrine of respondeat superior said that the master was responsible for the acts of servants while they were acting within the scope of their employment. Today, it holds employers responsible for the acts of their employees who are acting within the scope of their employment.

15-2. Apparent authority differs from actual authority in that the principle communicates directly with a third person to create apparent authority. To create actual authority, the principal communicates directly with the agent.

15-3. The agent’s duties to the principal are as follows: • Loyalty—the agent should act on behalf of one principal only to avoid conflicts of interest, communicate all material information to the principal, and refrain from acting in a manner that is adverse to the principal’s interest.

• Obedience—the agent has the duty to follow all reasonable and lawful instructions of the principal.

• Accounting—whenever the principal requests an accounting of money or property, it is the duty of the agent to hand over the requested material.

• Performance—courts have indicated that agents must use reasonable care and skill in performing their work.

15-4. Factors that distinguish agents and independent contractors are: • The degree of control the employer has over the agent • Whether the hired persons had a distinct occupation or profession • Whether they supplied their own tools and equipment • Whether they were employed for only a specific time period • Whether they were paid hourly or on completion of a job • What degree of skill is required 15-5. Principals are normally responsible for the acts of their agents if those acts come within the scope of the agents’ employment. Therefore, a principal’s liability for an agent’s contracts depends on whether the principal is disclosed or undisclosed to the third party at the time of the execution of the agreement. An agent with actual authority binds the principal to contracts. In the case where the third party is not aware of the identity of the principal and has no knowledge of an agency relationship, the agent may be liable to the third party if the principal does not pay.

15-6. a) Unlike in the United States, an agent in Japan must have expressed authority to act. b) Unlike in the US, most agency agreements are assumed to be for an indefinite time; thus, notice of one, two, andthree months, respectively, is required to terminate a relationship of one, two, and three years’ duration.

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Answers to Review Problems 15-7. Both Wilson and A & B were unaware of the actual value of the land till the time they were about to make the deal. However, A & B can argue that an implied agreement had been made and the discovery of the higher valuation of land cannot be a reason to revoke this agreement. It would have been a case of fraud if A & B had known about this beforehand but this is not the case, 15-8. As an agent Ankir is bound to follow through certain duties toward the principal. Ankir violated all the four legal duties that agents have toward the principal—loyalty, obedience, accounting, and performance. Jamision can sue Ankir for breach of fiduciary duty.

15-9. If an agent for an undisclosed principal makes an authorized contract, both the agent and principal are liable if there is breach of contract. The principal is liable because the contract is authorized. The agent is liable because they made the contract in their own name without disclosing they were acting for another. Both Paul and Global motors are liable here.

15-10. Owner does not have to pay Penelope a commission because she did not sell the house.

The clause about the right to cancel if financing falls through is standard. Real estate brokers get buyers and sellers together. Perhaps Penelope had a contract with the owner saying that she just has to bring the buyer and seller together. That’s it. This kind of arrangement would be rare. Owners want buyers who actually buy the property.

15-11. The Sylvester’s should sue Beck for fraud. Fraud is difficult to prove, but what Beck did seems underhanded. Arguably, however, the Sylvester’s were unreasonable to rely on Beck’s assertions. Allow the class to be the jury on this issue of fact.

15-12. Peter cannot cancel the contract. Arguably, the broker acted unethically by engaging in self-dealing. However, the broker sold at the current market price, so Peter did not suffer any real damage.

Answers to Case Problems 15-13. In this case, even though Dennegar claimed that he was not aware of the existence of the credit card, he was liable for the debt incurred. This is because the evidence supported this claim that the defendant had applied to for the credit card and that he had ceded the authority to manage his finances. For this reason, the Court found him liable on the stated charges.

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15-14. Frances being the plaintiff and Chen’s fiancée could create a conflict of interest. The testimony was admitted by the judge and this question was directed to a jury. The jury found that Chen had committed fraud and awarded damages to Frances. However, the appellate Court held that it is not the duty of the agent not to treat the principal as an adverse party, unless otherwise agreed by the two parties. Any violation on the agent’s part would be a breach in the agency relationship.

15-15 An agent for Trinity Mortgage set up the homeowners with a loan for construction with the promise that their payments would be relatively low. However, when the plaintiffs called the company, they were informed that the agent no longer worked there. Trinity should have informed the plaintiffs that the agent was no longer part of the firm. They did not and therefore violated their responsibility to the lender and were liable.

15-16. The court enforced the settlement agreement. A settlement agreement entered by an attorney without his client’s consent is enforceable against the client. The court noted that an attorney is a “powerful agent, who has apparent authority to dismiss case, to allow judgment against client, and to do all things ordinarily done with respect to litigation for which attorney was hired.”

Thinking Critically about Relevant Legal Issues 1.

The author concludes that agency relationships should be treated like contracts. He believes that without the contract aspect, they are too hard to define. He uses many analogies; some that are incomplete. For example the analogy about different languages is ambiguous because contracts get done all the time in other languages because both parties realize that the terms must be simplified so that there will be no misunderstanding.

2.

One would need to know the amount of agency relationships and those that are the most common. However, it seems that this subject is more subjective and harder to get concrete information on.

3.

The opposition would obviously argue that agency relationships are completely different from contracts and should be treated as such. Because of their nature, they are harder to define, but that does not mean they are less valid. Agency relationships, many times, deal with things that contracts could not cover, so implied relationships and estoppels are sometimes the only way.

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Chapter Sixteen Company and Partnership Law – I Introduction Chapter Sixteen addresses these questions: • • • •

What factors influence a business manager’s choice of organizational form?

What are some of the common forms of business organization in the United States?

What are the specialized forms of business associations?

What are some of the global dimensions of business associations?

Chapter Sixteen is significant because the choice of organizational form has a significant impact on the amount of regulation to which a business is subject. Also, different forms create different rights and responsibilities for owners. Business students are interested in understanding the form of association that employs them. They are also interested in the law of business associations because many of them will consider starting their own company at some point in their lives.

Achieving Teaching Excellence Generating Classroom Controversy This chapter of the Instructor’s Manual stresses the importance of using controversy as a teaching tactic. First, it presents information about the use of controversy in class. Second, it suggests a paper assignment that is consistent with using controversy in class.

M. Neil Browne and Mary L. Keeley-Vasudeva presented important information about classroom controversy that will help instructors see why they should care about this topic. In their article, “Classroom Controversy as an Antidote for the Sponge Model of Learning,” Browne and Keeley-Vasudeva urge college teachers to use controversy “to help bridge the gap between the stated importance of critical thinking and the actual classroom use of critical thinking.” They encourage professors in all disciplines to “find open-ended questions about which reasonable people disagree, possess knowledge used in controversial ways, and report conflicting evidence.”

The law offers seemingly endless possibilities. Once instructors identify controversies, these controversies will motivate students. Students will be interested in learning and engaging in critical thinking because they will be active, and controversies make the content come alive.

Students will be forced to struggle with engaging in reasoning about positions different from the Copyright ©2015 Pearson Education Ltd.

The Legal Environment Of Business: A Critical Thinking Approach

ones they prefer.

Browne and Keeley-Vasudeva offer an important reminder. Bringing controversies into the classroom is not enough. Instructors must encourage students to engage in critical thinking, not just memorize and repeat alternative perspectives. They ask instructors to use controversy to encourage students to elevate their goals above the sponge model of education. “Critical thinking is the antithesis of the sponge model.”

Charles S. Green, III and Hadley G. Klug describe an assignment that is consistent with the advice offered by Browne and Keeley-Vasudeva. Green and Klug, sociology professors, describe an assignment in which students used a debate format for their papers. The professors gave students a choice of five debate topics, and assigned students randomly to the “pro” and “con” sides of their debate topics. Of course, they gave students detailed handouts that contained directions for research, and suggestions for coordinating their efforts for oral in-class debates and the written versions of their arguments. Green and Klug found that their students were interested in the assignment as the assignment brought the content to life. Students also practiced enhancing their critical thinking skills. They had to find the best arguments and evidence in support of their position on the controversy, and they practiced finding flaws in their own arguments, and the opponents’ arguments.

The legal environment of business class is especially appropriate for this kind of assignment.

At this point in the semester, students have practiced critical thinking enough to write in a debate format. Some public law chapters present some challenging, interesting issues, so instructors might want to start preparing an assignment now. For instance, instructors could have students debate whether preferential programs should be abolished? Or, should the Americans with Disabilities Act be reconsidered? Does it impose too many burdens on businesses? Instructors can think of many debate topics! This text raises many interesting issues in the text.

Good luck on creating new, exciting, controversial topics for students to consider. One more step toward achieving.

Teaching Excellence References •

•

M. Neil Browne & Mary L. Keeley-Vasudeva, "Classroom Controversy as an Antidote for the Sponge Model of Learning," COLLEGE STUDENT JOURNAL 368 (September 1992).

Charles S. Green, III & Hadley G. Klug, "Teaching Critical Thinking and Writing Through Debates: An Experimental Evaluation," 18 TEACHING SOCIOLOGY 462 (1990).

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The Legal Environment Of Business: A Critical Thinking Approach

Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview Chapter Sixteen outlines some of the common forms of business associations, including simple proprietorships, partnerships, and specialized associations (joint stock, joint venture, and franchises). Additionally, global dimensions of some of these business associations will be examined here.

This chapter includes much information business students need to know. Instructors should make sure that they ask students what they have learned in the instructor’s other classes so that the instructor can avoid being repetitive. Most students learn about the factors used to decide which form of business association to adopt, so instructors can often skip this material and concentrate more on the cases in the chapter and the critical thinking questions. Discussion questions that follow the topic outline come from throughout the chapter.

Topic Outline I. Factors Influencing a Business Manager’s Choice of Organizational Form II. Some Common Forms of Business Organization in the United States A. Sole Proprietorships B. General Partnerships Creating a Partnership In re KeyTronics Relationship between Partners Enea v. Superior Court of Monterey County Terminating a Partnership C. Limited Partnerships and Limited Liability Limited Partnerships Limited Liability Limited Partnerships III. Specialized Forms of Business Associations A. Joint Stock Company B. Syndicate C. Joint Venture D. Franchising Laws Governing Franchising Internet Franchising IV. Global Dimensions of Business Associations A. Outsourcing V. Summary Discussion Questions for Chapter Sixteen Copyright ©2015 Pearson Education Ltd.

The Legal Environment Of Business: A Critical Thinking Approach

1.

Explain relationships between sole proprietorships and partnerships.

Several relationships between the two exist. One relationship between the two is that the sole proprietorship involves a person going into business on his or her own, while the partnership is a voluntary association of one or more person. Another relationship between the two is that the profits of the business are taxed to individuals. Even in partnerships, the business profits are divided among the partners, who pay taxes as individuals.

2.

Explain why someone might think this statement is true: The law protects people who do not have written partnership agreements.

Sometimes, people who work in partnerships do not have a written partnership agreement.

When they do not have a written agreement, the Uniform Partnership Act is applied. It sets out the basic rules for partnerships. People who do not have written agreements can rely on this law to set out the basic rules by which the partnership will operate.

3.

Evaluate: The partnership form is best if people are concerned about tax liability.

This statement is flawed because the partnership form is not always the best if people are concerned about tax liability. Taxes on partnership profits must be paid by the partners even when those profits are not distributed but instead are reinvested in the partnership business.

Also, one must consider tax rates, and whether the law currently has higher rates for individuals or corporations.

In order to follow-up, instructors could ask students to analyze the statement above, rather than evaluate it.

4.

Explain why someone might think this statement is true: The concept of indemnification is important.

Indemnification means the payment of expenses or damages from the legally responsible party. This concept is important for partners. The rules of agency render each partner liable for the damages resulting from the torts of another partner committed within the scope of partnership business. However, if other partners are forced to pay a portion of the damages caused by another partner’s tortious act, they can seek indemnification from that tortfeasor.

5.

Why are people more careful in regulating limited partnerships than other forms of partnerships?

People regulate limited partnerships more because the limited partner gives money, but does Copyright ©2015 Pearson Education Ltd.

The Legal Environment Of Business: A Critical Thinking Approach

not have control over business decisions. This separation of ownership from control urges people to protect the owner of limited partner interests more carefully.

6.

Evaluate this statement: Once a business has chosen a particular form, it should stick with its choice indefinitely.

This statement is flawed. This text reminds its readers that once a particular form is selected, it need not be retained for the life of the business. Astute business managers frequently review the several factors and reconsider the best form of organization.

7.

Explain relationships between cooperatives and franchises.

A cooperative is a not-for-profit organization formed by individuals to market products. A franchise is a relationship based on a private agreement between a franchiser who owns a trade name or trademark and the franchisee, which sells or distributes the goods using the trade name. Both are forms of business associations. One difference is that the franchising relationship is “bigger business” than the cooperative, which is not for profit, and relies on individuals. Have students think of other differences.

Answers to Critical Thinking about the Law Questions, Case Summaries, Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law Questions 1.

One general comment is that people expect more personal service from a sole proprietor or a partner in a partnership than they do from a major corporation. Students could say that they get a haircut at a salon which may be a partnership. Such a business may be small and they could expect personal attention. They might buy groceries at a national chain which may be incorporated. They could expect good service, but cannot expect personal attention. Because of the absence of a personal relationship with a corporation, they could make sure that they look out for themselves when interacting with agents of a major corporation. Instructors could ask students what they expect from different forms of business.

2.

Joan appreciates freedom. She wants to act without restriction from rules imposed by others.

3.

A person who wants a sole proprietorship probably wants freedom. Vanessa wants to be her own boss, free from restrictions placed on her by others. She probably values justice. She wants to receive the product of her labor. With a sole proprietorship, all gains and losses flow through her personal income. She does not have to give shareholders dividends. She does not have to answer to shareholders.

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Case Summary—In re KeyTronics This case focuses on testing partnership existence. Willson and King worked together to create a key dispenser-revalue station for carwashes and to set up a business called “Secure Data Systems” but the business ideas were never carried through. No written agreement was signed by the two men, but Willson sued King and alleged a partnership had been formed. The court found in favor of King because there was no “specific agreement” to warrant a partnership. Willson appealed. The appellant court reversed the trial court’s ruling because Willson and King’s relationship did fall under the definition of a partnership. Both men were working together toward creating a business and planned to share the profit, which makes their relationship a partnership.

Case Summary—Enea v. Superior Court of Monterey County The Daniels family created a partnership called 3-D, with the sole asset being an office building. The building housed the law office of William Daniels and was also leased to Claudia Daniels. There was no stipulation that the spaced had to be rented at fair market price. Enea, a client of Daniels’ purchased his brother’s third of the partnership. Years after the purchase, Enea questioned Daniels about the rent and Daniels was disassociated from the partnership. Enea brought a suit against Daniels claiming that he used the partnerships property for significantly less than the market price. The Court denied the defendants summary judgment, ruling that they did in fact breach the partnership laws by not collected fair market rent.

Suggested Answers to Critical Thinking about the Law Questions 1.

The Court is saying that the defendants would have had to specifically state that the purpose was to rent space at a lower price than the market dictated. This would also have to be open to all lessees. If that were the case, then the defendants would have received summary judgment on the basis of adhering to the partnership contract.

2.

There are certain duties dictated by law that a partnership must follow. For the most part, these laws are those that govern all other business dealings, regarding fraud and other whitecollar crimes. In this case, the Daniels were taking advantage of the partnership at the expense of the partnership.

Answers to Review Questions 16-1. The primary difference between limited and general partnerships is that in a limited partnership the limited partner invests money, but takes no part in its management so the limited partner will not incur unlimited liability. However, general partners share the management, and the risks.

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The Legal Environment Of Business: A Critical Thinking Approach

16-2. Sole Proprietorship: No formalities or expenses required other than those specific to the business to be operated.

General partnership: No formalities or expenses required other than those specific to the business to be operated. Written agreement Limited partnership (limited liability partnership): Added expense and time required to draw up and file written partnership agreement. Failure to comply with formalities will result in a loss of limited partnership status.

Public Corporation: Expense and time required to comply with statutory formalities.

Must receive charter from state; usually required to register and pay fees to operate in state other than the state of incorporation.

Subchapter S Corporation: Same as for public corporation. Must follow IRS regulations carefully or lose subchapter S status.

16-3. The answer is based on the probability that a partnership is not going to be immediately profitable. In other words, it will not have any way to use its possible losses as a tax break for the partnership as an organization. But because partners can use the losses as a deduction from their ordinary income, the partnership form does have advantages for the partners. Had they chosen to organize as a sole proprietorship, the same tax advantage would not have been available to them.

16-4. Is there a demand for the product in the targeted country or countries?

• Are there legal obstacles in the targeted country that should be carefully considered?

• Is managing an international business at a distance a realistic possibility for the firm?

• Will management be able to deal successfully with currency fluctuations?

• Is the risk of political interference by the target country’s government too great to make doing business in that country worthwhile?

• Is there a serious risk of nonperformance, nonpayment, or loss of property or freight in the country or region the firm is considering entering?

16-5. Liability for LPs is greater for a general partner than it is for a limited partner, while liability for LLLPs is the same for a general partner as for a limited partner. This is because in a general partnership all the profits are usually divided equally among the partners, and all partners have unlimited personal liability for partnership debts.

16-6. When individuals, partnerships, or corporations make a private agreement to finance, produce, and sell goods, securities, or commodities for a limited purpose and/or a limited time, they have formed a joint venture. Joint ventures are a popular way for developing nations to attract foreign capital.

Answers to Review Problems Copyright ©2015 Pearson Education Ltd.

The Legal Environment Of Business: A Critical Thinking Approach

16-7. No, Elliot would not be liable for the debt incurred. Tracy Peoples had committed fraud by including Elliot’s name in the credit application as a partner of the company, when he wasn’t. For this reason, there is no question of an existence of a contract and for this reason he cannot be held liable.

16-8. The limited partners would not be liable to pay all the claims to the suppliers as they did not take part in management or control of the partnership. This is because under the 2001 revision of the Revised Uniform Limited Partnership Act, a limited partner cannot be held liable for the partnership debts even if he or she participates in the management and control of the limited partnership.

16-9. According to the definition of partnership, which is the association of two or more persons to carry on as co-workers of a business for profit, a partnership did exist between Clark and Bird. In re KeyTronics also confirms this interpretation of the definition of partnership.

16-10. Yes, Dunn will be held liable. He had enough control over the management of the business to be considered a general partner. This case is similar to the Pitman case, in which the court similarly held that someone who helped secure financing was a general partner, not a limited one.

16-11. No, Bron and Arthur cannot legally compel David to account for the profits of the partnership because all three men have created an illegal business by bribing boxers. A partnership can allow for a wide variety of profit-sharing and operational arrangements, as long as the operation or arrangement is not illegal.

16-12. Charles made a mistake. He could continue or just to wind up the affairs of the partnership. Upon Hugo’s death, the partnership dissolved, and Charles must face reality and dissolve, and then reorganize. He must be responsible for all losses, now that Hugo has passed away.

Answers to Case Problems 16-13. Both the trial and appellant courts ruled in favor of Mack. Defining a partnership as an association of two or more persons to carry on as co-owners a business for profit and finding that a partnership contract can be either express or implied, the court decided that Charlie and Mack had a partnership. Mack had worked for Charlie ever since he was a child, he was responsible for making bank deposits for the business, and there was an understanding between him and his father that they were partners and Mack would take over the business after his father’s death.

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The Legal Environment Of Business: A Critical Thinking Approach

16-14. The court ruled in favor of Ferguson and granted him insurance from Consumer Finance Co. The contract between Ferguson and Consumer Finance created their relationship. The court found that the motorcycle was covered under the contract because it was a covered auto that was intended for resale. Ferguson was covered if his damages resulted from bodily injury sustained by him as a result of an accident with an uninsured motor vehicle.

This is what happened, so the court found that Consumer Finance had to cover Ferguson’s medical expenses.

16-15. Because there was no stipulation to the continuation of the partnership, it was to be ended. However, the surviving member did have a fiduciary responsibility during the winding-up of the partnership. Therefore the responsibility existed between the surviving member and the legal representative.

16-16. The indications of a partnership include the parties’ intent to enter into a partnership and the sharing of profits. However, the fact that Design88 acted on its own and that there was no joint ownership suggests that there was no partnership. The court recognized that there was a “Master Partnership Agreement” but found that the parties did not act as a partnership.

16-17. The Court did rule in Guzman’s favor, finding that the company was liable for fraudulent misrepresentation. This is because, as part of the franchise agreement, the cleaning company promised that at least one new account would be active after 120 days. When that did not happen, the contract was breached. Also, because it was determined that the company could not live up to the terms of the agreement with Guzman, they were found in violation of the franchising agreement.

Thinking Critically about Relevant Legal Issues 1.

Perhaps as his business partner, Ed has some ethical responsibility to tell Jack about the new opportunity, but overall Ed is not responsible for telling Jack about the mall development.

Ed and Jack have a business partnership to improve and operate the office building but Ed is not obligated to tell Jack about his other potential business investments. Ed only has to tell Jack information pertaining to the office building.

2.

It does not matter where business discussions originate because until they are acted upon, they are just ideas. It would be more professional for Ed and James to make formal arrangements in public, though, so Jack knows he is not being cheated.

3.

Ed should be allowed to leave the partnership as long as he goes through the dissolution and winding-up process. This process will prevent a new business from taking place and will tie Copyright ©2015 Pearson Education Ltd.

The Legal Environment Of Business: A Critical Thinking Approach

up loose ends, including completing unfinished transactions, paying off debts, dividing the remaining profit and distributing any assets. Once this process is complete, Ed will be free to make more risky and profitable investments, like participating in the mall development.

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The Legal Environment Of Business: A Critical Thinking Approach

Chapter 17 Company and Partnership Law –II Introduction Chapter Seventeen addresses these questions: • • • • • • •

What is a corporation?

How are corporations classified?

How are corporations created?

How are corporations financed?

How do corporations operate?

What are limited liability companies?

What are some global dimensions of corporations?

Chapter Seventeen is important because it focuses on corporations and what power they have in the business world. Limited liability companies (LLCs) are a valuable part of business associations because as a hybrid, they incorporate aspects of various organizations. Business students will be interested to learn about the different types of corporations and how they operate because corporations may be their future employers.

Achieving Teaching Excellence One of the most valuable lessons instructors can pass along to their students is a love of asking questions. Instructors ask questions, not because it is just a habit, but rather because every answer they have seem to contain within it a set of unanswered questions, which are just waiting to be explored.

One of the strongest forms of questions is to regularly be curious about context. Many of the facts in a fact pattern for a legal case are crucial to understanding the case because those facts provide the needed context for examining the extent to which a legal principle applies. One of the strongest things about the study of the law is its recognition that specifics matter. If the facts change just a bit, the case becomes quite different and has a totally different implication.

Good luck on encouraging students to experience the joy and the developmental advantage of regularly asking questions. One more step toward achieving Teaching Excellence!

Chapter Overview, Topic Outline, and Discussion Questions Copyright ©2015 Pearson Education Ltd.

The Legal Environment Of Business: A Critical Thinking Approach

Chapter Overview This chapter’s primary focus is on how corporations are classified, created, operated, and financed. Most business students already understand what a corporation is so instructors may want to focus on the more complex sections, such as fiduciary obligations and its cases. LLCs are also an important part of the chapter, and are a topic students are less familiar with. Instructors should encourage students to compare these associations with ones they learned about in Chapter Sixteen. The discussion questions are meant to incorporate different topics that are brought up throughout the chapter.

Topic Outline I. The Corporation II. lassification of Corporations A. Closely Held Corporation B. Publicly Held Corporation C. Multinational or Transnational Corporation D. Subchapter S Corporation E. ROBS Corporation F. Professional Corporation G. Nonprofit Corporation III. reation of Corporations IV. Financing of Corporations A. Debt Financing B. Equity Financing Classes of Stock C. Consideration V. Operation of Corporations A. The Role of the Shareholders B. The Role of the Board of Directors In Re Abbott Laboratories Derivative Shareholders Litigation C. The Role of the Officers and Managers D. Fiduciary Obligations of Directors, Officers, and Managers Beam v. Stewart Smith v. Van Gorkom VI. Limited Liability Companies A. The Uniform Limited Liability Act B. LLC Characteristics C. Creating a Limited Liability Company D. Duration of the LLC Copyright ©2015 Pearson Education Ltd.

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E. Financing of the LLC F. Control Considerations G. Tax Ramifications VII. Global Dimension of Corporations: A “Big Fat Greek” Bailout II and III VIII. mary Discussion Questions for Chapter Seventeen 1.

Evaluate this statement: The corporate form of business association is the most common form.

This statement is flawed. The partnership form is the most common form. However, the dominant form in terms of the total dollar value of business transacted and assets owned is the corporate form.

2.

Explain relationships between publicly and privately held corporations.

Publicly held corporations are those corporations whose stock is traded on the national exchanges. They have numerous shareholders who are simply investors. Real control of the publicly held corporation lies in the hands of officers and managers, who rarely own controlling amounts of stock. Closely held corporations are much different. The stock is not traded on national securities exchanges. Stock is usually held by a small group of persons, often family members or friends. The shareholders serve as directors, officers, and managers of the corporation. They take an active role in operating the business.

3.

Explain relationships between subchapter S corporations and limited liability corporations.

The subchapter S corporation is a type of closely held corporation. It is a hybrid of the corporation and partnership. It is organized and operates as a regular business corporation, but for tax purposes it is treated similarly to a partnership. A limited liability corporation (LLC) is a new form of business that allows entrepreneurs and small business owners to limit personal liability similar to a holder of shares in a corporation while retaining their status as a partner in a partnership. One relationship is that both are hybrids between corporations and partnerships. Another relationship between the two is that each stresses the advantage of a different form of business association. The subchapter S corporation stresses the tax advantages of the partnership. The LLC stresses the limited liability feature of the corporation.

4.

Explain relationships between closely held and subchapter S corporations.

The subchapter S corporation is a type of closely held corporation.

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5.

Evaluate this statement: Professional corporations enjoy limited liability.

The professional corporation is new, and is used by professionals such as doctors and lawyers. They are allowed to incorporate so that they may obtain tax advantages of deductions for health and pension plans that are allowed under the corporate form. However, the professional corporation is different from other corporations in that the owners are not accorded limited liability for professional acts. Public policy considerations preclude limited liability for the negligence of professionals.

6.

Why should the corporate form of business associations be studied carefully?

The text explains that corporate activities have a great impact on society. Also, corporations are subject to greater regulation than are other forms of business.

7.

Explain relationships between debt financing and equity financing.

Debt financing means taking out loans in the form of notes, bonds, and debentures. Equity financing is not based on loans. It involves raising capital through the sale of equity securities, also called shares of stock. Debt financing offers tax advantages to corporations, which equity financing generally does not.

8.

Would an investor rather own common or preferred stock? Why? An investor would rather own preferred stock because it carries less risk of loss than common stock. Common stock has no preferential rights. Preferred stock is given special preferences as to either payment of dividends or the distribution of assets. In general, preferred stock carries with it more rights for the shareholders.

9.

How does the law of agency relate to this chapter?

Agency law outlines the duties partners owe to one another, and the duties shareholders owe to the corporation. Partners are agents, and owe duties to one another. Shareholders are not agents of the corporation, and cannot act on its behalf. Their control is limited to exercising their right to vote at shareholders’ meeting.

10. Explain relationships between the corporate opportunity doctrine and the business judgment rule.

Both are common law rules that protect the corporate form of business association. The first protects the corporate from unethical acts by those in powerful positions in corporations. The Copyright ©2015 Pearson Education Ltd.

The Legal Environment Of Business: A Critical Thinking Approach

second protects those in power from liability for situations in which they made a poor decision, but did so in good faith.

The corporate opportunity doctrine precludes corporate officers and directors from taking personal advantage of an opportunity that, in all fairness, should have belonged to the corporation. The business judgment rule is a rule that says corporate officers and directors are not liable for honest mistakes of business judgment.

11. Explain relationships between the business judgment rule and piercing the corporate veil.

The business judgment rule says that corporate officers and directors are not liable for honest mistakes of business judgment. Piercing the corporate veil is a legal doctrine used by courts when the corporate form is misused. Sometimes, the court disregards the existence of the corporation and holds the shareholders liable for the corporation’s debts and obligations.

Both are common law rules. Both protect the corporate form of business association, but in different ways. The business judgment rule comes into effect when officers and directors are showing good faith, but have made a mistake. Piercing the corporate veil is relevant when someone is not acting in good faith and is instead abusing the corporate form.

Answers to Critical Thinking about the Law Questions, Case Summaries, Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law Questions 1.

No. Because Drill Baby Drill’s number one priority, as required by law, is to pursue profits, it is easy to assume that the corporation would use its money to elect politicians that would best help the corporation. Drill Baby Drill would want the politicians to have the corporation’s interest uppermost in their minds.

The corporation could argue that these politicians consider the long-run health of the nation their first priority because it depends on how “the long-run health of the nation” is defined.

Perhaps “the long-run health of the nation” is reliant on Drill Baby Drill’s success; Drill Baby Drill could lower unemployment rates, improve foreign relations with Saudi Arabia, or lower the cost of oil. But there are other ways to define “the long-run health of the nation” that Drill Baby Drill’s success would not help and could even hurt, such as a more equal distribution of wealth, improved healthcare, welfare, and education systems, and national security.

2.

Most corporations are seeking to represent different interests than the average citizen, such as maximizing their profit or helping their interests internationally (in the case of MNCs).

Corporations are also considerably more powerful than the average citizen. If corporations Copyright ©2015 Pearson Education Ltd.

The Legal Environment Of Business: A Critical Thinking Approach

had the long-run health of the nation as their number one priority, considering them citizens might not be a problem. However, many corporations’ interests hinder the long-run health of the nation. In the case of MNCs, the corporation’s allegiances may lay with other countries, not the United States.

3.

Corporations are conglomerates of many individuals who already have the right to vote.

Allowing corporations to have political equality would give some individuals the ability to, in a sense, vote twice. Also, corporations have much more money and influence than the average citizen. Money and power hold weight within the United States and those people (or corporations) with money or power’s voices are heard more than other citizens’.

Case Summary—In Re Abbott Laboratories Derivative Shareholders Litigation This case deals with the role of the board of directors. Abbott Laboratories, an Illinois corporation, was fined for a civil violation of Food and Drug Administration (FDA) regulations.

The FDA regulated Abbott to take off 125 types of medical diagnostic test kits, destroy inventory, and make certain corrective changes in the manufacturing procedures. Even after repeated warnings Abbott failed to implement the changes following which its shareholders filed a suit against the directors for its repeated non-compliance with regulations and quality control violations. This case was dismissed by the district court and the plaintiffs appealed.

Case Summary—Beam v. Stewart This case deals with fiduciary responsibility. Beam brought suit against Martha Stewart, the director, founder, and CEO of Martha Stewart Living Omnimedia (MSO). The image of the company is tied to that of Stewart as a media personality and if her name were to be tarnished, the value of the company would plummet. Stewart and former CEO of ImClone, Samuel Waksal traded reciprocal stock advice through a shared broker. A day before a rejection of an ImClone product by the FDA, Waksal and Stewart sold their shares in the company. MSO stock plummeted amid allegation and investigation. Beam alleged that both the company and Stewart breached their fiduciary responsibilities to the stockholders. The Court sided with Stewart, ruling that Stewart’s actions regarding the stock of another company were not tied to MSO and therefore no fiduciary responsibility was breached.

Case Summary—Smith v. Van Gorkom The chapter includes this case to highlight the issue of a director’s duty of care. In this case, a shareholder, Smith, became a plaintiff after he and other shareholders discovered that a board of directors allegedly failed to give due consideration to a merger offer. A lower court held in favor of the defendant director Van Gorkon, but the appellate court reversed. The board did not scrutinize the deal offered to the Board by Van Gorkon. Consequently, they breached their duty Copyright ©2015 Pearson Education Ltd.

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to shareholders. The lower court was too lenient with the Board, inappropriately relying on the business judgment rule.

Suggested Answers to Critical Thinking about the Law Questions 1.

Two examples of ambiguous words are “fairness” of the $55 price per share, and “reasonable,” as used in the phrase “whether the directors informed themselves as to all the information that was reasonably available to them.”

2.

The court’s decision making is conclusory. The decision jumps right from the issues to the conclusion without stating how the court got from one to the other.

Answers to Review Questions 17-1. Notes are short-term loans, bonds are long-term loans, and debentures are unsecured long-term corporate loans.

17-2.

The directors are expected to function at least as overseers and policy makers. In this role, the board of directors generally must authorize or approve: (1) the payment of dividends, changes in financing, and other capital changes; (2) the selection, supervision, and removal of officers and other executive personnel; (3) the determination of executive compensation and pension plans; (4) the adoption, amendment, or repeal of the corporate bylaws; and (5) the establishment of policy regarding products, services, and labor relations.

17-3. A closely held corporation is a corporation whose stock is not traded on the national securities exchanges but is privately held by a small group of people.

17-4. The text reminds the students that if a business is going to be paying its net profits to the owners, the partnership formed prevents the double taxation problem of the corporate form. Also, it is anticipated that the business will lose money in the first few years, the partnership form is probably the most desirable from a tax standpoint because the losses may be deducted from the owner’s income during the year in which they occurred.

17-5. It is misleading because liability insurance protects people in all forms of business association. Also, potential creditors of a corporation are well aware of the limited liability of the corporation’s shareholders, so they might ask for a personal guarantee from one or more of the shareholders. This decreases the unlimited liability advantage.

17-6.

• Choose a state where the LLC will be doing most of its business.

• Select a name. It is important to make sure the state’s statute governing the LLC is met and the name is not already being used. The words limited liability company or the abbreviation LLC or other language approved by ULLCA Section 105(a) should be Copyright ©2015 Pearson Education Ltd.

The Legal Environment Of Business: A Critical Thinking Approach

used, as adopted by the state statute. Reserve the name by filing the application with the secretary of state, following a determination of whether the proposed company name is federally trademarked by another company.

• Under the ULLCA, an LLC may be formed by one or more persons by delivering articles of organization to the secretary of state. The LLC comes into existence at the time of filing by the secretary (ULLCA Section 202).

Answers to Review Problems 17-7. No, the defendant will end up being liable. If necessary, the court will pierce the corporate veil and hold the defendant personally liable. People who own businesses are not allowed to shift assets to avoid liability.

17-8. Before the court pierces the corporate veil and goes after Jones, it will have to decide how much both corporations are simply extensions of Jones. How much control did he have over each corporation? The trial court will be given much discretion to rule on the facts.

The court will be reluctant to pierce the corporate veil.

17-9. The shareholder’s agreement is enforceable. Alder and Shaw cannot sell the business without including Svingos in the decision-making process.

17-10. In this case Mr. Jones sold the ski shop franchise to Mr. Hamilton. Following that Mr. Jones took a loan Union Bank. For this reason, Mr. Jones would not be liable to make a payment as the two of them had never entered into a partnership.

17-11.

It can be incorporated as nonprofit corporation as it has the object of helping people. This type of corporation is formed for purposes other than making a profit. Some examples of nonprofit (not-for-profit) corporations include hospitals, educational institutions, charities, and religious groups. Nonprofit corporations are used by groups as a way to carry out transactions and own property without individuals (who belong to a group) being held liable.

Answers to Case Problems 17-12. The court ruled in favor of the defendants as the directors of the corporation did not owe any fiduciary duty to the corporate creditors. Additionally, they were not related to the personal liability that the creditors had alleged with regard to the breach in contract.

17-13. The court had to decide whether the directors were careless and not acting in the shareholders’ best interest when they created the formula for issuing stocks. If the court applies the business application law to this case lightly, whether the directors were careless would not matter too much. The ruling would mainly depend on whether the

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directors had the power to make such a formula and because the directors do have this power, the court would most likely rule in the directors’ favor. If the court is like the ones that judged this case, though, and it takes the application of the business application law very seriously, the verdict may differ. The appellant court, in this case, agreed with the trial court and ruled in favor of the directors on the first issuance of compensatory shares but in favor of Baldwin on the second issuance. The directors were acting responsibly the first time because the WMI was having serious financial trouble and something drastic needed to be done. However, the directors acted carelessly when they did not reevaluate their formula the second time when the company was doing much better and, therefore, they violated their duty to Baldwin and the other shareholders.

17-14. The Court sided with Stoker, ruling that a breach of contract and fiduciary responsibility occurred. Members of an LLC have to act in good faith and in concert with one another.

This means that one member of the group cannot use the group’s assets to compete against the independent company of one of the members, as what happened here. An LLC’s larger assets cannot be used against one of the members.

17-15. As the manager, Hoaas was responsible for the debt Grand Casino incurred from the missing money and owes Griffiths that money. Griffiths, on the other hand, was responsible for withholding profits and selling the casino without informing Hoaas. He owes Hoaas his share of the profits and assets. The Supreme Court of South Dakota ruled that, to a degree, both parties breached their duties to one another but Griffiths was most to blame for withholding profits and selling the casino without his partner’s consent or acknowledgement. Hoaas owed Griffiths the debt money and Griffiths owed Hoaas his share of the profits and assets.

Thinking Critically About Relevant Legal Issues 1.

The author concluded that corporations should be made illegal. To back that up, he cited information that links corporations to unhappy workers, pollution, and sweatshops. He argued that it goes against traditional capitalism.

2.

The author is only addressing large corporations that operate, many times, in many countries.

He categorizes all corporations as evil and all partnerships and sole proprietorships as “mom and pop” stores. This is not an accurate representation.

3.

The opposite view would include an account that corporations are the evolution of the “mom and pop” and fall right into capitalism. To maximize profits, owners band together to create a product and service and sell it so they receive the most profit for the least amount put in.

One could also argue that corporations are not people and therefore cannot be governed as such. There are different expectations. Lastly, one would argue that corporations help the Copyright ©2015 Pearson Education Ltd.

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consumer because they provide product at low costs.

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Chapter 18 Administrative Agencies and Functions Introduction Chapter Eighteen addresses these questions: • • • • • •

What is administrative law and what are administrative agencies?

How are administrative agencies created?

What are the functions of administrative agencies?

What laws limit the power of administrative agencies?

How are the state and local administrative agencies created and regulated?

What are the global dimensions of administrative agencies?

Chapter Eighteen is significant because administrative agencies affect daily lives of people.

They also affect businesses by placing limits on what businesses can do. Administrative agencies also provide help and assistance to businesses.

Achieving Teaching Excellence The Importance of “Why” Questions If instructors want to modify their teaching style to demonstrate Teaching Excellence, one major change could yield significant results in the classroom. This major change requires instructors to ask students why they believe their particular conclusion is correct.

Many students have strong views about particular legal issues. For example, some students feel strongly that we must change the legal system so fewer people can sue. Other students feel strongly that insider trading should be illegal. No matter which conclusions students cherish, instructors must be prepared to ask them why. Instructors must expect students to present reasons to show why they prefer a particular conclusion.

In Asking the Right Questions, M. Neil Browne and Stuart M. Keeley remind instructors that “[i]t is the mark of a rational person to support his or her beliefs by adequate proof, especially when the beliefs are of a controversial nature.” Instructors should ask their students, “Why do you say that?” Browne and Keeley also remind instructors to ask why, no matter whether they agree or disagree with the conclusion the student prefers. Instructors’ goal should be to see whether students’ reasons are strong, weak, or somewhere in between. Instructors will not know until they identify students’ reasons.

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Depending upon a particular student’s past learning experiences, he or she might be surprised when instructors ask why questions. Surprisingly, many are not used to the professor asking them to explain their reasons. Instructors should make sure that they practice their wait time with why questions. Additionally, instructors should explain their behavior to students.

Instructors should expect students to ask the objective behind asking the why questions. In the long run, some of the students will appreciate the instructors’ demand that they identify reasons to support their conclusions.

In this chapter, and throughout the term, instructors should ask many why questions. They should expect students to ask why questions too. If this kind of questioning environment is created, instructors can demonstrate their interest in achieving Teaching Excellence.

References •

M. Neil Browne & Stuart M. Keeley, ASKING THE RIGHT QUESTIONS: A GUIDE TO CRITICAL THINKING (Seventh Edition).

Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview The impact of administrative agency regulations on business and society is a primary focus of this text. Although the text emphasizes the role of federal administrative agencies, each of the 50 states, the District of Columbia, and Puerto Rico, as well as counties, cities, and some towns, have administrative agencies that also regulate business and societal conduct. This chapter defines administrative law and administrative agencies and discusses the reasons for their growth, how they were created, and their functions. It also explores the federal administrative agencies’ relationship to the executive, legislative, and judicial branches of government, as well as the institutions and laws that limit the power of administrative agencies. The chapter ends with a brief consideration of the global dimensions of administrative agencies.

This chapter presents important information for managers. It helps managers understand the process by which administrative agencies regulate the businesses they manage. It also helps them see how administrative agencies are a source of help and guidance. The discussion questions that follow the topic outline come from throughout the chapter.

Topic Outline I. Introduction to Administrative Law and Administrative Agencies A. Administrative Law B. Administrative Agencies Copyright ©2015 Pearson Education Ltd.

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Types Reasons for Growth II. Creation of Administrative Agencies III. Functions of Administrative Agencies A. Rulemaking Formal Rulemaking Informal Rulemaking Hybrid Rulemaking Exempted Rulemaking Judicial Review of Rulemaking Massachusetts v. EPA B. Adjudication Investigation and Complaint Formal Complaint and Hearing Initial or Recommended Decision Appeal to the Full Commission Judicial Review of Adjudicative Proceedings Fox Television Stations, Inc. v. Federal Communications Commission C. Administrative Activities IV. Limitations on Administrative Agencies’ Power A. Statutory Limitations B. Institutional Limitations Executive Branch Legislative Branch Judicial Branch V. State and Local Administrative Agencies Vonage Holdings Corp. v. Minnesota Public Utilities Commission VI. Global Dimensions of Administrative Agencies VII. Summary Discussion Questions for Chapter Eighteen 1.

Explain relationships between procedural and substantive rules.

A procedural rule affects the way administrative agencies function, whereas substantive rules define the rights of parties.

2.

Explain relationships between administrative agencies and alternative dispute resolution.

The two share a goal of preventing overcrowding in courts. In the absence of administrative agencies, people would seek redress through courts. Administrative agencies take burdens off courts. Similarly, alternative dispute resolution methods take burdens off courts. (This Copyright ©2015 Pearson Education Ltd.

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question would be a good midterm or final exam question because it asks students to relate material from one part of the course to another.)

3.

Explain why someone might think this statement is true: Administrative agencies are not really a “fourth branch of government.”

Although administrative agencies are important, they are not independent enough to call them a fourth branch of government. The legislative, executive, and judicial branches of government have a considerable amount of control over administrative agencies, so administrative agencies are not on the same level to consider them a fourth branch of government.

4.

Explain relationships between informal and hybrid rulemaking.

Informal rulemaking requires the agency to give prior notice of a proposed rule by publishing it in the Federal Register, providing an opportunity for all interested parties to submit written comments, and publish the final rule with a statement of its basis and purpose. The final rule is published in the Federal Register. Hybrid rulemaking combines some of the aspects of formal and informal rulemaking. It is similar to informal rulemaking in that it requires notice. Hybrid rule making is different in that it requires a period for public comments and a public hearing.

5.

How is adjudication in administrative agencies similar to civil litigation? How is it different?

Hearings under adjudication are similar to civil litigation in that there is a complaint, a judge, discovery, presentation of evidence with direct and cross-examination of the witnesses, motions, and arguments. However, adjudication is more informal. No jury is present, and the judge asks questions about the facts. The proceedings are less adversarial and more inquisitorial.

6.

Evaluate this statement: In administrative agencies, the burden of proof is the same as the burden of proof in a criminal case.

This statement is incorrect. The burden of proof is the same as in a civil case. This burden of proof is the preponderance-of-evidence standard.

7.

Explain why someone might think this statement is true: Some of the most important functions that administrative agencies serve are helpful to businesses.

This statement is true because many of the services administrative agencies provide to businesses help them maximize their efficiency. For instance, administrative agencies give Copyright ©2015 Pearson Education Ltd.

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advice to businesses. They also conduct studies that help businesses make decisions.

Administrative agencies also provide information to businesses, grant licenses, and manage property.

8.

Explain relationships between the Freedom of Information Act (FOIA) and the Federal Privacy Act (FPA).

One relationship is that FOIA requests are exceptions to the FPA. The FOIA requires agencies to let the public know how to get information from the agency. It also requires agencies to make certain documents available for copying. The FPA prevents agencies from disclosing any record in a system of record to any person or agency without the written authority of the individual. One exception to the FPA is that the agency can give information to meet an FOIA request.

9.

Evaluate this statement: Politics does not affect the work of administrative agencies.

Politics does affect the work of administrative agencies. The President appoints the heads of agencies, and some lower-level heads of departments and divisions. Presidential appointees usually share the same political beliefs as the President. Thus, the President has influence over both independent and executive agencies.

Answers to Critical Thinking about the Law Questions, Case Summaries, Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law Questions 1.

The critical thinking question that could be applied to this disagreement is, “What does the word law mean?” Only Congress can pass statutes, but administrative regulations are also laws.

2.

Some individuals may argue that the creation of regulations by administrative agencies promotes unfair restrictions on business. The ethical norm that seems to be behind this thought is freedom. Freedom means to act without restriction from rules imposed by others.

If people want to maximize freedom, they are likely to view administrative rules as unfair.

3.

Matt would not want to fund administrative agencies. Why fund an agency that cannot make a difference? Matt might also be in favor of privatization. Matt might make the assumption that private companies could do a better job in some areas than federal agencies.

Case Summary—Massachusetts v. EPA

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This case illustrates the use of judicial review on administrative agencies’ actions. The Environmental Protection Agency rule makers decided the Clean Air Act did not give them the authority to regulate certain greenhouse gas emissions from new motor vehicles. Massachusetts, other states, and private organizations filed a suit to challenge the EPA’s denial. The Supreme Court ruled in favor of Massachusetts because the EPA was responsible for determining whether greenhouse gas emissions should be regulated under the Clean Air Act. Greenhouse emissions clearly fell under the Clean Air Act’s definition of “air pollutants” and, therefore, the EPA is required to decide whether these gas emissions contribute to global warming and should be regulated.

Case Summary—Fox Television Stations, Inc. v. Federal Communications Commission Demonstrating the importance of judicial review of adjudicative proceedings, this case is about a new definition of “indecent speech” created by the Federal Communication Commission.

Fox Television Station appealed to the court to have the new FCC order reviewed. The court found in favor of Fox because the FCC did not have a logical reason to change the already existing definition of “indecent speech.” The FCC declared that even nonliteral uses of “the Fword” could be considered sexual and the court stated that this assertion was false considering the word could be used in a manner that no reasonable person would believe referenced sexual activities. Therefore, the court decided the FCC needed to reevaluate its definition of “indecent speech.”

Case Summary—Vonage Holdings Corp. v. Minnesota Public Utilities Commission This case deals with the power of a state agency. Vonage is a private phone company that uses the Internet to route calls. Traditional phone companies use a switchboard. The company has about 500 customers in Minnesota. They were investigated regarding a claim that they did not have the proper licenses to provide phone services in Minnesota. The Minnesota Public Utilities Commission filed suit stating that Vonage had to comply with state statutes regarding telephone service. Vonage counterclaimed, seeking an injunction. The Court ruled in favor of the Commission, citing that because Vonage users make phone calls, it is a telecommunications system and therefore must be regulated as such.

Answers to Review Questions 18-1. Congress created administrative agencies because it didn’t have time to regulate everything, and wanted administrative agencies to develop expertise in particular areas so they could regulate effectively. So administrative agencies take some of the regulatory burden off Congress, and the agencies do their work well because of their expertise.

18-2. Step 1 Copyright ©2015 Pearson Education Ltd.

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Agency drafts rules in consultation with interested parties.

Step 2 Proposed rules are published in the Federal Register Step 3 Interested parties can file written comments on the written draft usually within a 30-day period from publication in the Federal Register.

Step 4 Final draft of a rule is published in the Federal Register 30 days before it takes effect.

A statement of its purpose and cost-benefit analysis must accompany its publication Step 5 Agency receives feedback from interested parties during the 30-day period and makes a decision on whether the final draft should be rewritten. If not, it becomes law.

18-3. Independent administrative agencies are headed by a board of commissioners who are appointed for a specific term of years by the President with the advice and consent of the Senate. Each of the commissioners can be removed before serving his or her full term only for causes defined by Congress and not at the whim of the President. However, the President has more control over executive agencies. Heads and members of these boards serve at the pleasure of the President with no fixed term. They can be removed by the chief executive at any time.

18-4. The FSA’s self-avowed goals are to (1) maintain confidence in the British financial system, (2) promote public understanding of that system, (3) secure the right degree of protection for customers, and (4) help reduce financial crime.

18-5. Administrative agencies have proliferated rapidly since the late 1890s for the following reasons: • Flexibility—unlike the court proceedings, administrative agency hearings are not governed by strict rules of evidence.

• Need for expertise—the staff of each of the agencies has technical expertise in a relatively narrow area, gained from concentrating on that area over the years.

• Prevention of overcrowding in courts—if administrative agencies did not exist, the United States’ highly complex, often litigious, society would have to seek redress of grievances through the federal and state court systems.

• Expeditious solutions to national problems—after the 1929 stock market crash and the ensuing Depression, Congress sought to give investors confidence in the securities markets by creating the SEC in 1934. When the public became concerned about the deterioration of the nation’s water, land, and air, Congress created the EPA to implement air, water, and waste regulations.

18-6. Section 553(c) of the APA requires formal rulemaking when an enabling statute or other Copyright ©2015 Pearson Education Ltd.

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legislation states that all regulations or rules must be enacted by an agency as part of a formal hearing process that includes a complete transcript. This procedure provides for: • An agency notice of proposed rulemaking to the public in the Federal Register • A public hearing at which witnesses give testimony on the pros and cons of the proposed rule, each witness is cross-examined, and the rules of evidence are applied • The making and publication of formal findings by the agency As provided by Section 553 of the APA, informal rulemaking applies in all situations in which the agency’s enabling legislation or other congressional directives do not require another form. The APA requires that the agency: • Give prior notice of the proposed rule by publishing it in the Federal Register • Provide an opportunity for all interested parties to submit written comments • Publish the final rule, with a statement of its basis and purpose, in the Federal Register Informal rulemaking is the model most often used by administrative agencies because it is efficient in terms of time and cost. No formal public hearing is required, and no formal record need be established, as in formal rulemaking.

Answers to Review Problems 18-7. IBM cannot be held accountable for Cubbage’s statement as the transaction tool place between the franchise and the customer. The franchise had the power to take its own decisions as long as it was within its operational area and did not conflict with IBM’s policies. The court would have ruled in IBM’s favor.

18-8. The EPA probably won this one. They had scientific evidence, so their behavior was not arbitrary and capricious. Plus, the court will be reluctant to second guess the EPA because the EPA has expertise in regulating gasoline additions.

18-9. Sabo & Zahn acted on behalf of Holabird & Root and for this reason they can be considered to be agents. They had signed a binding contract regarding this as well. This means that the principles of law would be applicable to both of them equally.

18-10. The DOT’s findings must be sustained if they are supported by substantial evidence on the record viewed as a whole. This rule was learnt from the Warner Lambert case. The DOT will probably win, as long as their decision was supported by substantial evidence.

The DOT is a little confused about the standard (it is not that they win unless there is substantial evidence to the contrary), but even under the correct standard they will win if they have substantial evidence.

18-11. Probably not. The court will be reluctant to tell the FTC that they must resolve disputes in Copyright ©2015 Pearson Education Ltd.

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a particular manner. It was not an arbitrary decision that the FTC does not want to include 513 bottlers in a case. The court is likely to rely on the FTC’s judgment.

18-12. Section 5 of the FTC Act gives the FTC broad authority to investigate “unfair and deceptive acts and practices in or affecting commerce.” In addition to its general authority under Section 5 of the FTC Act, the FTC has authority to investigate and prosecute privacy violations and data security breaches under 33 different sets of rules, laws, and guides.

Among the more frequently-invoked sources of FTC investigations are the Children’s Online Privacy Protection Act, the Fair Credit Reporting Act, including the Disposal Rule, the Graham-Leach-Bliley Act Safeguards Rule, and the Telemarketing and Consumer Fraud and Abuse Act.

Answers to Case Problems 18-13. The court denied the agents motion for a summary judgment. However, the U.S. appeals court reversed this judgment in favor of the agents. The court stated that privacy of the wastewater was not a reasonable expectation. For this reason, Riverdale and James Knott could not evoke the fourth amendment act. Therefore, anyone would have the right to inspect this wastewater.

18-14. No, the court won’t rule in favor of ITAC as it was unable to prove evidence of prejudice.

Apart from that clarifications were made but it did not constitute to be improper discussions as it pertained to the government’s decision making process.

18-15. Ethyl Corp. won this case because the EPA could not delegate fuel efficiency tests. Those tests have to be controlled by EPA regulations and standards. If each company comes up with a test, then there will be many variations on fuel economy.

18-16 Informal rulemaking is the model most often used by administrative agencies because it is efficient in terms of time and cost. The APA requires that the agency • Give prior notice of the proposed rule by publishing it in the Federal Register • Provide an opportunity for all interested parties to submit written comments • Publish the final rule with a statement of its basis and purpose, in the Federal Register The missing steps here are the notice and comment steps. Here, the court ruled in favor of the Chamber of Commerce.

18-17 The main issues of this case are whether the EPA has the right and knowledge to declare that global warming affects human health and well-being and that certain states and industries will be greatly affected economically by the EPA’s regulations regarding Copyright ©2015 Pearson Education Ltd.

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greenhouse gases. The court found in favor of the EPA. The EPA’s research was considered sufficient and the states and industries were unable to prove that their harm is certain or is a direct result of the EPA’s regulations.

18-18 The court granted Lion Raisins its bid proposal costs because the court did consider the USDA’s immediate suspension of Lion Raisins arbitrary and capricious. The USDA was obligated by law to make an affirmative finding of responsibility before awarding a contract and ordering a suspension without providing a reason was unreasonable.

Thinking Critically About Relevant Legal Issues 1.

The author is very pro-democracy and believes in equality. All people should have a say in all the ways they are governed. Equality is very important to the author because she believes it is the basis of American democracy. Agencies are no different than elected ruling bodies.

The author is not concerned with efficiency. The author would much rather sacrifice efficiency for the sake of making agencies more democratic.

2.

The author ignores the fact that agencies, especially local ones, are made up of citizens, not politicians. These agencies enforce regulations and laws established by elected officials. And any powers the agencies have are given to them by the officials. If there are any problems, then a voter can vote for a representative who will change the stance on agencies.

3.

Basically, the opposition would talk about what the author ignored. The opposition would argue that in a large democratic country, efficiency is very important. Without it, many problems would continue unabated. The opposition would argue that elected bodies control the agencies and that their power can be taken away by a vote. In that regard, they are an extension of democracy.

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Chapter 19 The Employment Relationship Introduction Chapter Nineteen addresses these questions: • • • • • • • •

What obligations do wage and hour laws place on employers?

How and when can an employee get unemployment compensation?

How does the Consolidated Omnibus Budget Reconciliation Act of 1985 benefit the employees?

How do worker’s compensation laws benefit employees and employers?

What requirements does the Family and Medical Leave Act of 1993 impose on employers?

What is the goal of the Occupational Safety and Health Act of 1970?

What are employees’ privacy rights in the workplace?

What are the global dimensions of employment relationship?

Chapter Nineteen is significant because it explains major pieces of legislation that affect the employer–employee relationship. The laws this chapter explains limit the employers’ freedom to make whatever deal they want with their employees. Federal and state laws limit employers’ freedom, and ensure the security and safety of employees.

Achieving Teaching Excellence Perry’s Scale At this point in the semester, it might be worthwhile to introduce an additional model of learning. Instructors have already used Bloom’s taxonomy, and are encouraging a critical thinking model. This chapter of the Instructor’s Manual introduces the Perry’s Scale of Intellectual Development and Explanation. This scale is important as students become critical thinkers because instructors do not want their students to think that everything is relative or that “anything goes”. Instructors discover that once students start to get good at evaluating arguments presented by others, some of them start to exaggerate and think “All arguments are worthless.”

Perry’s scale is important because the final stages encourage students to take charge of their learning.

The lower part of Perry’s Scale explains that lower levels of intellectual development find students who see issues as black or white, right or wrong. Eventually, students start to view situations as having answers that are relative. They might say, “My answer is as good as yours.”

Many students get stuck at this level of intellectual development. Critical thinking, when done Copyright ©2015 Pearson Education Ltd.

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correctly, encourages them to move to higher levels of intellectual development. Ideally, instructors want their students to know that answers and arguments are relative, but some are better than others. Students should choose the best answers and arguments from among the flawed choices. Most arguments are flawed. Writers do not have the time or the space to present virtually perfect arguments. Instructors should train their students to know how to identify a good argument, and a better argument.

What can instructors do in class and with this text to encourage their students to move toward higher levels of intellectual development on Perry’s scale? Instructors do not want students to despair and start to believe that all judicial opinions are worthless. Some are better than others from a critical thinking perspective. Instructors should ask students to compare one case to another. Instructors should ask students, “What does Judge X do in the A case that shows stronger critical thinking skills than what Judge Y does in the B case?”

By encouraging students to move toward higher levels on Perry’s scale of intellectual development, instructors are moving toward achieving Teaching Excellence.

References • •

Donald R. Woods, “Nurturing Intellectual Development,” 19 JOURNAL OF COLLEGE SCIENCE TEACHING 250 (1990).

Donald R. Woods, “Models for Learning and How They’re Connected—Relating Bloom, Jung, and Perry,” 22 COLLEGE SCIENCE TEACHING 250 (1993).

Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview This chapter explains many of the conditions that the government imposes on employment relationships. The first five sections focus on the laws that affect employee wages and benefits— wage and hour laws; unemployment compensation legislation; the Consolidated Omnibus Budget Reconciliation Act of 1985; state workers’ compensation laws; and the Family and Medical Leave Act. The sixth and seventh sections shift the focus to protection of worker safety and health and privacy rights. The final section discusses the international dimensions of the employment relationship.

One of the primary strengths of this chapter is that it gives a good overview of the employment relationship before students learn about labor law and employment discrimination law. Organizationally, it makes sense to consider the relationship between employers and employees before specific problems are considered. The cases in this chapter are interesting and timely.

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Topic Outline I. Wage and Hour Laws II. Unemployment Compensation Cassandra Jenkins v. American Express Financial Corp.

III. Consolidated Omnibus Budget Reconciliation Act of 1985 IV. Workers’ Compensation Laws A. Coverage B. Recoverable Benefits C. The Claims Process D. Benefits of the Workers’ Compensation System V. The Family and Medical Leave Act of 1993 A. Major Provisions Rachael Schaar, Appellant v. Lehigh Valley Health Services, Inc.; Lehigh Valley Physicians Business Services, Inc. B. Remedies for Violations of the FMLA C. The Future of the FMLA VI. The Occupational Safety and Health Act of 1970 A. Occupational Safety and Health Administration Standard Setting Enforcement Inspection Procedure Penalties Public Education State Plans B. Occupational Safety and Health Review Commission C. National Institute for Occupational Safety and Health D. Implementation of the OSH Act VII. Employee Privacy Rights A. Electronic Monitoring and Communication Brian PIETRYLO and Doreen Marino, Plaintiffs, v. HILLSTONE RESTAURANT GROUP d/b/a Houston’s, Defendant.

B. Drug Testing C. Other Testing VII. Global Dimensions of the Employment Relationship VIII. Summary Discussion Questions for Chapter Nineteen 1.

Analyze: Federal and state laws place limits on employers’ freedom.

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This question allows students to present an overview of the material in the chapter. What are employers not allowed to do? Employers are not allowed to pay workers less than a specific wage. They are not allowed to opt out of the unemployment compensation system. They are not allowed to fire workers who take family or medical leave. They are not allowed to maintain an unsafe workplace. Employers are not allowed to violate employees’ privacy.

2.

Evaluate: Everyone who loses his or her job is entitled to unemployment compensation.

There are some eligibility requirements that must be set, with most states requiring, at minimum, that employees who are fired for just cause or who voluntarily quit are not eligible for unemployment compensation.

3.

Analyze: It is important to know whether one is an employee or an independent contractor in case the person is injured at work.

The statement is true because worker’s compensation laws protect employees, but not independent contractors. The key fact in determining whether someone is an employee or an independent contractor is the degree of control the employer exerts over the worker. The more control, the more likely it is the person is an employee rather than an independent contractor.

4.

Evaluate this statement: Workers’ compensation legislation considers fault.

This statement is flawed because the worker’s compensation statute is generally a no fault statute. Recovery does not depend on a showing that the injury was caused by an employer’s error. The system is a form of insurance system.

5.

Explain why someone might think this statement is true: The worker’s compensation system is not always beneficial to workers.

This statement is true because some employees would receive more compensation if they were allowed to sue their employers in a personal injury case. Worker’s compensation statutes usually state that the worker’s compensation system is the employee’s exclusive remedy. These exclusivity provisions are especially harmful to employees who could prove extensive damages and receive high award in a regular civil case.

6.

After reading the cases that raise issues under the Family and Medical Leave Act (FMLA), make a generalization about why employers contest employees’ claims that the FMLA should provide protection to them.

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Employers generally believe employees are seeking leave when they are not seriously ill.

Employers want to fire employees who are frequently absent so they can replace the employees with more dependable employees.

7.

Explain relationships between the Occupational Safety and Health (OSH) Act and worker’s compensation.

One relationship is that the OSH Act is federal legislation that applies the same way in all states, whereas worker’s compensation statutes are state laws that vary from state to state.

Another relationship is that if the OSH Act works well, workplaces are safer, and workers do not need to rely on the worker’s compensation system because they have fewer injuries.

8.

Analyze: We need the Occupational Safety and Health (OSH) Act less now than we did ten years ago.

As the American economy has shifted toward service industries, employees are much less likely to be injured on the job. Fewer employees are worried about whether they will lose a body part (e.g., a toe) or a sense (sight or hearing) than they were when jobs were more industrial and dangerous.

9.

How is the National Institute for Occupational Safety and Health (NIOSH) related to the Occupational Safety and Health Review Commission (OSHRC)?

The NIOSH is a research facility; the OSHRC is a review body that hears claims by employers that their penalty under the OSH Act is inappropriate in some way. Both agencies provide support to OSHA, whose general mandate is to promote workplace safety.

10. Why are workplace privacy concerns more important today than they were ten years ago?

When workers had industrial jobs, they had lower privacy expectations. Employees were not likely to have their own offices and were seldom on the phone. Now, employees have their own areas, and they expect some measure of privacy to make phone calls and to have personal belongings close to them during the working day.

11. Explain why someone might think this statement is true: It would be desirable to have uniform labor laws among all industrialized nations.

Some people believe there are certain inherent rights workers should enjoy no matter where they live and work. Another argument in support of the statement is that uniformity would make it easier for multinationals that operate in many countries to know their rights and responsibilities.

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Answers to Critical Thinking about the Law Questions, Case Summaries, Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law Questions 1.

The employer is upset because he or she does not want to train a new employee or suffer from the loss of Mike’s work while he takes time off to adjust to parenthood. The employer values efficiency. It is expensive to get a replacement for an employee who goes on leave.

2.

The employer’s statement shows he or she would be unlikely to grant leave if he or she were in a position to choose. That means someone else (the government) has to step in to protect the rights of workers.

3.

The additional information that would help the students’ thinking are: • Will Mike get full or partial pay during the leave?

• Will the pay be subsidized by the government?

• How long can the leave last?

• Will mothers and fathers get the same amount of paid leave?

Case Summary—Cassandra Jenkins v. American Express Financial Corp.

This case deals with unemployment compensation. Jenkins, who worked as an insurance specialist, was sentenced to prison for assault. She was to serve 30 days, but she had workrelease privileges. She notified her supervisor, who assured her that she could continue her employment. However, when she got to the workhouse, her employment had not been verified.

She appealed and was told that she had been terminated for misconduct. Her appeal went all the way to the Minnesota Supreme Court. The Court reversed the prior rulings and found in favor of Jenkins, citing that because the misconduct did not have anything to do with her job, she was unfairly terminated. The court held that Jenkins’ absence from work was not misconduct that disqualified her from receiving unemployment benefits and that it could not be used to fire her.

Case Summary—Rachael Schaar, Appellant v. Lehigh Valley Health Services, Inc.; Lehigh Valley Physicians Business Services, Inc. This case deals with a medical leave from work. Rachael Schaar worked for Lehigh Valley.

After visiting a Lehigh Valley doctor, Schaar took a few days off from work. Lehigh Valley fired Schaar for missing work due to being sick and other employment indiscretions. Schaar filed a suit claiming interference and discrimination in violation of the FMLA. The appellant court ruled that Schaar’s illness could qualify as a valid excuse to miss work under the FMLA and remanded the case back to a trial court for further processing.

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Suggested Answers to Critical Thinking about the Law Questions 1.

The crucial facts are: • Schaar was an eligible employee • Lehigh Valley was a covered employee • Dr. Twaddle wrote a note saying Schaar was incapacitated for two days and Schaar testified that she was ill for more than three days which the court ruled was enough evidence to prove Schaar suffered from a “serious health condition” • Schaar gave Lehigh Valley adequate notice of her illness

2.

The FMLA protects the personal rights of employees who are suffering from an illness and employers’ rights to fire employees who do not meet their employers’ expectations.

Case Summary—Brian PIETRYLO and Doreen Marino, Plaintiffs, v. HILLSTONE RESTAURANT GROUP d/b/a Houston’s, Defendant Pietrylo and Marino, employees in a restaurant, created a group on MySpace that was password protected. This group was called Spec-Tator, where former and current employees of the restaurant vented their feelings. None of the managers were extended an invitation to join the group. However, on hearing about this group a manager forced an employee who had access to this group to disclose the password. Consequently, after reading the discussions on the group the manager fired Pietrylo and Marino. They sued the manager for invasion of privacy and violations of the federal Stored Communications Act. The jury awarded compensatory damages and punitive damages to the plaintiff. However the jury found that no invasion of privacy took place.

Answers to Review Questions 19-1. The Fair Labor Standards Act requires employers to pay a minimum wage, and pay time and a half for work more than 40 hours per week (unless exemptions apply). This specified amount is periodically raised by Congress to compensate for increases in the cost of living caused by inflation.

19-2. • The birth of a child • The adoption of a child • The placement of a foster child in the employee’s care • The care of a seriously ill spouse (including sae sex spouses in those statesthat recognize same sex marriage), parent, or child • A serious health condition that renders the employee unable to perform anyof the essential functions of his or her job

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19-3. As per the Family and Medical Leave Act, employers must formulate and publish a family leave policy, and provide eligible employees with up to twelve weeks of leave during any twelve-month period for family related occurrences (e.g., birth of a child, care of a seriously ill family member, a serious health condition that renders the employee unable to perform any of the essential functions of his or her job).

19-4. If an employer violates the Family and Medical Leave Act, employees may recover damages for unpaid wages or salary, lost benefits, denied compensation, and actual monetary losses up to an amount equivalent to the employee’s wages for twelve weeks.

Plus, plaintiffs may bet attorney fees and court costs. If the employer shows bad faith, double damages may be awarded. The employee may be entitled to reinstatement or promotion.

19-5. NIOSH is a research facility that helps OSHA identify occupational and safety problems, develops controls to prevent occupational accidents and diseases, and disseminates findings.

19-6

In France, Austria, and Finland, paid parental leave begins 6 weeks before childbirth; it extends to 10 weeks after birth in France, 8 weeks in Austria, and almost 1 year in Finland. French working mothers are then entitled to an additional (unpaid) job-protected leave until their children reach age 3.

Answers to Review Problems 19-7. Robert will not be able to collect unemployment compensation. Employees who quit voluntarily, as Robert did, are not eligible. Robert should have waited to get laid off.

19-8. Worker’s compensation is a no-fault system. It is irrelevant that Mandle ignored company safety policies. She was at fault, but she was entitled to receive compensation as per the no-fault rule.

19-9. The key issue is whether Caroline Williams had a reasonable expectation of privacy. She did not. She knew her company was monitoring telephone calls. Plus, she was not supposed to use the phone for personal calls. The employer should not have stayed on the line, but was in his or her legal rights to do so.

19-10. Employee is entitled to receive workers’ compensation benefits if injured in the scope of employment. Steve was injured in the course of employment, so he will receive workers’ compensation benefits.

19-11 The employer can probably use a drug test. Employees have few rights before they are Copyright ©2015 Pearson Education Ltd.

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hired. As long as the testing method is not unduly intrusive, it is probably okay. The lie detector test will not be allowed. Generally, employers are not allowed to use lie detector tests. Here, the trade secret issue is probably not important enough to warrant an exception.

Answers to Case Problems 19-12. The Court reversed the Special Workers’ Compensation Appeals Panel’s decision and affirmed the trial court’s decision to grant 40 percent permanent partial disability to each hand and temporary total disability benefits for the time Trosper spent recuperating. The Court found that Trosper’s osteoarthritis pain worsened when his work duties became more manual. The change in work duties caused his increased arthritic pain.

19-13. The appellant court reversed the trial court’s decision and found in favor of Krenzke. To file a suit under the FMLA, Krenzke had to prove she provided notice to Lindsey Lexus that she needed a leave of absence due to an illness. Because Krenzke did notify Lindsey Lexus, the burden then shifts to the employer to prove that the request is viable. Lindsey Lexus did not make any inquiries into the note provided by Krenzke’s doctor and, therefore, Lindsey Lexus did violate the FMLA. 19-14. The Court affirmed the judgment in their favor because they were not defense contractors.

The defense exemption to the rule that disallowed the second test applied only to contractors. Because the employees worked in the mailroom, they did not fall under the exemption and therefore did not have to take the second test.

19-15. Yes, there is an issue of material fact because it is unclear whether Indergit was entitled to overtime pay. Rite Aid claims the company did not owe Indergit overtime pay because Indergit’s employment fell within the executive exemption. The court ruled, however, that Indergit’s claim that the majority of his job responsibilities were the same as those performed by nonexempt employees need to be further investigated because it created an issue of material fact.

For the court to rule that Indergit’s job responsibilities made him exempt from the overtime requirements, Rite Aid would need to prove that Indergit’s primary duties were managerial in nature.

19-16. In this case, the district ruled in favor of the plaintiff and awarded a summary judgment.

However, this decision was reversed by the appeals court based on the fact that a jury would have to deliberate whether the employer had in fact violated the employee’s FMLA leave.

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19-17. The court ruled in favor of the defendant, Mission Linen Supply. Even the court of appeals reaffirmed this judgment.

Thinking Critically About Relevant Legal Issues 1.

The issue is an alternative to the present form of workplace drug testing. The saliva swab is the answer. The author still believes that drug testing is a good idea; it just needs to be implemented in a way that is not only fast, but also less invasive.

2.

The new test is apparently “faster” then the old ones. This is ambiguous because there is no source. Although they do say how fast it is, they do not give any factual indication of how reliable the test is. It is confusing whether the test is fast, accurate, both, or neither. There is no real indication.

3.

The sources are missing. This would be much stronger if there was a name for the test and if there were stats from the two states. One needs to know more about this drug test before any conclusions can be drawn. The author leaves out too many important details about the test, such as the name, maker, how exactly it works, the probability for a false positive, and so on.

4.

The opposition could take two approaches: • The opposition could write about how drug tests are too invasive and infringe on the right to privacy, regardless of how they are administered. Employers have to trust employees, and if one’s work is not up to par, then questions can be asked, or the employee can be fired. There is no need for a test if the work is steady and of good quality.

• The opposition could write that this new test is not proven and leaves too much room for error. Until it has been lab-tested and approved, employers should stick to the old methods. Speed should not be an issue; reliability is the key.

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Chapter 20 Labor Management Policies Introduction Chapter Twenty addresses these questions: • • • • •

What is the structure of the primary U.S. Labor Legislation and the mechanisms that enforce it?

How does labor law regulate union organizing activities?

How does labor law regulate collective bargaining?

What legal rules restrict the use of strikes, picketing, and boycotts?

What are the global dimensions of labor–management relations?

Chapter Twenty is significant because it explains major pieces of legislation that affect the employer-employee relationship. Managers need to be aware of these legal rules because they must be loyal to the employer, and they also benefit from some of these legislations.

Achieving Teaching Excellence Are Our Students Consumers?

In NLRB v. Yeshiva University, 444 U.S. 672 (1980) the Supreme Court considered whether faculty members are managerial employees, and hence not protected by the NLRA. In reaching its decision that faculty members are managerial, the court presents an analogy between what faculty members and students do on a college campus, and what a business can do in the market place. The Court says, “The controlling consideration in this case is that the faculty of Yeshiva University exercise authority which in any other context unquestionably would be managerial.

[Then the Court gives examples—faculty decide what courses will be offered, grading policies, which students will graduate, etc.] When one considers the function of a university, it is difficult to imagine decisions more managerial than these. To the extent the industrial analogy applies, the faculty determines within each school the product to be produced, the terms upon which it will be offered, and the customers who will be served.”

The idea that the students are customers and the instructors are managers of a product they create seems to be expressed frequently these days on college campuses. Perhaps this metaphor is raised in efforts to make the campuses “total quality” organizations. While reviewing the Yeshiva case, many instructors start thinking about whether the “students as consumers” metaphor is a good one. Understanding whether the students are or are not consumers can help instructors achieve Teaching Excellence. Understanding one’s goals as professors helps Copyright ©2015 Pearson Education Ltd.

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instructors figure out how best to do their jobs.

In “Students as Consumers-A Tainted Metaphor,” Professors M. Neil Browne and John H. Hoag explain the significance of metaphors. They explain that metaphors “guide professors as they select their teaching behaviors.” The consumer metaphor of education suggests that faculty should be “responsive to the expressed preferences of their students in a manner similar to that used by any successful commercial enterprise.” Browne and Hoag suggest the student as consumer metaphor is tainted. Learners have different short and long run desires. They might want to learn as much as possible in the long run, but in the short run they might decide to select faculty members the students themselves claim create ineffective learning environments.

Browne and Hoag explain that the customer metaphor does make some sense. Students want instructors to demonstrate certain behavior—enthusiasm, punctuality, and clarity. Students value these traits. However, Browne and Hoag explain that when students choose and evaluate instructors, other factors may be more important. Browne and Hoag conducted a study to determine the link between student selection of instructors and student opinion concerning expected learning in instructor's classrooms. The study concluded that students were most likely to choose instructors who, in the student’s eyes, created the least productive learning environments. The consumer metaphor does not recognize the influence of students’ short run decision-making processes.

Browne and Hoag conclude that a review of the consumer metaphor reminds them that “(1) students may not always have their own long-run interests in mind when they choose or evaluate an instructor and (2) students, like most of us, commonly make decisions based more on immediate than long-run considerations.” They suggest that an instructor’s focus should not be so much on pleasing their customers, but instead on meeting the long-run needs of their students.

This textbook will help instructors meet the long-run needs of their students, but it might not make all customers happy. Engaging in critical thinking is difficult and requires energy.

Instructors should be prepared to explain why customer satisfaction is not their guiding force in an educational setting.

References •

M. Neil Browne & John H. Hoag, "Students as Consumers - A Tainted Metaphor," COLLEGE STUDENT JOURNAL 274 (September, 1990).

Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview

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The first section of this chapter outlines the structure and enforcement of the NLRA and the Landrum–Griffin Act. The next three sections discuss areas of labor–management relations governed by the NLRA—organizing, collective bargaining, and the collective activities of striking, picketing, and boycotting. This chapter concludes with a consideration of the international dimensions of labor law.

One of the primary strengths of this chapter is that it presents a contemporary view of labor law. Many textbooks present labor law in a way that makes students ask why labor law is relevant to them because most of the legal environment students will not work in unionized places of employment. This text does an excellent job of making the material relevant, even to students who will not work in heavily unionized industries. Most of the material in the chapter is easy for students to understand after instructors work with them on the material. Students will find some of the ideas the chapter presents difficult to grasp, so this chapter of the Instructor’s Manual presents discussion questions that focus on some of the more difficult concepts the chapter presents.

Topic Outline I. Structure of the Primary U.S. Labor Legislation and the Mechanisms for its Enforcement A. The Wagner Act of 1935 B. The Taft–Hartley Act of 1947 C. The Landrum–Griffith Act of 1959 D. The National Labor Relations Board Structure Jurisdiction Procedures in Representation Cases Procedures in Unfair Labor Practice Cases II. Labor Organizing A. Board Rules B. Unfair Labor Practices by Employers Interference with Organizing Progressive Electric, Inc. v. National Labor Relations Board Domination or Support of Labor Organizing Discrimination Based on Union Activity Gaetano & Associates, Inc. v. National Labor Relations Board C. Unfair Labor Practices by Employees D. Organizing the Appropriate Unit Specialty Healthcare and Rehabilitation Center of Mobile and United Steelworkers, District 9, Petitioner III. The Collective Bargaining Process A. Subjects of Bargaining Copyright ©2015 Pearson Education Ltd.

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IV. Strikes, Boycotts, and Picketing A. Strikes Lawful Strikes Unlawful Strikes B. Boycotts C. Picketing V. Global Dimensions of Labor–Management Relations VI. Summary Discussion Questions for Chapter Twenty 1.

Explain relationships between the Wagner Act and the Taft-Hartley Act. The Wagner Act and Taft-Hartley Act together are referred to as the National Labor Relations Act, or NLRA. The Wagner Act was passed first and gave employees the right to form labor unions. The Taft-Hartley Act was passed later to curtail perceived excesses of power that unions had been able to acquire under the Wagner Act.

2.

What impact does the President have on the decisions of the National Labor Relations Board (NLRB)?

The President appoints the five members of the NLRB with the advice and consent of the Senate. Members serve staggered five-year terms. Also, the President appoints the general counsel of the NLRB. The President chooses people who agree with him about labor law.

Over time, the President can ensure that everyone on the NLRB will share his political views about labor law issues.

3.

Evaluate this statement: The National Labor Relations Act (NLRA) protects all American workers.

This statement is flawed because the NLRA does not protect some categories of workers, including federal, state and local government employees, employees in the transportation industry, those workers covered under the Railway Labor Act, independent contractors, agricultural workers, household domestics, and persons employed by a spouse or parent. The NLRA also excludes supervisors and managers from protection. Finally, the NLRB places additional limits on who it will protect because it has limited resources. The NLRB decides based upon whether a firm does a significant amount of business.

4.

Explain why someone might think this statement is true: The National Labor Relations Act (NLRA) attempts to balance employer and employee rights in organizing campaigns.

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This statement is true because NLRA decisions and rules show they consider the rights of workers to unionize, and the rights of employers to run an orderly business. For instance, employers are allowed to give certain kinds of speeches and force their employees to attend.

However, they are not allowed to make speeches to captive audiences within twenty-four hours of an election. Have students give additional examples of how the NLRA attempts to balance employer and employee rights in organizing campaigns.

5.

Evaluate this statement: Nonemployee union organizers enjoy extensive rights.

The statement is inadequate because nonemployee union organizers enjoy few rights. They have fewer rights than employees. For instance, they may be prohibited from entering the employer’s property, including parking lots.

6.

Explain why someone might think this statement is true: The National Labor Relations Act (NLRA) assumes an adversarial relationship between employers and employees.

Have students look at the list of employer unfair labor practices, and the list of employee unfair labor practices. The book reviews these rules in tables 20-2 and 20-3. The NLRA assumes employees are driven to maximize their pay and rights, and that employers are driven to keep employees from getting more money and benefits. The law also assumes that rules are needed to keep the behavior of both sides in line.

7.

Explain why someone might think this statement is true: Courts are trying hard to support some kinds of cooperative programs in companies today.

The National Labor Relations Board and a few appellate courts have created exceptions to the general rule that participatory committees constitute labor organizations. One exception is when all workers in a bargaining unit or plant participate in the program. Another exception is when employees carry out a traditional management function. When considering whether a committee is structurally independent from management, some courts are willing to ask whether the employer had good motives when establishing the plan. Also, the court might be willing to ask whether employees are satisfied with the plan.

8.

Evaluate this statement: It really does not matter to unions which employee groups are in the bargaining unit.

The statement is flawed because unions want the bargaining unit to consist of employees with similar concerns and interests. They want to avoid having a bargaining unit that does not present a united force to management.

9.

Explain why someone might think this statement is true: The duty to bargain in good faith Copyright ©2015 Pearson Education Ltd.

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requires little of employers.

This statement is true because the duty to bargain in good faith does not require employers and employees to reach an agreement. Instead, it means the parties must meet at reasonable times and confer in good faith, sign a written agreement if one is reached, meet certain requirements about terminating existing contracts, give notice if there are pending disputes, and neither strike nor engage in a lockout during the sixty-day notice period.

10. Explain relationships between mandatory and permissive subjects of bargaining.

One relationship is that mandatory subjects require parties to bargain about them, while permissive subjects do not. An example of a mandatory subject is wages. Failure to bargain over wages would constitute an unfair labor practice. An example of a permissive subject would be a managerial decision, such as whether the company should build a new building.

This kind of decision need not be bargained over.

11. Explain relationships between strikes and boycotts.

A strike is a temporary, concerted withdrawal of labor. A boycott is a refusal to deal with, purchase goods from, or work for an employer. Both are means used to prohibit an employer from carrying out his or her business so he or she will accede to union demands.

12. Explain relationships between economic strikes and unfair labor practice strikes.

An economic strike is a nonviolent work stoppage for the purpose of obtaining better terms and conditions of employment under a collective bargaining agreement. An unfair labor practice strike is a nonviolent work stoppage in protest against an employer’s commission of an unfair labor practice. One relationship between the two is that the unfair labor practice striker is in a better position at the end of the strike compared to the economic strike. The unfair labor practice strikers are entitled to return to their jobs at the end of the strike, while economic strikers have to wait to be rehired until the permanent replacements leave and create vacancies. This makes the economic strike less potent than the unfair labor practice strike.

13. Explain relationships between primary and secondary boycotts.

Primary boycotts are legal, and secondary ones are not. Primary boycotts occur when a union boycotts an employer with whom it has a dispute. Secondary boycotts occur when unionized employees who have a labor dispute with their employer boycott another employer to force it to cease doing business with their employer.

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14. Explain relationships between informational and jurisdictional picketing.

Informational picketing is designed to truthfully inform the public of a labor dispute between the employer and employee. Jurisdictional picketing, like jurisdictional strikes, occurs when two unions are in dispute over which union’s workers are entitled to do a particular job.

Informational picketing is legally protected. Jurisdictional picketing may or may not be protected, depending on the specific facts of the case. Have students give examples of protected and unprotected strikes.

Answers to Critical Thinking about the Law Questions, Case Summaries, Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law Questions 1.

Unions protect employees from mistreatment by employers. They provide security. They keep employees safe from employer interference with rights. See whether students can explain how unions strive for justice also.

2.

When thinking about labor legislation, paying attention to personal ethical norms benefits employers more than employees. Unions count on employees acting collectively; establishing collective norms. If people pay attention to personal ethical norms, the cohesiveness of union work will be diminished, thereby benefiting employers.

3.

Union activity costs employees. They must pay dues. Also, unions decrease inequality of wage distribution within a firm. If an employee is relatively well paid, union activity might not help him or her get a raise.

Case Summary—Progressive Electric, Inc. v. National Labor Relations Board This case deals with strikes in a non-union workplace. Progressive is a non-union electrical contractor that hired two men involved in unions—Cousins, who did not disclose that he was a union worker, and Randall, who had a discussion about it with the president, Neeman. Both were hired. During the job, a foreman made comments that the president did not want unionized workers because the company would lose business. Randall walked off the job site and called for a strike. At a meeting, Neeman informed Randall that he voluntarily quit when he walked off site, not strike. Neeman called an employee meeting and was very anti-union. A suit was filed with the NLRB and they won. Progressive appealed. The appeal went in favor of the NLRB because Randall’s firing coupled with the speech could be construed to coerce employees and cause them to believe that if they joined a union they would lose their jobs.

Suggested Answers to Critical Thinking about the Law Questions Copyright ©2015 Pearson Education Ltd.

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1.

Because it seemed as though the meeting was called in response to Randall’s call for a strike and his termination, employees were made to believe that Randall’s attempts for unionization was the reason he was not at work. The comments would have been more ambiguous had the incident taken place well before the meeting.

2.

They were not protected, as opinion because Hildreth told the employees that Neeman did not want any unions at Progressive. Therefore, he was leading the employees to believe that their jobs could be in danger if they belonged to a union.

Case Summary—Gaetano & Associates, Inc. v. National Labor Relations Board This case deals with firing union workers. Gaetano & Associates Inc. (the Company) worked in NYC developing properties. They hired some carpenters to work on a property. The Carpenters Union came in and started organizing these workers. On April 16, 2003, the Company was notified by the union that many of the workers were represented and they requested an election to be held. The hearing was set for April 25. On April 16, many of the carpenters were laid off and replaced. Much of the work could have been easily done by the fired carpenters. The union brought suit against the Company and won. The decision was appealed and upheld because the company exhibited anti-union sentiments and fired the workers just because they were members of a union.

Case Summary—Specialty Healthcare and Rehabilitation Center of Mobile and United Steelworkers, District 9, Petitioner This case deals with creating an appropriate unit for collective bargaining. The plaintiff in this case represented a unit of 53 CNAs, who had to be certified by the State of Alabama. This certification course included several components that an individual would have to complete in order to receive it. Apart from that they would have to take up specialized training on a regular basis to maintain their certification. The employer believed that the only appropriate unit consists of its approximately 86 non-supervisory, nonprofessional service and maintenance employees, along with the CNAs. CNAs’ wages started at $8.50 per hour, whereas all the other employees the employer wanted to group with them had starting wages ranging from $7 to $ 10 per hour.

The Regional Director found that a petitioned-for bargaining unit of certified nursing assistants (CNAs) was appropriate under a traditional community-of-interest analysis. The employer requested a review of the decision. The employer argued that because the CNAs in acuter care facilities included in bargaining units with all nonprofessional and maintenance employees, they should be similarly grouped in nursing homes.

Answers to Review Questions

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20-1. This question gives students the opportunity to review Table 20-1, which explains the two faces of unions. This table could also serve as the basis for a short writing assignment.

Have students explain which face they agree with more. Then, have them pick the opposite face of unions, and write an essay in which they present the best argument possible in favor of the face of unions they do not prefer.

20-2. Section 7 of the NLRA explains employees’ rights under the NLRA. Section 8(a) of the Act identifies specific employer behaviors, called unfair labor practices that are prohibited. It also protects Section 7 rights. It prohibits specific acts of “employer unfair labor practices.” Employee unfair labor practices are set out in Section 8(b).

20-3. Section 8(a)2-5 presents specific ways in which employers might interfere with employees’ Section 7 rights. Arguably, these sections are unnecessary because employees could just charge the employer with violating the general prohibition against interfering with Section 7 rights found in Section 8(a)1. Many cases charge the employer with both 8(a)1, and a more specific subsection.

20-4. The National Labor Relation Board’s three primary functions are: • Monitoring the conduct of the employer and the union during an election to determine whether or not workers want to be protected by a union • Preventing and remedying unfair labor practices by employers or unions • Establishing rules and regulations interpreting the act The general counsel of the NLRB, appointed by the president with the advice and consent of the Senate, oversees the investigation and prosecution of unfair practice charges before the board. If a board decision is subsequently challenged in court, it is the general counsel who represents the board before the appellate court.

20-5. Violating a board rule (such as the twenty-four-hour rule) means the employer or employee has gone against a policy enacted by the National Labor Relations Board (NLRB). The NLRB has the power to take appropriate corrective action. Unfair labor practices are outlined by the statute itself, not the NLRB, although the NLRB interprets the statute. All unfair labor practices are also considered violations of the board’s election rules. The procedures for resolving unfair labor practices are extensive. In organizing campaigns, a violation of board rules may result in the Board’s setting aside the results of the election and ordering a new election. If an unfair labor practice is committed, the Board may ignore the election and require the employer to bargain with the union without a new election.

20-6. The ILO formulates conventions and recommendations for labor legislation that can be adopted by all countries. These include minimum specifications and often provisions for Copyright ©2015 Pearson Education Ltd.

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national or traditional variations on those basics.

Answers to Review Problems 20-7. This case is similar to the Lechmere, Inc. v. National Labor Relations Board case, in which a nonemployee union was not allowed to have access to the employees in the employer’s parking lot. Now, in this case, the union was probably not allowed to distribute the handbills on the company lot. The burden would be on the union to show they could not communicate in any other way. However, they could have put a sign up on the highway, or contacted the employees by mail.

20-8. No, United Technology’s (UT) decision to refuse to bargain over the relocation of work was not a violation of the National Labor Relations Act. That decision was a managerial one, and not a mandatory subject. However, UT would be required to bargain about the consequences of its managerial decision. For instance, UT would have to bargain about which and how employees would be given the opportunity to transfer, and what their severance pay would be if they lost their jobs.

20-9. If there is no dispute between employer and employee, picketing seems unfair. All the definitions of different kinds of picketing assume a dispute between the employer and employee. Raley maintained a neutral position, so it seems unfair to allow the Retail Clerks to make it appear there is a dispute. Therefore, Raley’s could obtain an injunction that would prohibit picketing.

20-10. It is not known why the employees are calling in sick. Perhaps they are protesting an employer’s unfair labor practice. Here, however, it appears that the employees are engaging in an unlawful strike, which means the employer can discharge them.

20-11. In this case the picketing would be illegal. This is because is illegal when another union has already been recognized as the exclusive representative of the employees, and the employer and employees are operating under a valid collective bargaining agreement negotiated by that union, a need for a new union does not arise.

Answers to Case Problems 20-12. The NLRB found in favor of the plaintiffs. They stated that Costco could not enforce such broad rules regarding social media. Additionally, even though the employees damaged the employer’s reputation positing the personal statements online regarding their employer was not a punishable offense.

20-13. The court ruled that the newspaper did not have grounds for reconsideration. The union Copyright ©2015 Pearson Education Ltd.

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was allowed to stop work while negotiations were underway. Moreover, further strikes cannot be prevented as long as the terms and conditions of the agreement that the two parties have arrived at has not been breached.

20-14. The court ruled in favor of the union and insisted that the board review its rules regarding collective bargaining. The union did not clearly waive its claim to protection from unilateral change so the board has the right to explain the rule it has adopted or adopt a different rule with a reasoned explanation to explain it.

20-15. The appellant court reversed the board’s decision and found in favor of the WSNA. Sacred Heart was unable to prove that the messages on the nurses’ pins disturbed the patients. No patients had complained about the pins and the potential for harm caused by the pin is minor. Therefore, Sacred Heart’s ban was an unfair labor practice.

20-16. The second proposal falls under collective bargaining. Here, the subjects are not primarily about conditions of employment and, therefore, need not be bargained over.

20-17. The court ruled that some of the Venetian’s actions were protected under the First Amendment even though they were intended to interfere with a lawful demonstration.

However, the Venetian’s recording stating that the protestors were trespassing on private property and their attempt to arrest a union officer were not protected by the First Amendment because the demonstration was lawful and on public property. Therefore, these actions constituted an unfair labor practice. The court ordered the National Labor Relations Board to address whether the Venetian’s summonsing of the police was protected under the First Amendment.

20-18. Tartaglia’s actions were not protected because she was only assisting herself and not others. The union only picketed because she wanted them to and she wanted to receive better benefits. Because a single striker is not protected, she was legally terminated.

Thinking Critically About Relevant Legal Issues 1.

The issue here is that strikes do not work. Not only do they hurt the worker who is striking, they also hurt those who depend on those workers. These factors lead employers to find alternatives to settling the strike and very little is accomplished. In conclusion, strikes are outdated and ineffective. Workers need to make changes from within the work place.

2.

One needs to know if strikes do work. The author gives a few examples of when they did not work but does not disclose any instances where they have. This missing information would greatly help one make a balanced conclusion.

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3.

The section about making up for lost wages is very ambiguous. One cannot be sure exactly what the author means. It seems illogical that strikers would want to make up for the salary that they lost by striking. The logical progression is that the workers strike to make the future better, not rectify the past. With that in mind, it seems the author is not making verifiable claims and is instead speculating in a way that is hard to understand.

4.

The opposition would hold that strikes do work. They force employers to treat their workers more equally and with more respect. Also, the prospect of a strike solves many problems because employers do not want to deal with a full-blown strike, so instead they come to agreements with the workers that benefit both sides. Lastly, strikes that affect more people than just the workers brings attention to the cause and also forces the employer to make an agreement faster and one that is favorable for the workers. Strikes are not meant to harm businesses. At their core, strikers do not want extreme changes, they just want to be treated fairly and be compensated accordingly for they work they do.

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Chapter 21 Discrimination at Work Introduction Chapter Twenty-One addresses these questions: • • • • • • • • •

What is the employment-at-will doctrine, and how does it help or hurt employers and employees?

How do constitutional provisions relate to employment discrimination?

How does the Civil Rights Acts of 1866 and 1871 protect some employees from employment discrimination?

How does the Equal Pay Act of 1963 protect some employees from employment discrimination?

What is the Civil Right Act of 1964, and how did the Civil Rights Act of 1991 modify the 1964 Act? How does the Age Discrimination in Employment Act of 1967 respond to one of the most important discrimination issues of the 1990’s?

How do the Rehabilitation Act of 1973 and Americans with Disabilities Act of 1991 protect handicapped workers from employment discrimination?

How do affirmative action plans protect certain workers from employment discrimination?

What are the global dimensions of employment discrimination legislation?

Achieving Teaching Excellence Using a Role-Play Activity as a Way to Tie Major Course Themes Together Near the End of the Term Peter Frederick, in his article, “Active Learning in History Classes,” presented some ideas about role-playing in class that could easily be modified for use in the legal environment of business classroom. One idea he presented was that he sometimes gives students time to research historical characters and bring them together for a panel, press conference, or debate. He brings together characters such as Benjamin Franklin, Horace Mann, or Malcolm X. The purpose of the role-play is to bring out the “intellectual convictions, controversies, and contradictions of real people.”

Before the role-play, Frederick gives a mini-lecture to establish the context and setting for the role-play activity. Then, he makes sure each student or group has a clearly defined task. For instance, he asks each to propose a position on a topic and a course of action. During the role-playing, he maintains a leadership role as the President, or moderator, or whatever leadership role is relevant given how he has designed the activity. He carefully organizes and monitors the interactions. Finally, Copyright ©2015 Pearson Education Ltd.

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after the role-playing he spends time debriefing the class. He clarifies the purpose of the exercise, and makes appropriate transitions.

Role-play activities would be a good active learning experience for the legal environment of business students. The activity would also work well near the end of the term to help students tie material from the course together before the final examination. The role-play experience could be structured in more than one way. There a few alternatives that the instructors can modify to achieve the specific goals they have outlined for their students and course.

One idea would be to have students pretend they are representatives from the various schools of jurisprudence. Instructors could choose a legal topic, and ask each actor to present his or her position on a topic, and to propose a course of action. For instance, the instructor could ask the students whether we should abolish affirmative action. Students’ responses will differ considerably.

Instructors should make sure to include feminist scholars and critical legal thinkers. To make sure all views are covered, instructors could have students pick their school of jurisprudence from slips of paper in a hat. Otherwise it might be difficult to get students to volunteer for certain schools.

Another idea would be to pick a case currently pending before the U.S. Supreme Court.

Instructors should make sure to pick a case that relates to something students have learned in class.

Then, they could divide the class into groups, with a group that represents each justice of the Court.

Instructors should then ask students to do research in order to figure out how their justice is likely to rule in the case. Then, they could organize a panel discussion in which the students argue the case pretending they are the justices.

Instructors could also do a role-play in which the class takes a wide variety of roles. Instructors should pick an issue, such as whether people should be more vigorous in the enforcement of antitrust laws. Instructors could then have the students pretend they are the head of the Department of Justice, a Wall Street Journal editor, a prominent businessperson, and a consumer rights advocate such as Ralph Nader. Instructors should make sure they define the issue clearly, and expect each person to state a position on the topic that reflects strong critical thinking skills.

Another possibility is to have the class watch a movie outside of class, such as “Norma Rae”.

This movie relates well to labor law. Instructors could organize a panel discussion with a union representative, someone from the NLRB, a businessperson who opposes unions, an employee who does not favor the union, and someone on the board of directors of the company. Instructors could then have the panel make appropriate comments about the movie, given their specific roles.

A final idea is to use a book, such as Roberts v. Texaco to set the stage for a role-play discussion. How did different players in that case view what happened to the plaintiff and Texaco?

Instructors may also think of some other books (e.g., A Civil Action) that would set the stage for a good role-play discussion.

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This kind of role-playing provides a good, energetic class activity that gives instructors and their class a boost near the end of the term. This will help instructors demonstrate their desire to achieve Teaching Excellence.

References •

Peter Frederick, “Active Learning in History Class,” 16 TEACHING HISTORY 67 (1991).

Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview Today, employers’ decision-making powers are restricted by both federal and state laws, many of which are discussed in this chapter. The right of the employer to terminate an employment relationship was originally governed almost exclusively by the employment-at-will doctrine, discussed in the first section of this chapter. The second section discusses the constitutional provisions that affect an employer’s ability to hire and fire workers.

The following six sections discuss each of the major pieces of federal legislation designed to prohibit discrimination in employment; these acts are discussed in the order of their enactment. The ninth section discusses the increasingly controversial subject of affirmative action. Global dimensions of employment discrimination are discussed in the final section.

Most business students want to learn the material in this chapter, especially if they have managerial experience. They perceive they will be easily sued for employment discrimination. Many students do not seem to be aware of the employment-at-will doctrine. They are also unaware of how difficult it is for plaintiffs to win employment discrimination cases, or that their fears of huge jury awards are exaggerated. Chapter Twenty-One does an excellent job of showing managers the rules regarding hiring, firing, and promoting employees. The case selections are strong, and the explanations in this chapter are especially good. The discussion questions that follow the topic outline help the instructors and their students work with material from throughout the chapter.

Topic Outline I. The Employment-at-Will Doctrine II. Constitutional Provisions III. The Civil Rights Act of 1866 and 1871 A. Applicability of the Acts Remedies Procedural Limitations Copyright ©2015 Pearson Education Ltd.

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IV. The Equal Pay Act of 1963 A. Equal Work Extra Duties Establishments B. Defenses C. Remedies V. The Civil Rights Act of 1964, as Amended (Title VII), and the Civil Rights Act of 1991 A. Applicability of the Act B. Proof in Employment Discrimination Cases Disparate Treatment Disparate Impact Harassment Teresa Harris v. Forklift Systems, Inc. Same-Sex Harassment Hostile Environment Extended A New Limitation on the Employer’s Liability Vance v. Ball State University C. Retaliation D. Statutory Defenses Bona Fide Occupational Qualification Merit Seniority Systems Mixed Motives Desert Palace, Inc., dba Caesar’s Palace Hotel & Casino v. Catharina Costa E. Protected Classes Race and Color National Origin Religion Sex Pregnancy Discrimination Act F. Enforcement Procedures The Charge Conciliation and Filing Suit G. Remedies H. Lilly Ledbetter Fair Pay Act of 2009 VI. The Age Discrimination in Employment Act of 1967 A. Applicability of the Statute B. Proving Age Discrimination Jones v. National American University C. Statutory Defenses Bona Fide Occupational Qualification Copyright ©2015 Pearson Education Ltd.

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Other Defenses Executive Exemption After-Acquired Evidence of Employee Misconduct D. Enforcement Procedures E. Remedies under ADEA VII. The Rehabilitation Act of 1973 VIII. The Americans with Disabilities Act of 1991 A. Covered Individuals McMillan v. City of New York B. Enforcement Procedures C. Remedies IX. Affirmative Action X. Global Dimensions of Employment Discrimination Legislation XI. Summary Discussion Questions for Chapter Twenty-One 1.

Evaluate this statement: Most business students will not be at will employees once they graduate from college or get their MBA degrees.

This statement is inadequate because most business undergraduate students and MBA students will be employees at will. Not many people have employment contracts. These students will not be protected by collective bargaining agreements because most will be managerial employees, and most will not have employment agreements. Probably, most will see in their employee handbooks that the employer will state clearly they are employees at will.

2.

Explain relationships between the employment-at-will doctrine and the public policy exception.

The most important relationship is that the public policy is the common law exception to the employment-at-will doctrine that most states have accepted. Thirty-three states have accepted some form of the public policy exception. This exception says that employers cannot fire employees when doing so would contravene some public policy. For instance, they cannot fire employees if they report the employer for engaging in illegal behavior. To fire them for that reason would contravene public policy in favor of reporting crime.

3.

Explain relationships between the Civil Rights Act of 1866 and the Equal Pay Act. One relationship between the two is that both are federal antidiscrimination laws, but they protect two different groups. The Civil Rights Act of 1866 protects people from racial discrimination, whereas the Equal Pay Act responds to gender discrimination. The Civil Rights Act of 1866 guarantees that all persons have the same right to make and enforce contracts that Copyright ©2015 Pearson Education Ltd.

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have the full and equal benefit of the law. So this act applies only when some sort of contract that discriminates racially is involved. The Equal Pay Act prevents wage discrimination based on sex within a business establishment.

4.

Explain why someone might think this statement is true: Disparate treatment is harder to prove than disparate impact.

Disparate treatment cases focus on the employer’s unlawful discriminatory motive. The disparate impact test focuses on the employer’s apparently neutral policy that has an adverse impact on a protected class. Arguably, it is harder to prove a discriminatory motive. It is difficult to show that someone wanted to discriminate. It is especially hard for plaintiffs to show that an employer’s stated reason for discriminating was a pretext for a real discriminatory motive.

5.

Evaluate this statement: The bona fide occupational qualification (BFOQ) defense helps many employers win employment discrimination cases.

This statement is flawed because courts rarely accept the BFOQ defense. This defense allows an employer to discriminate in hiring on the basis of sex, religion, or national origin when such a characteristic is necessary for the performance of the job. Race cannot be a BFOQ. The BFOQ defense is available only if it is reasonably necessary to normal operations or essence of defendant’s business. This is very difficult for employers to prove.

6.

Explain why someone might think this statement is true: The U.S. Supreme Court allows “reverse discrimination.”

In some cases, the U.S. Supreme Court has allowed some groups to suffer in order to advance the interests of groups that have suffered discrimination in the past. For instance, in Johnson v.

Santa Clara County Transportation Agency, the court allowed a woman to get promoted over an arguably better qualified man because women and minorities had been underrepresented in certain positions. No quotas were established. Instead, the Court decided race or sex could be one of several factors considered.

7.

Evaluate this statement: Quotas are permissible and common in places of employment today.

Quotas are specifically outlawed by the 1991 Civil Rights Act Amendment. They were rarely used prior to the 1991 Act. Instead, most employers have used goals and timetables to combat discrimination.

8.

Explain relationships between quid pro quo and hostile environment harassment.

Quid pro quo sexual harassment is a much older theory than hostile environment sexual Copyright ©2015 Pearson Education Ltd.

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harassment. Hostile environment harassment theory protects more women in the workplace, especially if they are harassed and suffer no tangible economic loss, such as a job loss or pay cut. Quid pro quo cases focus on supervisors who make sexual demands on someone of the opposite sex and this demand is reasonably perceived as a term or condition of employment. The hostile environment theory says that when a workplace is permeated with discriminatory intimidation, ridicule, and insult that is sufficiently severe or pervasive to alter the conditions of the victim’s employment and create an abusive working environment, that situation is actionable.

9.

Explain why someone might think this statement is true: Plaintiffs in discrimination cases do not have the chance to win verdicts as high as plaintiffs in tort cases.

This statement is true because plaintiffs win compensatory damages, including attorney fees, but even if they win punitive damages there are caps on how much they can get. These caps do not limit what plaintiffs in most states can get in tort cases. In cases of discrimination other than race, punitive damages are capped at $300,000 for employers of more than 500 employees, $100,000 for firms with 101 to 200 employees; and $50,000 for firms with 100 or fewer employees.

10. Explain relationships between the Rehabilitation Act of 1973 and the Americans with Disabilities Act of 1991.

One relationship between the two is that the Americans with Disabilities Act was an expansion of the protections offered under the Rehabilitation Act. The Rehabilitation Act of 1973 protects handicapped individuals from discrimination in employment and helps them secure rehabilitation training, access to public buildings, and all benefits of covered programs that might otherwise be denied to them because of their handicap. This Act applies only to the federal government and employers who have contracts with the federal government. The Americans with Disabilities Act extends these protections to private sector employers who do not have federal contracts.

11. Evaluate this statement: Current antidiscrimination statutes require employers to hire people who are unqualified for their jobs.

None of the antidiscrimination statutes requires employers to hire people who are unqualified for their jobs. Instead, when choosing from qualified applicants, the laws prohibit the employer from ruling people out based upon their protected traits, such as race, gender, or a handicap.

12. Evaluate this statement: Antidiscrimination statutes do not apply to U.S. citizens who work abroad for American companies.

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This statement is flawed. The Civil Rights Act of 1991 extended the protections of Title VII and the ADA to U.S. citizens working abroad for American employers. The ADEA was extended in 1984. One problem that sometimes arises is determining whether a multinational is “American” enough to be covered by the laws.

Answers to Critical Thinking about the Law Questions, Case Summaries, Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law 1.

The phrase “extra duties” is ambiguous. For instance, if "extra duties" means typing reports, it is difficult to know whether this task is extra. For instance, maybe the male secretaries have to type the extra reports, but they are excused from other duties such as cleaning the coffee pot. Extra duties could also mean extra work that required more time and effort than regular secretarial work for the extra duties to call for extra pay.

2.

Other reasons why the men might have received raises may be that the men: • Started at lower probationary pay rates and their raise gave them the standard secretarial pay • Are somehow more productive • Really do undertake extra duties • Are pals with the person making salary decisions

3.

The cases are similar in that men are paid more because they are special in some way—that they are physically stronger or that they are taking on extra duties. The cases are also similar in that the special difference between men and women might be a pretext for discrimination in both cases. The extra duties might not be extra at all. The physical strength issue might not even matter in the factory case. The cases are different in that the extra duties for the male secretaries were assigned by the employer, whereas physical strength is more likely to be out of the worker’s or the employee’s control.

Case Summary—Teresa Harris v. Forklift Systems, Inc. This case established the hostile environment theory of sexual harassment. The Plaintiff, Harris, was insulted by her boss, and he made numerous suggestive comments to her. Harris quit and filed a lawsuit. The district court ruled against her, finding that some of the comments were offensive to the reasonable woman, but were not so serious as to severely affect Harris’ psychological well-being or interfere with her work performance. Harris appealed to the U.S. Supreme Court after the appellate court affirmed the district court’s decision. The U.S. Supreme Court reversed the decision of the lower courts and ruled in favor of Harris. The Court reaffirmed the hostile environment theory of sexual harassment, which had first been articulated in the Meritor case. Additionally, the Court said Copyright ©2015 Pearson Education Ltd.

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it was not necessary for the plaintiff to prove the behavior seriously affected her psychological wellbeing or led her to suffer injury.

Suggested Answers to Critical Thinking Questions about the Law 1.

The court does not define “reasonable person”. An “objectively hostile environment” occurs when the “reasonable person” would find the work environment hostile or abusive. Get students to try to articulate what a “reasonable person” might find hostile or abusive. They will see the difficulty of defining a reasonable person standard.

2.

The key fact was whether plaintiffs had to prove the conduct “seriously affected plaintiff’s wellbeing” or led her to “suffer injury.” Title VII does not require concrete psychological harm.

Case Summary—Vance v. Ball State University This case deals with work place harassment. Maetta Vance made a claim that Saundra Davis harassed her at work through physical threats and racial harassment. Vance sued Bell State University, her employer, arguing that her supervisor was Davis. However, the District Court and Court of Appeals for the Seventh Circuit determined that Davis was not Vance’s supervisor and granted summary judgment to Ball State. Vance appealed to the U.S. Supreme Court. The Court affirmed in favor of Defendant Ball State University.

Case Summary—Desert Palace, Inc., dba Caesar’s Palace Hotel & Casino v. Catharina Costa This case deals with sexual harassment and discrimination, as well as defenses for termination.

Costa worked for Caesar’s Palace as the only woman in the warehouse. She was involved in many altercations. Finally, she was let go. Costa filed suit, alleging discrimination and harassment. She claimed that she was stalked by a supervisor, received harsher treatment, was subjected to many slurs, and had her record stacked. During trial, the court instructed the jury regarding mixed motive termination. The company appealed to the Supreme Court. The Court held in favor of Costa because the District Court did not err in the jury instructions, and Costa proved that she worked in a hostile environment.

Case Summary—Jones v. National American University This case is in the book to show how age discrimination occurs in the workplace. Kathy Jones filed an age discrimination suit against National American University after not receiving a promotion. NAU did not argue that the initial reason Jones was not hired was age but NAU asserted that it was not guilty of age discrimination because it provided a legitimate reason for not hiring Jones—that she lacked management experience. However, the appellant court found that Jones provided sufficient evidence to show that NAU’s proffered reason for not promoting Jones was a Copyright ©2015 Pearson Education Ltd.

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pretext for age discrimination. Jones was also able to refute the evidence NAU provided about other proffered reasons they had to not promote Jones. These findings led the appellant court to agree with the trial court in finding NAU guilty of age discrimination.

Suggested Answers to Critical Thinking Questions about the Law 1.

The defendant cited Scroggins v. University of Minnesota and McBary v. Schreiber Foods, Inc. because, in both of these cases, the defendant won. The defendants won because the employee plaintiffs were unable to disprove the other proffered reasons the defendants offered for why they did not hire the plaintiffs. Although age discrimination may have played a part in the defendants’ decisions about whether to hire the plaintiffs, the plaintiffs could not disprove other possible reasons for not being hired.

2.

According to Judge Murphy, in the Scroggins and McBary cases, the plaintiffs were unable to disprove the other possible reasons the defendants provided for not hiring the plaintiffs. In this case, however, Jones was able to disprove NAU’s other proffered reasons for not promoting her.

Therefore, the cases are not analogous.

Case Summary—McMillan v. City of New York This case deals with the Americans with Disabilities Act of 1991 (ADA). Rodney McMillan was an employee HRA Community Alternative Systems Agency (CASA). He was undergoing treatment for schizophrenia with regular medication. His employer had a “flex-time policy” where employees could arrive by 10:15 am. However, the tardiness of an employee would have to be approved by their supervisor. McMillan was often late to work and his supervisor, Loshun Thornton allowed this for an extended period. Later, McMillan was fined for his late arrival and in 2010 the City brought charges against him for “misconduct and incompetence.” Consequently, McMillan requested for flexible timings to accommodate his disability, which was sent to Donald Lemons, the Deputy Director of HRA’s Equal Employment. His request was denied as there was no one to supervise McMillan after 6 pm to accommodate his late arrival. He filed a suit against the City of New York for violating the ADA. The district court granted summary judgment and dismissed the claims made by McMillan and he appealed. This judgment was vacated and remanded.

Suggested Answers to Critical Thinking Questions about the Law 1.

Once this case is returned to the district court stated that a reasonable juror would not find McMillan’s claims to be without merit. The court also stated that if all or some of the claims made by him might not survive summary judgment as the accommodations demanded would pose hardship to the City and it was unreasonable.

2.

Yes, it would be relevant to examine the plaintiff’s disciplinary record as it would help Copyright ©2015 Pearson Education Ltd.

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determine whether he could work without supervision. Therefore, it would definitely affect the reasonableness of this accommodation as well. In this case, the plaintiff had a habit of being late to work but it did not have an effect his work performance. Additionally, the plaintiff was ready to make an accommodation by working through his lunch time. For this reason the City should be ready to make an accommodation for the plaintiff.

Answers to Review Questions 21-1. The three exceptions are implied contract, violations of public policy, and implied covenant of good faith and fair dealing. The public policy exception makes it unlawful to dismiss an employee for taking certain actions in the public interest. The implied covenant of good faith and fair dealing holds that every employment contract, even an unwritten one, contains an implicit understanding that the parties will deal fairly with one another. An implied contract may arise from statements made by the employer in advertising the position or in an employment manual.

21-2. a. b. c.

21-3. a. b. c.

21-4. a.

b.

These jobs would be substantially similar in terms of skill, effort, responsibility, and working conditions, so they are “equal” under the Equal Pay Act. This one is tougher. The jobs are not equal because those who check narcotics have more significant responsibilities than those who check nonnarcotic drugs.

This one depends on whether the two jobs require the same levels of skill and effort.

Some students may think that both jobs would be substantially similar.

The Equal Pay Act strives to prevent wage discrimination based on sex within a business establishment.

Remedies include back pay, attorney fees, and sometimes additional amounts if the employer did not act in good faith.

Employers may assert defenses. The first is that the pay differential is based on one of the four statutory exceptions found in the Bennett Amendment to the Equal Pay Act. These are a bona fide seniority system, a bona fide merit system, a pay system based on the quality or quantity of output, and factors other than sex.

Title VII prohibits employers from hiring, firing, or otherwise discriminating in terms and conditions of employment, and segregating employees in a manner that would affect their employment opportunities on the basis of their race, color, religion, sex, or national origin.

Remedies in Title VII cases vary. Employers might be required to establish special training programs for minorities. Also, plaintiffs might be back paid for up to two years from the time of the discriminatory act, and remedial seniority when Copyright ©2015 Pearson Education Ltd.

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c.

appropriate, compensatory damages, and attorney fees.

The most important defenses for the employer are the BFOQ defense, merit, and seniority.

21-5. One major change of the 1991 Civil Rights Act was that it allowed plaintiffs to recover both compensatory and punitive damages. Also, it should be noted that the punitive damages are capped in cases other than race cases. For instance, punitive damages are capped at $300,000 for employers of more than 500 employees, $100,000 for firms with 101 to 200 employees, and $50,000 for firms with 100 or fewer employees.

21-6. Reasonable accommodation includes accommodations such as changing work schedules, restructuring jobs, or giving an employee time off for treatment. The law does not require the employer to experience undue hardship.

Answers to Review Problems 21-7. Yes, the Civil Rights Act was violated. The policy is discriminatory on its face. Not all women outlive all men, so it is unfair to make all women pay extra.

21-8. No. It is legally valid to pay extra amounts of money based upon swinging shifts because this makes Bryon’s working conditions less desirable.

21-9.

Sexism or gender discrimination is prejudice or discrimination based on a person's sex or gender. Sex discrimination also can involve treating someone less favorably because of his or her connection with an organization or group that is generally associated with people of a certain sex. The law forbids discrimination when it comes to any aspect of employment, including hiring, firing, pay, job assignments, promotions, layoff, training, fringe benefits, and any other term or condition of employment.

21-10. The problem is that the supervisor’s behavior was not sexual (even though people believed it was). Ellen should still argue the environment is hostile. She can show the environment has been altered. She can also show that if she were a man, people would not be jumping to the conclusion she is having an affair just because she talks to the guy behind closed doors. In addition to raising a Title VII claim (which will be hard for her to win), she could sue for defamation because he is hurting her reputation. She could also sue for intentional infliction of emotional distress, which will also be difficult to prove because she has probably not suffered enough emotional damage.

21-11. No. The ADEA applies to a U.S. citizen who is working in a multinational company’s Zaire facility. As long as the company is “American”, the U.S. citizen can sue under the ADEA. However, one would need more facts to determine whether the company is “American” enough.

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21-12. The Rehabilitation Act applies only to the federal government and employers who have contracts with the federal government. Here, the two city employees, Davis and Sims, have no recourse. Because the CETA program is federally funded, D’Elea has recourse under the Rehabilitation Act. Answers to Case Problems 21-13. The Court found in favor of the plaintiff. The suggestions Demirelli made were found to be reasonable because they did not violate any law or company policy. There was no overbearing burden to supply him with a parking space and extending his lunch by 15 minutes did not violate the punctuality requirement.

21-14. The statute requires that McGullam file her complaint within 300 days of the alleged discriminatory act. In this case, the only alleged act of sexual discrimination that happened to McGullam within the last 300 days was the incident with her co-worker talking about “chickies” and “sleepovers” after McGullam was moved to the estimation department. The court decided that the “chickies” comments were too trivial to be considered sexual harassment because they were not lewd or sexually suggestive. With regards to the “sleepover” comments, McGullam must prove that these comments were significantly related to the sexual harassment she used to face in the productions department. The court found that the “sleepover” comments were insufficiently related to the production department conduct because McGullam was transferred from the production department. McGullam testified that she had no problem with her co-workers in the estimating department, and the “sleepover” comments were not lewd or directed toward her. Based on this evidence, the decision in favor of Cedar Graphics, Inc. was upheld by the appellant court.

21-15. The appellant court upheld the trial court’s ruling in favor of Hogan and Springstun.

However, the court reversed the amount of compensatory damages awarded to Hogan and Springstun because they were excessive.

21-16. The essential functions of Richardson’s position as an assistant manager were to assist in the kitchen, dining, and take-out operations. Performing many tasks that would be considered essential included using manual labor. Due to this, the appellant court agreed with the trial court by ruling that Richardson was no longer qualified to work as an assistant manager at Friendly’s.

21-17. Yes, this case constitutes discrimination. The plaintiff was able to provide a number of instances where her coworkers referred to her in a discriminatory manner. Title VII was violated as Bashir was terminated due to her religious convictions and she had been working in a hostile environment as well.

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21-18. A.D.P. is covered by the Americans with Disabilities Act as she was an alcoholic. It would be understandable if there were random breathalyzer tests but the A.D.P. was constantly subject to this even though there wasn’t any problem with her work performance. For this reason the appellate court found in her favor.

Thinking Critically About Relevant Legal Issues 1.

The issue here is that homosexuality must be treated like any other characteristic that is controlled by the person. In other words, it is like hair color. The author also argues that it would come into conflict with another protected class: religion. She concludes that homosexuality should not be a protected class.

2.

The reasoning is that at-will employees can be let go for any reason. Homosexuality is not an immutable characteristic and therefore falls into the category of characteristics that can lead to termination. Also, if there are other unchosen characteristics that are not under one’s control, such as voice. Lastly, it comes into conflict with religion, not a specific religion, just “religion.”

3.

The analogies are inappropriate and frankly unintelligent. First of all, being gay is not a choice and therefore is not like firing someone for having purple hair. Secondly, the comment about voice is out of line because voice can be linked to race and gender, for example, a “Latino voice.” There would be a claim if that were a reason for termination.

4.

The opposition would correctly argue that sexual orientation should be a protected class. It is an immutable characteristic, just like race and gender. It is even above religion because religion is a choice. It is on a much higher level then voice or height because by firing someone because they are gay, that is saying that gays cannot do the work, just as it would be if someone firing someone based on race. Because being gay does not have anything to do with job performance and because it is a class of people who have been discriminated against in a way that, for example, tall people have not, it should be protected.

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Chapter 22 Environmental Law Introduction Chapter Twenty-Two addresses these questions: • • • • • • • •

What are the alternative approaches to environmental protection?

What are the Environmental Protection Agency’s responsibilities?

What is the National Environmental Policy Act of 1970 about?

What are the measures taken toward regulating water quality?

What are the measures taken toward regulating air quality?

What are the regulations related to regulating hazardous waste and toxic substances?

What is the Pollution Prevention Control Act of 1990?

What are the global dimensions of environmental regulation?

Chapter Twenty-Two is significant because the United States has a long history of not doing enough to protect its physical environment. Today’s students seem especially concerned about the environment. This chapter gives them the basic information they need to understand the strengths and weaknesses in the United States’ regulatory efforts to date.

Achieving Teaching Excellence Silent Participation Instructors shouldn’t overlook the possibilities for creating class discussions in silent ways.

Some students have much to contribute, but their personalities make it difficult for them to speak out in class. This section offers three ways to encourage meaningful silent participation.

First, if instructors have not already started using the computer to keep in-class conversations going after class, then they should consider it. Most colleges and universities offer the possibility for ongoing discussions. For example, Loyola College makes Blackboard available to faculty. Blackboard is a software platform from Blackboard, Inc. that includes a number of features, including a discussion board that allows the professor or students to create forums that allow for continued discussion.

Second, instructors may create a silent participation opportunity by asking their students to respond to a question in class, on paper. For instance, an instructor can sometimes present a Copyright ©2015 Pearson Education Ltd.

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newspaper article that relates to course material and ask the students to write a ten-minute response, showing what they learned from the reading for that day. Then, they can collect the responses, reply in writing, and return the response to each student in the next class session.

A final way to encourage silent participation is to engage in a process called “passing notes.”

This teaching technique is used by Dr. Peggy McIntosh at a teaching institute that encouraged professors to create more inclusive classrooms. Instructors could ask students to take a piece of paper and write a question at the top of the page that relates to course material. Instructors can present a short legal case and ask the students to read it prior to writing a question. Then, they could ask the students to write a question about the case. Students are then asked to pass the question to the person sitting next to them. The students are given writing time of five minutes.

Then, the instructors can ask the students to pass their paper once again. The student who receives this paper now has a question and one student’s response. The student then responds to the analysis on the page, pointing out the strengths and weaknesses of the analysis. The instructor allows the students to pass the paper three times, thereby allowing a few students to respond to the initial question and to evaluate other students’ analysis. Students pass the notes back, reading other students’ responses to the initial question and other students’ comments. Then, the instructors allow the students to raise questions about the case out loud. Students are likely to point out areas of confusion. They often point out disagreements with how to respond to the initial question. Also, sometimes, students offer comments about which questions were most helpful in analyzing a particular case.

Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview During the late 1960s, environmental problems became a major national concern, which led to the enactment of legislation to protect the environment and clean up existing problems. This chapter first examines alternatives to the regulatory approach for solving pollution problems and examines the primary agency responsible for enforcing environmental laws, the Environmental Protection Agency. Next it discusses the primary direct regulations designed to protect the environment, followed by an overview of the Pollution Prevention Act of 1990. The global dimensions of environmental protection are discussed last.

This chapter is difficult because it presents much detailed information about various federal laws that regulate environmental hazards. In spite of its difficulty, students will be interested in studying the material in this chapter. The chapter does an excellent job of presenting scientific information in an interesting, understandable way. The chapter also presents key facts about issues that relate to environmental law. The discussion questions that follow the topic outline ask students to integrate material in the chapter. It is important for students to understand relationships among various laws the chapter describes.

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Topic Outline I. Alternative Approaches to Environmental Protection A. Tort Law Boomer et al. v. Atlantic Cement Co. Negligence, an Alternative Tort Solution B. Government Subsidies Approach C. Emission Charges Approach D. Marketable Discharge Permits Approach E. Direct Regulation Approach II. The Environmental Protection Agency III. The National Environmental Policy Act of 1970 A. Threshold Considerations B. Content of the EIS Brodsky v. United States Nuclear Regulatory Commission C. Effectiveness of the EIS Process IV. Regulating Water Quality A. The Federal Water Pollution Control Act Point-Source Effluent Limitations B. The Safe Drinking Water Act V. Regulating Air Quality Massachusetts v. Environmental Protection Agency A. The National Ambient Air Quality Standards B. New Source Review C. The Acid Rain Control Program D. Climate Change VI. Regulating Hazardous Waste and Toxic Substances A. The Resource Conservation and Recovery Act of 1976 The Manifest Program RCRA Amendments of 1984 and 1986 Enforcement of RCRA B. The Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendment and Reauthorization Act of 1986 C. The Toxic Substances Control Act of 1979 D. The Federal Insecticide, Fungicide, and Rodenticide Act of 1972 Pesticide Tolerances in Food VII. The Pollution Prevention Control Act of 1990 A. Business Aspects of Voluntary Pollution Prevention B. Sustainable Development VIII. Global Dimensions of Environmental Regulation Copyright ©2015 Pearson Education Ltd.

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A. The Need for International Cooperation B. The Transnational Nature of Pollution C. The Global Commons D. Primary Responses of the United States Research Conferences Treaties Aid IX. Summary Discussion Questions for Chapter Twenty-Two 1.

Explain relationships between tort law and the National Environmental Policy Act (NEPA).

Both tort law and the NEPA respond to environmental issues, but in very different ways.

Tort law responds after some sort of harm has already occurred. The aim of tort law is usually to compensate a private individual for the consequences they suffered due to an environmental problem. Two kinds of tort law that respond to environmental issues are the torts of nuisance and negligence. The NEPA is the umbrella legislation for federal environmental laws. Federal laws, unlike tort law, are applied the same way throughout the United States. Also, federal law tries to prevent and remedy pollution, not just compensate people who have been injured by environmental hazards.

2.

Explain relationships between negligence and nuisance.

Both are torts that people can use in environmental cases to seek compensation for damage or injuries caused by the environment. A nuisance is an unreasonable interference with someone else’s use and enjoyment of his or her land. Courts usually respond in nuisance cases by granting damages to the person who cannot enjoy his or her land. Negligence is also used in cases where a defendant’s polluting harmed a plaintiff. Like nuisance law, negligence law responds inadequately to environmental matters. One problem is that it is hard to prove cause because the harm caused by environmental hazards is not always immediate.

3.

Explain relationships between the government subsidies approach and the emission charges approach.

Both the government subsidies approach and the emission charges approach are alternative ways of trying to reduce or eliminate pollution. Under the government subsidies approach, the government pays polluters to reduce their emissions. Examples of subsidies are tax breaks, low-interest loans, and grants for the purchase and installation of pollution control Copyright ©2015 Pearson Education Ltd.

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devices. Taxpayers bear the expense, rather than polluters. Emission charges are applied to polluters, who pay a flat fee on every unit of pollution discharged. This alternative does not require taxpayers to bear the cost of pollution. This approach is difficult to apply because it is hard to monitor every discharge of a pollutant. Also it is hard to know how much to assess the polluter for each unit of pollution. Finally, this approach seems to allow the polluter to continue polluting, as long as they can pay for the pollution. At least the subsidies approach tries to stop some of the pollution.

4.

Explain relationships between the discharge permits approach and the direct regulation approach.

Discharge permits provide an approach similar to emission charges. The government sells permits for the discharge of various pollutants. These pollutants can be discharged only if the polluter has the appropriate permit. Polluters are encouraged to reduce their emissions because this reduction would enable them to sell their permits. The direct regulation approach is very different. It protects the environment better by trying to prevent pollution, and clean up existing pollution. Direct regulation is imposed by the Environmental Protection Agency.

5.

Evaluate this statement: People ignore white collar crime in the area of environmental crime.

This statement is incorrect because the Environmental Protection Agency (EPA) seems to be increasing their enforcement in the environmental area, and is now using criminal sanction, including incarceration, to enforce environmental laws. The EPA refers certain cases to the Justice Department, which prosecutes environmental crimes. This shows that people do not ignore white collar crime in the area of environmental law.

6.

Explain relationships between Federal Water Pollution Control Act (FWPCA) and Safe Drinking Water Act (SDWA).

Both FWPCA and SDWA fall under the National Environmental Policy Act (NEPA), the umbrella legislation for environmental laws. Also, both are ways to regulate water quality.

The FWPCA, also known as the Clean Air Act, concentrates on the quality of water in the waterways. The SDWA ensures that the water that is consumed is not harmful to one’s health.

7.

Evaluate this statement: The Federal Water Pollution Control Act (FWPCA) ensures that the water available in the public water supply system is safe to drink.

This statement is inadequate. It is the Safe Drinking Water Act, or the SDWA that ensures that the water available in the public water supply system is safe to drink. This law sets Copyright ©2015 Pearson Education Ltd.

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standards for drinking water supplied by public water systems that have at least 15 service connections or serve 25 or more persons. The law establishes maximum contaminant level goals and maximum contaminant levels for all contaminants that have the potential to have an adverse effect on human health.

8.

Explain the special difficulties in trying to regulate air pollution.

Air pollution is hard to control because it floats away and is hard to measure. When people discharge water pollutants, it is much easier to gather and test the water than when people discharge air pollutants. The Clean Air Act establishes national ambient air quality standards. It leaves some of the regulation to states. The quality of the air varies considerably from one location to another.

9.

Evaluate this statement: The Environmental Protection Agency (EPA) has developed strong regulations to combat indoor air pollution.

This statement is inadequate. The EPA has somewhat regulated indoor air pollution. OSHA has some air quality standards for workplaces. The EPA has publicized the problem. That’s the extent of what regulatory agents have done to respond to this form of pollution.

10. Explain why someone might think this statement is true: One of the problems with environmental regulation is that people lack scientific knowledge concerning environmental hazards.

This statement is true. For each kind of pollution, have students identify what people still need to know from the scientific community before they can regulate it effectively. For instance, for each chemical that might be considered hazardous waste or a toxic substance, people need to know how much of each substance causes what kinds of harm to humans.

That’s the only way people will know how to prioritize their environmental concerns.

11. Explain relationships between the Resource Conservation and Recovery Act (RCRA) and the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) of 1980.

The RCRA regulates the treatment, storage, and disposal of hazardous waste through a manifest or “cradle to grave” regulation. They try to keep track of hazardous waste through the use of records called manifests. The CERCLA also regulates hazardous waste, but it focuses on cleaning up hazardous waste. CERCLA authorized the creation of Superfund to clean up leaks from hazardous waste disposal sites. Superfund also provides money for energy responses to hazardous waste spills.

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12. Explain relationships between the Toxic Substances Control Act (TSCA) and the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA).

The TSCA fills in a gap left by RCRA and CERCLA. It regulates toxic substances by ensuring that the least amount of damage will be done to human health and the environment by certain substances. A toxic substance is any chemical or mixture whose manufacture, processing, distribution, use, or disposal may present an unreasonable risk of harm to human health or the environment. The TSCA regulates both existing chemicals and new ones. The FIFRA has the same goals as the TSCA, but is narrower in focus. It takes a specific kind of toxic substance and regulates it separately. This category of toxic substance is pesticides.

FIFRA requires pesticides to be registered and properly labeled.

13. Explain relationships between the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and the Superfund Amendment and Reauthorization Act (SARA) of 1986.

SARA, is an amendment to CERCLA. The SARA amendments provide more stringent cleanup requirements, increase Superfund’s funding, and place the costs on corporations, or certain hazardous products or locations, such as petroleum, chemical feedstocks, and imported chemical derivatives.

14. Why are international dimensions of environmental law especially important?

International dimensions of environmental law are especially important because pollution does not stay within borders. Pollution generated in the United States falls into other countries. For instance, acid rain affects Canada. Also, pollution generated in other countries affects the United States. For instance, Mexican factories right across the Texas border create hazards that can affect the health of U.S. citizens. Therefore, the U.S. has to implement regulations that protect U.S. citizens and others in neighboring countries.

Answers to Critical Thinking about the Law Questions, Case Summaries, Answers to Review Questions, Review Problems, and Case Problems Case Summary—Boomer et al. v. Atlantic Cement Co. This case demonstrates why the tort of nuisance is ineffective as a means of controlling pollution. Plaintiffs in this case brought an action against the defendant. They sought an injunction against the defendant due to the considerable amount of dirt and smoke the cement plant created. The plaintiffs won the case, but they did not get the injunction. Instead, the court ruled that the appropriate remedy in the nuisance case was that the cement company would have to give the plaintiffs permanent damages. The court decided that permanent damages are allowed Copyright ©2015 Pearson Education Ltd.

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where the loss recoverable would be small compared with the cost of removal of the nuisance.

Thus, it seemed fair to the court to give the plaintiffs permanent damages.

Suggested Answers to Critical Thinking Questions about the Law 1.

The court started by saying its essential function was to decide the rights of the parties before it, not to solve major problems such as pollution. The judicial system is not equipped to establish policies to eliminate air pollution. When looking at the parties in front of the court, the court decided to compare the total damage to the plaintiffs’ properties to the value of the defendant’s operation and the consequences of granting the injunction. Then, the court noted the negative economic consequences if they granted the injunction. Finally, the court said they would not grant the injunction unless the defendant refused to pay permanent damages.

The requirement that the defendant pay damages will inspire them to improve techniques to minimize the pollution.

2.

The court makes the assumption that if the cement company has to pay damages that will inspire the company to do research and figure out how to minimize pollution. Possibly, however, paying damages will be disincentive to the company. It might be cheaper to pay plaintiffs off than do anything about pollution abatement.

Case Summary—Brodsky v. United States Nuclear Regulatory Commission This case is related to the environmental impact statement. The plaintiff, Richard L. Brodsky claimed that the Nuclear Regulatory Commission (NRC) had not produced an environmental impact statement (EIS) under the NEPA. The plaintiff had claimed that the environmental assessment (EA) and finding of no significance impact (FONSI) were inadequate. However, the defendant claimed that the environmental assessment was an increased fire safety risk that would adversely impact the environment. The U.S. District Court for the Southern District of New York concluded that the agency’s environmental assessment satisfied its minimum burden to justify the forgoing of the impact statement and thus granted summary judgment and the plaintiff appealed.

Suggested Answers to Critical Thinking Questions about the Law 1.

Yes, the same evidence can be used to overturn the original decision made by the court. For this reason, it is not necessary that there can be only one judgment in a case.

2.

Unless otherwise defined the term “significant impact” is ambiguous. Therefore, it would be difficult to reach a judgment without talking this into account.

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This case is about the power of states to influence the Environmental Protection Agency (EPA). The state of Massachusetts and 19 other private organizations filed a rulemaking petition to the EPA to regulate greenhouse emissions from cars. The EPA denied the petition, citing that the Clean Air Act does not give the EPA the ability to address climate change and that it would be unwise to do that at this time. Massachusetts challenged that ruling. The Supreme Court found for Massachusetts, ruling that unless the EPA was able to demonstrate that greenhouse emissions did not contribute to global warming, they had to comply with the petition.

Answers to Review Questions 22-1. Under common law, those who are injured by pollution can sue using the torts of nuisance or negligence. Both are ineffective remedies to pollution problems because they compensate injured parties, but do not prevent or stop the pollution.

22-2. • Explicit senior management support for environmental auditing and the willingness to follow up on the findings • An environmental auditing function independent of audited activities • Adequate auditor training and staffing • An explicit audit program, with objectives, scope, resources, and frequency • A process that collects, analyzes, interprets, and documents information sufficient to achieve audit objectives • A process that includes specific procedures to promptly prepare candid, clear, and appropriate written reports on audit findings, corrective actions, and schedules for implementation • A process that includes quality assurance procedures to verify the accuracy and thoroughness of such audits

22-3. Emission charges make the polluter pay a flat fee on every unit of pollutant discharged.

Polluters will want to keep charges low. Discharge permits involve government sales of permits for the discharge of various pollutants. Polluters would be encouraged to reduce their emissions because this reduction would enable them to sell their permits.

22-4. Some people think the use of the EIS creates too much red tape. Those who write them regularly know how to pass judicial scrutiny, and might not follow the plan. The preparation of an EIS costs too much in terms of both money and time. On the other hand, these statements are important because they allow interested parties to examine the facts.

Also, the EIS affects administrative decision making.

22-5. The Federal Water Pollution Control Act (FWPCA) strives to make sure that the water is Copyright ©2015 Pearson Education Ltd.

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clean. The FWPCA uses point source effluent limitations, and expects polluters to use the best available technology economically achievable.

22-6. The Federal Water Pollution Control Act (FWPCA) and the Clean Air Act both strive to set an acceptable level of pollution. The FWPCA does so through point source effluent limitations; the Clean Air Act does so through national ambient air quality standards.

Both expect pollution to be reduced gradually. Both encourage companies to use technological advances to help reduce pollution.

Answers to Review Problems 22-7. The plaintiffs are likely to use tort law theories to recover against the defendant. In particular, they are likely to use the theory of nuisance, which alleges an unreasonable interference with someone else’s use and enjoyment of his land. The plaintiff is likely to win and get monetary damages to compensate for any loss. In addition, however, the plaintiff will probably have to ask government regulators to assist in making sure the defendant actually cleans up the contaminated water.

22-8. Power plants are not required to eliminate all polluting emissions. It is required to meet the standards set by EPA. Automobiles manufacturers are not required to install emission control equipment on previously made car, only on newly made cars. Homeowners are not required to remove all pollutants from their residences.

22-9. Yes, the injunction was granted. The Environmental Protection Agency (EPA) has power over the states to amend state plans and enforce the plans. States must comply with the EPA’s revisions.

22-10. One needs to know more about the disagreement between Idaho and the Environmental Protection Agency (EPA). The EPA cannot require a state to do more than is technologically feasible. If Idaho can prove that 72 percent is the technologically feasible number, the EPA cannot expect more.

22-11. Yes, Kantrell could be violating several federal laws, including the Federal Water Pollution Act, the Safe Drinking Water Act, the Resource Conservation and Recovery Act, and maybe even the Toxic Substances Control Act. 22-12. Yes, the defendant was still responsible under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). Under CERCLA, a person who owned or operated a plant at the time waste was deposited is a responsible party, and may be held liable for cleaning up the site.

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22-13. The appellate court would not have ruled differently. It is because the court stated that it was not its place to substitute the judgment that was made with regard to the Bureau of Land Management (BLM) as it cannot determine the best option that the BLM can take up. It is because the records revealed the presence of a number of problems with the allotment of Split Rock and the BLM acknowledged that the Proposed Decision was not a remedy that could be resolved quickly.

22-14. In this case, the appellate court will be likely to affirm the decision of the district court.

This is because the court held that the insurance company did not allege that it was a claimant and therefore was not a liable party.

22-15. It is less likely that the appeals court would overturn the district court’s ruling. In order to win the appeal they would have had to show substantial evidence that the United States caused the contamination in this area.

22-16. The Supreme Court overturned the ruling of the district court. The Court found that Shell was not liable as an “arranger” of disposal because Shell legally sold hazardous substances to B&B and, although Shell may have known the substances would have to be disposed eventually, the company did not intend for spills of its product and even took steps to encourage the reduction of spills. However, the Court did find that Shell was a “potentially responsible party” and, therefore, was responsible for paying a portion of the cleanup cost.

22-17. The case was remanded back to the lower courts with the instruction to look closer at the statute. The Supreme Court found the Fourth Circuit Court’s analysis was actually invalidated by their interpretation of the law. The PSD had to be equated to the NSPS counterparts and because the definitions did not match up, the case had to be revisited.

22-18. The court stated that the EPA lacked the statutory authority to assess the administrative penalties and failed to timely submit the permit application. Therefore, the agency would have guessed the identity of the various potential new point sources, or would have allowed unpermitted discharges to ensue.

Thinking Critically About Relevant Legal Issues 1.

The author finds that the Kyoto Protocols are ineffective and because of that the United States rightfully disagreed to sign them. Because there are many problems and because they come up short, the United States is better off trying to reduce emissions by itself, without signing a treaty.

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2.

The section about China is ambiguous because although the author believes that China will pollute the environment to a point where no treaty can help, the author does not take a stand on whether China should be considered a developed nation. The author offers no middle ground. Also, the part about current efforts is ambiguous because no efforts are discussed.

3.

What is the United States doing to limit greenhouse emissions? This question is problematic because the United States is not doing enough. The U.S. has not lowered its emissions and it continues to cater to the oil companies. Until the United States does something, Kyoto is the best option available.

4.

The opposition would say that although Kyoto may not be perfect, it’s a step in the right direction. With the United States’ involvement, changes can be made, such as putting a cap on emissions and removing China from the list of developing nations. Lastly, one would argue that President Bush had largely ignored the problem and is doing very little to help limit emissions, whereas Kyoto countries are leading the way, such as Great Britain, Germany, and Japan.

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Chapter 23 Trading in Securities Introduction Chapter Twenty-Three addresses these questions: • • • • • • •

What role do federal and state governments play in regulating securities?

What is the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010?

What is the Sarbanes-Oxley Act of 2002?

How are the Securities Act of 1933 and Securities Exchange Act of 1934 related?

What rules apply to the various actors in the state securities laws?

How are e-commerce, online securities disclosure, and fraud regulation related?

What are the global dimensions of rules governing the issuance and trading of securities?

Chapter Twenty-Three is significant because regulations that affect the area of securities law protect the integrity of free markets. The securities field needs to be protected from fraud and other problems so that Americans will continue to invest in companies. The securities industry is one that managers want to protect through necessary rules and regulations. In regulating, the government provides protections to managers as investors, and as individuals who want to continue to work for financially secure companies.

Achieving Teaching Excellence Exciting Audiovisuals—Using Slides and Music to Enhance Classroom Experiences An article by Peter Frederick presented good ideas about how to promote active learning in class. Frederick, a history professor presented several ideas for promoting active learning in history classes. One works particularly well in legal environment of business classes. Frederick presented a section on using slides and music in class to evoke students’ emotional learning.

First, this section of the Instructor’s Manual will present a summary of the section of Frederick’s article on affective learning with audio-visual media. Second, this section will take some of Frederick’s ideas and present ideas about how to modify them for use in the legal environment of business classroom.

Frederick describes examples of how to use emotion in class to motivate students, set the tone for a topic, raise questions, and encourage rethinking. He writes that “emotional experience leads to cognitive insights.” Then, he gives several examples of how to use audio-visual media in class. Some of his examples are as follows: 1. Establish a mood for a particular class period by showing slides. Or, as students walk into Copyright ©2015 Pearson Education Ltd.

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2.

class, let them hear a speech or music that relates to course material for the day. Also, the instructor might want to put several powerful short quotations on a transparency.

Go one step further and combine some of the ideas above. Combine a piece of music with slides. Synchronize one or two slides with each lyrical line of a song.

Frederick explains how music and slides are intensely active experiences for students. He advises instructors to be careful as they evoke emotional as well as intellectual responses from the students. He advises instructors to respect the students’ need for privacy. Frederick suggests that quiet writing time and talking in pairs can provide students with space they might need to think through their responses to the audio-visual material. Finally, he reminds instructors that his goal is to structure “ways of empowering students to discover, and own, historical knowledge, skills, and attitudes for themselves and to feel good about themselves as learners.”

How can instructors use Frederick’s ideas in their classes? Is it even possible to take some of his ideas and use them with a topic as securities regulation? First, it is important to recognize that some areas of law evoke more emotional responses than others. Labor law and constitutional law probably trigger more emotions than contract and antitrust law. Thus, this idea for improving what happens in class will work better in some chapters of the legal environment of business than others. Still, it is possible to use some of Frederick’s ideas in parts of the book that seem less inspirational. For instance, instructors can do some active learning by using some of Frederick’s ideas … even in the current chapter about securities regulation!

It might be a challenge to create slides for use in this chapter, but it would be easy to bring in sections of a few videotapes that relate to this section’s materials. One choice would be excerpts for the movie Wall Street, although this movie is old enough now that students might not even relate to the idea that “greed is good.” A more recent movie, Startup.com, might yield some good conversations about securities law. This documentary, released in 2001, tells the story of Tom Herman and Kaleil Isaza, who start their own Internet business, govWorks. This movie shares the development of the business by two hardworking entrepreneurs, and their rapid descent into failure. It would be interesting to raise questions about what happened to the investors when the business failed.

Another idea would be to put several short, powerful statements from court cases about securities fraud on a transparency. Instructors could put several strong statements that show the damage fraud can inflict on investors and the market in general. Once instructors start looking, they might be surprised at how many sources of great audio-visual material are available. The Internet certainly makes it easier to find good sources.

The instructors could start by doing an audio-visual activity for one or two chapters during the term. They should experiment. Frederick’s idea of combining the audio-visual activity with an in-class writing assignment is one that most instructors would like. Good luck! This section Copyright ©2015 Pearson Education Ltd.

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has presented one more idea for achieving Teaching Excellence!

References •

Peter Frederick, “Active Learning in History Classes,” 16 TEACHING HISTORY 67 (1991).

Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview Both because of their importance to the operation of the United States’ free enterprise society and because of the ease with which they can be manipulated, securities have been regulated by governments for nearly a century. This chapter chiefly examines the role of the federal government in regulating securities. It introduces the subject with a brief history of securities regulation that contains a summary of the most important federal legislation. Then, the chapter turns to the creation, function, and structure of the Securities and Exchange Commission (SEC). In a survey of major and representative securities legislation, it examines the provisions of the Dodd-Frank Act of 2010 and the Sarbanes-Oxley Act of 2002.

Both the Securities Act of 1933, which governs the issuance of securities and outlines the registration requirements for both securities and transactions (and the allowable exemptions from those requirements), and the Securities Exchange Act of 1934, which governs trading in securities, are discussed. Next, the chapter examines the state securities laws and online securities disclosure and fraud regulations. It ends with a discussion of the global dimensions of the 1933 and 1934 securities acts and the Foreign Corrupt Practices Act. Finally, the chapter briefly examines the Convention on Combating Bribery of Foreign Officials in International Business Transactions This chapter packs a great amount of detailed, technical information into one important chapter. It will be important for the instructors to establish priorities for the class in what they expect the students to absorb in the way of details. When instructors use this chapter, they should encourage students to learn ideas and general concepts, and do not expect them to remember things like the names of the forms businesses must file under the 1934 Act. The discussion questions are the focus of class discussion. The instructors should focus more on the cases because they present interesting fact situations and important legal concepts. Instructors might want to consider emphasizing the material that describes the Securities Exchange Act of 1934.

This material is especially important to business managers.

Topic Outline

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I. Introduction to the Regulation of Securities A. Summary of Federal Securities Legislation B. The Securities and Exchange Commission Creation and Function Structure Division of Corporation Finance Division of Market Regulation Division of Enforcement Division of Corporation Regulation Division of Investment Management II. Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 A. Oversight of Financial Problems by Regulatory Agencies B. Risk Taking by Large Banks and Nonbanks C. Executive Compensation D. Too Big to Fail E. Credit Rating Agencies F. Derivatives G. Consumer Protection H. Exemptions I. Regulation of the Regulators by a Court of Law III. The Sarbanes-Oxley Act of 2002 A. Corporate Accountability B. New Accounting Regulations C. Criminal Penalties IV. The Securities Act of 1933 A. Definition of a Security Common Enterprise Reasonable Expectations of Profit Profits Derived Solely from the Efforts of Others Securities and Exchange Commission v. Edwards B. Registration of Securities under the 1933 Act Purpose and Goals Registration Statement and Process Disclosure Prefiling Period Waiting Period Posteffective Period Communications Shelf Registration C. Securities and Transactions Exempt from Registration under the 1933 Act Private Placement Exemptions Copyright ©2015 Pearson Education Ltd.

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Intrastate Offering Exemption Small Business Exemptions Other Offering Exemptions Exempt Securities D. Resale Restrictions E. Liability, Remedies, and Defenses under the 1933 Securities Act Private Remedies Misrepresentations in a Registration Statement Failure to File a Registration Statement Misrepresentation or Fraud in the Sale of a Security Governmental Remedies Administrative Action Injunctive Action Criminal Penalties V. The Securities and Exchange Act of 1934 A. Registration of Securities Issuers, Brokers, and Dealers Registration of Securities Issuers Registration of Brokers and Dealers B. Disclosure: Compensation C. Securities Markets D. Proxy Solicitations Procedural and Substantive Rules Shareholder Proposals Proxy Contests E. Tender Offers and Takeover Bids Rules Governing Tender Offers F. Remedies and Defensive Strategies Remedies Barbara Schreiber v. Burlington Northern, Inc. Defensive Strategies G. Securities Fraud Section 10(b) of the Securities Exchange Act Stoneridge Investment Partners, LLC, et al. v. Scientific-Atlantic Inc., et al.

Insider Trading and Section 10(b) of the 1934 Act Misstatements of Corporations and Section 10(b) Securities and Exchange Commission v. Texas Gulf Sulphur Co. Corporate Mismanagement and Section 10(b) Fraud-on-the-Market Theory and Section 10(b) H. Liability and Remedies under the 1934 Exchange Act Criminal Penalties SEC Action Copyright ©2015 Pearson Education Ltd.

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Private Actions The Wharf (Holdings) Limited v. United International Holdings, Inc. I. Short-Swing Profits Purpose and Coverage Liability VI. State Securities Laws VII. E-Commerce, Online Securities Disclosure, and Fraud Regulation A. Marketplace of Securities B. E-Commerce and Fraud in the Marketplace VIII. Global Dimensions of Rules Governing the Issuance and Trading of Securities A. Legislation Prohibiting Bribery and Money Laundering Overseas The Foreign Corrupt Practices Act of 1977, as Amended in 1988 Convention on Combating Bribery of Foreign Officials in International Business Transactions The International Securities Enforcement Cooperation Act of 1990 B. Legislation Governing Foreign Securities Sold in the United States C. Regulations and Offshore Transactions IX. Summary Discussion Questions for Chapter Twenty-Three 1.

Explain relationships between the Securities Act of 1933 and the Securities and Exchange Act of 1934.

The primary difference between the two laws is that the 1933 Act regulates the initial public offering of securities, whereas the 1934 Act regulates the trading of securities. Another relationship is that the 1934 Act accomplishes more than the 1933 Act. In addition to its primary purpose, the 1934 Act also requires brokers and dealers trading in securities to register with the Securities and Exchange Commission (SEC). It also created the SEC to enforce both the 1933 and 1934 Acts.

2.

Explain relationships between the Foreign Corrupt Practices Act of 1977 (FCPA) and the International Securities Enforcement Cooperation Act of 1990 (ISECA).

The FCPA prohibits the direct or indirect giving of “anything of value” to a foreign official for the purpose of influencing his or her actions. The ISECA clarifies SEC authority to provide securities regulators of other governments with documents and information. It also exempts from the Freedom of Information Act disclosure requirements of documents given to the SEC by foreign regulators. ISECA also gives the SEC authority to impose administrative sanctions on buyers and dealers who have engaged in illegal activities in foreign countries. The ISECA finally authorizes the SEC to investigate violations of the Copyright ©2015 Pearson Education Ltd.

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securities law set out here which occur in foreign countries. One relationship between the two is that both help protect the international dimensions of securities law.

3.

Evaluate this statement: The Securities and Exchange Commission (SEC) evaluates the worth of a public offering of securities by a corporation.

This statement is inadequate because the SEC does not evaluate the worth of a public offering. Instead, the SEC tries to make sure investors have complete, accurate information so they can determine for themselves the worth of a public offering.

4.

Evaluate this statement: It is easy to tell whether something is a “security”. One would just have to look at it carefully.

This statement is inadequate because sometimes it is very difficult to tell whether something is a security just by looking at it. For instance, it would be difficult to look at the sale of rows of orange trees to the public with a service contract and know it is a security. To determine whether something is a security, the Howey test is applied. This test looks at whether the contract or scheme is one in which individuals invested in a common enterprise, whether investors had a reasonable expectation of profits, and whether the profits were derived solely from the efforts of those other than the investors.

5.

Explain relationships between the prospectus and Part II information statement.

Both the prospectus and the Part II information statement are parts of the registration statement that meets the disclosure requirements of the 1933 Act. The prospectus describes a new security issue. Part II consists of a longer, more detailed statement, which is not given to prospective buyers but is open for public inspection at the commission.

6.

Explain relationships between the Securities Act of 1933 and shelf registration.

The Securities Act of 1933 regulates the initial issuance of securities. Shelf registration is one specific kind of registration the law permits. Shelf registration allows a corporation to file a registration statement for securities that it may wish to sell over a period of time rather than immediately. Once the security is registered, the corporation can place it on the “shelf” for future sale and not have to register it again.

7.

What basic rationales underlie the exemptions to the 1933 Securities Act? The exemptions assume that some people do not need the government to require full, accurate, complete information before they decide whether to invest in a particular company.

For instance, in a private placement of stock, investors are sophisticated and know the Copyright ©2015 Pearson Education Ltd.

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company, so they do not need the SEC’s protection. Another rationale is that some companies are so small they could not afford to go through the registration process. The small business exemption says that offerings not exceeding $5 million are exempt when the SEC finds registration is not necessary.

8.

Explain relationships between the due diligence defense and the business judgment rule.

The business judgment rule protects directors and managers from poor decisions, as long as they make decisions that reflect good faith. The due diligence defense is much less forgiving to officers, directors, and anyone who signs a registration statement that includes misstatements or omissions. The due diligence defense claims a defendant has reasonable grounds to believe that all statements in the registration statement are true and no omission of material fact has been made. Escott v. BarChris shows the difficulty of using this defense successfully. Therefore, one must be much more careful with registration statement decisions than business decision making in general.

9.

Explain relationships between proxy solicitations and takeover bids.

One relationship between proxy solicitations and takeover bids is that both are regulated by the Securities Exchange Act of 1934. Section 14 of the Exchange Act sets forth the ground rules governing proxy solicitations by inside management, dissident shareholders, or potential acquirers of a company. Takeover bids are regulated by Sections 13 and 14 of the Exchange Act.

10. Explain relationships between insider trading and misstatements of corporations.

Both insider trading and misstatements of corporations are specific kinds of securities fraud under Section 10(5) of the exchange act. Insider trading is the use of nonpublic information received from a corporate source by an individual who has a fiduciary obligation to shareholders and potential investors, and who benefits from trading on such information.

Misstatements of corporations include any report, release of financial statement, or any other statement, that is released by an officer, director or employee of a corporation in connection with the purchase or sale of a security that shows an intent to mislead shareholders or potential investors.

11. Explain relationships between insider trading and fraud-on-the-market theory.

Both insider trading and fraud-on-the-market theory are specific kinds of securities fraud banned by Section 10(b)-5 and Rule 10(b)-5 of the 1934 Act. The fraud-on-the-market is a relatively new and creative theory compared to insider trading. It is also a less specific theory. The fraud-on-the-market theory allows shareholders to allege that they relied on the Copyright ©2015 Pearson Education Ltd.

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integrity of an efficient market to assimilate all information about a company to reflect this information in a fair price for securities. The plaintiff argues that when a company makes fraudulent disclosures or omissions, it distorts the information flow to the market and thus fixes the price of the company’s securities too high.

12. Evaluate this statement: Congress has defined “insider trading” clearly.

This statement is inadequate because Congress has refused to define insider trading. Instead, courts have developed definitions through case law. Instructors could ask students why Congress would not want to define insider trading.

13. Evaluate this statement: States are not allowed to regulate in the area of securities law.

This statement is flawed. State regulatory agencies are not preempted from regulatory authority by the federal government. Securities may be subject to both state and federal rules.

14. Why are global dimensions of securities law especially important?

People invest and trade in securities internationally, and some people put their fraudulently obtained profits in foreign banks. Thus, international dimensions are especially important because people have to respond to situations involving fraud throughout world markets.

Answers to Critical Thinking about the Law Questions, Case Summaries, Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law Questions 1.

The ethical norm emphasized hers is security, defined as to achieve the psychological condition of self-confidence, such that, risks are welcomed. Jessica wants to make sure she doesn’t lose her money due to someone else’s dishonesty. Government regulators require companies to be honest.

2.

First, it is important to know whether Buy-It-Here really misrepresented itself. It is possible the caller was not an agent of Buy-It-Here. Possibly, the caller was engaging in fraud on his own, and But-It-Here was also victimized by the fraud.

3.

Here, the cases are similar because both women lost money in the stock market when a company they invested in went bankrupt. However, the two cases are different in such a significant way that Jessica cannot use Andrea’s case as an analogy. The key difference is that Andrea relied on the advice of a stockbroker, whereas Jessica made her purchase independently. In Andrea’s case, the stockbroker did not give Andrea all the information she Copyright ©2015 Pearson Education Ltd.

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needed to make a good decision. Andrea had a good cause of action against the stockbroker.

Jessica did not rely on the advice of a professional. Instead, she relied on the sales pitch of a stranger who called her. A jury would not have much sympathy for someone so naive.

Suggested Answers to Critical Thinking about the Law Questions—St. Patrick’s Day Bailout of an Investment Banking Firm (Bear Stearns, Inc.) by the U.S. Taxpayers 1.

The government prefers the norm of security. Government actors wanted to bailout Bear Stearns to ease anxieties in the financial markets. The employees of Bear also want security—they want to know they will be okay after the bailout. They also want justice, defined as fairness. They want to get what they are due, as loyal employees.

2.

This is a judgment call. Preferably, markets would weed out weak companies such as Bear Stearns. The complexity here, though, is that, if Bear had gone bust, the ripple effects might have been unbearable.

Case Summary—Securities and Exchange Commission v. Edwards This case is in the book to illustrate how cases can be interpreted to define security. In this case, the Supreme Court had to decide whether an investment scheme that promises a fixed rate of return can be a security. The Court ruled that there was no reason to differentiate between an investment scheme that promised a fixed return and a scheme that promised a variable return because, in both cases, investors are attracted to promises of profits. Both types of return are considered investment contracts, therefore, they are securities.

Case Summary—Barbara Schreiber v. Burlington Northern, Inc. In this landmark case, the U.S. Supreme Court interpreted the meaning of the Williams Act. The Court was concerned with the correct interpretation of the word “manipulative”, which is the basis for causes of action brought under Section 14(e). In this case, defendant Burlington Northern, Inc. won a case after the U.S. Supreme Court ruled that the company’s behavior was not manipulative. The company had rescinded a tender offer, and shareholders suffered. The shareholders lost.

Suggested Answers to Critical Thinking about the Law Questions 1.

The court tries to figure out what the word “manipulative” means.

2.

To define “manipulative”, the Court looks to the purpose of the law and its legislative history.

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3.

The primary ethical norm that would be damaged if judges decided fairness would be efficiency. The number of court cases would go up, and judges would have to use more of their already limited resources figuring out whether certain behavior was fair. The Court wants to stay out of this kind of decision making to save both time and money.

Case Summary—Stoneridge Investment Partners, LLC, et al. v. Scientific-Atlantic Inc., et al In this important securities law case, the U.S. Supreme Court rejected an argument that private investors can sue actors (e.g., accountants, lawyers, other businesses) that allegedly participate in a scheme to violate Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. Stoneridge Investment Partners sued Scientific-Atlanta and Motorola for scheming with Charter in violation of securities laws. The Court said that investors may sue only those who issued statements or otherwise took direction action that the investors relied upon in buying or selling stock—whether that involved public statements, omissions of key facts, manipulative trading, or conduct that was itself deceptive.

Suggested Answers to Critical Thinking about the Law Questions 1.

Some of the reasons why the Supreme Court rejected the theory are as follows: • There was no sufficient link in the chain toward legal liability.

• The plaintiff would have to prove reliance while making decisions of holding or acquire a security.

• The §10(b) implied private right of action does not extend to aiders and abettors. The conduct of a secondary actor must satisfy each of the elements or preconditions for liability.

2.

The defendants, Scientific-Atlanta and Motorola did not get away “free.” They had to defend themselves in a very important securities regulation case. Their reputations were tarnished.

These companies were deceptive, which makes their acts questionable from a moral perspective. However, in order to win the case the plaintiffs would have to prove §10(b) private action satisfies the following: • A material misrepresentation or omission by the defendant • Scienter • A connection between the misrepresentation or omission and the purchase or sale of a security • Reliance upon the misrepresentation or omission • Economic loss • Loss causation

Case Summary—Securities and Exchange Commission v. Texas Gulf Sulphur Co.

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This case has been included in the text as it deals with insider trading. The SEC filed a suit against the Texas Sulphur Company (TGS) along with 13 of its officers, directors, and employees for violating the Section 10(b) of the Exchange Act and SEC Rule 10(b)-5. TGS had acquired an option to acquire land 160 acres of land in Timmons, Ontario, where there were substantial amounts of copper and zinc in November 1963. As a result the NYSE barred stop orders in order to curb volatility in the stock market. Initially, officers, directors, and employees of TGS owned only 1,135 shares. After the drilling began, in March 1964, it was observed that the insiders and the tippees acquired an additional 7,100 shares and 12,300 calls. It was seen that when the confirmatory press release was issued, 10 insiders and their tippees made estimated profits of $273,892 on the purchase of their shares or calls of TGS stock. The federal court dismissed charges against all the defendants apart from two. Those two defendants appealed. Additionally, the SEC appealed as charges were dropped against nine individuals.

Case Summary—The Wharf (Holdings) Limited v. United International Holdings, Inc. In this case, the Supreme Court ruled in favor of United, when it alleged securities fraud against Wharf. The Court stated that even oral contracts are covered by Section 10(b). The Court stated that “[t]o sell an option while secretly intending not to permit the option’s exercise is misleading, because a buyer normally presumes good faith.”

Answers to Review Questions 23-1. Short-swing profits are a kind of insider trading. They occur when a director or someone with a fiduciary responsibility to other investors use insider trading methods within the first six months of being in their position. These profits are large. Insider trading refers to the use of material, nonpublic information received from a corporate source by someone who has a fiduciary obligation to shareholders and potential investors and who benefits from trading on such information.

23-2. The shareholder proposal may be excluded if under the particular state law, it would be unlawful if agreed to by the directors; it involves a personal grievance; it relates to ordinary operational business functions; it is not significantly related to a company’s business; the stockholder does not own a certain amount of stock; or the shareholder’s proposal received less than 5 percent of the votes when submitted the previous year.

23-3. The plaintiff must prove: (1) a material misstatement or omission in a registration statement and (2) monetary damages.

Three affirmative defenses are available to defendants: 1. The purchaser (plaintiff) knew of the omission or untruth.

2. The decline in value of the security resulted from causes other than the misstatement or omission in the registration statement.

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3. The statement was prepared with the due diligence expected of each defendant.

23-4. All securities that meet the Howey test and do not fall under an exemption to the 1933 Act must be registered under the 1933 Act. 23-5. No offer is made to a person in the United States and the buyer is outside the United States at the time the buy order is originated; or the transaction is executed in, on, or through the facilities of a designated offshore securities market.

Answers to Review Problems 23-6. Livingston will win. He does not perform policy functions. Instead, he handles day to day operations, so he does not fall under Section 16.

23-7. Bigelow Corporation uses the over-the-counter market and for this reason it does not require any qualification for membership. Under Section 6(b) of the Exchange Act, an exchange cannot be registered unless the SEC determines that its rules are designed “to prevent fraudulent and manipulative acts and practices” and to discipline its members for any violations of its rules or the securities laws.

23-8. The plaintiffs would be able to recover their money if they are able to establish that: • The transaction being attacked involves the purchase or sale of securities.

• The alleged fraud is in connection with a purchase or sale.

• The plaintiff is either a purchaser or a seller of securities in the transaction involved.

23-9. The statements are material if the information would affect the judgment of the average prudent investor. It is a question of whether the facts listed here would affect the probable future of the company. Some students will think that most investors would care about millions of dollars, even if the company is worth billions. They will believe that Schlitz was in the wrong.

23-10. The transaction seems to meet the Howey test. There is a common enterprise, a reasonable expectation of profits, and the profits are derived solely from the efforts of others. In fact, this situation is very much like the Howey facts—with the rows of orange trees accompanied by a service contract.

23-11. As per the Securities Exchange Act of 1934, the securities of reporting companies must be registered. Reporting companies include those with securities sold on a national stock exchange and those with 500 or more shareholders and more than $10 million in assets. Fab’s securities are actively traded on national stock exchange, so Fab must file Copyright ©2015 Pearson Education Ltd.

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a registration statement even though it has less than 500 shareholders. Corporations with more than $10 million in assets must register; not those with assets exceeding $2 million.

Answers to Case Problems

23-12. Initially, the case was dismissed because the trial court found that Todman could not incur primary liability for securities fraud. However, the appellant court ruled that an accounting firm could incur primary liability if the auditor provided a false or misleading certified opinion, knew investors were relying on this opinion, and still failed to correct or withdraw its opinion. The appellant court decided that because the plaintiff’s were pleading this exact theory of liability, the trial court’s decision should be dismissed and remanded for further proceedings.

23-13. In this case the court found that NMC and Bleakney were ignorant of the unorthodox transactions that took place were that Bleakney had sold as well as purchased at his own convenience. For this reason, he was not entrapped by the merger or imposed to surrender or acquire shares involuntarily to match the transactions. For this reason, there is no basis of law or fact for treating Bleakney’s action as implicating the “unorthodox transactions” doctrine.

23-14. The appeals court reversed and remanded this case. In addition to that the court dismissed Northstar’s Federal Claims since the job of the enforcement was that of the SEC.

Thinking Critically About Relevant Legal Issues 1.

The author wants strict punishments because not only do those who commit fraud financially hurt a lot of people who trust them, but it also hurts the economy because people become afraid to invest.

2.

The author provides no data, just broad concepts about why, in theory, white collar crime is very dangerous to the economy.

3.

Some data about how often these crimes occur and how the economy has suffered because of these crimes and some statistics about how much the average investor lost in the most recent fraud, would be helpful in evaluating the worth of the author’s claims. All these would give credence to the author’s argument and help accent the broad, theoretical argument.

4.

The section about the way the general economy is harmed is a little ambiguous. The author makes claims that need to be qualified in order for them to make sense. The connections the author makes are vague.

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5.

One could argue that many times, the investors are not completely sure of the extent of the problems. This is a capitalist system and insider traders are products of that system. They feel the need to make a lot of money at all costs.

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Chapter 24 Enforcing Antitrust Policies Introduction Chapter Twenty-Four addresses these questions: • • • • • •

What is the purpose of antitrust law?

How are antitrust laws enforced, and what are the exemptions under the antitrust laws?

What does the Sherman Act of 1890 prohibit?

What does the Clayton Act of 1914 prohibit?

What other antitrust statutes do business managers need to understand?

What are the global dimensions of antitrust laws?

Chapter Twenty-Four is significant because antitrust law ensures the functioning of free markets in the United States. The Sherman Act of 1890 has a significant impact on business conduct and management decision making. It is important for managers to understand this area of law because of its relationship to competition. Chapter Twenty-Four also explains important laws regarding price discrimination, tying arrangements, exclusive-dealing contracts, mergers and acquisitions, and interlocking directorates. These sometimes present complicated situations for businesses, especially ones that want to continue to grow. Managers must be aware of what behavior is legal, and what is not. This chapter is especially important in light of the government’s legal action against Microsoft.

Achieving Teaching Excellence In-Class Writing At this point in the semester, instructors could engage in “discussion” with students using short, in-class writing assignments, rather than engaging in verbal exchanges with them. One characteristic of excellent teaching is that instructors show appreciation for students’ and their own need for variety in class. Using a critical thinking model goes well with in-class writing assignments. This section gives some examples of appropriate in class writing assignments. It gives examples that focus on the material presented in Chapter Twenty-Four of the textbook.

In-Class Writing Assignment One—Using a Case from this Chapter—have students choose one of the cases the chapter presents that is not followed by critical thinking questions. At this point in the semester, students should be familiar enough with the critical thinking questions that they can write good questions on their own. Ask them to write three critical thinking questions for one of the cases that do not include critical thinking questions.

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In-Class Writing Assignment Two—A Debate Format—pick a case in the book. Ask students to write an argument in which they explain whether the facts of the case call for increased government regulation, or whether the facts suggest the need for either deregulation or no regulation. Tell students to identify the ethical norm that is most consistent with their argument. An additional assignment would be for students to trade arguments, and evaluate an argument written by one of their peers.

These writing assignments allow active learning, encourage critical thinking, and allow instructors to see what students are and are not learning. Additionally, instructors get to vary the way they conduct their class. These ideas will help instructors move one step closer to achieving Teaching Excellence.

Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview This chapter begins with an introduction to the meaning of antitrust and a summary of the federal antitrust statutes. It then discusses enforcement of the antitrust laws and exemptions made to those laws. Next it examines the types of business conduct that are forbidden by the Sherman Act, as well as the Clayton Act, the Federal Trade Commission Act, and the Bank Merger Act of 1966. Because these acts have affected, directly and indirectly, almost every business and political institution in American society, and carry criminal and/or civil penalties, much of the chapter focuses on dissecting them. Finally, it examines the global dimensions of antitrust policy.

Chapter Twenty-Four presents some interesting articles that help students understand how the goals of antitrust legislation change when people with different perspectives on the goals of antitrust legislation are in positions of power. Instructors should make sure that they have current knowledge about the Microsoft antitrust action. Students will want the latest information.

Topic Outline I. Introduction to Antitrust Law A. A Definition of Antitrust B. Law and Economics: Setting and Enforcing Antitrust Policy C. Goals of the Antitrust Statutes II. Enforcement of and Exemptions from the Antitrust Laws A. Enforcement Public Enforcement Private Enforcement B. Exemptions Copyright ©2015 Pearson Education Ltd.

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III. The Sherman Act of 1890 A. Section 1: Combinations and Restraints of Trade Combination, Contract, or Conspiracy Restraints of Trade Horizontal Restraints Williamson Oil Co. v. Philip Morris, USA Vertical Restraints Leegin Creative Leather Products, Inc. v. PSKS, Inc., dba Kay’s Kloset, Kay’s Shoes Continental TV, Inc. v. GTE Sylvania B. Section 2: Monopolies Monopolization Relevant Product and Geographic Markets Newcal Industries, Inc. v. Ikon Office Solutions Overwhelming Power in the Market Intent to Monopolize United States v. Microsoft Corporation Attempt to Monopolize IV. The Clayton Act of 1914 A. Section 2: Price Discrimination The Meeting-the-Competition Defense B. Section 3: Tying Arrangements and Exclusive-Dealing Contracts C. Section 7: Mergers and Acquisitions Reasons for Increase in Mergers Criteria for Determining the Legality of Mergers under Section 7 Relevant Product and Geographic Markets Probable Impact on Competition Types of Mergers Defenses to Section 7 Complaints Enforcement Merger Guidelines Premerger Notification Remedies D. Section 8: Interlocking Directorates V. Other Antitrust Statutes A. Federal Trade Commission Act of 1914 California Dental Association v. Federal Trade Commission B. Bank Merger Act of 1966 VI. Global Dimensions of Antitrust Statues A. Transnational Reach of U. S. Antitrust Legislation B. Global Dimensions of U. S. Antitrust Laws Copyright ©2015 Pearson Education Ltd.

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C. Enforcement VII. Summary Discussion Questions for Chapter Twenty-Four 1.

Explain why someone might think this statement is true: It matters whether antitrust regulators prefer the Chicago School or the Harvard School views on antitrust policy.

This statement is true because those who adhere to the Chicago School prefer much less government regulation than those who prefer the Harvard School. The Harvard School is concerned about having many buyers and sellers in the economy, is worried about concentration of power, prefers local control of business, and wants efficiency of markets.

Harvard School followers would apply antitrust law rigidly, and impose criminal sanctions on people who violate antitrust law. Chicago School followers want to maximize consumer welfare. They would decriminalize antitrust law, and would prefer limited government regulation of markets.

2.

Explain how trusts relate to antitrust law.

The abuse of trust relationships led to the development of antitrust law. Trusts are originally business arrangements in which owners of stocks in several companies place their securities in the hands of trustees, who control and manage the companies. Trusts are not illegal.

However, in the late 1800’s, trusts were used by a few companies to buy up or drive out many small companies in a single industry. Because of this behavior, Congress decided to pass antitrust legislation.

3.

Explain why someone might think this statement is true: Some of the goals of antitrust law are in conflict.

Antitrust law strives to: (1) preserve small businesses; (2) prevent concentration of political and economic power in the hands of a few sellers in each industry; (3) preserve local control of business; and (4) promote the maximization of consumer welfare. One example of a clash is goals 1 and 4. Those who adhere to the Harvard School prefer goal 1, whereas Chicago School followers favor goal 4. Some people believe small businesses are inefficient. Large firms can make cheaper goods, and this benefits consumers.

4.

Explain relationships between Section 1 and Section 2 of the Sherman Act. Both share the same penalties, but they focus on different violations. Section 1 governs illegal contracts, combinations, or conspiracies in restraint of trade, whereas Section 2 governs monopolizing, attempts to monopolize, or conspiracies to monopolize. Both Copyright ©2015 Pearson Education Ltd.

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sections state that these offenses are felonies, punishable by fines up to $10 million per corporation and up to $350,000 per individual. A person may be imprisoned up to three years, fined, or both.

5.

Evaluate this statement: Private lawsuits are not allowed in antitrust cases.

This statement is flawed. Individuals or businesses are allowed to bring private action suits against businesses they think are violating antitrust laws. Individuals can also bring class action suits. State attorneys general can also bring actions on behalf of citizens.

6.

How does the concept of privity relate to material in this chapter?

This would be a good final exam question because it requires students to remember material from a prior chapter. In this chapter, the textbook explains that the U.S. Supreme Court requires plaintiffs in private antitrust actions to actually be purchasers of the product. Ask students, “How is this different from our standards in product liability cases?”

7.

What reasons underlie certain exemptions from antitrust statutes?

People gain exemptions from antitrust statutes if they can lobby Congress effectively. Also, they will be exempt if another law regulates them. Finally, we try to protect government actors through the “state action doctrine” and by recognizing the difficulties in suing cities and towns.

8.

Explain relationships between horizontal and vertical restraints.

Horizontal restraints seem more offensive to courts. In vertical restraint cases, courts seem to be moving toward a rule-of-reason standard. Ask students, “Which kind of restraints interfere more with free market competition? Explain.”

9.

Explain relationships between tying agreements and monopolies.

Section 1 of the Sherman Act regulates tying agreements, whereas Section 2 of the Sherman Act regulates monopolies. Tying agreements are restraints of trade where the seller permits a buyer to purchase a product or service only if the buyer also agrees to purchase a second product or service. A monopoly occurs when in an economic market situation a single business has the power to fix the price of goods or services. Both situations give a business the kind of power we cannot tolerate if we want to protect competitive markets.

10. Evaluate this statement: Cases that focus on conspiracies to monopolize are more common than cases that focus on attempts to monopolize.

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This statement is flawed because although people fail at monopolizing (so one can sue them for attempting to monopolize), very few cases are filed under the conspiracy to monopolize theory. When a plaintiff wants to show a combination or conspiracy, it must show an agreement. The case is usually filed under Section 1 rather than Section 2 of the Sherman Act. 11. Evaluate this statement: In price discrimination cases, the Clayton Act governs both tangible goods and services and other intangible goods.

This statement is flawed because in price discrimination cases, the Clayton Act governs only tangible goods such as oranges or bananas. It does not regulate services or other intangibles.

12. Explain relationships between primary, secondary, and tertiary line injuries.

All are forms of price discrimination, but they vary according to who the parties to the price discrimination are. Different people are victims in each kind of price discrimination.

• A primary line injury refers to a price discrimination situation in which a seller attempts to put a local competitive firm out of business by lowering its price only in the region where the local firm sells its products.

• A secondary line injury occurs when a seller offers a discriminatory price to one buyer, and not to another buyer.

• A tertiary line injury occurs when a discriminatory price is passed along from a secondary line party to a favored party at the next level of distribution.

13. Evaluate this statement: Mergers were a fad in the 1980’s. They are now on the decline.

This statement is flawed. The mergers and acquisitions scene is still hot and growing, according to the text. Some of the activity lacks ’80s pizzazz, but the activity is still strong.

Mergers are still happening because some companies have undervalued assets, some companies want to spin parts of their companies off, some companies want to diversify, some are striving for tax credits for research and development, some companies want economies of scale, and the philosophy that “bigness” is not “bad”.

14. How would the Harvard and Chicago schools respond to current trends in the field of mergers and acquisitions?

The Chicago school followers believe bigness is not bad, and that the government should not try to regulate mergers and acquisitions. Followers of the Harvard school think bigness does create problems, and that it should be regulated so that the economy does not end up with some companies that enjoy large concentrations of market power.

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15. Explain relationships between horizontal and vertical mergers.

The two kinds of mergers differ according to where the acquired company is in the distribution system.

• Horizontal mergers usually involve the acquisition of one firm by another when both firms are at the same level in the distribution system.

• Vertical mergers involve the acquisition of one firm by another at different levels in the distribution system.

16. Explain relationships between vertical and conglomerate mergers.

Vertical mergers involve the acquisition of one firm by another at different levels in the distribution system. Conglomerate mergers involve the acquisition by one company of a firm that produces products or services that are not directly related to the acquiring firm. One relationship is that conglomerate mergers are more likely to help a company diversify than vertical mergers.

17. Evaluate this statement: Defendants have few defenses in Section 7 cases.

This statement is inadequate because defendants have several defenses in Section 7 cases.

One is that the merger does not have a substantial effect on interstate commerce. Another is that the merger does not have the probability of substantially lessening competition or tending to create a monopoly. A third defense is that one of the companies to the merger is failing. A final defense is that the merger is solely for investment purposes.

18. Evaluate this statement: Private individuals and corporations rarely bring antitrust actions because it is too costly.

This statement is flawed. Private actions represent by far the largest number of present-day antitrust cases. Approximately 90 percent of all antitrust claims were brought by privateparty plaintiffs. Moreover, when a small company, sues a large company, for antitrust violations, victory has the double advantage of enhancing its cash flow and showing bondrating agencies and investors that it is a viable entity able to take on a big company.

19. Explain how the Federal Trade Commission Act (FTCA) of 1914 relates to the Sherman and Clayton Acts.

The FTCA prohibits unfair methods of competition. It is easier to prove a violation of the FTCA than either the Sherman or Clayton Act. The degree of proof required under the FTCA is less than under the other two acts.

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Answers to Critical Thinking about the Law Questions, Case Summaries, Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law Questions 1.

Microsoft wants to be free of governmental intervention because it wants to gain market share and power. The government wants to regulate Microsoft so the company cannot use its power to the detriment of competitors and customers. Ask students to follow the case and add to the reasons that have been listed.

2.

The statement is flawed because it assumes a relatively competitive market. If Microsoft operated in a market with many suppliers of homogeneous goods, it would be easy for consumers to vote with their dollars. However, the more market power Microsoft acquires, the less likely it is consumers will have many choices.

3.

One does not know how the consumer might benefit from having more choices. It is possible several smaller companies have developed Web browsers that do a better job of meeting consumers’ needs. One will never know if Microsoft is allowed to decide for the consumer.

So, one fact one needs to know about the World Wide Web industry is what Web browsers are available and how they compare to the Internet Explorer.

Case Summary—Williamson Oil Co. v. Philip Morris, USA In the 1990s, four companies controlled the cigarette industry—Philip Morris (PM), R.J. Reynolds (RJR), Brown & Williamson (B&W), and Lorillard (the manufacturers). PM and Lorillard were the premium makers and the other two controlled the discount brands. The discount brands were making a great profit, but that was not guaranteed to continue. PM, seeing the trend, cut their prices by $0.40. The other’s followed suit. However, the discount makers refused to keep their prices too low, so they raised them to the rates of the other companies. The others followed suit. Several hundred wholesalers sued, claiming price fixing. The Courts were satisfied that the companies did not communicate to intentionally defraud the consumer, rather the price hikes were a market phenomenon seen when only a few large companies control the market.

Suggested Answers to Critical Thinking about the Law Questions 1.

There would have had to be communication between the companies to raise the prices. Also, the prices would have had to change at the same time, rather than in response to changes the other companies made in order to stay competitive.

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2.

The issue is communication of some kind. There must be some agreement to keep the prices at a certain level for there to be price fixing. Otherwise, the companies are just responding to the actions of the other. The response is in good faith, meaning that there was not prior knowledge and the prices happen to be the same because that is what the market dictates.

Case Summary—Leegin Creative Leather Products, Inc. v. PSKS, Inc., dba Kay’s Kloset, Kay’s Shoes Leegin refused to sell its goods to stores that did not sell the products at the suggested prices.

PSKS filed suit, alleging that Leegin violated antitrust laws by entering into vertical agreements to set prices. Leegin argued no agreements occurred, it was only a company policy. However, PSKS won the jury trial. On appeal, the Court ruled in favor of Leegin, citing that its policy was not an agreement that unfairly benefited them over all other distributors.

Case Summary—Continental TV, Inc. v. GTE Sylvania This landmark case considers vertical territorial and customer restrictions. The U.S. Supreme Court changed the standard for judging such restrictions from per se to a rule of reason. GTE Sylvania had terminated a franchise agreement with Continental and sued for money owed.

Continental accused Sylvania of violating the Sherman Act. The U.S. Supreme Court ruled in favor of Sylvania and returned to the rule of reason that governed vertical restrictions prior to Schwinn.

Suggested Answers to Critical Thinking about the Law Questions 1.

The main issue raised in this case is: Did GTE Sylvania attempt to vertically restrict the number of Sylvania retailers and was this illegal under the Sherman Act? When Continental applied for a franchise it was denied. The plaintiff claimed that this was a breach of the Sherman Act. The court found that GTE violated the Sherman Act only if this restriction led to diminished competition and promoted inefficiency.

2.

The reason stated by the Court for its conclusion is that whether the per se rule stated in United States v. Schwinn & Co. should be expanded to include nonsale transactions or abandoned in favor of a return to the rule of reason. The court found no persuasive support for expanding the rule. In sum, it concluded that the appropriate decision is to return to the rule of reason that governed vertical restrictions prior to Schwinn. The court affirmed in favor of Plaintiff.

Case Summary—Newcal Industries, Inc. v. Ikon Office Solutions In this case, Newcal Industries sued Ikon Office Solutions for violating the Sherman Act’s Copyright ©2015 Pearson Education Ltd.

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antitrust laws. The appellant court reversed the trial court’s decision and found in favor of Newcal. Newcal was able to establish a “relevant market” and show that Ikon had a contractually-created monopoly over services provided under original Ikon contracts. Therefore, Ikon is violating the Sherman Act. Case Summary—United States v. Microsoft Corporation Here, the court decides whether Microsoft has achieved a monopoly through innovation, patents, and business acumen, or whether it has attained a monopoly by conduct whose foreseeable consequence is the reinforcement of a monopoly position. The latter would show intent to monopolize. Here, after a lengthy analysis, the court concludes (1) that Microsoft possesses monopoly power, (2) that Microsoft maintained its power through anticompetitive means. The court remanded the case to consider remedies. The appellate court is more sympathetic to Microsoft than the district court, and, in its final words, discourages the district court from enacting the structural remedy of divestiture.

Case Summary—California Dental Association v. Federal Trade Commission In this case, the U.S. Supreme Court considers whether the California Dental Association violated Section 5 of the Federal Trade Commission Act when it enacted restrictions on advertising for dental services. Here, the court ruled for the defendants, and remanded the case to consider the extent to which the restrictions were designed to benefit customers.

Suggested Answers to Critical Thinking about the Law Questions 1.

Justice Souter asserts that (1) it is difficult for dental customers to get information and (2) individual patients have a hard time determining the quality of this kind of professional service. He also assumes that patients irrationally attach themselves to particular professionals.

2.

Students may make assertions that support unrestricted advertising. First, they may assert that unrestricted advertising allows customers to get quality information. Second, they may assert that patients are generally good at judging the quality of dental services. Third, they may assert that dental patients have a long history of showing their ability to switch from one dentist to another if they are dissatisfied with the quality of the services provided.

Answers to Review Questions 24-1. The Department of Justice and the Federal Trade Commission in the public sector are primarily responsible for enforcement. For instance, the Antitrust Division of the Justice Department exclusively enforces the Sherman Act and has concurrent jurisdiction with Copyright ©2015 Pearson Education Ltd.

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the FTC to enforce the Clayton Act. However, for serious violations of the Sherman Act, the Justice Department may bring a criminal action.

24-2. Adherents of the Chicago School would like to see antitrust statutes enforced less strictly, especially in the areas of vertical price and territorial restraints, and would decriminalize many antitrust offenses. They believe that large size in U.S. business is far from bad, considering that competitive foreign firms are big and are sometimes aided by their governments as well. The Harvard School (a structural approach to antitrust policy) favors the preservation of an economy characterized by many buyers and sellers, with little domination by anyone. Adherents of this approach condemn the accumulation of economic power because they believe that it leads to substantial political power at the federal, state, and local levels as politicians are “bought” by the holders of economic power.

24-3. Horizontal restraints take place between competitors at the same level of the marketing structure, and are per se illegal. Vertical restraints are restraints agreed to between individuals or corporations at different levels of the manufacturing and distribution process. Courts are moving in the direction of judging such restraints by a rule-of-reason standard.

24-4. Conglomerate mergers involve the acquisition by one company of a firm that produces products or services that are not directly related to the acquiring firm.

24-5. Merger guidelines are not laws. Instead, they serve an advisory function. In them, the Justice Department puts the business community on notice about what the department views as Section 7 violations, and when it is most likely to bring an enforcement action.

Answers to Review Problems 24-6. The circumstances in this case do not fit the price-fixing scheme between the competing companies violating the Sherman Antitrust Act. This is because it can be considered to be a single entity, which made pricing decisions where the oil companies had participated in the role of cooperative investors.

24-7. In this case the rule-of-reason standard was used and whether Topco’s behavior increases or decreases competition was considered. If Topco is correct in its assertion that it is trying to compete with large chains, their behavior is legal. If these can be established then Topco can win the case.

24-8. The key in this case will be the probable impact of the particular merger on competition in the relevant product and geographic markets. Here, it is possible that Falstaff will be Copyright ©2015 Pearson Education Ltd.

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able to use its power in the New England area to drive competitors out of that market. If there is a good chance Falstaff has “deep pocket” enough to eliminate competitions in New England, the Clinton Administration’s regulators will be concerned.

24-9. In order to win the suit the government would have to prove that Dentsply International, Inc. was illegally monopolizing the market and maintained this power knowingly. The relevant market in question here includes laboratories and dealers. The nearest competitor of Dentsply International, Inc. directly sells its products to laboratories. As far as monopoly is concerned Dentsply International, Inc. owned 30 percent or more of a particular market is prima facie illegal. Therefore, the Justice Department has a good chance of winning because they could make their prima facie case.

24-10. Ford will definitely have to divest itself of Autolite. It doesn’t appear that the government can require them to stop manufacturing spark plugs for ten years, or that it must purchase 50 percent of its requirements from Autolite for five years. This remedy seems harsh. If this is an acceptable remedy, we need more facts to justify this remedy.

Answers to Case Problems 24-11. The case was remanded with instructions to grant the government’s injunction. The company was found to be able to manipulate prices at will and could influence distributors because they controlled the market as a monopoly.

24-12. Yes, this conduct was in violation of the Sherman Act. In this case, the plaintiff had to prove that they incurred sufficient losses owing to the pricing per se violation.

24-13. In order to win the case, Purex would have to prove that they had sustained damages.

However, the Court found that there was no antitrust violation that took place and denied any damages to be paid to them.

24-14. The court found that it would be difficult to ascertain the amount of damages sustained by Edmonds. For this reason, the Court found a permanent injunction to be the best course of action in this case.

24-15. Oracle did not violate the Clayton Act because the plaintiffs could not prove that there would be a lack of competition as a result of the merger. Part of this is because they failed to prove that the market is only in the United States. In other words, there may be international companies that would have a hand in competition for the market.

Thinking Critically About Relevant Legal Issues

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1.

The author is very concerned about fair play and theoretical capitalism. He believed in pure competition where companies are free from the shadows of large conglomerates.

2.

The second-to-last paragraph is a little ambiguous. The author makes it seem as though it is easy for companies to move their base of operation. In fact, the process takes many years and is very costly. Businesses want to save money in the long run.

3.

The opposition would argue that this is capitalism in action. Congress and the Courts should stay out because businesses are making record profits and selling goods to consumers at very low prices. One could also argue that they are providing jobs to people in the Third World who would not have one otherwise.

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Chapter 25 Consumer Protection Practices Introduction Chapter Twenty-Five addresses these questions: • • • • • • • •

What are the dimensions of Debtor–Creditor Relations?

What are the provisions of the federal Bankruptcy Code and the incorporation of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005?

How has consumer law evolved?

Which specific federal laws govern trade practices and consumer–business relationships?

What federal laws focus on consumer credit arrangements and business debt-collection practices?

What is the Dodd-Frank Act and what are the laws related to consumer protection?

What are the different state consumer legislations?

What are the global dimensions of consumer protection laws?

Chapter Twenty-Five is significant because the post-transaction business-consumer relationship can sometimes generate anger and litigation. Business managers and customers must know their rights and responsibilities under state, federal, and local law. This knowledge would eliminate friction and litigation between parties in consumer transactions.

Achieving Teaching Excellence The Importance of the Campus Atmosphere The final Teaching Excellence section of this Instructor’s Manual looks at a different aspect of teaching and critical thinking. This Instructor’s Manual has asked instructors to take a fresh look at their behavior in class, and their students’ behavior in class. Additionally, these sections have explained one of the many reasons this textbook is important. It provides an important resource. Most textbooks do not encourage critical thinking, even when they say they do. Instead, most encourage lower-order rather than higher-order thinking skills. This textbook is the only one in the legal environment of business area that is true to its marketing promises. The textbook does much more than present facts students are supposed to absorb. It is designed to promote critical thinking skills, and if instructors have used the book to promote critical thinking, they are much farther along than most faculty members in achieving Teaching Excellence. It is sure that instructors have inferred by now that “teaching excellence” means promoting higherorder thinking skills in the classroom. Instructors are encouraging their students to evaluate, which is the primary goal of critical thinking.

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An instructor’s own efforts are important, but sometimes as instructors they need to change things around to make sure they are doing their best work with and for the students. This final section of the Instructor’s Manual asks instructors to look at the atmosphere on the campus.

Does the campus encourage the growth of critical thinking skills?

In an article entitled “Preconditions for Encouraging Critical Thinking on the Campus,” M. Neil Browne considers both factors and provides useful guidance for instructors who want to promote critical thinking. Browne makes important points about the campus atmosphere. He indicates that two aspects of a campus are particularly significant in encouraging the growth of critical thinking.

Browne first explains that “a campus that has critical thinking instruction as a high priority must integrate its efforts across the curriculum.” If only one instructor uses a critical thinking approach, it will be a challenge for the instructor to get his or her students to internalize the behavior as much as he or she wants. Browne writes that “[w]hen multiple courses reinforce critical thinking behavior, students learn to associate that behavior with what educated people are expected to do.” Instructors do not want their students to leave their course thinking that their course was what Browne refers to as “an educational outlier.”

Another aspect of the campus atmosphere that is important is the campus perspective on research. If instructors teach at a campus that places a high priority on research, it will be difficult to promote critical thinking skills in students. Browne writes that “[f]aculty energy is limited.

Critical thinking instruction requires unusual amounts of preparation and evaluation.” Browne reminds instructors that administrators who emphasize the instructor’s roles as researchers encourage faculty members to “take the easy way out in their teaching.” The more the college or university expects instructors to publish, the more likely instructors are to lecture, post limited office hours, and avoid their students.

Now, the question arises as to what instructors can do if their campus does not provide the kind of environment that urges them to achieve Teaching Excellence. If jobs for faculty members were plentiful, instructors could all look for the campus environment most consistent with their priorities? Unfortunately, most instructors have to create the kind of atmosphere they want in their present environment. Instructors should start talking to colleagues about the importance of promoting critical thinking across the curriculum. Explain to those who evaluate instructors work the clash between research productivity and teaching excellence. Browne ends his article with an important reminder, “The autonomy, tolerance, humility, and creativity potentially stimulated by critical thinking skills and attitudes can be encouraged by the conscious, systematic attempts of teachers.” Continue trying to achieve Teaching Excellence!

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•

M. Neil Browne, “Preconditions for Encouraging Critical Thinking on the Campus,” THE INTERNATIONAL JOURNAL OF SOCIAL EDUCATION, 18 (1987).

Chapter Overview, Topic Outline, and Discussion Questions Chapter Overview This chapter describes debtor–creditor relationships; the Bankruptcy Act of 2005, which amends the federal Bankruptcy Code; and the evolution of consumer law through legislation and case law. It then examines major federal legislation governing such trade practices as advertising, labeling, and the issuance of warranties on products. Federal laws pertaining to the credit arrangements entered into by consumers and the debt-collection practices of businesses are discussed, as are state laws governing consumer transactions. The chapter ends with an examination of the global dimensions of consumer protection laws.

This chapter presents information that students need to know as consumers and managers.

Undergraduate students are interested in some of the material that is new to them. Many of them are for the first time getting credit cards and car loans. They are interested in knowing their rights and responsibilities. MBA students are familiar with much of the material in the chapter, but some of the information is especially important to them at this point in their lives. Many of them are purchasing houses for the first time, so they too are interested in knowing their rights and responsibilities. Several MBA students work in the financial industry, so they already know much of the material in the chapter. Still, it is good for them to see the material from a legal perspective, and they are particularly interested in the kinds of fact situations that make consumers sue. After the topic outline, the discussion questions encourage the instructors and their students to work on material from throughout the chapter.

Topic Outline I. Debtor–Creditor Relations A. Rights of and Remedies for Creditors Liens Mortgage Foreclosure Suretyship and Guaranty Contracts B. Rights and Remedies for Debtors Exemptions to Attachments II. The Federal Bankruptcy Code and the Incorporation of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 A. History and Background Provisions Copyright ©2015 Pearson Education Ltd.

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B. Bankruptcy Management and Proceedings Courts Bankruptcy Petition Bankruptcy Schedules Creditors’ Meeting Bankruptcy Trustee Automatic Stay Discharge Bankruptcy Estate Estate Exemptions State Exemption Fraudulent Transfers C. Chapter 7 Discharge of Debts In re Savage v. United State Bankruptcy Statutory Distribution of Property D. Chapter 13 E. Chapter 11 Individuals Filing under Chapter 11 Reorganization Small Business Bankruptcy F. Chapter 12 Chapter 12 Discharge G. The New Bankruptcy Law – 2011 III. The Evolution of Consumer Law A. Economics IV. Federal Regulation of Business Trade Practices and Consumer–Business Relationships A. The Federal Trade Commission: Functions, Structure, and Enforcement Powers Functions Structure and Enforcement Powers B. Deceptive and Unfair Advertising Deceptive Advertising Federal Trade Commission v. Verity International, Ltd. Federal Trade Commission v. QT, Inc. Unfair Advertising Private-Party Suits and Deceptive Advertising The FTC and Deceptive Labeling and Packaging C. Consumer Legislation Franchising Relationships Consumer Warranties Full or Limited Warranties Remedies Copyright ©2015 Pearson Education Ltd.

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Telemarketing Legislation V. Federal Laws Regulating Consumer Credit and Business Debt-Collection Practices A. Truth-in-Lending Act Goals Scope Provisions General Disclosure Finance Charges Annual Percentage Rate Right to Cancel Open- and Closed-End Credit Transactions Credit Advertising Remedies Household Credit Services, Inc. v. Pfenning B. Credit Card Accountability, Responsibility and Disclosure Act of 2009 Rates Fees Disclosure and Notice Billing Practices C. The Electronic Fund Transfer Act Goals Provisions Remedies D. A Plastic Society E. The Fair Credit Reporting Act Goals Provisions Safeco Insurance Co. v. Burr Remedies F. Identity Theft and Credit Ratings G. Equal Credit Opportunity Act Goals Provisions Remedies H. The Fair Credit Billing Act Goals Provisions Remedies I. The Fair Debt Collection Practices Act Goals Provisions Copyright ©2015 Pearson Education Ltd.

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Miller v. McCalla, Raymer Padrick and Clark, LLC Remedies VI. Dodd-Frank Act and Consumer Protection A. Credit and Debit Cards B. Consumer Loans C. Credit Scores D. Residential Mortgages VII. State Consumer Legislation A. Uniform Consumer Credit Code B. Unfair and Deceptive Practices Statutes C. Arbitration of Disputes VIII. Global Dimensions of Consumer Protection Laws IX. Summary Discussion Questions for Chapter Twenty-Five 1.

Explain how the ideas of laissez-faire and caveat emptor are related.

Laissez-faire economic philosophy presents a revolt against government regulation. This philosophy was popular in the eighteenth and nineteenth centuries. The doctrine of caveat emptor is consistent with laissez-faire philosophy. Caveat emptor means “let the consumer beware.” In other words, it is the consumers’ responsibility to protect themselves, not the government’s responsibility.

2.

Evaluate this statement: The federal government has developed an efficient, coordinated plan in the area of consumer protection laws and regulations.

This statement is flawed. The book is a reminder that consumer and business relationships at the federal level are governed by an array of federal agencies. These agencies often duplicate one another’s efforts and have no centralization or coordination of authority.

3.

Explain relationships between deception and puffery.

The most important relationship is that deception is illegal, whereas puffery is not. Puffery is an expression of opinion in a sales talk given by the seller in order to make the product more attractive. Deception in describing a product can be either express or implied. For instance, when an advertiser makes a certain quality claim based upon what “studies show,” it must possess reasonable substantiation of its claim.

4.

Evaluate this statement: The FTC requires manufacturers and sellers of consumer products to give express warranties.

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The FTC does not require manufacturers and sellers of consumer products to give express warranties. However, if they choose to give express warranties, the Magnuson-Moss Warranty Act of 1975 places limits on what the warranties can and cannot promise. The purpose of the law is to prevent confusing and misleading information from being passed on to consumers by requiring that all conditions of a warranty be clearly and conspicuously disclosed for any product sold in interstate commerce and costing more than five dollars.

5.

Explain relationships between full and limited warranties.

A full warranty is a written protection for buyers that guarantees free repair of a defective product. If the product cannot be fixed the consumer must be given a choice of a refund of a replacement free of charge. In a limited warranty, the warrantor limits the scope of the warranty in some way. One relationship is that the full warranty is a more attractive sales feature to consumers than a limited warranty.

6.

Explain relationships between the Truth-in-Lending Act and the Equal Credit Opportunity Act. Both laws are subparts of the Consumer Credit Protection Act, but they strive to achieve different objectives. The Truth-in-Lending Act seeks to require disclosure by creditors of all terms of a credit arrangement before an agreement is entered into with a consumer-debtor.

The Equal Credit Opportunity Act strives to eliminate all forms of discrimination in granting credit, including discrimination based upon race, sex, color, religion, national origin, marital status, and receipt of public assistance.

7.

Explain relationships between the Fair Credit Billing Act and the Fair Debt Collection Practices Act. Both these laws are subparts of the Consumer Credit Protection Act, but they have different purposes. The Fair Credit Billing Act aims to eliminate inaccurate and unfair billing practices, and to limit the liability of consumer creditors for the unauthorized use of their credit cards. The Fair Debt Collection Practices Act prevents harassment of a creditor of a consumer-debtor at his or her place of work or home.

8.

Evaluate this statement: Consumers need credit card insurance in case their credit cards are stolen.

This statement is flawed. The Electronic Fund Transfer Act, which amended the TILA, protects consumers in this situation. The liability of the holder of a credit card is limited to fifty dollars in the event someone steals and uses the card in an unauthorized manner.

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9.

Explain relationships between Chapters 7, 11, and 13 of the Bankruptcy Reform Act. All three are forms of bankruptcy. They differ in terms of what happens to the debts, and what happens to the person or business that went bankrupt. Under Chapter 7 (liquidation), the consumer-debtor sells his assets and the proceeds are distributed to creditors. All debts are discharged for a six-year period except taxes, child support and alimony, and credit obtained under material false pretenses. Under Chapter 13 (the wage earner’s plan), a portion of the consumer-debtor’s earnings is paid into the court for distribution to creditors over three years or, with court approval, five years. Chapter 11 allows businesses and individuals to reorganize and function while it arranges for the discharge of its debts.

10. Evaluate this statement: Federal preemption precludes states from regulating in the area of consumer protection.

This statement is flawed. States also regulate in the area of consumer protection. For instance, all states have statutes that protect consumers against unfair and deceptive practices. Other common laws include “lemon laws” for used cars, and laws that provide “cooling-off” periods when they’ve purchased something from a door-to-door salesperson.

Answers to Critical Thinking about the Law Questions, Case Summaries, Answers to Review Questions, Review Problems, and Case Problems Suggested Answers to Critical Thinking about the Law 1.

Ethically, Woodcock should have raised the issue that his payments could not be differed as he was not a degree student. However, the mistake of issuing this student loan was on the part of the issuer. In this case the ethical norm that needs to be taken into consideration is justice where an individual can possess anything that someone else is ready to grant them.

2.

The ethical norm that is closely attached to the theme of personal responsibility is security.

This is because it would be the ethical norm that would fulfill a person’s order of business.

Case Summary—In re. Savage v. United State Bankruptcy This case considers the concept of “undue hardship” in the context of an individual who wants to discharge student loans. A court had discharged all but $3,120 of a total student loan debt of $32,248.45. Here, the appellate court reversed the decision of the lower court, finding that the individual did not demonstrate that her current level of income and future prospects warranted discharge of her loans. The court thought she could work more at her current job or get a part-time job. The court also considered that the individual chose a private school for her son.

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Suggested Answers to Critical Thinking about the Law Questions 1.

The legal rule is: To prove undue hardship … a debtor must show that her necessary and reasonable expenses leave her with too little to afford repayment. Additionally, she has to show that her prospects for increasing her income in the future are too limited to afford her sufficient resources to repay the student loans and provide herself and her dependents with a minimal (but fair) standard of living.

2.

The case considers several ambiguous words and phrase, e.g., “undue hardship,” “satisfactory reason,” “necessary,” and “reasonable.” In this case, the court found that in the presence of the public school system sending a child to a private school was an undue expense. For this reason, this amount had to be paid by the plaintiff.

Case Summary—Federal Trade Commission v. Verity International, Ltd. The Federal Trade Commission (FTC) accused Verity International and Automatic Communications of deceptive practices under Section 5 of the FTCA. Verity and Automatic Communications were deceptively charging pornography viewers using phone rather than credit card charges. The appellant court found that the companies acted in a misleading manner, consumers acted reasonably, and that the practice of the companies was material. Therefore, the court agreed with the trial court by ruling in favor of the FTC, although the court found the monetary judgment excessive.

Case Summary—Federal Trade Commission v. QT, Inc. This case is about the deceptive advertising used by QY, Inc. QT falsely advertised that their bracelets would offer immediate pain relief. Both the trial and appellant courts found QT guilty of false advertising and ordered that the company stop making these promotional claims and pay $16 million into a fund for their customers.

Suggested Answers to Critical Thinking about the Law Questions 1.

QT might argue that individuals’ testimonies prove that the bracelets had worked and that although their advertisements exaggerated the effects of the bracelets, what they had said had not been disproved.

2.

Judge Easterbrook is suggesting that anyone can make a claim but just because a man says he keeps the elephants off the streets by snapping his fingers does not mean it is true.

Reliable proof is needed before someone, especially a company, can make an allegation like QT did.

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Case Summary—Household Credit Services, Inc. v. Pfenning This case considers whether an “over-limit fee” is a finance charge that should have been reported under the TILA. Here, the U.S. Supreme Court decides that the over-limit fee is a penalty for violating the credit agreement, and the penalty is not covered by the TILA. Case Summary—Safeco Insurance Co. v. Burr This case determined that Safeco Insurance and GEICO General Insurance were not guilty of breaking the laws of the Fair Credit Reporting Act. Although Safeco and GEICO issued insurance policies to applicants without telling them that the companies had obtained credit reports on the applicants, the Court found that the companies were not acting in reckless disregard of the act.

Suggested Answers to Critical Thinking about the Law Questions 1.

The Court found that GEICO and Safeco would have recklessly been disregarding the law if they had not informed the applicants of their credit reports and had charged them more for insurance. Because GEICO and Safeco offered the same initial rates to their applicants, regardless of the applicants’ credit ratings, the companies were not acting recklessly.

2.

If GEICO or Safeco had charged their applicants a higher initial rate because of the credit score, they would have violated a statute of the Fair Credit Reporting Act.

Case Summary—Miller v. McCalla, Raymer Padrick and Clark, LLC Miller sued McCalla for violating the FDCPA by failing to state “the amount of debt” in the dunning letter sent. Miller was successful in getting the case remanded to the trial court. The dunning letter listed the unpaid principal balance on the debt, which was only part of the debt.

Lesson learned: Construct dunning letters carefully!

Answers to Review Questions 25-1. In the creditor–debtor context garnishment refers to an order of the court granted to a creditor to seize wages or bank accounts of a debtor. This can be either a postjudgment or a prejudgment remedy, although the latter requires a hearing. Both federal and state laws limit the amount of money that a debtor’s take-home pay may be garnished for.

25-2. • Legal action to collect debts before petitioning for bankruptcy • Enforcing judgments obtained against a debtor Copyright ©2015 Pearson Education Ltd.

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• Enforcing liens against property of the debtor • Nonjudicial collection efforts by a creditor (e.g., repossession of an automobile) 25-3. The directive called on member states of the European Union to prohibit misleading advertising by statute and to create means to enforce such laws.

25-4. A contract of suretyship allows a third person to pay the debt of another (debtor) that is owed to a creditor, in the event the debtor does not pay. The suretyship creates an express contract with the creditor, under which the surety is primarily liable.

25-5. A consumer credit reporting agency must disclose the following: notice to the consumer whenever he or she has been adversely affected by an adverse credit report from a consumer reporting agency. The agency must also disclose to banks if they have made any errors in terms of reporting. Most of the other provisions protect consumers in specific ways, but they do not require “disclosure”. For instance, consumers are allowed to include a written report in their file to explain their side of a dispute if they disagree with what is in their file.

25-6. The FTC can issue injunctions. Also, individuals can pursue actions for both actual and punitive damages.

Answers to Review Problems 25-7.

a.

b.

Burke can file a voluntary bankruptcy petition under Chapter 12. However, under bankruptcy exemptions she would be able to retain her farm and would not have to liquidate her assets to repay her debt.

In case, Burke does not file for voluntary bankruptcy and if she has 12 or more creditors, the petition must be signed by a minimum of 3. Also, an involuntary petition must set forth a statement that the debtor is not paying its debts as they become due.

25-8. In this case, Montoro can file for Chapter 7 bankruptcy and he has to turn all assets over to a trustee. The trustee sells the nonexempt assets and distributes the proceeds to creditors. The remaining debts are discharged.

25-9. The court affirmed the ruling that the bankruptcy discharge was void it was not in compliance with the ECMC. Also, they failed to comply with the Bankruptcy Code.

25-10. The appeals court found that the bankruptcy court had erred in its decision and affirmed the BAP’s decision to reverse and remand the case in order to apply the appropriate legal standards. The court would need to look at whether Nys was unable to make the payments Copyright ©2015 Pearson Education Ltd.

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even if a substantial part of her pay was used toward loan repayment. Therefore, the bankruptcy court would have to determine the merits of the case and take the correct legal standards and apply for the claim.

25-11. Both an unrecorded invoice for repairs and the sale of assets below its carrying value would result in reduction of “estate equity” for business liquidating under Chapter 7 of Federal Bankruptcy Code. Voluntary or involuntary bankruptcy proceeding under Chapter 7 of the Federal Bankruptcy Code creates an “estate” for liquidating entity. $9,000 should be debited.

Answers to Case Problems 25-12. Yes, filing a lawsuit in state court can be considered as “initial communication.”

Deadlines have been set for filing suits and respond to them in order to follow a structured framework. However, the deadlines set by the FDCPA differ. For this reason more importance is given to recovering the debt rather than meeting these deadlines.

25-13. Goulet was not able to discharge his loans. The mere facts that his income was low was an insufficient reason to discharge his debt.

25-14. The company’s arguments were rejected by the lower court and it stated that it could not engage in any debt collection activities. They had argued that the writer of a back check could not be considered to be consumers under the FDCPA. The company was ordered to pay any debt owed and were found liable to pay over 10 million dollars as restitution. The appeals court affirmed the decision made by the lower court.

25-15. CrossCheck, Inc. won the case as it did not violate the FDCPA. The court ruled that CrossCheck, Inc. was not acting as a “creditor” attempting to collect dishonored checks given to its merchant customers.

25-16. The defendants did violate the FCRA. The court held that conducting bank searches for third parties by repeatedly using credit reports for the purpose of developing additional financial information about search targets violated the FCRA. It was also against the law to make false representations about how the reports would be used. Using deception or trickery to obtain even more information from financial institutions was also illegal.

Thinking Critically about Relevant Legal Issues 1.

The author downplays freedom (for companies to act without restriction from FTC regulations) and individual responsibility (for each family to decide whether to turn off the television).

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2.

The relevant rule of law would highlight the extent to which companies are allowed to engage in manipulative or deceptive advertising.

3.

Ads mislead children. Children are harmed psychologically when they end up disappointed that advertised products do not make them happy. Disappointments lead to cynicism.

4.

The opposing argument would focus on the lack of evidence that children are so easily fooled, so easily disappointed, and so quick to become cynical.

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