Solutions Manual For The Legal Environment Today 11th Edition By Roger LeRoy Miller (All Chapters 1-

Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 01: Law and Legal Reasoning

Solution and Answer Guide

Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 01: Law and Legal Reasoning

TABLE OF CONTENTS Critical Thinking Questions in Features .............................................................................1 Managerial Strategy—Business Questions............................................................................ 1 Landmark in the Law............................................................................................................... 2 Chapter Review ................................................................................................................... 2 Practice and Review................................................................................................................. 2 Practice and Review: Debate This ......................................................................................... 3 Issue Spotters ........................................................................................................................... 3 Business Scenarios and Case Problems .............................................................................. 4 A Question of Ethics ................................................................................................................ 6 Time-Limited Team Assignment ........................................................................................... 8

CRITICAL THINKING QUESTIONS IN FEATURES MANAGERIAL STRATEGY—BUSINESS QUESTIONS 1.

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

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

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

Solution: Just because Roberta is legally able to avoid paying the salespeople at her new used car dealership overtime, should she? As with so many managerial decisions,

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 01: Law and Legal Reasoning

the answer to this question involves the tricky determination of costs and benefits. On the one hand, Roberta’s costs will be lower if she does not have to pay overtime to the salespeople. On the other hand, the salespeople may be more motivated if they feel they are being properly compensated for the extra hours they spend on the lot. The extra motivation will likely lead to additional sales, which very well may offset the overtime costs.

LANDMARK IN THE LAW 1.

The equitable maxims listed here underlie many of the legal rules and principles that are commonly applied by the courts today—and that you will read about in this book.

For instance, in the contracts materials, you will read about the doctrine of promissory estoppel. Under this doctrine, a person who has reasonably and substantially relied on the promise of another may be able to obtain some measure of recovery, even though no enforceable contract exists. The court will estop (bar) the one making the promise from asserting the lack of a valid contract as a defense. The rationale underlying the doctrine of promissory estoppel is similar to that expressed in which of the maxims just listed?

Solution: The rationale underlying the doctrine of promissory estoppel is similar to that expressed in the fourth and fifth equitable maxims listed in the feature. The fourth maxim supports the notion that the law should not be applied unfairly just because the law does not provide a solution to a particular problem. The fifth maxim holds that those administering the law should not get bogged down in technicalities when doing so leads to unfairness or injustice. In a perfect legal world, then, a lack of a valid contract should not punish a party who has justice and fairness on their side.

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

1.

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

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

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

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 01: Law and Legal Reasoning

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

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

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

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

PRACTICE AND REVIEW: DEBATE THIS 1.

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

Solution: Both England and the U.S. legal systems were constructed on the common law system. The doctrine of stare decisis has always been a major part of this system—courts should follow precedents when they are clearly established, except when compelling reasons dictate otherwise. Even though more common law is being turned into statutory law, the doctrine of stare decisis is still valid. After all, statutes often must be interpreted by courts. What better basis for judges to render their decisions than by basing them on precedents related to the subject at hand?

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

ISSUE SPOTTERS 1.

The First Amendment to the U.S. Constitution provides protection for the free exercise of religion. A state legislature enacts a law that outlaws all religions that do not derive from the Judeo-Christian tradition. Is this law valid within that state? Why or why not? (See Sources of American Law.) Solution: No. The U.S. Constitution is the supreme law of the land and applies to all jurisdictions. A law in violation of the Constitution (in this question, the First Amendment to the Constitution) will be declared unconstitutional.

2. Apex Corporation learns that a federal administrative agency is considering a rule that will have a negative impact on the firm’s ability to do business. Does the firm have any opportunity to express its opinion about the pending rule? Explain. (See Sources of American Law.) Solution: Yes. Administrative rulemaking starts with the publication of a notice of the rulemaking in the Federal Register. Among other details, this notice states where and

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when the proceedings, such as a public hearing, will be held. Proponents and opponents can offer their comments and concerns regarding the pending rule. After reviewing all the comments from the proceedings, the agency’s decision makers consider what was presented and draft the final rule.

BUSINESS SCENARIOS AND CASE PROBLEMS 1–1. Binding versus Persuasive Authority. A county court in Illinois is deciding a case involving an issue that has never been addressed before in that state’s courts. The Iowa Supreme Court, however, recently decided a case involving a very similar fact pattern. Is the Illinois court obligated to follow the Iowa Supreme Court’s decision on the issue? If the United States Supreme Court had decided a similar case, would that decision be binding on the Illinois court? Explain. (See The Common Law.) Solution: A decision of a court is binding on all inferior courts. Because no state’s court is inferior to any other state’s court, no state’s court is obligated to follow the decision of another state’s court on an issue. The decision may be persuasive, however, depending on the nature of the case and the particular judge hearing it. A decision of the United States Supreme Court on an issue is binding, like the decision of any higher court, on all inferior courts. The United States Supreme Court is the nation’s highest court, however, and thus, its decisions are binding on all courts, including state courts.

1–2. Sources of Law. This chapter discussed a number of sources of American law. Which source of law takes priority in the following situations, and why? (See Sources of American Law.) 1.

A federal statute conflicts with the U.S. Constitution.

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

2. A federal statute conflicts with a state constitutional provision.

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

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

Solution: The state statute—State statutes are enacted by state legislatures.

Areas not covered by state statutory law are governed by state case law.

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

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

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1–3. Remedies. Arthur Rabe is suing Xavier Sanchez for breaching a contract in which Sanchez promised to sell Rabe a Van Gogh painting for $150,000. (See The Common Law.) 1.

In this lawsuit, who is the plaintiff, and who is the defendant?

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

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

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

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

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

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

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

1–4. Philosophy of Law. After World War II ended in 1945, an international tribunal of judges convened at Nuremberg, Germany. The judges convicted several Nazi war criminals of “crimes against humanity.” Assuming that the Nazis who were convicted had not disobeyed any law of their country and had merely been following their government’s (Hitler’s) orders, what law had they violated? Explain. (See The Common Law.) Solution: Crimes against humanity constituted, at the time of the Nuremberg trials, a new international crime, consisting of “murder, extermination, enslavement, deportation, and other inhumane acts committed against any civilian population, before or during the war, or persecutions on political, racial, or religious grounds.” In response to the defendants’ assertion that they had only been following orders, the Nuremberg judges explained in part that these were familiar crimes within domestic jurisdictions and thus the accused must have known, when they committed their acts, that they would be considered criminal.

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

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 01: Law and Legal Reasoning

with the natural law precept, in which case individuals should disobey the written law and obey the natural law.

1–5. Business Case Problem with Sample Answer—Reading Citations. Assume that you want to read the entire court opinion in the case of Friends of Buckingham v. State Air Pollution Control Board, 947 F.3d 68 (4th Cir. 2020).

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

1–6. Spotlight on Gateway Hotels—Stare Decisis. Orlando Garcia filed a lawsuit against Gateway Hotels, contending that, in violation of the Americans with Disabilities Act (ADA), the company’s website failed to indicate whether any of its rooms would accommodate his disability. After a court ruled that Gateway’s website did comply with the ADA, the company sought an award of attorney’s fees, as allowed by federal law. Garcia countered that his case was not “frivolous” and therefore he should not be forced to cover the hotel chain’s legal costs. Gateway pointed out that, according to a previous United States Supreme Court ruling, attorney’s fees could be awarded in such cases even if the original lawsuit was not frivolous.

Applying the doctrine of stare decisis, will the court side with Gateway? Explain. [Garcia v.

Gateway Hotel, LP, 82 F.4th 750 (9th Cir. 2023] (See The Common Law.) Solution: In Brown v. Lucky Stores (2001), the U.S. Court of Appeals for the Ninth Circuit (the authority deciding this case) ruled that ADA defendants could not recoup the legal costs of a failed discrimination lawsuit unless the action was “frivolous, unreasonable, or groundless.” Twelve years later, with its Marx v. General Revenue Corp. decision, the United States Supreme Court held that a district court has the discretion to award legal fees to a defendant regardless of whether the plaintiff’s legal action was in bad faith.

Applying the doctrine of stare decisis, the U.S. Court of Appeals for the Ninth Circuit concluded that “our decision in Brown cannot be reconciled with the Court's decision in Marx, and therefore it has been effectively overruled.” Therefore, in this case, at the district court’s discretion, Garcia could be found liable for those costs that Gateway incurred in defending itself against Garcia’s failed ADA lawsuit.

A QUESTION OF ETHICS 1–7. The Doctrine of Precedent. Sandra White operated a travel agency. To obtain lower airline fares for her nonmilitary clients, she booked military-rate travel by forwarding fake military identification cards to the airlines. The government charged White with identity theft, which requires the “use” of another’s identification. The trial court had two cases that represented precedents.

In the first case, David Miller obtained a loan to buy land by representing that certain investors had approved the loan when, in fact, they had not. Miller’s conviction for identity

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 01: Law and Legal Reasoning

theft was overturned because he had merely said that the investors had done something when they had not. According to the court, this was not the “use” of another’s identification.

In the second case, Kathy Medlock, an ambulance service operator, had transported patients for whom ambulance transport was not medically necessary. To obtain payment, Medlock had forged a physician’s signature. The court concluded that this was “use” of another person’s identity. [United States v. White, 846 F.3d 170 (6th Cir. 2017)] (See Sources of American Law.) 1.

Which precedent—the Miller case or the Medlock case—is similar to White’s situation, and why?

Solution: In this problem, White operated a travel agency. To obtain low fares for her clients, she submitted fake military identification cards to the airlines.

She was charged with the crime of identity theft, which requires the “use” of another’s identification. In a previous case, David Miller, to obtain a loan, represented that certain investors approved of the loan when they did not.

Miller’s conviction for identity theft was overturned on the ground that he had not “used” the investors’ identities—he had only said that they had done something when they had not. In a second case, Kathy Medlock, the operator of an ambulance service, obtained payment for transporting patients for whom there was no medical necessity to do so by forging a physician’s signature.

White’s actions most closely resemble Medlock’s forgery. White not only told the airlines that her clients were members of the military—she created false identification cards and sent them to the airlines.

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

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

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

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

Almost any definition of ethics, and any set of ethical standards, includes honesty as a component. In the White case, Sandra White lied to the airlines that her clients were members of the military, and created false identification cards to obtain cheaper fares. In the first case cited by the White court, David Miller, to obtain a loan, represented that certain investors approved of the loan when they did not. In the second case cited by the White court, Kathy Medlock, the operator of an ambulance service, obtained payment for transporting

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patients for whom there was no medical necessity to do so by forging a physician’s signature.

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

TIME-LIMITED TEAM ASSIGNMENT 1–8. Court Opinions. Go to the section entitled Reading and Understanding Case Law in the appendix at the end of this chapter, and read the subsection entitled “Decisions and Opinions.”

1.

One team will explain the difference between a concurring opinion and a majority opinion.

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

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

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

3. The third team will explain why judges and justices write concurring and

dissenting opinions, given that these opinions will not affect the outcome of the case at hand, which has already been decided by majority vote.

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

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 02: Courts and Alternative Dispute Resolution

Solution and Answer Guide

Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 02: Courts and Alternative Dispute Resolution

TABLE OF CONTENTS Critical Thinking Questions in Features .............................................................................1 Landmark in the Law—Application to Today’s World ........................................................ 1 Adapting the Law to the Online Environment—Critical Thinking.................................... 2 Ethical Issue—Value Judgment ............................................................................................. 2 Business Law in Context—Key Point .................................................................................... 2 Critical Thinking Questions in Cases ................................................................................. 3 Case 2.1—Critical Thinking ...................................................................................................... 3 Case 2.2—Critical Thinking ..................................................................................................... 4 Case 2.3—Critical Thinking ..................................................................................................... 4 Chapter Review ................................................................................................................... 5 Practice and Review................................................................................................................. 5 Practice and Review: Debate This ......................................................................................... 6 Issue Spotters ........................................................................................................................... 6 Business Scenarios and Case Problems .............................................................................. 7 A Question of Ethics ............................................................................................................... 11 Time-Limited Team Assignment .......................................................................................... 12

CRITICAL THINKING QUESTIONS IN FEATURES LANDMARK IN THE LAW—APPLICATION TO TODAY’S WORLD 1.

Since the Marbury v. Madison decision, the power of judicial review has remained unchallenged and today is exercised by both federal and state courts. Why is judicial review such an important check on the powers of the legislative branch of the U.S. government?

Solution: If the courts did not have the power of judicial review, the constitutionality of Congress’s acts could not be challenged in court—a congressional statute would remain law unless changed by Congress. Such an arrangement is fundamentally at

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odds with the separation of powers so important to both American law and American government.

ADAPTING THE LAW TO THE ONLINE ENVIRONMENT—CRITICAL THINKING 1.

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

Solution: Yes, there is one way. That defendant could have to have no social media accounts whatsoever. Increasingly, though, fewer and fewer individuals are not connected to others via social media.

ETHICAL ISSUE—VALUE JUDGMENT 1.

What steps should lawyers take to protect their clients from the ethical pitfalls of third-party litigation funding?

Solution: A lawyer’s ethical obligation is to act in the best interests of the client at all times (with certain rare exceptions involving a client’s criminal behavior). In situations involving potential third-party litigation funding, this obligation would start when a client tells their lawyer that they will not be able to pay for the proposed litigation without outside help. The lawyer would then have to advise the client on the pros and cons of third-party litigation funding, as discussed in the feature.

If the client decides to seek a third-party litigation partner, a lawyer would be obliged to find one with a reputation for ethical behavior. When such a litigation partner is identified, the lawyer would represent the client in negotiating the deal with the third party. If an agreement is reached, the lawyer must ensure that the third party does not improperly influence the lawyer’s independent professional judgment during the legal proceedings. Along these lines, it would be unethical for the lawyer to receive compensation from the third party without written consent from the client. If during the course of the lawsuit the client’s interests and the third party’s interests diverge, the lawyer must continue to act in the best interests of the client, even if this results in the lawyer being removed from the case. (Indeed, some third-party funding litigation contracts give the funders the ability to approve of and/or remove counsel.)

It is likely that, at some point, the third-party funder will ask for confidential information about the client. The lawyer cannot share this information without the client’s written consent. Finally, if the lawsuit results in a damage award for the client, the lawyer must ensure that the pretrial contract is adhered to in proportioning these damages.

BUSINESS LAW IN CONTEXT—KEY POINT 1.

It is understandable that companies wish to avoid the high cost of going to court for every customer grievance. Binding arbitration offers businesses numerous advantages over litigation. Taking Samsung’s experience as a guide, what step should a business take to give itself a better chance of successfully compelling arbitration when faced with a class-action lawsuit brought by its customers?

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 02: Courts and Alternative Dispute Resolution

Solution: A business in Samsung’s situation must be certain that a binding arbitration requirement is part of an actual contractual agreement between the business and its customers. Inserting an arbitration clause, even in all capital letters, in a multi-page document that customers may never read is usually not sufficient.

CRITICAL THINKING QUESTIONS IN CASES CASE 2.1—CRITICAL THINKING 1.

Economic. What might be some of the implications of this decision for the nation’s businesses?

Solution: Previous to this case, corporations like Norfolk Southern Railway assumed they would be subject to litigation only in the state where they were incorporated or headquartered, or in a state where the legal issue arose out of the corporation’s significant business activities there. In this case, the United States Supreme Court ruled that a company can be sued in any state that has a Pennsylvania-style consent statute, regardless of the amount of business the company does there. This is important because being sued out of state incurs a significant economic burden, requiring the company to, among other costs, hire out-of-state counsel and rent out-of-state office space. American businesses are also worried that the Supreme Court’s decision will spur other states besides Pennsylvania to pass similar consent-requirement laws. If this does happen, businesses will have to decide whether expansion into other states is worth the risk of increased exposure to lawsuits.

2. Ethical. Norfolk Southern argued that the “primary concern” of jurisdiction law is to treat parties to a lawsuit “fairly.” Does the Supreme Court’s decision in this case seem fair to Norfolk Southern? Explain your answer.

Solution: At first glance, many aspects of this decision do not seem fair to Norfolk Southern. The company was incorporated in Virginia and has its headquarters there, as well. Mallory lived in Virginia and claimed that he was exposed to carcinogens while working for the railway in Ohio and Virginia. Indeed, Mallory most likely was seeking a “plaintiff-friendly” venue over other, more suitable locales for the trial. Norfolk Southern also contended that Pennsylvania unfairly coerced out-of-state companies to agree to its consent statute by denying them the opportunity to do business in the state otherwise.

The facts of the Mallory case suggest, however, that the Supreme Court relied on equitable principles in coming to its decision. At the time of Mallory’s lawsuit, the company employed nearly 5,000 people in Pennsylvania and maintained more than 2,400 miles of railroad tracks in the state. It also operated a 70-acre locomotive shop in Altoona, Pennsylvania. So, Norfolk Southern had significantly more than “minimal contacts” with Pennsylvania, even if none of these contacts directly related to the company’s legal dispute with Mallory. Such facts suggest that, in future cases involving consent-requirement statutes, courts will continue to consider the totality of circumstances when deciding jurisdictional fairness.

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CASE 2.2—CRITICAL THINKING 1.

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

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

CASE 2.3—CRITICAL THINKING 1.

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

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

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

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

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

2. Legal. A judge or a jury can decide a question of fact, but only a judge can rule on a question of law. Why? Solution: A question of fact is decided by a trier of fact. In a jury trial, this is the jury.

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

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

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

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

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

Garner contacted George Foreman and his manager, who both reside in Texas, to sell the idea, and they arranged a meeting at Caesar’s Palace in Las Vegas, Nevada. At some point in the negotiations, Foreman’s manager signed a nondisclosure agreement prohibiting him from disclosing Garner’s promotional concepts unless they signed a contract. Nevertheless, after negotiations between Garner and Foreman fell through, Foreman used Garner’s “Battle of the Ages” concept to promote a subsequent fight. Garner filed a lawsuit against Foreman and his manager in a federal district court in Illinois, alleging breach of contract. Using the information presented in the chapter, answer the following questions.

1.

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

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

2. Does the federal district court have original or appellate jurisdiction?

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

3. Suppose that Garner had filed his action in an Illinois state court. Could an Illinois state court have exercised personal jurisdiction over Foreman or his manager? Why or why not? © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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

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

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

PRACTICE AND REVIEW: DEBATE THIS 1.

In this age of the internet, when people communicate via e-mail, tweets, social media, and Skype, is the concept of jurisdiction losing its meaning?

Solution: Many believe that yes, the idea of determining jurisdiction based on individuals’ and companies’ physical locations no longer has much meaning.

Increasingly, contracts are formed via online communications. Does it matter where one of the parties has a physical presence? Does it matter where the e-mail server or webpage server is located? Probably not.

In contrast, in one sense, jurisdiction still has to be decided when conflicts arise.

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

ISSUE SPOTTERS 1.

At the trial, after Sue calls witnesses, offers evidence, and so forth, Tom has at least two choices between courses of action. Tom can start by calling witnesses. What might Tom do instead? (See Following a State Court Case.)

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

2. Lexi contracts with Theo to deliver a quantity of computers to Lexi’s Computer Store.

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

Explain. (See Alternative Dispute Resolution.)

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

BUSINESS SCENARIOS AND CASE PROBLEMS 2–1. Standing to Sue. Jack and Maggie Turton bought a house in Jefferson County, Idaho, located directly across the street from a gravel pit. A few years later, the county converted the pit to a landfill. The landfill accepted many kinds of trash that cause harm to the environment, including major appliances, animal carcasses, containers with hazardous content warnings, leaking car batteries, and waste oil. The Turtons complained to the county, but the county did nothing. The Turtons then filed a lawsuit against the county alleging violations of federal environmental laws pertaining to groundwater contamination and other pollution. Do the Turtons have standing to sue? Why or why not? (See Basic Judicial Requirements.)

Solution: This problem concerns standing to sue. As you read in the chapter, to have standing to sue, a party must have a legally protected, tangible interest at stake.

Parties must show that they have been injured, or are likely to be injured, by the actions of the parties that they seek to sue. In this problem, the issue is whether the Turtons had been injured, or were likely to be injured, by the county’s landfill operations. Clearly, one could argue that the injuries that the Turtons complained of directly resulted from the county’s violations of environmental laws while operating the landfill. The Turtons lived directly across from the landfill, and they were experiencing the specific types of harms (fires, scavenger problems, groundwater contamination) that those laws were enacted to address. Thus, the Turtons would have standing to bring their suit.

2–2. Discovery. Advance Technology Consultants, Inc. (ATC) contracted with RoadTrac, LLC, to provide software and client software systems for products using global positioning satellite (GPS) technology being developed by RoadTrac. RoadTrac agreed to provide ATC with hardware with which ATC’s software would interface. Problems soon arose, however, and RoadTrac filed a lawsuit against ATC alleging breach of contract. During discovery, RoadTrac requested ATC’s customer lists and marketing procedures. ATC objected to providing this information because RoadTrac and ATC had become competitors in the GPS industry. Should a party to a lawsuit have to hand over its confidential business secrets as part of a discovery request? Why or why not? What limitations might a court consider imposing before requiring ATC to produce this material? (See Following a State Court Case.)

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

2–3. Discovery. Jessica Lester died from injuries suffered in an auto accident caused by the driver of a truck owned by Allied Concrete Co. Jessica’s widower, Isaiah, filed a suit against Allied for damages. The defendant requested copies of all of Isaiah’s Facebook photos and other postings. Before responding, Isaiah “cleaned up” the Facebook page. Allied suspected

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that some of the items had been deleted, including a photo of Isaiah holding a beer can while wearing a T-shirt that declared “I [heart] hotmoms.” Can this material be recovered? If so, how? What effect might Isaiah’s “misconduct” have on the result in this case? Discuss. [Allied Concrete Co. v. Lester, 736 S.E.2d 699 (Va. 2013)] (See Following a State Court Case.)

Solution: Yes, the items that were deleted from a Facebook page can be recovered.

Normally, a party must hire an expert to recover material in an electronic format, and this can be time consuming and expensive.

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

In the actual case on which this problem is based, Allied hired an expert, who determined that Isaiah had in fact removed some photos and other items from his Facebook page. After the expert testified about the missing material, Isaiah provided Allied with all of it, including the photos that he had deleted. Allied sought a retrial, but the court instead reduced the amount of Isaiah’s damages by the amount that it cost Allied to address his “misconduct.”

2–4. Electronic Filing. Betsy Faden worked for the U.S. Department of Veterans Affairs. Faden was removed from her position in April 2012 and was given until May 29 to appeal the removal decision. She submitted an appeal through the Merit Systems Protection Board’s e-filing system seven days after the deadline. Ordered to show good cause for the delay, Faden testified that she had attempted to e-file the appeal while the board’s system was down. The board acknowledged that its system had not been functioning on May 27, 28, and 29. Was Faden sufficiently diligent in ensuring a timely filing? Discuss. [Faden v. Merit Systems Protection Board, 553 Fed.Appx. 991 (Fed. Cir. 2014)] (See Courts Online.)

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

From the facts as stated, it appears that Faden attempted to file her appeal only at the end of the relevant period when the Board’s e-filing system was down. But there is no indication that anything prevented her from e-filing at a time when the Board’s system was not down, or from mailing or faxing her appeal at any time, before the deadline. Thus, Faden appears to have been neither timely nor diligent in filing her appeal before the deadline.

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

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2–5. Business Case Problem with Sample Answer—Corporate Contacts. LG Electronics, Inc., a South Korean company, and nineteen other foreign companies participated in the global market for cathode ray tube (CRT) products. CRTs were components in consumer goods, including television sets, and sold for many years in high volume in the United States, including the state of Washington. The state filed a suit against LG and the others, alleging a conspiracy to raise prices and set production levels in the market for CRTs in violation of a state consumer protection statute. The defendants filed a motion to dismiss the suit for lack of personal jurisdiction. Should this motion be granted? Explain your answer. [State of Washington v. LG Electronics, Inc., 185 Wash.App. 394, 341 P.3d 346 (2015)] (See Basic Judicial Requirements.)

Solution: No, the defendants’ motion to dismiss the suit for lack of personal jurisdiction should not be granted. A corporation normally is subject to jurisdiction in a state in which it is doing business. A court applies the minimum-contacts test to determine whether it can exercise jurisdiction over an out-of-state corporation. This requirement is met if the corporation sells its products within the state or places its goods in the “stream of commerce” with the intent that the goods be sold in the state.

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

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

2–6. Appellate, or Reviewing, Courts. Angelica Westbrook was employed as a collector for Franklin Collection Service, Inc. During a collection call, Westbrook told a debtor that a $15 processing fee was an “interest” charge. This violated company policy, and Westbrook was fired. She filed a claim for unemployment benefits, which the Mississippi Department of Employment Security (MDES) approved. Franklin objected. At an MDES hearing, a Franklin supervisor testified that she had heard Westbrook make the false statement, although she admitted that there had been no similar incidents with Westbrook. Westbrook denied making the statement but added that, if she had said it, she did not remember it. The agency found that Franklin’s reason for terminating Westbrook did not amount to the misconduct required to disqualify her for benefits and upheld the approval. Franklin appealed to a state intermediate appellate court. Is the court likely to uphold the agency’s findings of fact?

Explain. [Franklin Collection Service, Inc. v. Mississippi Department of Employment Security, 184 So.3d 330 (Miss.App. 2016)] (See The State and Federal Court Systems.)

Solution: Yes, the state intermediate appellate court is likely to uphold the agency’s findings of fact. Appellate courts normally defer to lower tribunals’ findings on questions of fact because those forums’ decision makers are in a better position to evaluate testimony. A trial court judge or jury, for example, can directly observe

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witnesses’ gestures, demeanor, and other nonverbal conduct during a trial. A judge or justice sitting on an appellate court cannot.

In this problem, Angelica Westbrook, an employee of Franklin Collection Service, Inc., allegedly made a statement during a call to a debtor that violated company policy.

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

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

2–7. Standing to Sue. Debra Laufer is disabled within the meaning of the Americans with Disabilities Act (ADA). Laufer is an advocate for disabled people’s rights and a self-proclaimed “tester” who monitors whether places of public accommodation and their websites comply with the ADA. In a lawsuit against a hotel, Laufer claimed to have suffered a “concrete” injury because the hotel’s website did not include accessibility-related information required by federal regulations. The inability to obtain the information on the website caused Laufer to experience “frustration and humiliation.” The defendant owner of the hotel, Arpan LLC, argued that Laufer lacked standing to sue. The district court agreed, holding that Laufer had not suffered a “concrete” injury. On appeal, should the reviewing court accept the trial court’s ruling? Why or why not? [Laufer v. Arpan, LLC, 29 F.4th 1268 (11th Cir. 2022)] (See Basic Judicial Requirements.)

Solution: The United States Court of Appeals for the 11th Circuit decided that precedent compelled it to vacate the district court’s decision and remand the case for further proceedings. “The plaintiff has Article 3 standing if she can establish (1) an injury in fact, (2) that is fairly traceable to the defendant’s conduct, and (3) that is redressable by a favorable decision.” The court looked at whether Laufer had suffered a concrete “intangible” injury that suffices for her to have standing to sue. The plaintiff’s allegations of frustration and humiliation are facially sufficient to demonstrate stigmatic injury standing.

2–8. Service of Process. Cincinnati Insurance Company (CIC) was involved in a lawsuit with Eric Hall. CIC twice requested certified-mail service on Hall at a residential address. On both occasions, electronic return receipts indicated that the summons and complaint were successfully “delivered” on specified dates and “left with individual.” Someone signed for service of process. CIC moved for default judgment against Hall, citing Hall’s failure to appear or otherwise defend. A trial court dismissed the lawsuit against Hall for lack of service of process. Should the Court of Appeals of Ohio affirm the trial court’s order? Why or why not?

[Cincinnati Insurance Co. v. Eric Hall, et al., 2022-Ohio-1112, 2022 WL 985977 (Ct. App. Ohio, 2nd Dist. 2022)] (See The State and Federal Court Systems.)

Solution: No. The Court of Appeals of Ohio, 2nd District, Montgomery County, concluded that the trial court erred in finding invalid service of process. The appeals

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court found both a rebuttable presumption of valid service and no evidence to rebut the presumption. The trial court’s judgment was reversed, and the case was remanded for further proceedings. The laws of civil procedure in the state of Ohio authorize certified-mail service with a return receipt “signed by any person.” Because the certified-mail return receipt was signed by “someone,” there was a rebuttable presumption of proper service.

A QUESTION OF ETHICS 2–9. Jury Trials. Adam Orduna accepted a position at Kansas City, Missouri, news station KCTV5 as a sports journalist. The employment contract Orduna signed contained a provision that both parties “voluntarily waive their right to a jury trial and agree to submit any claims to a court for a bench trial.” (A bench trial is one in which a judge rather than a jury decides the outcome.) Three years later, Gray Media Group, Inc., which owned KCTV5, terminated Orduna’s employment. Orduna, who is African American, filed a lawsuit alleging racial discrimination under the Civil Rights Act of 1964. The plaintiff demanded a jury trial, arguing that the contract waiver was ineffectual because he did not make it knowingly and voluntarily. [Orduna v. Gray Media Group, Inc., 2024 WL 21506 (D. Kan. 2024)] (See Following a State Court Case.)

1.

The right to a jury trial in a civil lawsuit is a fundamental right for defendants.

Should corporations be allowed to waive this right in employment contracts?

Explain.

Solution: The requirement is that both parties to the contract must waive the right to a jury trial. If one of the parties does not want to give up this right, they do not have to. Of course, Orduna claimed that he did not realize he had waived his right to a jury trial, which was the crux of his lawsuit against Gray Media.

It is not a given, however, that a jury trial is always “better” than a bench trial for defendants. In some respects, bench trials might be preferable. With no need for jury selection or jury instructions, bench trials are often shorter and less expensive than jury trials. A judge is—one would hope—more knowledgeable concerning the law than is the average juror, which might benefit the defendant. At the same time, there is definitely a widespread belief in the business community that jurors, many of whom are employees themselves, are more sympathetic to defendants such as Orduna than are judges. This belief explains why many companies include jury waiver clauses in their employment contracts.

2. Did the employment contract in this case unethically obscure the waiver of a jury trial provision so as to deceive an employee like Orduna?

Solution: The ethical aspect of this case is not straightforward. Generally speaking, contractual agreements waiving the right to trial by jury are neither contrary to public policy nor unlawful. Of course, the waiver of this right must be “knowing and voluntary.” In claiming that his waiver was unknowing and involuntary, Orduna relied more on ethical arguments than legal ones—always a risky courtroom strategy.

The ethical issue in the Orduna case was whether Meredith (the company with which Orduna negotiated his contract before it was purchased by Gray Media)

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had such a significant negotiating advantage over Orduna as to make the jury trial waiver unfair. Orduna argued that he was merely an individual while Meredith was a large corporation, implying an inherent inequality in bargaining power. He also noted that he was afraid that Meredith would pull its offer for employment if he attempted to negotiate the terms of a standard contract. The applicable ethical concepts here encompass basic fairness in the bargaining process, positing that the process cannot be fair if one side holds so much power over the other side that the agreement is the result of coercion rather than free will.

Was Meredith’s contract designed to take advantage of individuals such as Orduna by “tricking” them into waiving their right to a jury trial? The district court presiding over this case did not think so. First, the court pointed out that the waiver clause was “conspicuous” because it (1) was clearly labeled, boldfaced, and underlined; (2) used font the same size as was used in the rest of the contract; and (3) was clearly separated from the rest of the text. In addition, the waiver provision explicitly suggested that the potential employee consult a lawyer before agreeing to the contract’s terms, and the contract’s signature page contained a warning that, before signing, the employee should “CONSULT AN ATTORNEY OF HIS/HER OWN CHOOSING AT HIS/HER OWN EXPENSE TO REVIEW THIS AGREEMENT.” Using the court’s reasoning, it does not seem like Meredith’s standard contract was designed to fool employees into waiving the right to a jury trial without their knowledge. This conclusion is backed up by additional information about Orduna provided by the court (with the help of Meredith’s lawyers, no doubt).

At the time he signed the contract, Orduna was thirty-one years old, had a college degree, and had been working in the television broadcast industry for more than five years. The contract with KCTV5 was his second. Even though Orduna was not, as he pointed out, trained in the legalities of contracts, the court found that his experience was sufficient to understand the basics of Meredith’s standard contract.

As the court put it, “there is inevitably disparity in bargaining power between an employer and an employee.” Businesses are ethically obligated to lessen this imbalance by creating standard employment contracts that a reasonable potential employee will understand. In this case, the court felt that Meredith had done so, and therefore it dismissed Orduna’s claim that his waiver of jury trial was not made “knowingly and voluntarily.” In the end, this does not mean that Gray Media did not discriminate against Orduna. It means that the question will be decided by a judge rather than a jury of the plaintiff’s peers.

TIME-LIMITED TEAM ASSIGNMENT 2–10. Access to Courts. Assume that a statute in your state requires that all civil lawsuits involving damages of less than $50,000 be arbitrated. Such a case can be tried in court only if a party is dissatisfied with the arbitrator’s decision. The statute also provides that if a trial does not result in an improvement of more than 10 percent in the position of the party who demanded the trial, that party must pay the entire cost of the arbitration proceeding. (See Alternative Dispute Resolution.)

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1.

One team will argue that the state statute violates litigants’ rights of access to the courts and trial by jury.

Solution: The statute violates litigants’ rights of access to the courts and to a jury trial because the imposition of arbitration costs on those who improve their positions by less than 10 percent on an appeal is an unreasonable burden.

And the statute forces parties to arbitrate before they litigate—an added step in the process of dispute resolution. The limits on the rights of the parties to appeal the results of their arbitration to a court further impede their rights of access. The arbitration procedures mandated by the statute are not reasonably related to the legitimate governmental interest of attaining less costly resolutions of disputes.

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

Solution: The statute does not violate litigants’ constitutional right of access to the courts because it provides the parties with an opportunity for a court trial in the event either party is dissatisfied with an arbitrator’s decision. The burdens on a person’s access to the courts are reasonable. The state judicial system can avoid the expense of a trial in many cases. And parties who cannot improve their positions by more than 10 percent on appeal are arguably wasting everyone’s time. The assessment of the costs of the arbitration on such parties may discourage appeals in some cases, which allows the courts to further avoid the expense of a trial. The arbitration procedures mandated by the statute are reasonably related to the legitimate governmental interest of attaining speedier and less costly resolution of disputes.

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

Solution: The determination on rights of access could be different if the statute was part of a pilot program and affected only a few judicial districts in the state because only parties who fell under the jurisdiction of those districts would be subject to the limits. Opponents might argue that the program violates the due process of the Fifth Amendment because it is not applied fairly throughout the state. Proponents might counter that parties who object to an arbitrator’s decision have an opportunity to appeal it to a court.

Opponents might argue that the program exceeds what the state legislature can impose because it does not reasonably relate to a legitimate governmental objective—it arbitrarily requires only litigants who reside in a few jurisdictions to submit to arbitration. Proponents might counter that this is aimed at the reduction of court costs—that the statute rationally relates to a legitimate governmental end. An equal protection challenge would most likely be subject to a similar rational basis test. Under these and other arguments, the reduction of court costs would be a difficult objective to successfully argue against.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 03: Ethics in Business

Solution and Answer Guide

Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 03: Ethics in Business

TABLE OF CONTENTS Critical Thinking Questions in Features .............................................................................1 Business Law in Context—Key Point ..................................................................................... 1 Adapting the Law to the Online Environment—Critical Thinking.................................... 2 Managerial Strategy—Business Questions........................................................................... 2 Building Analytical Skills—Result and Reasoning .............................................................. 3 Critical Thinking Questions in Cases ................................................................................. 3 Case 3.1—Critical Thinking ...................................................................................................... 3 Case 3.2—Critical Thinking ..................................................................................................... 3 Chapter Review ................................................................................................................... 4 Practice and Review................................................................................................................. 4 Practice and Review: Debate This ......................................................................................... 6 Issue Spotters ........................................................................................................................... 6 Business Scenarios and Case Problems .............................................................................. 7 A Question of Ethics ............................................................................................................... 13 Time-Limited Team Assignment .......................................................................................... 15

CRITICAL THINKING QUESTIONS IN FEATURES BUSINESS LAW IN CONTEXT—KEY POINT 1. Unlike traditional forms of wealth, digital currency is not regulated by a central authority or backed by the world’s governments. How does the example of Bankman-Fried’s unethical behavior highlight the pitfalls of investing in cryptocurrency?

Solution: Most obviously, Sam Bankman-Fried’s wrongdoing shows that when a cryptocurrency exchange such as FTX fails due to unethical business practices, investors have little or no recourse. This would not be true if they had placed their funds in a traditional bank account, which is insured by the FDIC, or, arguably, if they had invested in the New York Stock Exchange, which is regulated by the Securities and Exchange Commission (SEC).

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Despite this lack of protection, the growing popularity of cryptocurrency is undeniable.

By some measures, about 17 percent of American adults have invested in, used, or traded digital currency. If such levels continue to grow, the federal government will feel pressured to create some sort of regulatory framework for cryptocurrency. Indeed, in 2024, the SEC permitted eleven investment firms to offer cryptocurrency-based funds to their clients for the first time. This move gave investors the ability to participate in the digital currency market without actually purchasing digital currency.

ADAPTING THE LAW TO THE ONLINE ENVIRONMENT—CRITICAL THINKING 1. Should U.S. lawmakers consider providing employees with a “right” to disconnect? What might be some practical and ethical issues with doing so?

Solution: About 44 percent of the companies in this country allow remote work, and only about 16 percent of American companies hire remote workers. That being said, employment from home became the norm for millions of employees during the COVID19 pandemic, further blurring the “nine to five, five days a week” standards of the traditional work week. Consequently, the “right to disconnect” when out of the office is a more pressing concern than it has been in the past.

What would right-to-disconnect legislation look like? At a minimum, it would include the right not to respond to email, phone, or instant messages outside the agreed-upon work hours, as well as assurances that an employee could not be punished for being unavailable during these disconnected hours. In addition, no meetings could take place outside the confines of the workday.

Several potential ethical problems with any such legislation are evident. The right to disconnect is not the same as the duty to disconnect. That is, workers could still “choose” to stay connected, and this “choice” might be unfairly influenced by management. Furthermore, many employees appreciate the flexibility of being able to work at home and during weekends rather than face the pressure and stress of finishing tasks during authorized working hours. Any right to disconnect legislation might reduce this flexibility.

On a practical level, the global nature of companies with international partners further confuses the subject. How would a right-to-disconnect law address different time zones and business cultures? Furthermore, many of the same industries that can accommodate a hybrid work schedule also serve clients that expect to be able to get in touch with employees outside normal office hours. In these situations, the right to disconnect might be impossible.

MANAGERIAL STRATEGY—BUSINESS QUESTIONS 1.

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

Solution: Anytime a company takes a stance on a political or social issue, it can assume that it will receive support from some customers and criticism from others. In this instance, given the fervor of the gun control debate in the United States today, Dick’s certainly expected to lose customers who are passionate about the right to bear

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 03: Ethics in Business

arms. In fact, the company experienced a 3.1 percent decline in sales for the fiscal year following its policy change. Afterwards, however, sales rose at a commensurate rate, showing that the public may have a short attention span even when it comes to the most highly charged political issues.

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

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

BUILDING ANALYTICAL SKILLS—RESULT AND REASONING 1.

It seems unlikely that a proposed Trovan test on children, based on the facts described here, would have survived an IDDR analysis under either a duty-based or an outcomebased ethical standard. What factors might have motivated Pfizer to behave in such an unethical manner?

Solution: It would appear that Pfizer was rushing to test and market Trovan as soon as possible. This focus on short-run profit maximization took precedence over any ethical considerations. It is often easier to see ethical lapses in retrospect than it is to identify potential ethical problems in advance, however.

CRITICAL THINKING QUESTIONS IN CASES CASE 3.1—CRITICAL THINKING 1.

What If the Facts Were Different? Suppose that Greif had been a young real estate investor who bought and sold commercial property on a regular basis. Would this lawsuit have dragged on for over ten years, as happened here? Why or why not?

Solution: Probably not. Typically, even relatively young professionals in the business of buying and selling real estate properties would have a difficult time claiming that they did not understand what the purchase price in the purchase agreement was or that it was less than fair market value. Probably such investors would not have even bothered to sue to rescind a purchase agreement. If, nonetheless, a professional engaged in selling the vacant land had nonetheless sued to rescind the purchase agreement, the trial court would have probably agreed to a motion to dismiss by the buyer.

CASE 3.2—CRITICAL THINKING 1.

Economic. What marketing tool did Watson gain by inflating its AWPs?

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 03: Ethics in Business

Solution: The marketing tool that Watson gained by inflating the AWPs of its drugs was “the spread”—the difference between the fabricated numbers and the prices that pharmacies actually paid.

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

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

2. What If the Facts Were Different? Watson argued that AWP was a “term of art” in the pharmaceutical industry that meant “suggested price.” Suppose that the court had accepted this argument. What might have been the effect of this decision?

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

The court’s acceptance of the argument would have condoned Watson’s pricing policy.

This would likely have led to a judgment in the drug maker’s favor in this case, which would have meant a forfeit by Mississippi Medicaid, the state, and the taxpayers of the amounts previously overpaid.

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

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

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

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 03: Ethics in Business

he knows that some probably are not. Using the information presented in this chapter, answer the following questions.

1.

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

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

2. Using Immanuel Kant’s categorical imperative, are the actions of RightLiving ethical?

Why or why not?

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

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

Solution: Utilitarianism asks the decision maker to perform a cost/benefit analysis of the alternatives. Stilton should evaluate the risks or chances of an investor buying a void policy compared to the benefits gained from purchasing legitimate policies. The cost/benefit analysis also should include whether he sells individual policies to individual investors or whether he sells a share of a bundle of policies. If he does the former, the risks to the individual investor are greater than if the latter. If the latter, the benefit of the legitimate policies may offset any loss from cancelled policies.

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

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

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

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 03: Ethics in Business

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

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

PRACTICE AND REVIEW: DEBATE THIS 1.

Executives in large corporations are ultimately rewarded if their companies do well, particularly as evidenced by rising stock prices. Consequently, shouldn’t those who run corporations be able to decide what level of negative side effects is “acceptable” for their companies’ products?

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

One now has to ask the question about who is in the best situation to decide the optimum level of side effects of any drug or good or service sold. (It’s impossible to create drugs with zero negative side effects.) Any government regulator will want to make sure that there are few, if any, people who suffer from negative side effects.

After all, the government regulator will look bad if the press reports about those who reacted badly to a drug. Therefore, there is a bias within any government regulatory apparatus against any good or service that has bad side effects. More limits on drugs, though, that help millions just because few suffer side effects will cost those who don’t obtain the drug—perhaps with their lives.

ISSUE SPOTTERS 1.

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

Explain your answers. (See Ethical Principles and Philosophies.)

Solution: When a corporation decides to respond to what it sees as a moral obligation to correct for past discrimination by adjusting pay differences among its employees, an ethical conflict is raised between the firm and its employees and between the firm and its shareholders. This dilemma arises directly out of the effect such a decision has on the firm’s profits. If satisfying this obligation increases profitability, then the dilemma is easily resolved in favor of “doing the right thing.”

2. Delta Tools, Inc., markets a product that under some circumstances is capable of seriously injuring consumers. Does Delta have an ethical duty to remove this product from the market, even if the injuries result only from misuse? Why or why not? (See Making Ethical Business Decisions.)

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 03: Ethics in Business

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

BUSINESS SCENARIOS AND CASE PROBLEMS 3–1. Business Ethics. Jason Trevor owns a commercial bakery in Blakely, Georgia, that produces a variety of goods sold in grocery stores. Trevor is required by law to perform internal tests on food produced at his plant to check for contamination. On three occasions, tests of food products containing peanut butter were positive for salmonella contamination.

Trevor was not required to report the results to U.S. Food and Drug Administration officials, however, so he did not. Instead, Trevor instructed his employees to simply repeat the tests until the results were negative. Meanwhile, the products that had originally tested positive for salmonella were eventually shipped out to retailers. Five people who ate Trevor’s baked goods that year became seriously ill, and one person died from a salmonella infection. Even though Trevor’s conduct was legal, was it unethical for him to sell goods that had once tested positive for salmonella? Why or why not? (See Ethics and the Role of Business.)

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

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

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

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

Clearly, the bakery’s decision should not be to simply retest the food until the results are negative and ship it to retailers because this shows a lack of concern for the buyers and indirectly the company’s other stakeholders. The decision might be to report to the FDA and follow its instructions for retesting or disposing of the food. Or it might be to

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 03: Ethics in Business

voluntarily pull the tainted food off the shelves so as not to put public health at risk. In either situation, the bakery needs to decide how to avoid potential salmonella contamination in the future.

The decision makers need to document the reasons underlying their decision and course of action. If the decision was to report the results to the FDA and follow its advice on how to handle the contamination, the bakery could justify its actions by articulating that it is concerned with public safety. The same justification applies to a decision to destroy the tainted food. The bakery is justified in taking a course of action showing it is better to be safe (and take a monetary loss) than sorry (when a buyer ingests salmonella and dies).

Either of these courses of action avoids potentially costly litigation that could result from injured persons suing the company over defective goods and avoids negative publicity and loss of goodwill from a salmonella outbreak. In addition, taking such preventive measures allows the bakery to avoid having the FDA investigate the salmonella problem and possibly issue regulations that would hamper its operation and profits.

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

3–2. Ethical Conduct. Internet giant Zoidle, a U.S. company, generated sales of £2.5 billion in the United Kingdom (UK) in 2013 (roughly $4 billion in U.S. dollars). The U.K. corporate tax rate is usually between 20 percent and 24 percent, but Zoidle paid only 3 percent (£6 million). At a press conference, company officials touted how the company took advantage of tax loopholes and sheltered profits to avoid paying the full corporate income tax. They justified their practices as ethical, declaring that it would be verging on illegal to tell shareholders that the company paid more taxes than it should.

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

Solution: Minimizing taxes can increase profits. Some people argue that a corporation’s only goal should be profit maximization, which will be reflected in a higher market value.

From an economist’s perspective, when all firms strictly adhere to the goal of profit maximization, resources tend to flow to where they are most highly valued by society.

Ultimately, profit maximization, in theory, leads to the most efficient allocation of scarce resources.

But a business’s focus on profits in the short run can lead to unethical conduct in the long run. In the short run, a company may increase its profits by taking full advantage of tax laws, even though it knows that the public may perceive this conduct as less than ethical.

In the long run, because of bad publicity—exemplified by the executive’s statements in this problem—as well as government audits or investigations and public or private lawsuits, such perception may compound and cause profits to suffer.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 03: Ethics in Business

Those who run corporations can and should act ethically. Some business leaders and others believe further that corporations should be accountable to society for their actions.

One view of corporate social responsibility stresses that corporations have a duty not just to shareholders, but also to other groups affected by corporate decisions. Under this approach, a corporation would consider the impact of its decision on the firm’s employees, customers, creditors, suppliers, and the community in which the corporation operates.

Another theory of social responsibility argues that corporations should behave as good citizens by promoting goals that society deems worthwhile and taking positive steps toward solving social problems—employment discrimination, human rights, environmental concerns, and similar issues. Under either of these views, in this problem, the corporation would consider the government and the poor in determining and executing fiscal and tax policies.

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

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

Solution: In this case, the court found that the company did not violate any laws and that the disclosures were adequate. From an ethical perspective, the question becomes whether the word “may” on the website gave adequate notice to the potential user or borrower that a charge would occur. It is settled legally that it is up to a contract signer to read all the components of a contract. In the online environment, it is hard to ever prove that a web page was not edited or changed from one day to the next.

A consumer may read the terms and conditions just before a round of edits and then agree and seem bound by changes that did not exist at the time they read them. From a fairness perspective, that would be unethical. At the same time, presumably the reader could print off a copy of the agreement and keep it filed. Underlying societal questions exist as to whether it is fair to assume that a purchaser in an online environment would print off that form contract language in the same way that a signer of a contract keeps a copy of the written contract. © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 03: Ethics in Business

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

3–4. Business Ethics. Mark Ramun worked as a manager for Allied Erecting and Dismantling Co., where he had a tense relationship with his father, who was Allied’s president. After more than ten years, Mark left Allied, taking DVDs and CDs containing 15,000 pages of Allied documents that constituted trade secrets. Later, he joined Allied’s competitor, Genesis Equipment & Manufacturing, Inc. Genesis soon developed a piece of equipment that incorporated elements of Allied equipment. How might business ethics have been violated in these circumstances? Discuss. [Allied Erecting and Dismantling Co. v. Genesis Equipment & Manufacturing, Inc., 511 Fed.Appx. 398 (6th Cir. 2013)] (See Making Ethical Business Decisions.)

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

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

What is not speculation, however, is that Mark took 15,000 pages of Allied’s documents on DVDs and CDs (trade secrets) when he left the firm. This act was likely a violation of the law (theft or misappropriation) and clearly a violation of business ethics. Later, Mark joined Allied’s competitor, Genesis Equipment & Manufacturing, Inc. Genesis soon developed a piece of equipment that incorporated elements of Allied equipment. This points to a second violation of the law and ethics (use of stolen property) by both Mark and Genesis.

Mark appears to have been competing against his family in the marketplace and trying to sell his products through another company. Assuming that Genesis profited from its sale of the equipment, this would have caused losses to Allied and unjustly enriched Genesis. If Mark was paid a bonus or given a promotion, he too would have gained undeservedly.

In the actual case on which this problem is based, Allied filed a suit in a federal district court against Genesis and Mark for misappropriation of trade secrets. A jury awarded Allied more than $3 million in damages, but the court issued a judgment as a matter of law in favor of the defendants. On appeal, the U.S. Court of Appeals for the Sixth Circuit reversed. “It is neither speculative nor conjectural that Genesis unjustly benefitted from its use of Allied's trade secrets.”

3–5. Spotlight on Bed, Bath & Beyond—Ethics and the Role of Business. Bed Bath & Beyond, Inc., sold a ceramic pot, called the “FireBurners” Pot, with a stainless steel fuel reservoir at its center and a bottle of gelled fuel called “FireGel” for use with the fire pot. A red sticker on the fire pot warned, “DON’T REFILL UNTIL FLAME IS OUT & CUP IS COOL.” “CARE AND USE INSTRUCTIONS” with the product cautioned, in a “WARNINGS” section, “Do not add fuel when lit and never pour gel on an open fire or hot surface.” The label on the back of the fuel gel bottle instructed, “NEVER add fuel to a burning fire,” and under a bold “WARNING” stated,

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“DANGER, FLAMMABLE LIQUID & VAPOR.” M.H., a minor, was injured when a fire pot in one of the products—bought from Bed Bath & Beyond—was refueled with the gel and an explosion occurred. Safer alternatives for the design of the fire pot existed, but its manufacturer chose not to use them. In these circumstances, is Bed, Bath & Beyond ethically responsible for the injury to M.H.? Discuss. [M.H. v. Bed, Bath & Beyond, Inc., 156 A.D.3d 33, 64 N.Y.S.3d 205 (1 Dept. 2017)] (See Ethics and the Role of Business.)

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

In this problem, a manufacturer made a ceramic pot, called the “FireBurners” Pot, with a stainless steel fuel reservoir at its center and a bottle of gelled fuel for use with the fire pot called “FireGel.” The design was apparently unsafe, prompting the addition of a plethora of warnings about the use of the pot. These warnings generally cautioned against adding fuel to the reservoir when it was hot. Safer alternatives for the design existed, but its maker chose not to use them. M.H., a consumer, was injured when a pot was refueled with the gel and an explosion occurred. Under the law of product liability, the seller—Bed, Bath & Beyond—could be held liable for the injury on the basis of a breach of the applicable legal duty. The sale of the pot in an unsafe condition was likewise a breach of a minimal ethical duty.

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

Doing so effectively could work to the satisfaction of the seller’s customers, as well as its owners, shareholders, and others.

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

3–6. Codes of Ethics. All professional organizations have their own codes of ethics. Many of them relate to the unlicensed practice of the relevant profession. Licensed veterinarians must follow the Rules of Professional Conduct for Veterinarians. Maria McElwee was a licensed chiropractor in Pennsylvania who had taken additional courses in animal chiropractic. She was not a licensed veterinarian and had never worked under the guidance of a licensed veterinarian. The Pennsylvania State Board of Veterinary Medicine filed suit against McElwee because, they contended, she was practicing veterinary medicine without having first become a licensed veterinarian. At that time, she was the owner of a practice called Critter Chiropractic, which exclusively treated animals. On her website, she offered care that “promotes healing and function within your animals’ body.”

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 03: Ethics in Business

McElwee had completed the Options for Animals College of Animal Chiropractic Program, which does not confer a degree but considers itself a “continuing education of post-graduate education program that certifies a certificate of completion.” The Pennsylvania Department of State issued an order concluding that the procedures performed by McElwee constituted the unlicensed practice of veterinary medicine. McElwee appealed. She argued that the order would deprive Pennsylvania consumers of choice in chiropractic care for their animals and would cause them economic harm. Should McElwee prevail on appeal? Why or why not?

[McElwee v. Bureau of Professional and Occupational Affairs, State Board of Veterinary Medicine, 271 A.3d 40, 2022 WL 150852 (2022)] (See Ethics and the Role of Business.)

Solution: The Commonwealth Court of Pennsylvania held that McElwee’s practice constituted a practice of veterinary medicine and that the Veterinarians’ Board’s order was not precluded as an impermissible enforcement of the Rules of Professional Conduct for Veterinarians imposed on a non-veterinarian. The appeals court pointed out that the Board had jurisdiction over any practitioner of animal chiropractic and that animal chiropractic was subject to then-current regulatory authority, even if this authority emanates from self-regulation (as opposed to regulation legislated by a state legislature, for example).

Some might argue that the appeals court’s ruling simply bolstered the anti-competitive nature of the self-regulation that veterinarians engage in. In other words, currently practicing veterinarians benefit economically when their own professional association, supported by the courts, eliminates competitors.

3–7. Business Case Problem with Sample Answer—Business Ethics. Jason Yearick was employed as a superintendent of Kimball Construction Company, Inc., located in Rossville, Maryland. On August 10, driving a company truck, Yearick was involved in a serious car accident, leaving him with physical injuries and emotional distress. The next day, Jerry Higdon, Yearick’s supervisor, told him to work from home. Yearick did so and logged his regular hours into Kimball’s payroll system. A few days later, Rebecca Pennington, the company’s human resources director, decided that Yearick would not be paid for the hours he worked from home. Yearick called Pennington and, during a heated argument, said, “Who the [expletive] are you to decide about my pay?” or words to that effect. Later that day, Kimball terminated Yearick’s employment. Who behaved unethically in these circumstances? Why? [Yearick v.

Kimball Construction Co., Inc., 2023 WL 8829243 (D. Md. 2023)] (See Making Ethical Business Decisions.)

Solution: Clearly, the use of profanity in an argument with a co-employee is unacceptable for ethical reasons, among others. Furthermore, the lack of communication between Higdon and Pennington regarding Yearick’s pay created a situation in which the company’s ethics could come into question. After all, Pennington docked an employee’s wages even though that employee was acting on instructions from a supervisor.

The main ethical issue here, however, regards Kimball terminating Yearick’s employment as the result of a pay dispute. Employees should not fear that such a step will result in their firing (especially when they have just been badly injured in a work-related accident).

Federal law backs up the ethics on this matter. The Fair Labor Standards Act (FLSA) makes it unlawful for employers in many industries to “discharge or in any manner discriminate against any employee because such employee has filed any complaint” about pay. After being fired, Yearick did in fact bring a suit against Kimball for violating his FLSA rights. A Maryland court ruled that this legal action could move forward, holding that such

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a complaint does not have to be written or formal to trigger the protection of federal law.

The complaint could, as in this case, be part of an employee “letting off steam,” as long as it “can be reasonably understood as demands for unpaid wages.”

A QUESTION OF ETHICS 3–8. Applying the IDDR Framework. Priscilla Dickman worked as a medical technologist at the University of Connecticut Health Center for twenty-eight years. Early in her career at the Health Center, Dickman sustained a back injury while at work. The condition eventually worsened, causing her significant back pain and disability. Her physician ordered restrictions on her work duties for several years. Then Dickman’s supervisor received complaints that Dickman was getting personal phone calls and was frequently absent from her work area.

Based on e-mails and other documents found on her work computer, it appeared that she had been running two side businesses (selling jewelry and providing travel agent services) while at work. The state investigated, and she was convicted of a civil ethics violation for engaging in “personal business for financial gain on state time utilizing state resources.”

Separate investigations resulted in criminal convictions for forgery and the filing of an unrelated fraudulent insurance claim. Dickman “retired” from her job (after she obtained approval for disability retirement) and filed a claim with the state of Connecticut against the health center. She alleged that her former employer had initiated the investigations to harass her and force her to quit. She claimed that the Health Center was unlawfully retaliating against her for being disabled and being put on workplace restrictions. [Dickman v. University of Connecticut Health Center, 162 Conn.App. 441, 132 A.3d 739 (2016)] (See Making Ethical Business Decisions.)

1.

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

Solution: Yes, as Dickman’s supervisor, you should report your findings to management. A supervisor might also want to speak with Dickman before going to management, to explain that others have noticed her away from her desk, and get her side of the story. Given the complaints that the employer received, there is no ethical dilemma in investigating Dickman. The possibility of misconduct would warrant investigation and possibly termination, even in the case of a long-term employee or an employee who has a disability restriction.

“Disability restrictions” do not make an otherwise fair termination unfair. The ethical dilemma that the Health Center faced in this case was whether to discharge Dickman. Besides Dickman, the stakeholders include the Health Center and its employees and also the patients served by the health center.

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Perhaps the most pertinent ethical theory is the categorical imperative—what would happen if Dickman were allowed to stay on staff, and other employees took this as a cue to emulate her conduct?

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

If the findings prove to be true, management’s dilemma is whether to discharge Dickman. It could be believed that her workplace transgressions are not so serious as to warrant a discharge. Her actions have not been secretive, however—other employees are aware of at least some of her misconduct.

Permitting her to stay on would likely encourage others to commit similar acts.

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

Solution: Dickman’s ethical dilemma is how to continue performing her medical technologist job when she cannot sit at her desk without pain and to what extent she can run side businesses from the health center. Medical technologists work in the lab, analyzing and testing blood, fluid, tissue, and urine samples of patients. Dickman has an ethical duty to the patients and to the health center to competently perform this analysis and testing. Patients could be harmed if she fails to do the lab tests properly or in a timely fashion.

Therefore, Dickman needs to decide how she can continue competently performing this work. The stakeholders affected by her decision include herself, her employer, her co-workers, and patients of the health center.

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As stated in the facts to this question, Dickman experiences pain sitting at her work desk. She finds it less painful to move around—i.e., away from her desk.

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

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

TIME-LIMITED TEAM ASSIGNMENT 3–9. Corporate Social Responsibility. Methamphetamine (meth) is an addictive drug made chiefly in small toxic labs (STLs) in homes, tents, barns, and hotel rooms. The manufacturing process is dangerous, often resulting in explosions, burns, and toxic fumes. Government entities spend time and resources to find and destroy STLs, imprison meth dealers and users, treat addicts, and provide services for affected families.

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

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

(See Ethics and the Role of Business, Ethical Principles and Philosophies, and Making Ethical Business Decisions.)

1.

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

Solution: It could be argued that the defendants have an ethical responsibility to society to voluntarily take steps to reduce the availability of their products to meth makers. This might have become a more certain obligation once the defendants were aware that their products were used in the manufacture of meth. Retailers might have been asked to place the products behind the counter or lock them in display cases and limit sales or require consumers to sign for purchases. Retailers might have been educated about the suspicious behavior of buyers with illegal intent. (These measures were imposed as federal

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regulations in 2005.) The defendants might have developed alternative medications that did not contain ephedrine or pseudoephedrine.

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

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

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

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

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

The second step of the IDDR approach is a Discussion that considers actions to address the issue. Factors include the strengths and weaknesses of the actions and the consequences and the effects on the stakeholders. How might the manufacturer discourage the illicit use of its product? Some answers to this question depend on the nature of the product. Could harmless additives to the product make its misuse impossible? Could some ingredients be substituted for the illegally used components? Should the company stop making the product altogether? Technically, additives or substitutes may not be possible— they may not be available, they could dilute the medicinal effects, or they might be cost prohibitive. Removing the product from the market would benefit none of the stakeholders (except, of course, those suffering the consequences of the product’s illegal use, which might impact only a relatively small part of the community).

The third step of the approach is to come to a Decision and state the reasons.

In the eyes of the public, the company could benefit by taking some action to

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prevent its product’s misuse. This action might be to advise and encourage retailers at the point of sale to spot and stop buyers who appear to intend that misuse. This could enhance the value of the company to those who own it and work for it, as well as its image to its customers and society. And this action can actually improve the situation within the community by limiting the ability of those who would misuse the product to do so.

The last step of the approach is a Review of the success or failure of the action to resolve the issue and satisfy the stakeholders. No action would be completely successful, but a failure to take any action would guarantee a failure to protect the interests of at least some of the stakeholders. This supports the company’s obligation to do something, such as the choice suggested in this answer.

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

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

This result indicates that applying the minimal ethical standard—compliance with the law—and a cost-benefit analysis shows the connection between the actions of the company and the consequences in the community to be too tenuous to mandate either of the steps suggested in the question. That is, it might be said that the benefits of the products outweigh the costs that might be imposed on the company.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 04: Business and the Constitution

Solution and Answer Guide

Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 04: Business and the Constitution

TABLE OF CONTENTS Critical Thinking Questions in Features .............................................................................1 Landmark in the Law—Application to Today’s World ........................................................ 1 Adapting the Law to the Online Environment—Critical Thinking.................................... 2 Ethical Issue—Value Judgment ............................................................................................. 2 Building Analytical Skills—Result and Reasoning .............................................................. 3 Critical Thinking Questions in Cases ................................................................................. 3 Case 4.1—Critical Thinking...................................................................................................... 3 Case 4.2—Critical Thinking ..................................................................................................... 4 Case 4.3—Critical Thinking ..................................................................................................... 5 Chapter Review ................................................................................................................... 5 Practice and Review................................................................................................................. 5 Practice and Review: Debate This ......................................................................................... 6 Issue Spotters ........................................................................................................................... 7 Business Scenarios and Case Problems .............................................................................. 7 A Question of Ethics ............................................................................................................... 11 Time-Limited Team Assignment .......................................................................................... 12

CRITICAL THINKING QUESTIONS IN FEATURES LANDMARK IN THE LAW—APPLICATION TO TODAY’S WORLD 1.

Marshall’s conclusion that the power to regulate interstate commerce was an exclusive power of the federal government has also had significant consequences. For one thing, it means that a state law regulating in-state activities normally will be invalidated if the state law substantially burdens interstate commerce. What if a law passed by State A’s legislature has a negative impact within State B? Applying Marshall’s reasoning, what recourse would State B have?

Solution: Marshall’s ruling in Gibbons v. Ogden implies that a state cannot regulate activities that extend beyond its borders. The power to regulate interstate commerce rests squarely with the federal government. Therefore, in most circumstances, State B

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would have little or no legal avenue to change State A’s law. Assume, for example, that state B bans the sale of liquor on weekends, but neighboring State A allows the sale of liquor on weekends. Residents of State B routinely drive to State A to purchase liquor on weekends. State B has no means to regulate State A’s liquor laws to stop this practice.

Could State B pass a law punishing a resident who drove to State A on a Saturday to buy a bottle of vodka? This kind of question entered the public discourse after the United States Supreme Court ruled that the U.S. Constitution does not confer a right to abortion, a decision that left it up to the individual states to pass their own abortion laws. Several anti-abortion states considered laws to make it illegal for their residents to travel to another state for the procedure. Such a law, if passed, would provide a stern test for the principles laid down by Marshall in Gibbons v. Ogden.

ADAPTING THE LAW TO THE ONLINE ENVIRONMENT—CRITICAL THINKING 1.

One observer has said that the American legal system should evaluate social media companies based on how “they affect us as citizens, not only [on how] they affect us as consumers.” What is your opinion of this statement?

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

ETHICAL ISSUE—VALUE JUDGMENT 1.

What are the pros and cons of a workplace policy that prohibits employees from discussing politics while on the job?

Solution: The main benefit of a policy that prohibits employees from discussing politics while at work would seem to be increased workplace harmony. Politics is a touchy subject. It is reasonable for management to conclude that arguments over political views could negatively impact employee relationships, which could have a negative impact on productivity, which would definitely have a negative impact on the bottom line.

At the same time, employees do not like being told they cannot express themselves.

“People need to be able to discuss what’s going on in the world,” said one management expert skeptical of the changes at Google. “Communities are where you do that, and the community where people spend most of their waking time is at the office.” Furthermore, workplace speech policies can be difficult to carry out. Imagine a situation in which an employee complains to a supervisor about a co-worker’s derogatory comments concerning a presidential candidate. The co-worker denies

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making the comments. The first employee insists. Suddenly, management is dealing with a conflict that has the potential to take up a good deal of at least three employees’ valuable time.

Later in the textbook, you will learn that, in general, private employers are able to terminate the employment of workers for expressing political viewpoints. In contrast, public entities often cannot because of the protections provided to such speech by the First Amendment to the U.S. Constitution.

BUILDING ANALYTICAL SKILLS—RESULT AND REASONING 1.

The Supreme Court ruled that Colorado cannot force Smith to speak in a manner that aligns with state law but goes against her religious beliefs. In other words, the state’s interest in preventing discrimination does not outweigh a business owner’s right to free speech. As part of its reasoning, the Court asserted that Smith was not, in fact, negatively disposed toward same-sex couples. It was their “message” that she objected to. Why might this distinction be legally important in these types of cases?

Solution: In his majority opinion for this case, Associate Justice Neil Gorsuch explained that while Lorie Smith was willing to serve gay customers, she was not willing to allow her website to be used as a platform of gay marriage, which she believed “contradicts biblical truth.” In doing so, Gorsuch drew a distinction between a business discriminating against a customer based on the customer’s status, which is not allowed, and a business discriminating against the message a customer represents, which, according to this ruling, is allowed.

Critics of this Supreme Court decision rejected this line of legal reasoning as being a distinction without a difference. Whether Smith is objecting to the “message” promoted by homosexual couples or the homosexual couples themselves, the result is the same. Many states have public accommodation laws similar to Colorado’s, and civil rights activists worry that the Court has given American businesses a broad First Amendment excuse to refuse service based on a customer’s race, religion, gender, or sexual orientation.

CRITICAL THINKING QUESTIONS IN CASES CASE 4.1—CRITICAL THINKING 1.

Cultural. What “dangerous conditions” might have prompted the city to enact the ordinances at issue in this case? Why? Solution: As noted in the facts of the case, both ordinances at issue included an extensive rationale for their adoption, stating essentially that a geographically small city has the right to restrict a business from operating within the city when the restriction is for the safety of the city’s citizens and visitors.

As the basis for the city’s regulation, the appellate court referred to “the dangerous conditions” created by the irresponsible driving behavior of scooter renters, especially at night, amplified by the lack of training, supervision, and oversight practiced by the

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rental scooter businesses that “existed throughout the entire city.” The court paraphrased the expressive clauses in the ordinances more specifically: • • • • • •

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

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

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

City businesses have complained about numerous trespasses on their property by people driving scooters while being disruptive.

City police have been unable to cope with the situation, and essential police resources are being drained.

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

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

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

The answer to the previous question contains the reasons in support of this outlook.

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

CASE 4.2—CRITICAL THINKING 1.

What If the Facts Were Different? If this case had involved a small, private retail business that did not advertise nationally, would the result have been the same? Why or why not?

Solution: It is not likely that the result in this case would have been different even if the facts had involved a small, private retail business that did not advertise nationally.

The intended impact of the decision in Heart of Atlanta was to uphold the constitutionality of the Civil Rights Act of 1964 and the power of Congress to regulate interstate commerce to stop local discriminatory practices. In the Supreme Court’s opinion, “The power of Congress to promote interstate commerce also includes the power to regulate the local incidents thereof, including local activities in both the States of origin and destination, which might have a substantial and harmful effect upon that commerce.”

Thus, if the case had involved a small, local retail business, the Court would have found participation in interstate commerce based on the use of a phone, or a

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Facebook page (or other internet presence), or sales to customers who traveled across state lines—or, as in Wickard v. Filburn, participation might have been based on any transaction that might otherwise have occurred in interstate commerce.

CASE 4.3—CRITICAL THINKING 1.

Economic. Whose interests are advanced by laws designed to regulate the labeling of plant-based meat products?

Solution: Certainly, the overriding objective of such laws is to protect the consumer.

Indeed, the stated goal of Louisiana’s Truth in Labeling of Food Products Act is to “protect consumers from misleading and false labeling of food products that are edible by humans.” It would be naïve, however, to ignore the role that special interest groups play in getting legislation passed. Here, critics of the Louisiana statute, including animal rights and environmental groups, pointed out that the law was supported by “animal agriculture interests,” otherwise known as meat-producing businesses. Presumably, these businesses assumed that a product labeled “veggie burger” was more appealing to consumers searching for meat alternatives than would have been a product labeled “veggie puck.” As the court pointed out, however, the Louisiana law has not had this effect.

2. What If the Facts Were Different? Assume the Louisiana statute explicitly prohibited companies from labeling plant-based products in a manner that potentially could confuse consumers about the products’ meat content. Would the court’s ruling likely have been the same? Explain.

Solution: Probably not. In general, under the First Amendment, free speech protections only apply to commercial speech that is neither misleading nor related to unlawful activity. That is, if commercial speech is either of these things, it is not protected and can be regulated by the government. Commercial speech that is potentially misleading is protected by the First Amendment, but this protection is not absolute. In other words, courts will consider the facts on a case-by-case basis to determine whether commercial speech that is potentially confusing can be regulated.

In this case, the district court agreed with Tofurky that the Louisiana law threatened commercial speech that is only potentially misleading, leading it to find the statute unconstitutional. In reversing, the appellate court ruled that Louisiana was not, in fact, trying to prohibit potentially confusing commercial speech. Rather, the law applied only to food labels that were actually and intentionally misleading. It is likely that the law’s emphasis on intent was included expressly to protect it from First Amendment challenges such as the one brought by Tofurky.

CHAPTER REVIEW PRACTICE AND REVIEW A state legislature enacted a statute that required any motorcycle operator or passenger on the state’s highways to wear a protective helmet. Jim Alderman, a licensed motorcycle operator, sued the state to block enforcement of the law. Alderman asserted that the statute

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violated the equal protection clause because it placed requirements on motorcyclists that were not imposed on other motorists. Using the information presented in the chapter, answer the following questions.

1.

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

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

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

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

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

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

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

PRACTICE AND REVIEW: DEBATE THIS 1.

Legislation aimed at protecting people from themselves concerns the individual as well as the public in general. Protective helmet laws are just one example of such legislation.

Should individuals be allowed to engage in unsafe activities if they choose to do so?

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

In contrast, there is a public policy issue involved. If a motorcyclist is injured in an accident because that motorcyclist was not wearing a protective helmet, society ends

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up paying in the form of increased medical care expenses, lost productivity, and even welfare for other family members. Thus, the state has an interest in protecting the public in general by limiting some individual rights.

ISSUE SPOTTERS 1.

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

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

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

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

BUSINESS SCENARIOS AND CASE PROBLEMS 4–1. The Free Exercise Clause. Thomas worked in the nonmilitary operations of a large firm that produced both military and nonmilitary goods. When the company discontinued the production of nonmilitary goods, Thomas was transferred to the plant producing military equipment. Thomas left his job, claiming that it violated his religious principles to participate in the manufacture of goods to be used in destroying life. In effect, he argued, the transfer to the military equipment plant forced him to quit his job. He was denied unemployment compensation by the state because he had not been effectively “discharged” by the employer but had voluntarily terminated his employment. Did the state’s denial of unemployment benefits to Thomas violate the free exercise clause of the First Amendment? Explain. (See Business and the Bill of Rights.)

Solution: Thomas has a constitutionally protected right to the free exercise of his religion. In denying his claim for unemployment benefits, the state violated this right.

Employers are obligated to make reasonable accommodations for their employees’ beliefs that are openly and sincerely held, as were Thomas’s beliefs. By moving him to a department that made military goods, his employer effectively forced him to choose between his job and his religious principles. This unilateral decision on the part of the employer was the reason Thomas left his job and why the company was required to compensate Thomas for his resulting unemployment.

4–2. Spotlight on Plagiarism—Due Process. The Russ College of Engineering and Technology of Ohio University announced in a press conference that it had found “rampant and flagrant plagiarism” in the theses of mechanical engineering graduate students. Faculty singled out for

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“ignoring their ethical responsibilities” included Jay Gunasekera, chair of the department.

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

Solution: To adequately claim a due process violation, a plaintiff must allege that he was deprived of “life, liberty, or property” without due process of law. A faculty member’s academic reputation is a protected interest. The question is what process is due to deprive a faculty member of this interest, and in this case, whether Gunasekera was provided with it. When an employer inflicts a public stigma on an employee, the only way that an employee can rectify the situation is through publicity. Gunasekera’s alleged injury was his public association with the plagiarism scandal. Here, the court reasoned that “a name-clearing hearing with no public component would not address this harm because it would not alert members of the public who read the first report that Gunasekera challenged the allegations. Similarly, if Gunasekera’s name was cleared at an unpublicized hearing, members of the public who had seen only the stories accusing him would not know that this stigma was undeserved.” Thus, the court held that Gunasekera was entitled to a public name-clearing hearing.

4–3. Equal Protection. Abbott Laboratories licensed SmithKline Beecham Corp. to market an Abbott human immunodeficiency virus (HIV) drug in conjunction with one of SmithKline’s drugs. Abbott then increased the price of its drug fourfold, forcing SmithKline to increase its prices and thereby driving business to Abbott’s own combination drug. SmithKline filed a suit in a federal district court against Abbott. During jury selection, Abbott struck the only self-identified gay person among the potential jurors. (The pricing of HIV drugs is of considerable concern in the LGBTQ+ community.) Could the equal protection clause be applied to prohibit discrimination based on sexual orientation in jury selection? Discuss.

[SmithKline Beecham Corp. v. Abbott Laboratories, 740 F.3d 471 (9th Cir. 2014)] (See Due Process and Equal Protection.)

Solution: Yes, the equal protection clause can be applied to prohibit discrimination based on sexual orientation in jury selection. The appropriate level of scrutiny would be intermediate scrutiny. Under the equal protection clause of the Fourteenth Amendment, the government cannot enact a law or take another action that treats similarly situated individuals differently. If it does, a court examines the basis for the distinction. Intermediate scrutiny applies in cases involving discrimination based on gender. Under this test, a distinction must be substantially related to an important government objective.

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

In the actual case on which this problem is based, SmithKline challenged the strike.

The judge denied the challenge. On SmithKline’s appeal, the U.S. Court of Appeals for the Ninth Circuit held that the equal protection clause prohibits discrimination based on sexual orientation in jury selection and requires that heightened scrutiny be applied

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to equal protection claims involving sexual orientation. The appellate court remanded the case for a new trial.

4–4. Procedural Due Process. Robert Brown applied for admission to the University of Kansas School of Law. Brown answered “no” to questions on the application asking if he had a criminal history and acknowledged that a false answer constituted “cause for ... dismissal.” In fact, Brown had criminal convictions for domestic battery and driving under the influence. He was accepted for admission to the school. When school officials discovered his history, however, he was notified of their intent to dismiss him and was given an opportunity to respond in writing. He demanded a hearing. The officials refused to grant Brown a hearing and then expelled him. Did the school’s actions deny Brown due process? Discuss. [Brown v.

University of Kansas, 599 Fed.Appx. 833 (10th Cir. 2015)] (See Due Process and Equal Protection.)

Solution: No, the school’s actions did not deny Brown due process. Procedural due process requires that any government decision to take life, liberty, or property must be made fairly. The government must give a person proper notice and an opportunity to be heard. The government must use fair procedures—the person must have at least an opportunity to object to a proposed action before a fair, neutral decision maker.

In this problem, Robert Brown applied for admission to the University of Kansas School of Law. He answered “no” to the questions on the application about criminal history and acknowledged that a false answer constituted cause for dismissal. He was accepted for admission to the school. But Brown had previous criminal convictions for domestic battery and driving under the influence. When school officials discovered this history, Brown was notified of their intent to dismiss him and given an opportunity to respond in writing. He demanded a hearing. The officials refused and expelled him. As for due process, Brown knew he could be dismissed for false answers on his application. The school gave Brown notice of its intent to expel him and gave him an opportunity to be heard (in writing). Due process does not require that any specific set of detailed procedures be followed as long as the procedures are fair.

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

4–5. The Commerce Clause. Regency Transportation, Inc., operates a freight business throughout the eastern United States. Regency maintains its corporate headquarters, four warehouses, and a maintenance facility and terminal location for repairing and storing vehicles in Massachusetts. All of the vehicles in Regency’s fleet were bought in other states.

Massachusetts imposes a use tax on all taxpayers subject to its jurisdiction, including those that do business in interstate commerce, as Regency does. When Massachusetts imposed the tax on the purchase price of each tractor and trailer in Regency’s fleet, the trucking firm challenged the assessment as discriminatory under the commerce clause. What is the chief consideration under the commerce clause when a state law affects interstate commerce? Is Massachusetts’s use tax valid? Explain. [Regency Transportation, Inc. v. Commissioner of Revenue, 473 Mass. 459, 42 N.E.3d 1133 (2016)] (See The Constitutional Powers of Government.)

Solution: Yes, Massachusetts’s use tax is valid under the commerce clause. When a state regulation that affects interstate commerce is challenged under the commerce

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

In this problem, Regency Transportation, Inc., operates a freight business throughout the eastern United States. Regency maintains a headquarters, warehouses, and other facilities in Massachusetts. All of the vehicles in Regency’s fleet were bought in other states. When Massachusetts imposed a use tax on the purchase price of each tractor and trailer in Regency’s fleet, the trucking firm challenged the assessment as discriminatory under the commerce clause. But Massachusetts imposes the tax on all taxpayers subject to its jurisdiction, not only those that, like Regency, do business in interstate commerce. Hence, the tax is not discriminatory. As for the balancing test, Massachusetts presumably imposes the tax based on the benefits derived from a company’s using and storing vehicles in the state. The burden that the regulation places on interstate commerce seems slight weighed against the state’s interest in regulating this matter.

4–6. Business Case Problem with Sample Answer—Freedom of Speech. NutriSearch Corporation publishes a guide to nutritional supplements sold in the direct marketing industry. Written by Lyle MacWilliam, the guide sells itself as an independent source of information based on scientific analysis. According to the guide, Usana Health Science, Inc., produces the best nutritional supplements in the business. According to a lawsuit filed by competitor Ariix, LLC, NutriSearch and MacWilliam are paid by Usana to promote Usana’s products in the supposedly “impartial” guide. Defending its questionable relationship with Usana, NutriSearch claims that biased and inaccurate product reviews are commercial speech protected by the First Amendment, and therefore Ariix’s lawsuit must fail. Is this claim correct? Discuss. [Ariix, LLC v. NutriSearch Corp., 985 F.3d 1107 (2021)] (See Business and the Bill of Rights.)

Solution: When hearing a commercial speech case, a court relies on the facts of that case to determine whether the speech in question is, in fact, commercial and therefore protected by the First Amendment. Common sense dictates that a baseline definition of commercial speech would be speech used in commercial transactions. At first glance, then, NutriSearch Corporation’s Nutritional Supplements Guide is not commercial speech, since the company presents the guide as a source of neutral, data-based product reviews.

The evidence shows, however, that NutriSearch’s guide is actually a vehicle for advertising on behalf of Usana Health Science, Inc. It therefore qualifies as commercial speech. In its decision, the Ninth Circuit Court of Appeals called NutriSearch’s publication a “sophisticated marketing sham rather than a product review guide.” It added, “Society has little interest in protecting such conduct under the mantle of the First Amendment,” which does not shield the corporate purveyors of false advertising from being punished for their misleading speech.

4–7. Freedom of Speech. Muriel Bowser, the District of Columbia’s mayor, ordered city workers to paint a “Black Lives Matter” mural on a city street, 16th Street NW. Two months later, a trade group called the Small Business in Transportation Coalition requested a permit

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from the district to paint its motto, “Trucker Lives Matter” on a different city street. The district refused. The coalition filed a lawsuit claiming its free speech rights had been violated.

It argued that the district had created a public forum in which Mayor Bowser’s views were allowed while dissenting views were not. Do you agree with the coalition’s argument? What counterargument could the district offer by asserting that the mural was government speech rather than individual speech? [Small Business in Transportation Coalition v. Bowser, 610 F.Supp.3d 149 (D.C. Cir. 2022)] (See Business and the Bill of Rights.)

Solution: The Small Business in Transportation Coalition’s entire argument was based on whether the city’s denial of its permit to paint “Trucker Lives Matter” on a street was unconstitutional viewpoint discrimination. For this argument to succeed, the Coalition had to convince a federal district court that the “Black Lives Matter” mural was individual speech by Mayor Bowser. If the mural was government speech, the Coalition’s lawsuit would fail, because the United States Supreme Court has ruled that the government may—putting it bluntly—say whatever it wants.

The Coalition based its argument on three points: (1) the government did not usually express itself with paintings on city streets; (2) the public did not believe that “Black Lives Matter” was a government message; and (3) the District did not maintain editorial control over the mural, as opposed to Mayor Bowser as an individual.

In ruling against the Coalition, the federal district court rejected these points, noting that the mayor’s announcement concerning the mural was made as part of a press conference during which she was acting in her official capacity. Furthermore, the mural had been painted by government workers, and “the District exercises near-exclusive control over the painting of the city's streets.” Upholding the lower court’s decision, the appeals court added that individual politicians speak on behalf of “the government” all the time. Indeed, that is part of their job. Therefore, the district court’s summary judgment against the Coalition was proper.

A QUESTION OF ETHICS 4–8. Free Speech. Michael Mayfield, the president of Mendo Mill and Lumber Co., in California, received a “notice of a legal claim” from Edward Starski. The “claim” alleged that a stack of lumber had fallen on a customer as a result of a Mendo employee’s “incompetence.” The “notice” presented a settlement offer on the customer’s behalf in exchange for a release of liability for Mendo. In a follow-up phone conversation with Mayfield, Starski said that he was an attorney—which, in fact, he was not. Starski was arrested and charged with violating a state criminal statute that prohibited the unauthorized practice of law. [People v. Starski, 7 Cal.App.5th 215, 212 Cal.Rptr.3d 622 (1 Dist. Div. 2 2017)] (See Business and the Bill of Rights.)

1.

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

Solution: No. The First Amendment guarantees the freedom of speech for individuals against interference by the government. To protect citizens from those who would abuse the right, speech is subject to reasonable restrictions.

Speech that violates criminal laws is not constitutionally protected.

In this problem, Michael Mayfield received a “notice of a legal claim” from Edward Starski. The “claim” alleged that a stack of lumber fell on a customer

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

In the actual case on which this problem is based, the court convicted Starski of the charge. On appeal, a state intermediate appellate court affirmed the conviction. Responding to his free speech defense, the court concluded that Starski was wrong.

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

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

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

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

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

TIME-LIMITED TEAM ASSIGNMENT 4–9. Free Speech and Equal Protection. For many years, New York City has had to deal with the vandalism and defacement of public property caused by unauthorized graffiti. In an effort to stop the damage, the city banned the sale of aerosol spray-paint cans and broad-tipped indelible markers to persons under twenty-one years of age. The new rules also prohibited people from possessing these items on property other than their own. Within a year, five © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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people under age twenty-one were cited for violations of these regulations, and nearly nine hundred individuals were arrested for actually making graffiti.

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

1.

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

Solution: The rules in this problem regulate the content of expression. Such rules must serve a compelling governmental interest and must be narrowly written to achieve that interest. In other words, for the rules to be valid, a compelling governmental interest must be furthered only by those rules. To make this determination, the government’s interest is balanced against the individual’s constitutional right to be free of the rules. For example, a city has a legitimate interest in banning the littering of its public areas with paper, but that does not justify a prohibition against the public distribution of handbills, even if the recipients often just toss them into the street. In this problem, the prohibition against young adults' possession of spray paint and markers in public places imposes a substantial burden on innocent expression because it applies even when the individuals have a legitimate purpose for the supplies.

The contrast between the numbers of those cited for violating the rules and those arrested for actually making illegal graffiti also undercuts any claim that the interest in eliminating illegal graffiti could not be achieved as effectively by other means.

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

Solution: The rules in this problem do not regulate the content of expression— they are not aimed at suppressing the expressive conduct of young adults but only of that conduct being fostered on unsuspecting and unwilling audiences.

The restrictions are instead aimed at combating the societal problem of criminal graffiti. In other words, the rules are content neutral. Even if they were not entirely content neutral, expression is always subject to reasonable restrictions. Of course, a balance must be struck between the government’s obligation to protect its citizens and those citizens’ exercise of their rights. But the rules at the center of this problem meet that standard. Young adults have other creative outlets and other means of artistic expression available.

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

Solution: Under the equal protection clause of the Fourteenth Amendment, a state may not “deny to any person within its jurisdiction the equal protection of the laws.” This clause requires a review of the substance of the rules. If they

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limit the liberty of some people but not others, they may violate the equal protection clause. Here, the rules apply only to persons under the age of twenty-one. To succeed on an equal protection claim, opponents should argue that the rules should be subject to strict scrutiny—that the age restriction is similar to restrictions based on race, national origin, or citizenship. Under this standard, the rules must be necessary to promote a compelling governmental interest. The argument would be that they are not necessary—there are other means that could accomplish this objective more effectively.

Alternatively, opponents could argue that the rules should be subject to intermediate scrutiny—that the age restriction is similar to restrictions based on gender or legitimacy. Under this level of scrutiny, the restrictions must be substantially related to an important government objective. In this problem, the contrast between the numbers of those cited for violating the rules and those arrested for actually making illegal graffiti undermines any claim that the restrictions are substantially related to the interest in eliminating illegal graffiti.

If neither of these arguments is successful, opponents could cite these same numbers to argue that the rules are not valid because there is no rational basis on which their restrictions on certain persons relate to a legitimate government interest.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 05: Torts and Product Liability

Solution and Answer Guide

Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 05: Torts and Product Liability

TABLE OF CONTENTS Critical Thinking Questions in Features .............................................................................1 Ethical Issue—Value Judgment .............................................................................................. 1 Adapting the Law to the Online Environment—Critical Thinking.................................... 2 Building Analytical Skills—Result and Reasoning .............................................................. 2 Landmark in the Law—Application to Today’s World ....................................................... 2 Cybersecurity and the Law—Critical Thinking .................................................................... 3 Critical Thinking Questions in Cases ................................................................................. 3 Case 5.1—Critical Thinking ...................................................................................................... 3 Case 5.2—Critical Thinking ..................................................................................................... 4 Case 5.3—Critical Thinking ..................................................................................................... 5 Chapter Review ................................................................................................................... 5 Practice and Review................................................................................................................. 5 Practice and Review: Debate This ......................................................................................... 6 Issue Spotters ........................................................................................................................... 7 Business Scenarios and Case Problems .............................................................................. 7 A Question of Ethics ............................................................................................................... 13 Time-Limited Team Assignment .......................................................................................... 15

CRITICAL THINKING QUESTIONS IN FEATURES ETHICAL ISSUE—VALUE JUDGMENT 1.

Given the circumstances, was it fair to hold NCL liable for Kaskie’s actions? Why or why not?

Solution: This outcome may not seem fair, but it is arguably ethical. Yusko deserved to be compensated for her harm, and NCL—with a net worth of over $7 billion—was in a better position than its employee to do so. Furthermore, it is likely that NCL had insurance to cover accidents of this sort. In general, the doctrine of vicarious liability exists to protect victims of injury like Yusko. The doctrine only goes so far, however.

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Employers have a valid defense if the allegedly tortious employee is acting outside the scope of employment. For example, suppose that the cruise ship docked at a tropical island and Kaskie and Yusko disembarked to find a nightclub. While dancing at the nightclub, Kaskie injured Yusko in exactly the same way as happened on the cruise ship. NCL would almost certainly not have been liable because Kaskie was off the job when the accident occurred.

ADAPTING THE LAW TO THE ONLINE ENVIRONMENT—CRITICAL THINKING 1.

Several people arrested for engaging in “revenge porn” have claimed that such an activity is free speech protected by the First Amendment. Should this legal tactic succeed? Why or why not?

Solution: The argument that disseminating intimate images of a romantic partner is protected speech usually relies on the principle that, under the First Amendment, the government cannot restrict expression based on its content. The United States Supreme Court has consistently held, however, that First Amendment does not protect all content. Some examples of unprotected content include obscenity, defamation, child pornography, fraud, and fighting words. American courts have consistently placed “revenge porn” in this category of unprotected speech, citing society’s interest in order and morality. The courts also take into the consideration the privacy rights of someone who does not want sexual images of themselves spread across the internet without their consent. All these factors combine to create a well-established government interest in banning revenge porn, although the United States Supreme Court has yet to directly address the subject.

BUILDING ANALYTICAL SKILLS—RESULT AND REASONING 1.

Steamfitters did nothing to prevent the apprentices from creating a foreseeable fire hazard. Therefore, the company failed to uphold its duty of care to Gordon and was liable for negligence. During the trial, Steamfitters argued that—in determining foreseeability— the court did not pay enough attention to the high winds and Gordon’s improperly stored foam insulation. Is this argument valid? Why or why not?

Solution: The high winds and foam insulation both played crucial roles in the spread of the fire started by the apprentice’s discarded cigarette butt. Expert testimony at trial established that the wind was blowing “20 or 22 knots,” causing the fire to extend very quickly onto Gordon’s property, igniting the highly combustible foam, whose location near the property line violated local code provisions. Neither factor, however, impacted the court’s conclusion that the harm caused by the defendant was reasonably foreseeable. Indeed, the high winds made the unidentified apprentice’s actions more foreseeable—a reasonable person would not toss a lit cigarette butt onto dry mulch under such conditions. Furthermore, one expert testified that, because of the strong winds, the foam would have ignited wherever it was located on Gordon’s property.

LANDMARK IN THE LAW—APPLICATION TO TODAY’S WORLD 1.

The Palsgraf case established foreseeability as the test for proximate cause. Today, the courts continue to apply this test in determining proximate cause—and thus tort liability for injuries. Generally, if the victim of a harm or the consequences of a harm done are unforeseeable, there is no proximate cause. Is there any reason that these legal principles

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should not apply to allegedly tortious behavior that takes place online? Explain your answer.

Solution: Clearly, distinctions based on physical proximity, such as the “zone of danger” cited by the court in this case, are largely inapplicable online. Otherwise, however, proximate causation is as relevant in disputes that arise via the internet as those that take place offline. Suppose, for example, that Airline X makes a number of statements on social media about the online booking site EasyRes.com, including that it will not refund any tickets purchased on EasyRes.com and warning about the booking site’s “bogus discount” schemes. Suppose Airline X also emails people who purchased tickets on its flights through EasyRes.com and asks for additional information to confirm the flights.

EasyRes.com sues Airline X for tortious interference with prospective business relations. To succeed in this suit, the booking site would have to prove that Airline X’s actions were the proximate cause of its alleged loss of repeat business. As a defense, Airline X could point out that there are a number of reasons why a customer might not rebook with EasyRes.com, including that the customer found a better deal elsewhere or that the customer simply hasn’t traveled since their last flight. These reasons would break the chain of foreseeability that links Airline X’s admittedly dubious online behavior and EasyRes.com’s alleged loss of revenue.

CYBERSECURITY AND THE LAW—CRITICAL THINKING 1.

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

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

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

CRITICAL THINKING QUESTIONS IN CASES CASE 5.1—CRITICAL THINKING 1.

Legal Environment. Punitive damages may be awarded in a tort action when a defendant’s actions show malice—that is, when a person’s conduct is characterized by hatred, ill will,

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or a spirit of revenge. Would an award of punitive damages be appropriate in this case?

Explain.

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

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

For an award of punitive damages, malice is the state of mind under which a person’s conduct is characterized by hatred, ill will, or a spirit of revenge (or, in some cases, a conscious disregard for the rights and safety of other persons that has a great probability of causing substantial harm). Because punitive damages are assessed for punishment and not compensation, a positive element of conscious wrongdoing is required.

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

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

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

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

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

The court’s reasons were as stated above.

CASE 5.2—CRITICAL THINKING 1.

What If the Facts Were Different? Would the result in this case have been different if Taylor’s minor son, rather than Taylor herself, had been struck by the ball? Should courts apply the doctrine of assumption of risk to children? Discuss.

Solution: There is no legal bar to applying assumption of risk to children. Children are expected to use the degree of caution required of a child of like age and intelligence under similar circumstances. The courts have therefore applied the doctrine of assumption of the risk in numerous cases, such as when a child was injured while

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playing on a trampoline, swinging from a rope swing, or diving into a swimming pool.

The key is whether the child knew of the danger, was able to appreciate the risks associated with it, and voluntarily chose to run the risk. Normally, it is up to a jury (or a judge in a bench trial) to decide if the facts indicate that the child voluntarily undertook the risk.

CASE 5.3—CRITICAL THINKING 1.

Economic. Why were product manufacturers based in Georgia unhappy with the Georgia Supreme Court’s ruling in this case?

Solution: Manufacturers in Georgia worried that the outcome of this case would subject them to a landslide of product liability lawsuits from consumers who intentionally misused their products. The Georgia Supreme Court specifically addressed these concerns in its opinion, stating that a manufacturer would be held liable for intentional product misuse only when, as happened here, such misuse was reasonably foreseeable. Additionally, product liability plaintiffs must also prove that the manufacturer’s negligent design was the proximate cause of the alleged injury. So, the state was not trying to punish manufacturers by leaving them open to frivolous lawsuits. Rather, it aimed to disincentivize them from making and selling obviously dangerous products.

Note that, in part because of lawsuits such as the one brought by the Maynards, Snap eventually eliminated the “Speed Filter” option on the Snapchat app.

2. Legal Environment. In the context of product liability law, should social media platforms be treated the same as tangible products such as chainsaws or trampolines?

Solution: Probably. In several lawsuits involving the Speed Filter feature, Snap argued that it was not a “product” in the traditional sense. Instead, Snap contended, it is only a tool that allows users to post their own content. Therefore, civil lawsuits involving social media should be treated as free speech protected (or not) by the First Amendment.

Many courts, including the Georgia Supreme Court in the Maynard case, have rejected this premise. A social media platform, like other items produced by software companies, can be owned and distributed, just like a chainsaw or trampoline.

Furthermore, defects in software can be corrected, just as in other products.

One court did, however, dismiss a case against Snap involving Speed Filter after determining that the feature was no more than a “speedometer tool.” The court reasoned that the app does not publish content itself. It only allows users to add their own content. This led the court to rule that, under the First Amendment, Snap could not be held liable for user content.

CHAPTER REVIEW PRACTICE AND REVIEW Elaine Sweeney went to Ragged Mountain Ski Resort in New Hampshire with a friend. Elaine went snow tubing down a run designed exclusively for snow tubers. No Ragged Mountain

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employees were present in the snow-tube area to instruct Elaine on the proper use of a snow tube. On her fourth run down the trail, Elaine crossed over the center line between snowtube lanes, collided with another snow tuber, and was injured. Elaine filed a negligence action against Ragged Mountain seeking compensation for the injuries that she sustained. Two years earlier, the New Hampshire state legislature had enacted a statute that prohibited a person who participates in the sport of skiing from suing a ski-area operator for injuries caused by the risks inherent in skiing. Using the information presented in the chapter, answer the following questions.

1.

What defense will Ragged Mountain probably assert?

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

2. The central question in this case is whether the state statute establishing that skiers assume the risks inherent in the sport applies to Elaine’s suit. What would your decision be on this issue? Why? Solution: Yes, because the statute strengthened the traditional common law rule. The legislature can change or limit common law rules, such as those for liability. Here the legislature strengthened the rule of assumption of the risk, which makes it very difficult for a plaintiff to overcome.

3. Suppose that the court concludes that the statute applies only to skiing and not to snow tubing. Will Elaine’s lawsuit be successful? Explain.

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

4. Now suppose that the jury concludes that Elaine was partly at fault for the accident.

Under what theory might her damages be reduced in proportion to how much her actions contributed to the accident and her resulting injuries?

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

PRACTICE AND REVIEW: DEBATE THIS 1.

Each time a state legislature enacts a law that applies the assumption of risk doctrine to a particular sport, participants in that sport suffer.

Solution: The argument is that the less liability imposed on a sports-activity operator, the less that operator will take care to maintain the sports terrain and equipment. In other words, using the example of a ski area, a law that exempts the ski area from liability for skiing accidents will result in the ski area owner investing less in maintaining the trail system as well as in the signage indicating hidden hazards.

Additionally, the ski area owner will pay for fewer ski patrollers who force fast skiers to slow down in congested areas or areas reserved for beginners.

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

ISSUE SPOTTERS 1.

Jana leaves her truck’s motor running while she enters a Kwik-Pik Store. The truck’s transmission engages, and the vehicle crashes into a gas pump, starting a fire that spreads to a warehouse on the next block. The warehouse collapses, causing its billboard to fall and injure Lou, a bystander. Can Lou recover from Jana? Why or why not? (See Negligence.)

Solution: Probably. To recover on the basis of negligence, the injured party as a plaintiff must show that the truck’s owner owed the plaintiff a duty of care, that the owner breached that duty, that the plaintiff was injured, and that the breach caused the injury. In this problem, the owner’s actions breached the duty of reasonable care.

The billboard falling on the plaintiff was the direct cause of the injury, not the plaintiff’s own negligence. Thus, liability turns on whether the plaintiff can connect the breach of duty to the injury. This involves the test of proximate cause—the question of foreseeability. The consequences to the injured party must have been a foreseeable result of the owner’s carelessness.

2. Rim Corporation makes tire rims and sells them to Superior Vehicles, Inc., which installs them on cars. One set of rims is defective. An inspection would have revealed the defect, but Superior does not inspect the rims. The car with the defective rims is sold to Town Auto Sales, which sells the car to Uri. Soon, the car is in an accident caused by the defective rims, and Uri is injured. Is Superior Vehicles liable? Explain your answer. (See Product Liability.)

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

BUSINESS SCENARIOS AND CASE PROBLEMS 5–1. Defamation. Richard is an employee of the Dun Construction Corp. While delivering materials to a construction site, he carelessly backs Dun’s truck into a passenger vehicle driven by Green. This is Richard’s second accident in six months. When the company owner, Dun, learns of this latest accident, a heated discussion ensues, and Dun fires Richard. Dun is so angry that he immediately writes a letter to the union of which Richard is a member and to all other construction companies in the community. In it, Dun states that Richard is the

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“worst driver in the city” and that “anyone who hires him is asking for legal liability.” Richard files a suit against Dun, alleging libel on the basis of the statements made in the letters.

Discuss. (See Intentional Torts against Persons.)

Solution: The legal issue is whether Dun has libeled Richard’s character. For Richard to recover in a legal action, he must prove the following elements: (a) that the defendant’s writing contained a false statement, not privileged, presented as fact (called a false statement of fact), or a statement of opinion that was overpublicized, or even a true statement of fact that was overpublicized; (b) that the writing was made known to others besides the plaintiff (called publication); and (c) that damage occurred, if damages are sought by plaintiff. In this case, the writing of the letter and its distribution could not be considered privileged. One could argue that privilege may be extended to Dun if a union contract required that specific notice and reasons for firing union members be given to union officials. Such privilege, however, would not extend to the other construction businesses.

Dun could also argue that the statements were true. Truth is a defense against a defamation suit. Richard would then argue that the statements were presented as facts, not merely opinion, and were false, or that even if they were true, they were overpublicized. Proof of publication is already established.

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

5–2. Liability to Business Invitees. Kim went to Ling’s Market to pick up a few items for dinner. It was a stormy day, and the wind had blown water through the market’s door each time it opened. As Kim entered through the door, she slipped and fell in the rainwater that had accumulated on the floor. The manager knew of the weather conditions but had not posted any sign to warn customers of the water hazard. Kim injured her back as a result of the fall and sued Ling’s for damages. Can Ling’s be held liable for negligence? Discuss. (See Negligence.)

Solution: Yes. An occupier of the premises has a duty to use ordinary care to keep its premises in a reasonably safe condition and to warn customers of any foreseeable hazards. What constitutes a foreseeable hazard depends on whether a reasonably prudent person would conclude that harm could likely result from the conditions.

Here, the manager knew of the storm conditions, knew that water accumulated rapidly on the floor, and knew or should have known that the water created a hazard. A court could find that the manager’s failure to remove the water constituted negligence, and the manager could be held liable for Kim’s injuries.

5–3. Business Case Problem with Sample Answer—Negligence. At the Weatherford Hotel in Flagstaff, Arizona, in Room 59, a balcony extends across thirty inches of the room’s only window, leaving a twelve-inch gap with a three-story drop to the concrete below. A sign prohibits smoking in the room but invites guests to “step out onto the balcony” to smoke.

Toni Lucario was a guest in Room 59 when she climbed out of the window and fell to her death. Patrick McMurtry, her estate’s personal representative, filed a suit against the Weatherford. Did the hotel breach a duty of care to Lucario? What might the Weatherford assert in its defense? Explain. [McMurtry v. Weatherford Hotel, Inc., 231 Ariz. 244, 293 P.3d 520 (2013)] (See Negligence.)

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Solution: Negligence requires proof that (1) the defendant owed a duty of care to the plaintiff; (2) the defendant breached that duty; (3) the defendant's breach caused the plaintiff’s injury; and (4) the plaintiff suffered a legally recognizable injury. With respect to the duty of care, a business owner has a duty to use reasonable care to protect business invitees. This duty includes an obligation to discover and correct or warn of unreasonably dangerous conditions that the owner of the premises should reasonably foresee might endanger an invitee. Some risks are so obvious that an owner need not warn of them. But even if a risk is obvious, a business owner may not be excused from the duty to protect its customers from foreseeable harm.

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

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

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

5–4. Negligence. Ronald Rawls and Zabian Bailey were in an auto accident in Bridgeport, Connecticut. Bailey rear-ended Rawls at a stoplight. Evidence showed it was more likely than not that Bailey failed to apply his brakes in time to avoid the collision, failed to turn his vehicle to avoid the collision, failed to keep his vehicle under control, and was inattentive to his surroundings. Rawls filed a suit in a Connecticut state court against his insurance company, Progressive Northern Insurance Co., to obtain benefits under an underinsured motorist clause, alleging that Bailey had been negligent. Could Rawls collect? Discuss. [Rawls v. Progressive Northern Insurance Co., 310 Conn. 768, 83 A.3d 576 (2014)] (See Negligence.)

Solution: Yes, Rawls could obtain benefits from Progressive Northern Insurance Co. under an underinsured motorist clause, on the ground that Bailey had been negligent.

To succeed in a negligence action, the plaintiff must prove that (1) the defendant owed a duty of care to the injured party (plaintiff), (2) the defendant breached that duty, (3) the breach was the cause of harm to the plaintiff, and (4) the harm to the plaintiff was a legally recognizable injury. The duty must be such that a reasonable person engaging in the same activity would anticipate a risk of the negative consequences and guard against it.

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

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

5–5. Negligence. Charles Robison, an employee of West Star Transportation, Inc., was ordered to cover an unevenly loaded flatbed trailer with a 150-pound tarpaulin. The load included uncrated equipment and pallet crates of different heights, about thirteen feet off the ground at its highest point. While standing on the load, manipulating the tarpaulin without safety equipment or assistance, Robison fell headfirst and sustained a traumatic head injury. He filed a suit against West Star to recover for his injury. Was West Star “negligent in failing to provide a reasonably safe place to work,” as Robison claimed? Explain. [West Star Transportation, Inc. v. Robison, 457 S.W.3d 178 (Tex.App.—Amarillo 2015)] (See Negligence.)

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

In this problem, West Star Transportation, Inc., ordered its employee Charles Robison to cover an unevenly loaded flatbed trailer with a heavy tarpaulin. The load was ungainly, uneven, and about thirteen feet above the ground at its highest point.

Manipulating the tarpaulin without safety equipment or assistance, Charles fell from the load and sustained a head injury. West Star owed a duty to its employee to exercise reasonable care, but West Star did not do what a shipper of ordinary prudence would have done under the same or similar circumstances. West Star should have refused to handle a load requiring unreasonably dangerous tarping, or the company should have taken appropriate safety precautions.

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

5–6. Negligence. DSC Industrial Supply and Road Rider Supply are located in North Kitsap Business Park in Seattle, Washington. Both firms are owned by Paul and Suzanne Marshall.

The Marshalls had outstanding commercial loans from Frontier Bank. The bank dispatched one of its employees, Suzette Gould, to North Kitsap to “spread Christmas cheer” to the Marshalls as an expression of appreciation for their business. Approaching the entry to Road Rider, Gould tripped over a concrete “wheel stop” and fell, suffering a broken arm and a

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dislocated elbow. The stop was not clearly visible, it had not been painted a contrasting color, and it was not marked with a sign. Gould had not been aware of the stop before she tripped over it. Is North Kitsap liable to Gould for negligence? Explain. [Gould v. North Kitsap Business Park Management, LLC, 192 Wash.App. 1021 (2016)] (See Negligence.)

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

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

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

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

5–7. Product Liability. Barbara Kaiser had surgery to implant the Prolift Anterior Pelvic Floor Repair System, a medical device that supports the pelvic muscles. Within a few years, Kaiser began suffering severe pelvic pain. Kaiser’s physician attributed the pain to the Prolift and told her that the pain was likely permanent, because, in her situation, as with some other patients, it was impossible to remove the device safely. Kaiser filed a strict product liability suit in a federal district court against Ethicon, the maker of the Prolift, and Ethicon’s parent company Johnson & Johnson, to recover for her injuries. At the trial, pelvic-floor surgeons testifying on Kaiser’s behalf revealed that they had not known of the risks associated with the Prolift and “once [they] found out about them, [they] stopped using it.” What made this product so defective as to be unreasonably dangerous? Explain. (Hint: Who are Prolift’s “ordinary consumers,” and how was the product so dangerous as to exceed their expectations?) [Kaiser v. Johnson & Johnson, 947 F.3d 996 (7th Cir. 2020)] (See Product Liability.)

Solution: What made the Prolift so defective as to be unreasonably dangerous was that it was dangerous beyond the reasonable expectation of its “ordinary consumers.”

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

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The Prolift is a medical device that supports the pelvic muscles. Ethicon makes and sells the Prolift. In this case, Barbara Kaiser received an implant of the device. Her subsequent pain was attributed to the Prolift by her physician, who told her that the pain was likely permanent because the device could not be safely removed. In Kaiser’s product liability suit against Ethicon (and its parent company, Johnson & Johnson), surgeons testified on the plaintiff’s behalf that they had not known of the risks associated with the Prolift and “once [they] found out about them, [they] stopped using it.”

The controlling principle here is that a product is unreasonably dangerous when it exposes its user to a risk of harm extending beyond the ordinary consumer’s expectations. In applying this principle, a jury in the Kaiser case could properly consider evidence of the frequency and severity of the Prolift’s complications. And, based on the testimony of Kaiser’s witnesses, the jury could conclude that the Prolift created risks beyond the expectations of the device’s ordinary consumers—pelvic-floor surgeons. Finally, on this record, the jury could conclude that Prolift was unreasonably dangerous.

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

5–8. Intentional Infliction of Emotional Distress. Joshua Amin was a package sorter for United Parcel Service, Inc. (UPS), in Dallas, Texas. On his way to use the bathroom, Amin was stopped

by UPS division manager Sergio Castro. Claiming that Amin had already used his bathroom break for the day, Castro ordered Amin back to his workstation and told him, “You can use [the toilet] right where you are.” That is exactly what happened, and, according to Amin, he was forced to work in soiled pants for twenty minutes. Based on the humiliating nature of the incident and his consequent depression, Amin brought suit against UPS for intentional infliction of emotional distress. Should the court rule in Amin’s favor? Explain. [Amin v. United Parcel Service, Inc., 66 F.4th 568 (5th Cir. 2023)] (See Intentional Torts against Persons.)

Solution: No. This answer relies on the legal, rather than the popular, definition of emotional distress. One of the elements of the tort of intentional infliction of distress (IIED) is that the emotional distress suffered must be “severe.” After a federal district court granted UPS’s motion to dismiss his IIED claim, Amin asked the U.S. Court of Appeals for the Fifth Circuit to reverse. Amin based his amended IIED claim on “the humiliating nature” of the incident itself as well as testimony to establish the severity of his distress.

The appeals court was unimpressed with the evidence of “severity” presented by the plaintiff. Two friends testified that Amin was “depressed” and “withdrawn” after the incident. Amin told the appeals court that he was hesitant about going out in public with his son, for fear of running into someone who knew about the incident and might mention it to the boy. In the appeals court’s judgment, this behavior did not show Amin to have been “extraordinarily damaged” by his humiliating experience. Previously successful IIED claims in Texas involved plaintiffs who suffered intense psychosomatic symptoms, suicidal thoughts, and post-traumatic stress disorder. As Amin’s distress

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did not rise to these levels, the appeals court affirmed the district court’s ruling that his IIED claim must fail.

A QUESTION OF ETHICS 5–9. The IDDR Approach and Wrongful Interference. Julie Whitchurch was an employee of Vizant Technologies, LLC. After she was fired, she created a website falsely accusing Vizant of fraud and mismanagement to discourage others from doing business with the company.

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

1.

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

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

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

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

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

2. Using the IDDR approach, analyze and evaluate Vizant’s decision to file a suit against Whitchurch.

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

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

The IDDR approach has four steps—Inquiry, Discussion, Decision, and Review.

The purpose of the first step, Inquiry, is to identify the issue, the stakeholders, and applicable ethical theories. In this problem, the impact of Whitchurch’s accusations likely prompted Vizant to consider actions to curtail them. The company might have chosen to do nothing, or it might have attempted to negotiate with Whitchurch. A third option would be to file a suit against her.

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

The second step, Discussion, involves analyzing possible actions to address the issue. Factors include the strengths and weaknesses of those actions, considering their consequences and their effects on stakeholders. Choosing to do nothing could effectively rob Whitchurch’s accusations of credibility.

Negotiations might lead to a retraction of, and an end to, her comments. Either course would save the cost and publicity of litigation. If these actions were tried and failed, a suit could become the only viable option to stop the criticism. Utilitarianism would seem to be the ethical theory to apply here—a suit would be the proper action if it would produce the greatest good for the most people. Considering the number of stakeholders, there is little doubt that a successful suit against Whitchurch would have the optimal result.

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

The final step, Review, determines the success or failure of the action to resolve the issue and satisfy the stakeholders. In the actual case on which this problem is based, the court issued a judgment in Vizant’s favor and enjoined Whitchurch from discouraging others from doing business with Vizant. The U.S. Court of Appeals for the Third Circuit affirmed the judgment and the injunction.

This indicates the success of Vizant’s action to at least temporarily resolve the issue and, assuming a decline in negative effects coincident with the imposition of the injunction, satisfy the stakeholders.

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TIME-LIMITED TEAM ASSIGNMENT 5–10. Negligence. Donald and Gloria Bowden hosted a cookout at their home in South Carolina, inviting mostly business acquaintances. Justin Parks, who was nineteen years old, attended the party. Alcoholic beverages were available to all of the guests, even those who, like Parks, were between the ages of eighteen and twenty-one.

Parks consumed alcohol at the party and left with other guests. One of these guests detained Parks at the guest’s home to give Parks time to “sober up.” Parks then drove himself from this guest’s home and was killed in a one-car accident. At the time of death, he had a blood alcohol content of 0.291 percent, which exceeded the state’s limit for driving a motor vehicle.

Linda Marcum, Parks’s mother, filed a suit in a South Carolina state court against the Bowdens and others, alleging negligence. (See Negligence.)

1.

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

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

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

Why? Because this would impose a higher standard on the social host than that to which the commercial provider was subject.

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

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

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

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

Solution: The contrast in liability and punishments among the states is a consequence of conflicting public attitudes about underage drinking. Parents who would not approve of their underage children consuming alcoholic

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beverages outside their homes, for example, might condone such drinking in their homes. In that situation, the rationalization might be to keep teenagers off the road and out of other kinds of trouble. Some might view this attitude and its supporting “reasoning” as what is sometimes referred to as “situation ethics.” The legal environment might unintentionally lend support to these parents by rarely holding them responsible for allowing teenagers to consume alcohol in their homes. This is in part because it is difficult to prove in such circumstances which adults provided the alcohol or condoned its use. In some states, it is legal for minors to consume alcohol in their parents’ presence and in other limited circumstances—in conjunction with a religious ceremony, for example. Even parents who might allow their children to drink in their presence might object strongly to other adults making that choice for them.

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

Solution: The guest who detained Parks at his home to give Parks time to sober up could be held liable for negligence on the basis that he assumed a duty to Parks by taking this action and breached the duty by letting him drive home.

The breach might be construed as the proximate cause of the accident that resulted in Parks’s death, with his parents suffering emotional injuries for their loss.

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

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

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 06: Criminal Law and Cyber Crime

Solution and Answer Guide

Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 06: Criminal Law and Cyber Crime

TABLE OF CONTENTS Critical Thinking Questions in Features .............................................................................1 Managerial Strategy—Business Questions............................................................................ 1 Ethical Issue—Value Judgment ............................................................................................. 2 Adapting the Law to the Online Environment—Critical Thinking.................................... 2 Landmark in the Law—Application to Today’s World ....................................................... 3 Cybersecurity and the Law—Critical Thinking .................................................................... 4 Critical Thinking Questions in Cases ................................................................................. 4 Case 6.1—Critical Thinking...................................................................................................... 4 Case 6.2—Critical Thinking ..................................................................................................... 5 Chapter Review ................................................................................................................... 5 Practice and Review................................................................................................................. 5 Practice and Review: Debate This ......................................................................................... 7 Issue Spotters ........................................................................................................................... 7 Business Scenarios and Case Problems .............................................................................. 7 A Question of Ethics ............................................................................................................... 11 Time-Limited Team Assignment .......................................................................................... 13

CRITICAL THINKING QUESTIONS IN FEATURES MANAGERIAL STRATEGY—BUSINESS QUESTIONS 1.

Why might a corporation’s managers agree to pay a large fine rather than to be indicted and proceed to trial?

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

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

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 06: Criminal Law and Cyber Crime

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

ETHICAL ISSUE—VALUE JUDGMENT 1.

Should retailers notify customers that they are being surveilled by facial recognition technology? Why or why not? In general, what steps could retailers take to make this antishoplifting strategy more ethical?

Solution: Informing customers that they are under surveillance by facial recognition technology would seem to have two benefits. First, it would deter wrongdoers from shoplifting. Second, it would give those customers who do not want to have their biometrics recorded the option of leaving the store. Not only did Rite Aid fail to inform shoppers about its use of facial recognition technology, but the drugstore chain also discouraged employees from revealing that the surveillance was in place. When the system “flagged” a potential shoplifter, employees would sometimes follow the customer, stop and search them, order them to leave, call the police, or publicly accuse them of shoplifting. Given how often Rite Aid’s facial recognition system mistakenly identified shoplifters, such harassment and embarrassment were unacceptable.

The Federal Trade Commission has established a list of “best practices” when it comes to retailers’ use of biometric technology. Along with notifying customers that their images are being used in conjunction with a surveillance system, these practices include (1) deleting any images or photos stored in the system after a reasonable amount of time; (2) investigating and responding to consumer complaints about the surveillance system; (3) regularly obtaining third-party assessments of the surveillance system; (4) empowering employees to use their discretion in responding to the identification of potential shoplifters; and (5) ensuring that any biometric information collected is not susceptible to being hacked. Also, clearly, any retailer using this technology must take every step necessary to guarantee that it does not unfairly (and unlawfully) discriminate against people of color.

ADAPTING THE LAW TO THE ONLINE ENVIRONMENT—CRITICAL THINKING 1.

In the Andrews case, his attorney argued that Andrews’s passcodes were protected by the Fifth Amendment and that when suspects are compelled to provide passcodes, they are testifying against themselves. Do you agree? Why or why not?

Solution: As a general rule, the right against self-incrimination covers “testimonial communications.” That is, someone accused of a crime cannot be compelled to disclose incriminating information or make an incriminating assertion of fact that derives from that person’s mind. Actions that do not require a person to make an assertion of fact deriving from the person’s mind are not protected by the Fifth Amendment, even if the action is incriminating. For example, the Fifth Amendment does not bar the compelled production of a handwriting sample or (as is commonplace in drunken driving prosecutions) a sample of a person’s blood.

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The key question here is: Under which category does a cellphone password fall? Some argue that it fits neatly into the right against self-incrimination. When law enforcement demands that a person provide a passcode so that a device can be opened and, presumably, evidence gathered from that device, the person is being compelled to divulge the self-incriminating contents of their mind. For example, in an Oregon case, a suspect twice entered the wrong password into her phone after the police ordered her to unlock it. A trial court found her in contempt and sentenced here to thirty days in jail. The Supreme Court of Oregon reversed, holding that the suspect’s right against self-incrimination had been violated.

Almost fifty years ago, the United States Supreme Court held that forcing a suspect to hand over pre-existing documents could violate the right against self-incrimination because the “act of production” takes on a testimonial character. For example, if a person is compelled to provide the police with an email, the contents of the email are not protected, but the person’s act in producing it is, because that act is selfincriminating.

There is an exception to this “act of production,” rule, however. If the information revealed by the act is a “foregone conclusion,” then the Fifth Amendment does not apply. That is, if the government can establish that the document exists, is authentic, and has been in the possession of the person, then the document does not communicate anything new to the government. The New Jersey Court applied this exception in the Andrews case, reasoning that because the prosecutors had already proved that Andrews owned and operated the cellphones associated with the password, the foregone conclusion exception applied.

Presently, the outcome of these cases depends as much on jurisdiction as it does on legal theory. In some jurisdictions, courts have held that the right of self-incrimination covers cellphone passcodes. Other jurisdictions have held that it does not. In 2020, the United States Supreme Court declined to review a Pennsylvania case with facts similar to the Andrews case in which the state’s highest court reached the opposite conclusion. Thus, a national consensus on this issue remains elusive.

LANDMARK IN THE LAW—APPLICATION TO TODAY’S WORLD 1.

Today, both on television and in the real world, police officers routinely advise suspects of their “Miranda rights” on arrest. How does the Supreme Court’s ruling in this case uphold the due process rights of those suspected of criminal activity?

Solution: The due process function of American criminal law is to protect the individual from the unfair advantages that the government—with its immense resources—inherently enjoys in the courtroom. Constitutional guarantees such as the right to be represented by a lawyer, the right to a jury trial, and the protection against self-incrimination all fall into the category of due process.

In the context of interrogations and confessions, the Supreme Court’s Miranda decision focuses on the concept of inherent coercion. The term refers to the general atmosphere of intimidation that exists during a police interrogation, which, in turn, gives rise to a situation where suspects are more likely to incriminate themselves. In other words, “coercion can be mental as well as physical.” The best way to ensure that suspects do not make incriminating statements against their will is to have a lawyer

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 06: Criminal Law and Cyber Crime

present. The best way to have a lawyer present is for law enforcement agents to notify suspects of their right to counsel before questioning can begin.

CYBERSECURITY AND THE LAW—CRITICAL THINKING 1.

Why might privacy advocates be dismayed by the proliferation of blockchain-tracing technology?

Solution: Bitcoin was not designed to act as the perfect currency for cyber criminals.

Its creators were idealistic privacy advocates who wanted to provide an alternative to mainstream financial systems that relied heavily on central banks and government regulation. To these “old school” crypto advocates, the federal government’s ability to track cryptocurrency transactions defeats the purpose of the entire enterprise. Indeed, it foreshadows a world in which everyone uses cryptocurrency and every financial transaction is not only public but also traceable.

This is not a scenario that many privacy advocates—or cyber criminals—are enthusiastic about. It should come as no surprise, then, that technology is being created to thwart cryptocurrency detection. For example, some users are evading blockchain-tracking software through services called “mixers,” which jumble many different sources of digital currency to obscure its real source. Furthermore, hard-totrace “privacy coins” such as monero and zcash are becoming more popular with all cryptocurrency users, not just those engaged in cyber crime.

CRITICAL THINKING QUESTIONS IN CASES CASE 6.1—CRITICAL THINKING 1.

Legal. Does Linton’s claim that a series of individual fraudulent actions fails to rise to the level of conspiracy have any merit? Why or why not?

Solution: No. In general, there are two types of evidence presented in criminal trials: direct evidence and circumstantial evidence. Direct evidence, such as eyewitness testimony or the proverbial “smoking gun,” directly proves a fact. Circumstantial evidence is indirect evidence that, even if believed, does not establish the fact in question but only the degree of likelihood of the fact. In other words, circumstantial evidence can create an inference that a fact exists.

By its nature, conspiracy is a crime that doesn’t lend itself to direct evidence. In this case, for example, no witness testified that, “Linton and I were part of a plan to defraud insurance companies.” No written evidence of such a plan existed either.

Instead, government prosecutors relied on numerous instances of circumstantial evidence to show that a conspiracy was taking place, whether any of the individual actors specifically intended to conspire in an unlawful manner. As another court put it, a conspiracy conviction such as Linton’s will be upheld "when the circumstances surrounding a person's presence at the scene of conspiratorial activity are so obvious that knowledge of its character ... can fairly be attributed to [her]."

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 06: Criminal Law and Cyber Crime

2. Ethical. It seems reasonable to assume that one of the purposes of any business is to “maximize billing potential.” When does conduct to accomplish that purpose become unethical?

Solution: There is little question about the ethics of Linton’s behavior in this case. She knowingly altered prescriptions. She knowingly created prescriptions for products that didn’t exist. She knowingly billed insurers for unnecessary prescriptions. She knowingly helped hide fraudulent activity from auditors. Such unethical and illegal behavior creates a host of societal harms. Health-care fraud artificially increases the cost of medical services, meaning insurance companies must pay more for claims. To make up this difference, the insurance companies charge higher health-care premiums. When these higher premiums impact federal benefit programs, more funds must be raised through higher taxes or cutting other government services.

Interestingly, the government’s case against Linton did not focus on any personal gain she may have realized from the conspiracy. This created the impression that her wrongdoing was primarily in service to Global rather than for selfish reasons. The Gladden case underscores the reality that unethical business behavior often results from overzealous actions by “team players” such as Linton.

CASE 6.2—CRITICAL THINKING 1.

Legal Environment. Why was Sisuphan convicted of embezzlement instead of larceny?

What is the difference between these two crimes?

Solution: One of the key differences between embezzlement and larceny has to do with the element of possession. Larceny involves the wrongful taking of property in the possession of another, as does robbery (the latter crime involves the violent taking of the property). Embezzlement, in contrast, involves the wrongful appropriation of property that has been entrusted to the person appropriating it, typically an employee. In other words, the property is already in the perpetrator’s possession. Thus, Sisuphan was convicted of embezzlement instead of larceny because, as a dealership employee, he was in legitimate possession of the money until he took the added step of keeping it.

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

When the quarry’s backhoe operator punctured the pipeline, an estimated one thousand to five thousand gallons of oil were discharged into the river. Hanousek was charged with negligently discharging a harmful quantity of oil into a navigable water of the United States in

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violation of the criminal provisions of the Clean Water Act (CWA). Using the information presented in the chapter, answer the following questions.

1.

Did Hanousek have the required mental state (mens rea) to be convicted of a crime?

Why or why not?

Solution: Yes, because he was the corporate officer responsible for the project and had the power to prevent the criminal violation. Corporate directors and officers are personally liable for the crimes they commit and can also be held liable for the crimes of employees under their supervision. Because Hanousek was the corporate officer responsible for every detail of the “6-mile” quarry, he had the power to prevent the criminal violation. Therefore, Hanousek can be held criminally negligent for the backhoe operator puncturing the pipeline.

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

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

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

Solution: No, because he did not have the required mental state (mens rea) and was not a corporate officer in a responsible position to prevent the criminal violation. Criminal liability requires a guilty act at the same time as the defendant having a wrongful mental state. In this situation, the backhoe operator did pierce the pipeline (the guilty act), but he did not have a wrongful mental state because he was unaware that the pipeline was there. As an employee, a court would not use the same standard as if he were a responsible corporate officer who “knew or should have known” of the existence of the pipeline. Because both elements of criminal liability (guilty act and wrongful mental state) did not occur, the backhoe operator could not be charged with a crime.

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

Why or why not?

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

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PRACTICE AND REVIEW: DEBATE THIS 1.

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

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

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

ISSUE SPOTTERS 1.

Dana takes her roommate’s credit card, intending to charge expenses that she incurs on a vacation. Her first stop is a gas station, where she uses the card to pay for gas. With respect to the gas station, has she committed a crime? If so, what is it? (See Types of Crimes.)

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

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

Solution: Yes. The Counterfeit Access Device and Computer Fraud and Abuse Act provides that a person who accesses a computer online, without permission, to obtain classified data—such as consumer credit files in a credit agency’s database—is subject to criminal prosecution. The crime has two elements: (1) accessing the computer without permission and (2) taking data. It is a felony if done for private financial gain.

Penalties include fines and imprisonment for up to twenty years. The victim of the theft can also bring a civil suit against the criminal to obtain damages and other relief.

BUSINESS SCENARIOS AND CASE PROBLEMS 6–1. Types of Cyber Crimes. The following situations are similar, but each represents a variation of a particular crime. Identify the crime and point out the differences in the variations. (See Cyber Crime.)

1.

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

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

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

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

6–2. Business Case Problem with Sample Answer—White-Collar Crime. Matthew Simpson and others created and operated a series of corporate entities to defraud telecommunications companies, creditors, credit reporting agencies, and others. Through these entities, Simpson and his confederates used routing codes and spoofing services to make long-distance calls appear to be local. They stole other firms’ network capacity and diverted payments to themselves. They leased goods and services without paying for them. To hide their association with their corporate entities and with each other, they used false identities, addresses, and credit histories, and issued false bills, invoices, financial statements, and credit references.

Did these acts constitute mail and wire fraud? Discuss. [United States v. Simpson, 741 F.3d 539 (5th Cir. 2014)] (See Types of Crimes.)

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

Here, as stated in the facts, Simpson and his cohorts created and operated a series of corporate entities to defraud telecommunications companies, creditors, credit reporting agencies, and others. Through these entities, Simpson and the others used routing codes and spoofing services to make long-distance calls appear to be local.

They stole other firms’ network capacity and diverted payments to themselves. They leased goods and services without paying for them. And they assumed false identities, addresses, and credit histories, and issued false bills, invoices, financial statements, and credit references in order to hide their association with their entities and with each other. The “scheme” was to defraud telecommunications companies and other members of the public to the perpetrators’ gain of a variety of goods and services.

Wire services—the internet, and presumably phones and other qualifying services— were used to further the scheme.

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

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6–3. Defenses to Criminal Liability. George Castro told Ambrosio Medrano that a bribe to a certain corrupt Los Angeles County official would buy a contract with the county hospitals. To share in the deal, Medrano recruited Gustavo Buenrostro. In turn, Buenrostro contacted his friend James Barta, the owner of Sav–Rx, which provides prescription benefit management services. Barta was asked to pay a “finder’s fee” to Castro. He did not pay, even after frequent e-mails and calls with deadlines and ultimatums delivered over a period of months.

Eventually, Barta wrote Castro a Sav–Rx check for $6,500, saying that it was to help his friend Buenrostro. Castro was an FBI agent, and the county official and contract were fictional. Barta was charged with conspiracy to commit bribery. At trial, the government conceded that Barta was not predisposed to commit the crime. Could he be absolved of the charge on a defense of entrapment? Explain. [United States v. Barta, 776 F.3d 931 (7th Cir. 2015)] (See Defenses to Criminal Liability.)

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

In this problem, the government, through its agent George Castro, entrapped Barta into participating in a conspiracy to bribe a fictional county official. The government conceded at Barta’s trial that he was not predisposed to conspire to commit bribery.

Castro frequently e-mailed and called Barta over a period of months, with no response from him, even when the messages included deadlines and ultimatums. And Barta’s statement, when he eventually did write a check on his company’s account to Castro, that it was to help his friend gave the government reason to believe that Barta was making a deal only to benefit his friend.

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

6–4. Types of Crimes. In Texas, Chigger Ridge Ranch, L.P., operated a 700-acre commercial hunting area called Coyote Crossing Ranch (CCR). Chigger Ridge leased CCR and its assets for twelve months to George Briscoe’s company, VPW Management, LLC. The lease identified all of the vehicles and equipment that belonged to Chigger Ridge, which VPW could use in the course of business, but the lease did not convey any ownership interest. During the lease term, however, Briscoe told his employees to sell some of the vehicles and equipment.

Briscoe did nothing to correct the buyers’ false impression that he owned the property and was authorized to sell it. The buyers paid with checks, which were deposited into an account to which only Briscoe and his spouse had access. Which crime, if any, did Briscoe commit?

Explain. [Briscoe v. State of Texas, 2018 WL 792255 (Tex.App.—Texarkana 2018)] (See Types of Crimes.)

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

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 06: Criminal Law and Cyber Crime

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

The goal of this scheme was to acquire the buyers’ money. The theft was accomplished by fraud.

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

6–5. Property Crime. With the goal of reducing prison overcrowding, California voters passed Proposition 47, which recategorized a number of crimes as misdemeanors rather than felonies. One of the new statutory misdemeanors was the shoplifting of property worth less than $950. Miguel Angel Jiminez was convicted of two felony counts of “misuse of identity” for trying to cash phony checks. Jiminez argued that his stealing another person’s identity was the same as a shoplifter stealing merchandise. Therefore, his version of identity theft was analogous to shoplifting and, under Proposition 47, his crimes should be punished as misdemeanors rather than as felonies. Is identity theft similar enough to shoplifting to support Jiminez’s efforts to avoid a prison sentence? Why or why not? [People v. Jiminez, 459 P.3d 33, 9 Cal. 5th 53 (2020)] (See Types of Crimes.)

Solution: No. The attempt by the defendant to conflate the crimes of shoplifting and identity theft may seem reasonable at first, as shoplifting involves the theft of goods and identity theft involves the theft of a personal information. The statutory language of the crime of “misuse of identity,” however, does not include the word “theft” or any of its synonyms. Indeed, the statute criminalizes the willful and unlawful “use” of the victim’s personal information, not the willful and unlawful “taking” of the victim’s personal information. As the California Supreme Court’s ruling in the Jiminez case highlights, the term “identity theft” oversimplifies the wide range of criminal activity being described, which encapsulates issues of privacy and the loss of control of personal data. Indeed, the disruption in the victims’ lives when their identity is “misused” is unique within the world of property crime. For this reason, the court bluntly stated that misuse of identity is “not a theft offense” and refused to give Jiminez the benefit of treating it as such.

6–6. State of Mind: Mens Rea. Prestige Energy Products LLC met with representatives of Courtesy Dodge and offered to install new lighting in the showroom. Courtesy Dodge paid Prestige Energy 75 percent of the contract price before the work began. The check was deposited into Prestige Energy’s bank account. After a few months, the lighting project stalled. Apparently, there had been a “falling out” between Michael Lewis and Bradley Brussow, who were operating Prestige Energy Products. Lewis told Courtesy Dodge that his company, Prestige NRGY Products, would handle the rest of the work. After the work was completed, Courtesy Dodge issued a final check for $23,826.26 to Prestige NRGY and gave the check to Lewis. Lewis never presented the check to Prestige Energy. When Brussow finally asked Courtesy Dodge why it had not been paid, Courtesy Dodge indicated it had already

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issued the final check to Prestige NRGY. Subsequently, Michael Lewis was charged with embezzlement and using a computer to commit a crime. He was convicted. On appeal, he claimed that he had not been allowed to present a proper defense to show that he did not have criminal intent. He further argued that what was at issue was a simple contract dispute, rather than a criminal action. How should the appellate court rule? [State of Michigan v.

Michael Charles Lewis, 2022 WL 726798 (Ct.App. MI 2022)] (See Criminal Liability.)

Solution: The question at issue is whether the availability of a civil trial concerning a contract dispute prevents a prosecutor from bringing a criminal charge against a defendant. Clearly, intent is rarely, if ever, an issue in a civil trial. When filing a breach of contract suit, Courtesy Dodge would not have had to even discuss Michael Lewis’s intent. In any event, on appeal, the jury verdict was affirmed. The appellate court found no errors warranting reversal.

A QUESTION OF ETHICS 6–7. The IDDR Approach and Identity Theft. Heesham Broussard obtained counterfeit money instruments. To distribute them, he used account information and numbers on compromised FedEx accounts procured from hackers. Text messages from Broussard indicated that he had participated previously in a similar scam and that he knew the packages would be delivered only if the FedEx accounts were “good.” For his use of the accounts, Broussard was charged with identity theft. In defense, he argued that the government could not prove he knew the misappropriated accounts belonged to real persons or businesses. [United States v. Broussard, 675 Fed.Appx. 454 (5th Cir. 2017)] (See Cyber Crime.)

1.

Does the evidence support Broussard’s assertion? From an ethical perspective, does it matter whether he knew that the accounts belonged to real customers?

Why or why not?

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

In this problem, Heesham Broussard obtained counterfeit money instruments.

To distribute the items, he used FedEx account information and numbers misappropriated by hackers. Broussard’s text messages indicated that he had participated in an earlier, similar scam. Further, the messages showed that he knew the packages would be delivered only if the FedEx accounts were “good.”

Charged with identity theft, he argued that the government could not prove he knew the FedEx accounts belonged to real persons or businesses. His text messages, however, indicated the contrary. A judge or juror could infer from these statements that he knew the packages would not be delivered successfully unless the account information and numbers belonged to real customers.

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

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

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

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

The first step of the IDDR approach is an Inquiry—identify the issue, the stakeholders, and ethical standards. In the facts of this question, hackers stole the account information of FedEx customers. Was FedEx obligated to act to protect those customers from theft? Besides those customers and FedEx, the stakeholders could include the owners and employees of the company as well as the society as a whole. Relevant ethical standards could derive from the company’s policies or from religious, philosophical, or other standards. These would include such general principles as acting for the benefit of the most people.

The second step of the approach is a Discussion to analyze actions that might address the issue. Factors include the strengths and weaknesses of those actions and considering their consequences and the effects on stakeholders. To protect against theft through the use of stolen account information, FedEx might have to do as little as assign its customers new account names, numbers, or passwords. If the information could be used for illicit purposes other than fraudulent delivery charges, FedEx could notify its customers, publicize the theft, and alert law enforcement. The company might offer to pay to monitor victimized customers’ credit information. None of these actions would seem to be weak or costly, and their results and effects could be almost entirely beneficial—customers might feel protected, society’s interest in the reliability of FedEx accounts could be reassured, and the owners and employees of the company might believe more strongly in its continued success.

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

The final step of this approach is a Review to weigh the success or failure of the action to resolve the issue and satisfy the stakeholders. According to the facts, FedEx policy is to deliver packages only if an account is “good.” Thus, if FedEx were to take the steps indicated above, its actions would likely prove successful. The stolen data would not be able to initiate FedEx deliveries and

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would become potentially useless for almost any other purpose. These results could satisfy all of the stakeholders.

TIME-LIMITED TEAM ASSIGNMENT 6–8. Cyber Crime. Cyber crime costs consumers millions of dollars every year. It costs businesses, including banks and other credit card issuers, even more. Nonetheless, when cyber criminals are caught and convicted, they are rarely ordered to pay restitution or sentenced to long prison terms. (See Cyber Crime.)

1.

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

Solution: It goes without saying that the higher the anticipated cost of engaging in cyber crime activity, the lower will be the amount demanded. In other words, heavy fines and long jail sentences would have some deterrent effect. The real question is by how much. Many hackers who bring down corporate and government computer systems are teenagers. They cost businesses billions of dollars yet gain no monetary reward for their hacking—they do it to prove that they are as good or better than other hackers. If caught, they could not engage in much meaningful restitution to their corporate victims. In contrast, adult cyber criminals who engage in identity theft, credit-card fraud, and online auction fraud often make large sums of money from this criminal activity. They could be forced to engage in meaningful restitution to their victims. They could be sentenced to long jail terms, just as we routinely do for traditional thieves.

Restitution and long jail terms might serve as a deterrent to such cyber criminal activities. U.S. authorities, though, cannot easily arrest, try, convict, and sentence cyber criminals living and operating in, say, Russia.

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

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

3. A third team should decide how and when a court should order cyber criminals to pay restitution to their victims. Should victims whose computers have been infected with worms or viruses be entitled to restitution, or only victims of theft who have experienced financial loss? What should the measure of restitution be?

Should large companies that are victims of cyber crime be entitled to the same restitution as individuals?

Solution: Cyber criminals could and should arguably be ordered to pay restitution to their victims whenever those persons or businesses suffer a

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 06: Criminal Law and Cyber Crime

financial loss. The victims whose computers are infected with worms or viruses most likely must pay for cleansing software or a security sweep, or more, to clear their data of the infections. Victims of theft, of course, experience financial loss.

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

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

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 07: International and Space Law

Solution and Answer Guide

Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 07: International and Space Law

TABLE OF CONTENTS Critical Thinking Questions in Features .............................................................................1 Building Analytical Skills—Result and Reasoning ............................................................... 1 Ethical Issue—Value Judgment ............................................................................................. 2 Cybersecurity and the Law—Critical Thinking .................................................................... 2 Critical Thinking Questions in Cases ................................................................................. 3 Case 7.1—Critical Thinking ...................................................................................................... 3 Case 7.2—Critical Thinking ..................................................................................................... 4 Case 7.3—Critical Thinking ..................................................................................................... 5 Chapter Review ................................................................................................................... 5 Practice and Review................................................................................................................. 5 Practice and Review: Debate This ......................................................................................... 6 Issue Spotters ........................................................................................................................... 6 Business Scenarios and Case Problems .............................................................................. 7 A Question of Ethics ............................................................................................................... 12 Time-Limited Team Assignment .......................................................................................... 14

CRITICAL THINKING QUESTIONS IN FEATURES BUILDING ANALYTICAL SKILLS—RESULT AND REASONING 1.

Saudi Arabia should not be entitled to sovereign immunity. What factors would lead a court to this conclusion?

Solution: This situation is similar to the one described in this chapter’s Case 7. 1. Saudi Arabia should not be entitled to sovereign immunity. The government of Saudi Arabia was acting as a private company through its German agent to contract with Taconic in the United States. Also, substantial parts of the contract were performed in the United States because the materials for the tents were made in New York and shipped to Germany. Thus, the U.S. courts should have jurisdiction over this claim against Saudi Arabia.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 07: International and Space Law

ETHICAL ISSUE—VALUE JUDGMENT 1.

Is it appropriate for American trade policy to de-emphasize purely economic factors in favor of issues such as climate change and labor rights? Explain your answer.

Solution: Traditionally, U.S. trade negotiators have operated under the assumption that free trade benefits American consumers by opening home markets to international competition, increasing the variety of goods available while at the same time lowering those goods’ costs. Free trade is also seen as benefiting sectors of the American economy by allowing domestic companies to sell their products in other countries. To promote free trade, the United States has customarily pushed for tariff reductions.

High tariffs are equivalent to added taxes on imports, not only raising prices for American consumers but also insulating inefficient American companies from foreign competition.

So, for example, as noted in the text, a goal of KORUS FTA is to eliminate 95 percent of participating countries’ tariffs on industrial and consumer exports. By contrast, negotiations for a more recent trade agreement called the Indo-Pacific Economic Framework for Prosperity (IPEF), also involving the United States and South Korea, make almost no mention of market access. Instead, IPEF prioritizes the connected, clean, and fair economies described in this feature. Each government involved in IPEF negotiations is asked to promote the right to collective bargaining, a safe and healthy work environment, fair minimum wages, and the elimination of employment discrimination and child labor.

Even if you believe that such developments reflect a more ethical version of international trade, you should be aware that the implementation of “value-based” trade poses many challenges. Those nations such as the United States that have tried to incorporate climate-related provisions into trade agreements have struggled to establish protocols that can be applied fairly to all participants. Specifically, certain stakeholders, such as the auto industry, have resisted the idea of global regulatory standards that will raise the costs of production in certain countries without effective mechanisms to ensure compliance in others.

CYBERSECURITY AND THE LAW—CRITICAL THINKING 1.

Why is international law better suited for satellite regulation than national law?

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

As has been discussed at length in this chapter, the purpose of international law is the orderly settlement of disputes between nations. Indeed, the U.N.’s Outer Space Treaty does provide a broad framework for international space law. More specifically, as noted in the text, under the Liability Convention any harm caused by a satellite on

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Earth is the financial responsibility of the country that launched it, regardless of who or what actually caused the damage.

It should be noted that, in the context of twenty-first century cybersecurity and widespread computer hacking by malicious third parties, the Liability Convention is somewhat outdated. A more helpful model for such satellite-related disputes can be found in the treaties and established practices that govern international waters.

Customarily, the law of the sea holds that damages caused by ships or other vessels are the financial responsibility of the party that controls the vessel, not the party that owns it.

CRITICAL THINKING QUESTIONS IN CASES CASE 7.1—CRITICAL THINKING 1.

Legal Environment. Suppose France had waited until GME had excavated La Trinité and then demanded the ship’s return to its home country. If this demand led to a lawsuit, would France’s behavior be protected by sovereign immunity? Explain.

Solution: Probably yes. In the Global Marine Exploration case, to support its position, France cited a previous ruling involving Greece’s assertion of ownership of an ancient Greek artifact. In that case, Greece’s government learned that an American auction house was planning to sell the Greek artifact in question. Greek officials emailed the auction house, stating that the artifact belonged to Greece under a “patrimony” law that declared Greek artifacts to be Greece’s property, no matter where they were located.

The auction house filed suit against Greece, seeking declaratory relief on the disputed issue of ownership. The United States Court of Appeals for the Second Circuit held that it did not have jurisdiction over the case because the commercial activity exception of the FSIA did not apply to Greece’s behavior. Greece’s sending of a letter to the auction house demanding return of the artifact was not taken “in connection with any commercial activity.” Rather, it was the act of a government demanding the return of a culturally important item in keeping with its own laws. According to the Second Circuit, “[n]ationalizing property is a distinctly sovereign act.”

Here, the appeals court found that France’s activities were not like Greece’s. But, in the alternative set of facts proposed in the question, France’s attempt to nationalize La Trinité would have been comparable to Greece’s behavior regarding the artifact up for auction, and France probably would have been protected by the doctrine of sovereign immunity.

2. Ethical. Was justice served by the district court’s initial ruling in France’s favor? Why or why not?

Solution: Arguably, the district court’s ruling that France could not be sued by GME because of the doctrine of sovereign immunity was not a fair outcome. Under its agreement with Florida, GME “undertook prolonged and expensive research, survey, reporting, and identification of shipwrecked sites,” with assurances that this salvage

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activity would be “compensated in line with the value of the discovered sites.” These efforts cost the company millions of dollars and “enormous time and effort.”

Furthermore, without GME’s efforts, La Trinité probably would not have been discovered. Under these circumstances, it does seem that GME had conferred a substantial benefit on France with its services related to the shipwreck. It was not, then, unreasonable for the company to feel that it was entitled to compensation for these services.

CASE 7.2—CRITICAL THINKING 1.

Economic. How does this case illustrate that dumping is an unfair international trade practice? Discuss.

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

Dumping is generally subsidized by the government of the foreign exporting country.

This makes the practice unfair.

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

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

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

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

The ITC’s findings, supported by substantial evidence, formed the basis on which the U.S. Court of Appeals for the Federal Circuit affirmed the ITC’s determination “that subject imports were a significant cause of the decline in prices.” If the court had not had this material on which to base a conclusion, the court would have had to look elsewhere in the record for support. There is nothing provided in the facts or reasoning of this case to indicate another basis beyond the apparent “coincidence” of the imports and the decline in domestic prices. This would not likely have been sufficient. © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 07: International and Space Law

CASE 7.3—CRITICAL THINKING 1.

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

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

CHAPTER REVIEW PRACTICE AND REVIEW Robco, Inc., was a Florida arms dealer. The armed forces of Honduras contracted to purchase weapons from Robco over a six-year period. After the government was replaced and a democracy installed, the Honduran government sought to reduce the size of its military, and its relationship with Robco deteriorated. Honduras refused to honor the contract by purchasing the inventory of arms, which Robco could sell only at a much lower price. Robco filed a suit in a federal district court in the United States to recover damages for this breach of contract by the government of Honduras. Using the information provided in the chapter, answer the following questions: 1.

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

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

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

Explain.

Solution: The act of state doctrine provides that the judicial branch of one country will not examine the validity of public acts committed by a recognized foreign government within its own territory. Here, the newly democratic government of Honduras is seeking to reduce the size of its military. The U.S. government likely recognized the new democratic regime since the United States supports democratization globally. The United States is also likely to be supportive of its efforts to reduce the size of its military and its inventory of weapons. Because the Honduran government’s policy decision is a public act within its own territory, the U.S. judicial branch will most likely be unwilling to intervene and force the government to fulfill its contract to purchase arms. There is more at stake than a simple contract because enforcing an arms deal may harm international relations between the United States and the new government of Honduras.

3. Suppose that prior to this lawsuit, the new government of Honduras had enacted a law making it illegal to purchase weapons from foreign arms dealers. What doctrine might lead a U.S. court to dismiss Robco’s case in that situation?

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 07: International and Space Law

Solution: The principle of comity might apply here. This principle is a doctrine of deference. Under this principle, one nation will defer and give effect to the laws and judicial decrees of another country, as long as those laws are consistent with the law and public policy of the accommodating nation. The principle of comity is based on respect and is a customary courtesy extended to other nations. If a U.S. court extends comity to the new Honduran government’s law pertaining to arms dealing, then it would dismiss Robco’s case.

4. Now suppose that the U.S. court hears the case and awards damages to Robco, but the government of Honduras has no assets in the United States that can be used to satisfy the judgment. Under which doctrine might Robco be able to collect the damages by asking another nation’s court to enforce the U.S. judgment?

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

PRACTICE AND REVIEW: DEBATE THIS 1.

The U.S. federal courts are accepting too many lawsuits initiated by foreigners that concern matters not relevant to this country.

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

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

ISSUE SPOTTERS 1.

Café Rojo, Ltd., an Ecuadoran firm, agrees to sell coffee beans to Dark Roast Coffee Company, a U.S. firm. Dark Roast accepts the beans but refuses to pay. Café Rojo sues Dark Roast in an Ecuadoran court and is awarded damages, but Dark Roast’s assets are in the United States. Under what circumstances would a U.S. court enforce the judgment of the Ecuadoran court? (See International Law.) Solution: Under the principle of comity, a U.S. court would defer and give effect to foreign laws and judicial decrees that are consistent with U.S. law and public policy.

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

Solution: The practice described in this problem is known as dumping, which is regarded as an unfair international trade practice. Dumping is the sale of imported goods at “less than fair value.” Based on the price of those goods in the exporting country, an extra tariff—known as an antidumping duty—can be imposed on the imports.

BUSINESS SCENARIOS AND CASE PROBLEMS 7–1. Dumping. U.S. pineapple producers alleged that producers of canned pineapple from the Philippines were selling their canned pineapple in the United States for less than its fair market value (dumping). The Philippine producers also exported other products, such as pineapple juice and juice concentrate, which used separate parts of the same fresh pineapple, so they shared raw material costs, according to the producers’ own financial records. To determine fair value and antidumping duties, the plaintiffs argued that a court should calculate the Philippine producers’ cost of production and allocate a portion of the shared fruit costs to the canned fruit. The result of this allocation showed that more than 90 percent of the canned fruit sales were below the cost of production. Is this a reasonable approach to determining the production costs and fair market value of canned pineapple in the United States? Why or why not? (See Regulation of Specific Business Activities.)

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

7–2. Doing Business Internationally. Macrotech, Inc., develops an innovative computer chip and obtains a patent on it. The firm markets the chip under the trademarked brand name “Flash.” Macrotech wants to sell the chip to Nitron, Ltd., in Pacifica, a foreign country.

Macrotech is concerned, however, that after an initial purchase, Nitron will duplicate the chip, pirate it, and sell the pirated version to computer manufacturers in Pacifica. To avoid this possibility, Macrotech could establish its own manufacturing facility in Pacifica, but it does not want to do this. How can Macrotech, without establishing a manufacturing facility in Pacifica, protect Flash from being pirated by Nitron? (See Doing Business Internationally.)

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

Licensing is an attractive alternative to establishing a foreign production facility when a process or product has been patented, because the patent protects against the

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 07: International and Space Law

possibility that the innovation could be pirated. Licensing generally involves a payment of royalties, such as a percentage of profits from units sold. Licensing can benefit all of the parties involved. A firm that receives a license gains an established reputation for quality, and a firm that grants a license gets income from foreign sales and expands the scope of its reputation and possible demand for its products. Franchising is a form of licensing that generally involves trademarks more than patented products.

If Macrotech had not obtained a patent on its chip but had trademarked the brand name “Flash,” for example, the firm could license Nitron to use the mark, probably under certain conditions or limitations in exchange for a fee based on a percentage of sales.

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

7–3 Dumping. Nuclear power plants use low-enriched uranium (LEU) as a fuel. LEU consists of feed uranium enriched by energy to a certain assay—the percentage of the isotope necessary for a nuclear reaction. The amount of energy required is described by an industry standard as a “separative work unit” (SWU). A nuclear utility may buy LEU from an enricher, or the utility may provide an enricher with feed uranium and pay for the SWUs necessary to produce LEU. Under an SWU contract, the LEU returned to the utility may not be exactly the uranium the utility provided. This is because feed uranium is fungible and trades like a commodity (such as wheat or corn), and profitable enrichment requires the constant processing of undifferentiated stock. Foreign enrichers, including Eurodif, S.A., allegedly exported LEU to the United States and sold it for “less than fair value.” Did this constitute dumping? Explain. If so, what could be done to prevent it? [United States v. Eurodif, S.A., 555 U.S. 305, 129 S.Ct. 878, 172 L.Ed.2d 679 (2009)] (See Regulation of Specific Business Activities.)

Solution: The crux of this case is whether the LEU in question qualifies as good or as a service. Federal anti-dumping law applies only to “foreign merchandise” sold in the United States at “less than its fair value.” The law does not apply to international sales of services. Here, the defendants argued that they were providing a service under the SWU contracts. That is, they had no ownership rights over the LEU that was provided to them by the utilities, so they could not be said to have “sold” it any point.

The U.S. Department of Commerce countered that when, as in this case, cash plus an untracked fungible commodity are exchanged for a substantially transformed version of the same commodity, a sale of goods has taken place. The United States Supreme Court agreed, holding that the federal government had reasonably determined that the LEU in the SWU contracts was a “good” and therefore subject to this country’s antidumping laws. As a result, an extra tariff—known as an antidumping duty—could be assessed on the foreign LEU to prevent the underselling of U.S. businesses in this field.

7–4. Business Case Problem with Sample Answer—Import Controls. The Wind Tower Trade Coalition is an association of domestic manufacturers of utility-scale wind towers. The coalition filed a suit in the U.S. Court of International Trade against the U.S. Department of Commerce. It challenged the Commerce Department’s decision to impose only prospective (future) antidumping duties, rather than retrospective (retroactive) duties, on imports of

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utility-scale wind towers from China and Vietnam. The department had found that the domestic industry had not suffered any “material injury” or “threat of material injury” from such imports. It had further found that the industry would be protected by a prospective assessment. Can an antidumping duty be assessed retrospectively? If so, should it be assessed here? Discuss. [Wind Tower Trade Coalition v. United States, 741 F.3d 89 (Fed. Cir. 2014)] (See Regulation of Specific Business Activities.)

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

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

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

7–5. The Principle of Comity. Holocaust survivors and the heirs of Holocaust victims filed a suit in a U.S. federal district court against the Hungarian national railway, the Hungarian national bank, and several private Hungarian banks. The plaintiffs alleged that the defendants had participated in expropriating the property of Hungarian Jews who were victims of the Holocaust. The claims arose from events in Hungary seventy years earlier. The plaintiffs, however, had not exhausted remedies available through Hungarian courts. Indeed, they had not even attempted to seek remedies in Hungarian courts, and they did not provide a legally compelling reason for their failure to do so. The defendants asked the court to dismiss the suit. Does the principle of comity support the defendants’ request? Explain. [Fischer v. Magyar Államvasutak Zrt., 777 F.3d 847 (7th Cir. 2015)] (See International Law.) Solution: Yes. The principle of comity supports the defendants’ request to dismiss the plaintiffs’ claims. Under the principle of comity, one nation defers to and gives effect to the laws and judicial decrees of another country when those are consistent with the laws and public policy of the accommodating nation.

In the fact of this problem, Holocaust survivors and the heirs of other Holocaust victims filed a suit in a federal district court in the United States against a variety of entities based in Hungary—the national railway, the national bank, and several private banks—alleging that the defendants expropriated property from Hungarian Jews who were victims of the Holocaust seventy years ago. The plaintiffs had not tried to exhaust remedies available through Hungarian courts nor did they provide a legally compelling reason for not making the attempt. As the defendants requested, the court should dismiss the suit. Comity requires that Hungarian courts be given the first opportunity to hear the claims. Of course, the U.S. court could agree to hear the suit if the plaintiffs could show that Hungarian remedies were inadequate, procedural rules

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 07: International and Space Law

would unreasonably bar their claims, or other circumstances would prevent a fair and impartial hearing.

In the actual case on which this problem is based, the court dismissed the complaint.

The U.S. Court of Appeals for the Seventh Circuit affirmed the dismissal for the reason stated above.

7–6. International Law. For fifty years, the Soviet Union made and sold Stolichnaya vodka. At the time, VVO-SPI, a Soviet-state enterprise, licensed the Stolichnaya trademark in the United States. When the Soviet Union collapsed, VVO-SPI was purportedly privatized and fell under the control of Spirits International (SPI). In 2000, a Russian court held that VVO-SPI had not been validly privatized under Russian law. Thus, ownership of the Stolichnaya mark remained with the Soviet Union’s successor, the Russian Federation. The Russian Federation assigned the mark to Federal Treasury Enterprise Sojuzplodoimport (FTE). FTE then filed a suit in a U.S. federal district court against SPI, asserting unlawful misappropriation and commercial exploitation of the mark in violation of the Lanham Act. Is the validity of the assignment (transfer) of the vodka’s trademark to FTE a question to be determined by the court? Why or why not? [Federal Treasury Enterprise Sojuzplodoimport v. Spirits International, 809 F.3d 737 (2d Cir. 2016)] (See International Law.) Solution: No. The validity of the assignment of the Stolichnaya mark by the Russian Federation to FTE is not a question to be determined by a U.S. court. Under the international act of state doctrine, the judicial branch of one country does not review the validity of public acts committed by a recognized foreign government within the latter’s own boundaries.

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

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

7–7. Import Controls. Goods exported to a foreign country for repair or alteration can qualify for tariff-free or reduced-tariff treatment when they re-enter the United States. The goods do not qualify for favorable import-duty treatment if, in the foreign country, they are transformed into commercially different goods. Daimler–Chrysler’s Sprinter vans are marketed in the United States as cargo vans. Pleasure-Way Industries, Inc., bought 144 Sprinter vans and exported them to Canada for conversion into motorhomes. This included the installation of fully plumbed and furnished kitchens, bathrooms, and sleeping quarters.

After the conversion, Pleasure-Way sought to import the vehicles back into the United States

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 07: International and Space Law

to market the motorhomes under new model names—the Ascent TS or Plateau TS—as upscale leisure vehicles at prices double or triple the price for Sprinter vans. Do the converted vans qualify for favorable import-tariff treatment? Discuss. [Pleasure-Way Industries, Inc. v.

United States, 878 F.3d 1348 (Fed.Cir. 2018)] (See Regulation of Specific Business Activities.)

Solution: No. Pleasure-Way’s vans do not qualify for favorable import-tariff treatment.

Goods exported to a foreign country for repair or alteration can qualify for tariff-free or reduced-tariff treatment when they re-enter the United States. But the goods do not qualify for favorable import-duty treatment if, in the foreign country, they are transformed into commercially different goods.

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

In this problem, Pleasure-Way bought Sprinter cargo vans and exported them to Canada for conversion into motorhomes. This included the installation of plumbed and outfitted kitchens, bathrooms, and sleeping quarters. After the conversion, PleasureWay sought to import the vehicles back into the United States for sale under new model names—the Ascent TS or Plateau TS—as upscale leisure vehicles at prices double or triple the price for Sprinter vans. In Canada, Pleasure-Way’s vans were not just repaired or altered; they were transformed into commercially different goods. For this reason, they fail to qualify for favorable import-tariff treatment.

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

7–8. Sovereign Immunity. Rasha Mohammad was employed as an administrative assistant by the State of Kuwait’s consulate in Los Angeles. She filed suit alleging that she had been constructively terminated due to discrimination based on her religion, gender, and natural origin. The consulate moved to dismiss the action based on sovereign immunity. The district court denied the motion, finding it had jurisdiction under the commercial activity exception to the Foreign Sovereign Immunities Act (FSIA). Rasha Mohammad was not a diplomat, civil servant, or military officer. She was a Syrian national living in California as a legal permanent resident and eventually a U.S. citizen. Should the appellate court accept the trial court’s decision? Why or why not? [Mohammad v. General Consulate of State of Kuwait in Los Angeles, 28 F.4th 980 (9th Cir. 2022)] (See International Law.) Solution: The district court found that the commercial activity exception contained in the Foreign Sovereign Immunities Act allowed Rasha Mohammad to pursue her claim against the Kuwaiti Consulate. This exception applied because Mohammad’s work for the consulate “was that of clerical staff, not civil servants or diplomatic personnel.”

She was not the personal secretary of any diplomat. She had no access to confidential information. It was up to the consulate to show “by a preponderance of evidence that [Mohammad] performed uniquely government tasks.” The consulate was unable to do so.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 07: International and Space Law

A QUESTION OF ETHICS 7–9. The IDDR Approach and Doing Business Internationally. Incorporated under Venezuelan law, a subsidiary of U.S.-based Helmerich & Payne International Drilling Company supplied oildrilling rigs to entities that were part of the government of Venezuela. The government fell behind in payment on contracts for the use of the rigs. When the overdue amounts topped $100 million, the government nationalized the rigs and took possession. Helmerich filed a suit in a U.S. federal district court against Venezuela, claiming expropriation of property in violation of international law. Helmerich asserted that the U.S. court had jurisdiction under the Foreign Sovereign Immunities Act (FSIA). [Bolivarian Republic of Venezuela v. Helmerich & Payne International Drilling Co., 581 U.S. 170, 137 S.Ct. 1312, 197 L.Ed.2d 663 (2017)] (See International Law.) 1.

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

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

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

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

(It might be noted that simply arguing in a “non-frivolous” way that property has been taken in violation of international law is not sufficient to confer jurisdiction under the FSIA. If the situation were otherwise, the only limits to bringing a claim under the act would be the bounds of a lawyer’s “non-frivolous” imagination. Such claims could cause friction with other nations, leading to reciprocal actions against the United States.)

In the actual case on which this problem is based, the court rejected the argument that Helmerich had no rights in the subsidiary’s property and held that the parent’s claim fell within the jurisdiction of the court under the FSIA. The U.S. Court of Appeals for the District of Columbia Circuit agreed, concluding that Helmerich had

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asserted its rights in a “non-frivolous” way and that was enough to bring the case within the FSIA’s scope. The United States Supreme Court vacated this decision and remanded the case. The Court held that a party’s “non-frivolous, but ultimately incorrect” argument is not enough to confer FSIA jurisdiction.

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

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

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

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

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

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

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TIME-LIMITED TEAM ASSIGNMENT 7–10. Globalization. Assume that you are manufacturing tablet accessories and that your business is becoming more successful. You are now considering expanding operations into another country. (See Doing Business Internationally.)

1.

One team will explore the costs and benefits of advertising on the internet.

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

2. Another team will consider whether to take in a partner from a foreign nation and explain the benefits and risks of having a foreign partner.

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

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

3. The third team will discuss what problems may arise if a business chooses to manufacture in a foreign location.

Solution: Problems that may arise when a domestic business company decides to manufacture its products in a foreign location include the costs and other considerations in obtaining and using foreign labor, shipping, and raw materials.

There may also be different cultural, economic, legal, political, and social conditions to take into account.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 08: Intellectual Property Rights

Solution and Answer Guide

Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 08: Intellectual Property Rights

TABLE OF CONTENTS Critical Thinking Questions in Features .............................................................................1 Managerial Strategy—Business Questions............................................................................ 1 Adapting the Law to the Online Environment—Critical Thinking.................................... 2 Building Analytical Skills—Result and Reasoning .............................................................. 3 Business Law in Context—Key Point .................................................................................... 3 Ethical Issue—Value Judgment ............................................................................................. 4 Critical Thinking Questions in Cases ................................................................................. 4 Case 8.1—Critical Thinking...................................................................................................... 4 Case 8.2—Critical Thinking ..................................................................................................... 4 Case 8.3—Critical Thinking ..................................................................................................... 5 Chapter Review ................................................................................................................... 6 Practice and Review................................................................................................................. 6 Practice and Review: Debate This ......................................................................................... 7 Issue Spotters ........................................................................................................................... 8 Business Scenarios and Case Problems .............................................................................. 8 A Question of Ethics ............................................................................................................... 13 Time-Limited Team Assignment .......................................................................................... 15

CRITICAL THINKING QUESTIONS IN FEATURES MANAGERIAL STRATEGY—BUSINESS QUESTIONS 1.

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

Solution: In the online world, there is something called cybersquatting. Someone registers a domain name that a large company might want to use in the future in this

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 08: Intellectual Property Rights

situation. The owner then “squats” on this domain internet address until offered a large enough price to transfer it to a company that can actually make use of it.

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

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

2. Should trademark protection apply to similarities between noncompeting products? Why or why not?

Solution: As shown in the text’s coverage of this topic, one of the overriding goals of trademark protection law is to avoid consumer confusion between the nature of two products. If the trademark owner and the party alleged to have infringed on the trademark compete in the same market for goods and services, the court will rarely look beyond the trademark or service mark itself. Cases where the goods or services of the plaintiff and the defendant do not directly compete are more difficult to assess. In general, the court will look at the nature of the goods or services and the context in which they are marketed and sold to determine the likelihood of confusion. Some factors that courts take into account are (1) the strength of the plaintiff’s mark, (2) the intent of the defendant in adopting the mark, (3) the relationship in consumers’ minds between the goods and services, and, of course, (4) evidence of any actual confusion on the part of consumers.

ADAPTING THE LAW TO THE ONLINE ENVIRONMENT—CRITICAL THINKING 1.

Suppose Garret purchases a brand-name electric scooter from Amazon. While charging, the scooter ignites, starting a fire that injures Garrett and burns down his apartment. If the scooter is counterfeit, should Amazon be held liable for Garret’s personal injuries and property damage? Explain your answer.

Solution: The U.S. Congress recently passed a bill known as the Inform Act that requires online retailers such as Amazon to collect and verify information about third-party sellers that use their sites. The online retailers must also disclose this information to consumers. The legislation gives the Federal Trade Commission authority to levy significant financial penalties against companies that fail to adhere to these standards.

Members of Congress have pursued legislation that would, in addition, hold online retailers liable for counterfeits sold by third parties on their platforms. Supporters of this legislation see it as a necessary companion piece to the Inform Act, adding the threat of liability to the requirement of transparency. As yet, however, such legislation has not been passed, and Garrett would probably fail in an effort to hold Amazon liable for his injuries.

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Not surprisingly, large online retailers have lobbied against any law that would make them liable for fake products. Such legislation, they argue, would saddle them with the entire burden of preventing the online sale of counterfeit items while at the same time requiring no effort from the government or the brands being counterfeited to do so. In the past, courts largely have supported the online retailers’ stance. For example, when Tiffany & Co. sued eBay, Inc., for allowing large numbers of fake Tiffany jewelries on its site, a federal court ruled in favor of the defendant. EBay, the court noted, never took possession of the fake products, nor did it sell the fake products to consumers. The court added that it would be unreasonable to expect an online retailer to spot the relatively few fakes among the billions of new products that are listed on its platform each day.

Artificial intelligence (AI) may change this reasoning. As noted in the text, online retailers are turning to AI software to identify fakes being offered by third-party sellers. If this process becomes reasonably effective, the courts—and Congress—might decide that Amazon and its competitors could be held liable for damages caused by any counterfeits that evaded AI detection.

BUILDING ANALYTICAL SKILLS—RESULT AND REASONING 1.

Applying its own precedent, the United States Supreme Court ruled in Marvel’s favor. As Justice Elena Kagan said in the opinion, “Patents endow their holders with certain superpowers, but only for a limited time.” Do you think this outcome is fair to parties that have entered into a licensing contract? Why or why not?

Solution: In dissenting from the majority in this case, Justice Samuel A. Alito, Jr., argued that “The decision interferes with the ability of parties to negotiate licensing agreements that reflect the true value of a patent, and it disrupts contractual expectations.” The majority did not necessarily disagree, noting that its decision was based on an outmoded understanding of economics and may serve to hinder competition and innovation. In this instance, however, the doctrine of stare decisis dictated the result.

BUSINESS LAW IN CONTEXT—KEY POINT 1.

Suppose Big Machine finds a young singer who sounds very much like Taylor Swift and uses her to produce an album that is obviously a Swift “rip-off.” Do you think Swift could sue Big Machine for copyright infringement? Should Swift be able to do so? Explain.

Solution: For the most part, copyright protections do not extend to style, whether that style is musical or pertains to other art forms, such as painting or film. So, the quick answer to this question is no—Swift could not sue Big Machine, or anybody else, for copying her style. This “loophole” in intellectual property law seems justified. After all, artists are often influenced by other artists whom they admire, and it is not the place of the law to regulate this influence.

As with so many aspects of intellectual property, however, artificial intelligence (AI) has raised questions about copying a style. As we have pointed out in other sections of this chapter, AI programs “train” themselves by “scraping” data that they find on the internet. By scraping the entirety of an artist’s output online, the AI program will eventually, and easily, be able to replicate that artist’s style to the point where the

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 08: Intellectual Property Rights

real and the fake are indistinguishable. These circumstances provide a true threat to an artist’s livelihood and require an appropriate response from the intellectual property law community.

ETHICAL ISSUE—VALUE JUDGMENT 1.

How might licensing provide an equitable solution to the intellectual property dilemma caused by generative AI? Solution: Companies such as OpenAI could negotiate licensing agreements with internet providers of intellectual property to use that intellectual property for “scraping” and training purposes. Such agreements would provide legal access to the materials while at the same time compensate their creators for their work product.

OpenAI has shown a willingness to enter into these types of agreements, signing early licensing deals with the Associated Press news service and Shutterstock Inc., an online stock photography company.

CRITICAL THINKING QUESTIONS IN CASES CASE 8.1—CRITICAL THINKING 1.

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

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

CASE 8.2—CRITICAL THINKING 1.

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

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

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

But the translation of a copyrighted work to a different medium, such as creating a plastic version of a cast metal coin bank, is not sufficiently original to require additional copyright protection. Applying these principles in the LEGO case, the district court found that the actual LEGO Minifigures were not derivative works. Each image of a “Basic Minifigure” appearing with the copyright registration was, in the court’s words, “just that—a basic minifigure wearing a jacket.” And the copyrightable elements of the

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Minifigures in the images and the actual sculptured Minifigures were the same—“apart from the medium in which they are conveyed, there are no material differences between the LEGO Minifigure sculptures and the corresponding copyright images.”

In other words, although the Minifigure sculptures examined by the court differed from the Minifigure images accompanying the copyright registration in facial expression and jacket color, the court found that the differences were not material. The court’s comparison of the two toy makers’ products, therefore, was not improper.

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

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

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

What was not promised in the facts stated in the question, however, was a commitment to remove the Action Figures from Walmart’s website. This was not overlooked by LEGO, which proceeded with their cause despite ZURU’s late promise.

Ultimately, ZURU expended funds and effort in a futile attempt to keep its product on the market. This did not likely come to a satisfying end for any of the defendant’s stakeholders.

CASE 8.3—CRITICAL THINKING 1.

What If the Facts Were Different? What if AWF had sought to display Orange Prince in a museum? Or, conversely, what if AWF had licensed the image to Cengage for reproduction in this textbook? How might Goldsmith’s copyright infringement lawsuit have fared in those circumstances?

Solution: In the first instance, it is likely that the fair use exception would have applied to AWF’s licensing of Warhol’s work to a museum. Most museums are nonprofit and have a strong educational purpose, both factors that argue in favor of fair use. If, as in this case, AWF licensed Orange Prince to the museum for $10,000, Goldsmith would try to argue that the transaction had a “commercial purpose” and was therefore comparable to selling the image for a magazine cover. Given the emphasis that the Supreme Court placed on the similarities of the original use and the secondary use in © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 08: Intellectual Property Rights

Andy Warhol Foundation case, however, it seems unlikely that the Court would find comparable similarities in the image’s use as a magazine cover and a museum piece.

In the second instance, Goldsmith would have a stronger case. A textbook is not the same as a magazine, but publishers of textbooks and magazines are similarly driven by profit motives. Goldsmith would help her cause if she could show that some of her other photos had been licensed for uses in textbooks. AWF would undoubtedly point out that textbooks are educational, and therefore society benefits if the fair use exception is applied to the reproduction of art in their pages. As these examples show, and the Supreme Court pointed out in coming to its decision in favor of Goldsmith, each fair use case presents different facts and must be “assessed on its own terms.”

2. Legal Environment. One of the purposes of the fair use exception is to allow artists to make “new” art based on copyrighted material. Did the Supreme Court’s decision in this case contradict that objective? Explain.

Solution: Critics of this decision contended that, indeed, the Supreme Court shortsightedly contravened one of the basic goals of the fair use exception: To stimulate creativity by allowing artists to build on prior works. The federal district court granted summary judgment to AWF on this basis, going so far as to state that not only is Orange Prince more recognizable as a “Warhol” than as a “Goldsmith” but that the image is more recognizable as a “Warhol” than as a photograph of Prince.

According to that court, Orange Prince was “transformative” because its “purpose and character” had a much different message and meaning than did Goldsmith’s original photograph.

In a scathing dissent to the Court’s Andy Warhol Foundation holding, Associate Justice Elena Kagan went so far as to accuse the majority of not only misconstruing fair use law but also “misunderstand[ing]—and threaten[ing]—the creative process.” Indeed, there is some evidence that the Court might rule differently in a case where the copied image in question was not created by an artist of Warhol’s stature. At one point, while discussing the iconic nature of Warhol’s style, the appeals court warned against creating a “celebrity-plagiarist privilege,” in which famous artists are presumed to have “transformed” a copied image for fair use purposes simply by the force of their fame.

CHAPTER REVIEW PRACTICE AND REVIEW Two computer science majors, Trent and Xavier, have an idea for a new video game, which they propose to call “Hallowed.” They form a business and begin developing their idea. Several months later, Trent and Xavier run into a problem with their design and consult with a friend, Brad, who is an expert in creating computer source codes. After the software is completed but before Hallowed is marketed, a video game called Halo 2 is released for both the Xbox and the PlayStation systems. Halo 2 uses source codes similar to those of Hallowed and imitates Hallowed’s overall look and feel, although not all the features are alike. Using the information presented in the chapter, answer the following questions:

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 08: Intellectual Property Rights

1.

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

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

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

Solution: No, because all steps of a patented process must be copied to constitute infringement and these two games contain different features. For infringement of a business process patent to exist, all steps or their equivalent must be copied. In this scenario, while Halo 2 uses some of the same source codes as Hallowed, not all features are alike, so it does not infringe on Hallowed’s patent.

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

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

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

Solution: The fact that Brad took and sold Trent and Xavier’s idea to another company raises a trade secret issue, because Brad wrongfully disclosed the idea of a new video game to a competing company. Unlike copyright and trademark protection, protection of trade secrets extends both to ideas and their expression.

PRACTICE AND REVIEW: DEBATE THIS 1.

Congress has amended the Copyright Act several times. Copyright holders now have protection for many decades. Was Congress justified in extending the copyright time periods? Why or why not?

Solution: Obviously, copyright holders whose copyrights were about to run out benefited from the time-period extensions legislated by Congress. Hence, they certainly believe that Congress acted correctly. (It’s not surprising that major copyright holders such as large movie companies, record labels, and publishing houses did most of the lobbying that led to extensions of copyright protection periods.) In general, one can argue that more effort will go into the creation of intellectual property the longer the period of copyright protection for intellectual property. In other words, for the creation of new original works, the term extension of the copyright protection incentivizes creators of such works to extend more effort. © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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

ISSUE SPOTTERS 1.

Roslyn, a food buyer for Organic Cornucopia Food Company, decides to go into business for herself as Roslyn’s Kitchen. She contacts Organic’s suppliers, offering to buy their entire harvest for the next year. She also contacts Organic’s customers, offering to sell her products for less than Organic. Has Roslyn violated any of the intellectual property rights discussed in this chapter? Explain. (See Trade Secrets.)

Solution: Yes, Roslyn has committed theft of trade secrets. Lists of suppliers and customers cannot be patented, copyrighted, or trademarked, but the information they contain is protected against appropriation by others as trade secrets. Most likely, Roslyn signed a contract agreeing not to use this information outside her employment

by Organic. But even without this contract, Organic could make a convincing case against its ex-employee for a theft of trade secrets.

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

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

BUSINESS SCENARIOS AND CASE PROBLEMS 8–1. Patent Infringement. John and Andrew Doney invented a hard-bearing device for balancing rotors. Although they obtained a patent for their invention from the U.S. Patent and Trademark Office, it was never used as an automobile wheel balancer. Some time later, Exetron Corp. produced an automobile wheel balancer that used a hard-bearing device similar to the Doneys’ device. Given that the Doneys had not used their device for automobile wheel balancing, does Exetron’s use of a similar device infringe on the Doneys’ patent? (See Patents.)

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

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8–2. Fair Use. Professor Wise is teaching a summer seminar in business torts at State University. Several times during the course, he makes copies of relevant sections from business law texts and distributes them to his students. Wise does not realize that the daughter of one of the textbook authors is a member of his seminar. She tells her father about Wise’s copying activities, which have taken place without her father’s or his publisher’s permission. Her father sues Wise for copyright infringement. Wise claims protection under the fair use doctrine. Who will prevail? Explain. (See Copyrights.)

Solution: Professor Wise will prevail, as he has not violated federal copyright law.

Under Section 107 of the Copyright Act, the reproduction of copyrighted works for teaching purposes (including multiple copies for classroom use) falls under the “fair use” doctrine and is not an infringement of copyright.

8–3. Spotlight on Macy’s—Copyright Infringement. United Fabrics International, Inc., bought a fabric design from an Italian designer and registered a copyright to the design with the U.S. Copyright Office. When Macy’s, Inc., began selling garments with a similar design, United filed a copyright infringement suit against Macy’s. Macy’s argued that United did not own a valid copyright to the design and so could not claim infringement. Does United have to prove that the copyright is valid to establish infringement? Explain. [United Fabrics International, Inc. v. C & J Wear, Inc., 630 F.3d 1255 (9th Cir. 2011)] (See Copyrights.)

Solution: Copyrights can be registered with the U.S. Copyright Office in Washington, D.C. Copyright owners protect themselves by registering their copyrights. This registration is evidence that the copyright is valid. Thus, registering a copyright and showing proof of the registration is sufficient to establish the validity of the copyright.

Here, United bought a design and registered it with the U.S. Copyright Office. United does not otherwise have to prove that the copyright is valid. If Macy’s wants to challenge the validity of United’s registered copyright, Macy’s will have to present evidence that the copyright is invalid.

In the actual case on which this problem is based, the U.S. Court of Appeals for the Ninth Circuit ruled in United’s favor.

8–4. Business Case Problem with Sample Answer—Patents. The U.S. Patent and Trademark Office (PTO) denied Raymond Gianelli’s application for a patent for a “Rowing Machine”—an exercise machine on which a user pulls on handles to perform a rowing motion against a selected resistance. The PTO considered the device obvious in light of a previously patented “Chest Press Apparatus for Exercising Regions of the Upper Body”—an exercise machine on which a user pushes on handles to overcome a selected resistance. On what ground might this result be reversed on appeal? Discuss. [In re Gianelli, 739 F.3d 1375 (Fed.Cir. 2014)] (See Patents.)

Solution: One ground on which the denial of the patent application in this problem could be reversed on appeal is that the design of Raymond Gianelli’s “Rowing Machine” is not obvious in light of the design of the “Chest Press Apparatus for Exercising Regions of the Upper Body.”

To obtain a patent, an applicant must demonstrate to the satisfaction of the U.S. Patent and Trademark Office (PTO) that the invention, discovery, process, or design is novel, useful, and not obvious in light of current technology. In this problem, the PTO

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denied Gianelli’s application for a patent for his “Rowing Machine”—an exercise machine on which a user pulls on handles to perform a rowing motion against a selected resistance to strengthen the back muscles. The PTO considered the device obvious in light of a patented “Chest Press Apparatus for Exercising Regions of the Upper Body”—a chest press exercise machine on which a user pushes on handles to overcome a selected resistance. But it can be easily argued that it is not obvious to modify a machine with handles designed to be pushed into one with handles designed to be pulled. In fact, anyone who has used exercise machines knows that a way to cause injury is to use a machine in a manner not intended by the manufacturer.

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

8–5. Patents. Rodney Klassen was employed by the U.S. Department of Agriculture (USDA).

Without the USDA’s authorization, Klassen gave Jim Ludy, a grape grower, plant material for two unreleased varieties of grapes. For almost two years, most of Ludy’s plantings bore no usable fruit, none of the grapes were sold, and no plant material was given to any other person. The plantings were visible from publicly accessible roads, but none of the vines were labeled, and the variety could not be identified by simply viewing the vines. Under patent law, an applicant may not obtain a patent for an invention that is in public use more than one year before the date of the application. Could the USDA successfully apply for patents on the two varieties given to Ludy? Explain. [Delano Farms Co. v. California Table Grape Commission, 778 F.3d 1243 (Fed.Cir. 2015)] (See Patents.)

Solution: Yes, the USDA can obtain patents on the two varieties of grapes given to Ludy. Almost anything is patentable so long as it is novel, useful, and not obvious.

Plant material can be patented. But under patent law, an applicant may not obtain a patent for an invention that is in public use more than one year before the date of the application.

In this problem, a U.S. Department of Agriculture (USDA) employee, without the USDA’s authorization, gave Jim Ludy, a grape grower, plant material for two unreleased varieties of grapes. For almost two years, most of Ludy’s plantings bore no usable fruit, none of the grapes were sold, and no plant material was given to any other person. The plantings were visible from publicly accessible roads, but none of the vines were labeled, and the variety could not be identified by simply viewing the vines.

This use of the unreleased varieties in these circumstances did not constitute a public use sufficient to prevent the USDA from successfully applying for patents on the grapes.

In the actual case on which this problem is based, the USDA obtained patents on the grapes. Delano Farms Co. and other growers filed a suit in a federal district court against the USDA, seeking to invalidate the patents. The court rejected the challenge.

“If members of the public are not informed of, and cannot readily discern, the claimed features of the invention in the allegedly invalidating prior art, the public has not been put in possession of those features.” The U.S. Court of Appeals for the Federal Circuit affirmed.

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8–6. Copyright Infringement. Savant Homes, Inc., is a custom home designer and builder.

Using what it called the Anders Plan, Savant built a model house in Windsor, Colorado. This was a ranch house with two bedrooms on one side and a master suite on the other, separated by a combined family room, dining room, and kitchen. Ron and Tammie Wagner toured the Savant house. The same month, the Wagners hired builder Douglas Collins and his firm, Douglas Consulting, to build a house for them. After it was built, Savant filed a lawsuit in a federal district court against Collins for copyright infringement, alleging that the builder had copied the Anders Plan in the design and construction of the Wagner house. Collins showed that the Anders Plan consisted of standard elements and standard arrangements of elements.

In these circumstances, has infringement occurred? Explain. [Savant Homes, Inc. v. Collins, 809 F.3d 1133 (10th Cir. 2016)] (See Copyrights.)

Solution: No, in the circumstances of this problem, infringement did not occur. Works that are copyrightable include architectural plans and the products of those plans. The Copyright Act explicitly states that it protects works that fall into this category.

Specifically excluded, however, are ideas. The particular way in which an idea is expressed can be protected by copyright law if the expression is original. In other words, one of the key requirements for the protection of a work is originality. If a substantial part of an original expression is copied, infringement has occurred.

Here, Savant Homes, using what it called the “Anders Plan,” built a model house—a ranch house with two bedrooms on one side and a master suite on the other, separated by a combined family room, dining room, and kitchen. The Wagners toured the model and then hired Collins, a different builder, to build a house for them. After it was built, Savant charged that Collins had copied the Anders Plan in designing and constructing the Wagner house. Collins showed that the Anders Plan consisted of standard elements and standard arrangements of elements. Standard content receives no copyright protection.

To establish copyright infringement, a plaintiff must show “substantial similarity” between protectable elements of a work and an allegedly infringing work. Savant apparently failed to show that the Anders Plan included any protectable elements— that is, an original expression of a standard three-bedroom ranch house with the same floor plan.

In the actual case on which this problem is based, the court issued a judgment in Collins’s favor. The U.S. Court of Appeals for the Tenth Circuit affirmed this judgment, according to the reasoning stated here.

8–7. Patent Infringement. Finjan, Inc., owns a patent—U.S. Patent No. 7,418,731, or “the ’731 patent”—for a system and method that protect computers from malicious software embedded in websites on the internet. The system consists of a gateway that compares security profiles associated with requested files to the security policies of requesting users.

The method includes scanning an incoming file to create the profile, which comprises a list of computer commands the file is programmed to perform. The ’731 patent required “a list of computer commands.” Blue Coat Systems, Inc., sold a competing product. Blue Coat’s product scanned an incoming file for certain commands and created a new file called Cookie2 that contained a field showing whether, and how often, those commands appeared. Finjan filed a suit against Blue Coat, alleging patent infringement. Blue Coat argued that its profiles did not contain the ’731 patent’s required “list of computer commands.” Did Blue Coat’s product

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 08: Intellectual Property Rights

infringe Finjan’s patent? Explain. [Finjan, Inc. v. Blue Coat Systems, Inc., 879 F.3d 1299 (Fed. Cir. 2018)] (See Patents.)

Solution: Yes, Blue Coat’s product infringed on Finjan’s patent. A firm that makes, uses, or sells another’s patented product or process commits the tort of patent infringement. Infringement may occur even though not all features of the product are copied, but a process cannot be infringed unless all steps or their equivalents are copied.

In this case, Finjan owns a patent—the ‘731 patent—for a system and method that provides computer security from malicious software embedded in outside websites.

The system features a gateway that compares a security profile associated with a requested file to the security policies of the requesting user. The method includes scanning the file to create the profile, which comprises a list of computer commands the file is programmed to perform. Under the terms of the patent, such a list was required. Blue Coat sold a competing product. This product scanned an incoming file for certain commands and created a new file called Cookie2 that contained a field showing whether, and how often, those commands appeared. Contrary to Blue Coat’s argument, this field met the ’731 patent’s required “list of computer commands.” The patent was infringed.

In the actual case on which this problem is based, the court entered a judgment in Finjan’s favor, awarding damages of $6 million. The U.S. Court of Appeals for the Federal Circuit affirmed, on the reasoning stated above.

8–8. Fair Use Defense. What happens when the Star Trek television and movie series merges with the 1990 children’s classic Oh, the Places You’ll Go!—the final book written by the late Theodor S. Geisel, better known as Dr. Seuss? The company ComicMix, LLC, created a so-called primer on Star Trek characters that significantly replicated broad swaths of the Dr. Seuss original. ComicMix entitled its version Oh, the Places You’ll Boldly Go! The “Boldly” version borrowed liberally—graphically and otherwise—from the Dr. Seuss version and from other works by Dr. Seuss. The ComicMix version uses Captain Kirk and his spaceship Enterprise to tell readers that “life is an adventure but it will be tough.” In its defense, ComicMix argued that its work was protected by fair use and therefore not an infringement of copyright. It believed that the work was obviously a parody. Should the fair use doctrine protect ComicMix? Why or why not? [Dr. Seuss Enterprises, L.P. v. ComicMix, LLC, 983 F.3d 443 (9th Cir. 2020)] (See Copyrights.)

Solution: The court of appeals ruled that ComicMix’s so-called mash-up book was not a parody. Further, the appeals court pointed out that the mash-up book took a substantial amount from the copyrighted book, thus taking the “heart” of the copyrighted book. In short, the fair use defense typically does not allow for substantial use.

8–9. Distinctiveness of the Mark. The Wrigley Company owns the registered trademarks for the bean-shaped fruit-flavored candies called Skittles. California-based Terphogz, LLC, developed a popular cannabis strain called “Zkittlez” and registered the internet domain name zkittlez.com. Terphogz also trademarked its “Z” logo, which bears no resemblance to any Skittles packaging or marketing. Wrigley filed a lawsuit against Terphogz, alleging, among other intellectual property torts, trademark dilution. Terphogz countered that its Zkittlez brand

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name was protected by the First Amendment. What arguments should Wrigley make to convince the court to place an injunction on the sale of all Zkittlez-branded marijuana products by Terphogz? [Wm. Wrigley Jr. Company v. Terphogz, LLC, No. 21-CV-02357 (N.D. Ill. 2023)] (See Trademarks.)

Solution: Wrigley should argue that, even though Zkittlez’s marketing bears no visual resemblance to the Skittles brand, the name is clearly a “wink-wink” reference to the candies. The first Skittles product was released in the early 1970s, and over the decades the brand has become well known to the public. Wrigley will argue that not only is Terphogz taking advantage of this reputation, but it is also harming the Skittles brand by associating it with marijuana-related products. Even though marijuana use is now legal in many states, its sale to minors is still prohibited in every jurisdiction, and Wrigley understandably does not want its product associated with children consuming an illegal substance. Before this dispute went to trial, Terphogz agreed to stop using the Zkittlez name on its products, along with a number of possible “Z” names that referenced Skittles.

A QUESTION OF ETHICS 8–10. The IDDR Approach and Copyright Infringement. Usenet is an online bulletin board network. A user gains access to Usenet posts through a commercial service, such as Giganews, Inc. Giganews deletes or blocks posts that contain child pornography. Otherwise, the service does not monitor content. Perfect 10, Inc., owns the copyrights to tens of thousands of images, many of which have been illegally posted on Usenet through Giganews.

When Perfect 10 notified Giganews of posts that contained infringing images, the service took them down. Despite these efforts, illegal posting continued. Perfect 10 filed a suit in a federal district court against Giganews, alleging copyright infringement. [Perfect 10, Inc. v. Giganews, Inc., 847 F.3d 657 (9th Cir. 2017)] (See Copyrights.)

1.

Is Giganews liable for copyright infringement? Do internet service providers have an ethical duty to do more to prevent infringement? Why or why not?

Solution: No, Giganews is not liable for copyright infringement. The Digital Millennium Copyright Act (DMCA) protects the owners of copyrights in digital information. But the DMCA also limits the liability of internet service providers (ISPs). Under the act, an ISP is not liable for copyright infringement by a subscriber unless the ISP is aware of the violation. An ISP may be liable only if it fails to shut down the subscriber after learning of the violation.

In this problem, Giganews provided its subscribers with access to Usenet, an online bulletin board network. Giganews does not monitor its users’ posts except to delete or block posts that contain child pornography. Perfect 10, Inc. owns the copyrights to tens of thousands of images. Many of these have been illegally distributed over Usenet through Giganews. When notified of infringing posts, Giganews removed them. But users continued to post infringing content.

Perfect 10 filed a suit in a federal district court against Giganews, accusing the service of copyright infringement. In the circumstances, under the DMCA, Giganews is not liable for its users’ infringement.

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ISPs arguably have an ethical duty to do more to prevent copyright infringement. Posting images and other third-party content that a user does not own, or does not have permission to post, is copyright infringement. This is theft. Any party, such as an ISP, that has the capacity to block or delete such posts has an ethical duty to do so. An ISP could, at the least, clearly notify its users that such posts are violations of the law and maintain a policy that does not tolerate violations.

In the actual case on which this problem is based, the court issued a judgment in Giganews’s favor. The U.S. Court of Appeals for the Ninth Circuit affirmed the judgment.

2. Using the IDDR approach, decide whether a copyright owner has an ethical duty to protect against infringement.

Solution: Yes, a copyright owner has an ethical duty to protect against infringement. Arguably, any party that has the capacity to protect personal property, as a copyright owner most likely does, has an ethical duty to do so.

The IDDR approach has four steps, which begin with an Inquiry to express the issue, identify the stakeholders, and indicate potential ethical standards. Here, the question is whether an owner of copyrights has an ethical obligation to attempt to prevent a theft of those rights. The stakeholders include the owner, the creators of other copyrightable work, and the public at large. Applicable standards may derive from a specific owner’s situation—the owner of a copyright in music, for example, may license the music and distribute royalties, which would suggest a correlative duty to guard against its unlicensed use.

The second step of the IDDR approach is a Discussion that considers actions to address the issue. Factors include the strengths and weaknesses of the actions and the consequences and the effects on the stakeholders. How might the owner of a copyright discourage its theft? Some answers to this question depend on the nature of the copyrighted work. Intellectual property protected by copyright may be stored as data on a server, which can be encrypted, firewalled, password-barred, or disconnected from the internet to guard against thievery. If, as in this problem, an owner holds thousands of copyrights, some of the protected material might be made freely available to make it less tempting to steal. Or one song on an album might be accessible for playback online with an option to buy the song, or the whole album, for playback through other media. The disadvantage of this action is that, of course, some copyrighted items are available for free, which undercuts the reason for the protection. But this sort of sampling can acquaint a wider market with the work, which might then be more widely purchased, adding to its value.

The third step of the approach is to come to a Decision and state the reasons.

There seems little doubt that the owner of copyright has an ethical obligation to guard against its theft. This protects the existence of copyright as a principle for the protection of property. It enhances its value to those who own it, those who produced it, and those who might be inspired to create more. These

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 08: Intellectual Property Rights

outcomes can improve the life of the community at large by adding opportunities to appreciate products of the mind.

The last step of the approach is a Review of the success or failure of the action to resolve the issue and satisfy the stakeholders. No protective action will be entirely successful, but a failure to take any action will guarantee a failure to protect the interests of the stakeholders. This underscores the ethical obligation of an owner of a copyright to act to protect the property.

TIME-LIMITED TEAM ASSIGNMENT 8–11. Patents. After years of research, your company has developed a product that might revolutionize the green (environmentally conscious) building industry. The product is made from relatively inexpensive and widely available materials combined in a unique way that can substantially lower the heating and cooling costs of residential and commercial buildings. The company has registered the trademark it intends to use for the product and has filed a patent application with the U.S. Patent and Trademark Office. (See Patents.)

1.

One team will provide three reasons why this product does or does not qualify for patent protection.

Solution: To obtain a patent, an applicant must show that an invention is novel, useful, and not obvious in light of current technology. Almost anything is patentable—including artistic methods, certain works of art, the structures of storylines, and hybrid or genetically modified plants, microorganisms, and animals—but not the laws of nature, natural phenomena, and abstract ideas. A product that combines widely available materials with no change in their functions would not be novel or uniquely useful. If a person of ordinary skill in the art would recognize the way in which these materials are combined, then the product is “obvious in light of current technology.” If the materials that are combined are not otherwise modified, they may not qualify for a patent under the exception for “natural phenomena.”

2. A second team will develop a four-step plan for how the company can best protect its intellectual property rights (trademark, trade secret, and patent) and prevent domestic and foreign competitors from producing counterfeit goods or cheap knockoffs.

Solution: One step that a company can take to fight the theft of its intellectual property rights from the production and sale of counterfeit goods is to seek a court order to shut down the domain names of websites that sell the goods.

Shutting down websites, particularly on key shopping days, prevents the sale of some domestic and foreign counterfeit goods. Against those who in bad faith use a domain name that is confusingly similar to a legitimate business’s name, a plaintiff can collect actual damages and lost profits or statutory damages.

Use of a trademark as a meta tag without permission is trademark infringement. Dilution is another possible cause of action (and does not require proof of the likelihood of confusion among consumers).

A second step that a company can take is to seek the criminal prosecution of those who traffic in counterfeit labels, stickers, packaging, and the like, © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 08: Intellectual Property Rights

whether or not they are attached to goods. The legal owner of the rights to the copied trademarks and other intellectual property should insist on the destruction of the counterfeit products and restitution for any losses.

A third possibility to prevent counterfeiting is to license a mark or other property, permitting its use for certain limited purposes. This alternative may be the best choice to realize a return on patented products made and sold in a foreign country because no patent infringement occurs in that circumstance. An injunction, fees and costs, and as much as triple damages may be recouped in a patent infringement suit against domestic violations of patent rights. Damages and criminal penalties may also be available against those who violate copyrights or steal trade secrets.

3. The third team will list and explain three ways in which the company can utilize licensing.

Solution: A license is an agreement permitting the use of a trademark, copyright, patent, or trade secret for certain limited purposes. A licensor might, for example, allow a licensee to use a trademark as part of a company name, or as part of a domain name, but not otherwise use the mark on any products or services. For example, the Coca-Cola Bottling Company licenses firms worldwide to use its secret formula for the syrup used in its soft drink. A licensor can realize a return on the license through the payment of royalties—a percentage of the income gained from the sale of products using the licensed property.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 09: Internet Law, Social Media, and Privacy

Solution and Answer Guide

Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 09: Internet Law, Social Media, and Privacy

TABLE OF CONTENTS Critical Thinking Questions in Features .............................................................................1 Landmark in the Law—Application to Today’s World ........................................................ 1 Ethical Issue—Value Judgment ............................................................................................. 2 Adapting the Law to the Online Environment—Critical Thinking.................................... 2 Building Analytical Skills—Result and Reasoning .............................................................. 3 Critical Thinking Questions in Cases ................................................................................. 3 Case 9.1—Critical Thinking...................................................................................................... 3 Case 9.2—Critical Thinking ..................................................................................................... 4 Case 9.3—Critical Thinking ..................................................................................................... 4 Chapter Review ................................................................................................................... 5 Practice and Review................................................................................................................. 5 Practice and Review: Debate This ......................................................................................... 6 Issue Spotters ........................................................................................................................... 6 Business Scenarios and Case Problems .............................................................................. 7 A Question of Ethics ............................................................................................................... 12 Time-Limited Team Assignment .......................................................................................... 14

CRITICAL THINKING QUESTIONS IN FEATURES LANDMARK IN THE LAW—APPLICATION TO TODAY’S WORLD 1.

Without the DMCA, copyright owners would have a more difficult time obtaining legal redress against those who, without authorization, decrypt or copy copyrighted materials.

What might be some unintended consequences of the DMCA? Solution: As we have seen in this chapter and the previous one, one of the main goals of intellectual property law is to protect the rights of intellectual property owners while at the same time providing other members of society reasonable access to that property. Not surprisingly, criticism of the DMCA generally focuses on a lack of the proper balance between protecting private property and promoting the public good.

Many believe that the law suppresses fair use of copyrighted materials, obstructs

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 09: Internet Law, Social Media, and Privacy

innovation, hampers competition, restricts scientific research, and dampens free speech.

To give one example, several years ago an anonymous X platform user posted photos of private equity billionaire Brian Sheth and a woman, implying that the couple were romantically involved. Bayside Advisory LLC, a company with nebulous connections to Sheth, held the copyright on those photos and issued a DMCA takedown order against X to remove them, which X did. Bayside, still relying on the DMCA, also demanded that X reveal the identity of the user. Although a court eventually ruled that the user’s anonymity and his right to post the photos were both constitutionally protected, the lengthy and expensive legal proceedings seemed to highlight the DMCA’s potential for misuse.

ETHICAL ISSUE—VALUE JUDGMENT 1.

Should the courts use copyright law to punish cheatbot creators if the unauthorized programs are not used for financial gain? Explain your answer.

Solution: As noted in the text, at one time, criminal penalties could be imposed for copyright violations only if the unauthorized use of the intellectual property was for financial gain. Presently, a person who engages in piracy of copyrighted materials can be prosecuted regardless of profit motive. Similarly, is the use of a cheatbot really cheating if the main goal of the program is only to make the game more enjoyable for the user?

A popular analogy in the gaming world compares the tasks performed by many cheatbots to mowing one’s lawn. In the real world, those who find lawn mowing dull, or are too busy for garden tasks, will often pay someone else to do it. Similarly, many online games require the player to complete numerous repetitive tasks in order to advance to higher levels. Perhaps a player is bored by such tasks or has only a limited amount of time for gaming and would rather spend that time on the game’s “action.”

That player could engage a “lawn mowing” bot for the tedious tasks, thus freeing up the player for more exciting challenges.

Online video game developers might welcome—or at least turn a blind eye toward— lawnmower bots. After all, anything that makes the video game more enjoyable will lead to greater numbers of users and perhaps greater profits. Or courts might consider treating cheatbots more like fraud than copyright infringement, in that the deception must result in financial or personal gain for it to be actionable.

ADAPTING THE LAW TO THE ONLINE ENVIRONMENT—CRITICAL THINKING 1.

Suppose an auto dealership serves hot dogs and bottled water during a sales event. At this same event, an employee mistakenly allows a child to sit in the driver’s seat of a car.

As a result, the vehicle rolled into a pond and injured the child’s parent. Robert, a dealership employee, goes on Instagram to complain about the cheap food and drink, saying that it negatively impacted sales and commissions. He also posts photos of the accident involving the child, mocking his co-worker’s error. Can Robert be fired for his social media activities? Why or why not?

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 09: Internet Law, Social Media, and Privacy

Solution: In a case with similar facts, a Chicago-area BMW dealership did fire employee Robert Becker, an action that was contested by the National Labor Relations Board (NLRB). An administrative law judge found that the dealership was not justified in firing Becker for his social media complaints about the food at the sales event, because those complaints focused on working conditions and compensation. In the end, however, the judge held that the dealership did not err in terminating Becker’s employment, due to the bad judgment Becker showed in posting about the accident.

Such posts are not protected speech and clearly violated the dealership’s social media policy prohibiting online activity that harms the company.

In addition, the NLRB found several aspects of the dealership’s social media policy unenforceable. One provision prohibited employees from using “profanity or any other language which injures the image or reputation of the dealership,” which was so broad as to encompass complaints about working conditions. Another provision forbade employees from participating in “unauthorized [online] interviews” or answering “outside inquiries” online about the dealership and its employees. According to the NLRB, such activities are protected if the discussions address terms and conditions of employment.

BUILDING ANALYTICAL SKILLS—RESULT AND REASONING 1.

Given the extent to which Clarity tracks the browsing habits of potential customers, a reasonably prudent user could find Carnival’s actions “highly offensive” or “serious.”

Therefore, the company would have to make a significant effort to warn users of Clarity’s reach. Because Carnival has not done so, it may be liable for invasion of privacy. Do you agree that Carnival went too far in collecting website user data? Why or why not?

Solution: It is safe to say that most internet users do not give much thought when clicking “I Agree” on a website’s cookie policy banner. If users are agreeing to a reasonable level of information gathering by doing so, these cookie policies are not seen as being invasive of users’ privacy. Courts have found a “reasonable level” to include “routine commercial behavior” and, of course, any information that users provide themselves, such as names, addresses, credit card numbers, and so on.

Problems arise, as in this case, when the data collection goes beyond the routine. Most users do not expect to have their browsing history intercepted if they spend a few minutes on carnival.com or any other site. Courts have found that companies such as TikTok, Meta’s Facebook, and NaviStone have engaged in “highly offensive” or “serious” privacy breaches by behaving in a similar manner to how Carnival did in this instance.

CRITICAL THINKING QUESTIONS IN CASES CASE 9.1—CRITICAL THINKING 1.

What If the Facts Were Different? Suppose that the candyland.com website had not been sexually explicit but had sold candy. Would the result have been the same? Explain.

Solution: Probably. In this circumstance, Hasbro could most likely demonstrate a likelihood of prevailing on a claim that the defendant violated the applicable federal

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 09: Internet Law, Social Media, and Privacy

and state statutes against trademark dilution. The Hasbro trademark is famous; the defendant would presumably be using it without permission, and that use would arguably diminish the quality of the Hasbro mark.

2. Economic. How can companies protect themselves from situations such as the one described in this case? What limits each company’s ability to be fully protected?

Solution: To protect themselves from others who create websites that have similar domain names, companies can be vigilant and act quickly and forcefully to enforce their rights. A company’s ability to be fully protected is limited chiefly by its resources and by the skill of the persons on whom the company relies to protect it .

CASE 9.2—CRITICAL THINKING 1.

What If the Facts Were Different? Suppose that Vimeo removed not only the five videos that it objected to but also a thousand other videos posted by Daystar Television Network.

Do you think that the appellate court would have reached the same conclusion? Why or why not?

Solution: Probably. The tone of the court’s decision regarding the five videos in question suggests that it would make a similar decision no matter how large the number of prohibited videos. When discussing cases involving the Communications Decency Act (CDA), the first—and most important—thing to remember is that this legislation is designed to protect internet service providers (ISPs) from frivolous lawsuits. For the most part, the legislation provides legal cover for ISPs that take a “hands-off” approach to the content on their websites. Here, we see how the statute also protects an ISP that takes a more “hands-on” approach.

The appeals court showed great deference to Vimeo, stating that the DCA gives service providers leeway to decide “whether to publish, withdraw, postpone or alter content.”

In the World of God Fellowship case, the contract between Vimeo and Daystar Television expressly prohibited any content that made “false or misleading claims about vaccination safety.” Even absent such a clause, Vimeo was entitled to make a “good faith” decision to remove any content that the company considered “objectionable.” Thus, the court would have to examine the content of each of the one thousand other videos to determine whether Vimeo’s actions were in “good faith” and that the content was reasonably “objectionable.”

What if some or all of the one thousand videos contained religious content and Vimeo expressly removed them because of this religious content? This would bring a number of different legal issues into the equation, including the First Amendment’s guarantee of freedom of religion and any relevant state laws that might allow private companies to discriminate on the basis of religion.

CASE 9.3—CRITICAL THINKING 1.

Legal Environment. Is a violation of an individual’s right to privacy, without more, enough to sustain a legal cause, or should additional consequences be required to maintain an action? Explain.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 09: Internet Law, Social Media, and Privacy

Solution: Yes, an intrusion into an individual’s privacy is sufficient to sustain a legal cause of action. It constitutes a sufficiently concrete injury to support the cause.

Additional consequences are not necessary.

Violations of the right to privacy have long been subject to actions at common law.

Historically recognized as an “unreasonable intrusion upon the seclusion of another,” the cause has traditionally been extended to incorporate, among other things, “tapping” landline phone wires and opening others’ mail. Referred to as the invasion of a “substantive right,” the intrusion itself is enough to impose liability.

The Electronic Communications Privacy Act (ECPA), which was the basis for the plaintiffs’ claim in the Campbell case, codifies privacy torts into a federal statute making the intentional interception of any “electronic communication” a ground for an action. Additional consequences are not required. At common law or under the ECPA, a plaintiff does need not to allege or show any further harm to succeed.

2. Economic. Should Facebook pay the platform’s users for its use of their private data?

Discuss.

Solution: Yes, Facebook should pay its users for the use of their private data, particularly when those uses include the facilitation of targeted advertising. Users should be viewed as the owners of their data, and Facebook, which is profiting from its use, should be required to pay for it.

Further, individuals should have control over their data. They should be asked whether they want their data used, whom they would permit to use it, and the uses to which it would be applied. As with any property, the owners should be able to sell or not sell it as they choose.

Conversely, no, Facebook does not need to pay its users for the use of their data.

Layers of complexity challenge the categorization of data, such as that collected and used by Facebook, as property subject to the traditional definition of ownership. Its marketability by individual “owners” is doubtful—it is hard for individuals to trade. If it cannot be easily sold, its ownership is arguably incomplete.

CHAPTER REVIEW PRACTICE AND REVIEW While he was in high school, Joel Gibb downloaded numerous songs to his smartphone from an unlicensed file-sharing service. He used portions of the copyrighted songs when he recorded his own band and posted videos on YouTube and Facebook. He also used BitTorrent to download several movies from the internet. Now Gibb has applied to Boston University. The admissions office has requested access to his Facebook password, and he has complied.

Using the information presented in the chapter, answer the following questions: 1.

What laws, if any, did Gibb violate by downloading music and videos from the internet?

Solution: Technology has vastly increased the potential for copyright infringement. Generally, whenever a party downloads music into a computer’s random access memory, or RAM, without authorization, a copyright is infringed.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 09: Internet Law, Social Media, and Privacy

Thus, when file-sharing is used to download others’ stored music files, copyright issues arise. Recording artists and their labels stand to lose large amounts of royalties and revenues if relatively few digital downloads or CDs are purchased and then made available on distributed networks.

2. Was Gibb’s use of portions of copyrighted songs in his own music illegal? Explain.

Solution: At least one federal court has held that sampling a copyrighted sound recording of any length constitutes copyright infringement. Some other federal courts have not found that digital sampling is always illegal. Some courts have allowed the defense of fair use, while others have not.

3. Can individuals legally post copyrighted content on their Facebook pages? Why or why not?

Solution: Piracy of copyrighted materials online can occur even if posting the materials is “altruistic” in nature—unauthorized copies are posted simply to be shared with others. The law extends criminal liability for the piracy of copyrighted materials to persons who exchange unauthorized copies of copyrighted works without realizing a profit.

4. Did Boston University violate any laws when it asked Joel to provide his Facebook password? Explain.

Solution: Many states have enacted legislation to protect individuals from having to disclose their social media passwords. The federal government is also considering legislation that would prohibit employers and schools from demanding passwords to social media accounts. If, at the time of the application, however, Massachusetts was not covered by any of these statutes, Boston University would not have violated any law by asking for Gibbs’s password, which he then voluntarily divulged.

PRACTICE AND REVIEW: DEBATE THIS 1.

Internet service providers should be subject to the same defamation laws as newspapers, magazines, and television and radio stations.

Solution: Those who support this position argue that it is not fair to those who are defamed by others on the internet to not have recourse against the ISP. After all, there should be no difference between traditional media outlets and the internet. Those who are against applying similar defamation law to all media argue that ISPs cannot become censors. They point out the technological inability of ISPs to monitor all of the statements that go through their servers.

ISSUE SPOTTERS 1.

Karl self-publishes a cookbook titled Hole Foods, in which he sets out recipes for donuts, Bundt cakes, tortellini, and other foods with holes. To publicize the book, Karl designs the website holefoods.com. Karl appropriates the key words of other cooking and cookbook sites with more frequent hits so that holefoods.com will appear in the same search engine results as the more popular sites. Has Karl done anything wrong? Explain. (See Internet Law.)

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 09: Internet Law, Social Media, and Privacy

Solution: Karl may have committed trademark infringement. Search engines compile their results by looking through websites’ key-word fields. A site that appropriates the key words of other sites with more frequent hits will appear in the same search engine results as the more popular sites. But using another’s trademark as a key word without the owner’s permission normally constitutes trademark infringement. Of course, some uses of another’s trademark as a meta tag may be permissible if the use is reasonably necessary and does not suggest that the owner authorized or sponsored the use.

2. Eagle Corporation began marketing software in 2010 under the mark “Eagle.” In 2019, Eagle.com, Inc., a different company selling different products, begins to use eagle as part of its URL and registers it as a domain name. Can Eagle Corporation stop this use of eagle? If so, what must the company show? (See Internet Law.) Solution: Yes. This may be an instance of trademark dilution. Dilution occurs when a trademark is used, without permission, in a way that diminishes the distinctive quality of the mark. Dilution does not require proof that consumers are likely to be confused by the use of the unauthorized mark. The products involved do not have to be similar.

Dilution does require, however, that a mark be famous when the dilution occurs.

BUSINESS SCENARIOS AND CASE PROBLEMS 9–1. Privacy. SeeYou, Inc., is an online social network. SeeYou’s members develop personalized profiles to share information—photos, videos, stories, activity updates, and other items—with other members. Members post the information that they want to share and decide with whom they want to share it. SeeYou launched a program to allow members to share with others what they do elsewhere online. For example, if a member rents a movie through Netflix, SeeYou will broadcast that information to everyone in the member’s online network. How can SeeYou avoid complaints that this program violates its members’ privacy?

(See Privacy.)

Solution: Initially, SeeYou’s best option in this situation might be to give members the opportunity to prevent the broadcast of any private information by requiring their consent. Otherwise, the members could legitimately complain that the new program was causing publication of private information without their permission. Or SeeYou might allow members to affirmatively opt out of the program altogether. Of course, SeeYou might also discontinue the program. And if any of the members decide to file a suit against SeeYou for violations of federal or state privacy statutes, the firm might offer to settle to avoid further complaints and negative publicity.

9–2. Copyrights in Digital Information. When she was in college, Jammie Thomas-Rasset wrote a case study on Napster, an online peer-to-peer (P2P) file-sharing network, and knew that it had been shut down because it was illegal. Later, Capitol Records, Inc., which owns the copyrights to a large number of music recordings, discovered that “tereastarr”—a user name associated with Thomas-Rasset’s internet protocol address—had made twenty-four songs available for distribution on KaZaA, another P2P network. Capitol notified Thomas-Rasset that she had been identified as engaging in the unauthorized trading of music. She replaced the hard drive on her computer with a new drive that did not contain the songs in dispute. Is Thomas-Rasset liable for copyright infringement? Explain. [Capitol Records, Inc. v. ThomasRasset, 692 F.3d 899 (8th Cir. 2012)] (See Copyrights in Digital Information.)

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 09: Internet Law, Social Media, and Privacy

Solution: Yes, Thomas-Rasset is liable for copyright infringement. File-sharing is accomplished through peer-to-peer (P2P) networking. When file-sharing is used to download others’ stored music files, copyright issues arise. The issue of infringement in file-sharing has been a subject of debate since the cases against Napster, Inc., and Grokster, Ltd., two companies that created software used to share files in infringement of others’ copyrights. Napster operated a website with free software that enabled users to copy and transfer MP3 files via the internet. Firms in the recording industry sued Napster. Ultimately, the court held Napster liable for copyright infringement.

Here, Thomas-Rasset willfully infringed Capitol’s intellectual property rights under the Copyright Act by making twenty-four songs available for distribution on an online peer-to-peer network. Her subsequent effort to conceal her actions by changing the hard drive on her computer showed a proclivity for unlawful conduct. This would support imposing an injunction on Thomas-Rasset against making songs or any recordings available for distribution to the public through a P2P or any other online media distribution system.

In the actual case on which this problem is based, Capitol filed a suit in a federal district court against Thomas-Rasset, who was found liable for copyright infringement and assessed damages of $54,000. On appeal, the U.S. Court of Appeals for the Eighth Circuit vacated the lower court's judgment, concluding that it should have assessed statutory damages of at least $222,000 and should have enjoined Thomas-Rasset from making copyrighted works available to the public. The appellate court remanded the case with directions to enter a judgment that included those remedies.

9–3. Privacy. Using special software, South Dakota law enforcement officers found a person who appeared to possess child pornography at a specific internet protocol address. The officers subpoenaed Midcontinent Communications, the service that assigned the address, for the personal information of its subscriber. With this information, the officers obtained a search warrant for the residence of John Rolfe, where they found a laptop that contained child pornography. Rolfe argued that the subpoenas violated his “expectation of privacy.” Did Rolfe have a privacy interest in the information obtained by the subpoenas issued to Midcontinent? Discuss. [State of South Dakota v. Rolfe, 825 N.W.2d 901 (S.Dak. 2013)] (See Privacy.)

Solution: No, Rolfe did not have a privacy interest in the information obtained by the subpoenas issued to Midcontinent Communications. The courts have held that the right to privacy is guaranteed by the U.S. Constitution’s Bill of Rights, and some state constitutions contain an explicit guarantee of the right. A person must have a reasonable expectation of privacy, though, to maintain a suit or to assert a successful defense for an invasion of privacy.

People clearly have a reasonable expectation of privacy when they enter their personal banking or credit card information online. They also have a reasonable expectation that online companies will follow their own privacy policies. But people do not have a reasonable expectation of privacy in statements made on Twitter and other data that they publicly disseminate. In other words, there is no violation of a subscriber’s right to privacy when a third-party internet provider receives a subpoena and discloses the subscriber’s information.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 09: Internet Law, Social Media, and Privacy

Here, Rolfe supplied his e-mail address and other personal information, including his internet protocol address, to Midcontinent. In other words, Rolfe publicly disseminated this information. Law enforcement officers obtained this information from Midcontinent through the subpoenas issued by the South Dakota state court. Rolfe provided his information to Midcontinent—he has no legitimate expectation of privacy in that information.

In the actual case on which this problem is based, Rolfe was charged with and convicted of possessing, manufacturing, and distributing child pornography, as well as other crimes. As part of the proceedings, the court found that Rolfe had no expectation of privacy in the information that he made available to Midcontinent. On appeal, the South Dakota Supreme Court upheld the conviction.

9–4. File-Sharing. Dartmouth College professor M. Eric Johnson, in collaboration with Tiversa, Inc., a company that monitors peer-to-peer networks to provide security services, wrote an article titled “Data Hemorrhages in the Health-Care Sector.” In preparing the article, Johnson and Tiversa searched the networks for data that could be used to commit medical or financial identity theft. They found a document that contained the Social Security numbers, insurance information, and treatment codes for patients of LabMD, Inc. Tiversa notified LabMD of the find in order to solicit its business. Instead of hiring Tiversa, however, LabMD filed a suit in a federal district court against the company, alleging trespass, conversion, and violations of federal statutes. What do these facts indicate about the security of private information?

Explain. How should the court rule? [LabMD, Inc. v. Tiversa, Inc., 2013 WL 425983 (11th Cir. 2013)] (See Copyrights in Digital Information.)

Solution: The facts of this case indicate that the security of private information in any database accessible from the web is weak. And this information can be easily shared with others through peer-to-peer networks, which allow users to place shared computer files in folders that are open for other users to search.

As part of the research for their article, Johnson and Tiversa searched the networks for data that could be used to commit medical or financial identity theft. On one of them, they found a document that contained the Social Security numbers, insurance information, and treatment codes for patients of LabMD, Inc. Tiversa notified LabMD of the find. LabMD appeared not to have willingly revealed this information because on learning of its exposure, the company filed a suit against Tiversa.

In the actual case on which this problem is based, the court dismissed the suit for lack of personal jurisdiction over Tiversa. On appeal, the U.S. Court of Appeals for the Eleventh Circuit affirmed. LabMD asserted jurisdiction under a long-arm statute of Georgia. But Tiversa was not registered to do business in Georgia, had no employees or customers in Georgia, derived no revenue from business activities in Georgia, owned no Georgia property, and paid no Georgia taxes. Furthermore, although accessible in Georgia, Tiversa’s website merely advertised its services and did not offer products or services for purchase online. Tiversa's entire contact with Georgia consisted of one phone call and nine e-mails to LabMD. This was not sufficient.

9–5. Business Case Problem with Sample Answer—Social Media. Mohammad Omar Aly Hassan and nine others were indicted in a federal district court on charges of conspiring to advance violent jihad (holy war against enemies of Islam) and other offenses related to terrorism. The evidence at Hassan’s trial included postings he made on Facebook concerning his adherence to violent jihadist ideology. Convicted, Hassan appealed, contending that the

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 09: Internet Law, Social Media, and Privacy

Facebook items had not been properly authenticated (established as his own comments).

How might the government show the connection between postings on Facebook and those who post them? Discuss. [United States v. Hassan, 742 F.3d 104 (4th Cir. 2014)] (See Social Media.)

Solution: As stated in the text, law enforcement can use social media to detect and prosecute suspected criminals. But there must be an authenticated connection between the suspects and the posts. To make this connection, law enforcement officials can present the testimony or certification of authoritative representatives of the social media site or other experts. The posts can be traced from the pages on which they are displayed and the accounts of the “owners” of the pages to the posters through Internet Protocol (IP) addresses. An IP address can reveal the e-mail address, and even the mailing address, of an otherwise anonymous poster.

The custodians of Facebook, for example, can verify Facebook pages and posts because they maintain those items as business records in the course of regularly conducted business activities. From those sources, the prosecution in Hassan’s case could have tracked the IP address to discover his identity.

In the actual case on which this problem is based, on Hassan’s appeal of his conviction, the U.S. Court of Appeals for the Fourth Circuit affirmed.

9–6. Internet Law. Jason Smathers, an employee of America Online (AOL), misappropriated an AOL customer list with 92 million screen names. He sold the list for $28,000 to Sean Dunaway, who sold it to Braden Bournival. Bournival used it to send AOL customers more than 3 billion unsolicited, deceptive e-mail ads. AOL estimated the cost of processing the ads to be at least $300,000. Convicted of conspiring to relay deceptive e-mail in violation of federal law, Smathers was ordered to pay AOL restitution of $84,000 (treble the amount for which he had sold the AOL customer list). Smathers appealed, seeking to reduce the amount.

He cited a judgment in a civil suit for a different offense against Bournival and others for which AOL had collected $95,000. Smathers also argued that his obligation should be reduced by restitution payments made by Dunaway. Which federal law did Smathers violate? Should the amount of his restitution be reduced? Explain. [United States v. Smathers, 879 F.3d 453 (2d Cir. 2018)] (See Internet Law.) Solution: Smathers was charged with, and convicted of, violating the federal CAN-SPAM Act. This law applies to the sending of unsolicited “junk” e-mail, prohibiting the use of false, misleading, or deceptive information.

Smathers, an employee of America Online (AOL), misappropriated an AOL customer list with 92 million screen names. He sold the list for $28,000 to Sean Dunaway, who sold it to Braden Bournival. Bournival used it to send AOL customers more than 3 billion unsolicited, deceptive e-mail ads. AOL estimated the cost of processing the ads to be at least $300,000. Smathers was convicted of conspiring to relay deceptive e-mail in violation of the CAN-SPAM Act, which applied to the sending of the ads.

Smathers was ordered to pay AOL restitution of $84,000. He sought to reduce this amount by citing a judgment in a civil suit against Bournival and others for which AOL had collected $95,000. He also argued that the amount should be reduced by restitution payments made by Dunaway. As indicated by the facts, however, he was not a party to the Bournival litigation, which involved a different offense. And AOL’s

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 09: Internet Law, Social Media, and Privacy

total loss was at least $300,000. Payments by Smathers and Dunaway together are not likely to reach that figure, much less the $84,000 that Smathers was ordered to pay.

In the actual case on which this problem is based, the U.S. Court of Appeals for the Second Circuit affirmed the restitution order, concluding that Smathers’s contentions were “without merit.”

9–7. Employer Social Media Policies. Government employee Danyelle Bennett worked for the Emergency Community Center (ECC) in Nashville, Tennessee. She fielded 9-1-1 calls and was certified to take part in emergency medical dispatch and emergency fire dispatch. On the night of the presidential election in 2016, posting publicly on Facebook, Bennett used a racial slur for African Americans while celebrating Donald Trump’s victory. After community members complained, ECC officials terminated Bennett’s employment. Why is it important to this case that Bennett was employed by a government agency rather than a private company?

What factors should a court consider when weighing Bennett’s free speech rights against the detrimental impact her comments had on the ECC’s mission and the agency’s relationship with Nashville residents? [Bennett v. Metropolitan Government of Nashville, 977 F.3d 520 (6th Cir. 2020)] (See Social Media.)

Solution: The First Amendment prevents the government from restricting an individual’s right to free speech. Private employers are not, in most instances, held to the same free speech standards as are government employers when it comes to terminating employment on the basis of an employee’s comments. If Bennett had been a private employee rather than a public employee, she most likely would not have been given a chance to challenge her firing in court on First Amendment grounds.

Since Bennett did work for the Metropolitan Government of Nashville (Metro), she was not only able to sue for retaliation under the First Amendment but was able to prevail in federal district court. On appeal, the United States Court of Appeals for the Sixth Circuit conducted a balancing test to determine whether it would affirm or reverse.

Bennett has a right not to be fired for engaging in a political discussion online. But, does she have a right not to be fired for using a racial slur as part of that political discussion?

To answer this question, the appeals court focused on Metro’s interest in running an efficient operation, both within its offices and in the public sphere. The appeals court found that Bennett’s comments did indeed “impair the harmony of [her] workplace,” with her post prompting nonstop conversation for weeks afterwards and even causing some coworkers to seek counseling. The appeals court also noted that, after Bennett was terminated, working conditions at the ECC improved considerably.

In addition, the appeals court concluded that Bennett’s comments “detracted from the mission of the ECC,” which relied heavily on establishing a bond of trust with the public. One Nashville resident reacted to Bennett’s comment by wondering if, in her capacity as a 911 emergency operator, Bennett would discriminate against African Americans in distress: “If your skin is too dark, your call may have just been placed on the back burner.”

Had Bennett’s Facebook profile been private, or if it had not indicated that she worked for the ECC, the appeals court might have affirmed the lower court’s ruling in Bennett’s favor. But, considering the above factors, the appeals court decided that Metro’s interest in maintaining an efficient workplace outweighed Bennett’s free

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 09: Internet Law, Social Media, and Privacy

speech interest in using racially offensive language on social media. Therefore, the appeals court reversed and ordered a retrial consistent with its opinion.

9–8. Social Media. A school district had a long-standing business relationship with Riley’s American Heritage Farms, a company that provides field-trip venues for public school children. The principal shareholder of the company, James Patrick Riley, had personal social media accounts, including one on the X platform. Riley posted negative tweets about Senators Elizabeth Warren and Kirsten Gillibrand, and also tweeted about gender issues. None of Riley’s tweets appeared on any of Riley’s Farms’ social media accounts or website. None of the tweets referenced Riley’s Farms, the school district, or school field trips in general.

In an e-mail to her child’s teacher, a parent indicated that she did not feel comfortable “patronizing an establishment whose owner might be inclined to direct bigoted opinions toward [her] child or other vulnerable children in the group.” As a result of parental complaints about the tweets, the school district broke off its business relationship with Riley’s Farms. The company and its principal shareholder then sued the district. A federal trial court granted summary judgment for school officials. Was summary judgment appropriate in this case? Why or why not? [Riley’s American Heritage Farms v. Elsasser, 29 F.4th 484 (9th Cir. 2022)] (See Social Media.)

Solution: The appellate court pointed out that Riley’s American Heritage Farms and James Riley established a prima facie case of First Amendment retaliation. There was a genuine issue of material fact as to whether the school district’s asserted interest in preventing disruption were so substantial that they outweighed the company’s and its principal shareholder’s free speech interest and therefore precluded summary judgment. While the federal trial court dismissed the school district from the lawsuit based on sovereign immunity, the appellate court did not agree.

Furthermore, there was no genuine issue of disputed fact that James Riley engaged in expressive conduct that addressed matters of public concern. Riley’s personal tweets discuss matters that fall within the core protected First Amendment activity, including politics, religion, and issues of social relations. The school district’s defendants failed to establish that the school district’s asserted interests in preventing disruption in their operations and curricular design because of parental complaints were so substantial that they outweighed Riley’s free speech interests as a matter of law.

A QUESTION OF ETHICS 9–9. The IDDR Approach and Social Media. One August morning, around 6:30 a.m., a fire occurred at Ray and Christine Nixon’s home in West Monroe, Louisiana. The Nixons told Detective Gary Gilley of the Ouachita Parish Sheriff’s Department that they believed the fire was deliberately set by Matthew Alexander, a former employee of Ray’s company. Ray gave Alexander’s phone number to Gilley, who contacted the number’s service provider, Verizon Wireless Services, L.L.C. Gilley said that he was investigating a house fire that had been started with the victims inside the dwelling, and wanted to know where the number’s subscriber had been that day. He did not present a warrant, but he did certify that Verizon’s response would be considered an “emergency disclosure.” [Alexander v. Verizon Wireless Services, L.L.C., 875 F.3d 243 (5th Cir. 2017)] (See Social Media.)

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 09: Internet Law, Social Media, and Privacy

1.

Using the Inquiry and Discussion steps in the IDDR approach, identify the ethical dilemma that Verizon faced in this situation and the actions that the company might have taken to resolve that issue.

Solution: The ethical dilemma that Verizon faced in this case is whether to provide a police officer with the information that he asked for. With no warrant or other court order, Verizon had a substantial legal basis to refuse. If disclosure had been legally required, however, would the company have had an ethical basis to refuse? Or, did the company have an ethical obligation to respond regardless of whether it was legally required to do so?

The IDDR approach begins with an Inquiry that sets out the ethical dilemma and identifies the stakeholders and the relevant ethical standards in a set of facts. The Discussion step covers actions to address the issue, the actions’ strengths and weaknesses, and their consequences and effects.

Here, Ray and Christine Nixon told Sheriff’s Detective Gary Gilley that they believed a fire in their home had been set by Matthew Alexander. Ray gave Alexander’s phone number to Gilley, who contacted the number’s service provider, Verizon. Gilley said that he was investigating a house fire that may have been intentionally started with the victims inside and wanted to know where the number’s subscriber had been that day. He did not present a warrant, but he did certify that Verizon’s response would be considered an “emergency disclosure.”

The stakeholders in this situation include all of the immediate parties—the Nixons, Alexander, Gilley, and Verizon—as well as other police officers, service providers, the public generally, and, most importantly, other potential victims if, in fact, the fire had been arson.

Verizon can choose to reveal all of its information concerning its subscriber, none of the data, or some part of it. This choice might be affected by the company’s guidelines on what information to reveal, whom it may be disclosed to, and when it should be released. It might also be influenced by an altruistic motive to help others in distress (the Nixons), in need (the police), or in harm’s way (unwitting potential victims). There may also be a perceived overriding ethical duty to protect privacy rights.

The strengths and weaknesses of the actions exist in their consequences.

Refusing to disclose the information could protect the privacy of Verizon’s subscribers and ultimately contribute to the protection of privacy for all. But it would impede a police investigation of a possible crime, which could result in the Nixons or others being further victimized. Disclosing all, or at least some, of the information could prevent the negative consequences of revealing none of it. Relying on the detective’s “certification” that this response would be considered an “emergency disclosure” would lend moral, and possibly legal, support to this decision. Finally, revealing only where the subscriber had been that day, without disclosing content (no texts, e-mails, or conversations), could arguably protect privacy rights.

2. Suppose that Verizon gave Gilley the requested information, and that later Alexander filed a suit against the provider, alleging a violation of the Stored Communications Act. Could Verizon successfully plead “good faith” in its defense?

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 09: Internet Law, Social Media, and Privacy

Solution: Yes, if Verizon gave Gilley the requested information, and later Alexander filed a suit against the company under the Stored Communications Act (SCA), the defendant could successfully plead “good faith” in its defense.

The SCA prohibits the intentional and unauthorized access to stored electronic communications. The act also prevents providers of communications services from disclosing private communications to certain entities and individuals.

There are civil sanctions for violations. Thus, in the circumstances of this case, as a provider, Verizon might violate the act by responding to Gilley’s request with the information that he sought—where the subscriber to a certain phone number had been that day.

Gilley did not present Verizon with a warrant, but he stated the purpose for his request and certified that the provider’s response would be considered an “emergency disclosure.” The company could believe in good faith, then, that an emergency involving a risk of serious injury or other harm to a person mandated the disclosure of the data. This would most likely serve as a sufficient legal defense to a suit by the party whose information was disclosed.

In ethical terms, as related in the answer to the question above, there are also significant altruistic and other moralistic reasons to support the disclosure of the information.

In the actual case on which this problem is based, Verizon provided Gilley with the information. Alexander was charged in a Louisiana state court with arson.

The court suppressed the records obtained from Verizon, finding no exigent circumstances to justify Gilley acting without a warrant.

Alexander filed a suit in a federal district court against Verizon, alleging a violation of the SCA. The court dismissed the suit. The U.S. Court of Appeals for the Fifth Circuit affirmed the dismissal. “Verizon acted reasonably in concluding that there was an emergency ... that required Verizon to act without delay.”

TIME-LIMITED TEAM ASSIGNMENT 9–10. File-Sharing. James, Chang, and Braden are roommates. They are music fans and frequently listen to the same artists and songs. They regularly exchange MP3 music files that contain songs from their favorite artists. (See Copyrights in Digital Information.)

1.

One team of students will decide whether the fact that the roommates are transferring files among themselves for no monetary benefit protects them from being subject to copyright law.

Solution: Just because the three roommates are not profiting from their file-sharing actions does not mean that they wouldn’t be subject to copyright law. A copyright violation can occur in the absence of any monetary benefit.

Congress extended liability under copyright law to persons who exchange unauthorized copyrighted works without realizing a profit.

2. The second team will consider whether it would be legal for each roommate to buy music on CD and then, after downloading a copy onto their hard drive, give the CD to the other roommates to do the same. Does this violate copyright law? Is it the same as file-sharing digital music? Explain.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 09: Internet Law, Social Media, and Privacy

Solution: The purchaser of a CD has the right to loan or sell that CD to anyone else. If the roommates each rip the CD to their own hard drives, generally, there will be no copyright violation.

3. A third team will consider streaming music services. If one roommate subscribes to a streaming service and the other roommates use the service for free, would this violate copyright law? Why or why not?

Solution: If one roommate subscribes to a streaming service and the other roommates use the service for free, this would violate copyright law if it violates the terms of the service agreement or the service’s policy.

Copyright is the most important form of intellectual property protection on the internet. Because most, if not all, of the material is copyrighted, simply transferring it online is copying it in violation of copyright law. Thus, sharing the stored music files of others, especially those of the owner of the copyright to the music, raises copyright issues. Some companies have aggressively pursued those who shared the firms’ property. Others have not, perhaps to avoid bad publicity or to attract new customers.

If the streaming service in the question opposes the sharing of its service, then doing so clearly infringes on the company’s copyrights. This is both a criminal and a civil violation of copyright law. Penalties and sanctions include damages and injunctions. A user might argue the innocent infringer defense—being unaware that the actions constituted copyright infringement. The application of these principles is for the determination of a court.

Of course, if a streaming service turns a blind eye to the sharing of its material, there are not likely to be negative consequences to those who do it.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 10: The Formation of Traditional and E-Contracts

Solution and Answer Guide

Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 10: The Formation of Traditional and E-Contracts

TABLE OF CONTENTS Critical Thinking Questions in Features .............................................................................1 Building Analytical Skills—Result and Reasoning ............................................................... 1 Adapting the Law to the Online Environment—Critical Thinking.................................... 2 Managerial Strategy—Business Questions........................................................................... 2 Critical Thinking Questions in Cases ................................................................................. 3 Case 10.1—Critical Thinking .................................................................................................... 3 Case 10.2—Critical Thinking ................................................................................................... 4 Case 10.3—Critical Thinking ................................................................................................... 4 Chapter Review ................................................................................................................... 4 Practice and Review................................................................................................................. 4 Practice and Review: Debate This ......................................................................................... 5 Issue Spotters ........................................................................................................................... 6 Business Scenarios and Case Problems .............................................................................. 6 A Question of Ethics ............................................................................................................... 12 Time-Limited Team Assignment .......................................................................................... 14

CRITICAL THINKING QUESTIONS IN FEATURES BUILDING ANALYTICAL SKILLS—RESULT AND REASONING 1.

In this situation, the offer consisted of a reward. To obtain the reward, an offeree was asked to provide information regarding the “South Louisiana Serial Killer” to the Baton Rouge Crime Stoppers via a hotline. Alexander did not comply with the terms of this offer, and thus the offerors were not bound to pay her. How do the facts support this outcome?

Solution: Alexander did provide information to the police related to the arrest and indictment of the killer. But there was no indication in the offer that the police were the offerors or that they were authorized to accept the requested information on behalf of the offerors. Therefore, a court would not require BCS to pay the reward to Alexander.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 10: The Formation of Traditional and E-Contracts

ADAPTING THE LAW TO THE ONLINE ENVIRONMENT—CRITICAL THINKING 1. How can a company structure e-mail negotiations to avoid “accidentally” forming a contract?

Solution: The company should make sure that all e-mail conversations explicitly indicate that they are subject to any relevant conditions and that they are subject to further review and comment by the senders’ clients or colleagues. All negotiations via e-mail should include appropriate disclaimers such as “This e-mail is not an offer capable of acceptance.” or “This e-mail does not evidence an intention to enter into an agreement.” or “This e-mail has no operative effect until a definitive agreement is signed in writing by both parties.” Another possibility is to indicate that “No party should act in reliance on this e-mail until a definitive contract is signed in writing by both parties.”

MANAGERIAL STRATEGY—BUSINESS QUESTIONS 1.

What would be your strategy regarding liability waivers if you were managing a business that relied on minors engaging in inherently dangerous activities?

Solution: Initially, a manager would need to become well-versed in the applicable state law. The majority of states, through case law or legislative action, will not enforce parental waivers signed on behalf of children. Managers of trampoline parks— or other businesses that place minors at risk such as paintball or laser tag courses or go-kart tracks—in these states need to take precautions such as purchasing sufficient insurance and training employees to diffuse particularly dangerous situations immediately.

Managers should also avoid the situation discussed in this feature, where House of Boom relied on the parent’s signature alone to relieve it of liability for her daughter’s injury. Employees should verbally encourage parents to read and understand the implications of any liability waivers. Employees should also be made available to answer any questions parents might have about liability waivers. Furthermore, parents and the children should be explicitly warned of the risks of the activity in which they are about to engage. Generally speaking, the more information a business explicitly provides concerning a liability waiver, the more likely a court will be to find the waiver is enforceable.

2.

Under what circumstances would you, as a business owner, choose to aggressively defend your business against a customer’s liability lawsuit?

Solution: Business owners choose to aggressively defend liability lawsuits when they are certain that the customer was 100 percent negligent and that the lawsuit has nothing to do with the negligence of the business. Also, some large corporations choose to aggressively defend “nuisance” lawsuits in order to deter the filing of such lawsuits in the future, or at least reduce the potential number.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 10: The Formation of Traditional and E-Contracts

CRITICAL THINKING QUESTIONS IN CASES CASE 10.1—CRITICAL THINKING 1.

Legal Environment. As a principle of contract interpretation, courts consistently strive to interpret contracts in accord with common sense. Does the application of this principle to the facts in this case support or undercut the decision of the Maryland Court of Appeals? Explain.

Solution: Applying the principle that a contract should accord with common sense supports the decision of the Maryland Court of Appeals in the Credible case.

Interpreting the promissory note to require repayment only if an employee quits, as the lower courts did, defies common sense.

The lower courts’ interpretation of the repayment term of the note, making its repayment dependent on whether an employee was fired or quit, would result in disparate treatment. In those courts’ view, an employee fired by Credible would not be required to repay the loan, while an employee who quits would be required to repay.

There is no reason why, with respect to repayment of the loan, an employee who is fired should be treated more favorably than one who quits. In the words of the Maryland Court of Appeals, this interpretation “strains credulity, * * * is untenable and runs contrary to common sense.”

In addition to according with common sense, the interpretation of the state’s highest court of the two provisions referred to in the “Reason” section of the case brief aligns the meaning and substance of those provisions, showing clearly that the parties intended the loan to be repaid regardless of whether an employee quits or is fired.

2.

Economic. What consequences might Credible have suffered if the Maryland Court of Appeals had interpreted the terms of the note to require repayment only when an employee quit employment, not when that employee was fired? Discuss.

Solution: In the Credible case, Credible argues that the terms of the promissory note memorializing an agreement between the employer and its employee, as part of the employer’s tuition loan program, requires repayment regardless of whether the employee quits or is fired. According to the note, this is the intent of the parties— Credible and the employee—who agree to those terms. The Maryland Court of Appeals holds that this contention is a reasonable interpretation, in contrast to the argument of Credible’s employee-borrower, Emmanuel Johnson, who posits that the terms of the note requires repayment only if an employee quits the job.

If the court had agreed with Johnson, however, the consequences to Credible might have begun with the way in which its other employees subsequently regarded their employment and its termination. An involuntary discharge could mean that a fired employee would reap a windfall in terms of the repayment of a tuition loan. This circumstance would seem to encourage employees to obtain the loans and, when they wished to change their employment or desired simply to avoid repayment of what, given the cost of tuition, could be a substantial amount (plus interest), act in a manner so as to be fired. The result would not only be the cost to Credible of the loss of the amount of the loan, but havoc in the workplace, due to the employee’s effort to get

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 10: The Formation of Traditional and E-Contracts

fired. This sort of misconduct would create disharmony in the workplace, lowering productivity, and undermining the economic and social objectives of the business.

CASE 10.2—CRITICAL THINKING 1.

What If the Facts Were Different? Suppose that the day after Lucy signed the sales agreement, he decided that he did not want the farm after all, and Zehmer sued Lucy to perform the contract. Would this change in the facts alter the court’s decision? Why or why not?

Solution: No. In fact, this would likely support the court’s determination that there was an enforceable contract between the parties. In this circumstance, unless Lucy attempted to void the contract on the ground of intoxication, the court might not have addressed the issue at all.

CASE 10.3—CRITICAL THINKING 1.

What If the Facts Were Different? Assume that the Membership Agreement was a lengthy document, say 25 pages long, and that the exculpatory clause was in very small type, such that anyone doing a quick reading of that contract might have missed the exculpatory sentences. Would the result of this case have been different? Why or why not?

Solution: Probably. Public policy does not favor exculpatory clauses or contracts of adhesion, so courts will not uphold these types of contracts unless the documents meet all the necessary legal requirements. One such requirement is that an exculpatory clause must be “clear.” So, if the clause is “hidden” in small print as part of a lengthy document, a court would have the evidence needed to void the contract.

In this case, however, the waiver in question consisted of nearly five hundred words, in normal sized type. Furthermore, the line on the agreement immediately preceding Peter’s signature read, “By signing this Agreement, Buyer acknowledges that Buyer is of legal age, has received a filled-in and completed copy of this Agreement[,] has read and understands the entire agreement including . . . the Release and Waiver of Liability. . . .” Evidently, Fitness International’s legal counsel were aware of the need to draft a “clear” exculpatory provision.

CHAPTER REVIEW PRACTICE AND REVIEW Shane Durbin wanted to have a recording studio custom-built in his home. He sent invitations to a number of local contractors to submit bids on the project. Rory Amstel submitted the lowest bid, which was $20,000 less than any of the other bids Durbin received. Durbin called Amstel to ascertain the type and quality of the materials that were included in the bid and to find out if he could substitute a superior brand of acoustic tiles for the same bid price.

Amstel said he would have to check into the price difference. The parties also discussed a possible start date for construction. Two weeks later, Durbin changed his mind and decided not to go forward with his plan to build a recording studio. Amstel filed a suit against Durbin for breach of contract. Using the information presented in the chapter, answer the following questions:

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 10: The Formation of Traditional and E-Contracts

1.

Did Amstel’s bid meet the requirements of an offer? Explain.

Solution: Yes. A bid can be an offer if it contains all of the requisite elements: a serious, objective intent on the part of the offeror and an offer communicated to the offeree in certain, definite terms comprehensible to both parties. Amstel’s bid met these requirements. His intent appeared to be that of a serious, reasonable offeree; the terms were sufficiently definite; and the bid was communicated to Durbin. If the price, materials, and start date were left open, these factors might be sufficient to question the status of the bid as an offer.

2. Was there an acceptance of the offer? Why or why not?

Solution: To create a contract, an offer must be accepted unequivocally. Durbin questioned the materials included in the bid and asked about the possibility of substituting different acoustic tiles and discussed a starting date. Although this does not constitute an acceptance of the offer, neither is it a rejection. His questions were inquiries, not a rejection of the bid. Durbin’s later call to say that he had changed his mind, however, was a rejection.

3. How is an offer terminated? Assuming that Durbin did not inform Amstel that he was rejecting the offer, was the offer terminated at any time described here? Explain.

Solution: Yes. Durbin asked about better quality tiles; until that issue was settled, because it likely changed the price, a contract was never formed, so Durbin had the right to cancel the deal. The contract was still being negotiated because Amstel wanted information about alternative materials, which affected the price. Failure to settle that matter means the offer was never accepted and either party had the right to walk away.

PRACTICE AND REVIEW: DEBATE THIS 1.

The terms and conditions in click-on agreements are so long and detailed that no one ever reads the agreements. Therefore, the act of clicking on “I agree” is not really an acceptance.

Solution: The terms and conditions included in click-on agreements have become so detailed, confusing, and most importantly, long, that no one would ever take the time to read one. Knowing, though, that one is unable to purchase or license a product or service purchased on the internet without clicking “yes” means that everyone just clicks “yes.” That is far from what we normally believe is voluntary assent. Indeed, the choice is all or nothing—accept all terms and conditions or do not buy from us.

There appears to be no acceptable alternative to click-on agreements when buying a good or service on the internet. No company would ever eliminate the click-on agreement from its e-commerce system because it would be exposing itself to even more potential lawsuits. The reason such click-on terms and conditions are so numerous is specifically to avoid frivolous and expensive lawsuits. As a result, ultimately, overall costs are lower for e-commerce, and therefore consumers pay lower prices in general.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 10: The Formation of Traditional and E-Contracts

ISSUE SPOTTERS 1.

Applied Products, Inc., does business with Beltway Distributors, Inc., online. Under the Uniform Electronic Transactions Act, what determines the effect of the electronic documents evidencing the parties’ deal? Explain. (See E-Contracts.)

Solution: First, it might be noted that the Uniform Electronic Transactions Act (UETA) does not apply unless the parties to a contract agree to use e-commerce in their transaction. In this deal, of course, the parties used e-commerce. The UETA removes barriers to e-commerce by giving the same legal effect to e-records and e-signatures as to paper documents and signatures. The UETA does not include rules for those transactions, however.

2. Joan, who is sixteen years old, moves out of her parents’ home and signs a one-year lease for an apartment at Kenwood Circle. Joan’s parents tell her that she can return to live with them at any time. Unable to pay the rent, Joan moves back to her parents’ home two months later. Can Kenwood enforce the lease against Joan? Why or why not? (See Contractual Capacity.)

Solution: No. Joan may disaffirm this contract. Because the apartment was a necessary, however, she remains liable for the reasonable value of her occupancy of the apartment.

BUSINESS SCENARIOS AND CASE PROBLEMS 10–1. Implied Contract. Janine was hospitalized with severe abdominal pain and placed in an intensive care unit. Her doctor told the hospital staff to order around-the-clock nursing care for Janine. At the hospital’s request, Nursing Services Unlimited provided two weeks of in-hospital care and, after Janine was sent home, an additional two weeks of at-home care.

During the at-home period of care, Janine was fully aware that she was receiving the benefit of the nursing services. Nursing Services later billed Janine $4,000 for the at-home nursing care, but Janine refused to pay. She claimed that she had never contracted—either orally or in writing—for those services. Because no express contract was ever formed, can Nursing Services recover the $4,000 from Janine? If so, under what legal theory? Discuss. (See An Overview of Contract Law.) Solution: According to the question, Janine was apparently unconscious or otherwise unable to agree to a contract for the nursing services she received while she was in the hospital. As you read in the chapter, however, sometimes the law will create a fictional contract in order to prevent one party from unjustly receiving a benefit at the expense of another. This is known as a quasi contract and provides a basis for Nursing Services to recover the value of the services it provided while Janine was in the hospital.

As for the at-home services that were provided to Janine, because Janine was aware that those services were being provided for her, Nursing Services can recover for those services under an implied contract. Under this type of contract, the conduct of the parties creates and defines the terms. Janine’s acceptance of the services constitutes her agreement to form a contract, and she will probably be required to pay Nursing Services in full.

10–2. Online Acceptances. Heather Reasonover opted to try internet service from Clearwire Corp. Clearwire sent her a confirmation e-mail and a modem. When Reasonover plugged in

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the modem, an “I accept terms” box appeared. Without clicking on the box, Reasonover quit the page. She had not seen Clearwire’s “Terms of Service,” accessible only through its website. Although the e-mail she received and the printed materials included with the modem included URLs to the company’s website, neither URL gave direct access to the “Terms of Service.” A clause in the “Terms of Service” required subscribers to submit any dispute to arbitration. Is Reasonover bound to this clause? Why or why not? [Kwan v. Clearwire Corp., 2012 WL 32380 (W.D.Wash. 2012)] (See E-Contracts.)

Solution: No. A shrink-wrap agreement is an agreement whose terms are expressed inside the box in which the goods are packaged. Parties who open the box may be informed that they agree to the terms by keeping whatever is in the box. In many cases, the courts have enforced the terms of shrink-wrap agreements just as they enforce the terms of other contracts. But not all of the terms presented in shrink-wrap agreements have been enforced by the courts. One important consideration is whether the buyer had adequate notice of the terms.

A click-on agreement is formed when a buyer, completing a transaction on a computer, is required to indicate assent to be bound by the terms of an offer by clicking on a button that says, for example, “I agree.” In Reasonover’s situation, no such agreement was formed with respect to Clearwire’s “Terms of Service” (TOS). The e-mail did not give notice of the TOS. It did not contain a direct link to the terms— accessing them required clicks on further links through the firm’s homepage. The written, shrink-wrap materials accompanying the modem did not provide adequate notice of the TOS. There was only a reference to Clearwire’s website in small print at the bottom of one page. Similarly, Reasonover’s access to an “I accept terms” box did not establish notice of the terms. She did not click on the box but quit the page. Even if any of these references was sufficient notice, Reasonover kept the modem only because Clearwire told her that she could not return it.

In the actual case on which this problem is based, the court refused to compel arbitration on the basis of the clause in Clearwire’s TOS. 10–3. Spotlight on Kansas City Chiefs—Consideration. On Brenda Sniezek’s first day of work for the Kansas City Chiefs Football Club, she signed a document that purported to compel arbitration of any disputes that she might have with the Chiefs. In the document, Sniezek agreed to comply at all times with and be bound by the constitution and bylaws of the National Football League (NFL). She agreed to refer all disputes to the NFL commissioner for a binding decision. On the commissioner’s decision, she agreed to release the Chiefs and others from any related claims. Nowhere in the document did the Chiefs agree to do anything.

Was there consideration for the arbitration provision? Explain. [Sniezek v. Kansas City Chiefs Football Club, 402 S.W.3d 580 (Mo.App. W.D. 2013)] (See Consideration.)

Solution: No. There was no consideration for the arbitration provision. Consideration is required to create a bilateral contract. Consideration is something of legally sufficient value given in return for a promise. The “something of legally sufficient value” may consist of either a promise to do or refrain from doing something or a transfer of something of value.

In this problem, the arbitration “agreement” contains promises made only by Sniezek.

Only Sniezek agrees to comply at all times with and be bound by the constitution and bylaws of the National Football League (NFL). Only Sniezek agrees to refer all disputes to the NFL Commissioner for a binding decision. Only Sniezek agrees to release the

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Chiefs from any related claims on the Commissioner's decision. Nowhere in the document do the Chiefs agree to do anything. Thus, the document does not contain any promises by the Chiefs to constitute sufficient consideration for Sniezek's promise to forgo her right of access to the courts and arbitrate her claims against them.

The Chiefs might argue that the “agreement” was a condition of Sniezek's keeping her employment, which the Chiefs had already offered her and she had already accepted.

But the document did not alter the nature of her employment relationship—no employment contract was created, no additional compensation or other benefit was offered. Consequently, allowing Sniezek to stay on the job was not sufficient consideration to support a promise to arbitrate.

In the actual case on which this problem is based, Sniezek filed a charge of age discrimination against the Chiefs in a Missouri state court, and the Chiefs filed a motion to compel arbitration. The court denied the motion, and a state intermediate appellate court affirmed the denial for the reasons stated above.

10–4. Minors. D.V.G. (a minor) was injured in a one-car auto accident in Hoover, Alabama. The vehicle was covered by an insurance policy issued by Nationwide Mutual Insurance Co. Stan Brobston, D.V.G.’s attorney, accepted Nationwide’s offer of $50,000 on D.V.G.’s behalf. Before the settlement could be submitted to an Alabama state court for approval, D.V.G. died from injuries received in a second, unrelated auto accident. Nationwide argued that it was not bound to the settlement because a minor lacks the capacity to contract and so cannot enter into a binding settlement without court approval. Should Nationwide be bound by the settlement? Why or why not? [Nationwide Mutual Insurance Co. v. Wood, 121 So.3d 982 (Ala. 2013)] (See Contractual Capacity.)

Solution: Yes. Minors do not so lack the capacity to contract that they cannot enter into a binding settlement without court approval. The general rule is that a minor can enter into any contract an adult can, unless the contract is prohibited by law for minors (for example, the sale of tobacco or alcoholic beverages). A contract entered into by a minor, however, is voidable at the option of that minor. An adult who enters into a contract with a minor cannot avoid any contractual duties on the ground that the minor can. Unless the minor exercises the option to disaffirm the contract, the adult party normally is bound by it.

In this problem, it is clear that a contract existed at the time of D.V.G.’s death. As a minor, she did not lack the capacity to enter into a binding settlement of her potential claims. She would not have been liable on the contract, however, if she had chosen to avoid the deal. But she was the only party to the settlement that had this option. At the time that the settlement was agreed to, the contract was binding on Nationwide, notwithstanding that it was voidable at D.V.G.’s option.

In the actual case on which this problem is based, Nationwide asked a federal district court to declare that there was no settlement. The question was certified to the Alabama Supreme Court, which held that Nationwide was bound to the agreement.

10–5. Business Case Problem with Sample Answer—Requirements of the Offer. Technical Consumer Products, Inc. (TCP), makes and distributes energy-efficient lighting products. Emily Bahr was TCP’s district sales manager in Minnesota, North Dakota, and South Dakota when the company announced the details of a bonus plan. District sales managers who achieved 100 percent year-over-year sales growth and a 42 percent gross margin would earn 200

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percent of their base salaries as a bonus. TCP retained absolute discretion to modify the plan.

Bahr’s base salary was $42,500. Her final sales results for the year showed 113 percent year-over-year sales growth and a 42 percent gross margin. She anticipated a bonus of $85,945, but TCP could not afford to pay the bonuses as planned, and Bahr received only $34,229. In response to Bahr’s claim for breach of contract, TCP argued that the bonus plan was too indefinite to be an offer. Is TCP correct? Explain. [Bahr v. Technical Consumer Products, Inc., 601 Fed.Appx. 359 (6th Cir. 2015)] (See Agreement.)

Solution: No. TCP is wrong—the bonus plan was not too indefinite to be an offer. One of the requirements for an effective offer is that its terms must be reasonably definite.

This is so a court can determine whether a breach has occurred and award an appropriate remedy. Generally, these terms include an identification of the parties and the object or subject of the contract, the consideration to be paid, and the time of performance.

In this problem, TCP provided its employees, including Bahr, with the details of a bonus plan. District sales managers such as Bahr, who achieved 100 percent year-over-year sales growth and a 42 percent gross margin would earn 200 percent of their base salary. TCP also retained absolute discretion to modify the plan. Bahr exceeded the goal and expected a bonus commensurate with her performance. TCP paid her less than half what its plan promised, however. In the ensuing litigation, TCP claimed that the bonus plan was too indefinite to constitute an offer, but this was not in fact the case. Clear criteria applied to determine an employee’s eligibility for a certain amount within a specific deadline. A court asked to apply the plan would have little or no doubt as to the amount an employee would be entitled to. The term that reserved discretion to TCP to modify the plan did not sufficiently undercut the clarity of the offer to prevent the formation of a contract.

In the actual case on which this problem is based, the court concluded that the reservation of discretion to revoke a plan makes an offer too indefinite and issued a judgment in TCP’s favor. A state intermediate appellate court reversed this judgment, holding that TCP’s plan was a sufficiently definite offer.

10–6. Exculpatory Clauses. Sue Ann Apolinar hired a guide through Arkansas Valley Adventures, LLC, for a rafting excursion on the Arkansas River. At the outfitter’s office, Apolinar signed a release that detailed potential hazards and risks, including “overturning,” “unpredictable currents,” “obstacles” in the water, and “drowning.” (A release is an agreement in which one party gives up the right to pursue a legal claim against another party.) The release clearly stated that her signature discharged Arkansas Valley from liability for all claims arising in connection with the trip. On the river, while attempting to maneuver around a rapid, the raft capsized. The current swept Apolinar into a logjam where, despite efforts to save her, she drowned. Her son, Jesus Espinoza, Jr., filed a suit in a federal district court against the rafting company, alleging negligence. What are the arguments for and against enforcing the release that Apolinar signed? Discuss. [Espinoza v. Arkansas Valley Adventures, LLC, 809 F.3d 1150 (10th Cir. 2016)] (See Legality.)

Solution: An exculpatory clause releases a party from liability for injury or damage. A court may refuse to enforce an exculpatory clause when the parties are seen to possess unequal bargaining power—in a case involving an employment contract, for example. A business that offers non-essential services is not considered to be at a relative advantage in bargaining strength, so anyone contracting for its services is thought to do so voluntarily, making an exculpatory clause potentially enforceable as a part of the deal. This is especially likely if the clause is unambiguous and conspicuous.

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In this problem, Apolinar hired a guide through Arkansas Valley Adventures for a rafting trip on the Arkansas River. She signed a document that purported to release Arkansas Valley from liability for claims arising in connection with the trip. On a rapid on the river, the raft capsized. Apolinar was swept by the current into a logjam where she drowned. Her son filed a suit in a federal district court against the rafting company, alleging negligence.

In support of enforcing the release in this set of circumstances, Arkansas Valley was engaged in non-essential services—recreational rafting on the Arkansas River. This indicated that the company had no relative advantage in bargaining over the exculpatory clause. The release set out some of the risks and hazards, and clearly stated a signature discharged the business from liability for all claims arising in connection with the trip. Against the enforcement of the release, it might be argued that the clause was not sufficiently clear or conspicuous, and that Apolinar had no choice but to agree to it or forego the trip.

In the actual case on which this problem is based, the rafting company filed a motion for summary judgment, arguing that the release Apolinar signed shielded it from liability. The court granted the motion. The U.S. Court of Appeals for the Tenth Circuit affirmed. “Colorado allows private parties to assume some of the risks associated with their recreational pursuits.” And the release “was fairly entered into and clear in its terms.”

10–7. Agreements That Lack Consideration. Arkansas-Missouri Forest Products, LLC (Ark-Mo), sells supplies to make wood pallets. Blue Chip Manufacturing (BCM) makes pallets. Mark Garnett, an owner of Ark-Mo, and Stuart Lerner, an owner of BCM, went into business together. Garnett and Lerner agreed that Ark-Mo would have a 30-percent ownership interest in their future projects. When Lerner formed Blue Chip Recycling, LLC (BCR), to manage a pallet repair facility in California, however, he allocated only a 5-percent interest to Ark-Mo. Garnett objected. In a “Telephone Deal,” Lerner then promised Garnett that Ark-Mo would receive a 30-percent interest in their future projects in the Midwest, and Garnett agreed to forgo an ownership interest in BCR. But when Blue Chip III, LLC (BC III), was formed to operate a repair facility in the Midwest, Lerner told Garnett that he “was not getting anything.” Ark-Mo filed a suit in a Missouri state court against Lerner, alleging breach of contract. Was there consideration to support the Telephone Deal? Explain. [Arkansas-Missouri Forest Products, LLC v. Lerner, 486 S.W.3d 438 (Mo.App. 2016)] (See Consideration.)

Solution: Yes. There was consideration to support the Telephone Deal. Consideration can consist of a promise, a performance, or forbearance (refraining from an action that one has a legal right to undertake).

In this problem, Mark Garnett, an owner of Arkansas–Missouri Forest Products, LLC (Ark-Mo), and Stuart Lerner, an owner of Blue Chip Manufacturing (BCM), agreed to go into wood-pallet enterprises together, with Ark-Mo to have a 30-percent ownership interest in their future projects. When Lerner formed Blue Chip Recycling, LLC (BCR) to manage a pallet repair facility in California, however, he allocated only a 5-percent interest to Ark-Mo. Garnett objected. In a “Telephone Deal,” Lerner promised that Ark-Mo would receive a 30-percent interest in their future projects in the Midwest.

Garnett then agreed to forego an ownership interest in BCR. Acting on Ark-Mo’s behalf, Garnett could have accepted the 5-percent allocation in BCR, but he refrained from doing so. Instead, he accepted Lerner’s promise of a 30-percent share in their future projects in the Midwest and made no more demand regarding BCR. In other words, Garnett forwent the opportunity to have an ownership

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interest in BCR in exchange for Lerner’s agreement that Ark–Mo would have a 30-percent ownership interest in certain future projects.

In the actual case on which this problem is based, Ark-Mo filed a suit in a Missouri state court against Lerner, alleging breach of contract. The court issued a judgment in Lerner’s favor. A state intermediate appellate court reversed, in part on the reasoning stated here. “Valid legal consideration supported the Telephone Deal.”

10–8. Online Acceptances. Airbnb, Inc., maintains a website that lists, advertises, and takes fees or commissions for property rentals posted on the site. To offer or book accommodations on the site, a person must register and create an account. Airbnb’s sign-up web page states that by clicking on the “Sign Up” button, a user confirms acceptance of the site’s “Terms of Service” (TOS). The TOS, which are hyperlinked, include a mandatory arbitration provision. One day, Francesco Plazza registered with Airbnb and created an account, but she did not read the TOS. Later, Plazza filed a suit in a federal district court against Airbnb, alleging that the defendant was acting as an unlicensed real estate broker and committing deceptive trade practices in violation of New York state law. Airbnb filed a motion to compel arbitration, pursuant to the TOS. Can Plazza avoid arbitration? Explain. [Plazza v.

Airbnb, Inc., 289 F. Supp. 3d 537 (S.D.N.Y. 2018)] (See E-Contracts.)

Solution: Plazza can avoid arbitration only if Airbnb agrees. Otherwise, the court can compel Plazza to engage in arbitration according to Airbnb’s TOS, in response to the defendant’s motion.

Parties can agree to a contract by any means, including action. In the language of the UCC, a contract “may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.” Thus, for example, online, clicking on an “I agree” box can indicate acceptance. This is enough to bind a party to the terms, which online may be accessible via a hyperlink. A party does not need to have read all of the terms for them to be effective.

Here, Airbnb operates a website that features property rentals. To offer or accept a rental posted on the site, a user must register and create an account. The sign-up screen states, “By clicking ‘Sign Up’ . . . . you confirm that you accept the Terms of Service” (TOS). The TOS are hyperlinked, and include a mandatory arbitration provision.

Francesco Plazza registered with Airbnb and created an account, but did not read the TOS. Later, in response to Plazza’s suit against Airbnb, alleging deceptive trade practices and other violations of New York state law, Airbnb filed a motion to compel arbitration. When Plazza created an account, he agreed to the TOS, whether or not he actually read them.

In the actual case on which this problem is based, the court granted Airbnb’s motion.

With respect to “the terms of the arbitration provision . . . Plazza’s actions in signing up . . . manifested assent.” The court further stayed the suit, pending the outcome of the arbitration.

10–9. Unilateral Contract. Penguin Random House, a publishing company, requires all managers to report allegations of sexual harassment to human resources. Kristie Alley, a manager at Penguin’s Crawfordsville, Indiana, shipping warehouse, was informed by employee Marlene Guzman that a coworker was sexually harassing her. Instead of reporting this allegation as required, Alley conducted her own investigation into Guzman’s situation. For this infraction, Alley was demoted to forklift operator. Alley sued Penguin for breach of contract, relying on a clause in the company’s Code of Conduct stating that “intimidation and retaliation” against employees who report “suspected or actual misconduct must not be

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tolerated.” Alley argued that this clause created a unilateral contract that Penguin breached by demoting her. Should the appeals court dismiss Alley’s claim? Why or why not? Note that Indiana follows the at will doctrine, which generally allows employers to demote employees as they see fit. [Alley v. Penguin Random House, 62 F.4th 358 (7th Cir. 2023)] (See An Overview of Contract Law.) Solution: Alley does not have a valid claim. In making her argument for retaliatory demotion, Alley relies on a provision in Penguin’s Code of Conduct informing employees that certain behavior will not be tolerated in the company’s corporate culture. This provision is not the same as “an offer (or promise) which in invites performance by another, and the performance constitutes both acceptance of that offer and consideration.” Penguin’s Code of Conduct is not an enforceable unilateral contract, and it did not transform Alley’s at will employment into a different sort of contractual relationship.

Note that, even though Indiana is an at will state, Penguin would not have been permitted to demote Alley for reporting sexual harassment. Doing so would have violated Title VII of the Civil Rights Act of 1964. However, as the U.S. Court of Appeals for the Ninth Circuit pointed out in its decision, Alley was not demoted for reporting sexual harassment. She was demoted for failing to report sexual harassment.

A QUESTION OF ETHICS 10–10. The IDDR Approach and Contract Requirements. Mark Carpenter, a certified financial planner, contracted to recruit investors for GetMoni.com, which owned a defunct gold mine in Arizona. Carpenter then contracted with clients to invest their funds, sending more than $2 million to GetMoni.com. Only about 20 percent of the money went to developing the mine.

The rest was used to run a Ponzi scheme. Carpenter collected another $1 million, but instead of sending it to GetMoni.com, he deposited it into his own account. A federal investigation unraveled the scheme. Carpenter was charged with two counts of fraud—one for his deal with GetMoni.com and one for his misrepresentations to clients after he stopped dealing with GetMoni.com. [United States v. Carpenter, 676 Fed.Appx. 397 (6th Cir. 2017)] (See An Overview of Contract Law.) 1.

Which elements do Carpenter’s contracts lack, preventing them from being enforced?

Can he argue successfully that he acted ethically? Discuss.

Solution: The elements that these contracts lack are legality and voluntary consent. Legality is one of the four requirements that must be met for a contract to be valid. A contract’s purpose must be to accomplish a goal that is legal. Among the defenses to a contract that might otherwise be enforceable is voluntary consent—the consent of both parties must be voluntary. If a contract is formed as a result of fraud, the contract may not be enforceable.

Mark Carpenter contracted to recruit investors for GetMoni.com, which owned a defunct gold mine in Arizona. Carpenter further contracted with clients to invest their funds in the mine, collecting more than $2 million that he sent to GetMoni.com. He collected another $1 million from the investors, but deposited the money into his own accounts rather than sending it to GetMoni.com. None of the contracts was for a legal purpose. Instead, their purpose was to defraud investors and spend the ill-gotten proceeds other than as represented. And there was no voluntary consent. Carpenter entered into all of the contracts with fraudulent intent, keeping investors’ funds for himself.

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When investigators uncovered the scheme, Carpenter was charged with two counts of fraud—one for his deal with GetMoni.com and one for his misrepresentations to clients after he stopped dealing with GetMoni.com. With regard to the latter situation, he might argue that he continued to accept client funds without passing them on to GetMoni.com in order to repay some of the investors, not to defraud them. This is the closest contention that he might have to an argument he acted ethically. But it would fail. Even if it were true, he acted with fraudulent intent. Under most standards of ethics, one’s ultimate motivation is irrelevant.

In the actual case on which this problem is based, the court convicted Carpenter of the charges. The U.S. Court of Appeals for the Sixth Circuit affirmed the convictions 2. Using the IDDR approach, discuss whether certified financial planners have an ethical obligation to contract in the best interests of their clients.

Solution: A certified financial planner (CFP) should have an ethical obligation to contract in the best interests of clients. As with other ethical duties, this may not be enforceable at law. But it should be part of a CFP’s job description.

The IDDR approach starts with an Inquiry to identify the issue, the stakeholders, and the ethical standards. The issue is phrased in the question: Does a CFP have an ethical obligation to contract in the best interests of clients? The stakeholders include the planner, the planner’s clients, other planners, and the larger investment and business communities, as well as the public generally. There may be ethical codes issued by trade and business associations to which a CFP belongs that stipulate the obligation. Religious and philosophical sources include maxims to act in the interest of others.

The following step of the IDDR approach is a Discussion to suggest actions that might resolve the issue. The strengths and weaknesses of the actions, and the consequences and the effects on the stakeholders, should also be considered.

The facts of the Carpenter case indicate that CFPs who would act in the best interests of their clients would not recommend an investment in fraudulent schemes. Further, the CFP should be forthcoming and truthful about the nature of any investment—particularly its risk and whether there exists any conflict of interest, such as a commission payable to the CFP for selling it. Such advice could erode a CFP’s income by dissuading clients from choosing investments that might be more profitable to the planner. Ultimately, however, this could increase the level of trust among all of the parties and attract more clients, leading to greater income.

The next step of the approach is to state a Decision and its reasons. It appears that if CFPs were to observe an ethical obligation to contract in the best interests of their clients, benefits could be realized by the planners, their clients, other planners, the investment and business communities, and the public. The planners could obtain more business. Other planners might similarly benefit from the enhanced ethics of their occupation. Their clients might invest more funds with more confidence. The investment and business communities

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would clearly be enriched by an increase in the number of investors and dollars. The public would benefit from an improved business climate and economic growth.

The final step of the approach is a Review of the success or failure of the action to resolve the issue, and satisfy the stakeholders. A CFP who is forthcoming and truthful about the nature of any investment with clients would likely fulfill an ethical obligation to act in their best interests. This could also satisfy the other stakeholders.

TIME-LIMITED TEAM ASSIGNMENT 10–11. Preexisting Duty. Melissa Faraj owns a property lot and wants to build a house according to a particular set of plans and specifications. She solicits bids from building contractors and receives three bids: one from Carlton for $160,000, one from Feldberg for $158,000, and one from Siegel for $153,000. She accepts Siegel’s bid. One month after beginning construction of the house, Siegel contacts Faraj and tells her that because of inflation and a recent price hike for materials, his costs have increased. He says he will not finish the house unless Faraj agrees to pay an extra $13,000. Faraj reluctantly agrees to pay the additional sum. (See Consideration.)

1. One team will evaluate whether a contractor can ever raise the price of completing construction because of inflation and the rising cost of materials.

Solution: The legal issue deals with the preexisting duty rule, which basically states that a promise to do what one already has a legal or contractual duty to do does not constitute consideration, and thus a promise based on a preexisting duty is unenforceable. One of the purposes of this general rule is to prevent commercial blackmail. There are four basic exceptions to this rule. If any of these applied, a contractor might successfully raise the price of completing construction based on inflation and the rising cost of materials. (a) If the duties of Siegel are modified, for example, by changes made by Faraj in the specifications, these changes can constitute consideration and bind Faraj to pay the additional $13,000. (b) Rescission and new contract theory could be applied, by which the old contract of $153,000 would mutually be canceled and a new contract for $166,000 would be made. Most courts would not apply this theory unless there was a clear intent to cancel the original contract. It appears here that the intent to cancel the $153,000 contract is lacking (there is merely an intent to modify), so this exception would not apply. (c) A few states have statutes that allow any modification to be enforceable if it is in writing. The facts stated give no evidence that Faraj’s agreement to the additional $13,000 is in writing, but, if it is, Faraj is bound in those states. (d) The unforeseen difficulty or hardship rule could be argued. This rule, however, applies only to unknown risks not ordinarily assumed in business transactions. Because inflation and price rises are risks ordinarily assumed in business, this exception cannot be used by Siegel.

2. A second team will assume that after the house is finished, Faraj refuses to pay the extra $13,000. This team will decide whether Faraj is legally required to pay this additional amount.

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Solution: In this problem, Siegel was required contractually to build a house according to a specific set of plans for $153,000, and Faraj’s later agreed to pay an additional $13,000 for exactly what Siegel was required to do for $153,000.

Under the preexisting duty rule, this agreement is without consideration and unenforceable. Thus, Faraj is not legally required to pay this additional amount.

3.

A third team will determine the types of extraordinary difficulties that could arise during construction that would justify a contractor’s charging more than the original bid.

Solution: The preexisting duty rule states that a promise to do what one already has a legal or contractual duty to do does not constitute consideration, and thus a promise based on a preexisting duty is unenforceable. One of the purposes of this general rule is to prevent commercial blackmail. One of the exceptions to this rule concerns an unforeseen difficulty or hardship. This exception applies only to unknown risks not ordinarily assumed in business transactions. Because inflation and price rises are risks ordinarily assumed in business, this exception cannot be used by Siegel in this problem. The types of extraordinary difficulties that could arise during construction to justify a contractor charging more than an original bid include unexpected infrastructure and subsurface problems.

4. A fourth team will consider what would have happened if Faraj and Siegel had rescinded the initial contract and entered into a new construction contract that included the extra $13,000. An issue here is whether a court would have found that there was no consideration because of a preexisting duty.

Solution: If Faraj and Siegel had rescinded the initial contract and entered into a new contract that included the extra $13,000, a court could be likely to find that there was no consideration for the new deal—i.e., that it could not be enforced for lack of consideration because of a preexisting duty.

A promise to do what one has a legal duty to do is not legally sufficient consideration for a new contract. But two parties can mutually agree to rescind their contract, at least the extent that it is executory. By rescinding the deal, they return to the positions they were in before they made it. They are then free to enter into a new contract. If rescission and the new agreement occur at the same time, as was the circumstance indicated in the facts of this question, it may not be clear that there was consideration for the new contract. Thus, if Faraj were to refuse to comply with the new terms, a court might determine that there was no consideration for it because of a preexisting duty, and the new contract would be adjudged invalid.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 11: Contract Performance, Breach, and Remedies

Solution and Answer Guide

Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 11: Contract Performance, Breach, and Remedies

TABLE OF CONTENTS Critical Thinking Questions in Features .............................................................................1 Cybersecurity and the Law—Critical Thinking ..................................................................... 1 Building Analytical Skills—Result and Reasoning .............................................................. 2 Critical Thinking Questions in Cases ................................................................................. 2 Case 11.1—Critical Thinking ..................................................................................................... 2 Case 11.2—Critical Thinking .................................................................................................... 3 Case 11.3—Critical Thinking .................................................................................................... 3 Chapter Review ................................................................................................................... 4 Practice and Review................................................................................................................. 4 Practice and Review: Debate This ......................................................................................... 5 Issue Spotters ........................................................................................................................... 5 Business Scenarios and Case Problems .............................................................................. 6 A Question of Ethics ............................................................................................................... 13 Time-Limited Team Assignment .......................................................................................... 15

CRITICAL THINKING QUESTIONS IN FEATURES CYBERSECURITY AND THE LAW—CRITICAL THINKING 1.

Suppose a court rules that Arby’s weak point-of-sale security system does constitute a breach of contract. What might be some of the compensatory damages due to customers whose credit card information was stolen by hackers?

Solution: The goal of compensatory damages is to “make whole” the party who has suffered a breach of contract. Therefore, in this case, the plaintiffs would attempt to be compensated for any economic hardship they suffered because of the breach. Such hardships could include (1) unauthorized charges to the hacked credit card that were not reimbursed by the credit card company; (2) losses arising from the theft of financial and personal information; (3) losses arising from the inability to use a suspended credit card account; (4) the loss of productivity and enjoyment caused by the time spent reporting and rectifying the data breach; and (5) the dollar amount of

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 11: Contract Performance, Breach, and Remedies

any Arby’s products that would not have been purchased using a credit card had the customer known about the unreasonably high possibility of a data breach.

BUILDING ANALYTICAL SKILLS—RESULT AND REASONING 1.

PPP’s loan included a prepayment penalty clause common to many loan agreements. If PPP decided to repay its loan early, an amount would be added to the balance due according to a specific formula. When the contract was formed, the potential loss to the lender on the loan’s prepayment was difficult to estimate because the time of the prepayment could not be reasonably foreseen. The formula provided a reasonable estimate of that loss. Given this reasoning, what are the answers to both questions in the Analysis section: yes or no? Why? Solution: The answers to both questions in the Analysis section are yes. Thus, the provision in PPP’s loan was for liquidated damages and enforceable.

CRITICAL THINKING QUESTIONS IN CASES CASE 11.1—CRITICAL THINKING 1.

Economic. Dr. Brown argued that she had no financial incentive to mislead Borman. Is this relevant to the case? Explain.

Solution: For the trial court, the fact that Dr. Brown had no financial incentive to mislead Borman was of the utmost importance. The defendants had presented evidence that “Dr. Brown would have made more money had she performed a brow lift instead of a blepharoplasty on” Borman. For the trial court, this showed that Dr. Brown had no incentive to intentionally induce Borman’s justifiable reliance with her erroneous statement about a brow lift being covered by insurance. Indeed, Dr. Brown’s advice went against her own economic interests. This reasoning was the basis of the trial court ruling of summary judgement.

The appeals court rejected the trial court’s line of thought. Even assuming that Dr. Brown lacked any financial incentive to give Borman faulty advice, “this fact does not demonstrate that Dr. Brown did not intend for Borman to rely on her alleged statement that a brow lift would not be covered by Borman’s insurance.” In other words, a lack of financial incentive may have been relevant in proving that Dr. Brown wasn’t deviously trying to trick Borman into having the wrong procedure. But it remains irrelevant in determining whether Dr. Brown negligently misrepresented Borman’s medical and financial options with regards to the patient’s health issues.

2. Legal Environment. Regardless of the letter of the law, do you think that Dr. Brown should only be liable for fraud if she knowingly intended to mislead Borman? Why or why not?

Solution: Describing the situation in the most favorable light to Dr. Brown, she was careless in advising Borman about the brow lift not being covered by Borman’s insurance. Should this carelessness be punished? If you think not, then you are providing a great deal of legal cover to medical professionals, as well as professionals in many other fields. You are also saying that Borman has no recourse even though she justifiably relied on the advice of a medical professional.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 11: Contract Performance, Breach, and Remedies

This case is a good example of why negligent misrepresentation is treated, in most jurisdictions, as fraudulent misrepresentation even if the misrepresentation was not made on purpose. If a defendant such as Dr. Brown can reasonably say, “I didn’t know I was making a mistake,” the law seems comfortable in responding, “Maybe you didn’t know, but you should have known.”

CASE 11.2—CRITICAL THINKING 1.

Legal Environment. The New York Court of Appeals found that Jacob & Youngs had substantially performed the contract. To what, if any, remedy was Kent entitled?

Solution: Kent is entitled to be compensated for the difference between the value of the “Reading manufacture” pipe specified in the contract and the pipe that was actually installed.

CASE 11.3—CRITICAL THINKING 1.

Legal Environment. The lease between RRE and Chalk Supply required a security deposit to cover any default on a month’s rent by the tenant. Chalk Supply did not pay the deposit. Should the court have ruled that this breach prevented Chalk Supply from prevailing on its claim against RRE? Discuss.

Solution: No, the court should not have ruled that a tenant’s failure to pay a security deposit required under a lease constituted a breach sufficient to prevent the tenant from prevailing on a claim against the landlord in the circumstances of the Chalk Supply case.

Of course, a party who breaches a contract cannot base an action for breach against the other party on a subsequent breach or refusal to perform. But to prevent an action for a later breach, the first breach must be substantial. As a consequence, the non-breaching party must not have obtained the benefit reasonably expected under the contract.

In the typical sequence of events under a lease, a tenant’s failure to pay a security deposit is likely to precede the landlord’s repudiation of a duty owed under the contract. In the Chalk Supply case, Chalk Supply failed to pay the security deposit before RRE balked at its duty to pay the initial cost for a fire suppression system.

But the failure to pay the deposit was not a substantial breach. The purpose of the deposit was to cover a default on the payment of a month’s rent by the tenant. Chalk Supply paid most of the rent in advance. With this advance, RRE clearly obtained the benefit it reasonably expected under the lease.

2. What If the Facts Were Different? Suppose that RRE had received an estimate of the cost of the fire suppression system before the parties executed the lease and had then insisted on conditioning its payment on a longer term. Would the result in this case have been different? Explain.

Solution: Yes, the result in the Chalk Supply case would have been different if the landlord had received an estimate of the cost of the system before the parties signed the lease and had at that time insisted on negotiating a longer term.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 11: Contract Performance, Breach, and Remedies

RRE’s duty to pay for the initial cost of the fire suppression system was a provision in its contract to lease a warehouse to Chalk Supply. The landlord received an estimate of the cost after the parties executed their agreement and then notified the tenant that it was repudiating its duty to pay that price without a longer lease term.

If, however, RRE had insisted on the condition of a longer term during the parties’ original negotiations over the provisions of the lease, the proposal would not have been a repudiation of its duty. The landlord’s refusal to otherwise pay for the fire suppression system would not have been a legitimate basis for the tenant to bring an action for material breach, and the result in the Chalk Supply case would have been different.

CHAPTER REVIEW PRACTICE AND REVIEW Val’s Foods signs a contract to buy 1,500 pounds of basil from Sun Farms, a small organic herb grower, as long as an independent organization inspects the crop and certifies that it contains no pesticide or herbicide residue. Val’s has a contract with several restaurant chains to supply pesto and intends to use Sun Farms’ basil in the pesto to fulfill these contracts.

While Sun Farms is preparing to harvest the basil, an unexpected hailstorm destroys half the crop. Sun Farms attempts to purchase additional basil from other farms, but it is late in the season, and the price is twice the normal market price. Sun Farms is too small to absorb this cost and immediately notifies Val’s that it will not fulfill the contract. Using the information presented in the chapter, answer the following questions: 1.

Suppose that the basil does not pass the chemical-residue inspection. Which concept discussed in the chapter might allow Val’s to refuse to perform the contract in this situation?

Solution: The appropriate concept would be discharge by failure of a condition.

Under the contract, Val’s does not have to perform (pay) unless the basil meets the stated condition (that it pass an independent inspection for chemical residue).

Because the basil did not pass inspection, Val’s is not obligated to perform. This condition of the contract would be precedent rather than subsequent or concurrent: the basil must pass the inspection before Val’s is obligated to buy.

2. Under which legal theory or theories might Sun Farms claim that its obligation under the contract has been discharged by operation of law? Discuss fully.

Solution: The theory of commercial impracticability can excuse parties from their performance obligations when the performance becomes much more difficult or expensive than originally contemplated at the time the contract was formed. For this doctrine to be invoked, the anticipated performance must be extremely difficult or costly. Sun Farms’ inability to purchase basil from other sources at twice the normal market price meets this requirement: doing so would bankrupt Sun Farms.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 11: Contract Performance, Breach, and Remedies

3. Suppose that Sun Farms contacts every basil grower in the country and buys the last remaining chemical-free basil anywhere. Nevertheless, Sun Farms is able to ship only 1,475 pounds to Val’s. Would this fulfill Sun Farms’ obligations to Val’s? Why or why not?

Solution: Substantial performance is good faith performance that does not vary greatly from the contract and confers the same benefits as promised in the contract. Sun Farms acted in good faith and shipped as much chemical-free basil as it could obtain, which was only 25 pounds less than the contracted amount. A court would likely find that it had substantially performed its obligation to Val’s.

4. Now suppose that Sun Farms sells its operations to Happy Valley Farms. As a part of the sale, all three parties agree that Happy Valley will provide the basil as stated under the original contract. What is this type of agreement called?

Solution: This is a novation—an agreement between the contracting parties to substitute a third party for one of the original parties. Under a novation, the new contract extinguishes the old contract and discharges the obligations of the prior party to the contract.

PRACTICE AND REVIEW: DEBATE THIS 1.

The doctrine of commercial impracticability should be abolished.

Solution: Contracts are not made to be broken, even if that is a popular saying.

Contracts are made to be respected. Those who seek to avoid their contractual obligations by using the excuse of commercial impracticability, if successful, reduce the certain of contractual obligations and end up hurting the commercial society in which we all live.

Sometimes, a contract cannot be fulfilled through no fault of one of the parties. That is why the principle of commercial impracticability was created. If one party, usual a seller of goods or services, cannot perform because in so doing, that party would lose large sums and maybe go out of business, the courts should step in an allow that party to avoid the contract.

ISSUE SPOTTERS 1.

Simmons finds a stone in his pasture that he believes to be quartz. Jenson, who also believes that the stone is quartz, contracts to purchase it for $10. Just before delivery, the stone is discovered to be a diamond worth $1,000. Is the contract enforceable? Why or why not? (See Voluntary Consent.)

Solution: Simmons and Jenson have made a bilateral mistake. No. The contract can be avoided because Simmons and Jenson have made a bilateral mistake. The issue is whether the mistake involves the identity of the stone (quartz versus diamond) or the value of the stone ($10 versus $1,000). Because both parties were mistaken as to the true character of the subject matter, either party can rescind the contract. Had either party known that the stone was some type of gem, then even though its exact nature was unknown (diamond), the mistake would be one of value, not fact, and the contract would not be rescindable.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 11: Contract Performance, Breach, and Remedies

2. C&D Services contracts with Ace Concessions, Inc., to service Ace’s vending machines.

Later, C&D wants Dean Vending Services to assume the duties under a new contract. Ace consents. What type of agreement is this? Are Ace’s obligations discharged? Why or why not? (See Performance and Discharge.)

Solution: Novation substitutes a new party for an original party, by agreement of all the parties. The requirements are a previous valid obligation, an agreement of all the parties to a new contract, extinguishment of the old obligation, and a new, valid contract. Novation revokes and discharges the previous obligation.

Here, C&D delegated its duties under its contract with Ace to Dean, with Ace’s consent. Ace’s obligation to pay C&D for the execution of those duties is discharged, but its obligation under the new contract to pay Dean for those services will not be discharged until Dean is paid. The novation did, however, discharge C&D’s obligation under the contract.

BUSINESS SCENARIOS AND CASE PROBLEMS 11–1. Voluntary Consent. Jerome is an elderly man who lives with his nephew, Philip. Jerome is totally dependent on Philip’s support. Philip tells Jerome that unless Jerome transfers a tract of land he owns to Philip for a price 30 percent below market value, Philip will no longer support and take care of him. Jerome enters into the contract. Discuss fully whether Jerome can set aside this contract. (See Voluntary Consent.)

Solution: Undue influence arises from a relationship in which one party can, through unfair persuasion, greatly influence or overcome the free will of another. Any contract entered into under excessive or undue influence lacks genuine assent and is therefore voidable. Here, the influence of Philip over his Uncle Jerome is greatly enhanced by Jerome’s reliance on Philip for his support. Although Jerome cannot claim duress, the domination of Philip over Jerome’s decisions results in undue influence. The contract is primarily for the benefit of Philip, and Philip used unfair persuasion in securing the contract from Jerome. Jerome can have the contract set aside.

11–2. Impossibility of Performance. In the following situations, certain events take place after the contracts are formed. Discuss which of these contracts are discharged because the events render the contracts impossible to perform. (See Performance and Discharge.)

Solution: Normally, events that take place after the formation of the contract and that make performance of the contract more difficult or burdensome do not render the contract impossible to perform and do not discharge a party’s liability for failure to fully perform. If such events make performance so extremely difficult or burdensome that it is, in effect, impossible, impractical, or unreasonably expensive to perform, however, the contract is discharged. The basic problem is determining when this degree of difficulty or burdensomeness is reached.

1.

Jimenez, a famous singer, contracts to perform in your nightclub. He dies prior to performance.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 11: Contract Performance, Breach, and Remedies

Solution: Jimenez’s contract is personal, requiring his services for full performance of the contract. His death makes performance totally impossible, thereby discharging his estate from liability.

2. Raglione contracts to sell you her land. Just before title is to be transferred, she dies.

Solution: The passage of title to this land can be by Raglione or any person so authorized. Therefore, the death of Raglione does not render the contract impossible to perform, because a representative of her estate can perform it in her place. The contract is not discharged.

3. Oppenheim contracts to sell you one thousand bushels of apples from her orchard in the state of Washington. Because of a severe frost, she is unable to deliver the apples.

Solution: The contract called for apples to come from a specific orchard.

Through no fault of Oppenheim’s, the specific subject matter of the contract is destroyed by the frost. Therefore, Oppenheim cannot deliver the apples called for in the contract, rendering the contract impossible to perform.

4. Maxwell contracts to lease a service station for ten years. His principal income is from the sale of gasoline. Because of an oil embargo by foreign oil-producing nations, gasoline is rationed, cutting sharply into Maxwell’s gasoline sales. He cannot make his lease payments.

Solution: Major discussion should center on the doctrine of commercial impracticability or frustration of commercial purpose. For the doctrine to be applied, most courts would need proof that either the rationing frustrated the very purpose both parties had in mind in making the contract, or that there was an implied condition that the premises were to be used for the sole purpose of selling products no longer available, or that the events rendered the anticipated performance extremely difficult or costly. In cases involving rationing during World War II, some courts held that the rationing merely created a hardship, not an absolute prohibition, and the lease contracts were enforced even though performance was more burdensome.

11–3. Liquidated Damages. Cuesport Properties, LLC, sold a condominium in Anne Arundel County, Maryland, to Critical Developments, LLC. As part of the sale, Cuesport agreed to build a wall between Critical Developments’ unit and an adjacent unit within thirty days of closing.

If Cuesport failed to do so, it was to pay $126 per day until completion. This was an estimate of the amount of rent that Critical Developments would lose until the wall was finished and the unit could be rented. Actual damages were otherwise difficult to estimate at the time of the contract. The wall was built on time, but without a county permit, and it did not comply with the county building code. Critical Developments did not modify the wall to comply with the code until 260 days after the date of the contract deadline for completion of the wall.

Does Cuesport have to pay Critical Developments $126 for each of the 260 days? Explain.

[Cuesport Properties, LLC v. Critical Developments, LLC, 209 Md.App. 607, 61 A.3d 91 (2013)] (See Damages.)

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 11: Contract Performance, Breach, and Remedies

Solution: Yes. Cuesport has to pay Critical Developments $126 for each of the 260 days that elapsed between the contract deadline and the date of the completion of the wall. A liquidated damages provision in a contract specifies a certain dollar amount to be paid in the event of a future default or breach of contract. A penalty provision also specifies a certain amount to be paid in the event of a default or breach of contract but is designed to penalize the breaching party. Liquidated damages provisions are usually enforceable. A provision that calls for a penalty, however, will not be enforced—recovery will be limited to actual damages. To determine if a provision is for liquidated damages or a penalty, a court asks when the contract was agreed to (1) was it apparent that damages would be difficult to estimate in the event of a breach and (2) was the amount set as damages a reasonable estimate and not excessive? If the answers to both questions are yes, the provision normally will be enforced. If either answer is no, the provision usually will not be enforced.

In this problem, the contract that required the construction of the wall provided a $126-per-day payment for Cuesport’s failure to complete the wall within thirty days.

This was a valid liquidated damages clause, rather than an invalid penalty. It was an estimate of the amount of rent that Critical Developments would lose until the wall was finished and the unit could be rented. Actual damages were otherwise difficult to estimate at the time of the contract. In other words, in these circumstances, the answers to both of the questions above are yes.

In the actual case on which this problem is based, Critical Developments filed a suit in a Maryland state court against Cuesport for breach. The court awarded the liquidated damages stipulated in the parties’ contract. On Cuesport’s appeal, a state intermediate appellate court affirmed.

11–4. Limitation-of-Liability Clauses. Mia Eriksson was a seventeen-year-old competitor in horseback-riding events. Her riding coach was Kristi Nunnink. Eriksson signed an agreement that released Nunnink from all liability except for damages caused by Nunnink’s “direct, willful and wanton negligence.” During an event at Galway Downs in Temecula, California, Eriksson’s horse struck a hurdle. She fell from the horse and the horse fell on her, causing her death. Her parents, Karan and Stan Eriksson, filed a suit in a California state court against Nunnink for wrongful death. Is the limitation-of-liability agreement that Eriksson signed likely to be enforced in her parents’ case? If so, how will it affect their claim? Explain. [Eriksson v.

Nunnink, 233 Cal.App.4th 708, 183 Cal.Rptr.3d 234 (4 Dist. 2015)] (See Damages.)

Solution: Yes. The limitation-of-liability agreement that Eriksson signed is likely to be enforced in her parents’ suit against Nunnink, their daughter’s riding coach. And this would likely result in a judgment against them unless they can establish Nunnink's “direct, willful and wanton negligence.” A limitation-of-liability clause affects the availability of certain remedies. Under basic contract principles, to be enforceable, these clauses must be clear and unambiguous.

In this problem, Eriksson, a young equestrian event competitor, signed an agreement that released Nunnink from all liability except for damages caused by Nunnink's “direct, willful and wanton negligence.” During an event, Eriksson’s horse struck a hurdle, causing her to fall from the horse. The horse fell on her, resulting in her death.

Her parents filed a suit against Nunnink for wrongful death. The limitation-of-liability clause expressly released Nunnink from liability for all of Eriksson’s equestrian

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 11: Contract Performance, Breach, and Remedies

activities related to Nunnink's services except for those caused by Nunnink's “direct, willful and wanton negligence.” The clause is straightforward, clear, and unambiguous, and therefore enforceable. Nunnink would be liable only if Eriksson’s death was caused by Nunnink's gross negligence. The facts do not state that Eriksson’s parents proved Nunnink was grossly negligent.

In the actual case on which this problem is based, the court issued a judgment in Nunnink’s favor. A state intermediate appellate court affirmed the judgment, on the basis expressed here.

11–5. Business Case Problem with Sample Answer—Conditions. H&J Ditching & Excavating, Inc., was hired by JRSF, LLC, to perform excavating and grading work on Terra Firma, a residential construction project in West Knox County, Tennessee. Cornerstone Community Bank financed the project with a loan to JRSF. As the work progressed, H&J received payments totaling 90 percent of the price on its contract. JRSF then defaulted on the loan from Cornerstone, and Cornerstone foreclosed and took possession of the property. H&J filed a suit in a Tennessee state court against the bank to recover the final payment on its contract. The bank responded that H&J had not received its payment because it had failed to obtain an engineer’s certificate of final completion, a condition under its contract with JRSF. H&J responded that it had completed all the work it had contracted to do. What type of contract condition does obtaining the engineer’s certificate represent? Is H&J entitled to the final payment? Discuss. [H&J Ditching & Excavating, Inc. v. Cornerstone Community Bank, 2016 WL 675554 (Tenn.Ct.App. 2016)] (See Performance and Discharge.)

Solution: The requirement that the contractor obtain an engineer’s certificate of final completion before the final payment will be made under the contract is a condition precedent. In most contracts, promises of performance are not expressly conditioned—they are absolute and must be performed to avoid a breach of the contract. In some situations, however, performance is contingent on the occurrence of a certain event. If the condition is not satisfied, the obligations of the parties are discharged. A condition that must be fulfilled before a party’s performance can be required is a condition precedent.

In this problem, H&J was hired to excavate and grade land for a residential construction project. Cornerstone Community Bank financed the project. As the work progressed, H&J received payments totaling 90 percent of the price on its contract.

But the last payment was not forthcoming when H&J believed it was due. The contractor filed a suit in a Tennessee state court against the bank to recover the final payment. The bank responded that H&J did not receive the payment because it failed to obtain an engineer’s certificate of final completion, a condition under its contract.

H&J argued that it completed all the work it contracted to do.

H&J is not entitled to the final payment on the contract because it did not comply with the condition to obtain the engineer’s certificate. This condition preceded the obligation under the contract to make the final payment. Even assuming that H&J “completed all the work it contracted to do,” the final payment is not subject to disbursal without the certificate.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 11: Contract Performance, Breach, and Remedies

In the actual case on which this problem is based, the court issued a judgment in the bank’s favor. A state intermediate appellate court affirmed. “No certificate of substantial completion was ever issued, a condition precedent to final payment.”

11–6. Damages. Robert Morris was a licensed insurance agent working for his father’s independent insurance agency when he contacted Farmers Insurance Exchange in Alabama about becoming a Farmers agent. According to Farmers’ company policy, Morris was an unsuitable candidate due to his relationship with his father’s agency. But no Farmers representative told Morris of this policy, and none of the documents that he signed expressed it. Farmers trained Morris and appointed him its agent. About three years later, however, Farmers terminated the appointment for “a conflict of interest because his father was in the insurance business.” Morris filed a suit in an Alabama state court against Farmers, claiming that he had been fraudulently induced to leave his father’s agency to work for Farmers. If Morris was successful, what type of damages was he most likely awarded? What was the measure of damages? Discuss. [Farmers Insurance Exchange v. Morris, 228 So.3d 971 (Ala. 2016)] (See Damages.)

Solution: If Morris succeeds in the action against his former employer for fraudulently inducement, he is most likely to be awarded compensatory damages. Plaintiffs are awarded compensatory damages to compensate for actual losses. The goal is to make the plaintiffs whole and place them in the same positions that they would have been in if the damage had not occurred.

In this problem, Morris was working for his father’s insurance agency when he contacted Farmers Insurance Exchange about becoming its agent. Farmers trained Morris and gave him an appointment as an agent. But three years later, Farmers terminated the appointment for “a conflict of interest because his father was in the insurance business.” Farmers had never informed Morris that according to its company policy he was unsuitable to serve as its agent due to his relationship with his father’s agency. These circumstances constitute a case of fraud—the company’s silence on its policy was an intentional misrepresentation of a material fact on which Morris reasonably relied to his detriment.

Morris’s injury consisted of the “opportunities” that he had lost by becoming an agent for Farmers—selling insurance policies out of his father’s agency—and this would be the measure of the damages to which he is entitled. He might prove the amount of the lost commissions on those sales by showing what he sold during that same period for Farmers.

In the actual case on which this problem is based, a jury awarded Morris $600,000 in compensatory damages, and the court entered a judgment on the verdict. The Alabama Supreme Court affirmed. Morris’s measure of damages was based on “the opportunities he had lost by becoming a Farmers agent.”

11–7. Commercial Impracticability. Lisa Goldstein reserved space for a wedding in a building owned by Orensanz Events, LLC, in New York City. The rental agreement provided that on cancellation of the event “for any reason beyond” Orensanz’s control, the client’s sole remedy was another date for the event or a refund. Shortly before the wedding, the New York City Department of Buildings found Orensanz’s building to be structurally unstable and ordered it vacated. Orensanz closed the building and told Goldstein to find another venue. Goldstein

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 11: Contract Performance, Breach, and Remedies

filed a lawsuit in a New York state court against Orensanz for breach of contract, arguing that the city’s order had specified a cause within the defendant’s control. Was the commercial building’s structural issue a foreseeable difficulty, thus making Goldstein’s claim valid?

Explain your answer. [Goldstein v. Orensanz Events, LLC, 146 A.D.3d 492, 44 N.Y.S.3d 437 (2017)] (See Performance and Discharge.)

Solution: Yes. The owner of a commercial building is under an ethical duty to keep it structurally sound, at least to the extent the owner is legally obligated to its occupants. That legal obligation, which may arise from a contract, is subject to a standard of foreseeability and hence something within the owner’s control.

In this problem, Lisa Goldstein rented space for a wedding in a building owned by Orensanz Events. The rental agreement provided that if the event was canceled “for any reason beyond Owner’s control,” Goldstein’s sole remedy was another date or a refund. Just before the wedding, the city found the building to be structurally unstable and ordered it vacated. Orensanz closed it and told Goldstein to find another venue.

She filed a suit against Orensanz, arguing that the city’s order had been for a cause within the defendant’s control.

A party may sometimes be excused from performing a contract under the doctrine of commercial impracticability. Performance is commercially impracticable when it is significantly more difficult than anticipated. The difficulty must have been unforeseeable at the time the contract was made or due to forces the party could not control. Here, if the lack of structural integrity of Orensanz’s building had been unforeseeable, it would have been beyond the owner’s control. This would satisfy the legal standard of excuse for contract performance.

In the actual case on which this problem is based, the court issued a summary judgment dismissing Goldstein’s complaint. A state intermediate appellate court reversed the dismissal. The appellate court cited “issues of fact whether the failure was foreseeable or within defendants’ control.”

11–8. Reformation. Dr. John Holm signed a two-year employment agreement with Gateway Anesthesia Associates. During negotiations for the agreement, Gateway’s president, Dr. Jon Nottingham, told Holm that on completion of the contract he would become a partner in the firm, and during the term, he would be paid “like a partner.” The written agreement did not reflect this promise, however. The actual contract read that Holm would be paid based on “net collections” for his services, and it did not state that he would become a partner at the end of the term. Later, Gateway told Holm that it did not intend to make him a partner. Holm filed a complaint in an Arizona state court against Gateway, alleging breach of contract.

Before the trial, Holm filed a motion to reform the contract to express what he had been told.

Nottingham did not dispute Holm’s account. What is the basis for the reformation of a contract? Is it appropriate in this case? Why or why not? [Holm v. Gateway Anesthesia Associates, 2018 WL 770503 (Ariz.App. 2018)] (See Equitable Remedies.)

Solution: Yes. Reformation is appropriate in the circumstances of this case.

Reformation is an equitable remedy used when the parties to an agreement have imperfectly expressed it in writing. A court applies this remedy to rewrite the contract to reflect the parties’ true intentions. Courts often order reformation when a mutual mistake exists.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 11: Contract Performance, Breach, and Remedies

In this problem, during negotiations for an employment agreement, the employer’s president Nottingham told the potential employee Holm that at the end of the contract’s term Holm would become a partner in the firm. Nottingham also told Holm that during the term he would be paid “like a partner.” The written expression did not reflect this exchange—it explained that Holm’s compensation would be based on “net collections” for his services and did not state that he would become a partner. When the firm refused to offer Holm a partnership, he filed a suit for breach and sought to reform the contract.

Nottingham’s telling Holm that during the term of the deal Holm would be paid “like a partner” supports a conclusion that he would be compensated as he was told. And Nottingham did not dispute that this is what he told Holm. Thus, there does not appear to be a genuine issue of material fact regarding a mistake in the written expression of the parties’ agreement. The purpose of reformation is to correct a mistake that occurs when, as here, the parties’ intent does not accord with its written expression.

In the actual case on which this problem is based, the court granted Holm’s motion for reformation. A state intermediate appellate court affirmed. Holm did “not seek to alter the agreement in the sense of changing what the parties agreed to, but rather to bring it in conformity with what the parties actually agreed.”

11–9. Discharge by Novation. Atlantic Pacific Scaffolding Equipment (AT-PAC) and Gulf South Services, Inc. (GSSI), engaged in business dealings for over a decade. GSSI eventually stopped making payments on monies owed. AT-PAC sent GSSI a statement reflecting a balance owed totaling over $1.5 million. The two businesses negotiated an agreement in which GSSI would pay about $1.5 million to purchase over 100,000 pieces of leased equipment. AT-PAC filed a suit because GSSI did not follow through with that agreement. GSSI then agreed to pay AT-PAC $35,000 per month in three payments, totaling $105,000. The trial court concluded that the debt GSSI owed for rentals was thereby extinguished by a novation. On appeal, AT-PAC claimed that the trial court erred in finding a novation. Did the supposed novation satisfy all necessary elements? Should the appeals court accept the trial court’s decision?

[Atlantic Pacific Equipment, Inc. v. Gulf South Services, Inc., 342 So.3d 898 (Ct.App. LA, 1st Cir. 2022)] (See Performance and Discharge.)

Solution: There are four requirements for finding a novation: (1) a previously valid obligation; (2) an agreement by all parties to a new contract; (3) the extinguishing of the old obligation (discharge of the prior party); and (4) a new contract that is valid.

The appeals court ruled that no novation occurred as a result of the sale of leased equipment owned by AT-PAC. As it turns out, the sale was subsequently dissolved for non-payment of the purchase price. AT-PAC argued on appeal that there could never have been a novation because the purchase price was never paid in full.

The appeals court further pointed out that a novation is the extinguishment of an existing obligation by the substitution of a new one. “For novation to occur, the party’s intension to extinguish the original obligation must be clear and unequivocal.” A novation may not be presumed, and the burden of proving a novation falls on the party who seeks its protection. The appeals court pointed out that it was not clear whether the parties intended for a novation to occur even if GSSI did not actually pay the

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purchase price. The appeals court reversed a portion of the trial court’s judgment.

GSSI still owed AT-PAC for unpaid equipment rentals.

A QUESTION OF ETHICS 11–10. The IDDR Approach and Fraudulent Misrepresentation. Data Consulting Group contracted with Weston Medsurg Center, a health-care facility in Charlotte, North Carolina, to install, maintain, and manage Weston’s computers and software. At about the same time, Ginger Blackwood began to work for Weston as a medical billing and coding specialist. Soon, she was submitting false time reports and converting Weston documents and data to her own purposes. On her request, Data Consulting’s manager Nasko Dinev removed evidence of her actions from her work computer. [Weston Medsurg Center v. Blackwood, 795 S.E.2d 829 (2017)] (See Voluntary Consent.)

1.

What should Weston do when it learns of these activities? With respect to this situation, identify and consider the firm’s primary ethical dilemma using the IDDR approach.

Solution: When Weston discovers the conduct identified in the facts, it might choose to fire Blackwood, stop paying Data Consulting, and file a suit against Blackwood, Data Consulting, and Dinev. Weston’s primary ethical dilemma with respect to this situation is in deciding which legal steps to take.

When an innocent party consents to a contract with fraudulent terms, the contract can be avoided because the innocent party did not voluntarily consent to the terms. Among the elements required to prove fraud, one party must intend to deceive the other by means of a misrepresentation of a material fact.

The innocent party must justifiably rely on the misrepresentation and, to recover damages, suffer harm.

In this problem, Weston contracted with Data Consulting to install, maintain, and manage Weston’s computers and software. At the same time, Blackwood, a Weston medical billing and coding specialist, submitted false time reports and converted her employer’s data for her own purposes. Dinev, a Data Consulting manager, helped her remove evidence of her transgressions from her work computer.

Weston’s discovery of these activities could prompt the company to terminate Blackwood, stop paying Data Consulting, and bring an action against Blackwood, Data Consulting, and Dinev for breach of contract and fraud. The first step of the IDDR approach requires a statement of the ethical issue and an identification of the stakeholders and the relevant ethical standards. From an ethical perspective, Weston’s chief dilemma is to decide which of the actions to take. Stakeholders include Weston’s owners and employees, including Blackwood, and its suppliers and others with whom it contracts, such as Data Consulting. But perhaps the most important stakeholders are Weston’s patients, whose privacy and confidentiality might be at risk depending on what data has been converted or lost. Ethical standards to which Weston might adhere include its statements of policy to its owners, employees, and patients.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 11: Contract Performance, Breach, and Remedies

The second step of the IDDR approach is a Discussion of actions that might resolve the issue. If Weston were to proceed with all of the possible actions stated above, from a legal perspective, the company is likely to prevail against any challenge to a decision to discharge Blackwood. She clearly breached her employment contract. Weston might not prevail against a claim by Data Consulting to recover any amount owed on its contract, however, absent proof that Data Consulting colluded with Blackwood and Dinev to commit fraud.

Weston could succeed in a fraud claim against Blackwood and Dinev if the firm could prove an injury.

Stakeholders include Weston’s owners and employees, including Blackwood, and its suppliers and others with whom it contracts, such as Data Consulting.

But perhaps the most important stakeholders are Weston’s patients, whose privacy and confidentiality might be at risk depending on what data has been converted or lost. The disadvantages of the actions arise from their expense, such as the cost of litigation and any payment that might yet have to be made to Data Consulting. If Weston were not to take any of these actions, however, its loss of credibility among its owners, employees, and patients, with a consequent loss of investment, productive work, and business revenue, could more than exceed this expense.

The third step of the IDDR approach is to state a Decision and its reasons.

Here, Weston would seem to have only one clear decision—to discharge Blackwood and initiate legal action against her and the others. The reasons are set out in the paragraphs above. Withholding payment from Data Consulting might also be advisable under the circumstances—it could heighten the contractor’s awareness of its manager’s part in Blackwood’s fraud and motivate that company to consider its own ethical practices. But Weston should be prepared to eventually pay what may be owed under its contract with Data Consulting—there is no indication that the contractor is liable for fraud or a contract breach.

The last step of the approach is a Review of the success or failure of the proposed actions to resolve the issue, and satisfy the stakeholders. If Weston were to take the suggested legal actions, it could embolden its owners, employees, and patients to continue their investments, work efforts, and trust in the medical center. This would clearly be a success.

2. Suppose that despite Dinev’s efforts, Weston is later able to recover the data that were removed from Blackwood’s work computer. How might this affect Weston’s choices? Discuss.

Solution: If Weston were able to recover all of the deleted data—through the efforts of other Data Consulting employees, for example—it might thereby be able to recoup overpayments to Blackwood based on her false time reports. If she were to make restitution, this might mitigate what Weston could otherwise recover in a suit. Similarly, Data Consulting’s undoing what its manager did might limit what Weston might otherwise recover against the contractor.

In the actual case on which this problem is based, Weston learned of Blackwood and Dinev’s activities and stopped paying Data Consulting. Data

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Consulting filed a claim in a North Carolina state court against Weston, and was awarded $5,441.60 for services rendered and unpaid. Weston filed claims of fraud against Blackwood and Dinev. At the same time, the firm was able to recover the data that had been removed from its computer. A jury ruled in the defendants’ favor but denied them attorneys’ fees. A state intermediate appellate court affirmed these results.

TIME-LIMITED TEAM ASSIGNMENT 11–11. Fraudulent Misrepresentation. Radiah Givens was involved romantically with Joseph Rosenzweig. She moved into an apartment on which he made the down payment. She signed the mortgage, but he made the payments and paid household expenses. They later married.

Givens had the marriage annulled, however, when she learned that Rosenzweig was already married to someone else. Rosenzweig then filed a lawsuit against Givens to collect on the mortgage. (See Voluntary Consent.)

1.

The first team should decide whether Rosenzweig committed fraud.

Solution: Yes. Rosenzweig could have committed fraud against Givens. Fraud requires (a) a misrepresentation of a material fact, (b) an intent to deceive, (c) an innocent party’s justifiable reliance on the misrepresentation, and (d) the innocent party’s injury.

Rosenzweig misrepresented to Givens, with whom he was romantically involved, that he was not married. Of course, he knew that the truth was otherwise. This meets the first two requirements for a finding of fraud.

Agreements between spouses involve a fiduciary relationship that requires the utmost good faith. A similar fiduciary relationship may have existed between Givens and Rosenzweig. Givens justifiably relied on this relationship when she believed Rosenzweig’s misrepresentation, signed the mortgage, and married him. As for injury, besides the mental and emotional anguish that these circumstances undoubtedly inflicted on Givens, she may have suffered other losses—giving up educational or employment opportunities, for example.

2. The second team should evaluate whether Rosenzweig’s conduct was deceitful, and if so, whether his deceitfulness should affect the decision in this case.

Solution: Yes. Rosenzweig’s conduct was deceitful. Rosenzweig certainly appears to have suffered from some deficiencies of character and he likely would be subject to sanctions by the state attorneys’ professional responsibility organization. But a desire to see a scoundrel punished should not motivate the application of the legal principles in this, or any other, case.

Here, Rosenzweig’s deceit did not concern the mortgage contract, and thus it should not affect the outcome. But Rosenzweig is not the mortgagor and does not appear to be the mortgagee, so unless there is a different contract between Givens and Rosenzweig, there is no basis for a decision in his favor.

3. The third team should consider how fraud is related to ethics. Can a contracting party act ethically and still commit fraud? If so, how?

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 11: Contract Performance, Breach, and Remedies

Solution: It might be possible to act ethically and still commit fraud. For example, if fraud were committed in the service of an ethical duty or directed towards an ethical end—such as perpetrating fraud to subvert a greater evil by deceiving a party into foregoing a wrong—it could be interpreted as an ethical act.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 12: Sales and Lease Law

Solution and Answer Guide

Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 12: Sales and Lease Law

TABLE OF CONTENTS Critical Thinking Questions in Features .............................................................................1 Adapting the Law to the Online Environment—Critical Thinking..................................... 1 Building Analytical Skills—Result and Reasoning .............................................................. 2 Ethical Issue—Value Judgment ............................................................................................. 2 Critical Thinking Questions in Cases ................................................................................. 2 Case 12.1—Critical Thinking .................................................................................................... 2 Case 12.2—Critical Thinking.................................................................................................... 3 Case 12.3—Critical Thinking.................................................................................................... 3 Chapter Review ................................................................................................................... 4 Practice and Review................................................................................................................. 4 Practice and Review: Debate This ......................................................................................... 5 Issue Spotters ........................................................................................................................... 5 Business Scenarios and Case Problems .............................................................................. 6 A Question of Ethics ............................................................................................................... 10 Time-Limited Team Assignment .......................................................................................... 12

CRITICAL THINKING QUESTIONS IN FEATURES ADAPTING THE LAW TO THE ONLINE ENVIRONMENT—CRITICAL THINKING 1.

Does the Supreme Court’s decision in South Dakota v. Wayfair, Inc., make it more or less likely that Congress will enact legislation that requires out-of-state corporations to collect and pay taxes to states for online sales?

Solution: Congress is probably more likely to pass legislation aimed at taxing online sales in the aftermath of the Supreme Court’s holding to clarify the states’ power to impose taxes on internet sales. Although legislation had been proposed before this case was decided, it has been difficult for Congress to come to a consensus because there are so many taxing jurisdictions involved (some estimate nearly twelve thousand, including states, cities, and counties).

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 12: Sales and Lease Law

BUILDING ANALYTICAL SKILLS—RESULT AND REASONING 1.

If the P.S. is interpreted as materially altering the contract, then it is not part of the contract, and a court should dismiss BSI’s lawsuit. Do you agree with this interpretation of the facts of the case? Explain your answer.

Solution: When Brown (BSI’s owner and the offeree) signed Jayco’s (the offeror’s) letter, it indicated BSI’s agreement to the terms. Thus, BSI made a definite expression of acceptance. The practice of the parties (for six years rejected items were not returned) supports the conclusion that their contract did not contemplate the return of those items. Therefore, the P.S. could be interpreted as materially altering the contract and not part of the contract. Following this reasoning, a court should dismiss BSI’s lawsuit.

ETHICAL ISSUE—VALUE JUDGMENT 1.

The used-car market in the United States is highly competitive. How might this fact prevent dealerships from overcharging consumers for extended warranties on preowned vehicles?

Solution: When a dealership sells a used car with a twelve-month warranty, the dealership—often in partnership with the manufacturer of the car—includes the cost of the warranty in the resale price of the car. And because of the intense competition in the sale of used cars, charging an inflated price for the twelve-month warranty would put the dealership at a disadvantage in the used-car market.

CRITICAL THINKING QUESTIONS IN CASES CASE 12.1—CRITICAL THINKING 1.

Legal. In your opinion, were the agreements between AT&T and the petitioners mixed contracts involving both goods and services? Or were the agreements for services only?

Explain.

Solution: The appeals court focused on the fact that neither the original contract between AT&T and Tweedie and Waugh nor the subsequent monthly billing statements mentioned cell phone purchases. Thus, the appeals court found that these were contracts for services only, not mixed contracts involving goods and services.

The appeals court did not consider, however, that original agreements between consumers and telecommunications companies such as AT&T often do involve both the sale of the cellular phone devices and cellular services. For example, if a new iPhone costs $800, instead of requiring $800 at the time of the sale, the telecommunications company will allow the consumer to remit $10 a month until the device is paid off or, as often happens, the consumer purchases another, more up-to-date, cell phone. So, the initial contract and the early monthly billing statements most likely reflect these mixed goods and services charges.

In fact, in arguing their cases before the circuit court, both the petitioners and USAM accepted that AT&T had entered into a hybrid transaction for goods and services with

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 12: Sales and Lease Law

Tweedie and Waugh and other members of the class. The petitioners argued that, under the predominant-factor test, the contract was primarily for goods. USAM argued that, under the predominant-factor test, the contract was primarily for services. The circuit court sided with USAM and granted summary judgment in favor of USAM. Thus, the appeals court affirmed the lower court’s decision, though it did not agree with the lower court’s reasoning.

2. E-Commerce. Waugh electronically signed her initial contract with AT&T and Tweedie “could not remember” entering into any agreement with the telecommunications company. Are either of these factors relevant to the outcome of this case? Why or why not?

Solution: Neither of these factors were likely to have any impact on the outcome of the Tweedie case. In most instances, e-signatures are just as valid as “wet ink” signatures when it comes to contract formation. Even if Waugh could prove that someone else was responsible for her e-signature, she behaved as if it were valid. In any event, she made no such claim.

Tweedie did claim that she could not recall the specifics of her agreement with AT&T, raising the possibility that no valid e-contract existed. The appeals court dismissed this line of reasoning, relying on testimony from an AT&T executive to the effect that “an AT&T cellular phone account can only [be] opened upon the entry of a signed written contract.” Indeed, if a party’s “lack of memory” of entering into an online agreement were sufficient to challenge that agreement, the courts would be overwhelmed with lawsuits over e-contracts.

CASE 12.2—CRITICAL THINKING 1.

Social. Why would the seller’s knowledge of the buyers’ limited resources support a finding of unconscionability?

Solution: It may be that the court viewed the sellers’ knowledge of the buyers’ limited resources as evidence that the defendant’s approach to the transaction was knowingly exploitative and overreaching.

CASE 12.3—CRITICAL THINKING 1.

What If the Facts Were Different? Suppose that Fitl and Strek had included in their deal a written clause requiring Fitl to give notice of any defect in the card within “7 days to 1 month” of its receipt. Would the result have been different? Why or why not?

Solution: Possibly. The parties to a sale of lease contract can insert such a provision, which can be enforceable. Of course, in that situation, Fitl might have acted quicker, and the defect might then have been discovered sooner.

2. Legal Environment. What might a court award to a buyer who prevails in a dispute such as the one in this case?

Solution: Fitl paid Strek $17,750 for a 1952 Mickey Mantle Topps baseball card. In the suit against Strek, Fitl asked for damages in the amount of “the current fair market value of an unaltered version of the same card.” The trial court awarded Fitl the

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contract price of the card—$17,750—and the costs to maintain the suit. The state supreme court affirmed the amount of this award on appeal.

CHAPTER REVIEW PRACTICE AND REVIEW Guy Holcomb owns and operates Oasis Goodtime Emporium, an adult entertainment establishment. Holcomb wanted to create an adult internet system for Oasis that would offer customers adult-theme videos and “live” chat room programs using performers at the club.

On May 10, Holcomb signed a work order authorizing Thomas Consulting Group (TCG) “to deliver a working prototype of a customer chat system, demonstrating the integration of live video and chatting in a web browser.” In exchange for creating the prototype, Holcomb agreed to pay TCG $64,697. On May 20, Holcomb signed an additional work order in the amount of $12,943 for TCG to install a customized firewall system. The work orders stated that Holcomb would make monthly installment payments to TCG, and both parties expected the work would be finished by September.

Due to unforeseen problems largely attributable to system configuration and software incompatibility, the project required more time than anticipated. By the end of the summer, the website was still not ready, and Holcomb had fallen behind in his payments to TCG. TCG threatened to cease work and file a suit for breach of contract unless the bill was paid.

Rather than make further payments, Holcomb wanted to abandon the website project. Using the information presented in the chapter, answer the following questions: 1.

Would a court be likely to decide that the transaction between Holcomb and TCG was covered by the Uniform Commercial Code (UCC)? Why or why not?

Solution: The issue in this question is whether the predominant feature of the contract in the problem is goods or services. Most goods require some related service—their design, assembly, installation, or manufacture—but the effort and expertise to make a good does not mean that the buyer is buying the service instead of the good. The focus is on the buyer’s objective. Does the buyer want a good or a service? To fall under the UCC, the service must be incidental to the buyer’s purpose. In this problem, a court would most likely conclude that the service TCG is providing (customizing software) is incidental to Holcomb’s goal (acquiring an operational website).

2. Would a court be likely to consider Holcomb a merchant under the UCC? Why or why not?

Solution: Under the UCC, a merchant is a person who deals in goods of the kind involved in the sales contract. A merchant for one type of goods is not necessarily a merchant for another type. Here, the goods in the contract between Holcomb and TCG consist of a website for which Holcomb might not be considered a merchant because his business is adult entertainment (arguably a service), not technology.

3. Did the parties have a valid contract under the UCC? Were any terms left open in the contract? If so, which terms? How would a court deal with open terms?

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Solution: The contract between TCG and Holcomb is a valid contract. It sets out all of the essential terms—price, payment, delivery, duration, and quantity—in a signed writing. Had some terms been left open, the UCC would likely have allowed the court to fill the gaps.

4. Suppose that Holcomb and TCG meet in October in an attempt to resolve their problems. At that time, the parties reach an oral agreement that TCG will continue to work without demanding full payment of the past due amounts and Holcomb will pay TCG $5,000 per week. Assuming the contract falls under the UCC, is the oral agreement enforceable? Why or why not?

Solution: This oral agreement would not be enforceable, because its amount, which is over $500, would bring it within the Statute of Frauds. The Statute of Frauds requires that sales contracts for goods priced over $500 be in writing to be enforceable.

PRACTICE AND REVIEW: DEBATE THIS 1.

The UCC should require the same degree of definiteness of terms, especially with respect to price and quantity, as contract law does.

Solution: Contract law requires definiteness sufficient for the parties to ascertain the contract’s essential terms when it is accepted. The UCC, in its quest to encourage more commerce, went overboard by removing this definiteness requirement. In so doing, the UCC opened up too many possibilities for fraud and unethical behavior on the part of one of the parties to a sales contract. Simply requiring that the parties’ actions show an intent to enter into a contract seems like an awfully weak standard.

The UCC was created to make sure that parties to sales agreements carried out those agreements. The UCC creates a sales contracting environment that promotes exchange rather than one that encourages parties to find ways to back out of sales agreements.

Sometimes, parties to a sales contract truly wish to reach an agreement but do not specify certain elements to the sales contract. That does not necessarily mean that they weren’t serious about entering into the agreement.

ISSUE SPOTTERS 1.

E-Design, Inc., orders 150 computer desks. Fav-O-Rite Supplies, Inc., ships 150 printer stands. Is this an acceptance of the offer or a counteroffer? If it is an acceptance, is it a breach of the contract? What if Fav-O-Rite told E-Design it was sending the printer stands as “an accommodation”? (See Formation of Sales and Lease Contracts.)

Solution: A shipment of nonconforming goods constitutes an acceptance and a breach, unless the seller reasonably notifies the buyer that the nonconforming shipment does not constitute an acceptance and is offered only as an accommodation. Thus, since there was no notification in this problem, the shipment was both an acceptance and a breach.

2. Truck Parts, Inc. (TPI), often sells supplies to United Fix-It Company (UFC), which services trucks. Over the phone, they negotiate for the sale of eighty-four sets of tires. TPI sends a letter to UFC detailing the terms and two weeks later ships the tires. Is there an

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enforceable contract between them? Why or why not? (See Formation of Sales and Lease Contracts.)

Solution: Yes. In a transaction between merchants, the requirement of a writing is satisfied if one of them sends to the other a signed written confirmation that indicates the terms of the agreement and the merchant receiving it has reason to know of its contents. If the merchant who receives the confirmation does not object in writing within ten days after receipt, the writing will be enforceable even though the merchant has not signed anything.

BUSINESS SCENARIOS AND CASE PROBLEMS 12–1. Merchant’s Firm Offer. On May 1, Jennings, a car dealer, e-mails Wheeler and says, “I have a 1955 Thunderbird convertible in mint condition that I will sell you for $13,500 at any time before June 9. [Signed] Peter Jennings.” By May 15, having heard nothing from Wheeler, Jennings sells the car to another. On May 29, Wheeler accepts Jennings’s offer and tenders $13,500. When told Jennings has sold the car to another, Wheeler claims Jennings has breached their contract. Is Jennings in breach? Explain. (See Formation of Sales and Lease Contracts.)

Solution: Yes. Under UCC 2–205, a merchant offeror, who in a signed writing gives assurance that an offer will remain open, creates an irrevocable offer (without payment of consideration) for the time period stated in the assurance up to a three-month period. Jennings, as a merchant (a car dealer), was obliged to hold the offer (which had been made in a signed writing—the e-mail) open until June 9.

Wheeler’s acceptance of the offer before June 9 created a valid contract. When Jennings sold the 1955 Thunderbird to a third party before June 9, he breached the contract.

12–2. Anticipatory Repudiation. Moore contracted in writing to sell her Hyundai Santa Fe to Hammer for $16,500. Moore agreed to deliver the car on Wednesday, and Hammer promised to pay the $16,500 on the following Friday. On Tuesday, Hammer informed Moore that he would not be buying the car after all. By Friday, Hammer had changed his mind again and tendered $16,500 to Moore. Moore, although she had not sold the car to another party, refused the tender and refused to deliver. Hammer claimed that Moore had breached their contract. Moore contended that Hammer’s repudiation released her from her duty to perform under the contract. Who is correct, and why? (See Performance.)

Solution: Hammer is correct. Moore’s refusal to deliver the car to Hammer on Friday, when Hammer tendered the $16,500 to Moore, constituted a breach of their contract.

Moore could have canceled the contract on Hammer’s anticipatory breach [UCC 2–610] but did not do so and did not change her position in any way as a result of Hammer’s anticipatory breach. Hammer could retract his anticipatory repudiation of the contract at any time prior to the time performance was due [UCC 2–611]. Because Hammer did retract his repudiation and decided to buy the car at the time performance was due (and not later), Moore was obligated to abide by the terms of the contract.

12–3. Spotlight on Apple—Implied Warranties. Alan Vitt purchased an iBook G4 laptop computer from Apple, Inc. Shortly after the one-year warranty expired, the laptop stopped working due to a weakness in the product manufacture. Vitt sued Apple, arguing that the laptop should have lasted “at least a couple of years,” which Vitt believed was a reasonable

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consumer expectation for a laptop. Vitt claimed that Apple’s descriptions of the laptop as “durable,” “rugged,” “reliable,” and “high performance” were affirmative statements concerning the quality and performance of the laptop, which Apple did not meet. How should the court rule? Why? [Vitt v. Apple Computer, Inc., 469 Fed.Appx. 605 (9th Cir. 2012)] (See Warranties.)

Solution: The court should rule in favor of Apple. Apple’s statements are generalized and nonactionable puffery because there are vague and generalized terms and not factual representations about a particular standard of quality. Apple’s statements do not imply that the laptop would last a certain period of years. For example, a “durable” laptop might imply that it is resistant to problems with being dropped and not that its lifespan would significantly exceed the warranty. The consumer bears the risk that a product will not match his economic expectations unless the manufacturer specifically agrees that it will do so.

12–4. The Statute of Frauds. Kendall Gardner agreed to buy from B&C Shavings a specially built shaving mill to produce wood shavings for poultry processors. B&C faxed an invoice to Gardner reflecting a purchase price of $86,200, with a 30 percent down payment and the “balance due before shipment.” Gardner paid the down payment. B&C finished the mill and wrote Gardner a letter telling him to “pay the balance due or you will lose the down payment.” By then, Gardner had lost his customers for the wood shavings, could not pay the balance due, and asked for the return of his down payment. Did these parties have an enforceable contract under the Statute of Frauds? Explain. [Bowen v. Gardner, 2013 Ark.App. 52, 425 S.W.3d 875 (2013)] (See Formation of Sales and Lease Contracts.)

Solution: Yes. Gardner and B&C Shavings had a contract enforceable under the Statute of Frauds. The Statute of Frauds applies to contracts for the sales of goods for more than $500. Those contracts must be in writing to be enforceable. A writing satisfies the Statute of Frauds as long as it indicates that the parties intended to form a contract and is signed by the party against whom enforcement is sought. An oral contract for the sale of goods priced at $500 or more will be enforceable despite the absence of a writing if goods are specially manufactured for a particular buyer, are not suitable for resale to others in the ordinary course of the seller's business, and the seller has substantially started to manufacture the goods.

In this problem, Gardner agreed to buy a special-order shaving mill from B&C for $86,200, which is clearly more than $500. Thus, the Statute of Frauds applied. B&C agreed to make and deliver the product according to Gardner’s specifications, and faxed an invoice to Gardner reflecting the purchase price, with a 30-percent down payment and the “balance due before shipment.” The faxed invoice did not contain all of the provisions of the deal—for example, and important to the circumstances in this case, after finishing the mill B&C wrote Gardner a letter telling him to “pay the balance due or you will lose the down payment.” But the order could be enforceable as a contract under the specially made goods exception (B&C specially made the mill for Gardner according to his specifications) provided it is not suitable for resale to others without further modifications.

In the actual case on which this problem is based, B&C filed a suit in an Arkansas state court against Gardner to recover the rest of the price. On Gardner’s appeal from a judgment in B&C’s favor, a state intermediate appellate court affirmed.

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12–5. Business Case Problem with Sample Answer—Goods and Services Combined. Allied Shelving and Equipment, Inc., sells and installs shelving systems. National Deli, LLC, contracted with Allied to provide and install a parallel rack system (a series of large shelves) in National’s warehouse. Both parties were dissatisfied with the result. National filed a suit in a Florida state court against Allied, which filed a counterclaim. Each contended that the other had materially breached the contract. The court applied common law contract principles to rule in National’s favor on both claims. Allied appealed, arguing that the court should have applied the Uniform Commercial Code (UCC). When does a court apply common law principles to a contract that involves both goods and services? In this case, why might an appellate court rule that the UCC should be applied instead? Explain. [Allied Shelving and Equipment, Inc. v. National Deli, LLC, 40 Fla.L.Weekly D145, 154 So.3d 482 (2015)] (See The Scope of Articles 2 and 2A.) Solution: A court applies common law principles to a dispute over contract that involves both goods and services when the court finds the services to be the dominant feature of the agreement. An appellate court, or any court, would rule that the UCC should be applied instead of the common law when the court finds the goods to be the dominant aspect of the deal. In either situation, the applicable law covers both the goods and services parts of the contract.

In this problem, because the court applied common law contract principles to rule in National’s favor on both parties’ claims, the court must have concluded that the services part of the contract was the dominant aspect.

In the actual case on which this problem is based, a state intermediate appellate court affirmed the lower court’s ruling in National’s favor. The appellate court recognized that the contract was a hybrid involving goods and services and reasoned that the lower court must have determined the services portion of the agreement to be the dominant factor. But the parties did not provide a trial transcript or a copy of the contract, so the appellate court could only affirm the lower court’s order.

12–6. Express Warranties. George Gregory, a competitive shotgun shooter, sent his Winchester Model 21 to Connecticut Shotgun Manufacturing Company (CSM) for repairs. While CSM was working on the Model 21, Gregory contacted Lou Frutuoso, one of CSM’s salespersons. Gregory wanted to purchase two Grand American shotguns—a 12-gauge and a 28-gauge—that matched the specifications of his Model 21. Gregory received an order confirmation and terms and conditions for the sale of the two shotguns from CSM. The confirmations included specifications for the guns but did not state in writing that they would match the specifications of Gregory’s Model 21. When the shotguns were delivered, their weights and dimensions were incorrect, according to Gregory, and they did not match the Model 21 specifications. Gregory filed a suit in a Texas state court against CSM, alleging breach of warranty. Because Gregory’s claims about matching specifications contradicted the express terms of the order confirmation, however, the court ruled in CSM’s favor. Did CSM breach an express warranty? Explain your reasoning. [Gregory v. Connecticut Shotgun Manufacturing Co., 2017 WL 511222 (Tex. App.—Tyler 2017)] (See Warranties.)

Solution: No. CSM did not breach an express warranty in its transaction with Gregory— to the contrary, Gregory’s claims contradicted the express terms of CSM’s order confirmation.

This is clear from the facts of this problem. Gregory ordered a pair of shotguns from CSM. The gun maker responded with an order confirmation that included the

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specifications for each gun. According to Gregory, however, the guns as delivered were not the correct weight or dimensions, were painful to shoot, and did not aim correctly.

He further claimed that they did not match the specifications of the Winchester Model 21 that he had sent to CSM for repair. Because these claims contradicted the express terms of the order confirmation, his suit against CSM, for breach of warranty, ended in a decision in favor of the defendant.

In the actual case on which this problem is based, Gregory appealed, and a state intermediate appellate court affirmed the decision in CSM’s favor. This result does not mean that Gregory’s claims were baseless, however. CSM’s sales staff might have misled its customer—through puffery or other legal means—to believe that the specifications of his order would match those of the gun that he sent CSM for repairs.

If so, they acted unethically. To avoid future lawsuits, negative publicity, and unhappy customers, CSM might remind its sales staff to make certain that its customers clearly understand the terms of a deal.

12–7. Implied Warranties. Harold Moore bought a barrel-racing horse named Clear Boggy from Betty Roper, who appraises barrel-racing horses, for his daughter. (Barrel racing is a timed rodeo event in which a horse and rider attempt to complete a cloverleaf pattern around preset barrels.) Clear Boggy was promoted for sale as a competitive barrel-racing horse. Roper represented that Clear Boggy did not have any performance issues or medical problems.

Shortly after the purchase, Clear Boggy began exhibiting significant performance problems, including nervousness, unwillingness to practice, and stalling at the first barrel during runs.

Roper then disclosed that the horse had been given shoulder injections before the sale and had previously stalled in competition. A veterinarian told Moore the horse suffered from arthritis, impinged vertebrae, foot problems, and a right hind leg fracture. Moore paid for a surgery to repair the fracture, but Clear Boggy remained unfit for competition. Moore also discovered that the horse had been scratched from competition before the sale because of injuries. Can Moore prevail in a lawsuit against Roper for breach of the implied warranty of fitness for a particular purpose? Why or why not? [Moore v. Roper, 2018 WL 1123868 (E.D.Okla.

2018)] (See Warranties.)

Solution: Yes. Moore most likely could prevail in a claim for breach of the implied warranty of fitness for a particular purpose. Moore must show that Roper knows both (1) the particular purpose for which a Moore will use the horse, and (2) that Moore was relying on the skill and judgment of the seller to select suitable goods.

Based on the facts of this problem, both of these elements appear to be satisfied.

Roper knew that Moore was looking for a barrel-racing horse for his daughter to use in competitions. Roper was also an appraiser of competitive barrel racing horses, so she had special skill in assessing their value (including medical condition, treatments, and performance history). She marketed Clear Boggy as a competitive barrel racing horse and the horse had previously raced in competitions. Even when the buyer had specifically inquired about the horse’s medical condition and performance, Roper did not disclose a fractured hind leg, shoulder injections, or previous performance issues.

In the actual case on which this problem is based, Roper filed a motion to dismiss Moore’s implied warranty of fitness claim. The court reviewed the requirements and facts stated above, and concluded that Moore had adequately pled a claim for breach of implied warranty of fitness for a particular purpose. The court allowed Moore’s claim to go forward to trial.

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12–8. Warranty Disclaimers. Salvatore Cangemi purchased a used GMC SUV from Prestige Cadillac, Inc. According to Cangemi, the salesperson told him that the vehicle was a lease turn-in, had only one prior owner, and had gone through the dealership’s 72-point inspection.

The seller established an “as is” disclaimer when the sale was made. Over a period of several months, the vehicle suffered numerous problems. Cangemi discovered that there had been damage to the frame and that the vehicle was unsafe. The vehicle had obviously been involved in an accident. Cangemi brought an action against Prestige alleging various claims, including breach of warranty of title, breach of expressed warranties, and breach of the implied warranty of merchantability. Is Cangemi likely to succeed with any of these claims?

[Cangemi v. Prestige Cadillac, Inc., 980 N.W.2d 714 (Mich. 2022)] (See Warranties.)

Solution: No. The Court of Appeals of Michigan affirmed the trial court’s summary disposition of all claims against Prestige Cadillac. According to the plaintiff, an expressed warranty was created when the salesperson represented that the vehicle was “new” and a “demonstrator.” But the trial court noted that the relevant state law requires a written warranty to overcome the “as is” disclaimer accompanying a sale.

Just because a salesperson said that the SUV was a demonstrator does not create an expressed warranty reduced to writing. Furthermore, the plaintiff knew he was purchasing a used vehicle. Additionally, the purchase agreement stated that there were no warranties expressed or implied. Nothing established “liability solely because a dealer may have verbally misrepresented the condition of a vehicle.”

A QUESTION OF ETHICS 12–9. The IDDR Approach and Sales and Lease Contracts. Camal Terry signed a “Sales Contract” to buy a 1995 BMW 3 Series from Robin Drive Auto, a car dealership in Delaware.

Terry agreed to pay $4,995 and Robin Drive agreed to hold the BMW for him in contemplation of a sale within twenty-one days. Also specified were a down payment of $1,200 and the timing of other payments. The payment schedule, however, exceeded the sale date by three weeks. In addition, the contract provided that the payments were fees for storage and “prep” and were not deductible from the car’s price. Terry paid more than $1,000 before asking Robin Drive to refund it. When the dealership refused, Terry filed a suit in a Delaware state court against Robin Drive. Testimony about the mismatched contract terms was conflicting. [Terry v.

Robin Drive Auto, 2017 WL 65842 (Del.Com.Pl. 2017)] (See Formation of Sales and Lease Contracts.)

1.

Ethically, what is wrong with this deal? Explain.

Solution: From an ethical (and legal) perspective, what is wrong with this deal for a BMW is the lack of clarity in the written “Sales Contract,” the discrepancy among its terms, and the parties’ conflicting testimony about their agreement. The situation could have been fixed by an expression of definite terms or by terms of sufficient clarity that a court could supply whatever was missing and fashion a remedy. This fix would have protected the rights of the deal’s stakeholders—Robin Drive Auto and Camal Terry.

From a legal (and ethical) perspective, the Uniform Commercial Code (UCC) governs the creation, interpretation, and enforcement of this sales contract—it involves a merchant selling goods to a consumer. The UCC imposes an obligation of good faith into every sales contract. In the case of a merchant, good faith means

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honesty in fact and the observance of reasonable commercial standards of fair dealing.

The UCC provides open-term provisions that can be used to fill the gaps in a contract. All that is necessary to prove the existence of a contract is an indication that there is a contract. Missing terms can be proved by evidence or it will be presumed that what the parties intended was whatever is reasonable.

In this problem, however, the agreement contained ambiguities and contradictions in its terms for the price of the goods and the date for full payment. With regard to the merchant seller, this likely violated the UCC’s requirement of good faith. In Terry’s suit, the court would have been unable to determine the parties’ intent from their “Sales Contract” and conflicting testimony. The court may have had no choice but to hold the contract void from the outset.

If the contract were held to be void, Terry could not use it as a basis to recover from Robin Drive. But this would have the effect of unjustly enriching the auto dealer by the amount of Terry’s payments. In the actual case on which this problem is based, the court rendered a decision from which Terry appealed. A state intermediate appellate court awarded Terry damages on the basis of unjust enrichment in the amount of the payments that he could prove had been made.

2. Using the IDDR approach, consider whether Robin Drive has an ethical obligation to use a different contract in its sales to consumers.

Solution: To be more successful, Robin Drive has an ethical obligation to redraft its contract to use with its sales to consumers. In the Terry case, the contract could have been fixed by an expression of definite terms or by terms of sufficient clarity that a court could supply whatever was missing and fashion a remedy. This draft would have satisfied the auto dealer’s ethical duty in subsequent deals.

The IDDR approach has four steps, starting with an Inquiry to set out the issue, list the stakeholders, and identify applicable ethical standards. The issue here is whether Robin Drive has an ethical obligation to use, in its sales to consumers, a contract that is different from the one at the center of the Terry case.

Stakeholders include the dealer’s owners and employees, including its salespersons, its customers, other auto dealers, and the general public.

The IDDR approach’s next step is a Discussion that considers actions to address the issue. The strengths and weaknesses of the actions and the consequences and effects on the stakeholders are factors to consider. Why should Robin Drive redraft its contract? Making changes could avoid future litigation and, perhaps more importantly, effectively thwart bad reviews related to the current contract. What should such changes consist of? As recognized in the answer to the previous question, the problems with the auto dealer’s contract include its lack of clarity and the discrepancy among its terms. Those terms could be made consistent and clear, with phrasing in “plain language.” The weaknesses might include the expense of having the contract rewritten and the loss of business from any consumers who would balk at the terms once they are clear. The cost of a redraft could be small compared to an increase in sales to consumers who understand their deals. And some terms could be negotiated with buyers who would otherwise “walk.”

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The approach’s third step is to arrive at a Decision and state the reasons. The decision here would seem to be to rewrite the contract. To do nothing would have the obvious effect of changing nothing—no potential increase in business, for example, among consumers who want their deals to be clear. Reasons in support of this decision are stated above—avoiding litigation, thwarting bad reviews, and enhancing the dealer’s reputation among the general public. Other results might be more confident salespersons and trusting customers, which could affect competition in the local market among other auto dealers.

The approach’s final step is a Review of the success or failure of the action to resolve the issue and satisfy the stakeholders. If the issue were phrased as a question about the ethical obligation of the dealer to redraft its contract, then doing so would resolve the issue. Such a fix could have the added value of meeting a merchant’s good faith obligation under the law and could lead to more business.

This would seem to be a win-win-win situation for Robin Drive.

TIME-LIMITED TEAM ASSIGNMENT 12–10. Warranties. Milan purchased saffron extract that was marketed online by Dr. Chen as “America’s Hottest New Way to a Flat Belly.” Dr. Chen’s website stated that recently published studies showed a significant weight loss (more than 25 percent) for people who had used pure saffron extract as a supplement without diet or exercise. Dr. Chen stated that the saffron suppresses appetite by increasing levels of serotonin, which reduces emotional eating.

Milan took the extract as directed without any resulting weight loss. (See Warranties.)

1.

The first team will determine whether Dr. Chen’s website made any express warranty on the saffron extract or its effectiveness in causing weight loss.

Solution: A seller can create an express warranty by making representations concerning the quality, condition, description, or performance potential of the goods. An express warranty arises when a seller or lessor indicates that the goods conform to (1) any affirmation of fact or promise that the seller makes to the buyer about the goods, (2) any description of the goods, and (3) any sample or model of the goods shown to the buyer. Express warranties can be found in a seller’s ad, brochure, or other promotional materials, in addition to being made orally or in a written contract. The buyer must rely on the representation at the time of entering into the agreement and the reliance must be reasonable.

In this problem, Chen’s website stated that studies showed a significant weight loss (over 25 percent) for people who used Chen’s product without diet and exercise. This would seem to be an express warranty—an affirmation of fact or a promise as to what a buyer could expect of the goods.

2. The second team will discuss whether the implied warranty of merchantability applies to the purchase of weight-loss supplements.

Solution: Every sale of goods made by a merchant who deals in goods of the kind sold automatically gives rise to an implied warranty of merchantability.

Weight loss supplements are not services, real estate, or securities—they are

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 12: Sales and Lease Law

goods. Thus, the implied warranty of merchantability applies to the purchase of weight loss supplements.

3. The third team will decide if Dr. Chen’s sale of saffron extract breached the implied warranty of fitness for a particular purpose.

Solution: The implied warranty of fitness for a particular purpose arises in the sale of goods when a seller knows the particular purpose for which a buyer will use the goods and that the buyer is relying on the skill and judgment of the seller to select suitable goods. A seller need not have actual knowledge of the buyer’s particular purpose. It is sufficient if a seller has reason to know the purpose.

In this problem, Chen promoted and sold his product as a weight loss supplement. This would give him reason to know a buyer’s particular purpose in purchasing the product was to lose weight. Milan bought the product from Chen. Its failure to fulfill its advertised promise would seem to breach the implied warranty of fitness for a particular purpose.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 13: Creditor-Debtor Relations and Bankruptcy

Solution and Answer Guide

Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 13: Creditor-Debtor Relations and Bankruptcy

TABLE OF CONTENTS Critical Thinking Questions in Features .............................................................................1 Managerial Strategy—Business Question.............................................................................. 1 Building Analytical—Skills Result and Reasoning .............................................................. 2 Critical Thinking Questions in Cases ................................................................................. 2 Case 13.1—Critical Thinking .................................................................................................... 2 Case 13.2—Critical Thinking.................................................................................................... 3 Case 13.3—Critical Thinking.................................................................................................... 4 Chapter Review ................................................................................................................... 4 Practice and Review................................................................................................................. 4 Practice and Review: Debate This ......................................................................................... 5 Issue Spotters ........................................................................................................................... 6 Business Scenarios and Case Problems .............................................................................. 6 A Question of Ethics ............................................................................................................... 12 Time-Limited Team Assignment .......................................................................................... 14

CRITICAL THINKING QUESTIONS IN FEATURES MANAGERIAL STRATEGY—BUSINESS QUESTION 1.

Nearly 20 percent of America’s office space was unoccupied in the mid-2020s, the highest vacancy rate in four decades. What lessons could managers of empty office buildings take from the retail industry to reverse this trend?

Solution: The culprits of the country’s alleged “retail apocalypse” and its actual “office space apocalypse” are similar. Just as the COVID-19 pandemic devastated the retail industry, it severely decreased demand for office space. Just as more shoppers are shopping from home, more workers are working from home. The “poster child” for high office vacancy rates was WeWork, a company that championed flexible office coworking space. At one point, WeWork had a market value of $47 billion. Several years later, the company filed for bankruptcy.

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If WeWork is a cautionary tale for the office space industry, it also offers lessons. The company’s financial problems can be traced back to signing too many long-term leases with too many subtenants just before the COVID-19 pandemic struck. But the concept of flexible coworking space, in which clients rent pay-as-you-go, on-demand office space when needed, is sound. Like retailers, office space providers need to diversify, offering clients more than just a place with a meeting room and cubicles. Particularly in downtown areas with the highest concentrations of vacant offices, office buildings need to be converted to mixed-use spaces, with residential, retail, and entertainment offerings.

WeWork is a model of this diversification, providing memberships and generic workspaces for individual freelancers and larger, customized workspaces for established companies and start-ups. In addition, it is important to understand that by declaring bankruptcy, WeWork did not cease operating. Rather, the company gave itself a chance to renegotiate or cancel many of its onerous leases so that it could reorganize itself into a viable business.

BUILDING ANALYTICAL—SKILLS RESULT AND REASONING 1.

Gholston can recover damages because EZ Auto willfully violated the automatic stay.

Explain why this is the proper outcome.

Solution: EZ Auto repossessed the car even though it had received notice of the automatic stay from the bankruptcy court. Moreover, EZ Auto retained the car even after Gholston’s attorney had reminded the company of the stay. Because Gholston suffered direct damages as a result, she can recover from EZ Auto. She may also be awarded punitive damages for EZ Auto’s wrongful conduct.

CRITICAL THINKING QUESTIONS IN CASES CASE 13.1—CRITICAL THINKING 1.

Legal Environment. Francis argued that the provision in the guaranty agreement making him liable for the Hospital’s debts “for any reason whatsoever” was “immaterial” and therefore should not influence the outcome of the case. Why was the appeals court so adamant in dismissing this argument?

Solution: Francis claimed that the “non-release provisions and waivers of defenses” in the guaranty agreement were immaterial, meaning that these provisions were not relevant to the main issues of the case. The appeals court countered by pointing out that its analysis was based on a plain reading of the guaranty agreement. “[The agreement’s] binding language does not contemplate a release of Francis's liability as a guarantor based on any release of Hospital's liability.” In other words, just because Francis asserted immateriality did not make his assertion true.

Guaranty arrangements are important drivers of loan activity in the business landscape. These agreements make it easier for principal debtors—backed by guarantors—to convince creditors to issue loans. They also incentive lenders to make loans, knowing that if the principal debtor is unable to meet its obligations, the

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 13: Creditor-Debtor Relations and Bankruptcy

guarantor will do so. If the binding terms found in guaranty agreements were “immaterial”—as Francis argued—the agreements often would be unenforceable, making it much less likely that creditors would be willing to enter into them.

CASE 13.2—CRITICAL THINKING 1.

Legal Environment. In determining whether a debtor’s failure to keep adequate records was justified, the Bankruptcy Code requires a determination based on all the circumstances of the case. What factors might a court weigh in making this determination? Discuss.

Solution: To determine whether a debtor’s record keeping is adequate and therefore justified, to support a discharge in bankruptcy, the Bankruptcy Code requires the court to make a determination based on “all the circumstances of the case.” Factors that the court might weigh in making this determination include, in particular, the debtor’s education, experience, and sophistication. Of course, the number and complexity of the transactions and their relation to the debtor’s financial situation are paramount considerations. The court should also decide what records someone in the debtor’s circumstances would keep.

In the Dykes’s bankruptcy proceeding, for example, the debtors did not have the same duty to create, preserve, and provide records of their financial transactions as a debtor operating a business. But Dykes was, in the court’s estimation, “a well-educated and sophisticated collector of highly valuable watches and jewelry.” And even in the circumstance of a consumer bankruptcy, a debtor has a duty to keep records of “a sudden and large dissipation of assets.”

2. Economic. How might the Dykeses have established, or at least indicated, the fair market value of the watches and jewelry at the time of their return in order to avoid the result in this case? Explain.

Solution: Under the Bankruptcy Code, the test of the adequacy of financial records to avoid denial of discharge is whether the documentation is sufficient to determine the debtor’s financial condition. The records should cover a debtor’s business and other transactions for a reasonable period. The debtor should take such steps as fair dealing and common sense would suggest. In addition to the court, creditors should also be able to learn what has taken place.

In the Dykes’ case, the debtors could have matched each watch and piece of jewelry with an invoice in their possession, they could have noted the purchase price of each item charged by the jeweler, and they could have insisted that the jeweler further document the amount each returned item reduced their debt. These records might have provided the court with sufficient information to assess the debtors’ situation and prevent denial of discharge on the ground that the records were inadequate. The information would also have allowed the debtors to challenge the jeweler’s claim against their estate, if necessary.

Of course, the Dykes did not provide such records, leaving serious, unanswered questions as to their financial condition, as well as the legitimacy of the jeweler’s claim.

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CASE 13.3—CRITICAL THINKING 1.

Legal Environment. Maryland law arguably does not include post-secondary education expenses in the definition of “child support.” Should this state law have governed the court’s conclusion? Why or why not?

Solution: No. Maryland state law should not have determined the court’s conclusion in the Chamberlain case. The Bankruptcy Code is federal law. In the context of a bankruptcy proceeding, the characterization of an obligation to pay for children’s college education, or any other debt ascribed at the time of a divorce, as a “domestic-support obligation” would be a question of federal law.

In other words, a debt may qualify as “support” for the purpose of a federal bankruptcy proceeding even if that obligation does not fit the definition of “support” under state law.

2. What If the Facts Were Different? Suppose that the marital settlement agreement had obligated Stephen to assume the mortgage debt on the family home. If all other facts were the same, would the result have been different? Explain.

Solution: No. The result in the Chamberlain case would not likely have been different if the marital settlement agreement had obligated Stephen to take on the mortgage debt of the family home.

Assuming all of the other facts were the same—particularly the couple’s relative financial circumstances—the reasons that led the court to conclude the obligation to pay the children’s college education was “in the nature of support” would have contributed to the same conclusion about a promise to pay the mortgage debt. Most likely, the couple would have viewed a home as a significant part of their children’s upbringing, they would have intended to provide such a home, and Stephen would have been the parent most able to assume the debt to pay for it.

CHAPTER REVIEW PRACTICE AND REVIEW Three months ago, Janet Hart’s husband of twenty years died of cancer. Although he had medical insurance, he left Janet with outstanding medical bills of more than $50,000. Janet has worked at the local library for the past ten years, earning $1,500 per month. Since her husband’s death, Janet has also received $1,500 in Social Security benefits and $1,100 in life insurance proceeds every month, for a total monthly income of $4,100. After she makes the mortgage payment of $1,500 and pays the amounts due on other debts, Janet has barely enough left to buy groceries for her family (she has two teenage daughters at home). She decides to file for Chapter 7 bankruptcy, hoping for a fresh start. Using the information presented in the chapter, answer the following questions.

1.

What must Janet do before filing a petition for relief under Chapter 7?

Solution: Janet must receive credit counseling from an approved nonprofit agency.

Under the BAPCPA, all debtors must receive credit counseling from an approved nonprofit agency within the 180-day period preceding the date of filing a petition in

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 13: Creditor-Debtor Relations and Bankruptcy

bankruptcy. Therefore, before Janet can file her petition, she needs to attend either an individual or group briefing from an approved credit-counseling agency.

2. How much time does Janet have after filing the bankruptcy petition to submit the required schedules? What happens if Janet does not meet the deadline?

Solution: Janet has forty-five days unless she is granted an extension of up to forty-five additional days. If she misses the deadline, her case will be dismissed.

3. Assume that Janet files a petition under Chapter 7. Further, assume that the median family income in the geographic area in which Janet lives is $49,300. What steps would a court take to determine whether Janet’s petition is presumed to be “substantial abuse” using the means test?

Solution: To determine whether Janet’s petition is presumed to be “substantial abuse,” the court would calculate Janet’s average monthly income for the last six months (less certain allowed expenses) and multiply it by twelve to establish her yearly income. If Janet’s yearly income exceeds the state’s median family income by $6,000 or more, then abuse is presumed.

In making these calculations, the debtor’s recent monthly income is presumed to continue for the next sixty months, and allowable living expenses and secured debt payments (such as mortgage payments) are deducted. Once the debtor’s future disposable income has been estimated, that amount is used to determine whether the debtor will have income that could be applied to unsecured debts.

4. Suppose that the court determines that no presumption of substantial abuse applies in Janet’s case. Nevertheless, the court finds that Janet does have the ability to pay at least a portion of the medical bills out of her disposable income. What would the court likely order in that situation?

Solution: If a court found that Janet had an ability to pay a portion of her deceased husband’s medical bills, a court would convert her bankruptcy case to a Chapter 13 individual repayment plan.

PRACTICE AND REVIEW: DEBATE THIS 1.

Rather than being allowed to file Chapter 7 bankruptcy petitions, individuals and couples should always be forced to make an effort to pay off their debts through Chapter 13.

Solution: Every time consumers deprive creditors of repayment by successfully obtaining Chapter 7 protection, the creditors’ costs rise. Consequently, all businesses that extend credit must raise the interest rates they charge to all borrowers to cover these increased costs. Therefore, allowing consumers to simply walk away from bona fide debts imposes extra burdens on all other borrowers.

Not all borrowers default on their debt repayments just because they borrowed “too” much. Sometimes, unplanned events occur, such as illness, infirmity, and protracted unemployment. It would not only be unfair but unrealistic to think that everyone could repay even part of what was owed through the use of a Chapter 13 plan. No one wants Chapter 7 to be abused, but means testing at least partially takes care of the problem of abuse in filing Chapter 7 plans.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 13: Creditor-Debtor Relations and Bankruptcy

ISSUE SPOTTERS 1.

Jorge contracts with Larry of Midwest Roofing to fix Jorge’s roof. Jorge pays half of the contract price in advance. Larry and Midwest complete the job, but Jorge refuses to pay the rest of the price. What can Larry and Midwest do? (See Laws Assisting Creditors.)

Solution: Each of the parties can place a mechanic’s lien on the debtor’s property. If the debtor does not pay what is owed, the property can be sold to satisfy the debt.

The only requirements are that the lien be filed within a specific time from the time of the work, depending on the state statute, and notice of the foreclosure and sale must be given to the debtor in advance.

2. After graduating from college, Tina works briefly as a salesperson before filing for bankruptcy. Tina’s petition states that her only debts are student loans, taxes accruing within the last year, and a claim against her based on her misuse of customers’ funds during her employment. Are these debts dischargeable in bankruptcy? Explain. (See Chapter 7—Liquidation.)

Solution: No. Besides the claims listed in this problem, the debts that cannot be discharged in bankruptcy include amounts borrowed to pay back taxes, goods obtained by fraud, debts that were not listed in the petition, domestic-support obligations, certain cash advances, and others.

BUSINESS SCENARIOS AND CASE PROBLEMS 13–1. Liens. Nabil is the owner of a relatively old home valued at $105,000. The home’s electrical system is failing, and the wiring needs to be replaced. He contracts with Kandhari Electrical to replace the electrical system. Kandhari performs the repairs, and on June 1 submits a bill of $10,000 to Nabil. Because of financial difficulties, Nabil does not pay the bill.

Nabil’s only asset is his home. His state’s homestead exemption is $60,000. Discuss fully Kandhari’s remedies in this situation. (See Laws Assisting Creditors.)

Solution: Kandahari’s has basically two remedies in this situation. The best remedy would be to file a mechanic’s lien on the home of Nabil. When a person furnishes labor and materials to improve the realty of the owner and does not receive payment, that person can file a mechanic’s lien against the property. The filing must take place within a statutory period (usually 60 to 120 days), measured in most states from the last day the materials or labor were furnished. Failure by Nabil to pay the debt after the filing allows lienholder Kandahari’s to foreclose on the real estate to satisfy the debt. Notice of foreclosure must be given to Nabil. From the proceeds of the sale, all costs to Kandahari’s and the debt of $10,000 will be deducted, with the remainder paid to Nabil. Homestead exemptions cannot be applied to foreclosure under mechanic’s liens.

The second remedy would be to reduce the $10,000 debt to judgment and then obtain a writ of execution (levy) on Nabil’s property. Nabil’s only property is his homestead and its contents. In this state, the homestead is exempt up to an amount of $60,000.

Because the value of the homestead exceeds this amount, Kandahari’s could exercise the writ by having the homestead sold at public auction. If the sale proceeds exceed $60,000 ($60,000 must be paid to Nabil), the excess can be used by Kandahari’s to cover the foreclosure costs incurred and the debt, with any surplus returned to Nabil.

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Should the proceeds exceed $60,000 but not cover the costs incurred and the debt, Kandahari’s is entitled to a deficiency judgment that allows her to go after other nonexempt property owned by Nabil. In this case, however, there is none.

13–2. Voluntary versus Involuntary Bankruptcy. Burke has been a rancher all her life, raising cattle and crops. Her ranch is valued at $500,000, almost all of which is exempt under state law. Burke has eight creditors and a total indebtedness of $70,000. Two of her largest creditors are Oman ($30,000 owed) and Sneed ($25,000 owed). The other six creditors have claims of less than $5,000 each. A drought has ruined all of Burke’s crops and forced her to sell many of her cattle at a loss. She cannot pay off her creditors. (See Chapter 7— Liquidation.)

1.

Under the Bankruptcy Code, can Burke, with a $500,000 ranch, voluntarily petition herself into bankruptcy? Explain.

Solution: Any person, including a rancher or farmer, can voluntarily petition themselves into bankruptcy. The person has only to be a debtor. This includes partnerships and corporations that are liable on a claim held by a creditor, as well as individuals. The debtor does not have to be insolvent to file a petition. Under the Code, a debtor is presumed to be insolvent when that individual’s debts exceed the fair market value of nonexempt assets. Thus, even though Burke owns a $500,000 ranch and has debts of only $70,000, she can voluntarily petition herself into bankruptcy.

2. Could either Oman or Sneed force Burke into involuntary bankruptcy? Explain.

Solution: Neither Oman nor Sneed—nor any combination of Burke’s creditors—can involuntarily petition Burke into bankruptcy. The Code provides that involuntary bankruptcy proceedings cannot be commenced against a farmer. The definition of a farmer includes individuals who receive 50 percent of their gross income from farming operations, such as tilling the soil, ranching, or the production or raising of crops or livestock. Because Burke obviously fits the definition of a farmer, no creditor can force her into bankruptcy.

13–3. Guaranty. Timothy Martinez, owner of Koenig & Vits, Inc. (K&V), guaranteed K&V’s debt to Community Bank & Trust. The guaranty stated that the bank was not required to seek payment of the debt from any other source before enforcing the guaranty. K&V defaulted.

Through a Wisconsin state court, the bank sought payment of $536,739.40, plus interest at the contract rate of 7.5 percent, from Martinez. Martinez argued that the bank could not enforce his guaranty while other funds were available to satisfy K&V’s debt. For example, the debt might be paid out of the proceeds of a sale of corporate assets. Is this an effective defense to a guaranty? Why or why not? [Community Bank & Trust v. Koenig & Vits, Inc., 346 Wis.2d 279 (Wis. App. 2013)] (See Laws Assisting Creditors.)

Solution: No. Martinez’s argument that the bank could not enforce his guaranty while other funds were available to satisfy K&V's debt—for example, that the debt might be paid out of the proceeds of a sale of corporate assets—is not an effective defense to the guaranty in the Community case. The guaranty contract terms determine the extent and time of the guarantor’s liability. Thus, a defense such as Martinez asserted might be defeated by the language of the guaranty—for example, it might state or indicate that payment is “unconditionally guaranteed” or that the

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 13: Creditor-Debtor Relations and Bankruptcy

creditor “is not required to seek payment of the principal’s debt from any other source to enforce the guaranty.”

In this problem, Timothy Martinez, owner of Koenig & Vits, Inc. (K&V), guaranteed the firm’s debt to Community Bank & Trust. When K&V defaulted, the bank sought payment of the debt from Martinez. Martinez made the argument stated above. But the guaranty expressly stated that the bank was not required to seek payment of the debt from any other source before enforcing the guaranty. This language is sufficient to support the rejection of Martinez’s argument.

In the actual case on which this problem is based, in the bank’s suit in a Wisconsin state court against Martinez to recover the amount of the debt, the court ruled in the bank’s favor. A state intermediate appellate court affirmed. “The terms of the guaranty compel us to reject all permutations of this argument. ... It is no defense to the guaranty that other funds may be available [now or] in the future to be applied to the bank's debt.”

13–4. Discharge. Michael and Dianne Shankle divorced. An Arkansas state court ordered Michael to pay Dianne alimony and child support, as well as half of the $184,000 the couple had in investment accounts. Instead, he withdrew more than half of the investment funds and spent them. Over the next several years, the court repeatedly held Michael in contempt for failing to pay Dianne. Six years later, Michael filed for Chapter 7 bankruptcy, including in the petition’s schedule the debt to Dianne of unpaid alimony, child support, and investment funds. Is Michael entitled to a discharge of this debt? Why or why not? [In re Shankle, 554 Fed.Appx. 264 (5th Cir. 2014)] (See Chapter 7—Liquidation.)

Solution: No. Michael is not entitled to a discharge of the debt to Dianne of half of the amount in the investment accounts or the unpaid alimony and child support.

The debt qualifies as an exception to discharge. As far as a debtor is concerned, the primary purpose of a liquidation proceeding is to obtain a fresh start through a discharge of debts. But certain debts are not dischargeable in bankruptcy. Claims that are not dischargeable in bankruptcy include domestic-support obligations and property settlements provided for in a divorce decree and claims based on willful or malicious conduct by the debtor toward another.

In this problem, on Michael and Dianne’s divorce, a court ordered Michael to pay alimony and child support and to tender half of the couple’s $184,000 in their investment accounts to Dianne. Michael did not comply with this order but withdrew half of the investment funds and spent them on himself. Meanwhile, the court repeatedly held him in contempt for failing to pay Dianne alimony, child support, and half of the investment funds. These items are nondischargeable because they are domestic-support obligations and part of the property settlement provided for in the parties’ divorce decree. The unpaid investment funds also constitute a claim based on Michael’s willful and malicious conduct towards Dianne. Michael deliberately defied multiple contempt orders to leave Dianne uncompensated, thereby certain to inflict harm on her.

In the actual case on which this problem is based, the court concluded that Michael's conduct was willful and malicious and that therefore the debt to Dianne listed in the petition’s schedule was nondischargeable. On Michael’s appeal, the U.S. Court of Appeals for the Fifth Circuit affirmed.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 13: Creditor-Debtor Relations and Bankruptcy

13–5. Business Case Problem with Sample Answer—Liens. Daniel and Katherine Balk asked Jirak Construction, LLC, to remodel their farmhouse in Lawler, Iowa. Jirak provided the Balks with an initial estimate of $45,975 for the cost. Over the course of the work, the Balks made significant changes to the plan. Jirak agreed to the changes and regularly advised the Balks about the increasing costs. In mid-project, Jirak provided an itemized breakdown at their request. The Balks paid Jirak $67,000, but refused to pay more. Jirak claimed that they still owed $55,000 in labor and materials. Jirak filed a suit in an Iowa state court against the Balks to collect. Which of the liens discussed in this chapter would be most helpful to Jirak in its attempt to collect? How does that type of lien work? Is the court likely to enforce it in this case? Explain. [Jirak Construction, LLC v. Balk, 863 N.W.2d 35 (Iowa App. 2015)] (See Laws Assisting Creditors.)

Solution: Among the liens discussed in this chapter, a mechanic’s lien would likely be most effective to Jirak in its attempt to collect the unpaid cost of its work for the Balks. A creditor can place a mechanic’s lien on the real property of a debtor who has contracted for improvements to the property and has not paid the price.

When a creditor obtains a mechanic’s lien, the debtor’s real estate becomes security for the debt. If the debtor does not pay, the creditor can foreclose on the property and sell it to collect the amount due.

In this problem, the Balks contracted with Jirak for the remodel of their farmhouse. Due to the Balks’ changes to the project during the course of the work, the costs exceeded the amount of Jirak’s original estimate. Although Jirak regularly advised the Balks about the increasing costs and provided an itemized breakdown at their request, they refused to pay the price. Jirak can make most effective use of a mechanic’s lien to collect the unpaid amount.

In the actual case on which this problem is based, Jirak filed a suit in an Iowa state court against the Balks to foreclose on their property by way of a mechanic’s lien and collect the unpaid amount. The court entered a judgment in Jirak’s favor and enforced the lien. A state intermediate appellate court affirmed the judgment.

13–6. Garnishment. Grand Harbour Condominium Owners Association, Inc., obtained a judgment in an Ohio state court against Gene and Nancy Grogg for $45,458.86. To satisfy the judgment, Grand Harbour filed a notice of garnishment with the court, seeking funds held by the Groggs in various banks. The Groggs disputed Grand Harbour’s right to garnish the funds.

They claimed that the funds were exempt Social Security and pension proceeds, but they offered no proof of this claim. The banks responded by depositing $23,911.97 with the court.

These funds were delivered to Grand Harbour. Later, the Groggs filed a petition for bankruptcy in a federal bankruptcy court. After they were granted a discharge, they filed a “motion to return funds to debtors” but provided no evidence that their debt to Grand Harbour had been included in the discharge. What is Grand Harbour’s best argument in response to the Groggs’ motion? [Grand Harbour Condominium Owners Association, Inc. v. Grogg, 2016-Ohio-1386 (Ohio App. 2016)] (See Laws Assisting Creditors.)

Solution: In response to the Groggs’ motion, Grand Harbour can successfully argue any or all of the following.

1.

The Groggs did not provide any evidence to support their claim that the funds garnished from their bank accounts and delivered to Grand Harbour represented exempt Social Security and pension proceeds.

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2. The funds in those accounts were attached before the Groggs filed for bankruptcy.

3. There is no evidence that the discharge in the Groggs’ bankruptcy included Grand Harbour’s judgment.

Grand Harbour might also assert that under the circumstances, only the bankruptcy trustee (a party who has authority over a debtor’s assets during a bankruptcy proceeding) could avoid the transfer of the funds from the banks.

In any case, with garnishment, a creditor can obtain a debtor’s funds or other property in the possession of a third party. A proceeding for garnishment of property, other than personal earnings, may be commenced. After a creditor obtains a judgment on a debt, that individual can commence a garnishment proceeding by filing written notice with the appropriate court. The debtor is then given an opportunity for a hearing at which the right to garnish can be disputed. If the debtor does not respond, waives the hearing, or does not appear, the right to garnish can be upheld. The garnishee is notified and the garnishment can proceed.

These steps occurred in this case. Grand Harbour was the creditor, the Groggs were the debtors, an Ohio state court was the appropriate court for the garnishment notice, the Groggs’ banks were garnishees, and the garnishment proceeded. The result was a disbursement of the debtors’ funds to the creditor. The Groggs later filed for bankruptcy in a federal court, giving rise to the events set out in the facts of the problem.

In the actual case on which this problem is based, the court in which the Groggs filed their “motion for return of funds to debtors” denied the motion. A state intermediate appellate court affirmed, based on the arguments noted here. In addition, the Groggs cited no authority to support their claim for a return of the funds.

13–7. Liquidation Proceedings. Jeffrey Krueger and Michael Torres, shareholders of Cru Energy, Inc., were embroiled in litigation in a Texas state court. Both claimed to act on Cru’s behalf, and each charged the other with attempting to obtain control of Cru through fraud and other misconduct. Temporarily prohibited from participating in Cru’s business, Krueger formed Kru, a company with the same business plan and many of the same shareholders as Cru. Meanwhile, to delay state court proceedings, Krueger filed a petition for Chapter 7 liquidation in a federal bankruptcy court. He did not reveal his interest in Kru to the bankruptcy court. Ownership of Krueger’s Cru shares passed to the bankruptcy trustee, but Krueger ignored this. He called a meeting of Cru’s shareholders—except Torres—and voted those shares to remove Torres from the board and elect himself chairman, president, chief executive officer, and treasurer. The Cru board then dismissed all of Cru’s claims against Krueger in his suit with Torres. Are there sufficient grounds for the bankruptcy court to dismiss Krueger’s bankruptcy petition? Discuss. [In re Krueger, 812 F.3d 365 (5th Cir. 2016)] (See Chapter 7—Liquidation.)

Solution: Yes. There are sufficient grounds for the bankruptcy court to dismiss Krueger’s petition for a Chapter 7 liquidation. Bad faith conduct is the basis for the court to dismiss the petition. Good faith is implicitly required for the commencement, prosecution, and confirmation of bankruptcy proceedings—a prerequisite for an honest debtor to obtain a fresh start. Acting in bad faith can serve as a ground for a bankruptcy court to dismiss a case, after notice and a hearing, for cause.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 13: Creditor-Debtor Relations and Bankruptcy

In this problem, Krueger and Torres, shareholders of Cru Energy, were suing each other in a state court, both claiming to act on Cru’s behalf and charging each other with fraud and other misconduct. Ordered not to participate in Cru’s business, Krueger formed Kru, with the same business plan and many of the same shareholders as Cru. Meanwhile, he filed a petition for a Chapter 7 liquidation in a federal bankruptcy court to delay the state court proceedings. He did not tell the court of his interest in Kru. Although ownership of his Cru shares had passed to the bankruptcy trustee, he called a meeting of Cru’s shareholders—except Torres—and voted those shares to remove Torres from the board and elect himself chairman, president, chief executive officer, and treasurer. The Cru board then dismissed all of Cru’s claims against Krueger in his suit with Torres.

Here, Krueger misled the courts and filed his bankruptcy petition for an illegitimate purpose. He sought to use the bankruptcy process as a shield against the state court’s actions to restrain his behavior and as a sword to take control of Cru. His primary reason for filing the bankruptcy petition was not to obtain a fresh start as an honest debtor but to delay the state court proceedings in his litigation with Torres over control of Cru. Furthermore, he failed to inform the bankruptcy court of his interest in Kru, the formation of which was likely a violation of the state court’s order to stay out of Cru’s business. He violated the automatic stay imposed through his bankruptcy petition when he voted his Cru shares at the meeting of its shareholders.

In the actual case on which this problem is based, the bankruptcy court dismissed Krueger’s case, on Torres’s motion, for all of the reasons stated above and more. The U.S. Court of Appeals for the Fifth Circuit affirmed this action.

13–8. The Reorganization Plan. Under the “plain language” of the Bankruptcy Code, at least one class of creditors must accept a Chapter 11 reorganization plan for it to be confirmed.

Transwest Resort Properties, Inc., and four related companies filed a petition for bankruptcy under Chapter 11. The five debtors filed a joint reorganization plan. Several classes of their creditors approved the plan. Grasslawn Lodging, LLC, filed a claim based on its loan to two of the companies and objected to the plan. Grasslawn further asserted that the Code’s confirmation requirement applied on a “per debtor” (not a “per plan”) basis, and because Grasslawn was the only class member for two of the debtors, the plan did not meet the test.

Can the court order a “cram-down”? Why or why not? [In the Matter of Transwest Resort Properties, Inc., 881 F.3d 724 (9th Cir. 2018)] (See Chapter 11—Reorganization.)

Solution: Yes. The court in the Transwest case can order a cramdown. Under the Bankruptcy Code’s cram-down provision, a bankruptcy court can confirm a Chapter 11 plan over the objections of one or more of the creditors if at least one class of creditors has accepted the plan. This is possible if it is demonstrated that the plan is fair and equitable.

In this problem, five related companies filed for bankruptcy under Chapter 11. The five debtors filed a joint reorganization plan. Some of their creditors approved the plan.

Grasslawn Lodging was the only creditor of two of the companies. Grasslawn argued that the Code’s confirmation requirement applied on a “per debtor,” not a “per plan,” basis. This plan did not meet the test, because Grasslawn was the only class member for two of the debtors, and it objected to the plan.

According to the stated facts, the Code does make a distinction concerning the creditors of different debtors under the plan nor does it distinguish between

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 13: Creditor-Debtor Relations and Bankruptcy

single-debtor and multi-debtor plans. Under the “plain language” of the statute, once a single class of creditors accepts a plan, the requirement for its confirmation is met.

In the actual case on which this problem is based, the court approved the plan despite Grasslawn’s objection. The U.S. Court of Appeals for the Ninth Circuit affirmed. “The plain language of the statute contemplates a ‘per plan’ approach.”

13–9. U.S. Trustees. Lawrence Hecker filed for Chapter 7 bankruptcy. The bankruptcy court appointed Bunce Atkinson as a trustee of the estate. Hecker received a full discharge, and the trustee, Atkinson, issued a report of no distribution. Nine years later, a creditor of Hecker filed a motion to reopen Hecker’s bankruptcy case in order to pursue a state court action against Atkinson (the trustee). The creditor claimed that Atkinson had breached his duties by failing to provide the creditor notice of the various bankruptcy proceedings. The bankruptcy court denied the creditor relief. The United States District Court for the District of New Jersey affirmed. Augustino, the creditor, filed an appeal. Should he prevail? Why or why not? [In re Hecker, 2022 WL 2816799 (3d Cir. 2022)] (See Chapter 7—Liquidation.)

Solution: The United States Court of Appeals for the Third District ruled that the United States District Court for the District of New Jersey had jurisdiction over the appeal from the bankruptcy court. The appeals court ruled that the bankruptcy court did not abuse its discretion. For the U.S. trustee, Bruce Atkinson, to be held liable for any wrongdoings in the bankruptcy proceedings, the plaintiff would have had to show that Atkinson violated a statutory or constitutional right and that that right was clearly established at the time of the challenged conduct. The bankruptcy court had pointed out that Atkinson had not violated any statutory rights. The creditor, Augustino, had a duty (not Atkinson) to provide notice of his claim.

A QUESTION OF ETHICS 13–10. The IDDR Approach and Defenses of the Guarantor. Woodsmill Park Limited Partnership borrowed $6.2 million secured by real property in Chicago, Illinois. Bill and Brian Bruce and Matthew O’Malley signed guaranties to meet Woodsmill’s obligation on the loan. Woodsmill defaulted on the payments. Northbrook Bank & Trust Company filed an action in an Illinois state court against Woodsmill and the Bruces to foreclose on the property. The defendants agreed to modify the contract to resolve the claim. In exchange for Northbrook not pursuing foreclosure proceedings, the defendants promised to pay the difference between the value of the property and the unpaid amount of the loan. As part of the contract modification, the parties also stipulated, “Nothing in this Agreement shall release or reduce O’Malley’s obligations under O’Malley’s Guaranty.” [Northbrook Bank & Trust Co. v. O’Malley, 2017 IL App (1st) 160438-U (2017)] (See Laws Assisting Creditors.)

1.

What is the effect on O’Malley’s guaranty of the agreement between Northbrook, Woodsmill, and the Bruces? Explain.

Solution: The effect of the agreement between Northbrook, Woodsmill, and the Bruces on O’Malley’s guaranty is to relieve O’Malley of liability. Any material change made in the terms of the original contract between the principal debtor and the creditor, including the awarding of a binding extension of time for making payment without first obtaining the consent of the surety or guarantor will discharge the surety or guarantor either completely or to the extent that the surety or guarantor suffers a loss.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 13: Creditor-Debtor Relations and Bankruptcy

In this problem, Woodsmill (a partnership) took out a loan secured by certain real property. Bill and Brian Bruce, and Matthew O’Malley signed guaranties on the loan. When the partnership defaulted. Northbrook Bank & Trust filed an action against the debtor and the Bruces to foreclose on the property. The defendants agreed to resolve the claim in exchange for a deed and a promise to pay the deficiency. These parties stipulated, “Nothing in this Agreement shall release or reduce O’Malley’s obligations.” But there is no indication in the facts that this stipulation was agreed to with O’Malley’s consent or knowledge. Thus, the principles stated above apply to relieve O’Malley of his obligation on the guaranty.

In the actual case on which this problem is based, the court issued a summary judgment in favor of O’Malley, relieving him of liability on the guaranty. A state intermediate appellate court affirmed.

2. Using the IDDR approach, evaluate the ethics of Northbrook, Woodsmill, and the Bruces in agreeing to the stipulation concerning O’Malley.

Solution: For O’Malley, it was not ethical for the other parties to the loan to agree to change its terms without his consent. The law also recognizes this conclusion by permitting guarantors to assert the modification of loan contracts without their consent to discharge them.

The IDDR approach opens with an Inquiry stating the issue, the stakeholders, and the ethical standards. The issue is framed in the question: Was it ethical of Northbrook, Woodsmill, and the Bruces to agree to resolve their dispute over Woodsmill’s debt in part by continuing O’Malley’s obligation for the debt according to his previously-signed guaranty? This was accomplished without O’Malley’s consent. The principal stakeholders are the parties to the deal that created the debt, any third parties who stand to benefit from a resolution of these parties’ dispute, and potential borrowers and investors aware of it.

Ethical standards include a duty to contract honestly and in good faith.

The IDDR approach next involves a Discussion of actions to address the issue.

The strengths and weaknesses of these actions, and any consequences and effects on the stakeholders, are also considered. Here, possible actions include informing O’Malley of the agreement before its conclusion—the stipulation of his continuing liability could then be included or excluded, depending on his response. Or the parties might have finalized an agreement that did not contain the stipulation. If the other facts in the case remained the same, taking either of these actions might result in a loss to the lender. But the parties would meet the obligation to act honestly and in good faith—their consciences with respect to O’Malley could be clear.

The IDDR approach also requires a Decision with a statement of the reasons.

The decision here would be to take either of the actions suggested above. The chief reason for taking these actions is to satisfy the parties’ ethical duty. A more practical result might be to avoid further litigation in this case, and provide a basis for avoiding disputes in similar circumstances.

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The IDDR approach has a final step—a Review of the success or failure of the actions to resolve the issue, and satisfy the stakeholders. From the perspective of the Bruces and Northbrook, it likely made sense to resolve their dispute in exchange for a deed and a promise to pay the difference between the value of the deeded property and the amount of the loan. The agreement efficiently disposed of Northbrook’s suit, which would have cost every party additional time and money. The agreement also provided an opportunity to renegotiate the loan. For O’Malley, however, it was not ethical for the other parties to the loan to agree to change its terms without his consent. Taking either of the actions suggested above would meet this duty, and thereby satisfy all of the stakeholders, by acting honestly and in good faith with O’Malley while preserving the resolution of the dispute.

TIME-LIMITED TEAM ASSIGNMENT 13–11. Discharge in Bankruptcy. Cathy Coleman took out loans to complete her college education. After graduation, Coleman was irregularly employed as a teacher before filing a petition in a federal bankruptcy court under Chapter 13. The court confirmed a five-year plan under which Coleman was required to commit all of her disposable income to paying the student loans.

Less than a year later, when Coleman was laid off, she still owed more than $100,000 to Educational Credit Management Corp. Coleman asked the court to discharge the debt on the ground that it would be an undue hardship for her to pay it. (See Bankruptcy Relief under Chapter 12 and Chapter 13.)

1.

The first team will explain when a debtor normally is entitled to a discharge under Chapter 13.

Solution: Debtors who seek Chapter 13 relief commit to a three- to five-year period of repayment, after which their remaining debts are discharged. Unlike Chapter 7 debtors, who are entitled to a discharge of debt as soon as their estate is liquidated and distributed, Chapter 13 debtors are not entitled to a discharge of debts unless and until they complete payments to creditors under the repayment plan.

2. The second team will discuss whether student loans are dischargeable and when “undue hardship” is a legitimate ground for an exception to the general rule.

Solution: Student loans are exempted from discharge unless the debtor can show “undue hardship.”

3. The third team will outline the goals of bankruptcy law and make an argument, based on these facts and principles, in support of Coleman’s request.

Solution: A fundamental goal of bankruptcy is to protect debtors by giving them fresh starts free from debt. It could be argued that a debtor who is burdened by student loans will not emerge from bankruptcy with a “fresh start” if the debt is not discharged. According to the facts in the question, Coleman is less than one year into a five-year plan. She would not normally be entitled to a discharge of any of her debts until she completed the plan and, of course, would not be entitled to discharge her student loans unless she could show “undue hardship.”

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Here, the hardship to Coleman arguably consists of the commitment of five years of disposable income to payments without any guarantee that the student loans will be discharged at the end of the period. This suggests that the court might at least agree to a discharge of the student loan debt on the completion of the plan.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 14: Agency Relationships

Solution and Answer Guide

Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 14: Agency Relationships

TABLE OF CONTENTS Critical Thinking Questions in Features .............................................................................1 Ethical Issue—Value Judgment .............................................................................................. 1 Building Analytical Skills—Result and Reasoning .............................................................. 2 Landmark in the Law—Application to Today’s World ....................................................... 2 Critical Thinking Questions in Cases ................................................................................. 3 Case 14.1—Critical Thinking .................................................................................................... 3 Case 14.2—Critical Thinking ................................................................................................... 4 Case 14.3—Critical Thinking ................................................................................................... 4 Chapter Review ................................................................................................................... 5 Practice and Review................................................................................................................. 5 Practice and Review: Debate This ......................................................................................... 6 Issue Spotters ........................................................................................................................... 6 Business Scenarios and Case Problems .............................................................................. 7 A Question of Ethics ............................................................................................................... 13 Time-Limited Team Assignment .......................................................................................... 15

CRITICAL THINKING QUESTIONS IN FEATURES ETHICAL ISSUE—VALUE JUDGMENT 1.

Despite the benefits of employee status, why might workers want to remain independent contractors?

Solution: Although appreciative of its protections, many gig workers regret the loss of job freedom that comes with employee status. A poll conducted by George Mason University’s Mercatus Center found that nearly 80 percent of surveyed independent contractors said they preferred to avoid an employment arrangement. In fact, shortly after the federal Department of Labor (DOL) announced the rule change discussed in this feature, a group of New Jersey freelance writers sued to block its implementation.

“This lawsuit,” the freelancers proclaimed, “seeks to vindicate the right of individual

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 14: Agency Relationships

entrepreneurs to remain independent in the face of a concerted effort to force them into employment relationships they neither want nor need.”

Unsurprisingly, companies that rely on gig work agree with these sentiments. The U.S. Chamber of Commerce, a business lobbying group, criticized the DOL’s new rule as being “clearly biased towards declaring most independent contractors as employees, a move that will decrease flexibility and opportunity and result in lost earning opportunities for millions of Americans.” Some data back up this claim. Three years after the passage of the California bill, the Mercatus Center estimated a statewide 10.5 percent decrease in self-employment in gig occupations and 4.4 percent decrease overall for gig occupations. Possible explanations for these decreases include that (1) employers hired some, but not all, of their former independent contractors as employees; (2) workers with a strong preference for flexibility exited the California workforce; and (3) small businesses that relied on independent contractors may have been forced to shut down. Also, some businesses might have turned to out-of-state independent contractors, working remotely.

Still, the disadvantages of being an independent contractor can be stark. The Economic Policy Institute—a think tank that favors employment status for gig operators—estimated that a typical independent contractor working in the construction industry makes as much as $16,720 a year less in income and benefits than a similarly placed employee. To offset these inequities, many policymakers are calling for “flexible benefits for a flexible workforce.” That is, instead of restricting the opportunities for independent work, policymakers should focus on providing independent contracts with benefits while allowing them to maintain their “nontraditional” work arrangement. “There's no law that says that you can't be an employee and have flexible hours,” as one expert on the gig economy put it.

In this spirit, New York City imposed a minimum wage of $19.96 per hour for food delivery workers, up from an average of $7.09 an hour that the “deliveristas” were previously making. The impact of this law on New York’s employment statistics will surely play a crucial role in determining whether other city- and state-level governments follow suit.

BUILDING ANALYTICAL SKILLS—RESULT AND REASONING 1.

Sclafani referred all credit questions to “the woman in the office.” Sclafani’s referral of credit matters to this woman established that she was his agent. He gave her the authority to enter into legally binding credit contracts on his behalf. Thus, Sclafani is bound to the contract. Why isn’t “the woman in the office” liable on the contract?

Solution: Sclafani was a disclosed principal—Felix knew his identity at the time the contract was made. Therefore, Sclafani was liable on the contract and his agent was not. This would be the case whether Sclafani or “the woman in the office” signed Felix’s credit application to guarantee payment.

LANDMARK IN THE LAW—APPLICATION TO TODAY’S WORLD 1.

The courts have accepted the doctrine of respondeat superior for some two centuries.

Today, the small-town grocer with one clerk and the multinational corporation with

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 14: Agency Relationships

thousands of employees are equally subject to the doctrine. What do you think accounts for this doctrine’s staying power?

Solution: Primarily, the doctrine of respondeat superior exists to provide protection for victims of injury, a group to which the law owed a responsibility to at the time of Lord Holt’s opinion and continue to do so today. In many instances, an individual employee will not have the financial resources to make an injury victim whole. The business that employs the at-fault employee is much more likely to be able to do so. Furthermore, the business also has the ability to purchase insurance to protect itself against lawsuits resulting from the employee’s harm. In sum, the doctrine of respondeat superior has remained a fair way to further the societal goal of victim protection.

CRITICAL THINKING QUESTIONS IN CASES CASE 14.1—CRITICAL THINKING 1.

What If the Facts Were Different? Would the plaintiff’s claim have survived the motion to dismiss if he had complained to Knapp about the dangerous conditions on the roof a week before falling off it? Explain your answer.

Solution: There is a good chance Anderson’s claim would have survived the motion to dismiss if he had previously complained to Knapp that the roof was unsafe. Under these circumstances, Anderson would have argued that (1) Knapp had knowledge of the dangerous condition of the work premises; (2) Knapp was the agent of the Harrises; and (3) the Harrises therefore had constructive knowledge of the dangerous condition because of their agency relationship with Knapp.

In the actual case, Anderson did claim that the Harrises had constructive knowledge of the unsecured sheet metal, relying on a precedential case in which an agent’s actual knowledge of a dangerous condition was imputed to the premises’ owner. This argument failed, however, because Anderson was unable to provide the court with any evidence that Knapp had actual or constructive knowledge of the hazardous working conditions on the roof. If Knapp was unaware of these conditions, then the Harrises— who had insufficient control over the project otherwise—could not be liable for Anderson’s injuries.

2. Legal Environment. What if Anderson had prevailed in his lawsuit against the Harrises, establishing a precedent for this type of independent contractor liability? How would such a ruling impact the construction industry?

Solution: If “independent contractor liability” in this form existed, general contractors surely would face a backlash from individuals and businesses that hired them for construction of homes and office buildings. Purchasers of general contractors’ services (future new homeowners, for example) would undoubtedly have to pay for relatively costly additional personal liability insurance to guard against lawsuits from all subcontractors of general contractors. In response, clients of construction general contractors would demand to pay lower overall prices for their construction projects to compensate for the additional personal liability insurance they would have to purchase. Indeed, the entire concept of general contractors within the building industry would have to be rethought. After all, purchasers of general contractors’

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services do not want to get involved in overseeing construction sites. That is why they hire general contractors in the first place.

CASE 14.2—CRITICAL THINKING 1.

Legal Environment. Did Ward breach any duties owed to his employer in addition to his alleged breach of the duty of loyalty? Discuss.

Solution: In the Taser case, if Taser can prove its case, Ward was in breach of the agent’s duty of loyalty. Taser might also allege that Ward breached the agent’s duty of notification. Under the duty of loyalty, an agent has the duty to act solely for the benefit of the principal. Under the duty of notification, an agent is required to notify the principal of all matters that come to the agent’s attention concerning the subject matter of the agency. “Assuming Taser was engaged in the research and development of a recording device during Ward's employment, assuming Ward knew or should have known of those efforts, and assuming Taser's device would compete with Ward's concept, substantial design and development efforts by Ward during his employment” without informing Taser would constitute a violation of the duty of notification.

Under the duty of obedience, when acting on behalf of the principal, an agent has a duty to follow all lawful and clearly stated instructions of the principal. Any deviation from such instructions is a violation of the duty. Depending on the scope of Ward’s employment—what he was instructed to do—he might also have violated this duty.

And under the duty of accounting, an agent has a duty to keep and make available to the principal an account of all property and funds received and paid out on behalf of the principal. If Ward expended any of Taser’s resources on research and development of his own projects, he might also have violated this duty.

2. What If the Facts Were Different? Suppose that Ward’s pre-termination activities focused on a product that was not designed to compete with Taser’s products. Would these efforts have breached the duty of loyalty? Why or why not?

Solution: In these circumstances, assuming that Ward’s activities did not involve the improper use of any of Taser’s resources (including Ward’s work time), there would be no basis for concluding that Ward had breached his duty of loyalty to his employer by planning a new and noncompetitive business venture.

CASE 14.3—CRITICAL THINKING 1.

Legal Environment. If the appellate court had upheld the trial court’s finding that Doughty was an independent contractor, would he have been liable to Simon? Explain.

Solution: Yes, Doughty would most likely have been liable to Simon if the appellate court had affirmed the trial court’s finding that Doughty was an independent contractor.

The term independent contractor connotes a freedom of action and choice with respect to the work or other performance on a job and a legal responsibility on the part of the contractor for discrepancies and deviations. A principal is not generally liable for the negligence of an independent contractor. Like an employee, an independent contractor may be engaged in an activity for the benefit of an employer, but it is the latter’s freedom from control that relieves the employer of liability.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 14: Agency Relationships

2. What If the Facts Were Different? Suppose that the accident had happened during Doughty’s drive home after he had dropped off the supplies. Would the result have been different? Discuss.

Solution: Yes, if Doughty had been involved in the accident during his drive home after he had dropped off the supplies, the result in the Simon case would likely have been different.

In that circumstance, Doughty would not have been at work at the time but on a commute, or a personal pursuit.

The key to determining liability for an agent or employee’s negligence, or other tort, is whether the act is committed within the scope or course of employment. Factors that affect this determination include the time of the act, the extent of the involvement of the worker’s private interests, and whether the employer provided the means by which the tort was committed. The time that an employee spends commuting to or from work is normally considered outside the scope of employment.

In the facts of the question, Doughty’s commute would have been outside the time of employment. He was driving home. Furthermore, he was using his own vehicle to make the trip.

CHAPTER REVIEW PRACTICE AND REVIEW Lynne Meyer, on her way to a business meeting and in a hurry, stopped by a Buy-Mart store for a new car charger for her smartphone. There was a long line at one of the checkout counters, but a cashier, Valerie Watts, opened another counter and began loading the cash drawer. Meyer told Watts that she was in a hurry and asked Watts to work faster. Watts, however, only slowed her pace. At this point, Meyer hit Watts.

It is not clear whether Meyer hit Watts intentionally or, in an attempt to retrieve the car charger, hit her inadvertently. In response, Watts grabbed Meyer by the hair and hit her repeatedly in the back of the head, while Meyer screamed for help. Management personnel separated the two women and questioned them about the incident. Watts was immediately fired for violating the store’s no-fighting policy. Meyer subsequently sued Buy-Mart, alleging that the store was liable for the tort (assault and battery) committed by its employee. Using the information presented in the chapter, answer the following questions.

1.

Under what doctrine discussed in this chapter might Buy-Mart be held liable for the tort committed by Watts?

Solution: The doctrine of respondeat superior, under which employers may be held liable for the actions of their agents or employees, may apply in this situation. The concept of respondeat superior is based on the assumption that employers are usually in a better position to absorb the costs that may result from agents’ or employees’ torts.

2. What is the key factor in determining whether Buy-Mart is liable under this doctrine?

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 14: Agency Relationships

Solution: Under the doctrine of respondeat superior, an employer is responsible for torts committed by agents or employees in the course and scope of their employment.

3. Did Watts’s behavior constitute an intentional tort or a tort of negligence? How would this difference affect Buy-Mart’s potential liability?

Solution: It seems clear that Watts’s behavior constituted an intentional tort. In any event, because Watts’s actions took place in the scope of employment, the employer in this problem may be liable in either situation under the doctrine of respondeat superior.

4. Suppose that when Watts applied for the job at Buy-Mart, she disclosed in her application that she had previously been convicted of felony assault and battery.

Nevertheless, Buy-Mart hired Watts as a cashier. How might this fact affect Buy-Mart’s liability for Watts’s actions?

Solution: This circumstance would support an assessment of liability on the employer under the theory that the employee acted with the employer’s knowledge of a propensity for tortious behavior.

PRACTICE AND REVIEW: DEBATE THIS 1.

The doctrine of respondeat superior should be modified to make agents solely liable for some of their own tortious (wrongful) acts.

Solution: Because of the doctrine of respondeat superior, some agents may act more recklessly because they know that the principal will pay all damages for their irresponsible behavior. If all agents knew that they would be financially liable for at least some of the damages their tortious conduct caused, they would behave in a more responsible manner.

Business owners and other principals take out sufficient insurance to cover damages owed due to their agents’ tortious acts. It would be unfair to impose any liability on agents, who, in general, are not in a financial position to pay for any part of a damage award as a result of their tortious acts.

ISSUE SPOTTERS 1.

Dimka Corporation wants to build a new mall on a specific tract of land. Dimka contracts with Nadine to act as its agent in buying the property. When Nadine learns of the difference between the price that Dimka is willing to pay and the price at which the owner is willing to sell, she wants to buy the land and sell it to Dimka herself. Can she do this?

Discuss. (See Duties of Agents and Principals.)

Solution: No. Nadine, as an agent, is prohibited from taking advantage of the agency relationship to obtain property that the principal (Dimka Corporation) wants to purchase. This is the duty of loyalty that arises with every agency relationship.

2. Davis contracts with Estee to buy a certain horse on her behalf. Estee asks Davis not to reveal her identity. Davis makes a deal with Farmland Stables, the owner of the horse, and makes a down payment. Estee does not pay the rest of the price. Farmland Stables sues

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 14: Agency Relationships

Davis for breach of contract. Can Davis hold Estee liable for whatever damages he has to pay? Why or why not? (See Liability in Agency Relationships.)

Solution: Yes. A principal has a duty to indemnify (reimburse) an agent for liabilities incurred because of authorized and lawful acts and transactions and for losses suffered because of the principal’s failure to perform any duties.

BUSINESS SCENARIOS AND CASE PROBLEMS 14–1. Ratification by Principal. Springer, who was running for Congress, instructed his campaign staff not to purchase any campaign materials without his explicit authorization. In spite of these instructions, one of his campaign workers contracted with Dubychek Printing Co. to print some promotional materials for Springer’s campaign. When the printed materials arrived, Springer did not return them but instead used them during his campaign.

When Springer failed to pay for the materials, Dubychek sued for recovery of the price.

Springer contended that he was not liable on the sales contract because he had not authorized his agent to purchase the printing services. Dubychek argued that the campaign worker was Springer’s agent and that the worker had authority to make the printing contract.

Additionally, Dubychek claimed that even if the purchase was unauthorized, Springer’s use of the materials constituted ratification of his agent’s unauthorized purchase. Is Dubychek correct? Explain. (See Formation of an Agency.)

Solution: Dubychek may very well be correct in their claim. Implied ratification by a principal of an agent’s unauthorized action occurs when a principal accepts the benefits of the unauthorized transaction and/or does not object to or repudiate the action within a reasonable time. It is essential, however, that the principal be aware of all material facts; otherwise, the ratification will not be effective.

If Springer knew that the printed materials had been ordered by his campaign workers without his authorization and used the materials in spite of this knowledge, such use would constitute ratification of the unauthorized purchase agreement. In such a case, Dubychek could successfully sue to recover the purchase price of the campaign materials.

If Springer were unaware that the materials had been purchased without his authorization, his use of the materials would not constitute ratification. A good point for discussion is whether the campaign worker was impliedly authorized or had apparent authority to contract for the printing of the promotional material. There is no question that there was no express authorization. Springer’s prohibition, unknown to Dubychek, may not relieve Springer of liability, however. If the campaign worker is one who is placed in a position of a person who usually orders campaign printing, or if this campaign worker had previously ordered campaign materials from Dubychek, Dubychek can claim that the campaign worker had either implied authority to act or that previous conduct led Dubychek to believe that the worker had (apparent) authority to contract for the printing. If either is applicable, ratification is not necessary, as the worker’s contract is authorized, and the principal, Springer, is liable.

14–2. Employee Versus Independent Contractor. Stephen Hemmerling was a driver for the Happy Cab Co. Hemmerling paid certain fixed expenses and abided by a variety of rules relating to the use of the cab, the hours that could be worked, and the solicitation of fares,

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among other things. Rates were set by the state. Happy Cab did not withhold taxes from Hemmerling’s pay. While driving the cab, Hemmerling was injured in an accident and filed a claim against Happy Cab in a Nebraska state court for workers’ compensation benefits. Such benefits are not available to independent contractors. On what basis might the court hold that Hemmerling is an employee? Explain. (See Agency Law.) Solution: A court might hold that Hemmerling and Happy Cab have an employment relationship primarily on the basis of control. Happy Cab clearly has the right to control the methods or means used by Hemmerling in the course of operating the taxicab by virtue of its exclusive control over the taxicab. Happy Cab exercises its control by establishing and enforcing a variety of rules relating to the use of the cab, solicitation of fares, and so on. Other factors supporting the existence of an employment relationship include that Hemmerling was not engaged in a distinct occupation or business from that of Happy Cab and the type of work is that which can be done by employees rather than specially skilled independent contractors. Also, Happy Cab supplied the instrumentality of the trade (the cab), and given that the rates were set by the state, Hemmerling’s ability to control his profit was limited. The only factor that supports an independent contractor relationship is that Happy Cab did not withhold taxes.

14–3. Agent’s Authority. Basic Research, LLC, advertised its products on television networks owned by Rainbow Media Holdings, Inc., through an ad agency, Icebox Advertising, Inc. As Basic’s agent, Icebox had the express authority to buy ads from Rainbow on Basic’s behalf, but the authority was limited to buying ads with cash in advance. Despite this limit, Rainbow sold ads to Basic through Icebox on credit. Basic paid Icebox for the ads, but Icebox did not pass all of the payments on to Rainbow. Icebox filed for bankruptcy. Can Rainbow recoup the unpaid amounts from Basic? Explain. [American Movie Classics v. Rainbow Media Holdings, 508 Fed.Appx. 826 (10th Cir. 2013)] (See Agent’s Authority.)

Solution: No. Rainbow cannot recoup the unpaid amounts from Basic. Express authority is authority declared in clear, direct, and definite terms. Express authority can be given orally or in writing. In most states, if the contract being executed is or must be in writing, then the agent’s authority must also be in writing. Otherwise, the contract may be avoided (or ratified) by the principal. If it is ratified, the ratification must be in writing. An agent has the implied authority to do what is reasonably necessary to carry out express authority. For example, authority to manage a business implies authority to do what is reasonably required to operate the business. But an agent’s implied authority cannot contradict that agent’s express authority. Thus, if a principal has limited an agent’s express authority, then the fact that the agent customarily would have such authority is irrelevant.

In this problem, Basic Research advertised its products on television networks owned by Rainbow Media Holdings through an ad agency, Icebox Advertising. Basic paid Icebox for the ads, but Icebox did not make all of the payments to Rainbow. Icebox filed for bankruptcy. Rainbow cannot recover what it was owed from Basic. As Basic's agent, Icebox had the express authority to buy ads from Rainbow on Basic's behalf, but that authority was limited to purchasing ads with cash in advance. Thus, Icebox did not have the authority—express or implied—to buy ads on Basic's credit. And Basic did not ratify the contracts that represented purchases on credit.

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In the actual case on which this problem is based, on Basic’s appeal from a judgment in Rainbow’s favor, the U.S. Court of Appeals for the Tenth Circuit reversed that judgment and ruled in Basic’s favor.

14–4. Business Case Problem with Sample Answer—Determining Employee Status. Nelson Ovalles worked as a cable installer for Cox Rhode Island Telecom, LLC, under an agreement with a third party, M&M Communications, Inc. The agreement stated that no employeremployee relationship existed between Cox and M&M’s technicians, including Ovalles. Ovalles was required to designate his affiliation with Cox on his work van, clothing, and identification badge, but Cox had minimal contact with him and limited power to control the manner in which he performed his duties. Cox supplied cable wire and similar items, but the equipment was delivered to M&M, not to Ovalles. On a workday, while Ovalles was fulfilling a work order, his van rear-ended a car driven by Barbara Cayer. Is Cox liable to Cayer? Explain. [Cayer v. Cox Rhode Island Telecom, LLC, 85 A.3d 1140 (R.I. 2014)] (See Agency Law.) Solution: No. Cox is not liable to Cayer for the injuries or damage that she sustained in the accident with Ovalles. Generally, an employer is not liable for physical harm caused to a third person by the negligent act of an independent contractor in the performance of a contract. This is because the employer does not have the right to control the details of the performance. In determining whether a worker has the status of an independent contractor, how much control the employer can exercise over the details of the work is the most important factor weighed by the courts.

In this problem, Ovalles worked as a cable installer for Cox under an agreement with M&M. The agreement disavowed any employer–employee relationship between Cox and M&M’s installers. Ovalles was required to designate his affiliation with Cox on his van, clothing, and an ID badge. But Cox had minimal contact with Ovalles and limited power to control the manner in which he performed his work. Cox supplied cable wire and other equipment, but these items were delivered to M&M, not Ovalles. These facts indicate that Ovalles was an independent contractor, not an employee. Thus, Cox was not liable to Cayer for the harm caused to her by Ovalles when his van rear-ended Cayer’s car.

In the actual case on which this problem is based, the court issued a judgment in Cox's favor. The Rhode Island Supreme Court affirmed, applying the principles stated above to arrive at the same conclusion.

14–5. Agent’s Authority. Terry Holden’s stepmother, Rosie, was diagnosed with amyotrophic lateral sclerosis (ALS), and Terry’s wife, Susan, became Rosie’s primary caregiver. Rosie executed a durable power of attorney appointing Susan as her agent. Susan opened a joint bank account with Rosie at Bank of America, depositing $9,643.62 of Rosie’s funds. Susan used some of the money to pay for “household expenses to keep us going while we were taking care of her.” Rosie died three months later. Terry’s father, Charles, as executor of Rosie’s estate, filed a petition in a Texas state court against Susan for an accounting. What general duty did Susan owe Rosie as her agent? What does an agent’s duty of accounting require? Did Susan breach either of these duties? Explain. [Holden v. Holden, 456 S.W.3d 642 (Tex.App.—Tyler 2015)] (See Agent’s Authority.)

Solution: As Rosie’s agent, Susan owed her a fiduciary duty to act in the utmost good faith on Rosie’s behalf and in her best interest. An agent’s duty of accounting requires

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an agent to keep and make available to the principal an account of all property and funds received and paid out on the principal’s behalf. The agent has a duty to maintain separate accounts for the principal’s funds and for the agent’s personal funds, and the agent must not intermingle these accounts. Susan violated both of these duties.

In this problem, Rosie executed a durable power of attorney appointing Susan as her agent. Susan opened a joint bank account with Rosie at Bank of America and deposited Rosie’s funds into the account. Susan used some of the money to pay for “household expenses.” The facts indicate that Susan did not account to Rosie for this use of her funds. After Rosie’s death, Charles, the executor of Rosie’s estate, filed a suit against Susan for an accounting. Susan breached her fiduciary duty to Rosie by spending Rosie’s funds for Susan’s own expenses. Susan breached the agent’s duty to account to the principal by not informing Rosie of the transactions involving her funds.

In the actual case on which this problem is based, in Charles’s suit against Susan for an accounting, the court ordered Susan to provide bank account summaries and transaction information. After review, the court ordered Susan to return all of Rosie’s funds deposited into their joint account to Rosie’s estate. A state intermediate appellate court affirmed the order.

14–6. Agency Relationships. Standard Oil of Connecticut, Inc., sells home heating, cooling, and security systems. Standard schedules installation and service appointments with its customers and then contracts with installers and technicians to do the work. The company requires an installer or technician to complete a project by a certain time but to otherwise “exercise independent judgment and control in the execution of any work.” The installers and technicians are licensed and certified by the state. Standard does not train them, provide instruction manuals, supervise them at customers’ homes, or inspect their work. The installers and technicians use their own equipment and tools, and they can choose which days they work. Standard pays a set rate per project. According to criteria used by the courts, are these installers and technicians independent contractors or employees? Why? [Standard Oil of Connecticut, Inc. v. Administrator, Unemployment Compensation Act, 320 Conn. 611, 134 A.3d 581 (2016)] (See Agency Law.) Solution: According to criteria used by the courts, the installers and technicians who contract with Standard to install and service the company’s products in its customers’ homes are classified as independent contractors. In deciding whether a worker is an employee or an independent contractor, courts consider a number of factors, including the following.

1. The degree of control that the employer exercises over the work.

2. Whether the worker is engaged in an occupation distinct from the business of the employer.

3. The amount of supervision that the employer imposes.

4. Who supplies the tools.

5. The duration of employment.

6. The timeframe of payment for the work (periodically or per project).

7. The degree of skill required of the work.

The degree of control is the most important factor.

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Standard sold home heating, cooling, and security systems; scheduled appointments with its customers for installation and service; and contracted with installers and technicians to do the work. The company required an installer or technician to finish by a certain time but otherwise encouraged each individual to “exercise independent judgment and control in the execution of any work.”

The installers and technicians were licensed and certified by the state. Standard did not provide training, instruction manuals, supervision at customers’ homes, or inspection of the work. The workers used their own equipment and tools and chose which days to work (if at all—they were free to accept or reject any assignment).

Standard paid a set rate per project. These facts indicate that the installers and technicians should be categorized as independent contractors, not employees.

In the actual case on which this problem is based, Standard classified the workers as independent contractors. The state ruled that they should have been classified as employees and assessed $41,501.38 in unpaid unemployment contribution taxes, plus interest. From adverse state agency and court decisions, Standard appealed. The Connecticut Supreme Court reversed and remanded. On proof of the facts in this case set out above, Standard “satisfied its burden of showing that the installers/technicians were free from its control and direction.”

14–7. Scope of Agent’s Authority. Kindred Nursing Centers East, LLC, owns and operates Whitesburg Gardens, a long-term care and rehabilitation facility in Huntsville, Alabama. Lorene Jones was admitted to the facility following knee-replacement surgery. Jones’s daughter, Yvonne Barbour, signed the admission forms required by Whitesburg Gardens as her mother’s representative in her presence. Jones did not object. The forms included an “Alternative Dispute Resolution Agreement,” which provided for binding arbitration in the event of a dispute between “the Resident” (Jones) and “the Facility” (Whitesburg Gardens). Six days later, Jones was transferred to a different facility. After recovering from the surgery, she filed a suit in an Alabama state court against Kindred, alleging substandard care on a claim of negligence. Can Jones be compelled to submit her claim to arbitration? Explain. [Kindred Nursing Centers East, LLC v. Jones, 201 So.3d 1146 (Ala. 2016)] (See Agent’s Authority.)

Solution: Yes. Jones can be compelled to submit her claim against Kindred (Whitesburg Gardens) to arbitration. The liability of a principal to third parties with whom an agent contracted depends on whether the agent had the authority to enter into a legally binding contract on the principal’s behalf. This authority can be actual (express or implied) or apparent. Apparent authority arises when a principal causes a third party reasonably to believe that an agent has the authority to act.

In this problem, Kindred operates Whitesburg Gardens, a rehabilitation facility to which Jones was admitted following knee-replacement surgery. Jones’s daughter Yvonne Barbour signed the admission forms as her mother’s representative in her presence and without objection by Jones. The forms included an “Alternative Dispute Resolution Agreement” (ADR Agreement), which provided for binding arbitration in the event of a dispute between Jones and Whitesburg Gardens. Later, Jones filed a suit against Kindred claiming negligence. The question is whether, under the ADR Agreement, this dispute could be submitted to binding arbitration.

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The answer depends on whether Barbour had the apparent authority to sign the admission forms, including the ADR Agreement with its arbitration provision, on Jones’s behalf. According to the facts, she did. Barbour signed the forms in Jones’s presence, with no objection by Jones. By her passive acquiescence, Jones caused Whitesburg Gardens reasonably to believe that Barbour had the authority to act on Jones’s behalf.

In the actual case on which this problem is based, the court denied Kindred’s motion to compel arbitration. The Alabama Supreme Court reversed. The decision turned in part on whether Jones was mentally competent at the time of her admission to Whitesburg Gardens—the court concluded that she was—and, as in this problem, whether Barbour had the apparent authority to sign the admission forms on Jones’s behalf. The court concluded that she did. “Jones passively permitted Barbour to act on her behalf in signing the admission forms.”

14–8. Agency Relationships. Jane Westmas was killed when a tree branch cut by Creekside Tree Service, Inc., fell on her while she was walking on a public path through the private property of Conference Point Center on the shore of Lake Geneva in Wisconsin. Conference Point had contracted with Creekside to trim and remove trees from its property, but the owner had no control of (and no right to control) the details of Creekside’s work. Jane’s husband, John, and her son, Jason, filed a suit in a Wisconsin state court against Creekside, alleging that the service’s negligence caused her death. Creekside contended it was immune from the suit under a state statute that provides “no . . . agent of an owner is liable for the death of . . . a person engaging in a recreational activity on the owner’s property.” Could Creekside be held liable for Jane’s death? Why or why not? [Westmas v. Creekside Tree Service, Inc., 2018 WI 12, 379 Wis.2d 471, 907 N.W.2d 68 (2018)] (See Agency Law.) Solution: Yes. Creekside could be held liable for Jane’s death. An employer normally is not responsible for the actions of an independent contractor because the employer does not control the independent contractor’s work. Whether an independent contractor is the employer’s agent can affect the employer’s liability. The most important factor in determining whether an independent contractor is also an agent is the employer’s degree of control over the details of the work. If an employer exercises considerable control over the work, the contractor is more likely to be construed as an agent.

In this problem, Conference Point contracted with Creekside to trim and remove trees from Conference Point’s property, but the employer had no control over, nor the right to control, the details of the contractor’s work. Jane Westmas was killed when a tree branch cut by Creekside fell on her while she was walking on a public path on the property. In response to a suit alleging that the service’s negligence caused her death, Creekside cited a state statute that provides “no ... agent of an owner is liable for the death of ... a person engaging in a recreational activity on the owner’s property.” Because Conference Point had no control of, nor the right to control, the details of Creekside’s work, the contractor would not qualify as the employer’s agent. Thus, Creekside would not be immune from liability for Jane’s death under the state statute.

In the actual case on which this problem is based, the court issued a judgment in Creekside’s favor. A state intermediate appellate court reversed. The Wisconsin Supreme Court affirmed the appellate decision, based on the reasoning set out here.

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14–9. Liability for Agent’s Torts. Steven Henderson slipped and fell after stepping out of his car near a worksite, allegedly sustaining injuries. Henderson later sued Atmos Energy Corporation, claiming that Atmos was vicariously liable for the worksite conditions. The work had been performed by Miller Pipeline, LLC, an independent subcontractor for Atmos.

Louisiana law states that a principal is not liable for the torts of an independent contractor unless the principal exercises operational control over, or expressly or impliedly authorizes, the independent contractor’s actions. The contract between Atmos and Miller contained an independent contractor provision and a termination-at-will provision. Atmos’s only liability on termination was to pay Miller the unpaid balance due for work performed. Should the court rule in favor of Atmos? Why or why not? [Henderson v. Atmos Energy Corporation, 2022 WL 3657191 (5th Cir. 2022)] (See Liability in Agency Relationships.)

Solution: Henderson argued that the five-factor test employed by Louisiana courts to determine independent contractor status leans in favor of Miller Pipeline, LLC, being an employee. Henderson contended that even if Miller was an independent contractor, there was a genuine dispute as to whether Atmos exercised operational control over Miller, such that Atmos could be held vicariously liable under the operational-control exception. The United States Court of Appeals for the Fifth Circuit did not agree. The district court’s judgment in favor of Atmos Energy Corporation was correct. Atmos could not be held vicariously liable for the actions of Miller Pipeline, LLC, an independent contractor over which the defendant did not have operational control.

A QUESTION OF ETHICS 14–10. The IDDR Approach and Agent’s Authority. Devin Fink was the manager of Precision Tune Auto Care in Charlotte, North Carolina. Randall Stywall brought her car to the shop to replace the rear shocks. Fink filled out the service order with an estimate of the cost. Later, Stywall returned to pick up her car, and Fink collected payment for the work. When Stywall started to drive away, however, the car bounced as if the shocks had not been replaced. A complaint to Precision’s corporate office resulted in the discovery that in fact the work had not been done and Fink had kept the payment. He was charged with larceny against his employer. He argued that he had not committed this crime because the victim was Stywall, not Precision. [State of North Carolina v. Fink, 798 S.E.2d 537 (N.C.App. 2017)] (See Agent’s Authority.)

1.

Which agency principles support the charge against Fink? Explain.

Solution: An agent may have the authority to enter into contracts on the principal’s behalf. An agent’s authority may be actual or apparent. Express authority is embodied in what the principal engages the agent to do. An agent has the implied authority to do what is reasonably necessary to carry out the express authority. Authority can also be inferred from the agent’s position.

These principles support the charges against Fink. He was the manager of an auto repair shop to which Stywall brought her car to have the shocks replaced.

Fink’s authority to manage the shop implied the authority to do what was reasonably required to operate the business. As his employer’s agent, it is reasonable to imply that he had the authority to collect Stywall’s payment for the work on her car. At that point, the funds became the property of Fink’s principal, his employer. By keeping those funds for himself, Fink committed the crime of larceny against his employer.

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2. Using the IDDR approach, determine whether Fink had an ethical duty to offer a defense to the crime with which he was charged. What does Fink’s stated defense suggest about his ethics?

Solution: Fink may have had an ethical duty to offer a defense to the crime with which he was charged. But such a defense should be as ethical as the duty. Here it is not, making it likewise unethical to offer it.

The first step of the IDDR approach is an Inquiry to state the issue, the stakeholders, and the ethical standards. The issue is whether Fink had an ethical duty to offer a defense to the crime with which he was charged.

Stakeholders would include those who depend on Fink to avoid criminal penalties—his immediate family, for instance, who might need his income to maintain their living standard, his presence to remain stable (a parent’s imprisonment can emotionally affect a child, for example), and his freedom to live their own lives more fully. His co-workers and his employer’s customers might feel justified in their having trusted Fink in other circumstances. Other criminal defendants familiar with Fink’s case might gain confidence to plead their defenses.

The second step of the IDDR approach is a Discussion of actions to address the issue, the strengths and weaknesses of the actions, and consequences and effects on the stakeholders. Offering a legitimate, truthful defense to the charge would meet the duty. The other chief strength of this action could be a finding of no liability to the charges. This conclusion would obviously satisfy all of the identified stakeholders.

The third step of the IDDR approach is a Decision on the action and a statement of its reasons. The decision on the issue seems clear, given the potentially positive outcome. Without offering a defense, Fink is not likely to avoid being found guilty as charged. The negative effects of this result on the stakeholders only add to the reasons to plead.

The fourth and final step of the IDDR approach is a Review of the success or failure of the actions to resolve the issue and satisfy the stakeholders. Success in these circumstances can only occur if a defense is pleaded, but if the defense is successful, the stakeholders will be satisfied.

In Fink’s case, he argued that he had not committed the charged crime because the victim was the customer, not the employer. This defense suggests both ethical honesty and deceit. Honesty is suggested by Fink’s appearance to face the charge and offer a defense and by his confession to keeping the funds.

Deceit is suggested by the false impression of sincerity created by the offered defense in the face of clear agency principles to the contrary. The sum of these impressions betrays a general lack of ethics.

In the actual case on which this problem is based, Fink was convicted of the larceny charge in a North Carolina state court. A state intermediate appellate court affirmed the conviction.

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TIME-LIMITED TEAM ASSIGNMENT 14–11. Liability for Independent Contractor’s Torts. Dean Brothers Corp. owns and operates a steel-drum manufacturing plant. Lowell Wyden, the plant superintendent, hired Best Security Patrol, Inc. (BSP), a security company, to guard the property and “deter thieves and vandals.”

Some BSP security guards, as Wyden knew, carried firearms. Pete Sidell, a BSP security guard, was not certified as an armed guard but nevertheless took his gun to work. While working at the Dean plant on October 31, Sidell fired his gun at Tyrone Gaines, in the belief that Gaines was an intruder. The bullet struck and killed Gaines. Gaines’s mother filed a lawsuit claiming that her son’s death was the result of BSP’s negligence, for which Dean was responsible. (See Liability in Agency Relationships.)

1.

The first team will determine what the plaintiff’s best argument is to establish that Dean is responsible for BSP’s actions.

Solution: The plaintiff’s best argument that Dean is responsible for BSP’s actions may be that work such as BSP was hired to perform creates a peculiar risk of harm to others. When armed guards are hired to deter vandals and thieves, it is foreseeable that someone might be injured by the inappropriate use of a weapon if proper precautions are not taken. Thus, in this case, such an injury is one that might have been anticipated as a direct or probable consequence of the performance of the work contracted for if reasonable care had not been taken in its performance. Also, the risk created is not a normal, routine matter of customary human activity, such as driving an automobile, but is instead a special danger arising out of the particular situation created and calling for special precautions. Under this reasoning, the plaintiff would argue that Dean could be liable even though the guard responsible was an employee of an independent contractor.

2. The second team will discuss Dean’s best defense and formulate arguments in support of it.

Solution: To the plaintiff’s best argument set out in the previous answer, Dean might respond that hiring armed guards to protect property does not create a peculiar risk of harm to others and, therefore, is not inherently dangerous work.

On this conclusion, even if Gaines’s death were the result of BSP’s negligence, Dean would not be liable, because BSP was an independent contractor, and an employer is not generally liable for the negligent acts of its independent contractor.

3. The third team will consider slightly different facts. Suppose that Dean Brothers had an express policy that prohibited all security guards from carrying firearms on its property, which Wyden had conveyed to BSP. Despite knowing about this policy, Sidell had brought his weapon to work, and then fired it, killing Gaines. Could Dean be held responsible for negligence in that situation? Explain.

Solution: No. Most likely, Dean could not be held liable for negligence under the slightly different facts provided in this question. The reason and conclusion are similar to the reason and conclusion in the answer to the previous question— Dean would not be liable, because BSP was an independent contractor whose employee was clearly acting outside the scope of employment. In the circumstances of the different facts in this question, BSP or its employee might © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 14: Agency Relationships

arguably be negligent, but their employer Dean would not be generally liable for their negligent acts.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 15: Employment, Immigration, and Labor Law

Solution and Answer Guide

Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 15: Employment, Immigration, and Labor Law

TABLE OF CONTENTS Critical Thinking Questions in Features .............................................................................1 Ethical Issue—Value Judgment .............................................................................................. 1 Building Analytical Skills—Result and Reasoning .............................................................. 2 Managerial Strategy—Business Questions........................................................................... 2 Critical Thinking Questions in Cases ................................................................................. 3 Case 15.1—Critical Thinking .................................................................................................... 3 Case 15.2—Critical Thinking.................................................................................................... 3 Case 15.3—Critical Thinking.................................................................................................... 4 Chapter Review ................................................................................................................... 5 Practice and Review................................................................................................................. 5 Practice and Review: Debate This ......................................................................................... 6 Issue Spotters ........................................................................................................................... 6 Business Scenarios and Case Problems .............................................................................. 7 A Question of Ethics ............................................................................................................... 12 Time-Limited Team Assignment .......................................................................................... 14

CRITICAL THINKING QUESTIONS IN FEATURES ETHICAL ISSUE—VALUE JUDGMENT 1.

Evaluate the ethics of tipping as common practice in the United States.

Solution: Critics of tipping think that a gratuity should be a discretionary expression of appreciation on the customer’s part, not a compulsory employer subsidy. Putting it a different way, employers should pay their employees without relying on customers to cover part of the paycheck. Along these lines, thousands of restaurants across the country have voluntarily forsaken traditional tipping, instead providing the same base pay for all front- and back-of-the-house workers. Customers that still want to tip are able to do so, with the gratuities going into a tip pool that is shared among all non-management employees.

Those in favor of tipping believe that there is nothing unfair about providing tipped workers with “something extra” for top-level service. There is also a belief in some

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quarters that, without tips as an incentive, some workers will not make give a maximum service effort. Additionally, some tipped workers oppose the single minimum wage because they think—or know—that any increase in base pay will not be enough to make up for the absent tips. Furthermore, if an establishment offers base pay for all workers but not tip pooling, the actual pay gap between the tipped (servers, bartenders) and the non-tipped (cooks, dishwashers) will increase dramatically and, to some extent, unfairly.

BUILDING ANALYTICAL SKILLS—RESULT AND REASONING 1.

Schrader is entitled to workers’ compensation benefits. It is established that Dynea required its employees to wear the boots that caused the sore on Schrader’s leg, which subsequently became infected with MRSA. Why is Dynea’s argument that the MRSA bacteria that caused the infection had been on Schrader’s skin before he came to work ineffective?

Solution: Even if the bacteria had been on Schrader’s skin before he came to work, it was the rubbing of the boot at work that caused the sore through which the bacteria entered his body. Therefore, the second requirement for the recovery of workers’ compensation benefits—that the injury occurred on the job—is fulfilled.

MANAGERIAL STRATEGY—BUSINESS QUESTIONS 1.

Employees meeting around the water cooler or coffee machine have always had the right to discuss work-related matters. Is an employer-provided e-mail system or social media outlet simply a digital water cooler? Why or why not?

Solution: Many businesspersons argue that the analogy is false. An actual water-cooler or coffee-machine discussion only involves a few individual employees. Social media sites, in contrast, are accessible by all employees, all suppliers, and perhaps, more importantly, by all actual or potential customers.

2. Why might the nondiscrimination component of the NLRB’s recent ruling make a ban on union-related e-mails difficult for managers to enforce?

Solution: In theory, if a manager wants to prohibit union-related e-mails on the company’s computer system, the NLRB ruling requires the manager to ban all e-mails that are not strictly work-related. Otherwise, employees or union representatives could argue that the policy wrongly discriminates again union organizing via e-mail.

This means that to stay within the bounds of the NLRB guidelines, the manager would have to prohibit non-work-related e-mails about a wide variety of subjects such as “What time to do you want to get together for lunch?” and “Who is in for the softball game on Saturday?” etc. Frankly, this would take more time and effort than most managers are willing to expend on the subject. As one observer asks, “How do you enforce a policy like that in a non-discriminatory way?”

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CRITICAL THINKING QUESTIONS IN CASES CASE 15.1—CRITICAL THINKING 1.

Economic. How could Helix have structured Hewitt’s pay to avoid owing him overtime?

Solution: Helix could have guaranteed Hewitt a certain amount each week regardless of how many days he actually worked. Or the company could have converted Hewitt’s compensation to a straight weekly salary. The reason Helix did not do either was that it did not want to pay Hewitt for the days he was not working. But, as the Supreme Court pointed out, this showed that Helix “wishes neither to pay employees a true salary nor to pay them overtime. And the whole point of the salary-basis requirement is to take [this] option off the table, even though doing so may well increase costs.”

2. Political. Congress enacted the FLSA to protect workers from “substandard wages” and “oppressive working hours.” As a matter of policy, should a high earner such as Hewitt be guaranteed overtime pay under this act? Explain your answer.

Solution: Helix argued, unsuccessfully, that if the salary-basis test excluded all highly paid “daily-rate” workers such as Hewitt, those workers would receive “windfalls” under a law that was not designed for their benefit. Justice Kavanaugh, joined by Justice Alito, made a similar argument in their dissent, pointing out that based on Hewitt’s salary level (a guaranteed $963 a week for any week he worked at least one day) and duties, he should not have been eligible for overtime.

The Supreme Court’s majority opinion rejected this reasoning, asserting that “even the most formidable policy arguments cannot overcome a clear, textual directive.” Because Congress expressly elected not to exempt highly compensated workers from the FLSA, workers such as Hewitt are not “deprived of the benefits of the Act simply because they are well paid.”

Having made this point, the Court went on to detail some of the troubling unintended consequences of Helix’s position. For example, many nurses operate on a per-day or per-shift basis and earn well-deserved overtime pay when they work more than 40 hours per week. Applying Helix’s reasoning, these nurses’ employers could exempt them from overtime by assuring them $455 a week or about $24,000 a year (the baseline minimum under the FLSA). Many employers would do so “in a heartbeat,” thereby denying overtime to numerous day-rate employees who make far less than an oil rig worker such as Hewitt.

CASE 15.2—CRITICAL THINKING 1.

Legal Environment. As a defense to the citation for an OSHA violation, Packers argued that the injured employee violated the proximity rule. Was this defense relevant to the question before the court? Discuss.

Solution: No, Packers’ argument in defense to the citation for the OSHA violation that the employee violated the two-foot rule, in effect attempting to blame the employee for the injury, was not relevant to the issue before the court in this case. The departure from OSHA standards, not the worker’s injury, was the violation. The relevant inquiry, on a contention shifting responsibility to an employee, would have

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been whether the employee caused the violation, not whether the employee could have avoided injury despite the employer’s violation. To be relevant, the defense would assert that the employee caused the violation.

In the circumstances of this case, to establish as a defense that the employee’s violation of a workplace rule caused the OSHA violation, Packers would have had to show that it had rules designed to prevent the violation, communicated those rules to the employees, took steps to discover violations of the rules, and enforced the rules when violations occurred.

For example, an assertion of employee misconduct might have been a successful defense here if Packers had shown that it imposed a rule requiring the use of machine guards to clean a quill puller, told the employees about the rule, directed a supervisor to check the puller before each cleaning to be sure the guards were in use, and employees had been disciplined for violating the rule.

2. What If the Facts Were Different? Suppose that no accident had taken place. Instead, the employee had refused to clean the unguarded quill puller, and Packers had discharged him. Would the result have been different? Explain.

Solution: No, the result would not have been different in this case if the employee had refused to clean the unguarded quill puller, and Packers had discharged him before the accident took place. Packers would have been cited for a different OSHA violation but it is not likely that any defense the employer asserted against that citation would have succeeded.

Under OSHA, an employer cannot discharge an employee who, in good faith, refuses to work in a high-risk area if bodily harm or death might occur as a consequence.

Terminating the employee in that circumstance would of course be a violation of the act and prompt an OSHA investigation, a workplace inspection, and a citation.

CASE 15.3—CRITICAL THINKING 1.

Legal Environment. In this kind of case, should the burden be on the union to prove that the election was valid or on the employer to prove that it was invalid? Explain your reasoning.

Solution: Precedent has established that courts are to be guided by the “strong presumption” that representation elections such as the one in the Exela Enterprise Solutions case “reflect the true desires of the employees.” As a result, the party challenging the election result “bears the entire burden” of showing facts sufficient for invalidation.

Here, Exela clearly did not want its small labor force of fourteen employees to be unionized. In addition, the company’s management was probably aggrieved that the final vote was so close: eight in favor and six against. Nonetheless, according to the appeals court, Exela was required to provide “specific evidence of specific events from or about specific people establishing a level of interference with employees’ free choice that either tended to or did materially influence” the results of the election.

According to the appeals court, Exela’s “specific evidence” did not meet this burden and so the company must recognize the union as a valid negotiating partner.

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2. What If the Facts Were Different? Suppose that, just before the election, the two Union representatives were in fact speaking with Exela employees outside the polling entrance, although the exact nature of the conversation could not be ascertained. Would the result in this case have been the same? Why or why not?

Solution: Probably not. The Board has established a bright-line rule that “prolonged conversations between representatives of any party to the election and voters waiting to cast ballots is of sufficient concern to warrant a strict rule against such conduct, without inquiry into the nature of the conversations." The intent of this bright-line rule is clear: To keep either the employer or the union from “electioneering” or campaigning to influence the result of the election. The unfairness of this tactic is so evident that the Board does not require any evidence that the conversation actually involved an attempt to sway the voter. Any conversation creates a presumption of electioneering.

The strong deterrent effect of this bright-line rule was evident in this case. The record reflected that an Exela human resources executive and two union representatives met with a Board representative just before the union election. Following this meeting, the Board representative told the union representatives to go “far away” before the polls opened at 10 a.m. It might be argued that eighty feet away, in the parking lot, was not far away enough, given that one of the union representatives was wearing a union jacket. Still, the union representatives were clearly not in the immediate vicinity of the voters, and Exela failed to provide any evidence that the union representatives interacted with the voters or even that the pair were seen by the voters.

CHAPTER REVIEW PRACTICE AND REVIEW Rick Saldona began working as a traveling salesperson for Aimer Winery in 2009. Sales constituted 90 percent of Saldona’s work time. Saldona worked an average of fifty hours per week but received no overtime pay. In June 2019, Saldona’s new supervisor, Caesar Braxton, claimed that Saldona had been inflating his reported sales calls and required Saldona to submit to a polygraph test. Saldona reported Braxton to the U.S. Department of Labor, which prohibited Aimer from requiring Saldona to take a polygraph test for this purpose. In August 2019, Saldona’s wife, Venita, fell from a ladder and sustained a head injury while employed as a full-time agricultural harvester. Saldona delivered to Aimer’s human resources department a letter from his wife’s physician indicating that she would need daily care for several months, and Saldona took leave until December 2019. Aimer had sixty-three employees at that time.

When Saldona returned to Aimer, he was informed that his position had been eliminated because his sales territory had been combined with an adjacent territory. Using the information presented in the chapter, answer the following questions.

1.

Would Saldona have been legally entitled to receive overtime pay at a higher rate? Why or why not?

Solution: No, because he is exempt from the overtime rules. Over 90 percent of Saldona’s time was spent on sales. As an outside salesperson, Saldona is exempt from the overtime rules established by the Fair Labor Standards Act.

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2. What is the maximum length of time Saldona would have been allowed to take leave to care for his injured spouse?

Solution: The Family and Medical Leave Act (FMLA) applied to Saldona’s employer, Aimer Winery, because Aimer had over fifty employees. Under the FMLA, Saldona would have been entitled to up to twelve weeks of unpaid medical leave to care for his injured wife.

3. Under what circumstances would Aimer have been allowed to require an employee to take a lie-detector test?

Solution: The Employee Polygraph Protection Act generally prohibits employers from requiring applicants or employees to take lie-detector tests. The only time employers are permitted to use polygraph tests under the act is when investigating losses attributable to theft, including embezzlement or theft of trade secrets.

Therefore, if Aimer had suffered losses due to theft, such as embezzlement or theft of trade secrets, and was attempting to investigate such losses, it could use polygraphs as part of its investigation.

4. Would Aimer likely be able to avoid reinstating Saldona under the key employee exception? Why or why not?

Solution: An important exception to the FMLA allows an employer to avoid reinstating a key employee—defined as an employee whose pay falls within the top 10 percent of the firm’s workforce. Thus, if Saldona falls within that group of Aimer’s employees, Aimer could avoid reinstating him.

PRACTICE AND REVIEW: DEBATE THIS 1.

The U.S. labor market is highly competitive, so state and federal laws that require overtime pay are unnecessary and should be abolished.

Solution: In a competitive market, arrangements for overtime pay would be dictated by the forces of supply and demand for labor. There is no need for the government to step in to regulate this market.

Most employees have little bargaining power in the labor market. Consequently, without government regulations with respect to overtime pay, employers would exploit the weakest employees, the ones that cannot seek alternative employment.

ISSUE SPOTTERS 1.

Erin, an employee of Fine Print Shop, is injured on the job. For Erin to obtain workers’ compensation, does her injury have to have been caused by Fine Print’s negligence? Does it matter whether the action causing the injury was intentional? Explain. (See Health, Safety, Income Security, and Privacy.)

Solution: Workers’ compensation laws establish a procedure for compensating workers who are injured on the job. Instead of suing to collect benefits, an injured worker notifies the employer of an injury and files a claim with the appropriate state agency.

The right to recover is normally determined without regard to negligence or fault but intentionally inflicted injuries are not covered. Unlike the potential for recovery in a

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 15: Employment, Immigration, and Labor Law

lawsuit based on negligence or fault, recovery under a workers’ compensation statute is limited to the specific amount designated in the statute for the employee’s injury.

2. Onyx applies for work with Precision Design Company, which tells her that it requires union membership as a condition of employment. She applies for work with Quality Engineering, Inc., which does not require union membership as a condition of employment but requires employees to join a union after six months on the job. Are these conditions legal? Why or why not? (See Labor Law.) Solution: No. A closed shop (a company that requires union membership as a condition of employment) is illegal. A union shop (a company that does not require union membership as a condition of employment but requires workers to join the union after a certain time on the job) is illegal in a state with a right-to-work law, which makes it illegal to require union membership for continued employment.

BUSINESS SCENARIOS AND CASE PROBLEMS 15–1. Unfair Labor Practices. Consolidated Stores is undergoing a unionization campaign. Prior to the union election, management states that the union is unnecessary to protect workers.

Management also provides bonuses and wage increases to the workers during this period. The employees reject the union. Union organizers protest that the wage increases during the election campaign unfairly prejudiced the vote. Should these wage increases be regarded as an unfair labor practice? Discuss. (See Labor Law.) Solution: The NLRB has consistently been suspicious of companies that grant added benefits during election campaigns. These benefits will be considered as an unfair labor practice that biases elections, unless the employer can demonstrate that the benefits were unrelated to the unionization.

15–2. Wrongful Discharge. Denton and Carlo were employed at an appliance plant. Their job required them to do occasional maintenance work while standing on a wire mesh twenty feet above the plant floor. Other employees had fallen through the mesh, and one was killed by the fall. When Denton and Carlo were asked by their supervisor to do work that would likely require them to walk on the mesh, they refused due to their fear of bodily harm or death.

Because of their refusal to do the requested work, the two employees were fired. Was their discharge wrongful? If so, under what federal employment law? To what federal agency or department should they turn for assistance? (See Employment at Will.)

Solution: The Occupational Safety and Health Act requires employers to provide safe working conditions for employees. The act prohibits employers from discharging or discriminating against any employee who refuses to work when the employee believes in good faith that undertaking the employment activity will bring about a risk of death or great bodily harm. Denton and Carlo had sufficient reason to believe that the maintenance job required of them by their employer involved great risk. Therefore, under the act, their discharge was wrongful. Denton and Carlo can turn to the Occupational Safety and Health Administration, which is part of the U.S. Department of Labor, for assistance.

15–3. Exceptions to the Employment-at-Will Doctrine. Li Li worked for Packard Bioscience, and Mark Schmeizl was her supervisor. In March 2000, Schmeizl told Li Li to call Packard’s competitors, pretend to be a potential customer, and request “pricing information and literature.” Li Li refused to perform the assignment. She told Schmeizl that she thought the

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work was illegal and recommended that he contact Packard’s legal department. Although a lawyer recommended against the practice, Schmeizl insisted that Li Li perform the calls.

Moreover, he later wrote negative performance reviews because she was unable to get the requested information when she called competitors and identified herself as a Packard employee. On June 1, 2000, Li Li was terminated on Schmeizl’s recommendation. Can Li Li bring a claim for wrongful discharge? Why or why not? [Li Li v. Canberra Industries, 134 Conn.App. 448, 39 A.3d 789 (2012)] (See Employment at Will.)

Solution: Li Li can bring a wrongful discharge claim. Ordinarily, an employer may terminate an employment relationship at will. Courts provide an exception, however, when an employer’s conduct violates public policy. In this case, Li has evidence that Packard retaliated against her because she refused to deceive Packard’s competitors.

Li Li also arguably engaged in whistleblowing by recommending that her supervisor contact the company’s legal department.

15–4. Business Case Problem with Sample Answer—Unemployment Compensation. Fior Ramirez worked as a housekeeper for Remington Lodging & Hospitality, a hotel in Atlantic Beach, Florida. After her father in the Dominican Republic suffered a stroke, she asked her employer for time off to be with him. Ramirez’s manager, Katie Berkowski, refused the request. Two days later, Berkowski received a call from Ramirez to say that she was with her father. He died about a week later, and Ramirez returned to work, but Berkowski told her that she had abandoned her position. Ramirez applied for unemployment compensation. Under the applicable state statute, “an employee is disqualified from receiving benefits if he or she voluntarily left work without good cause.” Does Ramirez qualify for benefits? Explain. [Ramirez v. Reemployment Assistance Appeals Commission, 135 So.3d 408 (Fla.App. 1 Dist. 2014)] (See Health, Safety, Income Security, and Privacy.)

Solution: Yes. Ramirez qualifies for unemployment compensation. Generally, to be eligible for unemployment compensation, a worker must be willing and able to work.

Workers who have been fired for misconduct or who have voluntarily left their jobs are not eligible for benefits. In the facts of this problem, the applicable state statute disqualifies an employee from receiving benefits if the employee voluntarily leaves work without “good cause.”

The issue is whether Ramirez left her job for “good cause.” When her father in the Dominican Republic had a stroke, she asked her employer for time off to be with him.

Her employer refused the request. But Ramirez left to be with her father and called to inform her employer. It seems likely that this family emergency would constitute “good cause,” and Ramirez’s call and return to work after her father’s death indicated that she did not disregard her employer’s interests.

In the actual case on which this problem is based, the state of Florida denied Ramirez unemployment compensation. On Ramirez’s appeal, a state intermediate appellate court reversed, on the reasoning stated above.

15–5. Labor Unions. Carol Garcia and Pedro Salgado, bus drivers for Latino Express, Inc., a transportation company, began soliciting signatures from other drivers to certify the Teamsters Local Union No. 777 as the official representative of the employees. Latino Express fired Garcia and Salgado. The two drivers filed a claim with the National Labor Relations Board (NLRB) alleging that the employer had committed an unfair labor practice. Which employer practice defined by the National Labor Relations Act did the plaintiffs most likely charge Latino Express with committing? Is the employer’s discharge of Garcia and Salgado likely to

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 15: Employment, Immigration, and Labor Law

be construed as a legitimate act in opposition to union solicitation? If a violation is found, what can the NLRB do? Discuss. [Ohr v. Latino Express, Inc., 776 F.3d 469 (7th Cir. 2015)] (See Labor Law.) Solution: The National Labor Relations Act (NLRA) defines a number of employer practices as unfair to labor. Most likely to be charged by the plaintiffs in this case is the ban on an employer’s interference with the efforts of employees to form, join, or assist labor organizations. Garcia and Salgado, who were bus drivers for Latino Express, had begun soliciting signatures from other drivers to certify a Teamsters local union as the employees’ official representative. Latino Express fired Garcia and Salgado.

The employer’s discharge of Garcia and Salgado is not likely to be construed as a legitimate act in opposition to union solicitation. Generally, an employer has control over unionizing activities that take place on company property during working hours.

An employer can limit the campaign activities of union supporters for a legitimate business reason. An employer can also reasonably limit the times and places that union solicitation takes place. An employer can campaign among its workers against the union. But an employer cannot issue threats or engage in other coercive conduct.

Discharging union supporters is likely to be perceived as coercive.

If a violation is found in these circumstances, the NLRB can issue a cease-and-desist order compelling the employer to stop engaging in the unfair practice. A U.S. court of appeals can enforce the order.

In the actual case on which this problem is based, Peter Ohr, regional director of the NLRB, asked a federal district court to enjoin Latino Express from engaging in specific acts prohibited by the NLRA and to reinstate the terminated drivers. The court issued the injunction. Latino Express did not comply. The court held the employer in contempt. The U.S. Court of Appeals for the Seventh Circuit affirmed.

15–6. Income Security. Jefferson Partners LP entered into a collective bargaining agreement (CBA) with the Amalgamated Transit Union. Under the CBA, drivers had to either join the union or pay a fair share—85 percent—of union dues, which were used to pay for administrative costs incurred by the union. An employee who refused to pay was subject to discharge.

Jefferson hired Tiffany Thompson to work as a bus driver. When told of the CBA requirement, she said that she thought it was unfair. She asserted that it was illegal to compel her to join the union and that it would be illegal to discharge her for not complying. She refused either to join the union or to pay the dues. More than two years later, she was fired on the ground that her continued refusal constituted misconduct. Is Thompson eligible for unemployment compensation? Explain. [Thompson v. Jefferson Partners LP, 2016 WL 953038 (Minn.App. 2016)] (See Health, Safety, Income Security, and Privacy.)

Solution: No. Thompson is not eligible for unemployment compensation. Under the Federal Unemployment Tax Act, a state-administered system provides unemployment compensation to eligible individuals who have lost their jobs. To be eligible for unemployment compensation, a worker must be willing and able to work. Workers are not eligible for benefits if they voluntarily left their jobs or were fired for misconduct.

Here, Jefferson hired Thompson to work as a bus driver. Thompson was informed of the CBA provision that stipulated a non-union employee’s payment of 85 percent of the amount of union dues paid by an employee who is a member of the union. She

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 15: Employment, Immigration, and Labor Law

was also told of the possible consequence for non-compliance of a termination of employment. She complained that this requirement was unfair. She argued that she thought it was illegal to compel her to join the union and it would be illegal to discharge her for not complying with the CBA. At any rate, she refused to join the union or to pay the dues. Two years later, Jefferson terminated her on the ground that her continued refusal constituted misconduct. This “misconduct” serves as a basis for the state’s denial of unemployment benefits.

In the actual case on which this problem is based, the Minnesota Department of Employment and Economic Development denied Thompson’s claim for benefits.

Thompson appealed to a Minnesota state intermediate appellate court. The court defined employment misconduct to include “a serious violation of the standards of behavior the employer has the right to reasonably expect of the employee.” The court held that Thompson’s failure to comply with the CBA was “a significant violation of Jefferson’s reasonable policy. Accordingly, Thompson committed employment misconduct and she is ineligible to receive unemployment benefits.”

15–7. Family and Medical Leave. To qualify for leave under the Family and Medical Leave Act (FMLA), an employee must comply with the employer’s usual and customary notice requirements, including call-in policies. Robert Stein, an employee of Atlas Industries, Inc., suffered a knee injury at work. Stein took medical leave to have surgery on the knee. Ten weeks into his recovery, Stein’s doctor notified Atlas that Stein could return to work with light-duty restrictions in two days. Stein, however, thought he was on leave for several more weeks. Atlas company policy provided that employees who missed three workdays without notification were subject to automatic termination. Stein did not return to work or call in as Atlas expected. Four days later, he was fired. Did Stein’s discharge violate the FMLA? Discuss.

[Stein v. Atlas Industries, Inc., 730 Fed.Appx. 313 (6th Cir. 2018)] (See Wages, Hours, and Leave.)

Solution: No. Atlas’s discharge of Stein did not violate the Family and Medical Leave Act (FMLA). The FMLA requires employers with fifty or more employees to provide them with up to twelve weeks of unpaid family or medical leave during any twelve-month period. Legitimate reasons for the leave include a serious health condition that renders the employee unable to perform the essential functions of their job.

But the FMLA does not grant an unconditional right to leave. As stated at the beginning of the problem, to qualify for leave, an employee must comply with his employer’s notice requirements, including any call-in policies. When an employee fails to do so, the employer is within its rights to terminate him—even if the days the employee failed to call in were otherwise FMLA-protected.

Here, Stein, an Atlas employee, took medical leave from his job to have surgery. Ten weeks into recovery, Stein’s doctor notified Atlas that Stein could return to work in two days. Stein, however, thought he was on leave for several more weeks. Atlas company policy provided that employees who missed three workdays without notice were subject to automatic termination. Stein did not return to work or call in as Atlas expected. Four days later, he was fired. Atlas was fully within its rights as an employer in the circumstances to take this step.

In the actual case on which this problem is based, the court issued a judgment in Atlas’s favor. The U.S. Court of Appeals for the Sixth Circuit affirmed, based on the reasoning set out here.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 15: Employment, Immigration, and Labor Law

15–8. Union Organization. Cedar Point Nursery was a strawberry grower in northern California that employed about 500 workers (400 season and 100 full-time). At 5 A.M. one morning, members of the United Farm Workers entered Cedar Point’s trim shed and, calling through bullhorns, encouraged the employees to join their union. Two lower courts dismissed Cedar Point’s resulting suit against United Farm Workers. These rulings relied on a state regulation that granted labor organizations a “right to take access” to an agricultural employer’s property to solicit support for unionization. Should this regulation be upheld, or does it unfairly burden California’s agriculture industry? Explain. [Cedar Point Nursery v. Hassid, 594 U.S. 139, 141 S.Ct. 2063, 210 L.Ed.2d 369 (2021)] (See Labor Law.) Solution: The California regulation in question grants labor organizations a “right to take access” to an agricultural employer’s property for solicitation purposes by mandating that these employers allow union organizers on their property for up to three hours a day, 120 days per year. Cedar Point argued that this law resulted in an unconstitutional, physical government taking by “appropriating without compensation an easement for union organizers to enter their property.” In other words, the state regulation violated the “takings clause” of the Fifth Amendment, which states that “private property” shall not “be taken for public use, without just compensation.”

A federal district court rejected Cedar Point’s argument, holding that the regulation did not constitute a physical taking because it “did not allow the public to access [Cedar Point’s] property in a permanent and continuous manner for whatever reason.” The U.S. Court of Appeals for the Ninth Circuit affirmed, accepting the circuit court’s reasoning while adding that Cedar Point had failed to show that the regulation deprived it of all economically beneficial use of its property.

The United States Supreme Court reversed, basing its opinion on the fact that the “right to exclude” is “one of the most treasured” rights of property ownership. Given this important right, the Court rejected the lower courts’ assertion that California’s access regulation was not a “taking” because it did not allow for permanent and continuous access. The Court asserted that a physical appropriation is a taking whether it is permanent or temporary. The duration is only relevant when determining the amount of compensation the government must pay the property owner.

Consequently, in the words of the Court, “[California’s] access regulation grants labor organizations a right to invade the growers' property. It therefore constitutes a per se physical taking.”

California’s Agricultural Relations Board, a regulatory agency that enforces state labor law, defended the law in question by pointing to a previous case in which the Court had “balanced property and [union] organization rights.” In that case, federal regulators had cited several employers for preventing union organizers from distributing labor literature on company property. That Court had ruled that the relevant statute did not require employers to allow organizers onto their property, except in situations where employees were otherwise “beyond the reach of reasonable union efforts to communicate with them.” In its Cedar Point opinion, the Court noted that this previous case did not involve a takings claim and was therefore not applicable to the matter at hand.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 15: Employment, Immigration, and Labor Law

A QUESTION OF ETHICS 15–9. The IDDR Approach and Immigration Law. Split Rail Fence Company sold and installed fencing materials in Colorado. U.S. Immigration and Customs Enforcement (ICE) sent Split Rail a list of the company’s employees whose documentation did not satisfy the Form I-9 employment eligibility verification requirements. The list included long-term workers who had been involved in company activities, parties, and picnics. They had bank accounts, driver’s licenses, cars, homes, and mortgages. At Split Rail’s request, the employees orally verified that they were eligible to work in the United States. Unwilling to accept the oral verifications, ICE filed a complaint against Split Rail for its continued employment of the individuals. [Split Rail Fence Co. v. United States, 852 F.3d 1228 (10th Cir. 2017)] (See Immigration Law.) 1.

Using the IDDR approach, identify Split Rail’s ethical dilemma. What steps might the company take to resolve it? Explain.

Solution: Split Rail’s ethical dilemma is how to satisfy the demands of the government and the needs and expectations of the company’s employees. One way to resolve this dilemma is to comply with the government’s demands while assuring the employees of the security of their employment.

The first step of the IDDR approach is an Inquiry to state the issue, the stakeholders, and the ethical standards. The issue is stated in the previous paragraph above. The stakeholders include Split Rail, its employees and their families, the government, and members of the larger community, including especially those who would work for Split Rail but for the company’s employment of persons who do not satisfy the Form I-9 requirements.

The second step of the IDDR approach is a Discussion of actions to address the issue, the strengths and weaknesses of the actions, and consequences and effects on the stakeholders. The Immigration Reform and Control Act (IRCA) makes it illegal to employ someone not authorized to work in the United States. To comply with the IRCA, an employer must complete Form I-9 (“Employment Eligibility Verification”). The employer must review and verify documents establishing each worker’s eligibility for employment in this country.

In this problem, U.S. Immigration and Customs Enforcement (ICE) sent Split Rail a list of its employees whose documentation did not satisfy the Form I-9 requirements. To meet the government’s demands, Split Rail would need to review acceptable documentation to verify the eligibility status of the listed employees or discharge them.

The ICE list included long-term employees who had been involved in company activities, parties, and picnics. They had bank accounts, driver’s licenses, cars, homes, and mortgages. To meet the needs and expectations of the employees, Split Rail should sufficiently verify their status to legitimately continue their employment.

At Split Rail’s request, the employees orally verified that they were eligible to work in the United States. Unwilling to accept the oral verifications, ICE filed a complaint against Split Rail for its continued employment of these individuals.

Split Rail is in violation of the IRCA provisions requiring the review and verification of documents. Consequently, the employer is also in violation for continuing to employ the individuals whose status is in question. These actions

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 15: Employment, Immigration, and Labor Law

clearly do not meet the demands of the government or the needs and expectations of the workers.

The third step of the IDDR approach is a Decision on the action and a statement of its reasons. Here, Split Rail should decide to make a more concerted effort to comply strictly with the government’s demands. To meet the needs and expectations of the workers, Split Rail should assure the employees that, on compliance with the government’s requirements, their employment is secure. These seem like relatively uncomplicated steps to take to resolve the company’s ethical dilemma.

The fourth and final step of the IDDR approach is a Review of the success or failure of the actions to resolve the issue and satisfy the stakeholders. The suggested actions have the potential to accomplish success in this case. This may be Split Rail’s best choice—almost any other action could lead to legal penalties, on the one hand, and a decimated workforce, on the other, with the remaining employees losing faith and trust in their employer.

In the actual case on which this problem is based, an administrative law judge imposed civil penalties on Split Rail for continuing to employ “unauthorized aliens in the United States” in violation of the IRCA. The U.S. Court of Appeals for the Tenth Circuit denied Split Rail’s petition for review.

2. Is penalizing employers the best approach to take in attempting to curb illegal immigration? Discuss.

Solution: Yes, penalizing employers is the best approach to take in attempting to reduce illegal immigration. Employment is the primary motivation for those who would immigrate illegally. Why else would anyone voluntarily leave their home to live where they know nearly no one, likely do not speak the language or understand much of the culture, would be unable to participate in the government, and may be subject to arrest and deportation? Sanctioning those who would employ illegal immigrants would reduce the employers’ willingness to hire the immigrants, thus eliminating the reason for the immigration.

Immigration should be curtailed and restricted because a nation might otherwise find itself overwhelmed. There could be too many persons seeking too few jobs, for example, or too many persons fleeing a temporarily discomfiting situation. There might be a movement of too many persons hostile to a nation, or its government, into its borders. There might be a large number of criminals who would seek refuge across international borders with too much ease.

No, penalizing employers is not the best approach to take in attempting to reduce illegal immigration. Penalizing employers puts the onus on those who are only taking economic advantage of a situation not of their own making. In some cases, those employers might not be able to fill the jobs that they have available.

Immigrants can revitalize nations and their economies, as well as enrich their cultures. Employed immigrants pay taxes, which help fund government programs, such as Social Security. Without immigration, in many countries,

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 15: Employment, Immigration, and Labor Law

including the United States, the populations would grow increasingly older, resulting in, among other things, fewer workers to support those who are retired. Immigrants contribute to economies in other ways too, often doing work that citizens reject, for example. Immigrants are often responsible for a disproportionate number of the innovations, inventions, and other achievements that can improve a nation’s life. Immigrants often follow different customs, religions, or artistic traditions, which can enhance and diversify a nation’s culture.

TIME-LIMITED TEAM ASSIGNMENT 15–10. Immigration. Nicole Tipton and Sadik Seferi owned and operated a restaurant in Iowa.

Acting on a tip from the local police, agents of Immigration and Customs Enforcement executed search warrants at the restaurant and at an apartment where some restaurant workers lived. The agents discovered six undocumented immigrants working at the restaurant and living together. When the I-9 forms for the restaurant’s employees were reviewed, none were found for the six undocumented immigrants. They were paid in cash while other employees were paid by check. Tipton and Seferi were charged with hiring and harboring undocumented immigrants. (See Immigration Law.) 1.

The first team will develop an argument that Tipton and Seferi were guilty of hiring and harboring undocumented immigrants.

Solution: Tipton and Seferi were guilty of hiring and harboring undocumented immigrants and should be convicted and be given prison terms. The evidence was sufficient to support the convictions for hiring and harboring undocumented immigrants. Given the way the restaurant was run and the differential treatment of employees, it was clear the defendants knew I-9 forms were required as they kept them for most employees but not for the undocumented workers. They also paid them in cash and did not pay taxes on behalf of those workers. They also maintained an apartment for those workers only. Separate accounts were maintained for the undocumented workers.

2. The second team will assess whether Tipton and Seferi can assert a defense by claiming that they did not know that the workers were undocumented.

Solution: It is not likely that Tipton and Seferi can successfully assert a defense by claiming that they did not know that the workers were unauthorized immigrants. It is clear from the evidence set out in detail in the answer to the previous question that Tipton and Seferi knew the workers were undocumented and they did not comply with employment verification procedures and other employment law requirements.

3. The third team will determine the potential penalties that Tipton and Seferi could face for violating the Immigration Reform and Control Act by hiring six unauthorized workers.

Solution: The employer can be fined up to $2,200 for each unauthorized employee for a first offense. Assuming this is their first offense, Tipton and Seferi could be fined up to $13,200 for employing the six undocumented workers.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 16: Employment Discrimination

Solution and Answer Guide

Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 16: Employment Discrimination

TABLE OF CONTENTS Critical Thinking Questions in Features .............................................................................1 Adapting the Law to the Online Environment—Critical Thinking..................................... 1 Building Analytical Skills—Result and Reasoning ............................................................... 1 Critical Thinking Questions in Cases ................................................................................. 2 Case 16.1—Critical Thinking .................................................................................................... 2 Case 16.2—Critical Thinking ................................................................................................... 3 Case 16.3—Critical Thinking ................................................................................................... 4 Chapter Review ................................................................................................................... 5 Practice and Review................................................................................................................. 5 Practice and Review: Debate This ......................................................................................... 6 Issue Spotters ........................................................................................................................... 7 Business Scenarios and Case Problems .............................................................................. 7 A Question of Ethics ............................................................................................................... 12 Time-Limited Team Assignment .......................................................................................... 14

CRITICAL THINKING QUESTIONS IN FEATURES ADAPTING THE LAW TO THE ONLINE ENVIRONMENT—CRITICAL THINKING 1.

Can you think of a way a company could use information from an applicant’s social media posts without running the risk of being accused of hiring discrimination?

Solution: The EEOC has recommended the use of a third party to conduct social media screenings of applicants. In this way, the prospective employer will not receive any information about an applicant’s protected characteristics. A third-party report can be created without disclosing the applicant’s race, age, disability status, or other protected characteristics.

BUILDING ANALYTICAL SKILLS—RESULT AND REASONING 1.

Dawson can establish a claim for retaliation in his state. Under the applicable state law, it was unlawful for an employer to discriminate against an individual based on sexual orientation. Dawson was subjected to derision on the part of coworkers, including his

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 16: Employment Discrimination

supervisor, based on his sexual orientation. He filed a complaint with his employer’s human resource department. What other factors support Dawson’s retaliation claim?

Solution: The fact that Dawson’s firing occurred so soon (two days) after the complaint filing would support a retaliation claim, as would the other circumstances, especially the supervisor’s conduct. Also, the discharge would likely have tended to dissuade others from making claims of discrimination. For these reasons, along with those discussed in the feature, it is likely that Dawson offered enough evidence to establish a claim for retaliation.

CRITICAL THINKING QUESTIONS IN CASES CASE 16.1—CRITICAL THINKING 1.

Legal. The Bostock defendants argued that the firings were motivated by the plaintiffs’ status—or behavior—as gay, not the plaintiffs’ gender. Therefore, there had been no Title VII violation. Critique this argument.

Solution: The United States Supreme Court acknowledged that there might be some merit to the defendants’ insistence that they weren’t biased against the plaintiffs’ gender, but rather against the plaintiffs’ lifestyle, which is not protected by Title VII. The problem with this argument, in the Court’s opinion, was that Title VII does not require sex, or gender, to be the “sole or primary reason for an employer’s challenged adverse employment action.” Rather, the Court applies a “but for” test in these cases.

That is, “but for” the employee’s sex, would they have been fired? If the answer is no, then a violation has occurred.

To make this point, the Court compared its Bostock ruling to a case it decided in 1971 in which a company allegedly refused to hire mothers with young children but did hire fathers with young children. The company claimed it was not discriminating because of its employees’ sex, but rather because they were the parents of young children, a status that was not covered in Title VII. In a ruling that seems uncontroversial today, the Court found in favor of the plaintiffs. As the Court put it, “That an employer discriminates intentionally against an individual only in part because of sex supplies no defense to Title VII.” The Court used the 1971 case to reiterate the principle that “it’s irrelevant what an employer might call its discriminatory practice, how others might label it, or what else might motivate it.” All that Title VII demands to establish liability is that an employee intentionally discriminates against an individual in part because of that individual’s “race, color, religion, sex, or national origin.”

2. Legal Environment. Critics of the Bostock ruling pointed out that few Americans in 1964 would have expected Title VII to apply to discrimination against gays and lesbians. If true, should these past attitudes influence a case decided more than five decades later? Why or why not?

Solution: The Bostock defendants argued that the Supreme Court should look at Title VII’s list of protected characteristics—color, religion, sex, and national origin—and find as dispositive that sexual orientation is implicitly excluded. If Congress had wanted to © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 16: Employment Discrimination

protect gay or lesbian individuals, the employers insisted, it would have referenced them explicitly. The defendants also submitted that, in 1964, the term “sex” bore a broader scope, describing more than just gender. “Sex,” the defendants argued, described societal norms about gender identity and sexual orientation, which were much different in 1964 than in 2020.

A dissent in the Bostock case, authored by Associate Justice Samuel L. Alito, also offered this theory as part of its basis for disagreement. Alito wrote that although the majority purported to adhere to the “plain meaning” of Title VII’s text in deciphering the word “sex,” the majority’s ruling in fact represented a form of statutory interpretation in which the Court “should ‘update’ old statutes so that they better reflect the current values of society.” Alito labelled this a “brazen” abuse of the Court’s authority. The actual question before the Court, Alito declared, was “not whether discrimination because of sexual orientation or gender identity should be outlawed. The question is whether Congress did that in 1964.” He concluded, “It indisputably did not.”

The majority agreed that sexual orientation and gender identity are distinct concepts from sex, before reiterating its position that discrimination based on these factors “necessarily entails discrimination based on sex.” As for the idea that Congress’s mindset in 1964 should determine a 2020 ruling, the majority opinion noted that those members of Congress likely weren’t thinking about many of the legislation’s consequences, including a prohibition against discrimination on the basis of motherhood or sexual harassment of male employees. “But,” the Court added, “the limits of the drafters' imagination supply no reason to ignore the law's demands. When the express terms of a statute give us one answer and extratextual considerations suggest another, it's no contest. Only the written word is the law, and all persons are entitled to its benefit.”

CASE 16.2—CRITICAL THINKING 1.

Economic. Because of the constant harassment, Franchina had to be placed on injuredon-duty status. Later, diagnosed with severe post-traumatic stress disorder and unable to work again as a rescue lieutenant, she “retired.” What is the appropriate measure of damages for this result? Discuss.

Solution: Damages, of course, are purposed, in part, to make a plaintiff whole for injuries suffered as a result of misconduct by a defendant. Damages for the harm visited upon Franchina should include at least what is termed “front pay”—the wages and benefits that the injured party would have earned had the wrongful conduct not occurred. The amount is at the equitable discretion of the court. It can be speculative and uncertain. Its calculation requires a prediction of what might have transpired without the harm. The court might consider the plaintiff’s age and length of employment, the pay and benefits that she was receiving, the likelihood that the employment would have continued, the raises and promotions that might have occurred, her ability to work, and other factors. To arrive at a final figure, the court might apply the effects of inflation, the rate of return on an investment of the award, and a discount for the uncertainty.

Here, the court might review Franchina’s earnings, her disability pay, the quality of her career, how long she might have been employed based on the longevity of other

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similarly situated employees, and her lost pension benefits. The calculated figure should be reduced to present value.

Also appropriate would be damages for the emotional harm that Franchina suffered and punitive damages to deter the department, other city agencies, and other employers and employees from engaging in similar misconduct. Punitive damages may not be available in this case, however.

2. Legal Environment. What steps might an employer take to avoid the circumstances that occurred in the Franchina case?

Solution: Steps that an employer could take to avoid the circumstances and unfortunate result in the Franchina case are suggested by the facts. The Providence fire department appears to have a protocol for accepting and considering discrimination complaints. The department may further have a procedure for adjudicating the complaints. Absent was action on the part of the agency to enforce policies that discourage discriminatory comments and conduct. There could—and should—have been disciplinary action taken on each of Franchina’s complaints. The department’s tolerance of discriminatory remarks and misbehavior effectively encouraged more wrongful conduct.

To avoid similar circumstances, any employer should take the same steps—protocol, procedure, and punishment—and publicize their existence among employees.

CASE 16.3—CRITICAL THINKING 1.

Legal Environment. Could Synovus have successfully claimed that Kassa’s short breaks created an undue hardship? Explain.

Solution: Probably not. An employer can avoid providing a reasonable accommodation for the known physical or mental limitations of an employee if it would impose an undue hardship on the employer. The test is whether the specific accommodation is significantly difficult or expensive in light of the employer’s resources.

In Kassa’s case, when he worked for Synovus in the company’s Network Operation Center (NOC), his supervisor knew about his disorders and granted his request to take short breaks when he got frustrated. This was subject to two conditions—to take a break, Kassa’s area in the NOC must be covered and he must be available to be reached if necessary. In these circumstances, it does not appear that granting Kassa’s request for short breaks was significantly difficult or expensive for Synovus.

There is no indication that after Kassa’s transfer to the ATM team, his request to take short breaks would have somehow imposed an undue hardship on Synovus. The request could have been granted subject to the same conditions in the NOC. His new supervisor simply refused the request.

2. What If the Facts Were Different? Suppose that instead of asking to take a short break whenever he had an episode, Kassa had asked if he could take customer service calls only from technicians, work nights, or work from home. Would the result have been different?

Discuss.

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Solution: Yes, if, instead of asking to take a short break whenever he had an episode, Kassa had asked to take customer service calls only from technicians, work nights, or work from home, the result in this case would likely have been different.

If an employee with a disability can perform essential functions of the job with a reasonable accommodation, the employer must make it. But an employer is not required to transform a position into a different job by eliminating an essential function in order to accommodate the needs of the employee.

Answering customer service calls constituted an “essential function” of Kassa’s position on the ATM team. A request to be exempted from answering all or some of those calls would have transformed the job and therefore would not have been reasonable. This would have been demonstrably true if, for example, Synovus’s phone system would not enable calls to be routed to off-site employees or no night shift position existed on the ATM team.

CHAPTER REVIEW PRACTICE AND REVIEW Amaani Lyle, an African American woman, took a job as a scriptwriters’ assistant at Warner Brothers Television Productions. She worked for the writers of Friends, a popular, adultoriented television series. One of her essential job duties was to type detailed notes for the scriptwriters during brainstorming sessions in which they discussed jokes, dialogue, and story lines. The writers then combed through Lyle’s notes after the meetings for script material.

During the meetings, three male scriptwriters told lewd and vulgar jokes and made sexually explicit comments and gestures. They often talked about their personal sexual experiences and fantasies, and some of these conversations were later used in episodes of Friends. During the meetings, Lyle never complained that she found the writers’ conduct offensive.

After four months, Lyle was fired because she could not type fast enough to keep up with the writers’ conversations during the meetings. She filed a suit against Warner Brothers, alleging sexual harassment and claiming that her termination was based on racial discrimination.

Using the information presented in the chapter, answer the following questions.

1.

Would Lyle’s claim of racial discrimination be for intentional (disparate-treatment) or unintentional (disparate-impact) discrimination? Explain.

Solution: Because Lyle has no direct evidence of discriminatory intent, her claim would likely be for unintentional, disparate-impact discrimination. She could argue that the employer’s requirement that she type as fast as the writers’ conversation speed disproportionately affected those in a protected class using the EEOC’s “four-fifths” rule.

2. Can Lyle establish a prima facie case of racial discrimination? Why or why not?

Solution: It is unlikely that Lyle could establish a prima facie case of unintentional discrimination. To do so, she would have to prove that the employer’s typing speed requirement had a discriminatory effect, excluding

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members of a protected class at a substantially higher rate than nonmembers.

Under the EEOC’s “four-fifths” rule, she would have to show that the selection (or retention) rate for members of a protected class was less than four-fifths, or 80 percent, of the selection rate for nonmembers. This would be difficult to show given these facts.

3. When she was hired, Lyle was told that typing speed was extremely important to her position. At the time, she maintained that she could type eighty words per minute, so she was not given a typing test. It later turned out that Lyle could type only fifty words per minute. What impact might typing speed have on Lyle’s lawsuit?

Solution: Evidence that Lyle had misrepresented how fast she could type at the time of her interview would not substantially impact her claim of racial discrimination, because it would be considered after-acquired evidence of employee misconduct. The United States Supreme Court has held that such evidence cannot shield an employer entirely from liability for discrimination. It could, however, be used to limit the amount of damages that she could obtain if she was successful in her lawsuit.

4. Lyle’s sexual harassment claim was based on the hostile work environment created by the writers’ sexually offensive conduct at meetings that she was required to attend.

The writers, however, argued that their behavior was essential to the “creative process” of writing Friends, a show that routinely contained sexual innuendos and adult humor. Which defense discussed in the chapter might Warner Brothers assert using this argument?

Solution: Warner Brothers can assert the writers’ sexually explicit conduct during the meetings was a business necessity, because it was necessary for the writers to freely discuss plot ideas and themes in creating the script for Friends. The television series has been popular largely because of its adult humor and sexual innuendos, and without those elements, the show would not be the same. Thus, some sexually explicit banter is necessary to write the script, and Warner Brothers would be able to claim this in their defense.

PRACTICE AND REVIEW: DEBATE THIS 1.

People of color and women no longer need special legislation to protect them from employment discrimination.

Solution: There is little doubt that people of color and women suffered discrimination in the U.S. labor market for decades, if not longer. Today, in contrast, this country has seen much growth in the average incomes of all Americans, regardless of race or gender. The labor market is competitive, so employers who discriminate against people of color and women end up suffering from higher costs compared to nondiscriminating employers.

Certainly there is less discrimination against people of color and women than there was one hundred years ago. That does not mean, though, that we should scrap all legislation that protects these groups. More progress needs to be made to create a color-, age-, race-, and gender-blind employment market. Without existing anti-discrimination laws, those who suffer discrimination would have no place to turn for redress of their grievances.

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ISSUE SPOTTERS 1.

Ruth is a supervisor for a Subs & Suds restaurant. Tim is a Subs & Suds employee. The owner announces that some employees will be discharged. Ruth tells Tim that if he has sex with her, he can keep his job. Is this sexual harassment? Why or why not? (See Title VII of the Civil Rights Act.) Solution: Yes. One type of sexual harassment occurs when a request for sexual favors is a condition of employment, and the person making the request is a supervisor or acts with the authority of the employer. A tangible employment action, such as continued employment, may also lead to the employer’s liability for the supervisor’s conduct. That the injured employee is a male and the supervisor a female, instead of the other way around, would not affect the outcome. Same-gender harassment is also actionable.

2. Koko, a person with a disability, applies for a job at Lively Sales Corporation for which she is well qualified, but she is rejected. Lively continues to seek applicants and eventually fills the position with a person who does not have a disability. Could Koko succeed in a suit against Lively for discrimination? Explain. (See Discrimination Based on Age, Disability, or Military Status.)

Solution: Yes. Koko can succeed in a discrimination suit if she can show that she was not hired solely because of her disability. The other elements for a discrimination suit based on a disability are that the plaintiff (1) has a disability and (2) is otherwise qualified for the job. Both of these elements appear to be satisfied in this scenario.

BUSINESS SCENARIOS AND CASE PROBLEMS 16-1. Title VII Violations. Discuss fully whether either of the following actions would constitute a violation of Title VII of the Civil Rights Act. 1.

Tennington, Inc., is a consulting firm with ten employees. These employees travel on consulting jobs in seven states. Tennington has an employment record of hiring only White men. (See Title VII of the Civil Rights Act.) Solution: Only employers with fifteen or more employees who are engaged in an activity that affects interstate commerce come under the Civil Rights Act, Title VII. Tennington, Inc., has only ten employees, and thus its employment of only White men is not a federal civil rights violation. Tennington could be in violation of state law, however, depending on the requirements of the state statute.

2. Novo Films, Inc., is making a film about Africa and needs to employ approximately one hundred extras for this picture. To hire these extras, Novo advertises in all major newspapers in Southern California. The ad states that only African Americans need apply. (See Defenses to Employment Discrimination.)

Solution: The 1964 Civil Rights Act, Title VII, as amended, prohibits discrimination at any stage of employment on the basis of race, color, religion, sex, or national origin. The advertisement, which clearly restricts employment applicants to African Americans, is in violation of the law. The Civil Rights Act does provide that it is not illegal to discriminate when such discrimination is necessary as a bona fide occupational qualification; however, race or color

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cannot be used as a bona fide occupational defense. Therefore, even though the film is about Africa, Novo Films cannot advertise solely for African Americans.

16-2. Religious Discrimination. Gina Gomez, a devout Roman Catholic, worked for Sam’s Department Stores, Inc., in Phoenix, Arizona. Sam’s considered Gomez a productive employee because her sales exceeded $200,000 per year. The store gave its managers the discretion to grant unpaid leave to employees but prohibited vacations or leave during the holiday season— October through December. Gomez felt that she had a “calling” to go on a “pilgrimage” in October to a location in Bosnia where some persons claimed to have had visions of the Virgin Mary. The Catholic Church had not designated the site an official pilgrimage site, the visions were not expected to be stronger in October, and tours were available at other times. The store managers denied Gomez’s request for leave, but she had a nonrefundable ticket and left anyway. Sam’s terminated her employment, and she could not find another job. Can Gomez establish a prima facie case of religious discrimination? Explain. (See Title VII of the Civil Rights Act.) Solution: Gomez cannot establish a prima facie case of religious discrimination. The facts show only a bona fide religious belief that she needs to go to Medjugorje at some time, not at a particular time. When an employee claims that religious beliefs require a particular pilgrimage, or some other duty, the employee must prove that this mandate is part of a bona fide religious belief. Otherwise, an employer would be forced to accommodate the employee’s personal preference (in this problem, the timing of the trip). If the visions of the Virgin Mary were expected to be more intense in October, for example, or the Catholic Church urged her to go at that time, she would have a stronger case. But without such factors, she cannot satisfy a crucial element of a prima facie case: a conflict between her religious belief and her employment duties.

16-3. Spotlight on Dress Code Policies—Discrimination Based on Gender. Burlington Coat Factory Warehouse, Inc., had a dress code that required male sales clerks to wear business attire consisting of slacks, shirt, and necktie. Female sales clerks, by contrast, were required to wear a smock so that customers could readily identify them. Karen O’Donnell and other female employees refused to wear the smock. Instead, they reported to work in business attire and were suspended. After numerous suspensions, the female employees were fired for violating Burlington’s dress code policy. All other conditions of employment, including salary, hours, and benefits, were the same for female and male employees. Was the dress code policy discriminatory? Why or why not? [O’Donnell v. Burlington Coat Factory Warehouse, Inc., 656 F. Supp. 263 (S.D.Ohio 1987)] (See Title VII of the Civil Rights Act.) Solution: Yes. The dress code policy was illegal discrimination based upon gender.

Unlike hair and grooming codes, which are based on well-established social expectations, there is no justifiable basis for women to wear smocks in the workplace.

There is a natural tendency to believe that uniformed women wearing smocks have lower professional status than their male colleagues in business attire. The smock requirement thus perpetuated sexual stereotypes of inferiority. Therefore, the dress code policy violated Title VII of the Civil Rights Act. 16-4. Age Discrimination. Beginning in 1986, Paul Rangel was a sales professional for pharmaceutical company Sanofi-Aventis U.S., LLC (S-A). Rangel had satisfactory performance reviews until 2006, when S-A issued new expectations guidelines with sales call quotas and other standards that he failed to meet. After two years of negative performance reviews,

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Rangel—who was then more than forty years old—was terminated as part of a nationwide reduction of sales professionals who had not met the expectations guidelines. This sales force reduction also included younger workers. Did S-A engage in age discrimination? Discuss.

[Rangel v. Sanofi Aventis U.S., LLC, 507 Fed.Appx. 782 (10th Cir. 2013)] (See Discrimination Based on Age, Disability, or Military Status.)

Solution: No. Sanofi-Aventis U.S. LLC (S-A) does not appear to have engaged in age discrimination. The Age Discrimination in Employment Act (ADEA) prohibits employment discrimination on the basis of age against individuals forty years of age or older. For the act to apply, an employer must have twenty or more employees and the employer’s business activities must affect interstate commerce.

To establish a prima facie case, plaintiffs must show that they were (1) members of the protected age group, (2) qualified for the position from which they were discharged, and (3) discharged because of age discrimination. If the employer offers a legitimate reason for its action, the plaintiff must show that the stated reason is only a pretext.

In this problem, Rangel was over forty years old. But he also had negative sales performance reviews for more than two years before he was terminated as part of S-A’s nationwide reduction in force of all sales professionals who had not met the “Expectations” guidelines, including younger workers. The facts do not indicate that a person younger than Rangel replaced him or that S-A intended to discriminate against him on the basis of age. Based on these facts, Rangel could not establish a prima facie case of age discrimination on the part of S-A. In the actual case on which this problem is based, in Rangel’s suit against S-A under the ADEA, alleging age discrimination, a federal district court issued a judgment in S-A’s favor. On Rangel’s appeal, the U.S. Court of Appeals for the Tenth Circuit affirmed, according to the reasoning stated above.

16-5. Business Case Problem with Sample Answer—Sexual Harassment. Jamel Blanton, a male employee at a Pizza Hut restaurant operated by Newton Associates, Inc., in San Antonio, Texas, was subjected to sexual and racial harassment by the general manager, who was female. Newton had a clear, straightforward antidiscrimination policy and complaint procedure. The policy provided that in such a situation, an employee should complain to the harasser’s supervisor. Blanton alerted a shift leader and an assistant manager about the harassment, but they were subordinate to the general manager and did not report the harassment to higher-level management. When Blanton finally complained to a manager with authority over the general manager, the employer investigated and fired the general manager within four days. Blanton filed a suit in a federal district court against Newton, seeking to impose liability on the employer for the general manager’s actions. What is Newton’s best defense? Discuss. [Blanton v. Newton Associates, Inc., 593 Fed.Appx. 389 (5th Cir. 2015)] (See Title VII of the Civil Rights Act.) Solution: Newton’s best defense to Blanton’s assertion of liability against the employer for its general manager’s actions is the “Ellerth/Faragher affirmative defense.” To establish this defense, an employer must show that it has taken reasonable care to prevent and promptly correct any sexually harassing behavior and that the plaintiff unreasonably failed to take advantage of any opportunity provided by the employer to avoid the harm.

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In this problem, Blanton was subjected to sexual harassment by the general manager at their place of employment, a Pizza Hut restaurant operated by Newton. Blanton alerted low-level supervisors about the harassment, but they, like Blanton, were subordinate to the general manager and had no authority over her. Newton had a clear, straightforward anti-discrimination policy and complaint procedure that provided an employee should complain to the harasser's supervisor in such a situation. Once Blanton finally complained to a manager with authority over the general manager, their employer promptly and effectively responded to Blanton's proper complaint. His delay in reporting the harassment to the appropriate authority can be construed as an unreasonable failure to take advantage of the opportunity provided by the employer to avoid the harm.

In the actual case on which this problem is based, in Blanton’s suit against Newton, a jury found that the plaintiff was harassed as he claimed but also that the defendant proved the Ellerth/Faragher affirmative defense, and the court issued a judgment in the employer’s favor. The U.S. Court of Appeals for the Fifth Circuit affirmed.

16-6. Discrimination Based on Disability. Dennis Wallace was a deputy sheriff for Stanislaus County, California, when he injured his left knee. After surgery, he was subject to limits on prolonged standing, walking, and running. The county assigned him to work as a bailiff. The sergeants who supervised him rated his performance above average. Less than a year later, without consulting those supervisors, the county placed him on an unpaid leave of absence, under the mistaken belief that he could not safely perform the essential functions of the job.

Wallace filed an action in a California state court against the county, alleging discrimination based on disability. Under state law, discriminatory intent is shown by evidence that an actual or perceived disability was a “substantial motivating factor or reason” for an employer’s adverse employment action. An employee is not required to show that the action was motivated by animosity or ill will. Could Wallace likely prove the “substantial motivating factor or reason” element? Explain. [Wallace v. County of Stanislaus, 245 Cal. App.4th 109, 199 Cal.Rptr.3d 462 (5 Dist. 2016)] (See Discrimination Based on Age, Disability, or Military Status.)

Solution: Yes. Based on the facts, Wallace could likely prove the “substantial motivating factor or reason” element of the state’s disability discrimination law. As stated in the problem, under that law, discriminatory intent can be shown by evidence that an actual or perceived disability was a “substantial motivating factor or reason” for an employer’s adverse employment action. A showing of an employer’s animosity of ill will is not required.

Wallace was a county deputy sheriff in California, when he suffered an injury to his knee that limited prolonged standing, walking, and running. Sometime after his return to work following surgery, he was assigned to the position of bailiff. His supervisors evaluated his performance in that capacity as above average. Despite this review, and without consulting the supervisors, the county removed Wallace from the bailiff position and forced him to take an unpaid administrative leave. In Wallace’s subsequent suit in a California state court against the county, he alleged discrimination based on disability.

In these circumstances, Wallace could prove the requisite discriminatory intent by showing his actual or perceived disability was a “substantial motivating factor or reason” for the county’s decision to remove him from his job as bailiff and place him on the unpaid leave of absence.

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In the actual case on which this problem is based, in Wallace’s action against the county, the court instructed the jury that animus or ill will was a requirement of his cause. The jury found that Wallace proved his claim but for this requirement. The court issued a judgment in the county’s favor. A state intermediate appellate court reversed, holding that the lower court’s instruction was erroneous. With the element of animus or ill will eliminated, the jury’s findings favored Wallace. The appellate court remanded the case for a retrial on the issue of damages only.

16-7. Discrimination Based on Gender. The Fresno County Office of Education hired Aileen Rizo as a math consultant. She had previously worked as a middle and high school math teacher, earning about $50,000 a year. Fresno based the salary of its new hires on the individual’s prior salary, according to the county’s Standard Operating Procedure (SOP). When Rizo learned that she was being paid less than comparable male employees for the same work, she filed a complaint. The county responded that all salaries were set under the SOP. Rizo filed a suit against Jim Yovino, the Fresno superintendent, claiming a violation of the Equal Pay Act. She asserted that under the Equal Pay Act, an employer should not be able to justify a wage differential between men and women on the basis of prior salary. Yovino argued that basing pay on a prior salary was permissible under an exception in the act for “any factor other than gender.” Did the county violate the Equal Pay Act? Discuss. [Rizo v. Yovino, 887 F.3d 453 (9th Cir. 2018)] (See Title VII of the Civil Rights Act.) Solution: Yes. The county violated the Equal Pay Act. This act requires equal pay for male and female employees doing similar work at the same establishment. If the wage differential is due to “any factor other than gender,” then it does not violate the act.

Otherwise, it might.

In this problem, Fresno County hired Aileen Rizo as a math consultant. The county based her initial salary on her prior salary, as a middle and high school math teacher, according to the county’s Standard Operating Procedure. When Rizo learned that she was being paid less than comparable male employees for the same work, she filed a suit against Jim Yovino, the Fresno superintendent, claiming a violation of the Equal Pay Act. Yovino argued that basing pay on a prior salary was permissible under the act’s exception for “any factor other than gender.”

“Factors other than gender” include seniority and merit systems, and an individual’s experience, educational background, ability, and prior job performance. In other words, a “factor other than gender” must be a legitimate, job-related factor. A female’s prior salary does not justify the current and future payment of a lower wage to her. To conclude otherwise would be to allow an employer to capitalize on a gender-based wage gap and continue it forever. This would be contrary to the purpose of the Equal Pay Act. In the actual case on which this problem is based, Yovino filed a motion for summary judgment, which the court denied. The U.S. Court of Appeals for the Ninth Circuit affirmed and remanded. “To accept the County’s argument would be to perpetuate rather than eliminate the pervasive discrimination at which the Act was aimed.”

16-8. Retaliation by Employer. Rosa López-Hernández worked for Terumo Puerto Rico LLC for three-and-a-half years. During that time, the company received numerous complaints from López-Hernández’s coworkers concerning her interpersonal and professional behavior. Five months after López-Hernández lodged an internal sex discrimination complaint against a

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supervisor, Terumo terminated her employment. López-Hernández responded with a lawsuit against Terumo, alleging retaliation in violation of Title VII. Should the short time period between López-Hernández’s sex discrimination complaint and her firing be sufficient evidence to sustain a retaliation claim? Explain. [López-Hernández v. Terumo Puerto Rico LLC, 64 F.4th 22 (1st Cir. 2023)] (See Title VII of the Civil Rights Act.) Solution: No. Temporal proximity between lodging a sex discrimination complaint against an employer and termination can infer retaliation, but, by itself, it is not enough to sustain a retaliation claim. When direct evidence of retaliation is unavailable, as in this case, the plaintiff must show that (1) she engaged in protected conduct; (2) she suffered an adverse employment action; and (3) a “causal nexus” existed between the protected conduct and the adverse action.

López-Hernández met the first two prongs of the test. An internal sex discrimination complaint is protected under Title VII, and being fired is an adverse employment event.

However, according to the U.S. Court of Appeals for the First Circuit, she failed to show that her complaint led to her termination. Terumo was able to provide the court with sufficient evidence that its decision to fire her was based on her job performance.

This evidence included testimony from twenty co-workers that López-Hernández “was disrespectful to her subordinates, that she showed favoritism to some employees and retaliated against others, that she gave her subordinates incorrect or conflicting instructions about procedures, that the team she supervised did not complete pending tasks and required documentation, and that she did not verify that operators under her supervision were following quality procedures.”

In sum, the appeals court found that, besides the short time period between her sex discrimination complaint and her firing, López-Hernández failed to produce any compelling evidence of retaliation. Therefore, it affirmed Terumo’s motion for summary judgment.

A QUESTION OF ETHICS 16-9. The IDDR Approach and Unintentional Discrimination. McLane Company is a supply-chain services company that distributes goods to retailers. McLane requires employees with physically demanding jobs to have physical evaluations, both when they start work and when they return after medical leave. After working in a physically demanding job for McLane for eight years, Damiana Ochoa took maternity leave. When she returned to work, she failed the physical evaluation and was fired. She filed a discrimination complaint with the Equal Employment Opportunity Commission (EEOC). The agency issued a subpoena—an order to appear in court—seeking the names and contact information of McLane employees who had been asked to have evaluations throughout the company’s national operations. [McLane Co. v.

E.E.O.C., 581 U.S.72, 137 S.Ct. 1159, 197 L.Ed.2d 500 (2017)] (See Title VII of the Civil Rights Act.) 1.

On what legal ground might McLane legitimately refuse to comply with the EEOC’s subpoena? What practical factors could affect the choice not to comply? Discuss.

Solution: A business has a legal obligation to comply with a subpoena unless compliance would be “unduly burdensome.” On this ground, McLane might legitimately refuse to comply with the subpoena issued by the Equal Employment Opportunity Commission (EEOC).

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Title VII of the Civil Rights Act prohibits unintentional discrimination. This can occur when a protected group of people is adversely affected by an employer’s test, even though it does not appear to be discriminatory. To succeed on a claim of unintentional discrimination, it must be shown statistically that the employer’s test is discriminatory in effect.

A statistical showing requires hard data. Accurate information about the effect of a specific test can be obtained from the employer who imposes it. This may require a subpoena. The EEOC monitors compliance with Title VII. Before filing a suit, a person who alleges discrimination must file a claim with the EEOC, which can issue a subpoena as part of its investigation into the facts.

In this problem, Ochoa held a physically demanding job with McLane. McLane requires employees with such jobs to take physical evaluations. When Ochoa failed the evaluation, McLane fired her. She filed a claim with the EEOC, which issued a subpoena, seeking the personal information of other McLane employees who took the evaluation.

Responding to a subpoena can be “unduly burdensome.” The most important factor is the requested information’s relevance—the relationship between the material sought and the matter under investigation. This might include access to virtually anything that casts light on an allegation against an employer. But a request that is for an illegitimate purpose or that is too indefinite, overbroad, arbitrary, or capricious is likely also overly burdensome. Privacy interests can be a factor. The difficulty of producing the requested materials is certainly a prime concern of the party who is asked to provide them.

In the actual case on which this problem is based, McLane refused to comply.

A federal district court quashed the subpoena. The U.S. Court of Appeals for the Ninth Circuit reviewed this decision de novo and reversed. On appeal, the United States Supreme Court reversed the appellate court’s judgment and remanded the case, holding that the appropriate standard for review was abuse of discretion, not de novo.

2. Using the IDDR approach, consider whether McLane has an ethical duty to comply with the subpoena.

Solution: Yes. McLane has an ethical duty to comply with the EEOC’s subpoena, at least to the extent of its legitimacy. Of course, the company does not violate this duty by initially attempting to resist the subpoena. Both actions should satisfy the stakeholders.

Use of the IDDR approach requires an Inquiry to identify the issue, the stakeholders, and the ethical standards. The ethical issue for McLane is whether to comply with the EEOC’s subpoena. The stakeholders include Ochoa, McLane’s other employees, and the company’s owners, suppliers, and customers, as well as the society at large, especially third parties affected through the other stakeholders and potential employees. Applicable ethical standards include, at a minimum, McLane’s legal obligation to comply and the

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company’s expressed or implied policy to generally act in compliance with the law.

The IDDR approach also requires a Discussion of actions to address the issue, the strengths and weaknesses of the actions, and the consequences and effects on stakeholders. McLane can stubbornly refuse to comply without proffering a reason, but this might result in significant penalties, to the benefit of none of the stakeholders. Instead, McLane can object to the subpoena and offer a reasoned defense. Or the company might choose to fully comply without objection. Either of these actions would recognize the interests of all of the stakeholders by avoiding the appearance of impropriety and illegality and the onus of sanctions.

A Decision on the action and a statement of its reasons is the next step in the IDDR approach. It seems clear that McLane should not baldly refuse to comply with the subpoena but should fully comply or offer a defense for the reasons stated in the preceding paragraph. Among likely defenses, for example, whether responding to a subpoena is “unduly burdensome” can help to determine the ethics of compliance. For the purpose of weighing an ethical duty to comply, an important factor might be the privacy interests of the employees. McLane could also assert that the request for information is overbroad and that the data sought is not relevant.

The last step of the IDDR approach is a Review of the success or failure of the actions to resolve the issue and satisfy the stakeholders. Either full compliance or objection to compliance on a legitimate basis should reassure stakeholders of the company’s lawful conduct and the soundness of its policies and procedures. This should positively resolve the ethical issue.

TIME-LIMITED TEAM ASSIGNMENT 16-10. Discrimination Based on Race. Two African American plaintiffs sued the producers of the reality television series The Bachelor and The Bachelorette for racial discrimination. The plaintiffs claimed that the shows had never featured a person of color in the lead role.

Plaintiffs also alleged that the producers had failed to provide people of color who auditioned for lead roles with the same opportunities to compete as White people who auditioned. (See Title VII of the Civil Rights Act.) 1.

The first team will assess whether the plaintiffs can establish a prima facie case of disparate-treatment discrimination.

Solution: To succeed on a claim of disparate-treatment discrimination in hiring, plaintiffs must show that (1) they are a member of a protected class, (2) they applied for and were qualified for the job in question, (3) they were rejected by the employer, and (4) the employer continued to seek applicants for the position or filled the position with a person not in a protected class. If the plaintiff can meet these relatively easy requirements, that individual has made out a prima facie case of illegal discrimination. This means that the plaintiff has met the initial burden of proof and will win in the absence of a legally acceptable employer defense. In this problem, a prima facie case could likely

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 16: Employment Discrimination

be established if people of color who auditioned for lead roles were not given the same opportunities to compete as White people who auditioned.

2. The second team will consider what the plaintiffs would have to show to establish disparate-impact discrimination.

Solution: In a disparate-impact discrimination case, the complaining party must first show statistically that the employer’s practices, procedures, or tests are discriminatory in effect. Once the plaintiff has made out a prima facie case, the burden of proof shifts to the employer to show that the practices or procedures in question were justified. A plaintiff can prove a disparate impact by comparing the employer’s workforce to the pool of qualified individuals available in the local labor market. The plaintiff must show that (1) as a result of educational or other job requirements or hiring procedures, (2) the percentage of non-White individuals, women, or members of other protected classes in the employer’s workforce (3) does not reflect the percentage of that group in the pool of qualified applicants. A plaintiff can also prove disparate-impact discrimination by comparing the selection rates of White and non-White individuals (or members of another protected class). When a job requirement or hiring procedure excludes members of a protected class from an employer’s workforce at a substantially higher rate than nonmembers, discrimination occurs. In this problem, to consider the validity of the plaintiffs’ claim requires consideration of the requirements to appear on the shows and the numbers and races of the applicants. If, however, the shows have never featured a person of color in a lead role, it seems likely that there is discrimination.

3. The third team will assume that the plaintiffs established a prima facie case and that the burden has shifted to the employer to articulate a legal reason for not hiring the plaintiffs. What legitimate reasons might the employer assert for not hiring the plaintiffs in this situation? Should the law require television producers to hire persons of color for lead roles in reality television shows? Explain your answer.

Solution: Despite the assumption in the facts that the plaintiffs can establish a prima facie case, the employer’s best defenses most likely relate to the elements of such a case. For example, if few persons of color applied for the lead roles, the disposition of their applications would have little statistical significance in a disparate-impact discrimination case. And those who did apply may not have met the shows’ criteria for the lead roles, undercutting a claim of disparate-treatment discrimination in hiring. Of the other defenses discussed in the text, the employer might argue that whatever criterion the rejected applicants failed to meet is a business necessity—necessary for the performance of the role. There is no indication that color is a bona fide occupational qualification (BFOQ) for the role, and in any circumstance, there is little likelihood it would be an acceptable BFOQ. In an analogy to a fair seniority system, in which persons with more years of service are promoted first, the employer might assert that the lead roles are filled on a first-to-apply, first-to-be-cast basis.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 17: Business Organizations

Solution and Answer Guide

Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 17: Business Organizations

TABLE OF CONTENTS Critical Thinking Questions in Features .............................................................................1 Adapting the Law to the Online Environment—Critical Thinking..................................... 1 Landmark in the Law—Application to Today’s World ....................................................... 2 Cybersecurity and the Law—Critical Thinking .................................................................... 2 Critical Thinking Questions in Cases ................................................................................. 3 Case 17.1—Critical Thinking .................................................................................................... 3 Case 17.2—Critical Thinking.................................................................................................... 3 Case 17.3—Critical Thinking.................................................................................................... 5 Chapter Review ................................................................................................................... 5 Practice and Review................................................................................................................. 5 Practice and Review: Debate This ......................................................................................... 7 Issue Spotters ........................................................................................................................... 7 Business Scenarios and Case Problems .............................................................................. 7 A Question of Ethics ............................................................................................................... 13 Time-Limited Team Assignment .......................................................................................... 15

CRITICAL THINKING QUESTIONS IN FEATURES ADAPTING THE LAW TO THE ONLINE ENVIRONMENT—CRITICAL THINKING 1.

After filing (often online) a DBA or FBN, the sole proprietor must publish the statement in a newspaper to notify the public. For the most part, online DBA notification is not an option. Should it be? Explain your answer.

Solution: The goal of the legal notice requirement for DBAs is to inform the general public that the trade name of a sole proprietorship or other business is different from its legal name or the name of its owner. This notice usually must be published in a newspaper with a daily or weekly circulation, and for several consecutive days or weeks. Given the extent to which business transactions have moved online, these rules seem highly anachronistic. If the goal of the legal notice requirement is to generate

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 17: Business Organizations

awareness and transparency, then relying on print newspapers hardly seems the most practical method of doing so.

LANDMARK IN THE LAW—APPLICATION TO TODAY’S WORLD 1.

Today, LLCs are a common form of business organization. Members can avoid the personal liability associated with the partnership form of business as well as the double taxation of the corporate form of business. What types of businesses might be best suited for this corporate structure?

Solution: LLCs can buy, own, and operate real property and personal property. The LLC can make its own contracts, lend or borrow funds, and make investments. Indeed, the main reason for the popularity of the LLC is that almost any type of business can benefit from these and many other advantages, including those described in the feature.

That being said, LLCs are particularly useful for business owners involved in fields that have a higher-than-average risk of generating litigation. LLCs are also attractive to businesspersons with significant personal assets that they would like to protect against litigation. These two factors seem particularly relevant to professionals such as doctor and lawyers. Consequently, many jurisdictions offer professional limited liability companies (PLLCs) for professionals—doctors, lawyers, psychologists, architects, veterinarians, etc.—that must be licensed by the state to operate. A PLLC offers the flexibility of an LLC with liability protection that is specifically tailored to the particular profession. For example, a PLLC formed by several doctors would protect each individual member from malpractice suits filed against other members.

CYBERSECURITY AND THE LAW—CRITICAL THINKING 1.

Suppose that a franchisor has two choices when it comes to cybersecurity provisions in its FDD. The franchisor can either (a) assume control and responsibility for a franchisee’s privacy security system, or (b) avoid this control and responsibility, leaving point-of-sale security in the hands of the franchisee. Which is the better choice, and why?

Solution: The temptation for franchisors to cede cybersecurity control and responsibility to franchisees in the FDD is easy to understand. If the franchisor is only minimally involved in the franchisee’s privacy and security policies, then it can hope to avoid liability if those policies prove insufficient to protect against a data breach. The reality, however, is that it is very difficult for the franchisor to escape responsibility when a franchisee is hacked, regardless of the terms of the FDD. As noted in the feature, plaintiffs’ lawyers will almost always focus their attention on the franchisor, and consumers are generally unaware of the difference between franchisors and franchisees. So, if a single Subway franchise is hacked, consumers will be wary of all the Sunway franchises, ultimately damaging the franchisor’s bottom line.

Consequently, franchisors are generally better served to assume control of IT security in an FDD. As part of this strategy, the franchisor should centralize and standardize each franchisee’s practices when it comes to point-of-sale system security and have quality control protocols in place to make sure these security systems are functioning properly. Ideally, the franchisor should also provide data-protection training to

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managers and employees of each franchise. These steps will provide a layer of liability protection should a franchisee experience a data breach.

CRITICAL THINKING QUESTIONS IN CASES CASE 17.1—CRITICAL THINKING 1.

Legal Environment. The trial court ruled that Wagner could have been an agent for “the business.” Why, in the view of the appellate court, did this ruling make no sense?

Solution: The appellate court concluded that “the business,” Northwest Cabinets & Furniture, a sole proprietorship, was inseparable from Misenar. In other words, Misenar and the sole proprietorship were indistinguishable. The court also concluded that, as Misenar’s spouse, Wagner had a community property interest in the business. In this context, Wagner, had he been construed to act in the capacity of an agent, as the trial court suggested, would have been acting as an agent for himself.

In the words of the trial court, “this business is [Misenar’s] separate property. Now [Wagner] can be an agent. And she could have authorized him to do anything. He can sign checks. He can work in the shop. He can make contracts. He can do all these things. But him having that authority and stuff does not give him the standing to make the claim. He’s simply acting as her agent.”

To this statement, the appellate court responded, “The trial court’s ruling suggests that Wagner was an agent for the business, but he cannot be. This ruling would only make sense if the court believed that the business is a separate legal entity, but it is not.”

2. What If the Facts Were Different? Suppose that instead of Wagner, Misenar had pursued the claim in the case against Port Orchard. Would the result have been different? Discuss.

Solution: No, if, instead of Wagner, Misenar had pursued the claim in the case against Port Orchard, the result would not likely have been different. As a sole proprietorship, the business was inseparable, or indistinguishable, from Misenar, its owner.

Misenar bought the business from Wagner, whom she later married. Even if they had not married, however, as the sole proprietor of Northwest Cabinets & Furniture, Misenar could have filed the claim for breach in this case. And if she had not bought the business from Wagner, she would still have had standing to bring such a claim. In the interpretation of the appellate court, whichever spouse was the owner of the sole proprietorship, the business would have constituted community property. “And a community property interest is a sufficiently real interest to confer standing.”

CASE 17.2—CRITICAL THINKING 1.

Legal Environment. Could the partnership have avoided the liquidation of its assets during the winding up process? Explain.

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Solution: Yes, the partnership in this case could have avoided the liquidation of its assets during the winding up process if the partners had agreed on a different method for the distribution.

Under Idaho partnership statutes, during the judicial dissolution and winding up of a partnership’s business, the entity’s assets must be sold and the cash realized on their sale distributed to the firm’s creditors and partners—unless the partners agree to an alternate method for the distribution. In other words, the statutory requirements are default provisions.

A partnership agreement cannot change the requirements that a dissolved partnership must be wound up, its liabilities discharged, and its assets marshaled and distributed.

But an agreement can alter the default provisions of the Idaho statutes for the distribution of the assets. Partners who agree not to liquidate the assets can take a different course. One partner might buy out another’s interest, for example, and continue the business.

Guenther and Ryerson formed a partnership to buy land on Lost Sage Lane in Boise, Idaho, and develop a vineyard and build a house on the property. After expending considerable funds and effort in pursuit of the project, they agreed to dissolve the partnership. Guenther filed a suit in an Idaho state court for a judicial dissolution. In the Guenther case, of course, the parties initially did not, and later could not, agree on the method of distribution. This triggered the application of the Idaho default provisions.

2. Economic. How should the lower court, on remand, structure the sale of the partnership’s Lost Sage Lane property? Discuss.

Solution: In winding up the business of a partnership, in a judicial dissolution under Idaho’s partnership statutes, a court should seek to sell the entity’s assets at their fair market value. Fair market value is the amount that a willing buyer, who desires to buy but is under no obligation to buy, would pay a willing seller, who desires to sell but is under no obligation to sell. To obtain fair market value, property should be sold at the highest price the market will bear. Thus, in the Guenther case, on remand, the court should order the Lost Sage Lane property to be sold on the open market at its fair market value.

After all the partnership’s assets have been sold, the costs of the sale have been paid from its proceeds, and the firm’s obligations to its creditors have been satisfied, the court can determine the amount of each partner’s capital contribution. If the remaining proceeds are not enough to reimburse the partners for their uncompensated contributions, each partner should be paid a pro rata share based on their contributions. If the proceeds are sufficient to compensate the partners for their contributions, on the payment of those contributions, any remaining amount should be distributed based on each partner’s right to share in the partnership’s profits. In this case, because there was no partnership agreement, under Idaho partnership law, Guenther and Ryerson have a right to share equally in the partnership’s profits.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 17: Business Organizations

CASE 17.3—CRITICAL THINKING 1.

Legal Environment. Besides the “exceptional circumstances” noted by the court in the Nesset case, in what situations might an LLC’s member or manager be personally liable for the liability of the company? Explain.

Solution: Under most circumstances, a member or manager of a limited liability company is not liable for a debt, obligation, or other liability of the firm. Situations in which piercing the veil of an LLC might be warranted include, as noted by the court in the Nesset case, that the company is undercapitalized, lacks separate books or finances, promotes a fraud or illegality, or is otherwise “merely a sham.”

Although “sham” can encompass considerable potential grounds for the personal liability of an LLC’s member or manager in the context of the firm’s obligations, this list is not exhaustive.

A member or manager may be liable for the breach of a professional duty. A licensed engineer, for example, might be personally liable for the harm caused by the faulty design of a product marketed by the LLC to an injured plaintiff. Some other negligent or wrongful act might also serve as the predicate for personal liability when a member or manager owed a duty of care to a plaintiff beyond the LLC’s contractual obligations.

A statute can impose personal liability. For example, personal liability might be ascribed to a member or manager who is assumed under a state’s tax code to be responsible for the collection and remittance of the tax. Of course, a member or manager of an LLC is personally liable for their own torts or crimes, for which, depending on the circumstances, the company might also be held to account.

2. Economic. Why does the law allow—and even encourage—limits on the liability of a business organization’s owners and managers for the firm’s actions? Discuss.

Solution: The law allows, and encourages, limits to the liability of a business organization’s owners and managers for the firm’s actions in order to facilitate business investment, which contributes to a more thriving economy. Imposing personal liability in all circumstances on the owners and operators would tend to discourage investment by providing a disincentive to going into business at all.

Of course, as noted in the court’s opinion in the Nesset case, there are exceptions.

Particularly when a business form is used to perpetrate fraud or commit other wrongdoing, personal liability may be assessed. But in situations that do not fall within the exceptions, a party who claims injury, damage, or loss through the actions of a business firm must normally seek relief through the assets of the firm, not those of its owners and managers.

CHAPTER REVIEW PRACTICE AND REVIEW A bridge on a prominent public roadway in the city of Papagos, Arizona, was deteriorating and in need of repair. The city posted notices seeking proposals for an artistic bridge design and reconstruction. Davidson Masonry, LLC, which was owned and managed by Carl Davidson and his wife, Marilyn Rowe, submitted a bid for a decorative concrete project that incorporated artistic metalwork. They contacted Shana Lafayette, a local sculptor who specialized in large-

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 17: Business Organizations

scale metal forms, to help them design the bridge. The city selected their bridge design and awarded them the contract for a commission of $184,000. Davidson Masonry and Lafayette then entered into an agreement to work together on the bridge project. Davidson Masonry agreed to install and pay for concrete and structural work, and Lafayette agreed to install the metalwork at her expense. They agreed that overall profits would be split, with 25 percent going to Lafayette and 75 percent going to Davidson Masonry. Lafayette designed numerous metal sculptures of salmon that were incorporated into colorful decorative concrete forms designed by Rowe, while Davidson performed the structural engineering. Using the information presented in the chapter, answer the following questions.

1.

Would Davidson Masonry automatically be taxed as a partnership or a corporation?

Explain.

Solution: This limited liability company (LLC) would be taxed as a partnership unless it opted to be taxed as a corporation. With a few exceptions, any LLC with at least two members can choose whether to be taxed as a partnership or a corporation. (A one-member LLC is taxed as a sole proprietorship unless it chooses to be taxed as a corporation.) If a firm prefers to be taxed as a corporation, it can check a box on a certain federal tax form to indicate this choice. Taxed as a partnership, an LLC would pay no taxes: its profits would be “passed through” to its members, who would however pay taxes on the profits. The corporate taxing option might be preferable to LLC members who want to reinvest the profits in the business, because corporate tax rates are often lower than personal tax rates.

2. Is Davidson Masonry a member-managed or manager-managed LLC? Explain.

Solution: The LLC in this problem is a member-managed firm—the owners are the managers. In a member-managed LLC, all members participate in management, and decisions are made by majority vote. In a manager-managed firm, the members designate managers, who may or may not be members of the firm.

3. Suppose that during construction, Lafayette entered into an agreement to rent space in a warehouse that was close to the bridge so that she could work on her sculptures near the site where they would be installed. She entered into the contract without the knowledge or consent of Davidson Masonry. In this situation, would a court be likely to hold that Davidson Masonry was bound by the contract that Lafayette entered? Why or why not?

Solution: Depending on the terms of the operating agreement, all members of the LLC have a right to manage. If Lafayette’s agreement were not approved by the majority of the members, it may not be binding upon the LLC. 4. Now suppose that Rowe has an argument with her husband and wants to withdraw from being a member of Davidson Masonry. What is the term for such a withdrawal, and what effect does it have on the LLC? Solution: When a member disassociates from an LLC, that member loses the right to participate in management and act as an agent for the LLC. However, the disassociated member has no right to force the LLC to dissolve, and the remaining members can opt to continue or dissolve the business of their own volition.

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PRACTICE AND REVIEW: DEBATE THIS 1.

All franchisors should be required by law to provide a comprehensive estimate of the profitability of a prospective franchise based on the experiences of their existing franchisees.

Solution: Because many franchisors seem only to survive by selling more franchises— rather than from current operations—they tend to exaggerate the potential profits that can be made. Those seeking to buy a new franchise are therefore often provided with little hard evidence about how much profit they can expect to make. To prevent individuals from succumbing to franchisors’ exaggerated sales pitches, government should require that verifiable estimates of profitability be provided. These should be available in print and on the internet and be current.

The profitability of any given franchise depends on many factors, including the business acumen of the franchisee. Even if franchisors provided accurate estimates of potential profitability for the average franchisee, there would be no guarantee that a new franchisee could earn the average profits so estimated. Hence, if franchisors were required to provide profitability estimates to prospective franchisees, the former would end up defending numerous lawsuits from franchisees whose business abilities turned out to be poor.

ISSUE SPOTTERS 1.

Gabriel, Harry, and Ida are members of Jeweled Watches, LLC. What are their options with respect to the management of their firm? (See Limited Liability Companies.)

Solution: The members of a limited liability company (LLC) may designate a group to run their firm, in which situation the firm would be considered a manager-managed LLC. The group may include only members, only nonmembers, or members and nonmembers. If instead, all members participate in management, the firm would be a member-managed LLC. In fact, unless the members agree otherwise, all members are considered to participate in the management of the firm.

2. Anchor Bottling Company and U.S. Beverages, Inc. (USB), enter into a franchise agreement that states that the franchise may be terminated at any time “for cause.” Anchor fails to meet USB’s specified sales quota. Does this constitute “cause” for termination? Why or why not? (See Franchises.)

Solution: Yes. Failing to meet a specified sales quota can constitute a breach of a franchise agreement. If the franchisor is acting in good faith, “cause” may also include the death or disability of the franchisee, the insolvency of the franchisee, and a breach of another term of the franchise agreement.

BUSINESS SCENARIOS AND CASE PROBLEMS 17–1. Limited Liability Companies. John, Lesa, and Tabir form a limited liability company. John contributes 60 percent of the capital, and Lesa and Tabir each contribute 20 percent. Nothing is decided about how profits will be divided. John assumes that he will be entitled to 60 percent of the profits, in accordance with his contribution. Lesa and Tabir, however, assume that the profits will be divided equally. A dispute over the question arises, and ultimately a court has to decide the issue. What law will the court apply? In most states, what will result?

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How could this dispute have been avoided in the first place? Discuss fully. (See Limited Liability Companies.)

Solution: Limited liability company (LLC) operating agreements typically state how profits will be divided. An operating agreement is not necessary for the formation of an LLC, and even if there is an operating agreement, it does need not to be in writing.

Generally, though, members protect their interests by signing a written operating agreement that spells out the terms of their LLC, including a division of profits and losses. If there is no agreement covering how profits will be divided, the applicable state LLC statute will govern. Most LLC statutes provide that if members do not specify how profits are to be divided, they will be divided equally. If there is no operating agreement or LLC statute addressing the particular issue, the principles of partnership law apply. Those principles also indicate that profits are divided equally among the owners of a firm unless specified otherwise.

17–2. Partnership Formation. Daniel is the owner of a chain of shoe stores. He hires Rubya to be the manager of a new store, which is to open in Grand Rapids, Michigan. Daniel, by written contract, agrees to pay Rubya a monthly salary and 20 percent of the profits. Without Daniel’s knowledge, Rubya represents himself to Classen as Daniel’s partner, showing Classen the agreement to share profits. Classen extends credit to Rubya. Rubya defaults. Discuss whether Classen can hold Daniel liable as a partner. (See Partnerships.)

Solution: Classen cannot hold Daniel liable as a partner, because a true partnership never existed nor is Daniel liable under a theory of partnership by estoppel. A partnership is defined as an association of two or more persons to conduct, as co-owners, a business for profit [UPA 101(6)]. To determine that a partnership was created, the court must look for a sharing of profits and a joint ownership of the business, with each party having an equal right to manage the business. When specific evidence that this situation existed is lacking, some guidelines are applied. First, the sharing of profits from a business is prima facie evidence of the existence of a partnership, unless such sharing is by means of one party receiving wages as an employee [UPA 202(c)(3)]. Rubya is not a co-owner of the business and his share of profits is partially the means of paying his salary. Therefore, a partnership is not created, and Daniel is not liable as a partner.

To be liable as a partner by estoppel, Daniel must either have represented himself to Classen as Rubya’s partner or have impliedly (or expressly) consented to Rubya’s representing himself as a partner. Because Daniel did not even know of Rubya’s assertions and did nothing to lead Classen to believe he was Rubya’s partner, Classen can look only to Rubya for payment of the debt. No partnership by estoppel was created.

17–3. Spotlight on Liberty Tax—Franchise Regulation. JTH Tax, Inc., doing business as Liberty Tax Service, provides tax preparation and related loan services through company-owned and franchised stores. Liberty’s agreement with its franchisees reserved the right to control their ads. In operations manuals, Liberty provided step-by-step instructions, directions, and limitations regarding the franchisees’ ads and retained the right to unilaterally modify the steps at any time. The California attorney general filed a suit in a California state court against Liberty, alleging that its franchisees had used misleading or deceptive ads regarding refund anticipation loans and e-refund checks. Can Liberty be held liable? Discuss. [People v. JTH Tax, Inc., 212 Cal.App.4th 1219, 151 Cal.Rptr.3d 728 (1 Dist. 2013)] (See Franchises.)

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Solution: Yes. Liberty can be held liable for the statements in its franchisees’ ads. The validity of a provision permitting the franchisor to establish and enforce certain quality standards is unquestioned. The franchisor has a legitimate interest in maintaining the quality of the product or service to protect its name and reputation. If a franchisor exercises too much control over the operations of its franchisees, however, the franchisor risks potential liability. A franchisor may occasionally be held liable under the doctrine of respondeat superior for the tortious acts of a franchisee or the franchisees’ employees.

In this problem, Liberty’s agreement with its franchisees reserved the right to control their ads. In operations manuals, Liberty provided step-by-step instructions, directions, and limitations to its franchisees regarding their ads and retained the right to unilaterally modify the steps at any time. This seems to give the franchisor a great deal of control over its franchisees’ marketing, which, under the principles stated above, points to the franchisor’s liability for the franchisees’ misleading or deceptive ads.

In the actual case on which this problem is based, the court issued a judgment in California’s favor. Liberty appealed. A state intermediate appellate court affirmed.

“Liberty retained the right to control, and in fact did seek to control, its franchisees' advertising and other marketing activities beyond that necessary to protect its marks and goodwill.”

17–4. Partnerships. Karyl Paxton asked Christopher Sacco to work with her interior design business, Pierce Paxton Collections, in New Orleans. At the time, they were in a romantic relationship. Sacco was involved in every aspect of the business—bookkeeping, marketing, and design—but was not paid a salary. He was reimbursed, however, for expenses charged to his personal credit card, which Paxton also used. Sacco took no profits from the firm, saying that he wanted to “grow the business” and “build sweat equity.” When Paxton and Sacco’s personal relationship soured, she fired him. Sacco objected, claiming that they were partners.

Is Sacco entitled to 50 percent of the profits of Pierce Paxton Collections? Explain. [Sacco v.

Paxton, 133 So.3d 213 (La.App. 4th Cir. 2014)] (See Partnerships.)

Solution: Yes. Sacco is entitled to 50 percent of the profits of Pierce Paxton Collections, PPDS, and KPD. The requirements for establishing a partnership are (1) a sharing of profits and losses, (2) a joint ownership of the business, and (3) an equal right to be involved in the management of the business.

The effort and time that Sacco expended in the business constituted a sharing of losses, and his proprietary interest in the assets of the partnership consisted of his share of the profits, which he had expressly left in the business to “grow the company” and “build sweat equity” for the future. He was involved in every aspect of the business. Although he was not paid a salary, he was reimbursed for business expenses charged to his personal credit card, which Paxton also used. These facts arguably meet the requirements for establishing a partnership.

In the actual case on which this problem is based, Sacco filed a suit in a Louisiana state court against Paxton, and the court awarded Sacco 50 percent of the profits. A state intermediate appellate court affirmed, based generally on the reasoning stated above.

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17–5. Business Case Problem with Sample Answer—Jurisdictional Requirements in LLCs. Siloam Springs Hotel, LLC, operates a Hampton Inn in Siloam Springs, Arkansas. Siloam bought insurance from Century Surety Company to cover the hotel. When guests suffered injuries due to a leak of carbon monoxide from the heating element of an indoor swimming pool, Siloam filed a claim with Century. Century denied coverage, which Siloam disputed.

Century asked a federal district court to resolve the dispute. In asserting that the federal court had jurisdiction, Century noted that the amount in controversy exceeded $75,000 and that the parties had complete diversity of citizenship. Century is “a corporation organized under the laws of Ohio, with its principal place of business in Michigan,” and Siloam is “a corporation organized under the laws of Oklahoma, with its principal place of business in Arkansas.” Can the court exercise diversity jurisdiction in this case? Discuss. [Siloam Springs Hotel, LLC v. Century Surety Co., 781 F.3d 1233 (10th Cir. 2015)] (See Limited Liability Companies.)

Solution: No. Based on the facts provided in the problem, the trial court cannot exercise diversity jurisdiction in the Siloam case—at least, not yet. When the parties to a suit are from different states, a federal court can exercise diversity jurisdiction if the amount in controversy exceeds $75,000. Total diversity of citizenship must exist, however. An LLC's citizenship is determined by reference to the citizenship of each and every one of its members.

Siloam Springs Hotel, LLC, operates a Hampton Inn. When Siloam’s insurer Century Surety Co. denied coverage for a certain claim, Siloam disputed the denial. Century asked a federal district court to resolve the dispute. The plaintiff asserted as the basis for jurisdiction an amount in controversy exceeding $75,000 and complete diversity of citizenship—Century is “a corporation organized under the laws of Ohio, with its principal place of business in Michigan,” and Siloam is “a corporation organized under the laws of Oklahoma, with its principal place of business in Arkansas.” The amount in controversy meets the requirement for diversity. Siloam, however, is not a corporation—it is an LLC. But the facts stated here do not reveal whether there was complete diversity between the parties.

In the actual case on which this problem is based, the court issued a summary judgment in Century’s favor. The U.S. Court of Appeals for the Tenth Circuit reversed this judgment for the reasons above. The court remanded the case for the lower court to determine whether complete diversity existed at the time of the complaint.

17–6. Partnership Formation and Operation. FS Partners is a general partnership whose partners are Jerry Stahlman, a professional engineer, and Fitz & Smith, Inc., a corporation in the business of excavating and paving. Timothy Smith signed the partnership agreement on Fitz & Smith’s behalf and deals with FS matters on Fitz & Smith’s behalf. Stahlman handles the payment of FS’s bills, including its tax bills, and is the designated partner on FS’s federal tax return. FS was formed to buy and develop twenty acres of unoccupied, wooded land in York County, Pennsylvania. The deed to the property lists the owner as “FS Partners, a general partnership.” When the taxes on the real estate were not paid, the York County Tax Claim Bureau published notice that the property would be sold at a tax sale. The bureau also mailed a notice to FS’s address of record and posted a notice on the land. Is this sufficient notice of the tax sale? Discuss. [FS Partners v. York County Tax Claim Bureau, 132 A.3d 577 (Pa. 2016)] (See Partnerships.)

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Solution: Yes. The notice published by the York County Tax Bureau, mailed to FS’s address of record, and posted on the partnership’s land, declaring that it would be sold at a sale for unpaid taxes, was sufficient. Property acquired by a partnership is the property of the partnership and not of the partners individually. This includes property that was acquired by the partnership or in the partnership’s name after its formation. A partner is not a co-owner of partnership property and has no right to sell, mortgage, or transfer it to another.

Here, FS Partners is a general partnership. The partners are Stahlman and Fitz & Smith, Inc. Timothy Smith represents Fitz & Smith in FS matters. Stahlman handles the payment of FS’s bills, including its tax bills, and is the designated partner on FS’s federal tax return. FS was formed to buy and develop certain land in York County, Pennsylvania. The deed lists the owner as “FS Partners, a general partnership.” When the taxes on the land were not paid, the York County Tax Claim Bureau published, mailed, and posted notice that the property would be sold at a tax sale.

This is sufficient notice—the individual partners do not need to be notified separately.

A general partnership can hold title to property in its own name. Although one partner in a general partnership does not have the authority to bind the partnership to a sale of the partnership’s property, a notice with respect to that property does not need to be sent to all the partners. In fact, notice to the partnership, or to any partner in the partnership, concerning partnership affairs, is sufficient.

In the actual case on which this problem is based, the land was sold at a tax sale.

Later, FS filed a petition to set aside the sale, challenging the sufficiency of the notice.

The court confirmed the sale. On the reasoning stated here, a state intermediate appellate court affirmed.

17–7. Franchise Termination. Executive Home Care Franchising, LLC, sells in-home health care franchises. Clint, Massare, and Greer Marshall entered into a franchise agreement with Executive Home Care. The agreement provided that the franchisees’ failure to comply with the agreement’s terms would likely cause irreparable harm to the franchisor, entitling it to an injunction. About two years later, the Marshalls gave up their franchise. They returned thirteen boxes of documents, stationery, operating manuals, marketing materials, and other items— everything in their possession that featured Executive Home Care trademarks. They quit operating out of the franchised location. They transferred the phone number back to the franchisor and informed their clients that they were no longer associated with Executive Home Care. They continued to engage in the home health care business, however, under the name “Well-Being Home Care Corp.” Is Executive Home Care entitled to an injunction against the Marshalls and their new company? Discuss. [Executive Home Care Franchising, LLC v.

Marshall Health Corp., 642 Fed.Appx. 181 (3d Cir. 2016)] (See Franchises.)

Solution: No. Executive Care is not entitled to an injunction against the Marshals and their new company. An injunction is an extraordinary remedy. To obtain an injunction before a suit is resolved, or arbitration or other alternative dispute resolution procedure is undertaken and completed, a party must establish that it will suffer irreparable harm if the injunction is denied.

In the facts of this problem, the Marshalls entered into a franchise agreement with Executive Care to operate a home healthcare franchise. The agreement provided that

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the franchisees’ failure to comply with the terms would likely cause irreparable harm to the franchisor, thereby entitling it to an injunction. When the Marshalls gave up their franchise, presumably before the end of its term under the franchise agreement, they returned everything in their possession with Executive Care trademarks. They quit operating out of the franchised location. They transferred the phone number back to Executive Care and informed their clients that they were no longer associated with that firm. Although the Marshalls continued to operate a home healthcare business, they did so under the name “Well–Being Home Care Corp.” There is nothing in these facts to establish that Executive Care is entitled to a preliminary injunction on the basis of irreparable harm. There appears to be little else the Marshalls might have done to prevent such harm to the franchisor.

In the actual case on which this problem is based, Executive Care filed a suit in a federal district court against the Marshalls and asked the court to issue a preliminary injunction. The court denied the request. On the reasoning stated here, the U.S. Court of Appeals for the Third Circuit affirmed.

17–8. Limited Liability of LLC Members. Vision Metals, Inc., owned and operated a pipemanufacturing facility that caused groundwater contamination. The Texas Commission on Environmental Quality (TCEQ) issued a plan that obligated Vision to treat the water and monitor the treatment. Later, Vision sold the property to White Lion Holdings, LLC. Bernard Morello, the sole member of White Lion, knew of the environmental obligations accompanying the property. When White Lion failed to comply with the TCEQ plan, the agency filed a suit in a Texas state court against Morello, asserting violations of the state’s environmental rules.

Morello was charged with personally removing the facility’s treatment plant and monitoring system. Considering the nature of an LLC, what is Morello’s best argument that he is not liable? Is this argument likely to succeed? Explain. [State of Texas v. Morello, 61 Tex.Sup.Ct.J. 381, 547 S.W.3d 881 (2018)] (See Limited Liability Companies.)

Solution: Morello’s best argument that he is not liable for his personal violations of the state’s environmental rules is that a member of an LLC is not liable for a debt, obligation, or liability of the company. But this argument is not likely to succeed.

Like shareholders of a corporation, the members of an LLC enjoy limited liability. That is, a key advantage of the LLC form of business organization is that the liability of its members for the debts, obligations, and liability of the firm is limited to the amount of the members’ investment in the company. The LLC as an entity can be held liable for harm caused by the wrongful acts of its members, but the members themselves are not generally personally liable.

But a member may be subject to personal liability for the results caused by negligent or wrongful acts. This requires, however, that the member owe a duty beyond the duties owed by the LLC to the plaintiff.

In this problem, a manufacturing facility owned by White Lion Holdings, L.L.C. was subject to a plan issued by the Texas Commission on Environmental Quality (TCEQ) that required the LLC to treat the facility’s contaminated groundwater and monitor the treatment. Morello, White Lion’s sole member, knew of the environmental obligations.

When White Lion failed to comply with the plan, the TCEQ filed a suit in a Texas state court against Morello, charging him with personally removing the facility’s treatment plant and monitoring system. If Morello were to make the argument stated above, it

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would not likely succeed as a defense because the charge was based on his personal actions, not on the company’s liability.

In the actual case on which this problem is based, Morello made the claim stated above. The court issued a judgment in the state’s favor. A state intermediate appellate court reversed. The Texas Supreme Court reversed the appellate decision, reasoning that Morello was liable “because of his own actions and liability ..., not because of the company’s liability.”

17–9. Breach of Franchise Agreement. After giving up his Taco Bell franchise, Roy Upshaw opened new restaurants called Taco Hut. He later renamed the restaurants Taco Casa and began franchising them in the mid-1980s. He was unable to obtain a federally registered trademark for Taco Casa, however, because someone else owned the mark.

Andrew Wilson, on behalf of Lacado, LLC, negotiated with Upshaw to obtain Taco Casa franchises. Upshaw assured Wilson that Upshaw owned the Taco Casa trademark. Eventually, Wilson signed three 20-year franchise agreements with Taco Casa. Wilson later discovered that Upshaw did not own the Taco Casa trademark. Wilson (through Lacado, LLC) filed suit against Upshaw and others, raising a claim for breach of the franchise agreement. A jury found the franchisor had breached the franchise agreement and had committed fraud.

Upshaw appealed. How should the Court of Appeals of Texas rule? [Upshaw and R&S Upshaw Franchising, L.L.C. v. Lacado, L.L.C., 650 S.W.3d 61 (TX App., Fort Worth, 2021)] (See Franchises.)

Solution: The appellate court agreed with the jury that Lacado (Wilson) had been fraudulently induced to enter into the franchise agreements. Upshaw argued that there was no evidence that he breached the franchise agreements. Upshaw claimed he had a common-law trademark for Taco Casa when he entered into the franchise agreements based on his continuous use of the mark for decades. The appellate court was not convinced by Wilson’s defense. The appellate court ruled that the evidence was sufficient to support the jury’s implicit finding that Upshaw breached the franchise agreements by failing to own the promised trademark when he signed the franchise agreements. The appellate court concluded that “the evidence was legally sufficient to support the jury’s breach-of-contract findings and its calculation of damages.”

A QUESTION OF ETHICS 17–10. The IDDR Approach and Sole Proprietorships. Tom George was the sole owner of Turbine Component Super Market, LLC (TCSM), when its existence was terminated by the state of Texas. A TCSM creditor, Turbine Resources Unlimited, won a suit in a Texas state court against George for breach of contract. Turbine sought to collect the amount of the judgment through a sale of George’s property. Instead of turning his assets over to the court, however, George tried to hide them by reforming TCSM. Without telling the court, he paid an unrelated debt with $100,000 of TCSM’s funds. George claimed that the funds were a loan and that he was merely an employee of TCSM. [Mitchell v. Turbine Resources Unlimited, Inc., 523 S.W.3d 189 (Tex. App.—Houston [14th Dist.] 2017)] (See Sole Proprietorships.)

1.

Is it more likely that the court will recognize TCSM as an LLC or a sole proprietorship? Explain your answer.

Solution: It is more likely that the court will see through Tom George’s subterfuge and hold that TCSM is a sole proprietorship. In a sole proprietorship,

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the owner is the business. Anyone who does business without creating a separate organization has a sole proprietorship. A limited liability company (LLC) must be formed and operated in compliance with state law.

A court has several methods to divine the truth in the circumstances of a case.

Not the least of these is the ability of the judge to carefully weigh the testimony of a witness and correctly determine that person’s credibility. This determination may be supported by the judge’s experience with litigants in many cases and by the physical evidence in the case at hand. For example, in George’s case, his demeanor would likely have betrayed the truth. Or there may have been state-issued documents that reveal the actual status of his businesses and their assets.

Here, when George lost a suit, the court ordered his assets sold to pay the judgment. Instead of tendering those assets to the court, however, George attempted to hide his assets within Turbine Component Super Market, LLC (TCSM). This firm had earlier been terminated by the state of Texas. George claimed to be TCSM’s employee, but he was its sole owner. And there was little or no distinction between the two, as evidenced by TCSM’s “loan” to George of $100,000. In other words, TCSM was in fact a sole proprietorship, not an LLC. 2. Using the Discussion step of the IDDR approach, consider whether the owner of a business has an ethical obligation to represent the character and purpose of the organization truthfully.

Solution: The owner of a business has an ethical obligation to represent the character and purpose of a business organization truthfully. At the very least, the obligation is owed by the owner to himself or herself in order to avoid the inevitable consequences. As in this problem, for example, misrepresentation is likely to be discovered by a court. The avoidance of liability or other negative results is likely to be short-term only.

The IDDR approach consists of four steps. The first step is an Inquiry to identify the issue, the stakeholders, and the ethical standards in a given situation. In this problem, for example, George was presented with the dilemma of whether to represent the status of TCSM truthfully, and thereby lose certain assets, or misrepresent its status in an attempt to avoid that loss. The stakeholders included George and the party from whom he wished to hide those assets (as well as the state court in which George would misrepresent his firm’s status).

The ethical standards include honesty and integrity, both generally and specifically in the oath George would be required to follow by the court (which has its own ethical code to follow).

The second step is the Discussion of actions to address the issue, the strengths and weaknesses of the actions, and the consequences and effects on stakeholders. So, here, George has to decide whether to misrepresent the true status of his business firm. By misrepresenting it, George might effectively retain assets that could otherwise be forfeited to satisfy a judgment. But he would sacrifice honesty in the process. This could weigh on his conscience and, more practically, form the basis for a later fraud suit. By presenting the status of his firm truthfully, George would lose the assets but retain his integrity and could avoid further litigation.

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The third step is to make a Decision and express the reasons for it. In this case, the decision seems clear—George should not have misrepresented his firm as a limited liability company. Instead, he should have confessed to its status as a sole proprietorship and suffered the inevitable consequences. This would have preserved his honesty and integrity, and avoided later regret and litigation.

The final step is a Review of the success or failure of the actions to resolve the issue and satisfy the stakeholders. George’s decision to attempt to defraud the court and his opposing party did not succeed, and would not have satisfied the stakeholders if it had. A decision to act truthfully would have worked to the ultimate satisfaction of the issue and the stakeholders.

In the actual case on which this problem is based, on an appeal from the court-ordered sale of George’s property (by Jennifer Mitchell, George’s girlfriend, who claimed an interest in the property), a state intermediate appellate court affirmed the order for the sale.

TIME-LIMITED TEAM ASSIGNMENT 17–11. Franchise Termination. Walid Elkhatib, an Arab American, bought a Dunkin’ Donuts franchise in Illinois. Ten years later, Dunkin’ Donuts began offering breakfast sandwiches with bacon, ham, or sausage through its franchises. Elkhatib refused to sell these items at his store on the ground that his religion forbade the handling of pork. Elkhatib then opened a second franchise, at which he also refused to sell pork products. The next year, at both locations, Elkhatib began selling meatless sandwiches. He also opened a third franchise. When he proposed to relocate this franchise, Dunkin’ Donuts refused to approve the new location.

The company also informed him that it would not renew any of his franchise agreements because he did not carry the full sandwich line. Elkhatib filed a lawsuit against Dunkin’ Donuts. (See Franchises.)

1.

The first team will argue on behalf of Elkhatib that Dunkin’ Donuts wrongfully terminated his franchises.

Solution: Elkhatib’s refusal to offer breakfast sandwiches containing pork at his franchise locations was based on his religious beliefs. When he sought to relocate one of the franchises, Dunkin’ Donuts (the franchisor) notified him that it would not allow relocation and furthermore would not renew his franchise agreement. The court should grant the franchisee a remedy. Dunkin’ Donuts acted unfairly and wrongfully. The dietary restrictions Elkhatib observed are associated with his religion. Both Islamic and Jewish law prohibits the handling and consumption of pork.

2. The second team will take the side of Dunkin’ Donuts and justify its decision to terminate the franchises.

Solution: Dunkin’ Donuts (the franchisor) has a right to require franchisees to offer a uniform menu to protect its name and reputation. Quality standards are particularly important in chain-style business operations. Dunkin Donuts acted fairly and honestly when it notified Elkhatib that it would not allow relocation and would not renew his franchise agreement. Its reasons were not arbitrary.

The court should issue a judgment in the defendants’ favor.

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3. The third team will assess whether Dunkin’ Donuts acted in good faith in its relationship with Elkhatib. Consider whether Dunkin’ Donuts should be required to accommodate Elkhatib’s religious beliefs and allow him to not serve pork in these three locations.

Solution: Elkhatib’s obligations under his current franchise agreement presumably require all franchisees to carry the full food product line of Dunkin’ Donuts. Because Elkhatib failed to carry the full line of food products, the franchisor would not extend his current franchise agreement or allow the relocation of his store. In determining whether a franchisor has acted in good faith when terminating a franchise agreement, the courts generally try to balance the rights of both parties. If the court perceives that the franchisor acted arbitrarily or unfairly, the court will grant the franchisee a remedy. In this situation, the court would consider the fact that the franchisee’s refusal to offer breakfast sandwiches containing pork was based on his religious beliefs.

Nonetheless, the court would balance this against the fact that Dunkin’ Donuts has a right to require its franchisees to offer a uniform menu to protect its name and reputation. Dunkin’ Donuts acted in good faith. As for the franchisor’s refusal to allow its franchisee’s relocation, it is within a franchisor’s rights to determine the location of a franchise.

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Solution and Answer Guide

Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 18: Corporations

TABLE OF CONTENTS Critical Thinking Questions in Features .............................................................................1 Cybersecurity and the Law—Critical Thinking ..................................................................... 1 Building Analytical Skills—Result and Reasoning .............................................................. 2 Critical Thinking Questions in Cases ................................................................................. 2 Case 18.1—Critical Thinking .................................................................................................... 2 Case 18.2—Critical Thinking ................................................................................................... 3 Case 18.3—Critical Thinking ................................................................................................... 4 Chapter Review ................................................................................................................... 4 Practice and Review................................................................................................................. 4 Practice and Review: Debate This ......................................................................................... 6 Issue Spotters ........................................................................................................................... 6 Business Scenarios and Case Problems .............................................................................. 6 A Question of Ethics ............................................................................................................... 13 Time-Limited Team Assignment .......................................................................................... 15

CRITICAL THINKING QUESTIONS IN FEATURES CYBERSECURITY AND THE LAW—CRITICAL THINKING 1.

What type of American businesses are impacted by the CLOUD Act? What steps should these businesses take in response to the CLOUD Act? Solution: The CLOUD Act impacts cloud service providers (CSPs) such as Amazon, Apple, Meta’s Facebook, Google, and Microsoft, as well as any other business that uses a CSP to store its data or the data of its clients on the cloud. In theory, any business that stores data in any capacity could be subject to a CLOUD Act request by an American law enforcement agency at any time.

To protect this data, the company must make sure that it is encrypted, meaning that it can be unlocked and accessed only by someone who has the proper authorization, usually via a password. The key to unlocking encrypted data must remain with the client or with the entity that wishes to control the data being stored in the cloud.

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Importantly, the CSP must not have access to the encryption password, meaning that the CSP cannot access the cloud-based data without the permission of the business or person that owns and controls that data. That way, if a government agency requests access to the encrypted data from the CSP, the CSP will not be able to comply without first alerting its client.

BUILDING ANALYTICAL SKILLS—RESULT AND REASONING 1.

The Songers are not personally liable for Country’s failure to complete its contract with Westside Storage. Explain why this is the proper outcome.

Solution: The Songers had not misused the corporate form to engage in misconduct, the firm had not been undercapitalized, and personal and corporate funds had not been commingled. In addition, Country had kept accounting records and minutes of its annual board meetings, thus observing the formalities required by law. These circumstances fall under none of the exceptions to the limit on shareholders’ liability for corporate obligations. Thus, as shareholders, the Songers are not personally liable for the failure of their company to complete its job.

CRITICAL THINKING QUESTIONS IN CASES CASE 18.1—CRITICAL THINKING 1.

Legal Environment. What issues of fact must be resolved concerning Wulf’s claim for Bravo Brio to be held liable under the doctrine of respondeat superior? Discuss.

Solution: To establish negligence, a party must show the existence of a duty, a breach of that duty, causation, and damages. Under the doctrine of respondeat superior, an employer is liable for an employee’s negligence during the performance of the employee’s work in the course of employment.

Wulf did not claim that Bravo Brio was negligent in maintaining the restaurant nor did he complain of any conditions on the property, such as a hidden step, cracked flooring, or a broken handrail. Wulf claimed that he was injured as a result of the negligence of a Bravo Brio employee, a waitress, backing into him, causing him to fall.

The trial court issued a summary judgment in Bravo Brio’s favor, finding that Wulf was unable to prove his claim chiefly due to his failure to specifically identify the waitress.

On appeal, Wulf argued that there was a genuine issue of material fact as to whether his fall and injuries were caused by the negligence of the waitress employed by Bravo Brio and thus whether Bravo Brio was liable under the doctrine of respondeat superior.

He asserted that the specific identification of the waitress was not necessary if he established that she was negligent in the course of her employment. The appellate court agreed with this position. But the court also found, “in light of all of the foregoing, and construing the inferences to be drawn from the underlying facts in a light most favorable to Wulf,” that there were genuine issues of material fact to be resolved on remand.

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For Bravo Brio to be held liable for its employee’s negligence under the doctrine of respondeat superior, one fact to be established is whether the person wearing a Bravo uniform who apologized to Wulf after the incident was a Bravo Brio employee. Other factual issues include whether the waitress had a duty to protect against colliding with patrons while performing her job responsibilities. There is the issue of whether she failed to look out before she bumped into Wulf and the question of whether Wulf did not see her coming because he was not looking or was simply too close to avoid her.

The resolution of these issues is needed to determine whether Bravo Brio is liable under the doctrine of respondeat superior.

2. Economic. Why should a corporation be held liable for torts committed by its employees during the course of their employment?

Solution: Liability is imposed on a corporate employer for a tort committed by its employee under the doctrine of respondeat superior only if the employee was acting within the course of employment. In other words, the employer can be liable if the incident occurred when the employee was acting on the employer's behalf by doing the employee’s job or otherwise carrying out the company’s business.

The reasoning underlying the application of this doctrine is that employers direct the conduct of their employees on the job and thereby realize the results, whether those results are good or bad. An employer is legally entitled to profit from an employee's labor. The employer, however, is also legally liable if that same behavior causes harm.

Another consideration is the goal of the legal system to compensate the victim for the cost of the harm suffered. Holding an employer responsible for an employee’s tort committed within the course of employment is more likely to accomplish this goal.

The employer is likely more capable of assuming the cost by obtaining insurance or by pricing goods or services to spread the risk.

Of course, if the employee acted independently or out of a personal motive, solely for the employee’s own benefit, the employer might not be liable.

CASE 18.2—CRITICAL THINKING 1.

What If the Facts Were Different? Suppose that Loft’s board of directors had approved Pepsi-Cola’s use of its personnel and equipment. Would the court’s decision have been different? Discuss.

Solution: Possibly. Guth contended that the Loft board had approved Pepsi’s use of Loft’s personnel and facilities, but there were no board minutes, no contract, and no other record or anything else in writing to prove the directors’ consent. The court found, among other things, that “Guth's use of Loft's money, credit, facilities, and personnel in the furtherance of the Pepsi venture was without the knowledge or authorization of Loft's directors.” The court also pointed out that Guth had selected the members of the board and that their livelihoods were dependent on him, intimating that even if he had sought their consent, it could be construed as coerced.

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CASE 18.3—CRITICAL THINKING 1.

What If the Facts Were Different? Suppose Murphy owned OpenText shares and alleged that OpenText directors had breached their fiduciary duties as part of the cash-out merger. Would a shareholder derivative suit be appropriate? Why or why not?

Solution: Yes, a shareholder derivative suit would be appropriate under these circumstances. A suit to enforce corporate rights or redress injury to the corporation is a derivative suit. In this situation, as opposed to the Murphy case, the plaintiff would likely have standing to sue on behalf of the corporation. Additionally, the plaintiff would be required to comply with several statutory provisions before bringing the derivative action, including providing evidence that OpenText had failed to respond to a written request to take appropriate action. (In the actual case, Murphy had not complied with these provisions, leading the lower courts to rule that he lacked standing to bring a derivative suit in the interests of Covisint.)

2. Legal Environment. Along with duties of care and loyalty to the corporation, should directors have a fiduciary duty to maximize the value of a shareholder’s shares? Explain your answer.

Solution: Directors of a corporation are required to perform their duties in a manner that they reasonably believe to be in the best interests of the corporation. In other words, a fiduciary duty requires corporate directors to act for the corporation’s benefit rather than their own. Common law intertwines the interests of the corporation and of its shareholders, assuming that director decisions that benefit one benefit the other and that director decisions that harm one harm the other.

The idea that a director’s primary fiduciary duty is to produce for each stockholder the best possible return on their investment has become controversial, as was discussed in this chapter’s Business Law in Context feature. Concerning a cash-out merger when the decision to sell Covisint had already been made, however, the court was able to see the matter clearly. Covisint’s board of directors was no longer tasked with preserving Covisint as a corporate entity. Instead, the directors were charged with (1) disclosing to the shareholders all material facts within their knowledge regarding the merger; and (2) “exercise[ing] their fiduciary duties to the shareholders with one goal in mind: to maximize shareholder value by securing the highest value share price reasonably available.”

Using this reasoning, the Supreme Court of Michigan established that the Covisint board had a fiduciary duty to obtain the best possible return on the investments of shareholders such as Murphy. The court then determined that Murphy could use direct legal action rather than a derivative suit to litigate a breach of this fiduciary duty.

CHAPTER REVIEW PRACTICE AND REVIEW William Sharp was the sole shareholder and manager of Chickasaw Club, Inc., an S corporation that operated a popular nightclub of the same name in Columbus, Georgia. Sharp maintained a corporate checking account but paid the club’s employees, suppliers, and

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entertainers in cash out of the club’s proceeds. Sharp owned the property on which the club was located. He rented it to the club but made mortgage payments out of the club’s proceeds and often paid other personal expenses with Chickasaw corporate funds.

At 12:45 a.m. on July 31, eighteen-year-old Aubrey Lynn Pursley, who was already intoxicated, entered the Chickasaw Club. Chickasaw employees did not check Pursley’s identification to verify her age, as required by a city ordinance. Pursley drank more alcohol at Chickasaw and was visibly intoxicated when she left the club at 3:00 a.m. with a beer in her hand. Shortly afterward, Pursley lost control of her car, struck a tree, and was killed. Joseph Dancause, Pursley’s stepfather, filed a tort lawsuit against Chickasaw Club and William Sharp. Using the information presented in the chapter, answer the following questions.

1.

Under what theory might the court in this case make an exception to the limited liability of shareholders and hold Sharp personally liable for the damages? What factors would be relevant to the court’s decision?

Solution: The court would be likely to pierce the veil of the corporation and hold Sharp personally liable. Because he commingled personal funds with corporate funds and generally treated the business as his alter ego, as one would treat a proprietorship, the limited liability that accompanies corporate status could be lost.

2. Suppose that Chickasaw’s articles of incorporation failed to describe the corporation’s purpose or management structure as required by state law. Would the court be likely to rule that Sharp is personally liable to Dancause on that basis? Why or why not?

Solution: Sharp is likely to be personally liable based on piercing the corporate veil due to ignoring the corporate form. Technical details in the articles of incorporation alone would not be likely to result in liability being imposed; the fact that the entire operation ignored the corporate status matters more in losing the liability shield.

3. Suppose that the club extended credit to its regular patrons in an effort to maintain a loyal clientele, although neither the articles of incorporation nor the corporate bylaws authorized this practice. Would the corporation likely have the power to engage in this activity? Explain.

Solution: Extending credit to customers is a normal business activity and is not improper. Such details need not be discussed in the articles of incorporation or the bylaws, which generally concern the purpose of the business itself and basic ownership structure issues.

4. How would the court classify Chickasaw Club, Inc.—domestic or foreign, public or private?

Solution: The corporation was formed and operated in Georgia, so it is a domestic corporation. One person owns the corporation, so it is private; its stock is not traded, so it is also a close corporation.

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PRACTICE AND REVIEW: DEBATE THIS 1.

The sole shareholder of an S corporation should not be able to avoid liability for the torts of employees.

Solution: Perhaps it makes sense to allow individuals to use business organization forms that allow them to pass through profits to their personal tax returns, but it makes little sense to allow them to escape liability with such structures when their employees or agents commit torts. Normally, employees do not have liability insurance or even assets that could pay for tort judgments against them. Those who suffer from these torts would therefore end up with nothing, even if they win at trial.

It should make no difference whether an S corporation is owned by one person or by many persons. A major benefit of all corporations, whatever form they take, has been to shield shareholders from liability. Therefore, if a shareholder of an S corporation knows that limited liability is not available, there is less reason to use the S corporation structure. Its use will decrease as a result.

ISSUE SPOTTERS 1.

Name Brand, Inc., is a small business. Twelve members of a single family own all of its stock. Ordinarily, corporate income is taxed at the corporate and shareholder levels. How can Name Brand avoid this double taxation of income? (See Nature and Classification.)

Solution: Small businesses that meet certain requirements can qualify as S corporations, created specifically to permit small businesses to avoid double taxation.

The six requirements of an S corporation are (1) the firm must be a domestic corporation; (2) the firm must not be a member of an affiliated group of corporations; (3) the firm must have fewer than a certain number of shareholders; (4) the shareholders must be individuals, estates, or qualified trusts (or corporations in some cases); (5) there can be only one class of stock; and (6) no shareholder can be a nonresident alien.

2. Wonder Corporation has an opportunity to buy stock in XL, Inc. The directors decide that instead of buying the stock in the name of the corporation, they will buy it for themselves.

Yvon, a Wonder shareholder, learns of the purchase and wants to sue the directors on Wonder’s behalf. Can she do it? Explain. (See Shareholders.)

Solution: Yes. A shareholder can bring a derivative suit on behalf of a corporation if some wrong is done to the corporation. Normally, any damages recovered go into the corporate treasury.

BUSINESS SCENARIOS AND CASE PROBLEMS 18–1. Preincorporation. Cummings, Okawa, and Taft are recent college graduates who want to form a corporation to manufacture and sell personal computers. Peterson tells them he will set in motion the formation of their corporation. First, Peterson makes a contract with Owens for the purchase of a piece of land for $20,000. Owens does not know of the prospective corporate formation at the time the contract is signed. Second, Peterson makes a contract with Babcock to build a small plant on the property being purchased. Babcock’s contract is conditional on the corporation’s formation. Peterson secures all necessary capitalization and files the articles of incorporation. Discuss whether the newly formed corporation, Peterson, or © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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both are liable on the contracts with Owens and Babcock. Is the corporation automatically liable to Babcock on formation? Explain. (See Formation and Powers.)

Solution: As a general rule, a promoter is personally liable for all pre-incorporation contracts made by the promoter. The basic theory behind such liability is that the promoter cannot be an agent for a nonexistent principal (a corporation not yet formed). It is immaterial whether the contracting party knows of the prospective existence of the corporation, and the general rule of promoter liability continues even after the corporation is formed. Three basic exceptions to promoter liability are: (1) The promoter’s contract with a third party can stipulate that the third party will look only to the new corporation, not to the promoter, for performance and liability.

(2) The third party can release the promoter from liability.

(3) After formation, the corporation can assume the contractual obligations and liability by novation. (If it is by adoption, most courts hold that the promoter is still personally liable.)

Peterson is therefore personally liable on both contracts, because (1) neither Owens nor Babcock has released him from liability, (2) the corporation has not assumed contractual responsibility by novation, and (3) Peterson’s contract with Babcock did not limit Babcock to holding only the corporation liable. (Peterson’s liability was conditioned only on the corporation’s formation, which did occur.)

Incorporation in and of itself does not make the newly formed corporation liable for pre-incorporation contracts. Until the newly formed corporation assumes Peterson’s contracts by novation (releasing Peterson from personal liability) or by adoption (undertaking to perform Peterson’s contracts, which makes both the corporation and Peterson liable), Babcock cannot enforce Peterson’s contract against the corporation.

18–2. Conflicts of Interest. Oxy Corp. is negotiating with the Wick Construction Co. for the renovation of the Oxy corporate headquarters. Wick, the owner of the Wick Construction Co., is also one of the five members of Oxy’s board of directors. The contract terms are standard for this type of contract. Wick has previously informed two of the other directors of his interest in the construction company. Oxy’s board approves the contract by a three-to-two vote, with Wick voting with the majority. Discuss whether this contract is binding on the corporation. (See Directors and Officers.)

Solution: Various state statutes contain different standards for contracts made between two corporations when a director of one corporation has a material interest in the other. In general, however, the courts will uphold these contracts, providing that: (1) The contract was fair and reasonable to the corporation at the time the contract was entered into.

(2) The director with conflicting interests gave a full disclosure of such interests to the other directors.

(3) The contract was approved by a majority of the disinterested directors or shareholders.

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In the case of Wick and Oxy Corp., the contract may be set aside for two reasons.

First, the conflict-of-interest transaction was not fully disclosed to all members of the board, and second, the contract was not approved by a majority of disinterested directors. Thus, Wick has breached his fiduciary duties to Oxy, and Oxy can set aside the contract.

18–3. Spotlight on Smart Inventions—Piercing the Corporate Veil. Thomas Persson and Jon Nokes founded Smart Inventions, Inc., to market household consumer products. The success of their first product, the Smart Mop, continued with later products, which were sold through infomercials. Persson and Nokes were the firm’s officers and equal shareholders, with Persson responsible for product development and Nokes in charge of day-to-day activities. By 1998, they had become dissatisfied with each other’s efforts. Nokes represented the firm as financially “dying,” and “in a grim state, . . . worse than ever.” He offered to buy all of Persson’s shares for $1.6 million, and Persson accepted.

On the day that they signed the agreement to transfer the shares, Smart Inventions began marketing a new product—the Tap Light. It was an instant success, generating millions of dollars in revenues. In negotiating with Persson, Nokes had intentionally kept the Tap Light a secret. Persson sued Smart Inventions, asserting fraud and other claims. Under what principle might Smart Inventions be liable for Nokes’s fraud? Is Smart Inventions liable in this case?

Explain. [Persson v. Smart Inventions, Inc., 125 Cal.App.4th 1141, 23 Cal.Rptr.3d 335 (2 Dist.

2005)] (See Formation and Powers.)

Solution: As stated in the text, the doctrine of respondeat superior applies to agents of corporations. Under this doctrine, a corporation is liable for torts (or crimes) committed by its agents or officers within the course and scope of employment. Thus, if Nokes was an agent acting in the scope of his employment, then Smart Inventions can be liable for Nokes’s fraud.

Because Nokes and Persson founded the company and were the only two shareholders and officers, Smart Inventions was most likely a close corporation. When Nokes negotiated to purchase all of Persson’s shares, Nokes would have been acting on behalf of the corporation (since he was the only remaining officer and corporate representative). Nokes intentionally lied about the financial condition of the corporation and the withheld information about a new product that he suspected would be successful. In these circumstances, Smart Inventions should be liable for Nokes’s fraud.

Indeed, the court that heard the case ruled that Nokes was acting on behalf of Smart Inventions and awarded nearly $720,000 in damages, fees, and costs to Persson. On appeal, a state intermediate appellate court affirmed the award of damages against Smart Inventions. The court explained that “Nokes possessed the information about the Tap Light and could have disclosed it at any time before the execution of the Stock Redemption Agreement. Even if ... Nokes acted only in his individual capacity during the ... negotiations between him and Persson, he was clearly acting for Smart Inventions by the time the agreement was executed, as his signature on behalf of Smart Inventions demonstrates. Accordingly, his continued concealment of the Tap Light was an ‘act or omission’ of an officer of Smart Inventions within the scope of his employment and, as a matter of law, the act or omission of Smart Inventions.”

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18–4. Business Case Problem with Sample Answer—Piercing the Corporate Veil. Scott Snapp contracted with Castlebrook Builders, Inc., which was owned by Stephen Kappeler, to remodel a house. Kappeler estimated that the remodeling would cost around $500,000. Eventually, however, Snapp paid Kappeler more than $1.3 million. Snapp filed a suit in an Ohio state court against Castlebrook, alleging breach of contract and fraud, among other things. During the trial, it was revealed that Castlebrook had issued no shares of stock and had commingled personal and corporate funds. The minutes of the corporate meetings all looked exactly the same. In addition, Kappeler could not provide an accounting for the Snapp project. In particular, he could not explain evidence of double and triple billing nor demonstrate that the amount Snapp paid had actually been spent on the remodeling project. Are these sufficient grounds to pierce the corporate veil? Explain. [Snapp v. Castlebrook Builders, Inc., 2014 -Ohio163, 7 N.E.3d 574 (2014)] (See Formation and Powers.)

Solution: Yes. There are sufficient grounds in the facts of this problem to support piercing the corporate veil and holding Kappeler personally liable to Snapp. First, in a case in which a plaintiff seeks to pierce a corporate veil, there must be a fraud or other injustice to be remedied. In that situation, the factors that a court will consider in determining whether to pierce the corporate veil include (1) a party is tricked or misled into dealing with the corporation rather than the individual, (2) the corporation has insufficient capital to meet its prospective debts or other potential liabilities, (3) corporate formalities, such as holding required corporate meetings, are not followed, and (4) personal and corporate interests are commingled.

In this problem, the amount that Snapp ultimately paid the builder exceeded the original estimate by nearly $1 million—and the project was still unfinished. Kappeler could not provide an accounting for the Snapp project—he could not explain double and triple charges nor whether the amount that Snapp paid had actually been spent on the project. These facts support a conclusion of fraud. And they also indicate that Kappeler may have tricked or misled Snapp into dealing with the corporation rather than with Kappeler as an individual. Castlebrook had issued no shares of stock, which indicates insufficient capitalization. The minutes of the corporate meetings “all looked exactly the same,” indicating that in fact the required corporate meetings had not been held. And Kappeler had commingled personal and corporate funds.

In the actual case on which this problem is based, in Snapp’s suit against the builder, the court pierced the corporate veil and held Kappeler personally liable. A state intermediate appellate court affirmed.

18–5. Torts. Jennifer Hoffman took her cell phone to a store owned by R&K Trading, Inc., for repairs. Later, Hoffman filed a suit in a New York state court against R&K, Verizon Wireless, Inc., and others, seeking to recover damages for a variety of torts, including infliction of emotional distress and negligent hiring and supervision. She alleged that an R&K employee, Keith Press, had examined her phone in a back room, accessed private photos of her stored on her phone, and disseminated the photos to the public. Hoffman testified that “after the incident, she learned from another R&K employee that personal information and pictures had been removed from the phones of other customers.” Can R&K be held liable for the torts of its employees? Explain. [Hoffman v. Verizon Wireless, Inc., 5 N.Y.S.3d 123, 125 A.D.3d 806 (2015)] (See Nature and Classification.)

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Solution: Yes. R&K can be held liable for the torts of its employees. A corporation is liable for the torts committed by its agents or officers within the course and scope of their employment. The doctrine of respondeat superior applies to corporations in the same way as it does to other agency relationships.

In the facts of this problem, Jennifer Hoffman took her cell phone to a store owned by R&K for repairs. She believed that R&K’s employee, Keith Press, examined her phone in a back room, accessed private photos of her stored on the phone, and disseminated the photos to the public. After the incident, Hoffman learned from another R&K employee that personal information and pictures had been removed from the phones of other customers. Hoffman filed a suit against R&K and others, seeking to recover damages for several torts, including infliction of emotional distress and negligent hiring and supervision. In this situation, the doctrine of respondeat superior applies to R&K. The corporation can be held liable for the torts committed by its employees within the course and scope of their employment. This can include Press’s hiring and his unauthorized accessing of private data on customers’ phones.

In the actual case on which this problem is based, R&K filed a motion for summary judgment. The court denied the motion. A state intermediate appellate court affirmed the denial. In light of Hoffman’s testimony, R&K “failed to eliminate all triable issues of fact as to those causes of action ... premised upon the theory of respondeat superior” and those alleging negligent hiring and supervision.

18–6. Rights of Shareholders. FCR Realty, LLC, and Clifford B. Green & Sons, Inc., were coowned by three brothers—Frederick, Clifford Jr., and Richard Green. Each brother was a shareholder of the corporation. Frederick was a controlling shareholder, as well as president.

Each brother owned a one-third interest in the LLC. Clifford believed that Frederick had misused LLC and corporate funds to pay nonexistent debts and liabilities and had diverted LLC assets to the corporation. He also contended that Frederick had disbursed about $1.8 million in corporate funds to Frederick’s own separate business. Clifford hired an attorney and filed an action on behalf of the two companies against Frederick for a breach of fiduciary duty. Frederick argued that Clifford lacked the knowledge necessary to adequately represent the companies’ interest because he did not understand financial statements. Can Clifford maintain the action against Frederick? If so, and if the suit is successful, who recovers the damages? Explain. [FCR Realty, LLC v. Green, 2016 WL 571449 (Conn.Super. 2016)] (See Shareholders.)

Solution: Clifford can pursue his action on the companies’ behalf against Frederick.

When a corporation is harmed by the actions of a director or officer, the other directors can bring a suit in the name of the company against that party. If the directors do not bring a suit, the shareholders can do so by filing what is known as a shareholder’s derivative suit.

Any damages recovered in Clifford’s action will go into the appropriate company treasury. When shareholders bring a derivative suit, they are not pursuing rights or benefits for themselves personally but are acting as guardians of the corporate entity.

Thus, if the suit is successful, any damages recovered go into the corporate treasury, not to the shareholders personally.

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Here, two firms—one a limited liability company (LLC), the other a corporation—are owned by three brothers, including Frederick and Clifford. Frederick is a controlling shareholder and the president of the corporation. Clifford believed that Frederick had been misusing the companies’ funds to pay non-existent debts, divert LLC assets to the corporation, and disburse about $1.8 million in corporate funds to his separate business. Clifford hired an attorney and filed an action on behalf of the two companies against Frederick. This action qualifies as a shareholder’s derivative. Under these facts, any damages recovered should be paid to the companies.

Frederick’s contention that a shareholder who lacks the knowledge necessary to adequately represent a corporation’s interest because that shareholder does not understand financial statements may be a factor that helps defeat a frivolous suit or an action driven by an outside party. But in this case, Clifford demonstrated the requisite knowledge required to represent the firms’ interests even if he did not know the details of the companies’ financial documents—the action was filed on his instigation, he clearly understood the allegations, and he hired an attorney on whom he could rely to represent the companies’ interests.

In the actual case on which this problem is based, Frederick filed a motion to dismiss based on the argument that Clifford lacked standing to bring the suit because he was the wrong party to represent the companies. The court denied the motion in part on the reasoning stated above.

18–7. Certificate of Authority. Armour Pipe Line Company assigned leases to its existing oil wells in Texas to Sandel Energy, Inc. The assignment included royalties for the oil produced from the wells. Armour specified that the assignment “does not pertain to production attributable to these leases from any new wells,” reserving for itself an interest in those royalties. Later, Armour—a foreign corporation in Texas—forfeited its certificate of authority to do business in the state. More than three years later, the certificate was reissued.

Meanwhile, new wells were drilled on the leases. Sandel filed a suit in a Texas state court against Armour, claiming that the reservation of a royalty interest in those wells was “ineffective” because of the temporary forfeiture. When and why does a corporation need a certificate of authority? Is Armour entitled to the royalties from the new wells? Discuss.

[Armour Pipeline Co. v. Sandel Energy, Inc., 546 S.W.3d 455 (Tex.App.—Houston (14th Dist.)

2018)] (See Nature and Classification.)

Solution: Arguably, yes. Armour is entitled to the royalties from the new wells. A corporation needs a certificate of authority to do business in a state outside its state of incorporation. Once a certificate is obtained, the corporation can generally exercise in that state all of the powers conferred on it by its home state. If a foreign corporation does business in a state without a certificate of authority, the state can impose sanctions, such as fines.

In this problem, Armour assigned leases to existing wells to Sandel. The assignment reserved to Armour an interest in royalties from any new wells. Armour, a foreign corporation, forfeited its certificate of authority to do business in the state, however.

Later, the certificate was reissued. Meanwhile, new wells were drilled. Sandel filed a suit against Armour, claiming that the reservation of the royalties was “ineffective” because of the temporary forfeiture.

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Armour had its certificate of authority when it assigned the leases to Sandel, reserving the royalty interest. The temporary forfeiture of the certificate could not have terminated the existence of the firm, which was not incorporated in the state.

Depending on state law, a sanction might be imposed, but this appears unlikely in the circumstance of a temporary forfeiture of a certificate.

In the actual case on which this problem is based, the court issued a summary judgment in Sandel’s favor, declaring that Armour’s reservation “is of no legal force nor effect.” A state intermediate appellate court held that Armour’s claim was not extinguished by any applicable Texas statute or case and reversed and remanded.

18–8. Close Corporations. Bruce Rowe and Clifford Daly were business partners for several decades. They started out doing business by forming Quality Composites, Inc. (QCI), a close corporation. Daly and Rowe each owned 50 percent of QCI. Both were officers and directors of the corporation, and each had appointed one additional director. QCI owned the rights to a product known as Braze Tape, a material used to bind metal products together. QCI had purchased the rights in Braze Tape, including the manufacturing process, from Coating Applications, Inc. (CAI), a corporation owned in part by Rowe. By agreement, CAI was authorized to sell and manufacture Braze Tape. In addition, QCI was a subtenant of CAI’s office premises.

Rowe came to believe that Daly was producing Braze Tape on his own, outside the company structure, and misrepresenting the quality of the product. Rowe evicted Daly and QCI from the CAI office premises. Daly, both individually and derivatively on behalf of QCI, filed suit against Rowe. The complaint asserted claims for breach of fiduciary duty and breach of contract, among other things. Rowe filed counterclaims alleging breach of fiduciary duty and other actions. The trial court found in favor of most of Daly’s claims. The defendants appealed. They argued, among other things, that Daly lacked standing to pursue a direct claim for breach of fiduciary duty because he had not suffered an injury separate from the injury to QCI. How should the appeals court rule? [Daly v. Rowe, 199 N.E.3d 237, 2022-Ohio-3750 (2022)] (See Nature and Classification.)

Solution: The Court of Appeals of Ohio, First District, Hamilton County, pointed out that a heightened fiduciary duty exists between majority and minority shareholders of a close corporation. This heightened fiduciary duty applies not only to majority shareholders but to “controlling shareholders” as well. In this case, because the corporate owners are equal shareholders, if one of them exercises control over the corporation to an extent that that shareholder’s actions dominate, then that shareholder does have a heightened fiduciary duty.

Here, Rowe evicted Daly, but the close corporation QCI suffered no injury from Rowe’s breach of fiduciary duty. The close corporation did not incur any debt, so Rowe’s actions caused no direct harm to QCI’s corporate worth. Rather, it was Daly who suffered the injury in this case, as Rowe retained all profits from Braze Tape sales, including those to which Daly was entitled. Daly suffered an injury separate and distinct from QCI. He therefore had standing to bring a direct claim for breach of fiduciary duty, so the trial court did not err in awarding judgment in his favor on that particular claim. Ultimately, the appellate court found that the trial court did err in finding that Daly failed to carry his burden of proving damages and in finding that Daly’s proof of loss profits was speculative. The appellate court reversed the trial

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court’s ruling on damages and remanded the case so that the trial court could determine an award of damages consistent with the law and the appellate decision.

A QUESTION OF ETHICS 18–9. The IDDR Approach and Duties of Directors and Officers. Hewlett-Packard Company (HP) hired detectives to secretly monitor the phones and e-mail accounts of its directors to find the sources of leaks of company information to the media. When the government learned of the monitoring, criminal charges were brought against HP’s then-chairwoman and general counsel. Mark Hurd, HP’s chief executive officer, was found free of wrongdoing. The scandal had the effect of bolstering Hurd’s reputation for integrity, and he became both chairman and CEO. In congressional testimony, press releases, and investor briefings, Hurd proclaimed HP’s integrity and its intent to enforce violations of its corporate code of ethics, the Standards of Business Conduct (SBC). Hurd’s statements concerning HP’s commitment to ethics and compliance with the SBC reassured investors and the public, and kept HP’s stock prices from falling.

Meanwhile, an independent contractor for HP accused Hurd of sexual harassment. An investigation by HP’s board found no harassment, but revealed that Hurd had lied about his personal relationship with the woman and falsified expense reports to cover it up. Hurd resigned, causing the price of HP stock to drop. A group of shareholders sued HP claiming that Hurd’s unethical behavior while promoting HP’s commitment to ethics constituted fraud.

[Retail Wholesale and Department Store Union Local 338 Retirement Fund v. Hewlett-Packard Co., 845 F.3d 1268 (9th Cir. 2017)] (See Directors and Officers.)

1.

Using the Discussion step of the IDDR approach, consider whether Hurd’s conduct constituted an ethical violation against HP and its shareholders.

Solution: By Hurd’s conduct, he committed an ethical violation against HewlettPackard Co. (HP) and its shareholders.

The IDDR approach consists of four steps. The first is an Inquiry to identify the issue, stakeholders, and ethical standards. The issue for Hurd was whether to lie as part of an effort to bolster HP’s damaged reputation for transparency and ethics. The stakeholders included Hurd, HP, and the firm’s directors, employees, shareholders, and third parties with which it does business.

Applicable ethical standards included the company’s code and perhaps the general prescription to “do what is right” underlying every set of ethical principles.

The second step is a Discussion, in question here, of actions on the issue, the strengths and weaknesses of the actions, and the consequences and effects on the stakeholders. In this problem, Hurd could publicly misrepresent HP and himself as consistently ethical, free of engaging in questionable acts. Or he could present the firm and himself as generally ethical but subject to recent lapses—monitoring the directors, in HP’s case, and lying about business-related behavior, in Hurd’s situation.

Officers are fiduciaries of their corporation. Their duties include the duty of care and the duty of loyalty. Officers must be honest and use prudent business judgment in the conduct of corporate affairs. They must exercise the degree of

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care that reasonably prudent people use in conducting their personal affairs.

Officers can be held to answer to the corporation and its shareholders for breaching the duty of care.

The duty of loyalty requires officers to subordinate their personal interests to the corporation’s welfare. They cannot use corporate funds for personal advantage.

HP and its shareholders may have had a cause against Hurd based on his apparent violation of an officer’s fiduciary duties. He was not honest with the board, and this was clearly not reasonably prudent. Further, he used corporate funds for personal advantage (false expense reports). The seriousness of these transgressions would determine Hurd’s liability in an action against him.

Counterarguments to the assertion of an ethical violation include that the promotion of ethical conduct at HP did not suggest there would be no violations of its code. Hurd did not appear to guarantee that he personally complied with the company’s code in all circumstances. And neither he nor his misconduct had any relation to the earlier monitoring scandal.

The last steps of the IDDR approach include a Decision and its Review. In this case, of course, Hurd decided to misrepresent the truth. A review of the failure of this decision to resolve Hurd’s ethical dilemma and its negative effect on the stakeholders clearly exposes this decision to have been a mistake.

2. Using the Review step of the IDDR approach, evaluate HP’s decision to monitor its directors’ phones.

Solution: HP’s decision to monitor its directors’ phones was ethically wrong. In this problem, a scandal erupted at HP when the company monitored the phones of its directors. Criminal charges resulted. HP’s chief executive officer (CEO) publicly touted the firm’s high standards for ethics and its code, the Standards of Business Conduct (SBC). A conflict between this promotion of the SBC and the CEO’s behavior arose when he lied about his personal relationship with a contractor and falsified related expense reports. The CEO resigned, causing the price of HP stock to drop.

The IDDR approach consists of four steps, the final of which is a Review of the success or failure of an action to resolve a particular ethical issue and satisfy the issue’s stakeholders. Here, the issue was whether to monitor the directors’ phones. The stakeholders included HP and the firm’s CEO, directors, employees, shareholders, and third parties with which it does business. The most relevant ethical standard was the SBC. When HP chose to monitor the phones, it violated the SBC and threatened the stakeholders’ trust in the firm to behave ethically. This decision may have immediately resolved the issue, but it was not successful in the long run and would not satisfy the stakeholders. To regain their confidence, HP would need to conduct itself ethically in accord with its own SBC for a reasonable period, avoiding even the appearance of impropriety.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 18: Corporations

In the actual case on which this problem is based, HP shareholders filed a suit against the CEO and the company, alleging securities fraud. The court issued a judgment in the defendants’ favor. The U.S. Court of Appeals for the Ninth Circuit affirmed, holding that the plaintiffs failed to allege that the defendants’ representations about ethics were materially misleading.

TIME-LIMITED TEAM ASSIGNMENT 18–10. Shareholders’ Duties. Milena Weintraub and Larry Griffith were shareholders in Grand Casino, Inc., which operated a casino in South Dakota. Griffith owned 51 percent of the stock and Weintraub 49 percent. Weintraub managed the casino, which Griffith typically visited once a week. At the end of 2012, an accounting audit showed that the cash on hand was less than the amount posted in the casino’s books. Later, more shortfalls were discovered. In October 2014, Griffith did a complete audit. Weintraub was unable to account for $200,500 in missing cash. Griffith kept all of the casino’s most recent profits, including Weintraub’s $90,447.20 share, and, without telling Weintraub, sold the casino for $400,000 and kept all of the proceeds. Weintraub filed a suit against Griffith, asserting a breach of fiduciary duty. Griffith countered with evidence of Weintraub’s misappropriation of corporate cash. (See Shareholders.)

1.

The first team will discuss the duties that these parties owed to each other and determine whether Weintraub or Griffith, or both, breached those duties.

Solution: These parties owed fiduciary duties to each other, which they breached by withholding cash from each other. Weintraub misappropriated corporate cash, and Griffith kept all of the proceeds from the sale of the casino.

2. The second team will decide how this dispute should be resolved and who should pay what to whom to reconcile the finances.

Solution: Griffith owed $58,447.20 to Weintraub for his 49 percent share of the proceeds from the casino’s sale and its profits. Weintraub owed Griffith $68,850 as his share of the cash that Weintraub took from the casino.

3. The third team will discuss whether Weintraub or Griffin violated any ethical duties to each other or to the corporation.

Solution: Of course, Weintraub violated his ethical duties to Griffith and to their corporation by misappropriating corporate cash. Griffith violated his ethical duties by intentionally withholding Weintraub’s portion of the corporate assets on the sale of the casino. In both cases, it would be inequitable for the parties to enjoy the full benefits of the sale and profits of the corporation without also being responsible for the money they each withheld from the other.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 19: Investor Protection, Insider Trading, and Corporate Governance

Solution and Answer Guide

Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 19: Investor Protection, Insider Trading, and Corporate Governance

TABLE OF CONTENTS Critical Thinking Questions in Features .............................................................................1 Landmark in the Law—Application to Today’s Legal Environment ................................. 1 Adapting the Law to the Online Environment—Critical Thinking.................................... 2 Ethical Issue—Value Judgment ............................................................................................. 2 Critical Thinking Questions in Cases ................................................................................. 3 Case 19.1—Critical Thinking .................................................................................................... 3 Case 19.2—Critical Thinking ................................................................................................... 4 Case 19.3—Critical Thinking ................................................................................................... 4 Chapter Review ................................................................................................................... 5 Practice and Review................................................................................................................. 5 Practice and Review: Debate This ......................................................................................... 6 Issue Spotters ........................................................................................................................... 6 Business Scenarios and Case Problems .............................................................................. 7 A Question of Ethics ............................................................................................................... 12 Time-Limited Team Assignment .......................................................................................... 14

CRITICAL THINKING QUESTIONS IN FEATURES LANDMARK IN THE LAW—APPLICATION TO TODAY’S LEGAL ENVIRONMENT 1.

Reg A+ helps start-ups and growing companies reach a bigger pool of potential investors and still retain control of their operations. Because it provides a simpler, lower-cost IPO process for small businesses, Reg A+ is likely to decrease the significance of all the other exemptions over time. Why would the ability to advertise under Reg A + further contribute to its growing popularity?

Solution: The SEC explicitly considers the ability to advertise as a “testing the waters” accommodation for small businesses seeking to attract investors under Reg A+. The agency states, “All issuers will be able to gauge market interest in a possible [IPO] or other registered securities offering through discussion with certain institutional

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 19: Investor Protection, Insider Trading, and Corporate Governance

investors prior to, or following, the filing of a registration statement.” In other words, by marketing their services, these businesses will be able to predetermine the level of investor interest before committing significant funds to the venture.

Besides traditional objectives such as raising brand awareness, marketing gives managers a chance to measure investor interest and also solicit investor feedback. So, ideally, a potential investor will be introduced to the brand through advertising (social media, podcasts, email solicitation, etc.), learn more about the company, and decide to commit financial backing. In sum, the ability to advertise lowers the risk involved with the small business venture. It also increases investor knowledge, thus furthering a primary goal of Reg A+: to offer average investors enhanced opportunities to invest in companies that they believe in and hope to profit from financially.

ADAPTING THE LAW TO THE ONLINE ENVIRONMENT—CRITICAL THINKING 1.

What alternatives are there to crowdfunding for a start-up business?

Solution: A start-up can obtain funding via loans from friends and family. Owners of start-ups often take out second mortgages on their homes to obtain financing. Startups can go to venture capitalists to request funding. Occasionally, start-ups can obtain bank financing. Usually, though, banks require that all members of the start-up sign personal guarantees for any funds loaned.

ETHICAL ISSUE—VALUE JUDGMENT 1.

Critics of California’s law claim that it violates the U.S. Constitution by perpetuating gender-based discrimination. Do you agree with this assessment? Why or why not?

Solution: In cases involving government policies that allegedly discriminate on the basis of gender, the government agency defendant must typically show that the challenged law furthers a “compelling state interest.” California’s Secretary of State asserted that California’s law mandating women on corporate boards supported the compelling state interests of (1) lessening discrimination in the director selection process; (2) increasing gender diversity to the benefit of the state’s economy; and (3) increasing gender diversity to benefit and protect taxpayers, public, employees, and retirees.

Not long after its passage, California’s law was challenged on constitutional grounds by a legal advocacy group alleging that it treated “similarly situated” individuals unequally in violation of the state’s Equal Protection Clause. A state court agreed, holding that the true goal of the law was to “achieve gender equity or parity” and not to “boost California’s economy” or improve “opportunities for women in the workplace,” as the state had claimed. The judge concluded that “remedying generalized non-specific allegations of discrimination” is not a “compelling state interest.”

In reaching this decision, the court cited testimony that the numerical differences in male and female board members were not the result of actual, intentional discrimination, but rather of a “lack of open board seats, women’s networking issues, board propensity to select persons that they already know, and boards’ preference for choosing CEOs to fill open board positions.” Given that the state could not produce

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 19: Investor Protection, Insider Trading, and Corporate Governance

any evidence that the law would change these circumstances, the court found it to be unconstitutional.

Though the law might not have been specifically tailored to address these societal issues, it did increase gender diversity on state boards of directors. Four years after the law passed, the number of women directors in California more than doubled to 33.3 percent. As soon as the law was deemed unconstitutional, that percentage began to drop.

CRITICAL THINKING QUESTIONS IN CASES CASE 19.1—CRITICAL THINKING 1.

Legal Environment. Scoville argued that the Adpacks were not investment contracts because there was no guarantee that buyers would receive a return on their investment.

Should the court have ruled in Scoville’s favor based on this argument? Explain.

Solution: No. Very few investments guarantee a return. To qualify as an investment contract, the investor, or buyer, only has to have a reasonable expectation of profits.

As long as a transaction satisfies the Howey test for an investment contract, it is immaterial whether the investment is speculative.

Scoville argued that Adpacks were not investment contracts because Traffic Monsoon’s obligation to share its revenue was contingent on there being revenue to share with no guarantee this would happen. In fact, Traffic Monsoon’s website stated that there was no guarantee there would be revenue for Adpack buyers to share.

But based on Scoville’s other representations, including the touted high rates of return, the Adpack buyers had a reasonable expectation of obtaining a share of Traffic Monsoon’s revenue. And this was enough to meet the requirements of the test set out in the Howey case (in which the investors were likewise not guaranteed a return on their investment).

2. Economic. The return on an investment in an Adpack was not based on any underlying business activity. Instead, money from new investors was used to pay earlier investors. Is this a legitimate business model? Discuss.

Solution: No. The Adpack business model—using money from new investors to generate returns for earlier investors—was likely to be established at trial as what is known as a Ponzi scheme. This sort of set-up is not legitimate because it is deceptive, generating a false appearance of profitability.

The central characteristic of a Ponzi scheme is that returns are not based on any underlying business activity. Instead, as in this case, money from new investors is used to pay earlier investors. And often, as also appears to have occurred in this case, the money contributed by later investors generates artificially high dividends for the earlier investors. This may attract even more investors.

Traffic Monsoon misrepresented the source of the revenue shared with Adpack investors. Although the company realized some income from its other advertising services, there was essentially no business activity generating the revenue shared with

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 19: Investor Protection, Insider Trading, and Corporate Governance

Adpack buyers except the amounts received from the sales of new Adpacks. This deception made the business illegitimate and likely that it would be established as a Ponzi scheme.

CASE 19.2—CRITICAL THINKING 1.

What If the Facts Were Different? Suppose that further drilling had revealed that there was not enough ore at this site for it to be mined commercially. Would the defendants still have been liable for violating SEC Rule 10b-5? Why or why not?

Solution: Assuming all of the other circumstances are as they are stated in the case, the answer to this question is most probably yes, because the defendants’ trading was based on their possession of inside information of a material fact without its public disclosure, which is a violation of SEC Rule 10b-5. Depending on subsequent events in this hypothetical situation, however, there may not have been any injury for which a private party could recover (that is, the defendants might have lost money on their trading rather than profiting at the expense of uninformed stock sellers).

CASE 19.3—CRITICAL THINKING 1.

Legal. The defendants claimed that their statements were predictions and/or puffery, and therefore did not signify any intent to defraud or deceive. What is your opinion of this argument?

Solution: Under federal law, to prove a violation of Section 10(b) of the Securities Exchange Act, plaintiffs must show that defendants acted with an intent to deceive.

Defendants can rebut this charge by relying on a “safe harbor” provision, which applies when corporate speech to investors is “forward-looking” and accompanied by meaningful cautionary statements. The defendants in the Oklahoma Firefighters case argued that their remarks regarding the opening of the projected parks in China should have received protection under this safe harbor provision.

The appeals court rejected this argument. Many of the defendants’ statements, the court pointed out, were not forward-looking predictions. For example, the executive’s claim that the parks were “progressing nicely toward their anticipated opening dates” was a “present construction progress” report that could not be transformed into a prediction just because it turned out to be false. The appeals court also held that an executive’s statement that “[international deals] sometimes take a long time to come to fruition” did not qualify as a cautionary statement because it did not address the actual risk of the China amusement parks project being delayed or failing to happen.

In general, statements are “non-actionable puffery” when they are “of the vague and optimistic type” and contain “no concrete factual or material misrepresentation.” The district court held that many of the executives’ statements under scrutiny were “simple expressions of corporate optimism” and therefore could not show proof of intent to deceive. The appeals court disagreed, finding that the statements regarding the timing of the park openings were not “vague” enough to constitute puffery. For example, saying that “the parks are progressing nicely” is not puffery because the statement confirmed projections previously provided by the defendants. In other words, such statements “convey precise information on which investors are likely to

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 19: Investor Protection, Insider Trading, and Corporate Governance

rely when valuing corporations, particularly because the revenue recognition for the parks depended on those projected opening dates.”

2. Economic. If the plaintiffs can prove the elements of their claim, what should be the measure of their damages? Explain.

Solution: In a case alleging fraud, if the plaintiffs can prove the elements of their claim, the measure of their damages should be the amount of their loss. In the circumstances of this case, that could be the difference between the price of Six Flags’ stock before the executives’ fraudulent behavior and its value after the China project’s failure was announced. As noted in the feature, Six Flags’ stock price decreased from a high of $73.88 to $31.89 per share during this time period.

CHAPTER REVIEW PRACTICE AND REVIEW Dale Emerson served as the chief financial officer for Reliant Electric Company, a distributor of electricity serving portions of Montana and North Dakota. Reliant was in the final stages of planning a takeover of Dakota Gasworks, Inc., a natural gas distributor that operated solely within North Dakota. On a weekend fishing trip with his uncle, Ernest Wallace, Emerson mentioned that he had been putting in a lot of extra hours at the office planning a takeover of Dakota Gasworks. When he returned from the fishing trip, Wallace purchased $20,000 worth of Reliant stock. Three weeks later, Reliant made a tender offer to Dakota Gasworks stockholders and purchased 57 percent of Dakota Gasworks stock. Over the next two weeks, the price of Reliant stock rose 72 percent before leveling out. Wallace sold his Reliant stock for a gross profit of $14,400. Using the information presented in the chapter, answer the following questions.

1.

Would registration with the SEC be required for Dakota Gasworks securities? Why or why not?

Solution: No, because the securities were not newly issued or offered to the public.

In this scenario, Dakota Gasworks was the target company in a successful takeover; it did not issue new securities to raise capital or offer any securities to the public. Therefore, it would not have been required to register with the SEC.

2. Did Emerson violate Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5? Why or why not?

Solution: No, because Emerson did not fail to disclose a material fact in connection with the purchase and sale of securities, nor did he intend to defraud or have knowledge of his misconduct. Emerson did not fail to disclose a material fact in connection with the purchase or sale of securities. What he did do was use bad judgment and breach a fiduciary duty by mentioning the planned takeover to his uncle, who then took the information and used it to his advantage. There is no indication in the facts that Emerson intended to do anything wrong or knew that his uncle would use this information to trade on the information (that he should not have disclosed).

3. What theory or theories might a court use to hold Wallace liable for insider trading?

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 19: Investor Protection, Insider Trading, and Corporate Governance

Solution: Because Wallace acquired inside information as a result of Emerson’s breach of his fiduciary duty, Wallace could be held liable for insider trading under the tipper/tippee theory. Wallace would have to have known that the information came from a breach of the fiduciary duty.

4. Under the Sarbanes-Oxley Act, who would be required to certify the accuracy of the financial statements Reliant filed with the SEC? Solution: Under the Sarbanes–Oxley Act, the chief executive officers and the chief financial officers are required to certify the financial statements.

PRACTICE AND REVIEW: DEBATE THIS 1.

Insider trading should be legalized.

Solution: The more quickly information about publicly held companies gets into the hands of the public, the more efficient the stock market becomes. Therefore, insider trading should be made legal because both good and bad company information will be made completely public more quickly. Those in publicly held companies who profit from having access to such inside information will end up with lower salaries because of competition in the labor market, even for managers.

Laws against insider trading were put in place to prevent insiders—usually highly paid upper-level managers—from undeservedly benefiting from their positions in the publicly held companies. If insider trading were no longer illegal, insiders would stand to make fortunes from buying the companies’ stock before good news is released. If the inside news is bad, insiders can make fortunes selling short the companies’ stocks.

ISSUE SPOTTERS 1.

When a corporation wishes to issue certain securities, it must provide sufficient information for an unsophisticated investor to evaluate the financial risk involved.

Specifically, the law imposes liability for making a false statement or omission that is “material.” What sort of information would an investor consider material? (See Securities Exchange Act of 1934.)

Solution: The average investor is concerned not with minor inaccuracies but with facts that if disclosed would tend to deter that individual from buying the securities. These include material facts that have an important bearing on the condition of the issuer and its business—such as liabilities, loans to officers and directors, customer delinquencies, and pending lawsuits.

2. Lee is an officer of Magma Oil, Inc. Lee knows that a Magma geologist has just discovered a new deposit of oil. Can Lee take advantage of this information to buy and sell Magma stock? Why or why not? (See Securities Exchange Act of 1934.)

Solution: No. The Securities Exchange Act of 1934 extends liability to officers and directors in their personal transactions for taking advantage of inside information when they know it is unavailable to the persons with whom they are dealing.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 19: Investor Protection, Insider Trading, and Corporate Governance

BUSINESS SCENARIOS AND CASE PROBLEMS 19–1. Registration Requirements. Langley Brothers, Inc., a corporation incorporated and doing business in Kansas, decides to sell common stock worth $1 million to the public. The stock will be sold only within the state of Kansas. Joseph Langley, the chair of the board, says the offering need not be registered with the Securities and Exchange Commission. His brother, Harry, disagrees. Who is right? Explain. (See Securities Act of 1933.)

Solution: Joseph is right. Under Regulation A, securities issued by an issuer that has offered less than $50 million in securities in any twelve-month period are exempt from registration. With respect to the amount of the offering in this problem, the issue would also fall under Rule 504 of Regulation D, which exempts noninvestment company offerings up to $5 million in any twelve-month period.

Rule 506 exempts private, noninvestment company offerings in unlimited amounts if these offerings are not generally solicited or advertised. This exemption is often referred to as the private placement exemption because it exempts “transactions not involving any public offering.” The offering can involve an unlimited number of accredited investors and no more than thirty-five unaccredited investors. The issuer must believe that each unaccredited investor has sufficient knowledge or experience in financial matters to be capable of evaluating the investment’s merits and risks. The private placement exemption is perhaps most important to firms that want to raise funds through the sale of securities without registering them.

19–2. Insider Trading. David Gain is the chief executive officer (CEO) of Forest Media Corp., which is interested in acquiring RS Communications, Inc. To initiate negotiations, Gain meets with RS’s CEO, Gill Raz, on Friday, July 12. Two days later, Gain phones his brother, Mark, who buys 3,800 shares of RS stock on the following Monday. Mark discusses the deal with their father, Jordan, who buys 20,000 RS shares on Thursday. On July 25, the day before the RS bid is due, Gain phones his parents’ home, and Mark buys another 3,200 RS shares. Over the next few days, Gain periodically phones Mark and Jordan, both of whom continued to buy RS shares. On August 5, RS refuses Forest’s bid and announces that it is merging with another company. The price of RS stock rises 30 percent, increasing the value of Mark’s and Jordan’s shares by nearly $660,000 and $400,000, respectively. Is Gain guilty of insider trading? What is required to impose sanctions for this offense? Could a court hold Gain liable? Why or why not? (See Securities Exchange Act of 1934.)

Solution: There is likely enough evidence in the facts of this problem to find that David violated the law because there was a clear pattern—every time David called his brother or father, Mark or Jordan bought more RS stock. Establishing liability under Section 10(b) and SEC Rule 10b-5 requires proof of an intent to defraud or knowledge of misconduct with respect, in this case, to a failure to disclose material facts used at the time of a trade. People generally buy when they believe the price of a stock is going up and sell when they believe it is going down. Insider trading can be established when it can be inferred that the most likely source of that belief was an insider. For example, a stock purchase or sale’s proximity in time to a phone conversation between a trader and one with inside information provides a reasonable basis for inferring an exchange of that information. Thus, in this problem, on this basis, a court could hold David liable for insider trading.

19–3. Violations of the 1934 Act. Matrixx Initiatives, Inc., makes and sells over-the-counter pharmaceutical products. Its core brand is Zicam, which accounts for 70 percent of its sales.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 19: Investor Protection, Insider Trading, and Corporate Governance

Matrixx received reports that some consumers had lost their sense of smell (a condition called anosmia) after using Zicam Cold Remedy. Four product liability suits were filed against Matrixx, seeking damages for anosmia. In public statements relating to revenues and product safety, however, Matrixx did not reveal this information.

James Siracusano and other Matrixx investors filed a suit in a federal district court against the company and its executives under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, claiming that the statements were misleading because they did not disclose the information about the product liability suits. Matrixx argued that to be material, information must consist of a statistically significant number of adverse events that require disclosure. Because Siracusano’s claim did not allege that Matrixx knew of a statistically significant number of adverse events, the company contended that the claim should be dismissed. What is the standard for materiality in this context? Should Siracusano’s claim be dismissed? Explain. [Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 131 S.Ct. 1309, 179 L.Ed.2d 398 (2011)] (See Securities Exchange Act of 1934.)

Solution: An omission or misrepresentation of a material fact in connection with the purchase or sale of a security may violate Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. The key question is whether the omitted or misrepresented information is material. A fact, by itself, is not automatically material.

A fact will be regarded as material only if it is significant enough that it would likely affect an investor’s decision as to whether to buy or sell the company’s securities. For example, a company’s potential liability in a product liability suit and the financial consequences to the firm are material facts that must be disclosed because they are significant enough to affect an investor’s decision as to whether to buy stock in the company.

In this case, the plaintiffs’ claim should not be dismissed. To prevail on their claim that the defendants made material omissions in violation of Section 10(b) and SEC Rule 10-5, the plaintiffs must prove that the omission was material. Their complaint alleged the omission of information linking Zicam and anosmia (a loss of the sense of smell) and plausibly suggested that reasonable investors would have viewed this information as material. Zicam products account for 70 percent of Matrixx’s sales.

Matrixx received reports of consumers who suffered anosmia after using Zicam Cold Remedy.

In public statements discussing revenues and product safety, Matrixx did not disclose this information. But the information was significant enough to likely affect a consumer’s decision to use the product, and this would affect revenue and ultimately the commercial viability of the product. The information was therefore significant enough to likely affect an investor’s decision whether to buy or sell Matrixx’s stock, and this would affect the stock price. Thus, the plaintiffs’ allegations were sufficient.

Contrary to the defendants’ assertion, statistical sampling is not required to show materiality—reasonable investors could view reports of adverse events as material even if the reports did not provide statistically significant evidence.

19–4. Business Case Problem with Sample Answer—Disclosure under SEC Rule 10b-5. Dodona I, LLC, invested $4 million in two securities offerings from Goldman, Sachs & Co. The investments were in collateralized debt obligations (CDOs). Their value depended on residential mortgage-backed securities (RMBSs), whose value in turn depended on the performance of subprime residential mortgages. Before marketing the CDOs, Goldman had

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 19: Investor Protection, Insider Trading, and Corporate Governance

noticed several “red flags” relating to investments in the subprime market, in which it had invested heavily.

To limit its risk, Goldman began betting against subprime mortgages, RMBSs, and CDOs, including the CDOs it had sold to Dodona. In other words, Goldman made investments based on the assumption that subprime mortgages and the securities instruments built upon them would decrease in value. In an internal e-mail, one Goldman official commented that the company had managed to “make some lemonade from some big old lemons.” Nevertheless, Goldman’s marketing materials provided only boilerplate statements about the risks of investing in the securities. The CDOs were later downgraded to junk status, and Dodona suffered a major loss while Goldman profited. Assuming that Goldman did not affirmatively misrepresent any facts about the CDOs, can Dodona still recover under SEC Rule 10b-5? If so, how? [Dodona I, LLC v. Goldman, Sachs & Co., 847 F. Supp. 2d 624 (S.D.N.Y. 2012)] (See Securities Exchange Act of 1934.)

Solution: Yes. Even if Goldman did not affirmatively misrepresent any facts about the collateralized debt obligations (CDOs), Dodona can recover if Goldman failed to disclose material facts. An omission is regarded as material if it is significant enough that it would have affected an investor’s decision concerning the securities. Here, Dodona might recover by showing that Goldman did not fully disclose the risks of investing in the CDOs. Goldman may have misled Dodona by providing only boilerplate statements about investments that it knew were particularly risky.

19–5. Securities Act of 1933. Big Apple Consulting USA, Inc., provided small publicly traded companies with a variety of services, including marketing, business planning, and website development and maintenance. CyberKey Corp. sold customizable USB drives. CyberKey falsely informed Big Apple that CyberKey had been awarded a $25 million contract with the Department of Homeland Security (DHS). Big Apple used this information in aggressively promoting CyberKey’s stock and was compensated for the effort in the form of CyberKey shares. When the Securities and Exchange Commission (SEC) began to investigate, Big Apple sold its shares for $7.8 million. The SEC filed an action in a federal district court against Big Apple, alleging a violation of the Securities Act of 1933. Can liability be imposed on a seller for a false statement that was made by someone else? Explain. [Securities and Exchange Commission v. Big Apple Consulting USA, Inc., 783 F.3d 786 (11th Cir. 2015)] (See Securities Act of 1933.)

Solution: Yes. Liability under the Securities Act of 1933 can be imposed on a seller for a false statement that was made by someone else. It is a violation of the Securities Act to intentionally defraud investors by misrepresenting or omitting facts in a connection with the purchase or sale of securities. Liability is also imposed on those who are negligent for not discovering the fraud.

In this problem, CyberKey falsely informed Big Apple that CyberKey had been awarded a $25 million contract with the Department of Homeland Security (DHS). Big Apple, a public relations firm, aggressively promoted CyberKey’s stock and was compensated for these efforts in the form of CyberKey shares. When the Securities and Exchange Commission (SEC) began to investigate the assertions, Big Apple sold the stock for $7.8 million. In these circumstances, Big Apple may have known that CyberKey’s representation about the DHS contract was false, in which case Big Apple might be liable for fraud. Or Big Apple may have been reckless in failing to exercise due

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 19: Investor Protection, Insider Trading, and Corporate Governance

diligence and thereby discover CyberKey’s fraud, in which situation Big Apple could be liable for negligence.

In the actual case on which this problem is based, the SEC alleged that Big Apple “knew, or [was] severely reckless in not knowing” that CyberKey did not have a contract with DHS. The court issued a summary judgment in favor of the SEC’ and against Big Apple. The U.S. Court of Appeals for the Eleventh Circuit affirmed.

19–6. The Securities Exchange Act of 1934. Dilean Reyes-Rivera was the president of Global Reach Trading (GRT), a corporation registered in Puerto Rico. His brother Jeffrey was the firm’s accountant. Along with GRT sales agents and other promoters, the brothers solicited funds from individuals by promising to invest the funds in low-risk, short-term, high-yield securities. The investors were guaranteed a rate of return of up to 20 percent. Through this arrangement, more than 230 persons provided the brothers with about $22 million. This money was not actually invested. Instead, the funds received from later investors were used to pay “returns” to earlier investors. The Reyes-Riveras spent $4.6 million of the proceeds to buy luxury vehicles, houses, furniture, jewelry, and trips for themselves. What is this type of scheme called? What are the potential consequences? Discuss. [United States v. Reyes-Rivera, 812 F.3d 79 (1st Cir. 2016)] (See Securities Exchange Act of 1934.)

Solution: The scheme perpetrated by the Reyes-Rivera brothers—a fraudulent investment operation that paid returns to investors from new capital paid to the fraudsters rather than from a legitimate investment—is known as a Ponzi scheme.

The potential consequences of such a scheme include the later investors’ loss of their funds. In some cases, many—if not most, or even all—of the investors suffer the loss of their invested capital. What is not returned as ostensible profit to investors is often stolen or spent by a defrauding party who, like the Reyes-Rivera brothers, runs the scheme.

In some circumstances, whatever assets remain in the possession of a perpetrator can be returned to investors through a court order for criminal restitution or an assessment of civil damages. Perpetrators can also be convicted of securities fraud and other violations of the law and be made to suffer appropriate sanctions. For example, the Securities and Exchange Commission has brought numerous enforcement actions against individuals and entities for carrying out Ponzi schemes.

In the actual case on which this problem is based, the scheme was uncovered, and the Reyes-Rivera brothers were indicted. Eventually, Dilean pled guilty to conspiracy to commit wire fraud and bank fraud. He was sentenced to concurrent terms of imprisonment of 60 months on the wire fraud conspiracy count and 242 months on the bank fraud count. Restitution was also ordered in the amount of $10,629,021.01.

Jeffrey pled guilty to the wire fraud charge and was sentenced to 48 months of imprisonment. On Dilean’s appeal, the U.S. Court of Appeals for the First Circuit affirmed the sentences over Dilean’s arguments about their wide disparity “because the district court provided a plausible and sensible rationale for the sentence it imposed.”

19–7. Securities Fraud. First Solar, Inc., is one of the world’s largest producers of photovoltaic solar panel modules. When First Solar revealed to the market that the company had discovered defects in its products, the price of the company’s stock fell, causing the shareholders to suffer an economic loss. Mineworkers’ Pension Scheme and other First Solar

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shareholders filed a suit in a federal district court against the firm and its officers, alleging a violation of Section 10(b). The plaintiffs contended that for more than two years, First Solar had wrongfully concealed its discovery, misrepresented the cost and scope of the defects, and reported false information on financial statements. On these facts, can the plaintiffs successfully plead the causation element of a securities fraud action under Section 10(b)?

Explain. [Mineworkers’ Pension Scheme. v. First Solar Inc., 881 F.3d 750 (9th Cir. 2018)] (See Securities Exchange Act of 1934.)

Solution: Yes. The plaintiffs in the Mineworkers case can successfully plead the causation element of a securities fraud action under Section 10(b) on the facts presented in the problem. Section 10(b) proscribes the use of deception in violation of the rules of the Securities and Exchange Commission. Among those rules is Rule 10b-5, which prohibits fraud in connection with the purchase or sale of any security. The basic elements of a securities fraud action include causation, meaning that there is a causal connection between the fraud and the loss.

In this problem, First Solar publicly disclosed that it had discovered defects in its products. There was a subsequent drop in the price of the company’s stock, causing shareholders to suffer economic losses. The shareholders filed a suit against the firm and its officers, alleging securities fraud. The plaintiffs contended that for more than two years, First Solar had wrongfully concealed its discovery, misrepresented the cost and scope of the defects, and reported false information on financial statements.

As pleaded, these facts, if established by evidence, could satisfy the causation test.

The issue is whether the defendants’ misrepresentation, as opposed to some other fact, foreseeably caused the plaintiffs’ loss.

In the actual case on which this problem is based, the court held that “a plaintiff can satisfy ... causation by showing that the defendant misrepresented or omitted the very facts that were a substantial factor in causing the plaintiff’s economic loss.” The U.S. Court of Appeals for the Ninth Circuit affirmed.

19–8. The Howey Test. JN Properties Solutions, owned by Koye Jemisin, is in the business of buying properties, renovating them, and then selling or renting out the properties. Brandi Hooker is a licensed real estate agent. Hooker introduced Jemisin to a group of investors, and Jemisin negotiated several projects with this group and with Hooker over a period of several years. Jemisin’s role was to provide financing, and the others were to carry out the renovation and sale of the properties. Some of the projects involved so-called joint venture agreements.

When several of the property deals yielded much lower returns than anticipated, Jemisin, through JN Properties, filed a multi-count complaint against Hooker and others. At trial, Hooker and the other defendants were accused, among other things, of violating the Maryland Securities Act (MSA). Applying the Howey Test, should the various agreements among the parties be considered investment contracts subject to state securities law? [Hooker v. JN Property Solutions, LLC, 2021 WL 4306899 (Ct. Special Appeals MD 2021)] (See Securities Act of 1933.)

Solution: Yes. A circuit court found that the agreements among the parties should be considered investment contracts subject to the Maryland Securities Act (MSA).

According to the Howey Test, an investment contract exists when (1) there is an investment of money; (2) in a common enterprise; (3) with an expectation of profits derived primarily from the efforts of others. The first two factors were easily met in this case. The defendants argued that the third factor was not met, however, because

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JN Properties was a knowledgeable and experienced investor who maintained significant control over its investments as a general partner.

Affirming the circuit court’s ruling, the Court of Special Appeals of Maryland rejected this application of the Howley Test’s third prong. “Minimal efforts by the investor do not,” according to the appeals court, “defeat the finding of an investment contract.”

That is, “An investment contract may be found where the expectation of profit derives from the essential and significant managerial and entrepreneurial efforts of others.” In this case, before JN Properties entered the deal as an investor, the defendants had already identified the properties to be “flipped,” determined what improvements needed to be made, and chosen contractors to do the work. In fact, JN Properties was told to wire the funds by a certain date, or the defendants would find another investor.

Furthermore, the defendants were responsible for the purchase of the property and its later listing. They oversaw the renovation and obtained the loans necessary to complete the project. JN’s role was limited to the contribution of funds. Under these circumstances, according to the appeals court, JN’s investment in the project was an investment contract.

A QUESTION OF ETHICS 19–9. The IDDR Approach and Insider Trading. Nan Huang was a senior data analyst for Capital One Financial Corporation. In violation of the company’s confidentiality policies, Huang downloaded and analyzed confidential information regarding purchases made with Capital One credit cards at more than two hundred consumer retail companies and used that information to conduct more than two thousand trades in the securities of those companies.

Capital One terminated Huang due to his violation of the company’s policies. The next day, Huang boarded a flight to his home country of China. Four days later, the Securities and Exchange Commission filed a complaint against Huang, alleging violations of Section 10(b) and Rule 10b-5. [Securities and Exchange Commission v. Huang, 684 Fed.Appx. 167 (3d Cir. 2017)] (See Securities Exchange Act of 1934.)

1.

Evaluate the ethics of Huang’s actions, as an employee of Capital One, using the IDDR approach.

Solution: Huang’s ethical obligations included duties to follow Capital One’s company policies and to obey the insider trading laws.

The IDDR approach begins with an Inquiry that sets out the ethical dilemma and identifies the stakeholders and the applicable ethical standards. Huang’s initial ethical dilemma was whether to take surreptitious advantage of his position as a data analyst for Capital One, a credit-card company, to access data on consumer retail transactions. Applicable ethical standards included company policy and, of course, federal law. The stakeholders included Huang, Capital One, the company’s other employees, its customers whose transactions Huang analyzed, and many others, such as consumers and stock traders. When a law is violated, the justice system might also be said to be a stakeholder.

The Discussion and Decision steps of the IDDR approach cover actions to address the dilemma, the strengths and weaknesses, their consequences and effects, and a selection among the choices. Huang gave in to temptation. He used the data to project

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 19: Investor Protection, Insider Trading, and Corporate Governance

the profitability of the firms and its effect on their share prices. He used these projections to buy and sell those shares—i.e., Huang used information that was not publicly available to profit on stock trades, in violation of Section 10(b) and Rule 10b-5 of the federal securities laws. No doubt that all of these actions also violated Capital One’s company policy. Discovered, Huang could guess that a criminal indictment was forthcoming. Instead of facing the situation, however, he chose to flee. When eventually confronted in court with evidence of his crime, rather than confess and testify, Huang refused to cooperate. By making the choices he did, Huang broke ethical obligations of trust to all of these parties. By itself, this shows the weakness of his actions and points to the consequences and effects.

The final step of the IDDR approach is a Review of the success or failure of the actions to resolve the issue and satisfy the stakeholders. Huang might have admitted to his wrongs, confessed his missteps to the court, and made restitution to his victims. The results of these actions would have included resetting Huang’s moral compass with an emerging resumption of his integrity and a clearing of his conscience. He and others might have been dissuaded from similar future conduct.

Instead, he chose to do none of these things, thereby adding to the list of his unethical behavior and increasing the dissatisfaction of his stakeholders. Perhaps Capital One could at least claim vindication—the employer terminated Huang immediately on learning of his misbehavior.

2. When Capital One learned what Huang had done, was the company ethically obligated to terminate him? Explain.

Solution: When Capital One, a credit-card company, discovered what its employee Huang had done, the company was ethically obligated to terminate him.

The Capital One database contained the confidential credit-card activity of its customers. Employed as a data analyst, Huang could access cardholder transactions. He downloaded and analyzed confidential information regarding purchases made with Capital One credit cards at consumer retail companies. This violated the company’s confidentiality policy. Huang then used that information to conduct trades in the securities of those companies.

On learning of these activities, Capital One had to determine how to approach and deal with the situation. The stakeholders to this dilemma included Capital One’s customers, employees, job applicants, and owners, as well as the companies that accepted Capital One cards and the owners of the firms whose stock Huang traded. Expressed or implied company policy would have been an applicable standard. But the terms of Huang’s employment contract (if any), the principles of the governing law, and the personal ethics of his superiors could also influence a decision.

Capital One could have chosen to take no action, to keep Huang employed subject to discipline, or to discharge him. Taking no action might have kept Huang’s activities secret, preventing or at least postponing any negative effects to the company from a public exposure of his actions. Once Huang’s violations were made known, however, if it was apparent that Capital One had done nothing in response, the company could suffer copycat conduct by other employees and also lose clients and cardholders. There could be similar consequences if Huang remained in

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the company’s employ, even if he were otherwise disciplined. The only reasonable choice would be Huang’s discharge.

And Capital One did terminate Huang. This action was likely sanctioned by the company’s policy. It was probably in line with any employment contract—after all, Huang’s breach of Capital One’s confidentiality principle would have also been a breach of the contract. Nor does it seem probable that any law or the personal standards of his superiors would have required Huang’s continued employment. All of the stakeholders, with the possible exception of Huang, would also have been gratified with this result. Perhaps the only outcome more satisfying would be Huang’s conviction on the charges against him and an order of restitution to those with whom he traded securities.

In the actual case on which this problem is based, the jury was asked simply whether Huang had committed insider trading. Their answer was an equally simple, “Yes.” Among other penalties, the court ordered Huang to fully disgorge the profits that he had made on the illegal trades. The U.S. Court of Appeals for the Third Circuit affirmed.

TIME-LIMITED TEAM ASSIGNMENT 19–10. Violations of Securities Laws. Karel Svoboda, a credit officer for Rogue Bank, evaluated and approved his employer’s extensions of credit to clients. These responsibilities gave Svoboda access to nonpublic information about the clients’ earnings, performance, acquisitions, and business plans from confidential memos, e-mail, and other sources.

Svoboda devised a scheme with Alena Robles, an independent accountant, to use this information to trade securities. Pursuant to their scheme, Robles traded in the securities of more than twenty different companies and profited by more than $2 million. Svoboda also executed trades for his own profit of more than $800,000, despite their agreement that Robles would do all of the trading. Aware that their scheme violated Rogue Bank’s policy, they attempted to conduct their trades in such a way as to avoid suspicion. When the bank questioned Svoboda about his actions, he lied, refused to cooperate, and was fired. (See Securities Exchange Act of 1934.)

1.

The first team will determine whether Svoboda or Robles committed any crimes.

Solution: Svoboda and Robles committed fraud when they traded securities using the nonpublic information that Svoboda had access to. Criminal charges could be filed against them under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission (SEC) Rule 10b-5, which generally prohibit fraud in connection with the purchase or sale of securities. Penalties could include extended incarceration and significant fines.

A person commits fraud under Section 10(b) and Rule 10b-5 when that person misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information. If this person tips another individual, the tippee also is liable for trading on the information if the tipper's breach of duty is established and the tippee was aware of the breach. The tipper must act with scienter—an intent to deceive, manipulate, or defraud, or at least knowing misconduct. The information must be material, which occurs if there is a substantial likelihood that a reasonable investor would view it as significantly

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 19: Investor Protection, Insider Trading, and Corporate Governance

altering the total mix of information. It must also be nonpublic, which means generally that persons trading in the stock must not have known it.

In this problem, Svoboda breached fiduciary duties owed to Rogue Bank and its clients by passing along confidential information to Robles for trading purposes and by personally trading on the information. Robles is liable as a tippee because of Robles' awareness of Svoboda’s breaches of duty, as shown by Robles' agreement to execute all of the trades. These parties acted with scienter. Their scheme involved repeated acts of fraud and steps to conceal the illegal activity.

And the information on which they based their trades was material and nonpublic.

2. The second team will decide whether Svoboda or Robles is subject to civil liability. If so, who could file a suit and on what ground? What are the possible sanctions?

Solution: Svoboda and Robles are also subject to civil liability for their actions. The SEC could file a civil suit in a federal district court against them for their insider trading violations. Possible sanctions include permanent injunctions against violating the securities laws, hefty civil fines, and disgorgement of their profit, plus interest. Svoboda might be assessed with joint and several liability for Robles’s portion.

3. A third team will identify any defenses that Svoboda or Robles could raise and determine whether the defenses would be likely to succeed.

Solution: Svoboda might defend against the civil charges by arguing that he had been “punished enough”—he had been caught, indicted on criminal charges, convicted, fined, and sentenced to incarceration. This defense is not likely to succeed.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 20: Administrative Law

Solution and Answer Guide

Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 20: Administrative Law

TABLE OF CONTENTS Critical Thinking Questions in Cases ..................................................................................1 Case 20.1—Critical Thinking .................................................................................................... 1 Case 20.2—Critical Thinking ................................................................................................... 2 Case 20.3—Critical Thinking ................................................................................................... 3 Chapter Review ................................................................................................................... 4 Practice and Review................................................................................................................. 4 Practice and Review: Debate This ......................................................................................... 5 Issue Spotters ........................................................................................................................... 5 Business Scenarios and Case Problems .............................................................................. 6 A Question of Ethics ............................................................................................................... 11 Time-Limited Team Assignment .......................................................................................... 12

CRITICAL THINKING QUESTIONS IN CASES CASE 20.1—CRITICAL THINKING 1.

Economic. Why would an owner of land that falls within the boundaries of a wild and scenic river area challenge those boundaries?

Solution: The chief reason an owner of land that falls within the boundaries of a wild and scenic river would challenge those boundaries is most likely a belief that the value and use of the land has been, or will be, negatively affected. Some owners fear that the government will subsequently forcibly acquire the land or regulate it out of viable use.

Despite these fears, there is no evidence that the designation of land to be within the boundaries of a wild and scenic river has a significant effect on property values. The purpose of the designation is to protect the quality of the river’s environment. By law, there can be no impact on existing water rights. No new privileges are granted to the public. Current uses of the land within the designated boundaries can continue.

No new hydro or power projects can be licensed. But federal administering agencies do not generally have the authority to control the public use of private land. A local,

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 20: Administrative Law

county, or regional planning or zoning commission, however, may impose physical and use limits on the land.

2. What If the Facts Were Different? Suppose that instead of establishing the boundaries of the NSRA to protect ORVs, the NPS had drawn the boundaries to maintain the area’s acreage at a certain number. Would the result in this case have been different? Explain.

Solution: Yes. If the NPS had drawn the boundaries of the NSRA to maintain the area’s acreage at a certain number, instead of establishing the boundaries to protect ORVs, the result in this case would have been different. The NPS’s action would have been ruled to be arbitrary and capricious. This is because the Niobrara Scenic River Designation Act required the NPS to focus on protecting the ORVs—that is, scenic, recreational, geologic, fish and wildlife, and paleontological factors. One of the bases for holding an agency action to be arbitrary and capricious is failing to consider relevant factors. No factor is more relevant than one referred by statute.

CASE 20.2—CRITICAL THINKING 1.

Legal Environment. Could a willful violation of a safety regulation be established if an employer did not know of the rule’s requirements? Explain.

Solution: Yes, an employer could be found to have willfully violated a safety regulation even if the employer was not aware of its requirement.

Generally, in this context, the definition of willful is an intentional disregard of, or plain indifference to, regulatory requirements. As indicated by this definition, and the reasoning of the court in the Edwin Taylor case, a willful violation can be established with proof either that (1) An employer knew of the standard prohibiting the conduct or condition and consciously disregarded it, or (2) An employer did not know of the standard, but exhibited such reckless disregard for employee safety or legal requirements generally that it could be inferred the employer would not have cared if the conduct or condition violated the standard.

In other words, ignorance of a regulation’s requirements will not excuse its violation.

2. What If the Facts Were Different? Suppose that one of the superintendents of Edwin Taylor’s worksite had told Hernandez’s workers to put up the railings, but they had refused. Would the result have been different? Discuss.

Solution: No, if an Edwin Taylor superintendent at the construction site had told Hernandez’s workers to erect guardrails, but they had refused, the result in this case would not have been different.

Edwin Taylor had general supervisory authority at the build site. This included authority over the employees of its subcontractors, including Hernandez. OSHA’s safety standards applied to the operations at the site. Edwin Taylor’s supervisors were tasked with identifying existing and predictable hazards. Thus, the builder had the authority both to correct safety violations and to require Hernandez’s workers to correct the violations at the site.

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In general, Edwin Taylor’s superintendents should have acted to detect and prevent violations of OSHA’s fall protection standards at the condominium worksite. This required railings at the sides and edges of decking on a build above six feet. If a superintendent had told a subcontractor’s workers to install the railings, and they had refused, the workers should have been told to stay off the decking, or to leave the site. Other workers might have then been instructed to add the guardrails.

If, however, the superintendent had accepted the refusal, or otherwise not cautioned the workers to stay off the decking, as indicated by the facts of the case and the question, and a worker had fallen to his death, Edwin Taylor would have been no less liable for the safety standard violation

CASE 20.3—CRITICAL THINKING 1.

Legal Environment. Supporters of the Chevron deference contended that administrative agencies, rather than courts, are in a better position to determine the ambiguities of federal law, especially when those ambiguities involve technical or scientific questions. Do you agree with this position? Why or why not?

Solution: To understand how the Chevron deference worked, it will be helpful to examine its origins. At issue in the Chevron case, decided in 1984, was whether courts should defer to an agency’s interpretation of the statute giving that agency the authority to act. The Environmental Protection Agency (EPA) had interpreted the phrase “stationary source” in the Clean Air Act as referring to an entire manufacturing plant, and not to each facility within a plant. The agency’s interpretation enabled it to adopt the so-called bubble policy, which allowed companies to offset increases in emissions in part of a plant with decreases elsewhere in the plant—an interpretation that reduced the pollution-control compliance costs faced by manufacturers. An environmental group challenged the legality of the EPA’s interpretation.

The United States Supreme Court found that the EPA’s interpretation of the statute was reasonable and upheld the bubble policy. Explaining why courts should play a limited role in these circumstances, Justice John Paul Stevens wrote, “Judges are not experts in the field and are not part of either political branch of politics.” In his Loper Bright Enterprises majority opinion, Chief Justice John G. Roberts, Jr., took direct aim at this sentiment, noting that judges are experts in the “field” of interpreting laws and this expertise has been the “province and the duty” of judges since the Supreme Court’s landmark Marbury v. Madison decision in 1803.

Roberts also rejected the notion that Congress ever intended for employees of administrative agencies to supersede the courts when it comes to interpreting technical or scientific regulatory schemes. Indeed, he noted, courts are often called on to interpret “the mass of technical detail that is the ordinary diet of the law” and did so routinely in administrative agency matters before the Chevron decision. “Courts, after all, do not decide such questions blindly,” Roberts continued. Rather, he pointed out, the litigating parties and “friends of the court” are well-versed in the subject matter of the case, and “reviewing courts have the benefit of their perspectives.” In other words, even if a judge is not expert in a particular subject before the court, the judge will hear the testimony of those who are expert in that subject and use such testimony to come to the proper decision.

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In her Loper Bright Enterprises dissent, Justice Elena Kagan expressed the opinion of those who favored the Chevron deference. She pointed out that Congress often enacts regulatory laws that contain “ambiguit[ies] or gap[s].” When faced with such ambiguities or gaps, the relevant agency must devise concrete and useful policies.

Starting with the Chevron decision, Kagan explained, courts have recognized that employees of administrative agencies are more likely than judges to have the scientific and technical expertise to make the proper statutory interpretations. This system contributed to “keeping air and water clean, food and drugs safe, and financial markets honest.” By overturning the Chevron ruling, Kagan asserted, the Court had opened the floodgates for a torrent of lawsuits challenging reasonable regulatory agency actions, filed by parties looking out for their own—rather than society’s—best interests.

CHAPTER REVIEW PRACTICE AND REVIEW Assume that the Securities and Exchange Commission (SEC) has a rule under which it enforces statutory provisions prohibiting insider trading only when the insiders make monetary profits for themselves. Then the SEC makes a new rule, declaring that it has the statutory authority to bring enforcement actions against individuals even if they did not personally profit from the insider trading. The SEC simply announces the new rule without conducting a rulemaking proceeding. A stock brokerage firm objects and says that the new rule was unlawfully developed without opportunity for public comment. The brokerage firm challenges the rule in an action that ultimately is reviewed by a federal appellate court. Using the information presented in the chapter, answer the following questions.

1.

Is the SEC an executive agency or an independent regulatory agency? Does it matter to the outcome of this dispute? Explain.

Solution: The SEC is an independent regulatory agency, because the president does not have the power to appoint and remove federal officers at the SEC. Because federal officers at the SEC are not appointed by the president, serve for a fixed term, and cannot be removed from their positions without just cause, the SEC is an independent regulatory agency. Whether the SEC is an executive or independent regulatory agency has no bearing on the outcome of this dispute, though.

2. Suppose that the SEC asserts that it has always had the statutory authority to pursue persons for insider trading regardless of whether they personally profited from the transaction. This is the only argument the SEC makes to justify changing its enforcement rules. Would a court be likely to find that the SEC’s action was arbitrary and capricious under the Administrative Procedure Act (APA)? Why or why not?

Solution: The new rule is likely arbitrary and capricious because little rationale was provided for a major change in a rule that should have been subject to notice-and-comment proceedings.

3. Would a court be likely to give Chevron deference to the SEC’s interpretation of the law on insider trading? Why or why not?

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 20: Administrative Law

Solution: The United States Supreme Court overruled its Chevron decision in 2024, so the deference is no longer available. Even if it were available, the SEC probably would not get the benefit of a Chevron deference and the courts would give careful review to the new regulation. The new rule is a major expansion of regulatory power and it is not clear it was the intent of Congress to go this far.

4. Now assume that a court finds that the new rule is merely “interpretive.” What effect would this determination have on whether the SEC had to follow the APA’s rulemaking procedures?

Solution: Interpretive rules are not subject to the same level of judicial review as are new substantive rules.

PRACTICE AND REVIEW: DEBATE THIS 1.

Because an administrative law judge (ALJ) acts as both judge and jury, there should always be at least three ALJs in each administrative hearing.

Solution: It is unfair to give an ALJ so much power within any administrative agency.

After all, each ALJ works for the administrative agency that they are supposed to judge in any dispute. How can we assume that an ALJ will be unbiased? There will always be a tenancy for ALJs to favor the actions of administrative agencies. There is at least a chance of more unbiased decisions if at least three ALJs hear each case.

The system of ALJs has worked well for decades, so now is not the time to change it.

In any event, ALJs frequently rule against the agencies for whom they work. Besides, when a party to an ALJ’s decision doesn’t like the outcome, that party can always appeal the decision in federal court, which happens quite often. Finally, the cost of tripling the number of ALJs would be prohibitive, especially with the federal government running such huge budget deficits.

ISSUE SPOTTERS 1.

The U.S. Department of Transportation (DOT) sometimes hears an appeal from a party whose contract with the DOT has been canceled. An administrative law judge (ALJ) who works for the DOT hears this appeal. What safeguards promote the ALJ’s fairness? (See The Administrative Process.)

Solution: Under the Administrative Procedure Act (APA), the administrative law judge (ALJ) must be separate from the agency’s investigative and prosecutorial staff. Ex parte communications between the ALJ and a party to a proceeding are prohibited.

Under the APA, an ALJ is exempt from agency discipline except on a showing of good cause.

2. Techplate Corporation learns that a federal administrative agency is considering a rule that will have a negative impact on the firm’s ability to do business. Does the firm have any opportunity to express its opinion about the pending rule? Explain. (See The Administrative Process.)

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 20: Administrative Law

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

BUSINESS SCENARIOS AND CASE PROBLEMS 20–1. Rulemaking. For decades, the Federal Trade Commission (FTC) resolved fair trade and advertising disputes through individual adjudications. In the 1960s, the FTC began setting forth rules that defined “unfair trade practices.” In cases involving violations of these rules, the due process rights of participants were more limited and did not include cross-examination. This was because, although anyone found violating a rule would receive a full adjudication, the legitimacy of the rule itself could not be challenged in the adjudication. Any party charged with violating a rule was almost certain to lose the adjudication. Affected parties complained to a court, arguing that their rights before the FTC were unduly limited by the new rules. What will the court examine to determine whether to uphold the new rules? (See The Administrative Process.)

Solution: The court will examine first whether the agency followed the procedures prescribed in the Administrative Procedure Act (APA). If so, the Federal Trade Commission (FTC) rules will likely be held legal. As long as an agency has both rulemaking and adjudicatory powers, the agency has great discretion in its choice of which power to use. Courts will not second-guess agencies on their choice of proceeding through rulemaking and adjudication. As long as the FTC followed prescribed rulemaking procedures, with notice and comment, the rules and subsequent adjudications will be legal.

20–2. Informal Rulemaking. Assume that the Food and Drug Administration (FDA), using proper procedures, adopts a rule describing its future investigations. This new rule covers all future circumstances in which the FDA wants to regulate food additives. Under the new rule, the FDA is not to regulate food additives without giving food companies an opportunity to cross-examine witnesses. Some time later, the FDA wants to regulate methylisocyanate, a food additive. After conducting an informal rulemaking procedure, without cross-examination, the FDA regulates methylisocyanate. Producers protest, saying that the FDA promised them the opportunity for cross-examination. The FDA responds that the Administrative Procedure Act does not require such cross-examination and that it is free to withdraw the promise made in its new rule. If the producers challenge the FDA in court, on what basis would the court rule in their favor? (See The Administrative Process.)

Solution: The court will consider first whether the agency followed the procedures prescribed in the Administrative Procedure Act (APA). Ordinarily, courts will not require agencies to use procedures beyond those of the APA. Courts will, however, compel agencies to follow their own rules. If an agency has adopted a rule granting extra procedures, the agency must provide those extra procedures, at least until the rule is formally rescinded. Ultimately, in this case, the court will most likely rule for the food producers.

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20–3. Spotlight on the Environmental Protection Agency—Powers of the Agency. A welldocumented rise in global temperatures has coincided with a significant increase in the concentration of carbon dioxide in the atmosphere. Many scientists believe that the two trends are related, because when carbon dioxide is released into the atmosphere, it produces a greenhouse effect, trapping solar heat. Under the Clean Air Act (CAA), the Environmental Protection Agency (EPA) is authorized to regulate “any” air pollutants “emitted into . . . the ambient air” that in its “judgment cause, or contribute to, air pollution.” A group of private organizations asked the EPA to regulate carbon dioxide and other “greenhouse gas” emissions from new motor vehicles. The EPA refused, stating that Congress last amended the CAA in 1990 without authorizing new, binding limits on auto emissions. Nineteen states, including Massachusetts, asked a district court to review the EPA’s denial. Did the EPA have the authority to regulate greenhouse gas emissions from new motor vehicles? If so, was its stated reason for refusing to do so consistent with that authority? Discuss. [Massachusetts v.

Environmental Protection Agency, 549 U.S. 497, 127 S.Ct. 1438, 167 L.Ed.2d 248 (2007)] (See Agency Creation and Powers.)

Solution: The United States Supreme Court held that greenhouse gases fit within the Clean Air Act’s (CAA’s) definition of “air pollutant.” Thus, the Environmental Protection Agency (EPA) has the authority under that statute to regulate the emission of such gases from new motor vehicles. According to the Court, the definition, which includes “any” air pollutant, embraces all airborne compounds “of whatever stripe.” The EPA's focus on Congress’s 1990 amendments (or their lack) indicates nothing about the original intent behind the statute (and its amendments before 1990). Nothing in the statute suggests that Congress meant to curtail the agency’s power to treat greenhouse gases as air pollutants. In other words, the agency has a pre-existing mandate to regulate “any air pollutant” that may endanger the public welfare.

The EPA also argued that, even if it had the authority to regulate greenhouse gases, the agency would not exercise that authority because any regulation would conflict with other administration priorities. The Court acknowledged that the CAA conditions EPA action on the agency’s formation of a “judgment,” but explained that judgment must relate to whether a pollutant “cause[s], or contribute[s] to, air pollution which may reasonably be anticipated to endanger public health or welfare.” Thus, the EPA can avoid issuing regulations only if the agency determines that greenhouse gases do not contribute to climate change (or if the agency reasonably explains why it cannot or will not determine whether they do). The EPA’s refusal to regulate was thus “arbitrary, capricious, or otherwise not in accordance with law,” The Court remanded the case for the EPA to “ground its reasons for action or inaction in the statute.”

20–4. Adjudication. After Dave Conley died of lung cancer, his widow filed for benefits under the Black Lung Benefits Act. To qualify for benefits under the act, she had to show that exposure to coal dust was a substantial contributing factor to her husband’s death. Conley had been a coal miner, but he had also been a longtime smoker. At the benefits hearing, a physician testified that coal dust was a substantial factor in Conley’s death. No evidence was presented to support this conclusion, however. The administrative law judge awarded benefits. On appeal, should a court defer to this decision? Discuss. [Conley v. National Mines Corp., 595 F.3d 297 (6th Cir. 2010)] (See The Administrative Process.)

Solution: A court of appeals reviews the legal issues raised in an administrative appeal but accords deference to relevant factual finding. An ALJ’s factual determinations

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 20: Administrative Law

must be upheld if they are supported by substantial evidence in the administrative record, and the decision as a whole must be affirmed if the ALJ’s decision was rational, supported by substantial evidence on the record, and consistent with controlling law. When an ALJ has improperly characterized the evidence or failed to take into account relevant material, however, deference is inappropriate and remand is required. A failure by the ALJ to apply the correct legal standard presents a legal question over which the BRB and the court of appeals have plenary (unlimited) review.

The appeals court reviews the BRB’s decision reversing the ALJ, not the ALJ’s decision itself. The question is if the BRB correctly concluded that the ALJ’s decision was not supported by sufficient evidence based on established legal standards. Since the medical record did not support the conclusion that coal dust exposure hastened death from lung cancer caused by cigarette smoking, the reversal by the BRB was correct.

20–5. Business Case Problem with Sample Answer—Arbitrary and Capricious Test. Michael Manin, an airline pilot, was twice convicted of disorderly conduct, a minor misdemeanor. To renew his flight certification with the National Transportation Safety Board (NTSB), Manin filed an application that asked him about his criminal history. He did not disclose his two convictions. When these came to light more than ten years later, Manin argued that he had not known that he was required to report convictions for minor misdemeanors. The NTSB’s policy was to consider an applicant’s understanding of what information a question sought before determining whether an answer was false. But without explanation, the agency departed from this policy, refused to consider Manin’s argument, and revoked his certification.

Was this action arbitrary or capricious? Explain. [Manin v. National Transportation Safety Board, 627 F.3d 1239 (D.C.Cir. 2011)] (See Agency Creation and Powers.)

Solution: Yes. The agency’s decision to revoke Manin’s certification was arbitrary and capricious. When reviewing an agency decision, a court considers whether the agency’s actions were arbitrary, capricious, or an abuse of discretion. An action is arbitrary or capricious if, for example, the agency changed its prior policy without justification or entirely failed to consider a relevant factor. When an agency’s action is arbitrary or capricious, a court can hold it to be unlawful and set it aside.

In this problem, the agency departed from its prior policy without explanation. That policy was to consider an applicant’s understanding of what information a question was asking for before determining whether the applicant’s answer was false. Manin argued that he had not known he was required to report convictions for minor misdemeanors. For policy reasons, the agency should have allowed him to present evidence that he did not know the statements he made on his application were false.

But the agency refused to consider this argument and revoked his certification.

In the actual case on which this problem is based, the court held that the agency’s action had been arbitrary and capricious.

20–6. Adjudication. Mechanics replaced a brake assembly on the landing gear of a CRJ–700 plane operated by GoJet Airlines, LLC. The mechanics installed gear pins to lock the assembly in place during the repair, but failed to remove one of the pins after they had finished. On the plane’s next flight, a warning light alerted the pilots that the landing gear would not retract after takeoff. There was a potential for danger, but the pilots flew the plane safely back to the departure airport. No one was injured, and no property was damaged. The Federal Aviation Administration (FAA) cited GoJet for violating FAA regulations by “carelessly or recklessly

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 20: Administrative Law

operating an unairworthy airplane.” GoJet objected to the citation. To which court can GoJet appeal for review? On what ground might that court decline to review the case? [GoJet Airlines, LLC v. F.A.A., 743 F.3d 1168 (8th Cir. 2014)] (See The Administrative Process.)

Solution: GoJet can appeal the decision of the Federal Aviation Administration (FAA) to the appropriate federal court of appeals. After a hearing before an administrative law judge (ALJ), the ALJ issues an initial order. Any party to the case can appeal this decision to the board or commission that governs the agency. If any party is further dissatisfied with the governing body’s ruling, the party can appeal the decision to a federal appellate court. If the party appeals and a review is denied, the order of the ALJ or the governing body becomes the final order in the case. If the party appeals and the case is accepted for review, the final order will come from the reviewing court.

In this problem, after the initial order in GoJet’s case, the airline can appeal to the FAA’s governing board or commission and, if further appeal is sought, to a federal appellate court. On the facts, GoJet might base its appeal from an adverse ruling on the pilots’ successful attempt to avoid injury or damage—a warning light alerted that the landing gear would not retract, and the pilots safely flew the aircraft back to the departure airport. A ground on which the court might deny review is that regardless of what actually occurred, the potential for danger and harm existed—one of the gear pins was not removed, and the landing gear would not retract after the plane had taken off. This is on its face a violation of FAA regulations by “carelessly or recklessly operating an unairworthy airplane.”

In the actual case on which this problem is based, the FAA imposed a civil penalty.

GoJet petitioned the U.S. Court of Appeals for the Eighth Circuit for review. The court denied the petition. The court held that proof of actual danger is not required for the FAA’s citation and imposition of a penalty—“the potential for danger is enough.”

20–7. The Arbitrary and Capricious Test. The Sikh Cultural Society, Inc. (SCS), petitioned the United States Citizenship and Immigration Services (USCIS) for a special immigrant religious worker visa for Birender Singh. The USCIS denied the request for several reasons. Despite certain statutory requirements, there were discrepancies or inadequate evidence as to Singh’s compensation, housing, and employment history. The SCS did not provide all of the requested information. In addition, the SCS did not show that Singh had worked continuously for the previous two years. The SCS filed a suit in a federal district court against the USCIS, arguing that the denial was arbitrary and capricious. In applying the arbitrary and capricious standard, what agency actions or omissions does a court typically consider? Does the denial of Singh’s visa pass the test? Explain. [Sikh Cultural Society, Inc. v. United States Citizenship and Immigration Services, 720 Fed.Appx. 649 (2018)] (See Agency Creation and Powers.)

Solution: Yes. The denial of Singh’s visa passes the arbitrary-and-capricious test. The Administrative Procedure Act provides that courts should set aside agency actions that are contrary to the law or so irrational as to be arbitrary or capricious. On a party’s challenge to an action on this basis, a court may consider whether the agency did the following: • • •

Failed to provide a rational explanation for its action.

Changed a prior policy without justification.

Considered legally inappropriate factors.

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• •

Failed to consider a relevant factor.

Acted plainly contrary to the evidence.

In this problem, the Sikh Cultural Society (SCS) asked the United States Citizenship and Immigration Services (USCIS) for a special immigrant religious worker visa for Birender Singh. The USCIS denied the request. The SCS filed a suit in a federal district court against the USCIS, challenging the denial as arbitrary and capricious. As noted in the facts, despite certain statutory requirements, there were discrepancies or the evidence was inadequate as to Singh’s compensation, housing, and employment history. The SCS did not provide all of the requested information. Additionally, the SCS did not show that Singh had worked continuously for the previous two years. The USCIS’s review of these factors demonstrates that its action was not arbitrary or capricious.

In the actual case on which this problem is based, the court issued a judgment in the agency’s favor. The U.S. Court of Appeals for the Second Circuit affirmed.

20–8. Evidence Required During an Administrative Process. Eric Marsh, an employee of New River Electrical Corporation, suffered severe burns when he picked up a live electrical wire at a job site. The Occupational Safety & Health Administration (OSHA) investigated the accident, determined that New River had committed serious violations of applicable safety regulations, and fined the company $38,802. New River appealed. An administrative law judge affirmed OSHA’s decision (although he decreased the penalty to $12,934). Evidence showed that no one at New River had tested, tagged, or grounded the transformer that connected the cable that shocked Eric Marsh. There was some evidence that New River foremen had falsified some information relating to the accident. Nonetheless, in its appeal, New River argued that to establish an OSHA violation, the Secretary of Labor must prove, among other things, that the employer had actual or constructive knowledge of the relevant OSHA violation. Should the United States Court of Appeals for the Fourth Circuit support OSHA’s decision? Why or why not? [New River Electrical Corporation v. Occupational Safety & Health Review Commission, 25 F.4th 213 (4th Cir. 2022)] (See The Administrative Process.)

Solution: Upon review, the United States Court of Appeals for the Fourth Circuit pointed out that the administrative law judge (ALJ) handling this case only briefly addressed the Secretary of Labor’s actual argument, which was that the lack of a grounding plan and the lack of a proper risk assessment, combined, established constructive knowledge. The administrative law judge relied heavily on the inadequacy of New River’s safety program. The reviewing court pointed out that the administrative law judge should have only considered the evidence and arguments actually advanced by the Secretary of Labor to ensure that a prima facie case had been established. “In sum, the ALJ erred by relieving the Secretary [of Labor] of his burden to prove [that] New River had constructive knowledge. This error cannot be deemed harmless because it is not apparent, based on the record before us, that the ALJ would have reached the same result based solely on the arguments and evidence presented by the Secretary of Labor.” The appeals court reversed the Commission’s final order with remand to the Commission for further proceedings that properly allocated the burdens of proof between the parties.

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A QUESTION OF ETHICS 20–9. The IDDR Approach and the Arbitrary and Capricious Test. The Delaware River Port Authority (DRPA) solicited bids to repaint the Commodore Barry Bridge, a mile-long structure spanning the Delaware River between New Jersey and Pennsylvania. Alpha Painting & Construction Company, an experienced contractor that had previously worked for the DRPA, submitted the lowest bid. Under DRPA guidelines, a “responsible” contractor has the “capacity” and “capability” to do a certain job. A “responsive” contractor includes all required documents with its bid. Alpha’s bid did not include certain required accident and insurance data. For this reason, and without checking further, the DRPA declared that Alpha was “not responsible” and awarded the contract to the second-lowest bidder. [Alpha Painting & Construction Co. v. Delaware River Port Authority, 853 F.3d 671 (3d Cir. 2017)] (See Agency Creation and Powers.)

1.

Using the Inquiry step of the IDDR approach, identify the ethical issue the DRPA faced when deciding whether to accept or reject Alpha’s bid.

Solution: The ethical issue the Delaware River Port Authority (DRPA) faced when deciding whether to accept or reject a bid by Alpha Painting and Construction Company concerned the extent to which the agency would follow its own guidelines in making this decision.

The IDDR approach consists of four steps. The first is an Inquiry to identify the ethical issue, stakeholders, and governing standards. In this problem, the stakeholders included the Delaware River Port Authority (DRPA), the bidders on a DRPA contract to repaint a certain bridge, the taxpayers whose funds the DRPA would spend on the contract, and members of the public who use the bridge. Ethical standards included the DRPA’s guidelines. The ethical issue focused on the degree to which the agency would follow its guidelines in awarding the contract.

Under the DRPA’s guidelines, a responsible contractor has the “capacity” and “capability” to do a certain job. A responsive contractor includes all required documents with its bid. In response to the DRPA’s solicitation of bids to repaint a bridge, Alpha submitted the lowest bid. Alpha’s bid omitted required accident and insurance data. Under the strictest interpretation of the DRPA’s guidelines, this omission would define Alpha as unresponsive. This conclusion could serve as a ground to reject the painter’s bid.

But Alpha was an experienced contractor who had done previous work for the DRPA. Perhaps the omission was an unintentional oversight. With this in mind, the agency might have given the bidder an opportunity to supplement its bid.

Or, the contractor might have believed that the government had the information, either as a consequence of the painter’s previous work or as a result of other state-mandated filings (tax returns, or license or bonding requirements, for example). The DRPA could have searched its own files or asked other agencies for the missing information.

In any event, the government, the taxpayers, and the public would benefit from an experienced painter doing contract work for the least amount of funds.

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2. Using the Discussion step of the IDDR approach, consider whether the DRPA’s rejection of Alpha was ethical.

Solution: The DRPA acted unethically in rejecting Alpha. The second step of the IDDR approach is a Discussion of possible actions to take to resolve an ethical issue, the strengths and weaknesses of those actions, and the consequences and effects on the stakeholders. The ethical issue here involved the extent to which a government agency would follow its guidelines in deciding which bid to accept for a certain contract.

An ethical person, business, or government agency will set standards and follow them. This is not only good from an ethical perspective—the predictability engendered by adherence to principles is good for doing business and good for governing. In this case, however, the agency—the Delaware River Port Authority (DRPA)—did not adhere to its own standards.

Under the DRPA’s guidelines, a responsible contractor has the “capacity” and “capability” to do a certain job. A responsive contractor includes all required documents with its bid. In response to the DRPA’s solicitation of bids to repaint a bridge, Alpha Painting and Construction Company submitted the lowest bid.

Alpha’s bid did not include required accident and insurance data. For this reason, and without checking further, the agency declared that the painter was not responsible and rejected its bid.

The DRPA faulted the “responsiveness” of Alpha and relied on the contractor’s failure to provide certain information to reject Alpha as not “responsible.” But under the DRPA’s own guidelines, the agency could reject a bidder as not “responsible” only if the bidder did not have the “capacity” or “capability” to do the work. There does not seem to be any justifiable doubt about Alpha’s “capability” or “capacity” to perform the job on which it bid—Alpha had previously worked for the DRPA and was an experienced contractor. The agency’s faulty rejection of the contractor is underscored by its failure to seek clarification on the issue of the unremitted information. (The agency might have undertaken a public records review or a general online search, or might simply have asked the contractor.)

In the actual case on which this problem is based, Alpha filed a suit in a federal district court against the DRPA. The court concluded that the agency acted arbitrarily and capriciously. The U.S. Court of Appeals for the Third Circuit affirmed this ruling.

TIME-LIMITED TEAM ASSIGNMENT 20–10. Investigation. Maureen Droge was a flight attendant for United Air Lines, Inc. (UAL).

After being assigned to work in Paris, France, she became pregnant. Because UAL does not allow its flight attendants to fly during their third trimester of pregnancy, Droge was placed on involuntary leave. She applied for temporary disability benefits through the French social security system. Her request was denied because UAL does not contribute to the French system on behalf of its U.S.-based flight attendants. Droge filed a charge of discrimination with the U.S. Equal Employment Opportunity Commission (EEOC), alleging that UAL had

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discriminated against her and other Americans. The EEOC issued a subpoena, asking UAL to detail all benefits received by all UAL employees living outside the United States. UAL refused to provide the information on the ground that it was irrelevant and that compliance would be unduly burdensome. The EEOC filed a suit in a federal district court against UAL. (See The Administrative Process.)

1.

The first team will decide whether the court should enforce the subpoena and explain why.

Solution: The court should not order UAL to comply with the subpoena. The information sought goes far beyond an inquiry into whether and for whom UAL makes French social security payments. It is not limited to individuals who may be considered similarly situated to Droge either by position (flight attendant) or by location (France). The subpoena requires extensive information with respect to all UAL employees residing abroad. Much of this information has little or no relevance to resolving Droge’s charge against UAL. And even if it were relevant to the charge in some tangential way, the request is overly burdensome. The financial and administrative demand placed on UAL to comply would be significant and, in light of the tangential need for the information, an undue burden.

2. The second team will discuss whether the EEOC should be able to force a U.S. company operating overseas to provide the same disability benefits to employees located there as it does to employees in the United States.

Solution: The Equal Employment Opportunity Commission (EEOC) does not have the authority to force a U.S. company that is operating oversees to provide the same (disability) benefits to employees located there as it does to employees in the United States.

The major U.S. law regulating employment discrimination—Title VII of the Civil Rights Act of 1964—applies extraterritorially to all U.S. employees working for U.S. employers abroad. Generally, U.S. employers must abide by U.S. discrimination laws unless to do so would violate the laws of the country where their workplaces are located.

The EEOC monitors compliance with Title VII. An employee who alleges discrimination must file a claim with the EEOC before a lawsuit can be brought against the employer. The EEOC may investigate the dispute and attempt to obtain the parties’ voluntary consent to an out-of-court settlement. If a voluntary agreement cannot be reached, the EEOC may file a suit against the employer on the employee’s behalf, but the agency itself cannot order a certain result.

3. The third team should determine whether UAL should be required to contribute to the French social security system for employees who reside in France and explain why or why not.

Solution: As for whether UAL should be required to contribute to the French social security system for employees who reside in France, relevant factors include UAL’s “U.S.-based” and foreign assignment distinctions, which tax and social benefit system its overseas employees are subject to, and the requirements of French law with respect to such contributions.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 21: Consumer Protection

Solution and Answer Guide

Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 21: Consumer Protection

TABLE OF CONTENTS Critical Thinking Questions in Cases ..................................................................................1 Case 21.1—Critical Thinking ..................................................................................................... 1 Case 21.2—Critical Thinking.................................................................................................... 2 Case 21.3—Critical Thinking.................................................................................................... 3 Chapter Review ................................................................................................................... 4 Practice and Review................................................................................................................. 4 Practice and Review: Debate This ......................................................................................... 5 Issue Spotters ........................................................................................................................... 5 Business Scenarios and Case Problems .............................................................................. 6 A Question of Ethics ............................................................................................................... 10 Time-Limited Team Assignment .......................................................................................... 12

CRITICAL THINKING QUESTIONS IN CASES CASE 21.1—CRITICAL THINKING 1.

Ethical. POM claimed that, for ethical reasons, RCTs should not be required to substantiate disease-related claims about food products. It argued that, for instance, “doctors cannot . . . ethically deprive a control group of patients of all Vitamin C for a decade to determine whether Vitamin C helps prevent cancer.” Is this a valid argument?

Why or why not?

Solution: No. POM’s argument that it is unethical to require RCTs to substantiate disease-related claims about food products because it is impossible to create a zero intake group for nutrients in an ethical manner is not a valid challenge to the FTC’s findings, conclusion, and order in this case.

There is no need for a study participant to undergo a decade-long deprivation of an essential nutrient. An ad can make a claim about the short-term benefits of consuming a certain product. This ad can be based on a short-term study. And whether or not it may be unethical to tell patients in a control group to stop consuming Vitamin C, there is no apparent reason to believe that it would be unethical to create a zero intake group for pomegranate juice.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 21: Consumer Protection

CASE 21.2—CRITICAL THINKING 1.

Ethical. Should federal agencies be required to justify proposed consumer safety regulations by showing that the benefits of such regulations outweigh their costs, as was the case here? Why or why not?

Solution: In 1981, President Ronald Reagan signed an executive order providing that, to the extent the law permitted, “regulatory action shall not be undertaken unless the potential benefits to society from the regulation outweigh the potential costs to society.” This requirement was criticized at the time, and continues to be criticized, for assigning monetary value to factors such as human life and natural beauty that are thought by many to be unmeasurable.

Thus, leading up to the Window Covering Manufacturer Association case, the Consumer Product Safety Commission was required to determine the “value of a statistical life” of each child who might be injured or killed by window shade cords. For those who oppose cost-benefit analyses of safety regulations, this determination is inherently flawed because it does not—and cannot—take into account ethical and moral considerations. These critics assert that, in practice, cost-benefit analyses of safety regulations will tend to show that the regulations are too expensive, thus benefitting businesses to the detriment of consumers and the environment.

In contrast, many economists believe that cost-benefit analyses are useful tools for allocating tax revenue in the most efficient manner. The reality is, no nation, even one as wealthy as the United States, has unlimited resources. A cost-benefit analysis helps government agencies choose between different options while keeping society’s values in mind. For example, if there is one government program to protect the public from air pollution that costs $200,000 for each life saved, and another government program that costs $2 million for each life saved, then the first program should be favored.

With regard to custom-made window coverings, then, the goal should not be to protect children at any cost, but to do so at a cost that can be reasonably borne by the widow covering industry.

2. What If the Facts Were Different? Suppose the WMCA had imposed safety standards on its members that addressed the federal government’s concerns regarding corded window coverings. Should the Commission defer to those voluntary standards and refrain from enacting its own rule? Explain your answer.

Solution: Under the Consumer Product Safety Act, when a regulated industry has imposed a voluntary standard, the Commission may not promulgate a safety rule unless it finds that: (1) compliance with the voluntary standard “is not likely to result in the elimination or adequate reduction of [the] risk of injury”; or (2) “it is unlikely that there will be substantial compliance” with the voluntary standard.

In this case, window covering manufacturers did put forth voluntary standards requiring that window coverings “be cordless, have only inaccessible cords, or have short helper cords.” These standards, however, applied only to “stock” window coverings. That is, the industry’s voluntary standards did not apply to the “custom” window coverings that were targeted by the Commission’s disputed rule.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 21: Consumer Protection

In devising its rule, the Commission found that the industry’s voluntary standard was “not likely to result in the elimination or adequate reduction of [the] risk of injury.” The U.S. Court of Appeals for the District of Columbia Circuit supported the Commission’s finding. The appeals court pointed out that while the industry’s voluntary standard may have reduced the risk of injury from corded window products, the Commission’s stated goal was to eliminate such risks. That is, the Commission made the “commonsense observation” that "[h]aving no operating cords effectively eliminates the strangulation hazard ... because there is no cord to cause strangulation." Therefore, the Commission was in compliance with the Consumer Product Safety Act when it determined that the industry’s voluntary standards did not sufficiently address the risk of strangulation.

CASE 21.3—CRITICAL THINKING 1.

Legal Environment. How might Merchants have phrased its debt-collection letters to meet the standards of the FDCPA? Explain.

Solution: Merchants might have avoided the result in the Manuel case simply by adding a sentence to inform the debtor that there was a statute of limitations.

For example, in Texas, after the lower court’s decision in the Manuel case, the state began to require that all first collection letters sent by debt buyers, on debt for which the limitations period has run, must contain one of three variations of the following notice: THE LAW LIMITS HOW LONG YOU CAN BE SUED ON A DEBT. BECAUSE OF THE AGE OF YOUR DEBT, WE WILL NOT SUE YOU FOR IT. THIS NOTICE IS REQUIRED BY LAW. Other states requiring similar notices include California, Connecticut, Massachusetts, New Mexico, New York, North Carolina, Vermont, and West Virginia.

The U.S. Court of Appeals for the Ninth Circuit, in Stimpson v. Midland Credit Management, Inc., 944 F.3d 1190 (9th Cir. 2019), reversed a grant of summary judgment to the plaintiffs for a letter that included the following warning: The law limits how long you can be sued on a debt and how long a debt can appear on your credit report. Due to the age of this debt, we will not sue you for it or report payment or nonpayment of it to a credit bureau.

In 2020, the Consumer Financial Protection Bureau issued a proposed rule that would require a debt collector “who knows or should know that a debt is time barred when the debt collector makes the initial communication” to clearly and conspicuously disclose (1) that the law limits how long the consumer can be sued for a debt and that, because of the age of the debt, the debt collector will not sue the consumer to collect it and (2) if, under applicable law, the debt collector’s right to bring a legal action against the consumer can be revived, the fact that revival can occur and the circumstances in which it can occur.

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A model form included in the proposed rule would provide: The law limits how long you can be sued for a debt. If you do nothing or speak to us about this debt, we will not sue you to collect it. This is because the debt is too old.

BUT if you acknowledge in writing that you owe this debt, then we can sue you to collect it.

2. Economic. Why would a debt collector use carefully crafted, ambiguous language in an attempt to collect an old debt? Discuss.

Solution: In the Manuel case, the U.S. Court of Appeals for the Fifth Circuit stated, “The only reason to use such carefully ambiguous language is the expectation that at least some unsophisticated debtors will misunderstand and will choose to pay on the ancient, time-barred debts because they fear the consequences of not doing so.”

Of course, some persons might consider full debt repayment to be a moral obligation, even though the legal remedy for the debt has been extinguished under a statute of limitations.

But in the view of the Federal Trade Commission and Consumer Financial Protection Bureau, most consumers do not understand their legal rights regarding time-barred debt. Gullible consumers who make partial payments on old debts could inadvertently reset limitations periods and thereby make themselves vulnerable to a suit on the full amount.

CHAPTER REVIEW PRACTICE AND REVIEW Leota Sage saw a local motorcycle dealer’s newspaper advertisement offering a MetroRider EZ electric scooter for $1,699. When she went to the dealership, however, she learned that the EZ model had been sold out. The salesperson told Sage that he still had the higher-end MetroRider FX model in stock for $2,199 and would sell her one for $1,999. Sage was disappointed but decided to purchase the FX model. When Sage said that she wished to purchase the scooter on credit, she was directed to the dealer’s credit department. As she filled out the credit forms, the clerk told Sage, who is an Asian American, that she would need a cosigner to obtain a loan. Sage could not understand why she would need a cosigner and asked to speak to the store manager. The manager apologized, told her that the clerk was mistaken, and said that he would “speak to” the clerk. The manager completed Sage’s credit application, and Sage then rode the scooter home. Seven months later, Sage received a letter from the manufacturer informing her that a flaw had been discovered in the scooter’s braking system and that the model had been recalled. Using the information presented in the chapter, answer the following questions.

1.

Did the dealer engage in deceptive advertising? Why or why not?

Solution: The advertising would mislead a reasonable consumer who would show up at the store expecting the advertised item to be available. This is a classic example of bait and switch advertising—luring a customer in with a low priced item

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 21: Consumer Protection

(the MetroRider EZ, the bait), then switching that customer’s interest to a more expensive item (the MetroRider FX).

2. Suppose that Sage had ordered the scooter through the dealer’s website but the dealer was unable to deliver it by the date promised. What would the FTC have required the merchant to do in that situation?

Solution: Under the FTC’s Mail or Telephone Order Merchandise Rule, as amended to include online sales, the dealer would be required to notify Sage when the order cannot be shipped on time. If Sage chooses to cancel her order, then the dealer is required to issue a refund within a specific period of time.

3. Assuming that the clerk required a cosigner based on Sage’s race or gender, what act prohibits such credit discrimination?

Solution: The Equal Credit Opportunity Act prohibits the denial of credit solely on the basis of race, religion, national origin, color, gender, marital status, or age. If the clerk required a cosigner on Sage’s loan because of her race or gender, a court would likely find that the dealer violated this act.

4. What organization has the authority to ban the sale of scooters based on safety concerns?

Solution: The CPSC is the Consumer Product Safety Commission, the organization responsible for setting safety standards for consumer products. The CPSC has the authority to ban the sale of products, such as scooters, that it deems potentially hazardous to consumers.

PRACTICE AND REVIEW: DEBATE THIS 1.

Laws against bait-and-switch advertising should be abolished because no consumer is ever forced to buy anything.

Solution: Just because an advertised item is not available when a consumer goes to buy it does not mean that sellers should be prevented from “up-selling.” That is to say, sellers should be free to offer higher-priced versions of unavailable lower-priced advertised items. After all, in a free society, consumers can just say no.

If sellers want to dupe consumers, they can always offer low-priced items but only have in stock higher-priced versions of the same items. Consumers take time to visit stores that advertise items, so once in the stores, these consumers may end up paying for higher-priced versions of the same products. Retailers must be prevented from using such unethical tactics.

ISSUE SPOTTERS 1.

United Pharmaceuticals, Inc., has developed a new drug that it believes will be effective in the treatment of patients with AIDS. The drug has had only limited testing, but United wants to make the drug widely available as soon as possible. To market the drug, what must United prove to the U.S. Food and Drug Administration? (See Protection of Health and Safety.)

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 21: Consumer Protection

Solution: Under an extensive set of procedures established by the U.S. Food and Drug Administration, which administers the federal Food, Drug, and Cosmetic Act, drugs must be shown to be effective, as well as safe, before they may be marketed to the public. In general, manufacturers are responsible for ensuring that the drugs they offer for sale are free of any substances that could injure consumers.

2. Gert buys a notebook computer from EZ Electronics. She pays for it with her credit card.

When the computer proves defective, she asks EZ to repair or replace it, but EZ refuses.

What can Gert do? (See Credit Protection.)

Solution: Under the Truth-in-Lending Act, a buyer who wishes to withhold payment for a faulty product purchased with a credit card must follow specific procedures to settle the dispute. The credit card issuer then must intervene and attempt to settle the dispute.

BUSINESS SCENARIOS AND CASE PROBLEMS 21–1. Unsolicited Merchandise. Andrew, a resident of California, received an advertising circular in the U.S. mail announcing a new line of regional cookbooks distributed by the EveryKind Cookbook Co. Andrew didn’t want any books and threw the circular away. Two days later, Andrew received in the mail an introductory cookbook entitled Lower Mongolian Regional Cookbook, as announced in the circular, on a “trial basis” from Every-Kind. Andrew was not interested but did not go to the trouble to return the cookbook. Every-Kind demanded payment of $20.95 for the Lower Mongolian Regional Cookbook. Discuss whether Andrew can be required to pay for the book. (See Advertising, Marketing, and Sales.)

Solution: Andrew will not be required to pay for the cookbook because of federal consumer protection law. The federal Postal Reorganization Act allows Andrew to retain or discard the cookbook without incurring any obligation, because it was unsolicited merchandise. The mailing of this unordered cookbook could also be considered an unfair trade practice. (As a California resident, Andrew is also protected by the California Civil Code, which permits consumers to keep unsolicited goods.)

21–2. Credit-Card Rules. Maria Ochoa receives two new credit cards on May 1. She has solicited one of them from Midtown Department Store, and the other arrives unsolicited from High-Flying Airlines. During the month of May, Ochoa makes numerous credit-card purchases from Midtown Department Store, but she does not use the High-Flying Airlines card. On May 31, a burglar breaks into Ochoa’s home and steals both credit cards, along with other items.

Ochoa notifies the Midtown Department Store of the theft on June 2, but she fails to notify High-Flying Airlines. Using the Midtown credit card, the burglar makes a $500 purchase on June 1 and a $200 purchase on June 3. The burglar then charges a vacation flight on the HighFlying Airlines card for $1,000 on June 5. Ochoa receives the bills for these charges and refuses to pay them. Discuss Ochoa’s liability for the charges. (See Credit Protection.)

Solution: The Truth in Lending Act (TILA) deals specifically with lost or stolen credit cards and the unauthorized use of credit cards. For credit cards solicited by the cardholder and then lost or stolen, the act limits the liability of the cardholder to $50 for unauthorized charges made before the card issuer is notified. There is no liability for any unauthorized charges made after the date of notice.

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Therefore, for the Midtown Department Store credit card stolen on May 31, Ochoa is liable for $50 of the $500 charge made on June 1, which occurred before Ochoa notified the card issuer. Ochoa has no liability for the $200 charge on June 3 because it was made after the issuer was notified.

TILA prohibits the issuance of unsolicited credit cards. Unless an individual accepts an unsolicited card (such as by using it), that person is not liable for any unauthorized charges if the card is lost or stolen. The person does not have to notify the issuer of an unsolicited, unaccepted card to be relieved of all liability for unauthorized charges.

Therefore, Ochoa owes $50 to Midtown Department Store and nothing to High-Flying Airlines.

21–3. Spotlight on McDonald’s—Food Labeling. McDonald’s Happy Meal® meal selection consists of an entrée, a small order of french fries, a small drink, and a toy. In the early 1990s, McDonald’s Corp. began to aim its Happy Meal marketing at children aged one to three. In 1995, McDonald’s began making nutritional information for its food products available in documents known as “McDonald’s Nutrition Facts.” The documents list the food items that the restaurant serves and provide a nutritional breakdown of each, but the Happy Meal is not included.

Marc Cohen filed a suit in an Illinois state court against McDonald’s. Cohen alleged, among other things, that McDonald’s had violated a state law prohibiting consumer fraud and deceptive business practices by failing to follow the Nutrition Labeling and Education Act (NLEA). The NLEA generally requires that standard nutrition facts be listed on food labels. The act, however, sets out different, less detailed requirements for products specifically intended for children under the age of four. Does it make sense to have different requirements for children of this age? Why or why not? Should a state court impose such regulations when the NLEA has not done so? Explain. [Cohen v. McDonald’s Corp., 347 Ill.App.3d 627, 808 N.E.2d 1, 283 Ill.Dec. 451 (1 Dist. 2004)] (See Labeling and Packaging.)

Solution: Parents are often aware that doses of medicine are smaller for young children and that portion sizes of restaurant items, as well as clothing and other things, are differently sized for children. It may be only common sense to conclude that daily nutritional requirements would be different, too, especially for children under four. With that in mind, it could be argued that it would be unethical not to post the requirements differently for children under four.

A consumer who is not familiar with nutrition standards, however, would likely not understand the NLEA’s different percentage requirements for products specifically intended for children under the age of four. A state court should not impose regulations under the NLEA for establishing nutritional requirements for children under four. A state cannot impose obligations that are different from those mandated by federal law, because non-uniformity among the states would result. In this case, too, the plaintiff was asking a state court to interpret a federal statute, which the court did not have the authority to do.

21–4. Deceptive Advertising. Brian Cleary and Rita Burke filed a suit against cigarette maker Philip Morris USA, Inc., seeking class-action status for a claim of deceptive advertising. Cleary and Burke claimed that “light” cigarettes, such as Marlboro Lights, were advertised as safer than regular cigarettes, even though the health effects are the same. They contended that the tobacco companies concealed the true nature of light cigarettes. Philip Morris claimed that it

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 21: Consumer Protection

was authorized by the government to advertise cigarettes, including light cigarettes. Assuming that is true, should the plaintiffs still be able to bring a deceptive advertising claim against the tobacco company? Why or why not? [Cleary v. Philip Morris USA, Inc., 683 F. Supp. 2d 730 (N.D.Ill. 2010)] (See Advertising, Marketing, and Sales.)

Solution: Yes. The court rejected the motion by the tobacco companies for judgment on the pleadings. Under Illinois law, the plaintiffs’ claim that the tobacco companies were unjustly enriched by deceptive claim that light cigarettes were healthier than regular cigarettes may proceed. The fact that the cigarette makers are allowed by the federal government to advertise their products does not mean that there is a right to engage in deceptive advertising. Hence, the plaintiffs may proceed to establish a class to be represented in litigation.

21–5. Business Case Problem with Sample Answer—Fair Debt Collection Practices Act. Bank of America hired Atlantic Resource Management, LLC, to collect a debt from Michael E. Engler. Atlantic called Engler’s employer and asked his supervisor about the company’s policy concerning the execution of warrants. The caller then told the supervisor that, to stop process of the warrant, Engler needed to call Atlantic about “Case Number 37291 NY0969” during the first three hours of his next shift. When Engler’s supervisor told him about the call, Engler feared that he might be arrested, and he experienced discomfort, embarrassment, and emotional distress at work. Can Engler recover under the Fair Debt Collection Practices Act? Why or why not? [Engler v. Atlantic Resource Management, LLC, 2012 WL 464728 (W.D.N.Y. 2012)] (See Credit Protection.)

Solution: Engler may recover under the Fair Debt Collection Practices Act (FDCPA).

Atlantic is subject to the FDCPA because it is a debt-collection agency and it was attempting to collect a debt on behalf of Bank of America. Atlantic also used offensive tactics to collect from Engler. After all, Atlantic gave Engler’s employer the false impression that Engler was a criminal, had a pending case, and was about to be arrested. Finally, Engler suffered harm because he experienced discomfort, embarrassment, and distress as a result of Atlantic’s abusive conduct. Engler may recover actual damages, statutory damages, and attorneys’ fees from Atlantic.

21–6. Deceptive Advertising. Innovative Marketing, Inc. (IMI), sold “scareware”—computer security software. IMI’s internet ads redirected consumers to sites where they were told that a scan of their computers had detected dangerous files—viruses, spyware, and “illegal” pornography. In fact, no scans were conducted. Kristy Ross, an IMI cofounder and vice president, reviewed and edited the ads. She was also aware of the many complaints that consumers had made about them. An individual can be held liable under the Federal Trade Commission Act’s prohibition of deceptive acts or practices if the person (1) participated directly in the deceptive practices or had the authority to control them, and (2) had or should have had knowledge of them. Were IMI’s ads deceptive? If so, can Ross be held liable?

Explain. [Federal Trade Commission v. Ross, Inc., 743 F.3d 886 (4th Cir. 2014)] (See Advertising, Marketing, and Sales.)

Solution: Yes. Ross can be held personally liable for a violation of the Federal Trade Commission (FTC) Act’s prohibition of deceptive acts or practices. Generally, deceptive advertising occurs if a reasonable consumer would be misled by the advertising claim.

Advertising that appears to be based on factual evidence but that in fact cannot be supported will be deemed deceptive. An individual can be held personally liable under

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 21: Consumer Protection

the FTC Act if the person (1) participated directly in the deceptive practices or had the authority to control them and (2) had or should have had knowledge of them.

In this problem, the facts indicate that IMI’s ads were deceptive. Consumers were misled by the ads that appeared to be based on factual evidence but were not actually supportable—the ads claimed that a scan of the consumers’ computers had detected dangerous files, such as viruses, when in fact no scans were conducted. The issue is whether Ross can be held individually liable for these violations. She was an IMI co-founder and vice president, reviewed and edited the ads, and was aware of the many complaints about them. Thus, under the FTC Act, Ross met the standard for personal liability—she knew of the deceptive practices, she had the authority to control them, and she participated directly in them.

In the actual case on which this problem is based, in the FTC’s suit against Ross, a federal district court held her jointly and severally liable. On her appeal, the U.S. Court of Appeals for the Fourth Circuit affirmed.

21–7. Debt Collection. Zakia Mashiri owns a home in San Diego, California. She is a member of the Westwood Club Homeowners’ Association (HOA), which charges each member an annual fee. When Mashiri failed to pay the fee, the law firm of Epsten Grinnell & Howell sent her a letter demanding payment. The letter read, “Failure to pay your . . . account in full within thirty-five days from the date of this letter will result in a lien . . . against your property.”

Mashiri asked for validation of the debt. Within two weeks of receiving it, she sent HOA a check for the fee. Meanwhile, the law firm filed a lien against her property. Mashiri filed a lawsuit in a federal district court against the law firm, alleging a violation of the Fair Debt Collection Practices Act. On what provision of the act did Mashiri likely base her allegation?

Will she succeed in her lawsuit against the law firm? Explain your answer. [Mashiri v. Epsten Grinnell & Howell, 845 F.3d 984 (9th Cir. 2017)] (See Credit Protection.)

Solution: The Fair Debt Collection Practices Act (FDCPA) requires debt collection agencies to include a validation notice whenever they initially contact a debtor for payment of a debt or within five days of that initial contact. The notice must state that the debtor has thirty days within which to dispute the debt and to request a written verification of the debt from the collection agency. These are the provisions of the act on which Mashiri most likely based her allegation.

In this problem, homeowner Zakia Mashiri owed a homeowners’ association (HOA) an annual fee. When she failed to pay it, the law firm of Epsten Grinnell & Howell sent her a letter demanding payment. The letter stated, “Failure to pay your ... account in full within thirty-five (35) days from the date of this letter will result in a lien ... against your property.” Mashiri later received validation of the debt and, within two weeks, sent HOA a check. Meanwhile, however, Epsten Grinnell filed a lien against her property. Mashiri filed a suit in a federal district court against Epsten Grinnell, alleging a violation of the FDCPA. Epsten Grinnell is a debt collection agency. The letter demanding payment within thirty-five days of its date violates a debtor’s right to dispute a debt within thirty days of receipt of the letter. By the time a debtor receives the letter, there may be fewer than thirty days before payment is due. This infringement of the debtor’s right to thirty days in which to dispute the debt violates the FDCPA’s notice and validation provision.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 21: Consumer Protection

In the actual case on which this problem is based, the court dismissed Mashiri’s complaint. On appeal, the U.S. Court of Appeals for the Ninth Circuit reversed the dismissal and remanded the case, in part on the reasoning stated above.

21–8. Deceptive Advertising. Manuka honey is a variety of honey made from the flowers of the Manuka bush, which is native to New Zealand and Australia. Trader Joe’s Company markets its Manuka Honey store brand as “100 percent New Zealand Manuka Honey” or “New Zealand’s Manuka Honey.” Lynn Moore and others filed a lawsuit against Trader Joe’s claiming that the company was engaged in false, misleading, and deceptive marketing. The plaintiffs claimed that the honey consisted of only 57.3 percent to 62.6 percent honey derived from Manuka flower nectar. Trader Joe’s countered that its labeling was consistent with all applicable Food and Drug Administration (FDA) guidelines. Those guidelines permit labeling honey by its “chief floral source,” since “busy bees cannot be prevented from foraging on different types of flowers, despite their keepers’ best efforts.” Trader Joe’s thus argued that the plaintiffs’ complaint should be dismissed. What should the court decide? [Moore v. Trader Joe’s Company, 4 F.4th 874, 21 Cal. Daily Op. Serv. 7088 (9th Cir. 2021)] (See Advertising, Marketing, and Sales.)

Solution: Ultimately the appeals court concurred with the district court that Trader Joe’s Manuka Honey label was not misleading to a reasonable consumer as a matter of law. Essentially, the reviewing court agreed with the trial court that Trader Joe’s did not display any affirmative misrepresentations that would mislead a reasonable consumer. The product in fact does “100 percent” consist of honey whose chief floral source is Manuka.

A QUESTION OF ETHICS 21–9. The IDDR Approach and Consumer Protection. In Richland, Washington, Robert Ingersoll planned his wedding to include about a hundred guests, a photographer, a caterer, a wedding cake, and flowers. Ingersoll had been a customer of Arlene’s Flowers and Gifts for more than nine years and had spent several thousand dollars at the shop. When he approached Arlene’s owner, Baronelle Stutzman, to buy flowers for his wedding, she refused because Ingersoll and his fiancé, Curt Freed, were a same-sex couple. Deeply offended, Ingersoll and Freed dropped their wedding plans and married in a modest ceremony. [Arlene’s Flowers, Inc. v. State of Washington, 138 S.Ct. 2671, 201 L.Ed.2d 1067 (2018)] (See Advertising, Marketing, and Sales.)

1.

Federal and state laws attempt to protect consumers from unfair trade practices, including discriminatory requirements, related to consumer transactions. Using the Review step of the IDDR approach, consider whether it would be ethically fair to hold Stutzman personally liable for a violation of these laws.

Solution: Yes. In the circumstances, it would be ethically fair to hold Stutzman personally liable for a violation of consumer protection law. Federal and state laws attempt to protect consumers from unfair trade practices, including discriminatory requirements, in consumer transactions. Consumer protection statutes generally authorize actions against “any person” for violations, with “person” defined to include business entities and “natural” persons.

Here, Stutzman owned Arlene’s Flowers and Gifts. Ingersoll had been a customer of Arlene’s for more than nine years and had spent several thousand dollars at the shop. Through Stutzman, however, Arlene’s refused to sell

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 21: Consumer Protection

wedding flowers to Ingersoll because his betrothed, Freed, was a man.

Offended by Stutzman’s refusal, the couple dropped their wedding plans and married in a modest ceremony.

The ethical focus is on whom to fairly sanction to punish and deter an “unfair practice.” Individuals may be personally liable for a violation of a law if they participate in the wrongful conduct or knowingly approve of it. This is not only legal, of course, but ethical, and would be more likely to resolve the issue with success than not holding violators personally liable. It would be unethical and fail to successfully address the issue to allow a business owner to avoid liability for such conduct behind the veil of a business entity. This is especially true here, when Stutzman, the owner of Arlene’s, committed the violation herself.

If such unfair practices were effectively deterred, the stakeholders—Ingersoll, Freed, and other consumers—would benefit. Other business owners, and the American public, generally, could also benefit from a more open market.

2. Using the Discussion step of the IDDR approach, consider actions that Ingersoll and Freed as consumers might take in response to Stutzman’s discriminatory rejection of their offer to do business.

Solution: Actions that Ingersoll and Freed as consumers might take in response to Arlene’s—Stutzman’s—discriminatory rejection of their offer to do business include filing complaints with private and government agencies, filing a suit, and doing nothing.

A Discussion is the second step in the IDDR approach, after an Inquiry to define the ethical issue. In this question, the issue is whether Ingersoll and Freed should act in response to Stutzman’s conduct. The stakeholders include Ingersoll and Freed’s relatives and others with a personal interest in their lives, as well as other consumers—especially those who might be refused products or services on the basis of any bias by any merchant—other businesses, and society generally.

The Discussion step posits actions to address the issue, their strengths and weaknesses, and consequences and effects. As stated above, Ingersoll and Freed might opt to do nothing. This would have the advantage of putting the incident quickly behind them. If it satisfies them, it would also likely satisfy their friends and families. But other consumers could be similarly discriminated against with immediate impunity by Arlene’s and other merchants. This would not benefit those stakeholders nor society generally.

Ingersoll and Freed might choose to file complaints with private and government agencies or to file a suit against Arlene’s and its owner. Either of these actions could vindicate the couple’s rights and those of other consumers to engage in commerce free of the discrimination practiced by Stutzman. A successful suit could deter other merchants from discrimination. This could contribute to a more vibrant and prosperous economy, which would ultimately inure to the profit of society generally.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 21: Consumer Protection

In the actual case on which this problem is based, Ingersoll and Freed filed a suit in a Washington state court against Stutzman, alleging a violation of the state’s Consumer Protection Act (CPA). The CPA prohibits “unfair practices,” which include discriminating against customers on the basis of their sexual orientation. The court granted a summary judgment and awarded damages to the plaintiffs, holding Stutzman personally liable. The Washington Supreme Court affirmed the rulings.

On a petition for a writ of certiorari, however, the United States Supreme Court vacated the judgment and remanded the case for further consideration. By this action, the Court directed the state supreme court to take into consideration Stutzman’s religious objections to same-sex marriage.

TIME-LIMITED TEAM ASSIGNMENT 21–10. Consumer Protection. Many states have enacted consumer protection laws that go beyond federal laws. Suppose that Florida enacts a new consumer protection law that forces all apartment and homeowners who offer short-term rentals through Airbnb to comply with certain regulations. A property owner must obtain a business license to list a property on Airbnb. The owner must also register with the local housing office in the relevant county or city and file a state income tax form created especially for Airbnb rentals. In addition, the property must pass an annual fire inspection, for which the owner must pay. (See Advertising, Marketing, and Sales.)

1.

The first team will compare an unregulated Airbnb situation with the newly created regulated Airbnb situation. The team will determine whether the expected number of Airbnb rentals offered by apartment and home owners will stay the same, fall, or increase.

Solution: The number of Airbnb rentals offered by apartment and homeowners in the newly regulated jurisdiction will likely remain the same as before the regulation, and the number may actually increase.

The regulation may eliminate those who rarely rent their homes, and especially homeowners who offer only short-term (less than thirty-day) rentals. It may have no impact on the number of listings of units available for more than thirty days, or on hosts renting out multiple units, or even the owner of a single home that is rented frequently.

Why? Because the economic benefits to those hosts are greater than the costs imposed by the regulation. The costs to obtain a business license, register with a local housing office, file a state tax form, and pass an annual fire inspection are no more burdensome than those assumed by almost any business to do business in almost any jurisdiction. And the hosts can, like other businesses, spread those costs across the rates charged to their customers.

2. The second team will look at the burden placed on local governments by the new regulation.

Solution: The burden placed on local governments by the regulation may be greater than the effects of the regulation on Airbnb or its hosts. Additional staff

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 21: Consumer Protection

time, or at least added staff time, will be needed to handle the local administrative licenses and registrations, the state tax filings, and possibly the inspections. Greater than any of these, however, might be the cost of the additional personnel to enforce the regulation. Most likely, local authorities will be tasked with monitoring the listings and the compliance of the hosts with the statutory requirements.

Obtaining Airbnb’s cooperation in enforcing the regulation might ameliorate these costs.

3. The third team will list all of the benefits of the regulation.

Solution: The regulation may reduce increases in the cost of long-term housing by reducing the number of properties converted to short-term accommodations. If a tax is added to the regulation, of course the state may realize enhanced tax revenues. There may be a reduction in the effects on the hosts’ neighbors of such factors as noise, traffic, and the use of shared building facilities.

From the perspective of Airbnb and its hosts, regulation can lend an image of stability to the platform. To be regulated is to be recognized and legitimized.

4. The fourth team will outline who will incur the costs of the regulation Solution: The regulation appears to impose its costs on the hosts. But the state and local governments will bear some of the burden, in monitoring the regulated parties’ compliance. And those who rent the properties may also bear some of the costs in terms of increased rental prices.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 22: Environmental Law

Solution and Answer Guide

Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 22: Environmental Law

TABLE OF CONTENTS Critical Thinking Questions in Cases ..................................................................................1 Case 22.1—Critical Thinking..................................................................................................... 1 Case 22.2—Critical Thinking ................................................................................................... 3 Case 22.3—Critical Thinking ................................................................................................... 4 Chapter Review ................................................................................................................... 5 Practice and Review................................................................................................................. 5 Practice and Review: Debate This ......................................................................................... 6 Issue Spotters ........................................................................................................................... 6 Business Scenarios and Case Problems .............................................................................. 7 A Question of Ethics ............................................................................................................... 11 Time-Limited Team Assignment .......................................................................................... 13

CRITICAL THINKING QUESTIONS IN CASES CASE 22.1—CRITICAL THINKING 1.

Political. In his majority opinion, Chief Justice John J. Roberts, Jr., did not focus on the potential harm to the environment caused by CO2 emissions. Given the importance of climate change to many Americans, was Roberts’s emphasis on administrative law appropriate? Explain your answer.

Solution: For Chief Justice Roberts and the five associate justices who voted in the majority, the West Virginia case revolved around the issue of separation of powers rather than climate change. That is, should federal administrative agencies such as the EPA have the power to create impactful regulatory schemes without Congress’s involvement? With its answer, the Court made a judgment to limit regulatory power without examining the importance of reducing carbon emissions.

Roberts did acknowledge that a nationwide transition from the coal-generated electricity might have been a “sensible solution to the crisis of the moment,” before adding that a “decision of such magnitude and consequence rests with Congress itself, or an agency acting pursuant to a clear delegation from that representative body.”

Associate Justice Neil Gorsuch’s concurrence continued this theme. “When Congress

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seems slow to solve problems [such as climate change], it may be only natural that those in the executive branch might seek to take matters into their own hands,” Gorsuch wrote. “But the Constitution does not authorize agencies to use pen-and-phone regulations as substitutes for laws passed by the people’s representatives.”

In contrast, Associate Justice Elena Kagan began her dissent with a lengthy description of the dangers posed by climate change—dangers that she felt had been ignored by the majority’s ruling. “This is not the attorney general regulating medical care, or even the C.D.C. regulating landlord-tenant relations,” Kagan wrote. “It is E.P.A. (that’s the Environmental Protection Agency, in case the majority forgot) acting to address the greatest environmental challenge of our time.”

2. Legal Environment. What is your opinion of the “major questions” doctrine, which limits policymaking efforts by regulatory agencies with regard to “significant” national issues?

Solution: Administrative agencies constantly interpret the statutes from which they are granted regulatory authority. No law covers every single consequence of its application, and thus employees of administrative agencies must use their best judgment and expertise to carry out what they believe to be the intent of the statute.

Recognizing this, courts will often defer to an agency’s interpretation of an ambiguous federal law, within the guidelines discussed in the previous chapter. In rare instances, however, if the “history and the breath of authority” that an agency exerts is exceptional, or the statute is being interpreted in a way of “economic and political significance,” a court should “hesitate before concluding that Congress meant to confer such authority.”

A court’s next step, following this hesitation, is to apply the “major questions doctrine.” Doing so, the United States Supreme Court has rejected regulatory action when the underlying claim concerns an issue of “vast ‘economic and political significance,’” and Congress has not clearly given the agency authority over the issue.

As Associate Justice Gorsuch wrote in his concurring opinion to the West Virginia case, the major questions doctrine “seeks to protect against ‘unintentional, oblique, or otherwise unlikely’ intrusions on these interests” by requiring federal agencies to have “clear congressional authorization” when they address important issues.”

One problem with the major question doctrine is that the Supreme Court has not defined which legal questions are “major.” So, because the scope of the doctrine is unclear, regulatory agencies have little guidance in determining which of their actions will come under judicial scrutiny and which legislative acts contain “clear” congressional intent. Besides the West Virginia case, the Court applied the major questions doctrine in two COVID-19 era cases. First, the Court ruled that the Centers for Disease Control and Prevention was not authorized to impose a ban on evictions during the pandemic. Also, the Court found that the Occupational Safety and Health Administration could not require large companies to have their workers undergo frequent COVID testing or get vaccinated.

Generally speaking, those who advocate limiting the power of the federal bureaucracy will be in favor of the major questions doctrine, while those who favor an active government operating through administrative agencies will be against the doctrine. At

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the same time, the doctrine holds that, without “clear congressional authority,” a regulatory agency is prohibited from acting on pressing national issues such as climate change, health care, trade policy, artificial intelligence regulation, and so on. This places the burden of addressing these issues squarely on Congress.

CASE 22.2—CRITICAL THINKING 1.

Legal Environmental. Fox introduced into evidence two receipts showing that he had properly disposed of oily water on shore and indicated that he had more. Should Fox have been exonerated on the basis of these receipts? Why or why not?

Solution: No, Fox should not have been exonerated on the basis of receipts showing that he properly disposed of oily water on shore. Regardless of the number of receipts for proper disposal that he might have been able to provide, they would not have contradicted the evidence of his improper disposal of oily water in the circumstances of this case.

There might have been many times that Fox did not violate the Clean Water Act (although since the defendant did not offer more receipts into evidence, there was little proof). But the charge here followed an inspection of Fox’s boat Native Sun by the U.S. Coast Guard, presumably during a different time frame than the dates of the receipts. The conviction was based on the testimony of the Native Sun’s crew and others. The jury was “rational” to be skeptical of Fox’s contradictory suggestion of where the oily water in the vessel’s bilge had gone.

2. Ethical. Was it ethical for Fox to attempt to avoid responsibility for the violation of the Clean Water Act by blaming his crew? Discuss.

Solution: No, it was not ethical for Fox to attempt to avoid responsibility for the violation of the Clean Water Act by blaming his crew.

According to the vessel’s log, Fox knew of the leaking oil in the engine room and of the crew’s unsuccessful efforts to clean it up. The oil contaminated the bilge water. This water was sucked through a submersible pump lacking an oil-water separator and discharged overboard. Fox bought an enzyme-based detergent to disperse the sheen created by the discharged oily water. An inspection of the boat by the U.S. Coast Guard, and the testimony at trial of the boat’s crew, supported the jury’s verdict that Fox was guilty of the charge. As the appellate court stated, “a rational jury could conclude that Fox, knowing that there was excessive oil in the bilge and that regular pumping of the bilge was occurring without an oil-water-separator, knowingly directed his crew to discharge oily bilge water.”

Fox’s attempt to avoid the conviction by assigning blame for the violation to his crew could have had a negative impact on the members of the crew, as well as on their dependents—their families and others—and the community of fishing boat crews generally. If the defense had succeeded, mistrust among those negatively impacted toward boat owners and operators would have been only the first effect. The mistrust could have seriously damaged the economies of the crew’s families and others. Fox’s success might have influenced other boat owners and operators to avoid liability for any infraction or unfortunate circumstance by blaming their crews. This would have caused only more discontent. © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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CASE 22.3—CRITICAL THINKING 1.

Legal Environment. Should a no-fault owner of a hazardous waste site have been held liable for any of the clean-up costs? Why or why not?

Solution: Yes, a so-called “no-fault” owner of a hazardous waste site should be held liable for a portion of the cleanup costs in some circumstances.

Factors supporting the imposition of this liability include that the owner has actual control over, and responsibility for, the site. The owner may be best able to bear the costs through insurance or an increase in the price of its products or services spread over time and charged to its customers. A cleanup can increase the market value of the property—if the government contributes to the costs of the cleanup, the owner of the property obtains the benefit of the increased value.

Otherwise, taxpayers will have to bear the costs. Taxpayers have in fact paid about 90 percent of the costs to clean up hazardous waste sites. (Note, however, that CERCLA created a trust fund to pay for the remedial costs at certain sites, and the tax supporting that trust fund comes from a levy on the industries historically associated with many of the hazardous disposal sites.)

No, a “no-fault” owner of a hazardous waste site should not be held liable for any of the cleanup costs. To impose liability, more should be required than simple ownership and the general authority to control that comes with it. At a minimum there should be active involvement in the disposal activity. This position encourages the redevelopment of such sites.

Thus, liability should not be imposed when an owner has done due diligence before purchasing a site and does not know, or have reason to know, at the time of acquisition of any contamination. Liability can reasonably be avoided by providing in a contract with the previous owner for its indemnity, or the acquisition of government funds or insurance to cover cleanup costs. Simple investment in a business without authority or control over its operations or the decisions relating to waste disposal should absolve the investor unless piercing the veil is warranted. And liability might be avoided in such circumstances as an act of God or war, or an act by a third party with no connection to the owner.

Of course, those responsible for problems caused by the disposal of hazardous waste should bear the costs and responsibility for remedying the harm. CERCLA imposes strict liability on past and present owners and operators of facilities where hazardous substances have been disposed, as well as on the generators and the transporters of the waste who participated in the selection of the disposal site.

2. Economic. Before purchasing the mill, Valbruna obtained $500,000 in government funds to cover some of the clean-up costs. Should this sum be applied to reduce the amount of its recovery from Joslyn? Explain.

Solution: Yes, the sum that Valbruna obtained from the government to cover some of the cleanup costs at the steel mill should be applied to reduce the amount of Valbruna’s recovery from Joslyn. Not reducing the recovery amount would inequitably

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permit a “double recovery” for Valbruna of the sum represented by the government funds.

Valbruna, as a rational buyer, likely discounted the potential value of the steel mill site by the amount that the company would need to cover the cleanup costs. This expected liability would reduce the price for the property that the buyer was willing to pay. Valbruna’s pre-purchase negotiation for government funds to cover some of the costs indicates that the potential buyer factored the amount into the price for the property. Thus, the government funds could be considered part of the price for the site.

CHAPTER REVIEW PRACTICE AND REVIEW Residents of Lake Caliopa, Minnesota, began noticing an unusually high number of lung ailments among the local population. Several concerned citizens pooled their resources and commissioned a study to compare the frequency of these health conditions in Lake Caliopa with national averages. The study concluded that residents of Lake Caliopa experienced four to seven times the rate of frequency of asthma, bronchitis, and emphysema as the population nationwide.

During the study period, citizens began expressing concerns about the large volume of smog emitted by the Cotton Design apparel manufacturing plant on the outskirts of town. The plant was located two miles east of town beside the Tawakoni River and employed seventy workers. Just downstream on the Tawakoni River, the city of Lake Caliopa operated a public waterworks facility, which supplied all city residents with water.

The Minnesota Pollution Control Agency ordered Cotton Design to install new equipment to control air and water pollution. Later, citizens brought a lawsuit in a Minnesota state court against Cotton Design, alleging that various respiratory ailments were caused or compounded by smog from Cotton Design’s factory. Using the information presented in the chapter, answer the following questions.

1.

Under the common law, what would each plaintiff be required to identify in order to be given relief by the court?

Solution: To establish a common law cause of action for nuisance, each plaintiff would have to identify a distinct harm caused by the pollution that was separate from that affecting the general public. In other words, they would need to show how each of them was individually harmed by Cotton Design’s emissions.

2. What standard for limiting emissions into the air does Cotton Design’s pollutioncontrol equipment have to meet?

Solution: Major stationary sources of air pollution are required to use the maximum achievable control technology to reduce emissions. The EPA issues guidelines as to what equipment meets this standard, and the guidelines may vary depending on whether the source is new or existing and whether the area is clean or polluted.

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3. If Cotton Design’s emissions violated the Clean Air Act, how much can the EPA assess in fines per day?

Solution: For violations of the Clean Air Act in these circumstances, the EPA can assess fines of about $100,000 per day.

4. What information must the city send to every household that it supplies with water?

Solution: Under the Safe Drinking Water Act, as amended, suppliers of drinking water are required to send an annual statement describing the source of its water, the level of contaminants contained in the water, and any possible health concerns associated with the contaminants. Thus, the city must send a statement that includes this information every year to every household it provides with water.

PRACTICE AND REVIEW: DEBATE THIS 1.

The courts should reject all cases in which the wetlands in question do not consist of actual bodies of water that exist during the entire year.

Solution: The Army Corps of Engineers brings numerous cases to court each year that involve areas that are not “wet” part of the year. Some are only wet during storms.

Congress never created wetlands legislation to protect such areas. The U.S. is a huge country such that the U.S. Army Corps of Engineers should spend its scarce resources protecting real wetlands—bodies of water that are wet all year long.

If the government were restricted to protecting just bodies of water that were wet all year long, it would be forced to allow development in fragile animal habitats. Because the United States is so big, developers do not need to encroach on areas that the U.S. Army Corps of Engineers has deemed wetlands. They have plenty of other locations for development. All wetlands legislation has as its goal to protect our environment.

ISSUE SPOTTERS 1.

Resource Refining Company’s plant emits smoke and fumes. Resource’s operation includes a short railway system, and trucks enter and exit the grounds continuously. Constant vibrations from the trains and trucks rattle nearby residential neighborhoods. The residents sue Resource. Are there any reasons why the court might refuse to issue an injunction against Resource’s operation? Explain. (See Common Law Actions.)

Solution: Yes. On the ground that the hardships that would be imposed on the polluter and on the community are greater than the hardships suffered by the residents, the court might deny an injunction. If the plant is the core of the local economy, for instance, the residents may be awarded only damages.

2. ChemCorp generates hazardous wastes from its operations. Disposal Trucking Company transports those wastes to Eliminators, Inc., which owns a hazardous waste disposal site.

Eliminators sells the property on which the disposal site is located to Fluid Properties, Inc. If the Environmental Protection Agency cleans up the site, from whom can it recover the cost? (See Toxic Chemicals and Hazardous Wastes.)

Solution: The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 regulates the cleanup of hazardous waste disposal sites. Any potentially

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responsible party can be charged with the entire cost of cleaning up a site. Potentially responsible parties include the person that generated the waste (ChemCorp), the person that transported the waste to the site (Disposal), the person that owned or operated the site at the time of the disposal (Eliminators), and the current owner or operator of the site (Fluid). A party held responsible for the entire cost may be able to recoup some of it in a lawsuit against other potentially responsible parties.

BUSINESS SCENARIOS AND CASE PROBLEMS 22–1. Clean Air Act. Current scientific knowledge indicates that there is no safe level of exposure to a cancer-causing agent. In theory, even one molecule of such a substance has the potential for causing cancer. Section 112 of the Clean Air Act requires that all cancer-causing substances be regulated to ensure a margin of safety. Some environmental groups have argued that all emissions of such substances must be eliminated if a margin of safety is to be reached. Such a total elimination would likely shut down many major U.S. industries. Should the Environmental Protection Agency totally eliminate all emissions of cancer-causing chemicals? Discuss. (See Air Pollution.)

Solution: The courts have held that “safe” does not mean absolutely risk-free. Some small level of risk of cancer might be permitted under the Clean Air Act. Consequently, the EPA has not eliminated all emissions of such cancer-causing substances. Rather, the EPA has regulated such substances so that the average risk of cancer from emissions is no greater than 1 in 100,000 or 1 in 1,000,000, depending on the relevant statute, economic feasibility, and other factors.

22–2. Environmental Laws. Fruitade, Inc., is a processor of a soft drink called Freshen Up. Fruitade uses returnable bottles, which it cleans with a special acid to allow for further beverage processing. The acid is diluted with water and then allowed to pass into a navigable stream. Fruitade crushes its broken bottles and throws the crushed glass into the stream.

Discuss fully any environmental laws that Fruitade may have violated. (See Water Pollution.)

Solution: Fruitade has violated a number of federal environmental laws if such actions are being taken without a permit. First, because the dumping is in a navigable waterway, the Rivers and Harbors Appropriations Act has been violated.

Second, the Clean Water Act, as amended, has been violated. This act is designed to make the waters safe for swimming, to protect fish and wildlife, and to eliminate discharge of pollutants into the water. Both the crushed glass and the acid violate this act.

Third, the Toxic Substances Control Act was passed to regulate chemicals that are known to be toxic and could have an effect on human health and the environment.

The acid in the cleaning fluid or compound could come under this act.

22–3. Spotlight on the Grand Canyon—Environmental Impact Statement. The U.S. National Park Service (NPS) manages the Grand Can yon National Park in Arizona under a management plan that is subject to periodic review. In 2006, after nine years of background work and the completion of a comprehensive environmental impact statement, the NPS issued a new management plan for the park. The plan allowed for the continued use of rafts on the Colorado River, which runs through the Grand Canyon. The number of rafts was limited, however. Several environmental groups criticized the plan because they felt that it still © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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allowed too many rafts on the river. The groups asked a federal appellate court to overturn the plan, claiming that it violated the wilderness status of the national park. When can a federal court overturn a determination by an agency such as the NPS? Explain. [River Runners for Wilderness v. Martin, 593 F.3d 1064 (9th Cir. 2010)] (See Government Regulations.)

Solution: When an agency acts in an arbitrary and capricious manner, then the court has grounds for intervention. Otherwise, the court defers to the expertise of the agency, as revealed in the record. Here, the environmental impact statement (EIS) was comprehensive and the National Park Service (NPS) had credible reason to believe that the use of rafts on the river did not damage the wilderness status of portions of the Park. Since the NPS acted within its statutory guidelines and followed proper procedure in its decision-making, the court would not intervene in the decision of the agency. The appellate court found that the plaintiffs had failed to establish that the NPS acted in an arbitrary and capricious manner when it adopted the plan.

22–4. Superfund. A by-product of phosphate fertilizer production is pyrite waste, which contains arsenic and lead. From 1884 to 1906, seven phosphate fertilizer plants operated on a forty-three-acre site in Charleston, South Carolina. Planters Fertilizer & Phosphate Co. bought the site in 1906 and continued to make fertilizer. In 1966, Planters sold the site to Columbia Nitrogen Corp. (CNC), which also operated the fertilizer plants. In 1985, CNC sold the site to James Holcombe and J. Henry Fair. Holcombe and Fair subdivided and sold the site to Allwaste Tank Cleaning Inc., Robin Hood Container Express, the city of Charleston, and Ashley II of Charleston, Inc. Ashley spent almost $200,000 cleaning up the contaminated soil. Who can be held liable for the cost? Why? [PCS Nitrogen Inc. v. Ashley II of Charleston LLC, 714 F.3d 161 (4th Cir. 2013)] (See Toxic Chemicals and Hazardous Wastes.)

Solution: All of the parties are potentially liable for the costs to clean up the site.

Under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), also known as Superfund, when a release or a threatened release of hazardous chemicals occurs at a site, persons who may be held liable for the cost of cleaning up the site include the person who generated the wastes disposed of at the site, the person who transported the waste to the site, the person who owned or operated the site at the time of the disposal, and the current owner or operator. These are referred to as potentially responsible parties. Liability cannot be avoided through transfer of ownership. Thus, selling a site does not relieve the seller of liability, and the buyer also becomes liable. Liability also extends to those that merge with or buy corporations that have violated CERCLA. Liability under Superfund is usually joint and several. CERCLA authorizes a party who has incurred cleanup costs to bring a contribution action against any other person who is liable or potentially liable for a percentage of the costs.

In this problem, persons who generated the wastes disposed of at the site include the original seven phosphate fertilizer plants, Planters Fertilizer & Phosphate Co., and Columbia Nitrogen Corp. The current owners or operators of the site include Allwaste Tank Cleaning Inc., Robin Hood Container Express, the city of Charleston, and Ashley II of Charleston, Inc. Under the principles stated above, liability extends to all of these parties for at least a portion of the cleanup costs. Because liability cannot be avoided through transfer of ownership, Holcombe and Fair may also be liable. Ashley could bring an action against any or all of these parties to recover.

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In the actual case on which this problem is based, on Ashley’s claim to recover the costs from PCS Nitrogen Inc. (CNC’s successor after a series of mergers) and PCS’s claims for contribution against the other parties, the court found PCS a potentially responsible party jointly and severally liable. The court found the other parties, including Ashley, potentially responsible parties, each liable for an allocated portion of the costs. The U.S. Court of Appeals for the Fourth Circuit affirmed.

22–5. Business Case Problem with Sample Answer—Environmental Impact Statements. The U.S. Forest Service (USFS) proposed a travel management plan (TMP) for the Beartooth Ranger District in the Pryor and Absaroka Mountains in the Custer National Forest of southern Montana. The TMP would convert unauthorized user-created routes within the wilderness to routes authorized for motor vehicle use and would permit off-road “dispersed vehicle camping” within 300 feet of the routes, with some seasonal restrictions. The TMP would ban cross-country motorized travel outside the designated routes. Is an environmental impact statement required before the USFS implements the TMP? If so, what aspects of the environment should the USFS consider in preparing it? Discuss. [Pryors Coalition v. Weldon, 551 Fed.Appx. 426 (9th Cir. 2014)] (See Government Regulations.)

Solution: Yes. An environmental impact statement (EIS) is required before the U.S. Forest Service (USFS) implements its proposed travel management plan (TMP). An EIS must be prepared for every major federal action that significantly affects the quality of the environment. An action is “major” if it involves a substantial commitment of resources. An action is “federal” if a federal agency has the power to control it. An EIS must analyze (1) the impact on the environment that the action will have, (2) any adverse effects on the environment and alternative actions that might be taken, and (3) irreversible effects that the action might generate.

Here, the resources committed to the implementation of the USFS’s TMP could include the resources within the wilderness and the time and effort dedicated by the agency.

The wilderness resources would include the soil, the vegetation, the wildlife, the wildlife habitat, any threatened or endangered species, and other natural assets impacted by the TMP. The agency’s resources would include its funds and its staff—to design, map, maintain, and enforce the TMP. These resources seem substantial. Of course, the implementation of the TMP is federal because the USFS has the power to control it.

As for the aspects of the environment that the agency might consider in preparing the EIS, some of the important factors are listed above—the soil, vegetation, wildlife, wildlife habitat, and threatened or endangered species. Other aspects of the environment impacted by the TMP might include cultural resources, historical resources, and wilderness suitability, and other authorized uses of the wilderness.

There is a potential for impact by every route that is designed to be part of the system, as well as the “dispersed vehicle camping” to be permitted on the terrain.

In the actual case on which this problem is based, the USFS considered all of the factors listed above. The agency then issued an EIS and a decision implementing the TMR. On a challenge to the EIS, a federal district court issued a judgment in the USFS’s favor. The U.S. Court of Appeals for the Ninth Circuit affirmed. “The Forest Service took the requisite hard look at the environmental impacts.”

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22–6. The Clean Water Act. ICG Hazard, LLC, operates the Thunder Ridge surface coal mine in Leslie County, Kentucky, under a National Pollutant Discharge Elimination System permit issued by the Kentucky Division of Water (KDOW). As part of the operation, ICG discharges selenium into the surrounding water. Selenium is a naturally occurring element that endangers aquatic life at a certain concentration. KDOW knew when it issued the permit that mines in the area may produce selenium but did not specify discharge limits for the element in ICG’s permit. Instead, the agency imposed a one-time monitoring requirement, which ICG met. Does ICG’s discharge of selenium violate the Clean Water Act? Explain. [Sierra Club v. ICG Hazard, LLC, 781 F.3d 281 (6th Cir. 2015)] (See Water Pollution.)

Solution: No. ICG’s discharge of selenium into the water surrounding ICG’s coal mining operation does not violate the Clean Water Act (CWA). The CWA established a permit system—the National Pollutant Discharge Elimination System (NPDES)—to regulate discharges from point sources of pollution. Under the NPDES system, a polluter must obtain a permit before discharging wastes into surface waters. An authorized state agency can issue an NPDES permit for a discharge that will not violate water-quality standards.

In this problem, KDOW, an authorized state agency, issued an NPDES permit to ICG for the operation of a surface coal mine. KDOW knew when it issued the permit that mines in the area could produce selenium but did not specify effluent limits for the element in ICG’s permit. Instead, the agency included a one-time monitoring requirement, which ICG met. In these circumstances, ICG obtained the required permit from an authorized agency before discharging selenium and complied with the permit’s monitoring condition, which qualifies as a “water-quality standard.”

In the actual case on which this problem is based, Sierra Club filed a suit in a federal district court against ICG, alleging that the discharge of selenium violated the CWA. The court issued a judgment in ICG’s favor. The U.S. Court of Appeals for the Sixth Circuit affirmed. ICG’s permit shielded the company from liability for the discharge.

22–7. Wetlands and Environmental Impact Statements. Preparation of an environmental impact statement is required under Minnesota law when a proposed project might eliminate a public waters wetland. Huber Engineered Woods, LLC, wanted to construct a manufacturing facility west of the city of Cohasset. The facility would occupy almost 160 acres of agricultural and undeveloped lands. The construction would involve filling or evacuating twenty-six of thirty-one wetlands. Nonetheless, the city decided that it was not necessary to prepare a detailed environmental impact statement (EIS). A realtor challenged the city’s decision not to prepare an EIS. Should the Court of Appeals of Minnesota rule in favor of the city or the realtor? Explain. [In re City of Cohasset’s Decision on Need for an Environmental Impact Statement for Proposed Frontier Project, 985 N.W.2d 370 (Ct. App. MN 2023)] (See Water Pollution.)

Solution: The court of appeals of Minnesota ruled in favor of the realtor. An environmental impact statement (EIS) is required under Minnesota law whenever there is the elimination of a public waters’ wetland. The appeals court concluded that the record lacked substantial evidence to support the city’s determination that no public waters wetlands would be eliminated. Further, the appeals court ruled that the city’s determination that the project did not have the potential for significant environmental effects through wetlands’ filling was in error.

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A QUESTION OF ETHICS 22–7. The IDDR Approach and Superfund. Sevenson Environmental Services was hired to clean up a Superfund site in Manville, New Jersey, where the soil was contaminated with creosote. (Creosote is a flammable oily mixture of chemical compounds often used for preserving wood or as a pesticide.) The Environmental Protection Agency (EPA) funded the effort. Sevenson’s project manager was Gordon McDonald, whose responsibilities included hiring subcontractors through a bidding process. McDonald made the contamination look as severe as possible to pressure rival bidders to bid higher. He showed the bids to one of the competitors, John Bennett, and permitted him to submit a new “lowest” bid in exchange for a kickback of $13.50 per ton of cleaned soil. Bennett won the contract, which (because of McDonald’s manipulation of the bidding process) covered the amount of the kickback. The scheme was eventually discovered, and Bennett was charged with criminal fraud. [United States v. Bennett, 688 Fed.Appx. 169 (3d Cir. 2017)] (See Toxic Chemicals and Hazardous Wastes.)

1.

What was Bennett’s ethical dilemma in this case? Using the IDDR approach, discuss and evaluate the actions he chose to resolve it.

Solution: Bennett’s chief ethical dilemma in this case was whether to agree to McDonald’s kickback scheme or forego the Sevenson contract. Bennett’s choice to participate in the scheme was not successful, in terms of its impact on the stakeholders.

In this problem, Sevenson was hired to clean up a Superfund site in Manville, New Jersey. The Environmental Protection Agency (EPA) paid for the work.

McDonald, Sevenson’s bid and project manager, exaggerated the contamination of the site to pressure the bidders to bid more. He showed the bids to Bennett and allowed him to submit a second lower bid in exchange for a kickback.

Bennett thereby won the contract. But the scheme was eventually revealed, and he was charged with criminal fraud.

Those stakeholders included Bennett, his company, and its owners, employees, and customers. Other stakeholders were Sevenson and its personnel, and the families of those persons, as well as the Environmental Protection Agency (EPA) and taxpayers whose funds cover the EPA’s contracts. Bennett might have required the deal to meet the needs of some of the stakeholders. By engaging in the conspiracy with Sevenson’s representative McDonald, Bennett guaranteed that he would win the contract. Of course, the scheme violated whatever legal and ethical standards could be brought to bear on it. These included the civil and criminal violation provisions of Superfund and other federal and state laws, as well as government and professional ethical codes.

Also applicable would be personal standards of integrity, honesty, and trust.

Bennett could have chosen instead to expose the scheme to the EPA, which would have met the applicable legal and ethical standards. He might have chosen simply to refuse to participate, which would have achieved at least the appearance of compliance. Neither choice is likely to have won his company the Manville site contract. But either choice would not have as fully disappointed the stakeholders as the decision to become complicit.

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Bennett’s decision to agree to pay the bribes won him the contract, and thus satisfied at least some of the stakeholders in the short term. But the scheme’s eventual unraveling came with a heavy price. As part of the sanctions, Bennett could be ordered to disgorge all profits, including amounts representing kickback payments. He and his company could also be enjoined from all future EPA projects. And he could be imprisoned. These results would not likely satisfy any of the stakeholders. The government and taxpayers might feel vindicated, however.

In the actual case on which this problem is based, Bennett was convicted, sentenced to sixty-three months in prison, fined, and ordered to pay restitution of more than $3.8 million. The U.S. Court of Appeals for the Third Circuit affirmed the conviction and the punishment.

2. Suppose that Bennett had refused the kickback scheme, had won the contract with an honest low bid, and had been paid for the work, but that he had not actually performed his part of the deal. Would this situation have been ethically distinct from the true facts? Explain.

Solution: The question poses a situation in which Bennett refuses the kickback scheme, wins the contract with an honest low bid, and is paid for the work. But he does not actually perform his part of the deal. This situation would not have been ethically distinct from the true facts.

As set out in the answer to the previous question, Bennett was offered the contract to clean up a contaminated Superfund site in exchange for his company’s participation in a kickback scheme. The scheme violated all of the legal and ethical standards that applied. These included provisions of Superfund and other laws, government and professional ethical codes, and personal standards of integrity, honesty, and trust.

Ultimately, this decision worked to the satisfaction of none of the stakeholders.

The scheme was discovered. Bennett was charged, convicted, and sentenced in a federal court for his part in the conspiracy. A federal appellate court upheld this outcome.

Had Bennett chosen not to participate in the scheme and won the contract honestly, but failed to do the work, for which he had nonetheless been paid, the ethical effect would have been the same. The payment would have been sought and accepted on false pretenses, as false as the deceitful kickback conspiracy undertaken in the actual facts. In other words, it would have violated all of the same legal and ethical standards.

The stakeholders, too, would have been the same. And on the inevitable discovery of the non-performance, the outcome would have worked to the satisfaction of none of them. The partial exception would have been again, of course, the government and taxpayers.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 22: Environmental Law

TIME-LIMITED TEAM ASSIGNMENT 22–9. Environmental Laws. Moonbay is a home-building corporation that primarily develops retirement communities. Farmtex, Inc., owns a number of livestock feedlots in Sunny Valley, where animals are fattened up before being slaughtered. Moonbay purchased 20,000 acres of farmland in the same area and began building and selling homes on this acreage. In the meantime, Farmtex continued to expand its feedlot business. Eventually, only five hundred feet separated the two operations. Because of the odor and flies from the feedlots, Moonbay found it difficult to sell the homes in its development. (See Common Law Actions, Air Pollution, and Water Pollution.)

1.

The first team will decide what common law theory Moonbay could use to seek an injunction to prevent Farmtex from operating its feedlot in the vicinity of the retirement home development. Would a court be likely to grant an injunction?

Solution: As a general rule, property owners are free to use their property in any manner desired so long as such use is not in violation of any statute or does not interfere with the property rights of others. When a use interferes with another’s property rights, an action for an injunction may be brought on the common law theory of the tort of nuisance. In a nuisance case, the court tries to balance the interests of the parties.

In this problem, in a presumably undeveloped rural area, Farmtex owned and operated livestock feedlots. Moonbay bought adjacent or nearby land on which to build and sell houses. Because of the odor and flies from the feedlots, Moonbay found it difficult to sell the houses. To enjoin Farmtex from operating its feedlots in the vicinity of the houses, Moonbay could file a nuisance suit.

A court hearing this case would be likely to grant an injunction in Moonbay’s favor—at least to the extent of ordering Farmtex to move its operation further from the houses—because that would allow both parties (and the buyers of the houses) to continue to enjoy their property.

2. The second team will determine if Farmtex has violated any federal environmental laws pertaining to air pollution. Consider that the air in a feedlot environment is often saturated with ammonia and methane gas (which are released from animal wastes).

Solution: Under the Clean Air Act, the Environmental Protection Act lists regulated hazardous air pollutants that are emitted from stationary sources.

These include substances that are known to cause harm to humans. Major sources of air pollution are required to use maximum achievable control technology to reduce emissions.

In this question, Farmtex owns and operates livestock feedlots. According to the facts, a feedlot environment is often saturated with ammonia and methane gas. If the presence or release of these wastes in the Farmtex operations violates federal (or state) environmental law, the operator could be required to use maximum achievable control technology to reduce emissions.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 22: Environmental Law

In the circumstance of a feedlot, this technology can consist of relatively simple, inexpensive abatement measures. Water sprinkling, surface mulch (such as wheat straw or sawdust), and frequent manure harvesting, for example, can mitigate the concentrations of wastes and their emissions.

3. The third team will analyze whether the runoff from Farmtex’s feedlot violates the Clean Water Act because it frequently contains antibiotics, ammonia, and other chemicals. What pollution-control equipment standard would apply to Farmtex?

Solution: Under the Clean Water Act, point sources of pollution are required to obtain permits before discharging waste into navigable waters. Discharges of various wastes are based on the technology available or controlling them. The equipment standard is the best practical control technology, with a timetable for its installation.

Here, Farmtex owns and operates livestock feedlots. According to the facts, the operation frequently contains antibiotics, ammonia, and other chemicals. If the feedlot is not managed properly, of course, runoff from its operation can pollute public water, threatening wildlife and undercutting its use for recreation and drinking.

The Clean Water Act requires proper management practices to control the runoff. The use of settling basins or filter systems can the amount of waste in runoff from entering surface and ground water.

4. The fourth team will look at the competing interests of the feedlot operators and the builders in this dispute. Is there any solution to the problem that will satisfy both sides? Explain your answer Solution: As a general rule, property owners are free to use their property in any manner desired so long as such use is not in violation of any statute or does not interfere with the property rights of others. When such use interferes with another’s property rights, an action may be brought as a tort of nuisance.

In such a case, the court would try to balance the interests of both parties.

In the dispute framed by this problem, Farmtex owns and operates livestock feedlots. Near these feedlots, Moonbay bought land on which to build and sell houses. Because of the odor and flies from the feedlots, however, Moonbay finds it difficult to sell the houses.

If Moonbay were to sue Farmtex on the same ground, a court hearing this case would be likely to enjoin the operator. In a nuisance suit involving a similar issue, the court enjoined a feedlot operator from continuing its operation near a residential development but required the developer to pay damages to the operator to cover the costs of moving or shutting down. This resolution might be imposed in Moonbay’s case. And government enforcement of environmental laws against Farmtex could include requiring such mitigation measures as those noted in the answers to the previous questions. These steps could also add to the effect of satisfying both sides to this dispute.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 23: Real and Personal Property

Solution and Answer Guide

Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 23: Real and Personal Property

TABLE OF CONTENTS Critical Thinking Questions in Features .............................................................................1 Building Analytical Skills—Result and Reasoning ............................................................... 1 Ethical Issue—Value Judgment ............................................................................................. 2 Adapting the Law to the Online Environment—Critical Thinking.................................... 2 Critical Thinking Questions in Cases ................................................................................. 2 Case 23.1—Critical Thinking.................................................................................................... 2 Case 23.2—Critical Thinking ................................................................................................... 3 Case 23.3—Critical Thinking ................................................................................................... 3 Chapter Review ................................................................................................................... 4 Practice and Review................................................................................................................. 4 Practice and Review: Debate This ......................................................................................... 5 Issue Spotters ........................................................................................................................... 5 Business Scenarios and Case Problems .............................................................................. 6 A Question of Ethics ............................................................................................................... 12 Time-Limited Team Assignment .......................................................................................... 13

CRITICAL THINKING QUESTIONS IN FEATURES BUILDING ANALYTICAL SKILLS—RESULT AND REASONING 1.

The McKeags satisfied the first three requirements for adverse possession.

1.

Their possession was actual and exclusive because they used the beach and prevented others from doing so, including the Finleys.

2. Their possession was open, visible, and notorious because they made improvements to the beach and regularly kept their belongings there.

3. Their possession was continuous and peaceable for the required ten years because they possessed the property for more than four decades.

Having satisfied these three requirements, will the McKeags be able to establish adverse possession?

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 23: Real and Personal Property

Solution: No. The McKeags’ possession was not hostile and adverse, which is the fourth requirement. The Finleys provided substantial evidence that they had given the McKeags permission to use the beach. Rather than reject the Finleys’ permission as unnecessary, the McKeags sometimes said nothing and other times seemingly affirmed that the property belonged to the Finleys (by asking permission to mow grass, for instance). Thus, because the McKeags did not satisfy all four requirements, they cannot establish adverse possession.

ETHICAL ISSUE—VALUE JUDGMENT 1.

At what point might the predicted benefits of a new private commercial endeavor outweigh the constitutional requirement of a taking only for public use?

Solution: Some people would say never—that the predicted benefits of a commercial endeavor never justify the taking of real property owned by individuals when it is not truly for public use. Others would say that if the predicted benefits were large enough, taking for private development is justified.

ADAPTING THE LAW TO THE ONLINE ENVIRONMENT—CRITICAL THINKING 1.

How might a couple who enjoy purchasing digital goods together avoid property division issues in the event of a divorce?

Solution: Couples can specify in pre-nuptial agreements which party gets what if divorce occurs. As they add new digital property, they can create addenda to their existing agreements.

CRITICAL THINKING QUESTIONS IN CASES CASE 23.1—CRITICAL THINKING 1.

Ethical. In not disclosing the house’s reputation to Stambovsky, was Ackley’s behavior unethical? If so, was it unethical because she knew something he did not, or was it unethical because of the nature of the information she omitted? What if Ackley had failed to mention that the roof leaked or that the well was dry—conditions that a buyer would normally investigate? Explain your answer.

Solution: Yes, her behavior was unethical. Using a values-based ethical approach, it would be wrong for Ackley to withhold information that she knew—or should have known—would potentially impact Stambovsky’s decision to purchase the house.

Ethically, a party should disclose all material facts to the other party in negotiating contracts. [This answer could go either way depending on the ethical models and theories discussed in class.]

2. Legal Environment. Why did the court decide that applying the strict rule of caveat emptor was inappropriate in this case? How would applying this doctrine increase costs for the purchaser?

Solution: The court ruled that applying the rule of caveat emptor was inappropriate in this case because it would be very difficult for a buyer from out of town to learn that

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 23: Real and Personal Property

a house was supposedly haunted, even though the seller had publicized the nature of the home. Placing the burden on the buyer to discover paranormal problems with a home would force the buyer to undertake a searching and costly review to determine whether the home and its reputation were free of ghosts.

CASE 23.2—CRITICAL THINKING 1.

Social. Explain why Green Genie’s challenge to Detroit’s zoning regulations probably would have failed on substantive due process grounds.

Solution: Recall that substantive due process protects private citizens or businesses from government actions that are “arbitrary or capricious.” With regard to zoning regulations, this means that such regulations must be rationally related to public health, safety, and welfare.

The premise behind Detroit’s “drug free zone” was that any drug related activity posed a threat to children. Indeed, many municipalities have zoning regulations in place that prohibit recreational and medical marijuana facilities from operating near places where children are likely to be present such as schools and public parks. These zoning restrictions are certainly not “capricious or arbitrary” and it would be very difficult to argue that they are not rationally related to public health, safety, and welfare.

2. What If the Facts Were Different? Suppose Green Genie had been able to provide incontrovertible evidence that its proposed store site was more than 1,000 feet from the school’s boundary. Would it automatically be granted the permit to sell medical marijuana?

Solution: No. Detroit’s zoning regulations for medical marijuana facilities required the process to start with a “determination” concerning the proposed facility’s location. The determination would establish whether the proposed medical marijuana facility was located within a “drug free zone,” defined as an area “within 1,000 radial feet of the zoning lot” containing any one of a number of sensitive places, including a school.

If Detroit’s Building, Safety Engineering, and Environmental Department (BSEED) determined that the application complied with this location requirement, the application would be transferred to the city’s Medical Marihuana Review Committee.

The review committee would send the application back to BSEED with “a host of discretionary zoning considerations specific to the project at issue.” Then, BSEED would review that application a final time and decide whether to approve it. The key word here is “discretionary.” So, even if the proposed facility was outside a drug-free zone, the Review Committee or BSEED had the discretionary power to reject the application.

CASE 23.3—CRITICAL THINKING 1.

Legal Environment. If a snow blower is left in your garage for an extended period of time, as the possessor, you could permit the owner to leave it there indefinitely. Under the statute applied in this case, could you become the owner of the snow blower? Explain.

Solution: Yes, under the Minnesota statute applied in the Zephier case, you could become the owner of a snow blower that is left in your garage for an extended period

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 23: Real and Personal Property

by its original owner. To obtain the ownership rights, you would have to meet the requirements of the statute.

As the appellate court stated in the case, Minnesota Statutes Section 345.75 “lays out a clear, concise process to obtain ownership of abandoned tangible personal property.”

It specifies that six months must pass before property may be deemed abandoned.

The possessor of the property must give its owner thirty days’ notice before the rights to ownership can transfer to the possessor. And the notice must be personal service or certified.

By following these steps, you could obtain the ownership rights to the snow blower. In the Zephier case, of course, Agate, Oliver’s possessor, did not provide the requisite notice to Zephier, Oliver’s owner, which led the appellate court to conclude that she could reclaim the dog.

2. Economic. Why is a possessor of abandoned property allowed to obtain ownership rights to it? Discuss.

Solution: Property is a fiscal resource. Its use has economic benefits. These facts provide the policy to support the transfer of ownership rights to abandoned property from its prior owner to its possessor.

By transferring the ownership rights to abandoned property, its possessor can put it to use, in contrast to the apparent disuse or non-use by its prior owner. If this use generates income, the transfer of rights may also support the collection of revenue by the state in the form of taxes from an ascertainable, asserted, and locatable owner. Or its new owner may sell the property, which is another way to generate income (and taxes). And if there is no declared owner, the state can acquire the property and sell it.

For example, if the ownership rights to an abandoned car were transferred to its possessor, the new owner could drive it or sell it. Either activity would likely result in income to the state in the form of personal property, gas, or sales taxes. And if the state became the possessor and subsequent owner, the car could be sold with the proceeds going into the state’s coffers.

CHAPTER REVIEW PRACTICE AND REVIEW Vern Shoepke purchased a two-story home from Walter and Eliza Bruster in the town of Roche, Maine. The warranty deed did not specify what covenants would be included in the conveyance. The property was adjacent to a public park that included a popular Frisbee golf course. (Frisbee golf is a sport similar to golf but using Frisbees.) Wayakichi Creek ran along the north end of the park and along Shoepke’s property. The deed allowed Roche citizens to walk across a five-foot-wide section of the lot beside Wayakichi Creek as part of a two-mile public trail system. Teenagers regularly threw Frisbee golf discs from the walking path behind Shoepke’s property over his yard to the adjacent park. Shoepke habitually shouted and cursed at the teenagers, demanding that they not throw objects over his yard. Using the information presented in the chapter, answer the following questions.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 23: Real and Personal Property

1.

What is the term for the right of Roche citizens to walk across Shoepke’s land on the trail?

Solution: Here, the right conveyed by the deed is nonpossessory and gives citizens a limited right to travel on a trail over Shoepke’s land. Therefore, it is an easement.

2. What covenants would most courts infer were included in the warranty deed that was used in the property transfer from the Brusters to Shoepke?

Solution: A warranty deed conveys the most covenants, or promises of any other deed. The seller promises title to the property, the power to convey it, that there are no encumbrances against the property, and that the buyer’s possession will not be disturbed (i.e., quiet enjoyment).

3. Suppose that Shoepke wants to file a trespass lawsuit against some teenagers who continually throw Frisbees over his land. Shoepke discovers, however, that when the city put in the Frisbee golf course, the neighborhood homeowners signed an agreement that limited their right to complain about errant Frisbees. What is this type of promise or agreement called in real property law?

Solution: A promise between a group of landowners protecting the interests of individuals who come onto the land and the interests of the owners of nearby land is called a restrictive covenant. The agreement may “run with the land” even if Shoepke was not a party to it.

PRACTICE AND REVIEW: DEBATE THIS 1.

Under no circumstances should a local government be able to condemn property in order to sell it later to real estate developers for private use.

Solution: The Constitution’s Fifth Amendment is clear about giving the power of condemnation to government. Such power can only be used to take private property for public use (and with appropriate compensation, of course). When a local government uses this taking power to condemn property that it later sells to private developers for a shopping mall development or nicer houses and apartments, that government is acting in violation of our Constitution.

Sometimes, local governments face tough economic times and must do what they can to raise more taxes. If a blighted area is never going to “upgrade” itself, then local governments should be able to step in and speed up the process by a taking, as provided for in the Fifth Amendment to the U.S. Constitution. The public good will be served in two ways: the blighted area will be transformed for the better and the local government will obtain more taxes revenues from the businesses located in this area.

ISSUE SPOTTERS 1.

Bernie sells his house to Consuela under a warranty deed. Later, Delmira appears, holding a title to the house that is better than Consuela’s. Delmira wants Consuela off the property. What can Consuela do? (See Transfer of Real Property Ownership.)

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 23: Real and Personal Property

Solution: This is a breach of the warranty deed’s covenant of quiet enjoyment.

Consuela can sue Bernie and recover the purchase price of the house, plus any damages.

2. Grey owns a commercial building in fee simple. Grey transfers temporary possession of the building to Haven Corporation. Can Grey enter the building without Haven Corporation’s permission? Explain. (See Ownership and Other Interests in Real Property.)

Solution: Yes. Owners of fee simples have the most rights possible—they can give the property away, sell it, transfer it by will, use it for almost any purpose, possess it to the exclusion of all the world, or, as in this case, transfer possession for any period of time. The party to whom possession is transferred can also transfer this interest (usually only with the owner’s permission) for any lesser period of time.

BUSINESS SCENARIOS AND CASE PROBLEMS 23–1. Eminent Domain. Some Catholic organizations proposed to build a private independent middle school in a run-down neighborhood in Philadelphia, Pennsylvania. They asked the Redevelopment Authority of the City of Philadelphia to acquire specific land for the project and sell it to them for a nominal price. The land included a house on North Eighth Street owned by Mary Smith, whose daughter Veronica lived there with her family. The Authority offered Smith $12,000 for the house and initiated a taking of the property. Smith filed a suit in state court against the Authority, admitting that the house was a “substandard structure in a blighted area,” but arguing that the taking was unconstitutional because its beneficiary was private. The Authority asserted that only the public purpose of the taking should be considered, not the status of the property’s developer. On what basis can a government entity use the power of eminent domain to take property? What are the limits to this power? How should the court rule? Why? (See Limitations on Property Rights.)

Solution: Under the U.S. Constitution, the government has the right to acquire possession of real property for public use. The power of eminent domain is limited to the taking of property for public use, though the United States Supreme Court (in the Kelo decision) has allowed the taking of private property to further economic development in blighted, or distressed, areas. The idea is that allowing the government to take private property and give it to private developers benefits the public by revitalizing the community. Since the Kelo case, however, there has been a lot of controversy and backlash over this use of the government’s power of eminent domain.

Many people and courts feel that it is unfair for the government to take one person’s property and give it to another.

In this problem, although Smith admitted that the property was substandard and in a distressed area, the government intended to take the property to be used to develop a private religious school, which is not in the public interest. Moreover, a government taking of private property to support or develop a religious school may be an unconstitutional violation of the Constitution’s establishment clause. Smith therefore has a strong argument that the taking was not for a public purpose at all, and the court should rule in Smith’s favor on the issue.

23–2. Zoning. The county intends to rezone an area from industrial use to residential use.

Land within the affected area is largely undeveloped, but nonetheless it is expected that the proposed action will reduce the market value of the affected land by as much as 50 percent. © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 23: Real and Personal Property

Will the landowners be successful in suing to have the action declared a taking of their property, entitling them to just compensation? Why or why not? (See Limitations on Property Rights.)

Solution: Because all land use regulations necessarily limit the ways in which property may be used, a regulation by itself will not generally be considered a compensable taking. Compensation will be required only if the regulation itself is found to be overly burdensome and thus subject to the requirement that just compensation be paid.

Rezoning the land from industrial use to commercial use—despite the expected reduction in its market value—would probably not be considered a compensable taking because it would not prevent the owner from using the land for any reasonable income-producing or private purpose.

23–3. Duties of the Bailee. Atka owns a valuable speedboat. She is going on vacation and asks her neighbor, Regina, to store the boat in one stall of Regina’s double garage. Regina consents, and the boat is moved into the garage. Regina, in need of some grocery items for dinner, drives to the store. She leaves the garage door open, as is her custom. While she is at the store, the speedboat is stolen. What standard of care is required in this situation? Has Regina breached that duty? (See Personal Property.)

Solution: This bailment was created primarily for the benefit of the bailor. Under these circumstances the bailee can be expected to use only slight care in the protection of the bailed property from loss or damage. Because the bailee’s custom was to leave the garage door open on short trips, her failure to close and lock the garage door might not necessarily be a breach of the care required here. Thus, the bailee may have no liability to the bailor. One could reasonably argue, however, that the bailee should have at least closed her garage door so as not to make the bailor’s boat obvious to any potential thief who walked by.

23–4. Business Case Problem with Sample Answer—Ownership and Other Interests in Real Property. Arthur and Diana Ebanks owned three properties in the Cayman Islands in joint tenancy. With respect to joint tenancies, Cayman law is the same as U.S. law. When the Ebanks divorced, the decree did not change the tenancy in which the properties were held. On the same day as the divorce filing, Arthur executed a will providing that “any property in my name and that of another as joint tenants . . . will pass to the survivor, and I instruct my Personal Representative to make no claim thereto.” Four years later, Arthur died. His brother Curtis, the personal representative of his estate, asserted that Arthur’s interest in the Cayman properties was part of the estate. Diana said that the sole interest in the properties was hers.

Who do the Cayman properties belong to? Why? [Ebanks v. Ebanks, 41 Fla. L. Weekly D291, 198 So.3d 716 (2 Dist. 2016)] (See Ownership and Other Interests in Real Property.)

Solution: Under the law of the Cayman Islands, and according to Arthur’s will, the three disputed Cayman properties became Diana’s sole property when Arthur died. In a joint tenancy, each of two or more persons owns an undivided interest in the property.

A deceased joint tenant’s interest passes to the surviving joint tenant or tenants. The right of a surviving joint tenant to inherit a deceased joint tenant’s ownership interest is referred to as a right of survivorship.

In this problem, Arthur and Diana owned three properties in the Cayman Islands in a joint tenancy. (For this purpose, Cayman law is the same as U.S. law.) When the couple divorced, the decree did not change the tenancy. Later, Arthur died. His will provided

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 23: Real and Personal Property

that any property he held in joint tenancy “will pass to the survivor, and I instruct my Personal Representative to make no claim thereto.” Despite this provision, his brother Curtis, personal representative of his estate, asserted that Arthur’s interest in the properties was part of the estate. Diana said that the properties were entirely hers.

Clearly, Diana is correct. Under the applicable principles of ownership of property by joint tenancy, Arthur’s interest in the properties passed to Diana as the sole surviving joint tenant. And under the terms of Arthur’s will, his interest passed to her (and Curtis was “to make no claim thereto”).

Joint tenants can transfer their rights to the property without the consent of the other joint tenants. The new owner becomes a tenant in common, however, not a joint tenant. Or a joint tenant’s interest can be levied against to satisfy the tenant’s judgment creditors. In either case, the joint tenancy terminates, and the remaining owners hold the property as tenants in common. Neither of these situations occurred in the facts of this problem, however.

In the actual case on which this problem is based, Curtis asked the Florida state court that issued the couple’s divorce to declare that Arthur’s interest in the Cayman properties was part of his estate. The court ruled in the estate’s favor and ordered Diana to sell the properties or buy Arthur’s interest in them. A state intermediate appellate court reversed the order.

23–5. Eminent Domain. In Tarrytown, New York, Citibank operated a branch that included a building and a parking lot with thirty-six spaces. Tarrytown leased twenty-one of the spaces from Citibank for use as public parking. When Citibank closed the branch and decided to sell the building, the public was denied access to the parking lot. After a public hearing, the city concluded that it should exercise its power of eminent domain to acquire the twenty-one spaces to provide public parking. Is this an appropriate use of the power of eminent domain?

Suppose that Citibank opposes the plan and alternative sites are available. Should Tarrytown be required to acquire those sites instead of Citibank’s property? In any event, what is Tarrytown’s next step? Explain. [Citibank, N.A. v. Village of Tarrytown, 149 A.D.3d 931, 52 N.Y.S.3d 398 (2 Dept. 2017)] (See Limitations on Property Rights.)

Solution: Yes. It is an appropriate use of the power of eminent domain for Tarrytown to acquire property to provide public parking. If the property owner objects, and alternate sites are available, Tarrytown is not required to acquire those sites instead.

Tarrytown’s next step is to bring a proceeding to obtain title to the property. In a second proceeding, a court will determine the fair value of the land.

The government can exercise its right of eminent domain to take land. After the government determines that a particular parcel of land is necessary for public use— property may be taken only for public use—a judicial proceeding is brought to obtain title to the land. In another proceeding, the court determines the land’s fair value (generally equal to its market value).

Here, Citibank owned land that included a building and a parking lot with thirty-six parking spaces. Tarrytown leased twenty-one of the spaces for use as public parking.

When Citibank decided to sell the building, the public was denied access to the parking lot. After a public hearing, Tarrytown concluded that it should exercise its power of eminent domain to acquire the twenty-one spaces to provide public parking.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 23: Real and Personal Property

The determination to take, or condemn, a portion of Citibank’s property is rationally related to the stated public purpose. That other sites may be available is not basis to stop the taking—the government has broad discretion to decide which land fulfills its purpose.

In the actual case on which this problem is based, Citibank filed a suit in a New York state court against Tarrytown, seeking a review of the determination to take Citibank’s property. The court confirmed the determination.

23–6. Bailor’s Duty to Reveal Defects. Anastasio Guerra agreed to loan his pickup truck to Gina Mandujano so that she could go grocery shopping in exchange for her making him lunch.

When Mandujano drove out of the store’s parking lot, the truck’s power steering failed. Her wrist was caught in the spokes of the steering wheel, and she was severely injured. Guerra knew that there was a problem with his truck’s steering, but he thought he had fixed the problem by replenishing the steering fluid. He did not believe that the issue was dangerous and did not tell Mandujano about it. What type of bailment existed between Guerra and Mandujano? What standard of care did the bailor (Guerra) owe the bailee (Mandujano)? Was the duty breached? Who is liable for the cost of Mandujano’s injury? Explain. [Mandujano v.

Guerra, 2018 WL 1611458 (Mich.App. 2018)] (See Personal Property.)

Solution: The bailment of the truck between Guerra and Mandujano was a bailment for the mutual benefit of the parties. As the bailor, Guerra owed a duty to exercise reasonable care in advising Mandujano of the truck’s defects. He breached this duty and is therefore liable in negligence for the cost of her injury resulting from the breach.

In this problem, Guerra agreed to loan his truck to Mandujano for her shopping in exchange for his lunch. While Mandujano was driving the truck, its power steering failed, causing her to be injured. Guerra knew that there was a problem with the steering, but he had not told Mandujano.

There are three types of ordinary bailments, distinguished by who receives a benefit from the bailment. This distinction determines the rights and liabilities of the parties, and the standard of care required of each.

Guerra might argue that the bailment of his truck to Mandujano was an arrangement for the sole benefit of the bailee. There was no promise to pay cash or even to buy gas to borrow the truck to go shopping. But Mandujano said that she would make Guerra lunch in exchange for the use of his truck. This categorizes the trade as a bailment for the mutual benefit of both parties.

In a mutual-benefit bailment, the bailee owes a duty to exercise a reasonable degree of care towards the bailed property. If the property is returned damaged, the bailee’s failure to have exercised appropriate care can result in tort liability. This obligation is excused if the property is damaged through no fault of the bailee—i.e., if the bailee shows that she exercised due care. In this problem, assuming that the truck was returned damaged, Guerra might contend that Mandujano failed to drive it with appropriate care and that consequently her injury was her fault. By showing that the truck was damaged as a consequence of the defective steering, Mandujano could refute this contention.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 23: Real and Personal Property

A bailor has the duty to provide property that is free of known defects that could cause injury to the bailee. In a mutual-benefit bailment, the bailor must reveal all of the property’s known defects, which include defects the bailor could have discovered with reasonable diligence. A bailor who fails to give this notice can be liable in negligence to the bailee for resulting injuries. Here, Guerra did not tell Mandujano about the truck’s defective power steering. Thus, he is likely liable in negligence for her resulting injuries.

In the actual case on which this problem is based, Mandujano filed a suit in a Michigan state court against Guerra to recover for her injury. The court denied Guerra’s motion for summary judgment. A state intermediate appellate court affirmed the denial because “there is a triable issue regarding whether defendant fulfilled his duty to warn plaintiff of any known defects.”

23–7. Transfer of Ownership. Craig and Sue Shaffer divided their real property into two lots.

They enclosed one lot with a fence and sold it to the Murdocks. The other lot was sold to the Cromwells. All of the parties orally agreed that the fence marked the property line. Over the next three decades, each lot was sold three more times. Houses were built, and the lots were landscaped, including lilac bushes planted against the fence. Later, one of the owners removed the fence, and another built a shed next to where it had been. On the lot with the shed, the Talbots erected a carport abutting the lilac bushes. The Nielsons bought the adjacent lot from the Parkers and measured it according to the legal description in the deed.

They discovered that the Talbots’ carport encroached on the Nielsons’ property by about thirteen feet. Are the Nielsons entitled to damages for their “loss” of this property from any party? Explain. [Nielson v. Talbot, 163 Idaho 480, 415 P.3d 348 (2018)] (See Transfer of Real Property Ownership.)

Solution: The Nielsons might be entitled to damages from the Parkers. A sale of real estate involves a transfer of ownership, often with specific warranties. Possession and title to land are passed from person to person by means of a deed. A deed must include a legally sufficient description of the land. Different types of deeds provide different levels of protection against defects of title, such as occurs when a third person has an interest in the property.

In this problem, the Shaffers divided their property into two lots, enclosed one with a fence, and sold both. The Shaffers and their buyers orally agreed that the fence marked the property line. Over the next three decades, through successive owners, houses were built on the lots, and landscaping was added, including lilac bushes planted against the fence. One owner removed the fence. Another built a shed next to where it had been. On the lot with the shed, the Talbots erected a carport abutting the lilac bushes. The Nielsons bought the lot with the bushes from the Parkers and measured it, following the legal description in the deed. This revealed that the Talbots’ carport encroached on the Nielsons’ property by about thirteen feet.

The Shaffers and their buyers intended the fence—which was later replaced by the lilac bushes, and still later by the shed and carport—to be the boundary line of the lots. All of the ensuing owners maintained this line. Under these circumstances, it would have been unreasonable for a buyer to assume the purchase of part of a shed or a carport on a neighbor’s lot. In other words, the original oral agreement about the property line came to be evidenced by landmarks on the ground, and the landmarks

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 23: Real and Personal Property

provided the subsequent buyers with notice of the location of the line. Thus, the Nielsons would not be entitled to damages from the Talbots for the encroachment of the carport onto the Nielsons’ lot.

Of course, as part of each sale, a legal description was included in the deed, which the sellers and buyers believed reflected the fence or landscaping line as the property line.

There was a discrepancy between the descriptions and the beliefs, however, which the Nielsons discovered when they measured their lot. This discrepancy could serve as the basis for a breach of warranty claim against the Parkers, from whom the Nielsons bought their lot.

In the actual case on which this problem is based, the Nielsons filed a suit in an Idaho state court against the Talbots and the Parkers to recover the value of the property “lost.” The court issued a summary judgment in favor of the Talbots, and ordered them to prepare new and accurate legal descriptions of both lots. The Idaho Supreme Court affirmed the judgment and order, and remanded the case for a determination of the Nielsons’ breach of warranty claim against the Parkers.

27–8. Licensee or Tenant? Valley Mill Camp, Inc. operated a children’s camp near Germantown, Maryland. Evelyn McEwan was the camp’s president. Her son, Bruce Uthus, had worked for the camp for twenty years. During that time, Uthus lived rent-free in an apartment unit on the campgrounds. Following a family dispute, Valley Mill fired Uthus and his mother requested that he vacate the apartment. Uthus refused. Valley Mill sued Uthus for trespass.

Uthus countered that this legal action must fail because he was a tenant of Mill Valley, not a licensee. Is this dispute controlled by license law or landlord-tenant law? Explain your answer. [Uthus v. Valley Mill Camp, Inc., 246 A.3d 1225, 472 Md. 378 (2021)] (See Ownership and Other Interests in Real Property.)

Solution: The Court of Appeals of Maryland found that Uthus was a licensee of Valley Mill, not a tenant. The appeals court explained that a landlord-tenant relationship usually exists when one person resides on property owned by another person by virtue of a written agreement that includes payment of rent and the exclusive possession of the renter. That is, the landlord cannot enter the property without the permission of the tenant, even though the landlord owns the land.

None of these factors applied to Uthus’s situation. He claimed possession of the apartment based on the fact that he had lived there for approximately twenty years.

But, the court noted, “residency alone” is not “dispositive of the question” before it.

More importantly, Uthus made no rental payments and Mill Valley did not demand any rental payments. Furthermore, no evidence existed to show that Uthus had an exclusive right to possess the apartment, as is customary in a landlord-tenant relationship. As a result, “Uthus was not a tenant of Valley Mill, but an employee who was allowed to reside in the apartment on the campgrounds during the tenure of his employment.”

When Uthus was asked to vacate the premises, as a licensee he no longer had a right to occupy the apartment. By remaining in the apartment without Valley Mill’s consent, he was interfering with Valley Mill’s possessory interest in its property. Therefore, the court concluded, Valley Mill’s common law trespass action against Uthus was legally sound.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 23: Real and Personal Property

A QUESTION OF ETHICS 23–9. The IDDR Approach and Abandoned Property. Mansoor Akhtar lived rent-free in the basement of Anila Dairkee’s duplex in Minneapolis, Minnesota, for more than a year. When Dairkee asked Akhtar to move out, he refused. She changed the locks and advised him to remove his property from the duplex. But he did not. About a year later, while Dairkee was staying in New York, her father had the basement cleaned out. When Dairkee returned four months later, she learned that her father had disposed of Akhtar’s property. Akhtar filed a suit in a Minnesota state court against Dairkee, alleging that she had wrongfully disposed of his property. [Akhtar v. Dairkee, 2017 WL 1210140 (Minn.App. 2017)] (See Personal Property.)

1.

Dairkee contended that Akhtar had abandoned his property. Is she correct?

Explain.

Solution: Yes. Anila Dairkee is correct that Mansoor Akhtar had abandoned his property. Property that has been discarded by its true owner, who has no intention of reclaiming title to it, is abandoned property. Someone who finds abandoned property acquires title to it, and this title is good against the whole world, including the original owner. An owner of property who shows no attempt to claim it can be held to have abandoned it.

In this problem, Akhtar lived in the basement of Dairkee’s duplex. She asked him to move out, but he refused. She changed the locks on the duplex and told him to remove his property. He did not. About a year later, while she was gone, her father had the basement cleaned without her knowledge or consent.

Months later, Akhtar filed a suit against Dairkee, alleging that she had wrongfully disposed of his property. She responded that he had abandoned it.

Here, Dairkee notified Akhtar to remove his property before she exercised rights of ownership over it. He did not reclaim it within a reasonable time. The property could justifiably be considered abandoned. Dairkee’s father disposed of it, arguably on her behalf and in her best interest. Akhtar does not have a supportable claim against her.

In the actual case on which this problem is based, the court concluded that Akhtar had abandoned his property and therefore was not entitled to damages.

A state intermediate appellate court affirmed this judgment.

2. Using the Review step of the IDDR approach, consider whether Dairkee’s handling of Akhtar’s property was ethical.

Solution: Anila Dairkee acted ethically with respect to Mansoor Akhtar’s property. Property that has been discarded by its true owner, who has no intention of reclaiming title to it, is abandoned property. Someone who finds abandoned property acquires title to it, and this title is good against the whole world, including the original owner.

The IDDR approach begins with an Inquiry to identify the ethical dilemma, the stakeholders, and the relevant standards in a set of facts. Dairkee’s dilemma was what to do with Akhtar’s property. He lived in her duplex until she asked him to move out. He refused. She changed the locks and asked him to remove

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 23: Real and Personal Property

his property. He did not—in fact, for about a year, he also made no claim to it.

The stakeholders included Dairkee, Akhtar, and potential tenants or buyers of Dairkee’s duplex. The relevant standard might be identified as a duty to take reasonable care of the property.

In the IDDR approach, the Inquiry is followed with a Discussion of actions to address the issue, the actions’ strengths and weaknesses, and their consequences and effects. Dairkee might have left the property locked in her duplex indefinitely. She might have removed it immediately. Or she might have disposed of it after a reasonable time that would have evidenced Akhtar’s abandonment of it. The first action would have inconvenienced all of the stakeholders, except perhaps Akhtar who, however, appeared to have abandoned his property. To be rid of the property immediately would have ignored the possibility that Akhtar might yet soon retrieve it. This would have been in complete derogation of any standard of care. Disposing of the property after a reasonable time would give due consideration to the interests of all of the stakeholders.

The IDDR step after the Discussion is a Decision on the actions and a statement of its reasons. About a year after Akhtar was locked out of the duplex, Dairkee’s father removed Akhtar’s property. By that time, Akhtar could reasonably be thought to have abandoned the property. Dairkee’s father acted without her knowledge or consent, but likely on her behalf and in her interest.

The final step of the IDDR approach is a Review of the success or failure of the actions to resolve the issue and satisfy the stakeholders. Because Dairkee notified Akhtar to remove his property and kept it available for his retrieval for about a year, her conduct with respect to the property was unquestionably ethical. Once the property was removed, she regained full use of her duplex, which could also be enjoyed by any other stakeholders.

TIME-LIMITED TEAM ASSIGNMENT 23–10. Adverse Possession. The Wallen family owned a cabin on Lummi Island in the state of Washington. A driveway ran from the cabin across their property to South Nugent Road. Floyd Massey bought the adjacent lot and built a cabin on it in 1985. To gain access to his property, Massey used a bulldozer to extend the driveway, without the Wallens’ permission but also without their objection. In 2010, the Wallens sold their property to Wright Fish Company.

Massey continued to use and maintain the driveway without permission or objection.

In 2016, Massey sold his property to Robert Drake. Drake and his employees continued to use and maintain the driveway without permission or objection, although Drake knew it was located largely on Wright’s property. In 2018, Wright sold its lot to Robert Smersh. The next year, Smersh told Drake to stop using the driveway. Drake filed a suit against Smersh, claiming an easement by prescription (which is created by meeting the same requirements as adverse possession). (See Transfer of Real Property Ownership.)

1.

The first team will decide whether Drake’s use of the driveway meets all of the requirements for adverse possession (easement by prescription).

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 23: Real and Personal Property

Solution: An easement arises by prescription when one person exercises an easement, such as a right-of-way, on another person’s land without the landowner’s consent, and the use is apparent and continues for the length of time required by the applicable statute of limitations. In much the same way, title to property may be obtained by adverse possession. The requirements are that the possession of the property must be actual and exclusive—sole occupancy or use, for example—the possession must be open, notorious, and visible—not secret— and the possession must be continuous and peaceable for a required period of time. In this problem, Drake’s use of the driveway meets all of the requirements for either easement by prescription or adverse possession. Drake’s use was open and notorious, over a uniform route, and continuous and uninterrupted for a ten-year period. And the permission of the owners was not sought when the driveway was extended, nor did they object to the extension.

2. The second team will determine how the court should rule in this case and why. Does it matter that Drake knew that the driveway was located largely on Wright’s (and then Smersh’s) property? Should it matter? Why or why not?

Solution: The court should rule in favor of Drake, whose use of the driveway satisfied all of the requirements for either easement by prescription or adverse possession, as explained in the answer to the previous question.

3. The third team will evaluate the underlying policy and fairness of adverse possession laws. Should the law reward persons who take possession of someone else’s land for their own use? Does it make sense to punish owners who allow someone else to use their land without complaint? Explain.

Solution: As stated in the text, there are a number of public-policy reasons for the adverse possession doctrine. These include society's interest in resolving boundary disputes, determining title when title to property is in question, and ensuring that real property remains in the stream of commerce. More fundamentally, policies behind the doctrine include rewarding possessors for putting land to productive use and punishing owners who sit on their rights too long and do not take action when they see adverse possession.

4. The fourth team will consider how the laws governing adverse possession (easement by prescription) vary from state to state. To acquire title through adverse possession, a person might be required to possess the property for five years in one state, for instance, and for twenty years in another. Are there any legitimate reasons for such regional differences? Would it be better if all states had the same requirements?

Explain your answers.

Solution: The laws governing adverse possession vary from state to state—mostly by the period of time the possession must be adverse to vest title to the property in the adverse possessor.

There are legitimate reasons for such differences, not the least of which is the authority of each state to determine the requirements of adverse possession for itself. The public policy reasons for the doctrine of adverse possession (listed in the text) can also provide grounds for differences among the states. The necessity of resolving boundary disputes, determining title to property when title is in

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 23: Real and Personal Property

question, and ensuring that real property remains in the stream of commerce can vary in urban, suburban, and rural environments, between sparsely and heavily populated areas, over remote and developed tracts, and so on. Rewarding adverse possessors for putting land to productive use may also have a higher priority in some locations, particularly those with distant, absentee owners.

If all of the states had the same requirements, there would be a consistency and predictability to the law of adverse possession. And such circumstances could lend themselves to cross-jurisdictional judicial precedents.

But there does not seem to be a good policy reason for complete uniformity in the requirements of adverse possession. Nor would there be a significant advantage to it—real property cannot generally be physically transferred between jurisdictions, unlike goods and negotiable instruments, the exchange of which benefits from the Uniform Commercial Code adopted in all, or most, of the states. And the policy reasons, stated in the previous paragraph, also provide support for different requirements.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 24: Antitrust Law and Promoting Competition

Solution and Answer Guide

Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 24: Antitrust Law and Promoting Competition

TABLE OF CONTENTS Critical Thinking Questions in Features .............................................................................1 Landmark in the Law—Application to Today’s Legal Environment ................................. 1 Adapting the Law to the Online Environment—Critical Thinking.................................... 2 Ethical Issue—Value Judgment ............................................................................................. 2 Critical Thinking Questions in Cases ................................................................................. 3 Case 24.1—Critical Thinking ................................................................................................... 3 Case 24.2—Critical Thinking ................................................................................................... 4 Case 24.3—Critical Thinking ................................................................................................... 5 Chapter Review ................................................................................................................... 6 Practice and Review................................................................................................................. 6 Practice and Review: Debate This ......................................................................................... 7 Issue Spotters ........................................................................................................................... 7 Business Scenarios and Case Problems .............................................................................. 8 A Question of Ethics ............................................................................................................... 12 Time-Limited Team Assignment .......................................................................................... 14

CRITICAL THINKING QUESTIONS IN FEATURES LANDMARK IN THE LAW—APPLICATION TO TODAY’S LEGAL ENVIRONMENT 1.

The U.S. Department of Justice and state attorneys general investigate many complaints and prosecute a number of corporations for Sherman Act violations each year. How would the principles of this law motivate a state attorney general to block a merger between two large supermarket chains?

Solution: A state attorney general who blocked the merger of two large supermarket chains would be doing so to prevent a potential monopoly. As rivals, the two companies are incentivized to seek competitive advantages against each other by lowering prices or improving services or taking some other steps that benefit consumers. If the chains join forces, they will no longer be in competition and will

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 24: Antitrust Law and Promoting Competition

therefore have less incentive to offer those benefits. According to the principles of the Sherman Antitrust Act, consumers will ultimately suffer from this lack of competition.

Washington State’s attorney general voiced similar concerns when he filed suit to block a merger between Kroger and Albertsons, two of the largest supermarket chains in the United States. If the merger was allowed to proceed, the state attorney general contended, the combined Kroger-Albertsons would “enjoy a near monopoly” in many parts of the state. Executives of the two supermarket chains countered that their merger was necessary to compete with nontraditional rival food-sellers such as Amazon, Costco, and Walmart.

ADAPTING THE LAW TO THE ONLINE ENVIRONMENT—CRITICAL THINKING 1.

Given that consumers seem to benefit from the free or low-cost services provided by Big Tech, should these companies have limits placed on them by federal antitrust regulators?

Explain your answer.

Solution: The arguments against taking drastic antitrust measures against companies such as Apple, Amazon, Meta (Facebook), and Google are fairly straightforward. Not only have these companies innovated at a historic pace over the past several decades, but they have also created products and services that are highly valued by consumers.

Additionally, these products and services are often free or offered at dramatically lower costs than was the case previously. Therefore, Big Tech should be celebrated for developing such a successful business model rather than punished as a threat to American consumers.

The counterargument, as detailed in the feature, focuses on competition. So, when Facebook, Instagram, and WhatsApp were three distinct entities, they were forced to compete with each other, which stimulated innovation, benefitting the consumer. Also, though it is not always evident, market concentration limits consumer choice. For example, Tile is a small company that makes Bluetooth trackers that help users find lost items such as wallets, keys, or smartphones. To function, the tracker needs to be paired with an app. Like almost every app developer, Tile needs to sell its product through the popular Apple App Store. Tile also needs to be able to pair its product with Apple’s iPhone, which dominates the smartphone market.

Apple, however, has its own “Find My” tracking app, which comes preloaded, at no cost, on Apple devices and cannot be deleted. By owning the platform—the Apple App Store—and stocking it with its own products, Apple is in an enviable situation when it comes to competitors such as Tile. In the words of one Tile executive, Apple is like a sports team that owns the ball, the field, the stadium, and the league and can change the rules whenever it pleases.

ETHICAL ISSUE—VALUE JUDGMENT 1.

If you were a business owner, would you consider dynamic pricing for your goods or services? Why or why not?

Solution: Wendy’s experience with dynamic pricing highlights one reason that a business would reject using it: negative publicity. For many consumers, demand-driven pricing just does not seem fair. From time to time, Uber and Lyft have had to defend

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 24: Antitrust Law and Promoting Competition

themselves against charges of obvious price gouging. In one instance, for example, the rideshare companies’ fares rose dramatically in the immediate vicinity of a subway shooting in Brooklyn, New York. Retailers have also been harshly criticized for raising the prices of necessities in areas affected by natural disasters such as hurricanes.

On the positive side, dynamic pricing maximizes a business’ revenue by permitting it to charge higher prices during times of high demand and lower prices during times of low demand. Extreme examples aside, dynamic pricing also appears to benefit consumers in some circumstances. With Uber, for example, a surge in prices during rush hours incentivizes more drivers onto the road to take advantage of higher pay. This, in turn, reduces wait times for passengers (who are willing to pay the higher prices) during busy periods. Furthermore, airlines and hotels don’t only raise their prices during peak travel periods. Businesses in these industries also lower their prices during the “off season,” giving budget travelers opportunities that might not otherwise exist.

Indeed, Wendy’s did not disavow dynamic pricing when responding to criticism of its alleged “price gouging.” Instead, the company promised to offer discounted prices at “slower times of the day.” This strategy of making goods and services cheaper when demand is low to attract more customers is commonplace. Lots of bars and restaurants, for example, offer reduced prices at “happy hour” or during the “early bird special.” Movie theaters offer matinee discounts, trains have “peak” and “off-peak” fares, and, as already mentioned, airline tickets cost less when air traffic slows.

Dynamic pricing opportunities will only increase as artificial intelligence algorithms emerge to track factors such as competitors’ prices, real-time supply and demand, and the locations of potential consumers due to special events, time of day, and the weather. Businesses using this strategy need to be aware, then, that as much as consumers appreciate discounted low-demand prices, they instinctively mistrust “surged” high-demand prices. To counteract this suspicion, companies must be transparent about how they use dynamic pricing and why they are doing so.

CRITICAL THINKING QUESTIONS IN CASES CASE 24.1—CRITICAL THINKING 1.

Legal Environment. Could the defendants have successfully argued that their agreement to rig bids and allocate the market for public school bus transportation was reasonable, or that it could be justified on an economic or business basis? Explain.

Solution: No, the defendants in this case could not have argued successfully that their conspiracy was reasonable or justifiable on an economic or business basis.

The defendants’ scheme involved deciding which company would submit the low bid for a given route. This conspiracy led to specific charges of bid rigging and market allocation. Bid rigging is a form of price fixing. Both price fixing and market allocation are per se violations of Section 1 of the Sherman Act, considered so blatantly anticompetitive as to be inherently illegal. In fact, a bid-rigging scheme is sometimes thought to be more harmful than ordinary price fixing because it is easier for the participants to enforce against each other.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 24: Antitrust Law and Promoting Competition

To convict on those charges, a jury is not required to assess whether the defendants’ conduct is somehow reasonable, justifiable, or cost-effective. Evidence of the supposed reasonableness of the conduct is arguably not even relevant. It would thus be within a court’s discretion to exclude any evidence that, in this case, for example, the defendants’ activity might not have cost the municipality much money.

2. Economic. Following the discovery of the bid-rigging scheme, Caguas held a presumably fair auction to award new school bus transportation contracts. Could the bids in the second auction provide a basis for determining the restitution amounts? Discuss.

Solution: Yes, the bids in the second, presumably fair, auction could provide a basis for setting the amounts of restitution that the defendants were ordered to pay.

Of course, the amount of restitution for an offense must be based on an actual loss, not, for example, on a defendant’s gain due to the offense. The amount must have a rational basis, but it does not have to be absolutely precise.

In this case, the ostensibly fair prices paid after the second auction are an appropriate benchmark. Market conditions would have been similar, given the short time between the rigged and fair auctions, assuming there were no intervening events to alter the supply or demand for bus services. The routes and the numbers of students were not likely to have been materially different. The court could reasonably presume that the two auctions were for approximately the same services in the same market.

CASE 24.2—CRITICAL THINKING 1.

Economic. What would be a fair and practical way to compensate those Washington consumers who had paid too much for packaged tuna because of the price-fixing conspiracy?

Solution: Washington State law authorizes the attorney general to bring antitrust enforcement actions “in the name of the state, or as parens patriae on behalf of persons residing in the state.” (Parens patriae is Latin for “parent of the homeland [or country]” and is a legal term implying that a court or governmental office acts on behalf of citizens.) This gives the attorney general not only the authority to bring lawsuits such as the one in the StarKist case but also the responsibility of determining how the damages should be distributed.

Here, Chicken of the Sea paid the state $500,000, and Bumble Bee’s former CEO paid the state $100,000. Instead of going through another trial, StarKist decided to settle for $4.1 million, with its parent company Dongwon Industries also paying a penalty of $450,000.

How to best apportion this approximately $5.1 million? Clearly, it would be unrealistic for every consumer who purchased a StarKist, Chicken of the Sea, or Bumble Bee tuna product to produce a receipt covering the relevant time period. So, Washington State Attorney General Bob Ferguson, who was preparing to run for governor, decided to split the amount among all Washington households at or below 175 percent of the federal poverty level. Examples of those who received checks from the state, whether they had purchased any overpriced tuna products or not, included a family of five with an annual household income of less than $61,495, a single parent with three children living on an income of $52,500 or less a year, a single parent with two children making

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$43,505 a year or less, a single parent of one with an annual income of $34,510 or less, and retired individuals or couples living on relatively low fixed incomes.

2. Legal. StarKist argued that because it was not in a legal partnership with its co-conspirators, it could not be held liable for their price-fixing profits. Why should this argument fail?

Solution: Recall that each partner in a partnership is jointly liable for the partnership’s obligations. Trying reverse logic, StarKist took this to mean that because it was not in a legal partnership with Chicken of the Sea and Bumble Bee, it could not be held liable for its co-conspirators’ obligations. Making this argument, StarKist relied on a previous United States Supreme Court case that seemed to hold that, applying equitable principles, only “partners in wrongdoing” could be liable for each other’s ill-begotten profits.

In the StarKist case, the Washington State appellate court rejected the idea that the Supreme Court’s reference to “partners in wrongdoing” could be understood as a requirement of actual legal partnership in such matters. Furthermore, under both federal and state case law, a conspiracy is a “partnership in a criminal purpose.” Given that StarKist pleaded guilty in federal court for its involvement in the conspiracy with Chicken of the Sea and Bumble Bee, the company was certainly a “partner in wrongdoing” with its co-conspirators. So, the Supreme Court precedent actually worked against StarKist and probably should not have been offered in the first place.

CASE 24.3—CRITICAL THINKING 1.

Legal Environment. A California statute provides for the waiver of fees at state university campuses for senior citizens. What distinguishes this differential treatment from the discriminatory practice at issue in the Candelore case?

Solution: The situation described in the question differs from the discriminatory practice at issue in the Candelore case because the university-fee waiver and other discounts for senior citizens (and others, in other circumstances) are independently justified by compelling social policy considerations expressed in, or at least evidenced by, legislative enactments.

Many statutes in California and elsewhere provide for differential treatment of senior adults. As in the situation of the fee waiver, some specifically provide for price discounts (such as reduced transit fares). In some instances, the limited earning capacities of seniors are cited as a justification for the price differential, but that, too, may reflect legislative limits on working conditions, hours, or opportunities for seniors.

These statutes reflect the judgment of a legislature to advance certain social policy objectives by treating seniors differently from the rest of the public. This supports the use of class-based criteria in those cases, without requiring a court to generalize about age and income in a way that runs counter to the individual nature of the rights secured to all persons by civil rights statutes.

2. Economic. Instead of personal characteristics such as age, could a business like Tinder use economic distinctions to broaden its user base and increase profits? Discuss.

Solution: Yes. A business’s interest in maximizing profits does not justify discrimination based on such personal characteristics as age. But this does not © 2026 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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preclude a business like Tinder from employing economic distinctions to increase its user base and profitability.

Those distinctions must be drawn in such a way that any customer could conceivably meet them, regardless of the customer’s age or other personal characteristics. For example, Tinder could establish different membership levels for its Tinder Plus service that would allow more budget-constrained customers, regardless of age, to access certain premium features at a lower price while offering additional features to those less budget-conscious users who are willing to pay more. Tinder could also offer discounts for buying several months of Tinder Plus in advance that would likewise allow budget-constrained users cheaper access to its premium features, without arbitrarily discriminating against older users on the basis of age.

CHAPTER REVIEW PRACTICE AND REVIEW The Internet Corporation for Assigned Names and Numbers (ICANN) is a nonprofit entity that organizes internet domain names. It is governed by a board of directors elected by various groups with commercial interests in the internet. One of ICANN’s functions is to authorize an entity to serve as a registrar for certain top-level domains (TLDs). ICANN entered into an agreement with VeriSign to provide registry services for the “.com” TLD in accordance with ICANN’s specifications. VeriSign complained that ICANN was restricting the services that VeriSign could make available as a registrar, blocking new services, imposing unnecessary conditions on those services, and setting the prices at which the services were offered.

VeriSign claimed that ICANN’s control of the registry services for domain names violated Section 1 of the Sherman Act. Using the information presented in the chapter, answer the following questions.

1.

Should ICANN’s actions be judged under the rule of reason or be deemed a per se violation of Section 1 of the Sherman Act? Explain.

Solution: Because ICANN is at a higher level of the distribution process than Verisign, it is imposing a vertical restraint. Since the vertical restraint that VeriSign complains of involves restrictions on services that VeriSign can offer (customer restrictions) and the setting of prices at which VeriSign can sell its services (resale price maintenance agreement), ICANN’s action should be judged under the rule of reason.

2. Should ICANN’s actions be viewed as a horizontal or a vertical restraint of trade?

Explain.

Solution: Because ICANN and VeriSign are firms at different levels in the distribution of top-level domain names, the actions that VeriSign complains of are a vertical restraint. ICANN, which is VeriSign’s superior, is allegedly placing restrictions on what services VeriSign can offer and how much it can charge for its services. This amounts to a vertical restraint.

3. Does it matter that ICANN’s directors are chosen by groups with commercial interests in the internet? Why or why not?

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 24: Antitrust Law and Promoting Competition

Solution: Yes. If ICANN’s leadership was chosen by those with a commercial interest in the internet, the directors might represent commercial interests with significant market power and restrain trade in violation of the Sherman Act. 4. If the dispute is judged under the rule of reason, what might be ICANN’s defense for having a standardized set of registry services that must be used?

Solution: ICANN’s best defense is to assert that a standardized set of registry services is efficient and has the effect of promoting competition rather than suppressing it. Under the rule of reason, as long as an agreement is merely regulatory and does not unreasonably restrain trade, it should not be considered illegal.

PRACTICE AND REVIEW: DEBATE THIS 1.

The internet and the rise of e-commerce have rendered our antitrust concepts and laws obsolete.

Solution: When our antitrust laws were written, the possibility of intense nationwide and even global competition was not possible. Today, in contrast, the internet has increased competition to such a degree that few, if any, sellers of most products can maintain prices that are significantly higher than prices offered by other sellers anywhere in the country. The internet has brought to the average consumer full information on prices, availability, and facts about most products—and at the speed of light. Also, anticompetitive behavior is readily denounced in blogs, websites, tweets, and social networking sites.

While it may be true that the internet has increased competitive forces throughout the world, we still need old-fashioned antitrust laws and enforcement of those laws. After all, big companies have become even bigger today. When an industry is highly concentrated, the relatively few sellers can still conspire to raise prices. When companies are worldwide in ownership and scope, they must be monitored to make sure that they are not using their market power to harm consumers with lower quality and/or higher prices. More than two hundred years ago in The Wealth of Nations, Adam Smith pointed out that whenever producers or sellers get together, they inevitably conspire to raise prices.

ISSUE SPOTTERS 1.

Under what circumstances would Pop’s Market, a small store in a small, isolated town, be considered a monopolist? If Pop’s is a monopolist, is it in violation of Section 2 of the Sherman Act? Why or why not? (See Section 2 of the Sherman Act.) Solution: Size alone does not determine whether a firm is a monopoly—size in relation to the market is what matters. A small store in a small, isolated town is a monopolist if it is the only store serving that market. Monopoly involves the power to affect prices and output. If a firm has sufficient market power to control prices and exclude competition, that firm has monopoly power. Monopoly power in itself is not a violation of Section 2 of the Sherman Act. The offense also requires an intent to acquire or maintain that power through anticompetitive means.

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 24: Antitrust Law and Promoting Competition

2. Maple Corporation conditions the sale of its syrup on buyers’ agreement to buy Maple’s pancake mix. What factors would a court consider to decide whether this arrangement violates the Clayton Act? (See The Clayton Act.) Solution: This agreement is a tying arrangement. The legality of a tying arrangement depends on the purpose of the agreement, the agreement’s likely effect on competition in the relevant markets (the market for the tying product and the market for the tied product), and other factors. Tying arrangements for commodities are subject to Section 3 of the Clayton Act. Tying arrangements for services can be agreements in restraint of trade in violation of Section 1 of the Sherman Act.

BUSINESS SCENARIOS AND CASE PROBLEMS 24–1. Sherman Act. An agreement that is blatantly and substantially anticompetitive is deemed a per se violation of Section 1 of the Sherman Act. Under what rule is an agreement analyzed if it appears to be anticompetitive but is not a per se violation? In making this analysis, what factors will a court consider? (See Section 1 of the Sherman Act.) Solution: Under what is called the rule of reason, anticompetitive agreements that allegedly violate Section 1 of the Sherman Act are analyzed with the view that they may, in fact, constitute reasonable restraints on trade. When applying this rule, the court considers the purpose of the arrangement, the powers of the parties to implement the agreement to achieve that purpose, and the effect or potential effect of the agreement on competition. Another possible factor that might be considered is whether the parties could have relied on less restrictive means to achieve their purpose. If the court deems that legitimate competitive benefits outweigh the anticompetitive effects of the agreement, it will be held lawful.

24–2. Tying Arrangement. John Sheridan owned a Marathon gas station franchise. He sued Marathon Petroleum Co. under Section 1 of the Sherman Act and Section 3 of the Clayton Act, charging it with illegally tying the processing of credit card sales to the gas station. As a condition of obtaining a Marathon dealership, dealers had to agree to let the franchisor process credit cards. They could not shop around to see if credit card processing could be obtained at a lower price from another source. The district court dismissed the case for failure to state a claim. Sheridan appealed. Is there a tying arrangement? If so, does it violate the law? (See The Clayton Act.) Solution: Yes. There is a tying arrangement, but it is not illegal. To violate the law, the seller of the tying product must have monopoly power. Marathon Petroleum Company has no monopoly power in the retail gasoline market, which is the tying product in this case. Marathon Petroleum Company has about 4 percent of the U.S. market. It tied credit-card processing to that, but it had no power in that market either.

24–3. Spotlight on Digital Music—Price Fixing. Together, EMI, Sony BMG Music Entertainment, Universal Music Group Recordings, Inc., and Warner Music Group Corp. produced, licensed, and distributed 80 percent of the digital music sold in the United States. The companies formed MusicNet to sell music to online services that sold the songs to consumers. MusicNet required all of the services to sell the songs at the same price and subject to the same restrictions. Digitization of music became cheaper, but MusicNet did not change its prices. Did MusicNet violate the antitrust laws? Explain. [Starr v. Sony BMG Music Entertainment, 592 F.3d 314 (2d Cir. 2010)] (See Section 1 of the Sherman Act.)

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 24: Antitrust Law and Promoting Competition

Solution: The participants in MusicNet appear to have engaged in a conspiracy to fix the prices (and terms) under which their music would be sold online. This may have violated the Sherman Act. The antitrust laws, including the Sherman Act, are intended to limit restraints of trade—agreements between firms that have the effect of reducing competition in the marketplace. The underlying assumption of Section 1 of the Sherman Act is that society’s welfare is harmed if rival firms are permitted to join in an agreement that restrains competition. Not all agreements between rivals, however, unreasonably restrain trade. Under the rule of reason, anticompetitive agreements that may violate the Sherman Act are analyzed with the view that they may, in fact, constitute reasonable restraints of trade. When applying this rule, a court considers the purpose of the arrangement, the powers of the parties, and the effect of their actions in restraining trade.

In this problem, the music companies’ conduct appeared to be the result of an agreement to fix prices, which would violate the Sherman Act. Parallel conduct— charging all of the online services the same price to obtain the songs in MusicNet’s catalogs, for example—is not in itself a violation of the Act, but it can be part of a strategy to restrain trade. A rule of reason analysis could determine whether this was an anticompetitive price-fixing agreement among competitors. In other words, the combination formed by the music companies and represented by MusicNet must be shown to have been unreasonable and anticompetitive for it to violate the antitrust laws.

In the actual case on which this problem is based, a coalition of consumers filed a suit against MusicNet’s participants, alleging that the service violated the Sherman Act. The court ruled that the consumers could attempt to prove their claim.

24–4. Business Case Problem with Sample Answer—Price Discrimination. Dayton Superior Corp. sells its products in interstate commerce to several companies, including Spa Steel Products, Inc. The purchasers often compete directly with each other for customers. From 2005 to 2007, one of Spa Steel’s customers purchased Dayton Superior’s products from two of Spa Steel’s competitors. According to the customer, Spa Steel’s prices were always 10 to 15 percent higher for the same products. As a result, Spa Steel lost sales to at least that customer and perhaps others. Spa Steel wants to sue Dayton Superior for price discrimination. Which requirements for such a claim under Section 2 of the Clayton Act does Spa Steel satisfy? What additional facts will it need to prove? [Dayton Superior Corp. v. Spa Steel Products, Inc., 2012 WL 113663 (N.D.N.Y. 2012)] (See The Clayton Act.) Solution: Spa Steel satisfies most of the requirements for a price discrimination claim under Section 2 of the Clayton Act. Dayton Superior is engaged in interstate commerce, and it sells goods of like grade and quality to at least three purchasers.

Moreover, Spa Steel can show that because it sells Dayton Superior’s products at a higher price, it lost business and thus suffered an injury. To recover, however, Spa Steel will also need to prove that Dayton Superior charged Spa Steel’s competitors a lower price for the same product. Spa Steel cannot recover if its prices were higher for reasons related to its own business, such as having a higher overhead or seeking a larger profit.

24–5. Mergers. St. Luke’s Health Systems, Ltd., operated an emergency clinic in Nampa, Idaho. Saltzer Medical Group, P.A., had thirty-four physicians practicing at its offices in Nampa. Saint Alphonsus Health System, Inc., operated the only hospital in Nampa. St. Luke’s

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acquired Saltzer’s assets and entered into a five-year professional service agreement with the Saltzer physicians. This affiliation resulted in a combined share of two-thirds of the Nampa adult primary care provider market. Together, the two entities could impose a significant increase in the prices charged patients and insurers, and correspondence between the parties indicated that they would. Saint Alphonsus filed a suit against St. Luke’s to block the merger.

Did this affiliation violate antitrust law? Explain. [Saint Alphonsus Medical Center-Nampa Inc. v. St. Luke’s Health System, Ltd., 778 F.3d 775 (9th Cir. 2015)] (See The Clayton Act.) Solution: Yes. The affiliation between St. Luke’s and Saltzer violated antitrust law.

Under Section 7 of the Clayton Act, a merger violates antitrust law “where the effect ... may be to substantially lessen competition.” This can occur when a merger results in a combination’s obtaining monopoly power in the relevant market. An important consideration is market concentration. When a small number of companies control a large share of the market, the market is concentrated.

A merger between firms that compete with each other in the same market is a horizontal merger. If a horizontal merger creates an entity with a significant market share, it increases market concentration and may be presumed illegal. But courts also consider other factors, including whether the apparent design of the merger is to establish market power.

Here, in Nampa, Idaho, the market for adult primary care providers was highly concentrated—there are only three providers mentioned in the facts. St. Luke’s emergency clinic acquired the assets of Saltzer Medical Group and entered into a professional service agreement with its physicians. Together, through this horizontal merger, these entities gained a two-thirds share of the Nampa market. This meant that the two could impose a significant increase in the prices charged patients and insurers, and their correspondence indicated that they would. In other words, their combination increased market concentration and could therefore be presumed illegal.

And because the entities’ apparent design of the merger was to establish and use market power to increase prices, their merger violated antitrust law.

In the actual case on which this problem is based, the court found that the “huge market share” of the post-merger entity “creates a substantial risk of anticompetitive price increases” and ordered divestiture. The U.S. Court of Appeals for the Ninth Circuit affirmed the order, based on the reasoning stated above.

24–6. Section 1 of the Sherman Act. Manitou North America, Inc., makes and distributes telehandlers (forklifts with extendable telescopic booms) to dealers throughout the United States. Manitou agreed to make McCormick International, LLC, its exclusive dealer in the state of Michigan. Later, Manitou entered into an agreement with Gehi Company, which also makes and sells telehandlers. The companies agreed to allocate territories within Michigan among certain dealers for each manufacturer, limiting the dealers’ selection of competitive products to certain models. Under this agreement, McCormick was precluded from buying or selling Gehi telehandlers. What type of trade restraint did the agreement between Manitou and Gehi represent? Is this a violation of antitrust law? If so, who was injured, and how were they injured? Explain. [Manitou North America, Inc. v. McCormick International, LLC, 2016 WL 439354 (2016)] (See Section 1 of the Sherman Act.) Solution: The agreement between Manitou North America Inc. and Gehi Co., both makers of telehandlers (a type of forklift), to allocate territories within Michigan among certain dealers for each manufacturer and to limit the dealers’ selection of

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Solution and Answer Guide: Miller, The Legal Environment Today - Building Skills You Will Need Tomorrow, 11e, 9798214046105; Chapter 24: Antitrust Law and Promoting Competition

competitive products to certain models is a horizontal trade restraint. A territorial or market division such as this agreement is a violation of antitrust law. As a result of the agreement, injured parties included the dealers and their customers, who were harmed by the reduced competition.

Competitors who agree to divide territories—a horizontal market division—commit a per se violation of Section 1 of the Sherman Act. To recover for the violation, a party must suffer an injury attributable to it that flows from the anticompetitive aspect of the agreement and reduces competition.

In this problem, the agreement between Manitou and Gehi provided for the division of territories among telehandler dealers at the same level of the market, thereby reducing competition. The agreement barred McCormick (and presumably other dealers) from buying and selling competitive Gehi telehandlers. This part of the agreement limited consumers’ selection and must have had a negative impact on McCormick’s sales and thereby its ability to survive in the market. This is inherently anticompetitive, a per se violation of antitrust law, and constitutes an antitrust injury, resulting in damages.

In the actual case on which this problem is based, McCormick International, LLC, a Manitou dealer, complained about Manitou’s arrangements with Gehi and other dealers. McCormick terminated its contract with Manitou, which then filed a suit in a Michigan state court against the dealer for breach. McCormick filed a counterclaim against the telehandler maker, alleging a violation of state antitrust law. (The state law and its controlling principles were based on federal antitrust law.) A jury found in favor of McCormick on both claims, and the court awarded $3.85 million in damages on the counterclaim. A state intermediate appellate court affirmed.

24–7. Tying Arrangements. PRC-Desoto International, Inc., makes and distributes more than 90 percent of the aerospace sealant used in military and commercial aircraft. Packaging Systems, Inc., buys the sealant in wholesale quantities, repackages it into special injection kits, and sells the kits on the retail market to aircraft maintenance companies. PRC-Desoto bought one of the two main manufacturing companies of injection kits and announced a new policy to prohibit the repackaging of its sealant for resale. Packaging Systems was forced to buy both the sealant and the kits from PRC-Desoto. Due to the anti-repackaging constraint, the reseller could no longer meet its buyers’ needs for pre-filled injection kits. Does this policy represent an unlawful tying arrangement? Explain. [Packaging Systems, Inc. v.

PRC-Desoto International, Inc., 2018 WL 735978 (C.D.Cal. 2018)] (See The Clayton Act.) Solution: Yes. PRC-Desoto International, Inc.’s new policy is an unlawful tying arrangement. A tying arrangement occurs when a seller conditions the sale of a product on the buyer’s agreement to buy another product made or distributed by the seller. The legality depends on the purpose of the agreement and its likely effect on competition in the markets for the products. The injury caused by an unlawful tying arrangement is reduced competition in the market for the tied product.

In this problem, PRC-Desoto made and distributed more than 90 percent of the aerospace sealant used in aircraft. Packaging Systems bought the sealant in wholesale quantities, repackaged it into injection kits, and sold the kits on the retail market to aircraft maintenance companies. PRC-Desoto bought one of the main makers of the kits and prohibited the repackaging of its sealant for resale. This forced Packaging Systems to buy both the sealant and the kits from PRC-Desoto. Also, due to the

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anti-repackaging constraint, the reseller could no longer meet its buyers’ needs for pre-filled injection kits.

Here, there is a market for wholesale sealant and a separate market for sealant sold in injection kits. PRC-Desoto had significant leverage over its customers to dictate the terms on which they must buy sealant and kits. With its anti-repackaging policy, resellers were compelled to buy the injection kits to obtain the sealant when, without the prohibition, they could have bought the products separately. PRC-Desoto effectively foreclosed competition in the market for sealant sold in injection kits.

In the actual case on which this problem is based, Packaging Systems filed a suit in a federal district court against PRC-Desoto, alleging the facts stated in the problem constituted antitrust violations. The court denied the defendant’s motion to dismiss the claim. The allegations “are sufficient to plead harm to competition.”

24–8. Exclusive Dealing Arrangements. The Commonwealth of Puerto Rico privatized most health care facilities. It also created a new government-run health care plan, the Puerto Rico Health Insurance Administration (ASES). ASES divided Puerto Rico into eight geographical regions and assigned a single private health care insurer to each region. It then entered into contracts with insurers to deliver the required services in the insurers’ respective regions.

When one region chose a group of urologists to become the exclusive provider of urology services in the area, a group of urologists who were “frozen out” brought an antitrust suit. The plaintiffs claimed that the exclusive-dealing agreement excluded them from specific markets.

At trial, the defendants prevailed in their motion to dismiss the case because the plaintiffs lacked standing to bring an antitrust action. On appeal, should the United States Court of Appeals for the First Circuit affirm the district court’s decision? Why or why not?

[Vaszquez-Ramos v. Triple-S Salud, Inc., 55 F.4th 286 (1st Cir. 2022)] (See The Clayton Act.) Solution: The reviewing court determined that the plaintiffs did have antitrust standing that was consistent with a six-factor test, assessing: 1.

2.

3.

4.

5.

6.

The causal connection between the alleged anti-trust violation and the harm to the plaintiff; An improper motive; The nature of the plaintiff’s alleged injury and whether the injury was a type that Congress sought to redress with the antitrust laws; The directness with which the alleged market restraint caused the asserted injury; The speculative nature of the damages; The risk of duplicative recovery or complex apportionment of damages.

The reviewing court found that the plaintiff’s alleged anti-trust injury was indeed a result of the exclusive dealing arrangement. The appellate court pointed out that there was concerted action and that the “actors’ agreement involved either restrictions that were per se illegal or restraints of trade that failed scrutiny under the rule of reason.”

The exclusive dealing arrangement did effectively shut out the plaintiffs from the plausibly relevant market entirely.

A QUESTION OF ETHICS 24–9. The IDDR Approach and Section 2 of the Sherman Act. Apple, Inc., controls which apps—such as ringtones, instant messaging, and video—can run on iPhone software. Apple’s App Store is a website where iPhone users can find, buy, and download the apps. Apple

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prohibits third-party developers from selling iPhone apps through channels other than the App Store, threatening to cut off sales by any developer who violates this prohibition. Apple also discourages iPhone owners from downloading unapproved apps, threatening to void iPhone warranties if they do. Seven iPhone app buyers filed a complaint in a federal district court against Apple. The plaintiffs alleged that the firm monopolized the market for iPhone apps. [In re Apple iPhone Antitrust Litigation, 846 F.3d 313 (9th Cir. 2017)] (See Section 2 of the Sherman Act.) 1.

Using the Decision step of the IDDR approach, provide reasons why Apple might attempt to protect iPhone software by setting narrow boundaries on the sales of related apps and aggressively enforcing them.

Solution: The Decision is the third step of the IDDR approach, following an Inquiry to state the issue and a Discussion of possible actions to resolve it. The issue here is whether it is ethical for Apple to protect iPhone software. The stakeholders include Apple’s owners, officers, and employees; the vendors and buyers of iPhones, as well as the designers and distributors of the apps; and those who would create other products for use in all types of markets. Options to resolve this issue in the interests of all of these stakeholders include Apple’s choice to protect its software by setting narrow boundaries on the sales of related apps and aggressively enforcing those limits. This choice is the focus of the IDDR approach’s Decision step.

Apple is protecting its technology and intellectual property from theft. Companies that do not set boundaries and protect their property can easily have it copied by competitors, who can use it to gain an unfair advantage. Apple believes that the threat to its products is genuine. Restricting the sales of iPhone apps is a legitimate step grounded on this honest belief. In fact, Apple also uses other methods to accomplish this goal—suits against makers of competitive products charging patent infringement, for example.

The final step of the IDDR approach is a Review of the success or failure of the action to resolve the issue and satisfy the stakeholders. In this case, were Apple to freely allow the copying or theft of its intellectual property, the company would be robbed of its success in the marketplace, with a consequent loss of market share, revenue, and profits. This result would ultimately satisfy none of the stakeholders.

2. Explain why Apple’s actions in this case might be considered unethical.

Solution: Arguably, it is not ethical for Apple to protect iPhone software by setting narrow boundaries on the sales of related apps and enforcing them. Apple is being too aggressive. The company is not simply protecting its technology and intellectual property from theft. It is profiting from the efforts of competitors, whom it is casting in a bad light by imposing restrictions on their sales.

Presumably, Apple’s goal is to be the monopolist of its market. In addition, Apple’s tight hold over its products and secrets could inhibit innovation and thereby eliminate any gain in market share against more open, collaborative competitors.

In the actual case on which this problem is based, the iPhone app buyers filed their complaint under the Clayton Act, which allows a private party to sue based on an alleged violation of any of the antitrust laws except the Federal Trade Commission Act. The complaint alleged violations of the Sherman Act.

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The court dismissed the complaint on the ground that the plaintiffs lacked standing. The U.S. Court of Appeals for the Ninth Circuit reversed and remanded the case. The appellate court held that the plaintiffs were direct purchasers of the apps from Apple and therefore had standing to sue.

TIME-LIMITED TEAM ASSIGNMENT 24–10. Antitrust Violations. Residents of the city of Madison, Wisconsin, became concerned about overconsumption of liquor near the campus of the University of Wisconsin (UW). The city took action by imposing conditions on area bars to discourage reduced-price “specials” that were believed to encourage high-volume and dangerous drinking. Later, the city began to draft an ordinance to ban all drink specials. Bar owners responded by announcing that they had “voluntarily” agreed to discontinue drink specials on Friday and Saturday nights after 8:00 P.M. The city put its ordinance on hold. Several UW students filed a lawsuit against the local bar owners’ association alleging violations of antitrust law. (See Section 1 of the Sherman Act.) 1.

The first team will identify the grounds on which the plaintiffs might base their claim for relief and formulate an argument on behalf of the plaintiffs.

Solution: The plaintiffs could base a claim for damages and an injunction on an allegation that the taverns, in agreeing to eliminate drink specials on Friday and Saturday nights after 8:00 p.m., violated antitrust prohibitions against “conspiracies in restraint of trade.”

2. The second team will determine whether the defendants are exempt from the antitrust laws.

Solution: The defendants might contend that they could not be held liable for anticompetitive conduct because their agreement was in direct response to the city's exercise of its legitimate regulatory authority over tavern operations. In other words, they could argue that they acted in response to a clearly articulated policy that was actively supervised by the state (through the city).

3. The third team will decide how the court should rule in this dispute and provide reasons for its answer.

Solution: The court should issue a judgment in the defendants’ favor.

Anticompetitive actions or agreements voluntarily undertaken by private entities can qualify for antitrust immunity if the private conduct is prompted or motivated by governmental regulatory authority and intent. Where the authority is a municipality, as in this problem, there is little or no danger that it is involved in a private price-fixing arrangement. Private parties who are regulated by a municipality are entitled to immunity as long as the effective decision maker is the municipality and not the private parties. Here, the city of Madison was the effective decision maker with respect to the bar owners’ agreement to forego drink specials on Fridays and Saturdays after 8:00 p.m. The owners’ private conduct was pursued under the city's supervision, and the conduct thus qualifies for exemption from the antitrust laws.

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