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Business_Law_I_Essentials_-_WEB.pdf | Essentials |
Business_Law_I_Essentials_-_WEB.pdf | Business Law I Essentials |
Business_Law_I_Essentials_-_WEB.pdf | OpenStax
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Business_Law_I_Essentials_-_WEB.pdf | TABLE OF CONTENTS
Preface
1
1
American Law, Legal Reasoning, and the Legal System
3
1.1 Basic American Legal Principles
3
1.2 Sources and Types of Law
5
1.3 Important Business Laws and Regulations
7
2
Disputes and Dispute Settlement
15
2.1 Negotiation
15
2.2 Mediation
19
2.3 Arbitration
22
3
Business Ethics and Social Responsibility
31
3.1 Business Ethics
31
3.2 Social Responsibility
35
4
Business and the United States Constitution
43
4.1 Commerce Clause
43
4.2 Constitutional Protections
47
5
Criminal Liability
53
5.1 Common Business Crimes
53
5.2 Civil vs: Criminal Liability
57
6
The Tort System
63
6.1 Intentional Torts and Negligence
63
6.2 Product and Strict Liability
67
7
Contract Law
75
7.1 Consideration and Promissory Estoppel
75
7.2 Capacity and Legality
78 |
Business_Law_I_Essentials_-_WEB.pdf | 7.3 Breach of Contract and Remedies
80
8
Sales Contracts
85
8.1 The Nature and Origins of Sales Contracts
85
8.2 Warranties and Sales Contracts
91
9
Employment and Labor Law
97
9.1 Employment, Worker Protection, and Immigration Law
97
9.2 Labor Law
101
9.3 Equal Opportunity in Employment
105
10
Government Regulation
113
10.1 Administrative Law
113
10.2 Regulatory Agencies
117
11
Antitrust Law
123
11.1 History of Antitrust Law
123
11.2 Antitrust Laws
127
12
Unfair Trade Practices and the Federal Trade Commission
133
12.1 Unfair Trade Practices
133
12.2 The Federal Trade Commission
136
13
International Law
141
13.1 Introduction to International Law
141
13.2 Sources and Practice of International Law
145
14
Securities Regulation
151
14.1 Liability Under the Securities Act
151
14.2 The Framework of Securities Regulation
154
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | Index
167 |
Business_Law_I_Essentials_-_WEB.pdf | This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | Welcome to Business Law I Essentials, an OpenStax resource. This textbook was written to increase student
access to high-quality learning materials, maintaining the highest standards of academic rigor at little to no
cost.
About OpenStax
OpenStax is a nonprofit based at Rice University, and it’s our mission to improve student access to education.
Our first openly licensed college textbook was published in 2012, and our library has since scaled to over 30
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About OpenStax resources
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Preface
Preface
1 |
Business_Law_I_Essentials_-_WEB.pdf | About Business Law I Essentials
Business Law I Essentials is a brief introductory textbook designed to meet the scope and sequence
requirements of courses on Business Law or the Legal Environment of Business. The concepts are presented in
a streamlined manner, and cover the key concepts necessary to establish a strong foundation in the subject.
The textbook follows a traditional approach to the study of business law. Each chapter contains learning
objectives, explanatory narrative and concepts, references for further reading, and end-of-chapter questions.
Business Law I Essentials may need to be supplemented with additional content, cases, or related materials, and
is offered as a foundational resource that focuses on the baseline concepts, issues, and approaches.
OpenStax’s Creative Commons licensing, described above, offers a instructors and course designers a great
deal of flexibility in its use.
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Contributing Authors and Reviewers
Mirande Valbrune, Esq. Employment Lawyer
Renee De Assis Texas Woman's University
Suzanne Cardell, University of Massachusetts Dartmouth
Tess C. Taylor, Walden University
Dr. Natalie Sappleton, Smartly Institute
C. M. Mitchell, Ashford University
Kenneth Mitchell-Phillips, Portland Community College
2
Preface
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | Chapter Outline
1.1 Basic American Legal Principles
1.2 Sources and Types of Law
1.3 Important Business Laws and Regulations
Introduction
Learning Outcome
•
Describe the foundation and sources that establish American law.
1.1
Basic American Legal Principles
The American legal system has its roots in the British legal system. It was developed with the purpose of
establishing standards for acceptable conduct, proscribing punishment for violations as a deterrent,
establishing systems for enforcement, and peacefully resolving disputes. The ultimate goal of the American
legal system is promotion of the common good.
Establishing Standards
The American legal system was developed with the goal of establishing a set of standards that outline what is
to be considered minimally acceptable behavior. Broadly speaking, federal laws are those that all United States
citizens are expected to follow. State and local laws may often be similar to federal laws, but they may also
differ quite a bit, and only govern the state’s citizens.
Figure 1.1 (Credit: MarkThomas /pixabay /Attribution 2.0 Generic (CC BY 2.0))
1
American Law, Legal Reasoning, and the Legal System |
Business_Law_I_Essentials_-_WEB.pdf | Figure 1.2
The American legal system is designed to establish a set of standards for acceptable behavior.
(Credit: joergelman/ pixabay/ License: CC0)
Promoting Consistency
The American legal system follows the British Common Law system, which is designed to leverage past judicial
reasoning, while also promoting fairness through consistency. Judges in the Common Law system help shape
the law through their rulings and interpretations. This body of past decisions is known as case law. Judges use
case law to inform their own rulings. Indeed, judges rely on precedent, i.e., previous court rulings on similar
cases, for ruling on their own cases.
All U.S. states, except Louisiana, have enacted “reception statutes,” stating that the judge-made common law
of England is the law of the state to the extent that it does not conflict with the state’s current laws.
However, the body of American law is now so robust that American cases rarely cite English materials, except
for a British classic or a famous old case. Additionally, foreign law is not cited as binding precedent. Therefore,
the current American practice of the common law tradition refers more to the process of judges looking to the
precedent set jurisdictionally, and substantially similar to, American case law.
Maintaining Order
Congruent with the goal of establishing standards and promoting consistency, laws are also used to promote,
provide, and maintain order.
4
Chapter 1 American Law, Legal Reasoning, and the Legal System
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Business_Law_I_Essentials_-_WEB.pdf | Resolving Disputes
Conflicts are to be expected given people’s varying needs, desires, objectives, values systems, and
perspectives. The American legal system provides a formal means for resolving conflicts through the courts. In
addition to the federal court and individual state systems, there are also several informal means for resolving
disputes that are collectively called alternative dispute resolution (ADR). Examples of these are mediation and
arbitration.
Protecting Liberties and Rights
The United States Constitution and state laws provide people with many liberties and rights. American laws
operate with the purpose and function of protecting these liberties and rights from violations by persons,
companies, governments, or other entities.
Based on the British legal system, the American legal system is divided into a federal system and a state and
local system. The overall goal of both systems is to provide order and a means of dispute settlement, as well as
to protect citizens’ rights.
Clearly, the purposes of the American legal system are broad and well-considered.
1.2
Sources and Types of Law
The American legal system is made up of many types of codified forms of law, with the United States
Constitution being the pre-eminent source of American law. The Constitution establishes the boundaries of
federal law, and it must be followed by all citizens, organizations, and entities. It includes Congressional acts,
Senate-ratified treaties, executive regulations, and federal case law. The United States Code (“USC”) compiles
these laws.
American law mainly originates from constitutional law, statutory law, treaties, administrative regulations, and
common law (which includes case law).
The Constitution
The United States Constitution is the foremost law of the land. The Constitution’s first ten amendments are
referred to as the Bill of Rights, which offers specific protections of individual liberty and justice. Additionally,
the Bill of Rights restricts certain powers of government. The Constitution empowers federal law making by
giving Congress the power to enact statutes for certain limited purposes, like regulating interstate commerce.
The United States Code officially compiles and codifies the federal statutes.
Chapter 1 American Law, Legal Reasoning, and the Legal System
5 |
Business_Law_I_Essentials_-_WEB.pdf | Figure 1.3
The U.S. Constitution is known as the supreme law of the land. (Credit: lynn0101/ pixabay/
License: CC0)
American Common Law
As discussed in the previous section, the United States follows the common law legal tradition of English law.
Judges in the Common Law system help shape the law through their rulings and interpretations. This body of
past decisions is known as case law, which is used by judges to inform their own rulings. In fact, judges rely on
precedent, i.e., previous court rulings on similar cases, when determining the ruling in their own cases.
An example of how case law works is the case of the State v. Wayfair Inc. (2017 SD 56, 901 N.W.2d 754 (S.D.
2017), cert. granted, 138 S. Ct. 735 (2018)), in which the South Dakota Supreme Court held that a state law
requiring internet retailers without an in-state physical presence to remit sales tax was unconstitutional.
Unless this ruling is overruled by the United States Supreme Court, then it becomes part of the case law and
precedent set in that state, and it will be followed by subsequent rulings when similar cases are filed.
Federal Law
The Constitution empowers federal law making by giving Congress the power to enact statutes for certain
limited purposes, like regulating interstate commerce. Federal law preempts conflicting state and local laws.
However, federal preemption is not without limits, insofar as states each have their own constitution and are
considered sovereign. Therefore, federal law may only preempt state law if it is enacted within the limited
powers that are enumerated and granted to Congress in the Constitution.
Broad interpretations of the Constitution’s Commerce and Spending Clauses have expanded the reach of
federal law into many areas. Indeed, its reach in some areas, such as aviation and railroads, is now so broad
that it preempts virtually all state law. In others areas, such as family law, lawmaking continues to be left to the
6
Chapter 1 American Law, Legal Reasoning, and the Legal System
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Business_Law_I_Essentials_-_WEB.pdf | states. Finally, a number of powerful federal and state laws coexist in areas such as antitrust, trademark,
employment law, and others.
Statutes
When a bill becomes a federal law, it is assigned a law number and prepared for publication by the Office of
the Federal Register (OFR) of the National Archives and Records Administration (NARA). Public laws are also
given legal statutory citation by the OFR and are incorporated into the United States Code (USC).
Regulations
Laws differ from regulations in that laws are passed by either the U.S. Congress or state congresses.
Regulations, by contrast, are standards and rules adopted by administrative agencies that govern how laws
will be enforced.
Federal agencies often enjoy broad rulemaking authority when Congress acts to grant them this power. Called
“regulations,” these agency rules normally carry the force of law, as long as they demonstrate a reasonable
interpretation of the relevant statutes. For example, the Environmental Protection Agency (EPA) has
established regulations for businesses and their emission and disposal of pollutants to protect the
environment. The EPA has the authority to enforce these regulations when a business violates them, and such
enforcement is usually done by fining the company or by using other means.
The Administrative Procedure Act (APA) enables the adoption of regulations, which are codified and
incorporated into the Code of Federal Regulations (CFR). Federal agencies frequently draft and distribute
forms, manuals, policy statements, letters, and rulings. Though these may be considered as persuasive
authority by the courts, they do not carry the same force as law. In other words, if a person or business
questions a regulation of a government agency, saying it is unconstitutional, and that party is successful in
proving it, then the regulation is not enforced and the agency will need to revise it or remove it.
State Law
America, as diverse as its fifty states, is also governed by fifty different state constitutions, state governments,
and state courts. Each has its own legislative, executive, and judicial branches. States are empowered to create
legislation that is related to matters not preempted by the federal Constitution and federal laws. Most cases
involve state law issues and are litigated in state courts.
Local Law
In addition to federal and state law, municipalities, towns or cities, and counties may enact their own laws that
do not conflict with state or federal laws.
As demonstrated, American law does not draw from one source alone; instead, it is derived from many
sources.
1.3
Important Business Laws and Regulations
Business law is a very expansive area of the law. It primarily addresses issues related to the creation of new
businesses, which arise as existing companies deal with the public, government, and other companies.
Chapter 1 American Law, Legal Reasoning, and the Legal System
7 |
Business_Law_I_Essentials_-_WEB.pdf | Business law consists of many legal disciplines, including contracts, tax law, corporate law, intellectual
property, real estate, sales, immigration law, employment law, bankruptcy, and others.
Figure 1.4
Contract law is just one type of law that businesses need to be concerned about. (Credit: edar/
pixabay/ License: CC0)
As noted, business law touches upon a number of other legal areas, practices, and concerns. Some of the most
important of these, which are discussed in this section, are disputes and dispute settlement, business ethics
and social responsibility, business and the United States Constitution, criminal liability, torts, contracts, labor
and employment law, Unfair Trade Practices and the Federal Trade Commission, international law, and
securities regulation. Though they are discussed in much more depth in later chapters, the following gives a
brief overview.
Disputes and Dispute Settlement
In addition to the federal court and individual state systems, there are also a variety of mechanisms that
companies can use to resolve disputes. They are collectively called alternative dispute resolution (“ADR”), and
they include mediation, settlement, and arbitration. Many states now require companies to resolve legal
disputes using ADR before the initiation of any lawsuit to encourage speedy resolution, cost and time
containment, and reduced judicial dockets. Traditional litigation remains an option in most cases if other
efforts fail or are refused.
Business Ethics and Social Responsibility
In the routine course of business, employees are often required to make decisions. Business ethics outline the
ethical model, or framework, that companies expect employees to follow when making these decisions, as well
as the behavior that the companies deem acceptable. Sound and ethical decision making can also help
8
Chapter 1 American Law, Legal Reasoning, and the Legal System
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | companies avoid legal liability and exposure. Typically, an ethics code and/or a code of conduct details a
company’s requirements and guidelines, while also serving as a key corporate governance tool.
In addition to business ethics, companies must also consider their social responsibility and the laws related to
it, such as consumer and investor protections, environmental ethics, marketing ethics, and ethical issues in
financial management.
Business and the United States Constitution
Since the start of the 20th century, broad interpretations of the Constitution’s Commerce and Spending
Clauses have expanded the reach of federal law into many areas. Indeed, its reach in some areas is now so
broad that it preempts virtually all state law. Thus, the Constitution’s Commerce Clause has been interpreted
to allow federal lawmaking and enforcement that applies to many aspects of business activity. Additionally, the
Constitution’s Bill of Rights extends some protections to business entities that are also constitutionally
guaranteed to individuals
For example, on January 21, 2010, in Citizens United v. Federal Election Commission, 558 U.S. 310 (2010), the
U.S. Supreme Court heard the issue of whether the government can ban political spending by corporations in
candidate elections. The Court ruled that corporations have the same Constitutional right to free speech as
individuals, and thus lifted the restrictions on contributions.
Criminal Liability
The imposition of criminal liability is one method used to regulate companies. The extent of corporate liability
found in an offensive act determines whether a company will be held liable for the acts and omissions of its
employees. Criminal consequences may include penalties, such as prison, fines and/or community service. In
addition to criminal liability, civil law remedies are usually available, e.g., the award of damages and
injunctions, which may include penalties. Most jurisdictions apply both criminal and civil systems.
Torts
Within the business law context, torts may involve either intentional torts or negligence. Additionally,
companies involved in certain industries should consider the risk of product liability. Product liability involves a
legal action against a company by a consumer for a defective product that caused loss or harm to the
customer. There are several theories regarding recovery under product liability. These include contract
theories that deal with the product warranty, which details the promises of the nature of the product sold to
customers. The contract product warranty theories are Express Warranty, Implied Warranty of Merchantability,
and Implied Warranty of Fitness. Tort theories deal with a consumer claim that the company was negligent,
and therefore caused either bodily harm, emotional harm, or monetary loss to the plaintiff. The tort liability
theories that can be used in this context are negligence (failure to take proper care in something), strict
liability (imposition of liability without a finding of fault), and acts committed under Restatement (Third) of
Torts (basic elements of the tort action for liability for accidental personal injury and property damage, as well
as liability for emotional harm).
Contracts
The main function of a contract is to document promises that are enforceable by law. The key to an agreement
Chapter 1 American Law, Legal Reasoning, and the Legal System
9 |
Business_Law_I_Essentials_-_WEB.pdf | or contract is that there must be an offer and acceptance of the terms of that offer. Sales contracts normally
involve the sale of goods and include price terms, quantity and cost, how the terms of the contract will be
performed, and method of delivery.
Employment and Labor Law
Employment and labor law is a very broad discipline that covers a broad array of laws and regulations
involving employer/employee rights and responsibilities in the workplace. This law includes worker protection
and safety laws, such as OSHA, and worker immigration laws, such as the Immigration Reform and Control Act,
which imposes sanctions on employers for knowingly hiring illegal immigrants. Other notable areas of
employment and labor law include, but are not limited to, the National Labor Relations Act, which deals with
union and management relations, as well as Equal Opportunity in Employment laws, which provide workers
with protections against discrimination in the workplace, e.g., Title VII, the Americans with Disabilities Act, Age
Discrimination in Employment Act, and others.
Antitrust Law
Antitrust legislation includes both federal and state laws regulating companies’ conduct and organization. The
purpose of such regulation is to allow consumers to benefit from the promotion of fair competition. The main
statutes implicated by antitrust law are the Sherman Act of 1890, the Clayton Act of 1914, and the Federal
Trade Commission Act of 1914. These Acts discourage the restraint of trade by prohibiting the creation of
cartels and other collusive practices. Additionally, they encourage competition by restricting the mergers and
acquisitions of certain organizations. Finally, they prohibit the creation and abuse of monopoly power.
Actions may be brought in courts to enforce antitrust laws by the Federal Trade Commission (“FTC”), the U.S.
Department of Justice, state governments, and private parties.
Unfair Trade Practices and the Federal Trade Commission
The term “unfair trade practices” is broadly used and refers to any deceptive or fraudulent business practice
or act that causes injury to a consumer. Some examples include, but are not limited to, false representations of
a good or service including deceptive pricing, non-compliance with manufacturing standards, and false
advertising. The FTC investigates allegations of unfair trade practices raised by consumers and businesses,
pre-merger notification filings, congressional inquiries, or reports in the media and may seek voluntary
compliance by offending businesses through a consent order, administrative complaints, or federal litigation.
Securities Regulation
Securities regulation involves both federal and state regulation of securities and stocks by governmental
regulatory agencies. At times, it may also involve the regulations of exchanges like the New York Stock
Exchange, as well as the rules of self-regulatory organizations like the Financial Industry Regulatory Authority
(FINRA).
The Securities and Exchange Commission (SEC) regulates securities on the federal level. Other instruments
related to securities, such as futures and some derivatives, are regulated by the Commodity Futures Trading
Commission (CFTC).
10
Chapter 1 American Law, Legal Reasoning, and the Legal System
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | Assessment Questions
1. What country is the United States legal system derived from?
a.
Germany.
b.
United Kingdom.
c.
United States of America.
d.
Canada.
2. What is the function of law in the United States?
a.
Establish standards.
b.
Promote consistency.
c.
Promote, provide, and maintain order.
d.
All of the above.
3. As a judge, Baxter applies common law rules. These rules develop from:
a.
decisions of the courts in legal disputes.
b.
regulations issued by administrative agencies.
c.
statutes enacted by Congress and the state legislatures.
d.
uniform laws drafted by legal scholars.
4. What is the difference between state and federal law?
5. The legislature of the state of Wyoming enacts a new statute that sets standards for the liability of
businesses selling defective products. This statute applies in:
a.
Wyoming only.
b.
only Wyoming and its bordering states.
c.
all states.
d.
all states but only to matters not covered by other states’ laws.
6. Alex has been sued by Will for failure to pay rent for their apartment which source of law will govern this
lawsuit?
a.
Administrative law.
b.
The Constitution.
c.
Civil Law.
d.
Criminal Law.
7. Four sources of law in the U.S. legal system are:
a.
Constitutional law, criminal law, civil law, and maritime law.
b.
Federal law, state law, international law, and maritime law.
c.
Statutory law, case law, equity, and common law.
d.
Constitutional law, judicial law, legislative law, and administrative law.
8. Where can you find a codification of federal laws?
a.
The library.
b.
Federal Court.
c.
United States Code.
d.
U.S. Library of Congress.
9. What is the supreme law of the land? What are statutes? What are ordinances? What is an administrative
rule?
Chapter 1 American Law, Legal Reasoning, and the Legal System
11 |
Business_Law_I_Essentials_-_WEB.pdf | 10. Regulations are:
a.
Laws passed by Congress.
b.
Rules made by local governments.
c.
Derived from decisions made by judges.
d.
Rules adopted by administrative agencies.
11. What is an Unfair Trade Practice and which Administrative Agency regulates it?
12. Some of the rights in the Constitution’s Bill of Rights extends to Corporations.
a.
True.
b.
False.
13. Forms of Alternative Dispute Resolution (“ADR”) include all of the following except:
a.
Mediation.
b.
Settlement.
c.
Litigation.
d.
Arbitration.
14. Consequences of being convicted a crime include all of the following except:
a.
Prison.
b.
Fines.
c.
Community service.
d.
Damages.
15. Securities are only regulated by federal laws.
a.
True.
b.
False.
Endnotes
Overview – Rule of Law. United States Courts. Retrieved from: www.uscourts.gov/educational-resources/
educational-activities/overview-rule-law.
Purposes and Functions of Business Law. UpCounsel. Retrieved from: https://www.upcounsel.com/purposes-
and-functions-of-business-law.
Williams, L. and Lumen Learning. The Meaning and Purposes of Law. Lumen Learning – Introduction to
Business. Retrieved from: https://courses.lumenlearning.com/wmopen-introbusiness/chapter/meaning-and-
purposes-of-the-law/.
Feltes, G. A Guide to the U.S. Federal Legal System - Web-based Public Accessible Sources. 2005. Hauser Global
Law School Program. Retrieved from: http://www.nyulawglobal.org/globalex/United_States.html.
How Laws Are Made. GovTrack. Retrieved from: https://www.govtrack.us/what-is-the-law.
Public Laws. December 28, 2017. National Archives. Retrieved from: https://www.archives.gov/federal-register/
laws.
Steenken, B. & Brooks, T. The United States Legal System. Sources of Law. Retrieved from:
http://sourcesofamericanlaw.lawbooks.cali.org/chapter/the-united-states-legal-system/.
Business Law Courses. edX. Retrieved from: https://www.edx.org/learn/business-law.
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Business_Law_I_Essentials_-_WEB.pdf | Introductory Business Law. Modern States. Retrieved from: https://modernstates.org/course/introductory-
business-law/.
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Chapter 1 American Law, Legal Reasoning, and the Legal System
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Business_Law_I_Essentials_-_WEB.pdf | Chapter Outline
2.1 Negotiation
2.2 Mediation
2.3 Arbitration
Introduction
Learning Outcome
•
Explain the theory, practice, and law of disputes and resolution.
2.1
Negotiation
We frequently engage in negotiations as we go about our daily activities, often without being consciously
aware that we are doing so. Negotiation can be simple, e.g., two friends deciding on a place to eat dinner, or
complex, e.g., governments of several nations trying to establish import and export quotas across multiple
industries. When a formal proceeding is started in the court system, alternative dispute resolution (ADR), or
ways of solving an issue with the intent to avoid litigation, may be employed. Negotiation is often the first
step used in ADR. While there are other forms of alternative dispute resolution, negotiation is considered to be
the simplest because it does not require outside parties. An article in the Organization Behavior and Human
Decision Processes defined negotiation as the “process by which parties with nonidentical preferences
allocate resources through interpersonal activity and joint decision making.” Analyzing the various
components of this definition is helpful in understanding the theories and practices involved in negotiation as
a form of dispute settlement.
Figure 2.1 (Credit: rawpixel/ pixabay/ Attribution 2.0 Generic (CC BY 2.0))
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Business_Law_I_Essentials_-_WEB.pdf | Negotiation Types and Objectives
Per the above definition, negotiation becomes necessary when two parties hold “non-identical” preferences.
This statement seems fairly obvious, since 100% agreement would indicate that there is not any need for
negotiation. From this basic starting point, there are several ways of thinking about negotiation, including how
many parties are involved. For example, if two small business owners find themselves in a disagreement over
property lines, they will frequently engage in dyadic negotiation. Put simply, dyadic negotiation involves two
individuals interacting with one another in an attempt to resolve a dispute. If a third neighbor overhears the
dispute and believes one or both of them are wrong with regard to the property line, then group negotiation
could ensue. Group negotiation involves more than two individuals or parties, and by its very nature, it is often
more complex, time-consuming, and challenging to resolve.
While dyadic and group negotiations may involve different dynamics, one of the most important aspects of
any negotiation, regardless of the quantity of negotiators, is the objective. Negotiation experts recognize two
major goals of negotiation: relational and outcome. Relational goals are focused on building, maintaining, or
repairing a partnership, connection, or rapport with another party. Outcome goals, on the other hand,
concentrate on achieving certain end results. The goal of any negotiation is influenced by numerous factors,
such as whether or not there will be contact with the other party in the future. For example, when a business
negotiates with a supply company that it intends to do business with in the foreseeable future, it will try to
focus on “win-win” solutions that provide the most value for each party. In contrast, if an interaction is of a
one-time nature, that same company might approach a supplier with a “win-lose” mentality, viewing its
objective as maximizing its own value at the expense of the other party’s value. This approach is referred to as
zero-sum negotiation, and it is considered to be a “hard” negotiating style. Zero-sum negotiation is based on
the notion that there is a “fixed pie,” and the larger the slice that one party receives, the smaller the slice the
other party will receive. Win-win approaches to negotiation are sometimes referred to as integrative, while
win-lose approaches are called distributive.
Figure 2.2
Certain negotiation styles adopt a mindset in which the extent of one’s win is proportional to the
other’s loss. (Credit: Sebastian Voortman/ pexels/ License: CC0)
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Everyone has a different way of approaching negotiation, depending on the circumstance and the person’s
personality. However, the Thomas-Kilmann Conflict Mode Instrument (TKI) is a questionnaire that provides
a systematic framework for categorizing five broad negotiation styles. It is closely associated with work done
by conflict resolution experts Dean Pruitt and Jeffrey Rubin. These styles are often considered in terms of the
level of self-interest, instead of how other negotiators feel. These five general negotiation styles include:
•
Forcing. If a party has high concern for itself, and low concern for the other party, it may adopt a
competitive approach that only takes into account the outcomes it desires. This negotiation style is most
prone to zero-sum thinking. For example, a car dealership that tries to give each customer as little as
possible for his or her trade-in vehicle would be applying a forcing negotiation approach. While the party
using the forcing approach is only considering its own self-interests, this negotiating style often
undermines the party’s long-term success. For example, in the car dealership example, if a customer feels
she has not received a fair trade-in value after the sale, she may leave negative reviews and will not refer
her friends and family to that dealership and will not return to it when the time comes to buy another car.
•
Collaborating. If a party has high concern and care for both itself and the other party, it will often employ
a collaborative negotiation that seeks to maximum the gain for both. In this negotiating style, parties
recognize that acting in their mutual interests may create greater value and synergies.
•
Compromising. A compromising approach to negotiation will take place when parties share some
concerns for both themselves and the other party. While it is not always possible to collaborate, parties
can often find certain points that are more important to one versus the other, and in that way, find ways
to isolate what is most important to each party.
•
Avoiding. When a party has low concern for itself and for the other party, it will often try to avoid
negotiation completely.
•
Yielding. Finally, when a party has low self-concern for itself and high concern for the other party, it will
yield to demands that may not be in its own best interest. As with avoidance techniques, it is important to
ask why the party has low self-concern. It may be due to an unfair power differential between the two
parties that has caused the weaker party to feel it is futile to represent its own interests. This example
illustrates why negotiation is often fraught with ethical issues.
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Business_Law_I_Essentials_-_WEB.pdf | Figure 2.3
Concern for self vs. others leads to the differences in negotiating styles. (Modification of art by
BNED/Rubin Credit: CC BY NC SA)
Negotiation Styles in Practice
Apple’s response to its treatment of warranties in China, i.e., giving one-year warranties instead of two-year
warranties as required by law, serves as an example of how negotiation may be used. While Apple products
continued to be successful and popular in China, the issue rankled its customers, and Chinese celebrities
joined the movement to address the concern. Chinese consumers felt that Apple was arrogant and didn’t
value its customers or the customers’ feedback. In response, Tim Cook issued a public apology in which he
expressed regret over the misunderstanding, saying, “We are aware that insufficient communications during
this process has led to the perception that Apple is arrogant and disregards, or pays little attention to,
consumer feedback. We express our sincere apologies for any concern or misunderstanding arising
therefrom.” Apple then listed four ways it intended to resolve the matter. By exhibiting humility and concern
for its customers, Apple was able to diffuse a contentious situation that might have resulted in costly litigation.
Negotiation Laws
Negotiations are covered by a medley of federal and state laws, such as the Federal Arbitration Act and
Uniform Arbitration Act. The Federal Arbitration Act (FAA) is a national policy that favors arbitration and
enforces situations in which parties have contractually agreed to participate in arbitration. Parties who have
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It is the FAA that allows parties to confirm their awards, as will be discussed in the following chapters. When
considering negotiation laws, it is important to keep in mind that each state has laws with their own definitions
and nuances. While the purpose of the Uniform Arbitration Act in the United States was to provide a uniform
approach to the way states handle arbitration, it has only been adopted in some form by about 35 states.
2.2
Mediation
Court or Agency-Connected Mediation
Mediation is a method of dispute resolution that relies on an impartial third-party decision-maker, known as a
mediator, to settle a dispute. While requirements vary by state, a mediator is someone who has been trained
in conflict resolution, though often, he or she does not have any expertise in the subject matter that is being
disputed. Mediation is another form of alternative dispute resolution. It is often used in attempts to resolve a
dispute because it can help disagreeing parties avoid the time-consuming and expensive procedures involved
in court litigation. Courts will often recommend that a plaintiff, or the party initiating a lawsuit, and a
defendant, or the party that is accused of wrongdoing, attempt mediation before proceeding to trial. This
recommendation is especially true for issues that are filed in small claims courts, where judges attempt to
streamline dispute resolution. Not all mediators are associated with public court systems. There are many
agency-connected and private mediation services that disputing parties can hire to help them potentially
resolve their dispute. The American Bar Association suggests that, in addition to training courses, one of the
best ways to start a private mediation business is to volunteer as a mediator. Research has shown that
experience is an important factor for mediators who are seeking to cultivate sensitivity and hone their conflict
resolution skills.
For businesses, the savings associated with mediation can be substantial. For example, the energy corporation
Chevron implemented an internal mediation program. In one instance, it cost $25,000 to resolve a dispute
using this internal mediation program, far less than the estimated $700,000 it would have incurred through
the use of outside legal services. Even more impressive is the amount it saved by not going to court, which
would have cost an estimated $2.5 million.
Mediation is distinguished by its focus on solutions. Instead of focusing on discoveries, testimonies, and expert
witnesses to assess what has happened in the past, it is future-oriented. Mediators focus on discovering ways
to solve the dispute in a way that will appease both parties.
Other Benefits of Mediation
•
Confidentiality. Since court proceedings become a matter of public record, it can be advantageous to use
mediation to preserve anonymity. This aspect can be especially important when dealing with sensitive
matters, where one or both parties feels it is best to keep the situation private.
•
Creativity. Mediators are trained to find ways to resolve disputes and may apply outside-the-box thinking
to suggest a resolution that the parties had not considered. Since disagreeing parties can be feeling
emotionally contentious toward one another, they may not be able to consider other solutions. In
addition, a skilled mediator may be able to recognize cultural differences between the parties that are
influencing the parties’ ability to reach a compromise, and thus leverage this awareness to create a novel
solution.
•
Control. When a case goes to trial, both parties give up a certain degree of control over the outcome. A
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Business_Law_I_Essentials_-_WEB.pdf | judge may come up with a solution to which neither party is in favor. In contrast, mediation gives the
disputing parties opportunities to find common ground on their own terms, before relinquishing control
to outside forces.
Role of the Mediator
Successful mediators work to immediately establish personal rapport with the disputing parties. They often
have a short period of time to interact with the parties and work to position themselves as a trustworthy
advisor. The Harvard Law School Program on Negotiation reports a study by mediator Peter Adler in which
mediation participants remembered the mediators as “opening the room, making coffee, and getting
everyone introduced.” This quote underscores the need for mediators to play a role beyond mere
administrative functions. The mediator’s conflict resolution skills are critical in guiding the parties toward
reaching a resolution.
Steps of Mediation
As explained by nolo.com (http://nolo.com) , mediation, while not being as formal as a court trial, involves the
following six steps:
•
Mediator’s Opening Statement: During the opening statement, the mediator introduces himself or
herself and explains the goals of mediation.
•
Opening Statements of Plaintiff and Defendant: Both parties are given the opportunity to speak,
without interruption. During this opening statement, both parties are afforded the opportunity to
describe the nature of the dispute and their desired solution.
•
Joint Discussion: The mediator will try to get the two disagreeing parties to speak to one another and will
guide the discussion toward a mutually amicable solution. This part of the mediation process usually
identifies which issues need to be resolved and explores ways to address the issues.
•
Private Caucus: During this stage, each party has the ability to meet and speak privately with the
mediator. Typically, the mediator will use this time to learn more about what is most important to each
party and to brainstorm ways to find a resolution. The mediator may ask the parties to try to put aside
their emotional responses and resentments to work toward an agreement.
•
Joint Negotiation: After the private caucuses, the parties are joined again in the same room, and the
mediator presents any newly discovered insight to guide them toward an agreement.
•
Closure: During this final stage, an agreement is reached, or it is determined that the parties cannot
agree. Either way, the mediator will review the positions of each party and ask them if they would like to
meet again or explore escalating options, such as moving the dispute to court.
Ethical Issues
Both the disputants themselves, and those who attempt to facilitate dispute resolutions, i.e., mediators and
attorneys, must navigate a myriad of ethical issues, such as deciding whether they should tell the entire truth,
or only offer a partial disclosure. This conflict has long roots in history and has often been considered in terms
of consequentialist and deontological ethical theories. Consequentialist ethics, sometimes known as
situational ethics, is a way of looking at difficult decisions by considering their implications. Someone who
follows consequentialist ethics in mediation or arbitration would consider the impact of his or her decision on
the parties in light of their unique circumstances. In contrast, deontologist ethics bases its decision on
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Imagine a situation in which a professional accountant holds a consequentialist ethical viewpoint and believes
that there are certain scenarios in which the disclosure of only part of the truth is a commendable course of
action. For example, if an accountant is interviewed regarding how the company handled a certain transaction
in its retirement account, he might choose to withhold certain information because he is afraid it will harm the
retirees’ ability to retain the full benefits of their pensions. In this case, the accountant is utilizing “the ends
justify the means” logic because he feels that the omission of truth will result in more benefit than its
revelation. A mediator or arbitrator who also follows a consequentialist viewpoint would consider the
accountant’s motivation and the circumstances, in addition to his or her actions.
Ethical situations like these are not only part of dispute mediation in business law scenarios, but also happen
in daily life. Consider the case of a parent who is on his way home from work when he receives a call from the
babysitter, telling him that his child’s forehead feels hot and that she is complaining of not feeling well. Sitting
in traffic, the parent remembers that he does not know the whereabouts of the digital thermometer, so he
decides to stop and purchase one. The parking lot at the store is extremely busy, so the parent decides to park
in a handicapped spot, even though he does not have any mobility challenges. These types of situations have
been addressed by philosophers such as Immanuel Kant, who spoke of the categorical imperative, which he
defined as, “Act only according to that maxim whereby you can, at the same time, will that it should become a
universal law.” In other words, one’s action should be considered in light of what would happen if everyone
were to engage in the same action. While it might not seem like a harmful infraction, if everyone were to do it,
then it would cause a true inconvenience and possible suffering for mobility-impaired individuals, for whom
those spaces were designated. A deontological ethical viewpoint would determine that it is always wrong to
park in the handicapped space, regardless of the situation. In real life, it is very difficult to adopt a 100%
deontological viewpoint for dispute resolution. Often, the reason the dispute has arisen in the first place is
because of some ambiguity inherent in the situation. In these cases, mediators must apply their best
judgment to help the disagreeing parties see one another’s viewpoints and to guide them toward a mutually
amicable solution.
Figure 2.4
Sometimes ethical issues have no clear-cut answers and mediators must rely upon their best
judgement. (Credit: George Becker/ pexels/ License: CC0)
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As technology continues to change the ways we interact with one another, it is likely that we will see advances
in mediation techniques. For example, there are companies that offer online mediation services, known as e-
mediation. E-mediation can be useful in situations where the parties are geographically far apart, or the
transaction in dispute took place online. Ebay uses e-mediation to handle the sheer volume of
misunderstandings between parties. Research has shown that one of the benefits of e-mediation is that it
allows people the time needed to “cool down” when they have to explain their feelings in an email, as opposed
to speaking to others in person.
In addition to technological advancements, new findings in psychology are influencing how disputes are
resolved, such as the rising interest in canine-assisted mediation (CAM), in which the presence of dogs is
posited to have an impact on human emotional health. Since the presence of dogs has a positive impact on
many of the neurophysiological stress markers in humans, researchers are beginning to explore the use of
therapy animals to assist in dispute resolution.
Figure 2.5
Mediation experts are considering the benefits of therapy dogs for canine-assisted mediation.
(Credit: Garfield Besa/ pexels/ License: CC0)
2.3
Arbitration
The American Bar Association (ABA) defines arbitration as the “private process where disputing parties agree
that one or several individuals can make a decision about the dispute after receiving evidence and hearing
arguments.” Arbitration is overseen by a neutral arbitrator, or an individual who is responsible for making a
decision on how to resolve a dispute and who has the ability to decide on an award, or a course of action that
the arbiter believes is fair, given the situation. An award can be a monetary payment that one party must pay
to the other; however, awards need not always be financial in nature. An award may require that one business
stop engaging in a certain practice that is deemed unfair to the other business. As distinguished from
mediation, in which the mediator simply serves as a facilitator who is attempting to help the disagreeing
parties reach an agreement, and arbitrator acts more like a judge in a court trial and often has legal expertise,
although he or she may or may not have subject matter expertise. Many arbitrators are current or retired
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Types of Arbitration Agreements
Parties can enter into either voluntary or involuntary arbitration. In voluntary arbitration, the disputing
parties have decided, of their own accord, to seek arbitration as a way to potentially settle their dispute.
Depending on the state’s laws and the nature of the dispute, disagreeing parties may have to attempt
arbitration before resorting to litigation; this requirement is known as involuntary arbitration because it is
forced upon them by an outside party.
Arbitration can be either binding or non-binding. In binding arbitration, the decision of the arbitrator(s) is
final, and except in rare circumstances, neither party can appeal the decision through the court system. In
non-binding arbitration, the arbitrator’s award can be thought of as a recommendation; it is only finalized if
both parties agree that it is an acceptable solution. This fact is why non-binding arbitration can be useful for
what the American Arbitration Association describes as “disputes where the parties may be too far apart in
their viewpoints to mediate or are in need of an objective evaluation of their respective positions.” Having a
neutral party assess the situation may help disputants to rethink and reassess their positions and reach a
future compromise.
Issues Covered by Arbitration Agreements
There are many instances in which arbitration agreements may prove helpful as a form of alternative dispute
resolution. While arbitration can be useful for resolving family law matters, such as divorce, custody, and child
support issues, in the domain of business law, it has three major applications:
•
Labor. Arbitration has often been used to resolve labor disputes through interest arbitration and
grievance arbitration. Interest arbitration addresses disagreements about the terms to be included in a
new contract, e.g., workers of a union want their break time increased from 15 to 25 minutes. In contrast,
grievance arbitration covers disputes about the implementation of existing agreements. In the example
previously given, if the workers felt they were being forced to work through their 15-minute break, they
might engage in this type of arbitration to resolve the matter.
•
Business Transactions. Whenever two parties conduct business transactions, there is potential for
misunderstandings and mistakes. Both business-to-business transactions and business-to-consumer
transactions can potentially be solved through arbitration. Any individual or business who is unhappy with
a business transaction can attempt arbitration. Jessica Simpson recently won an arbitration case in which
she disputed the release of a fitness video she had made because she felt the editor took too long to
release it.
•
Property Disputes. Business can have various types of property disputes. These might include
disagreements over physical property, e.g., deciding where one property ends and another begins, or
intellectual property, e.g., trade secrets, inventions, and artistic works.
Typically, civil disputes, as opposed to criminal matters, attempt to use arbitration as a means of dispute
resolution. While definitions can vary between municipalities, states, and countries, a civil matter is generally
one that is brought when on party has a grievance against another party and seeks monetary damages. In
contrast, in a criminal matter, a government pursues an individual or group for violating laws meant to
establish the best interests of the public. While the word crime often invokes the idea of violence, there are
many crimes, such as embezzlement, in which the harm caused is not physical, but rather monetary.
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As previously discussed, going to court to solve a dispute is a costly endeavor, and for large companies, it is
possible to incur millions of dollars in legal expenses. While arbitration is meant to be a form of dispute
resolution that helps disagreeing parties find a low-cost, time-efficient solution, it has become increasingly
important to question whose expenses are being lowered, and to what effect. Many consumer advocates are
fighting against what are known as forced-arbitration clauses, in which consumers agree to settle all
disputes through arbitration, effectively waiving their right to sue a company in court. Some of these forced
arbitration clauses cause the other party to forfeit their right to appeal an arbitration decision or participate in
any kind of class action lawsuit, in which individuals who have a similar issue sue as one collective group. For
example, in 2006, Enron investors initiated a class action lawsuit against executives who hid the company’s
losses and were awarded $7.2 billion dollars. While this example represents a case where the company being
sued was clearly in the wrong, it is important for large companies to be ethical in their use of arbitration
clauses. They should not be used as a way to keep wrongdoings “quiet” or to limit consumers’ abilities to
obtain rightful retribution for products and services that do not perform as promised.
Arbitration Procedures
When parties enter into arbitration, certain procedures are followed. First, the number of arbitrators is
decided, along with how they will be chosen. Parties that enter into willing arbitration may have more control
over this decision, while those that do so unwillingly may have a limited pool of arbitrators from which to
choose. In the case of willing arbitration, parties may decide to have three arbitrators, one chosen by each of
the disputants and the third chosen by the elected arbitrators.
Next, a timeline is established, and evidence is presented by both parties. Since arbitration is less formal than
court proceedings, the evidence phase typically goes faster than it would in a courtroom setting. Finally, the
arbitrator will make a decision and usually makes one or more awards.
Not all arbitration agreements have the same procedures. It depends on the types of agreements made in
advance by the disputing parties. Consider the following scenario: the owner of a large commercial office
building uses a lease agreement, which stipulates that arbitration will be used to settle the renewal terms of a
lease. For example, the lease may state that, at the end of year one, the second year’s lease payment will be at
current market value, and if the tenants cannot agree on that value, they will then allow an arbitrator to
decide. If the building owner feels that the renewal rate should be $40/square foot and the tenant feels it
should be $20/square foot, an arbiter who may not be an expert in local real estate values might decide to
resolve the dispute by using a rule of thumb, such as “splitting the difference.” In this case, the arbiter might
decide that $30/square foot represents a fair lease renewal rate.
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Various types of arbitration can be employed depending on what the parties think is best for their
situation. (Credit: Tim Eiden/ pexels/ License: CC0)
To overcome this shortcoming, the building owner could write a lease agreement that stipulates that the
parties use binding baseball arbitration and use subject matter experts as arbitrators. In this case, that might
include real estate attorneys or commercial real estate investors. In baseball arbitration, each party would
submit a lease renewal figure to an arbitrator. For example, imagine that the renewing tenant submits an offer
of $10/per square foot, which is very much under market value, while the building owner submits an offer of
$35/square foot. In this scenario, the arbitrator chooses one offer or the other, without modification. This type
of arbitration incentivizes both parties to be fair in their dealings with one another because to do otherwise
would be to their own detriment.
Arbitration Awards
An arbiter can issue either a “bare bones” or a reasoned award. A bare bones award refers to one in which
the arbitrator simply states his or her decision, while a reasoned award lists the rationale behind the decision
and award amount. The decision of the arbitrator is often converted to a judgement, or legal tool that allows
the winning party to pursue collection action on the award. The process of converting an award to a
judgement is known as confirmation.
Judicial Enforcement of Arbitration Awards
While it might seem that the party that is awarded a settlement by an arbitrator has reason to be relieved that
the matter is resolved, sometimes this decision represents just one more step toward actually receiving the
award. While a party may honor the award and voluntarily comply, this outcome is not always the case. In
cases where the other party does not comply, the next step is to petition the court to enforce the arbitrator’s
decision. This task can be accomplished by numerous mechanisms, depending on the governing laws. These
include writs of execution, garnishment, and liens.
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Writ of Execution. Cornell Law School defines a writ of execution as “A court order that directs law
enforcement personnel to take action in an attempt to satisfy a judgment won by the plaintiff.”
•
Garnishment. A garnishment refers to a court order that seizes the money, typically wages, to satisfy a
debt. A myriad of laws apply to wage garnishment, e.g., certain types of income, such as Social Security
Disability Income (SSDI), cannot be garnished. In addition, depending on state laws, sometimes only
debtors who make over a certain amount, e.g. $1,600 gross/month, are subject to wage garnishment.
•
Liens. A lien gives the entitled party in a judgement the right to seize the property of another to satisfy a
debt. Commonly, liens can be placed on real estate and personal property, such as automobiles and
boats. Property that has a lien cannot be sold because the title is encumbered and often cannot be legally
transferred until the lien is satisfied, or paid. Depending on state laws, only certain property is subject to a
lien. For example, the winning party in an arbitration case may only be able to place a lien on the other
party’s vehicle if it has a market value of over $7,500.
The enforcement of arbitration awards is governed by a number of laws, such as Federal Arbitration Act and
Uniform Arbitration Act.
Summary
Negotiation, mediation, and arbitration are alternatives form of dispute resolution that attempt to help
disagreeing parties avoid the time and expense of court litigation. While negotiation is involved in all three
forms, mediation and arbitration involve a neutral third party to help the parties find a solution. Frameworks
that consider self-interest, as opposed to interest in the other party, can help negotiators craft successful
negotiation approaches. Mediators, arbitrators, and groups of arbitrators all follow certain steps and play in
important role in trying to help parties reach common ground and avoid court proceedings. Mediators who
establish rapport with disputing parties can facilitate dispute resolution, as mediation is very much solution-
focused. Arbitrators must often decide upon awards when parties cannot reach an agreement. Even when an
aggrieved party attains an arbitration award, it may still have to pursue the other party by using a variety of
legal techniques to enforce the payment or practice stipulated by the award. Staying current with federal and
state laws associated with negotiation proceedings is essential for businesses looking to maximize their
relational and outcome goals.
Assessment Questions
1. A process in which a third party selected by the disputants helps the parties to voluntarily resolve their
disagreement is known as:
a.
Mediation.
b.
Discovery.
c.
Arbitration.
d.
Settlement.
2. What’s the first step in Alternative Dispute Resolution?
a.
Conciliation.
b.
Mediation.
c.
Negotiation.
d.
Arbitration.
3. What’s the definition of negotiation?
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Chapter 2 Disputes and Dispute Settlement
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Business_Law_I_Essentials_-_WEB.pdf | 4. How does the process of negotiation work?
5. Explain the Thomas-Kilmann Conflict Mode Instrument.
6. A person trained in conflict resolution is considered:
a.
An arbitrator.
b.
A mediator.
c.
A negotiator.
d.
A judge.
7. Mediation focuses on:
a.
Solutions.
b.
Testimony.
c.
Expert witnesses.
d.
Discoveries.
8. Name the steps in Mediation.
9. What’s the main benefit of e-mediation?
10. Roger and Larry are having a dispute regarding their joint business. They want to have a binding resolution
to their dispute, but they would prefer to have the dispute handled privately and by someone with special
expertise. The best form of dispute resolution for their problem would be:
a.
Arbitration.
b.
Litigation.
c.
Mediation.
d.
Summary Jury Trial.
11. All of the following are methods to enforce an arbitrator’s decision except:
a.
Writs of Execution.
b.
Garnishment.
c.
Fines.
d.
Liens.
12. Describe the typical steps in Arbitration.
13. Explain the differences between binding and non-binding arbitration.
14. All of the following are the most common applications of arbitration in the business context except:
a.
Labor.
b.
Business Transactions.
c.
Property Disputes.
d.
Torts.
15. The following are the type of awards that may be issue by an arbitrator:
a.
Bare Bones.
b.
Reasoned.
c.
Both a and b.
d.
Neither a nor b.
Chapter 2 Disputes and Dispute Settlement
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Business_Law_I_Essentials_-_WEB.pdf | Endnotes
He, L. (April 2013). Tim Cook’s apology letter to Apple customer in China. Forbes. Retrieved from:
https://www.forbes.com/sites/laurahe/2013/04/03/tim-cooks-apology-letter-to-customers-in-
china/#510458b51ea3.
Kilmann, R. H., & Thomas, K. W. (1977). Developing a forced-choice measure of conflict-handling behavior: The
“MODE” instrument. Educational and psychological measurement, 37(2), 309–325.
Top 10 International Business Negotiation Case Studies. Program on Negotiation. Harvard Law School.
Retrieved from: https://www.pon.harvard.edu/daily/international-negotiation-daily/top-negotiation-case-
studies-in-international-negotiations-from-business-and-global-politics/.
Pinkley, R. L., Neale, M. A., & Bennett, R. J. (1994). The impact of alternatives to settlement in dyadic
negotiation. Organizational Behavior and Human Decision Processes, 57(1), 97–116.
Pruitt, D. G. (1983). Strategic choice in negotiation. American Behavioral Scientist, 27(2), 167–194.
Pruitt, D. G., & J. Z. Rubin. (1986). Social conflict: Escalation, stalemate, and settlement. New York: Random
House.
Uniform Trusts Act. Cornell University Law School. Retrieved from: https://www.law.cornell.edu/uniform/
vol7#arbit.
Carver, T., & Vondra, A. (May–June 1994). Alternative dispute resolution: Why it works and why it doesn’t.
Harvard Business Review. Retrieved from: https://hbr.org/1994/05/alternative-dispute-resolution-why-it-
doesnt-work-and-why-it-does.
MacKinnon, D. P., Lockwood, C. M., Hoffman, J. M., West, S. G., & Sheets, V. (2002). A comparison of methods to
test mediation and other intervening variable effects. Psychological methods, 7(1), 83.
McGuire, J. Twelve tips for launching a mediation practice. General Practice, Solo and Small Firm Division The
American Bar Association. Retrieved from: https://www.americanbar.org/publications/gp_solo/2011/
september/twelve_tips_launching_mediation_practice.html.
Mediation: the six stages. NOLO. Retrieved from: https://www.nolo.com/legal-encyclopedia/mediation-six-
stages-30252.html.
Paul, D. Canine-assisted mediation. Retrieved from: http://www.hnlr.org/wp-content/uploads/HNLR-Paul-
Final.pdf.
Using E-Mediation and Online Mediation Techniques for Conflict Resolution. Program on Negotiation. Harvard
Law School. Retrieved from: https://www.pon.harvard.edu/daily/mediation/dispute-resolution-using-online-
mediation/.
What makes a good mediator? Program on Negotiation. Harvard Law School. Retrieved from:
https://www.pon.harvard.edu/daily/mediation/what-makes-a-good-mediator/.
Arbitration. American Bar Association. Retrieved from: https://www.americanbar.org/groups/
dispute_resolution/resources/DisputeResolutionProcesses/arbitration.html.
Dunlap, K. (May 2010). Singer Jessica Simpsons wins arbitration case. FindLaw. Retrieved from:
https://blogs.findlaw.com/celebrity_justice/2010/05/singer-jessica-simpson-wins-arbitration-case.html.
Elkouri, F., Elkouri, E. A., Ruben, A. M., American Bar Association, & Employment Law. (1985). How arbitration
works. Washington, DC: Bureau of National Affairs.
28
Chapter 2 Disputes and Dispute Settlement
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | Farber, H. S. (1981). Splitting-the-difference in interest arbitration. ILR Review, 35(1), 70–77.
Use ‘Baseball Arbitration’ to settle rent disputes at renewal time. Commercial Lease Law Insider. Retrieved
from: https://www.stroock.com/siteFiles/Pub391.pdf.
What We Do (n.d.). American Arbitration Association. Retrieved from: https://www.adr.org/Arbitration.
Writ of Execution (n.d.). Cornell Law School. Retrieved from: https://www.law.cornell.edu/wex/
writ_of_execution.
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Chapter 2 Disputes and Dispute Settlement
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Business_Law_I_Essentials_-_WEB.pdf | Chapter Outline
3.1 Business Ethics
3.2 Social Responsibility
Introduction
Learning Outcome
•
Analyze the role of ethics and social responsibility in business.
3.1
Business Ethics
Businesses must establish a clear set of values that promote ethical practices and social responsibility. In
today’s business climate, companies are increasingly under scrutiny by private citizens. A company that builds
its foundation on sound principles will have a better chance of staying competitive in a volatile market.
Figure 3.1 (Credit: rawpixel/ pixabay/ Attribution 2.0 Generic (CC BY 2.0))
3
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Business_Law_I_Essentials_-_WEB.pdf | Figure 3.2
A group of employees who uphold strong corporate values can be an asset to the company they
work for. (Credit: rawpixel/ pexels/ License: CC0)
Business ethics are considered to be the blueprint for building a successful organization. If an organization is
built on socially responsible values, it will be stronger than an organization that is built on profit alone. More
than just a positive reputation, the core ethics of a business dictate how every decision, process, and
procedure will take place. This steadfast governance applies even if the business faces hard times or difficult
situations. Some will even argue that businesses require full transparency in today’s world.
Over the last few decades, numerous cases of bad business practices have made headlines. From McDonalds’
funding of President Nixon’s campaign in an effort to reduce workers’ wages in the 1970s, to the more recent
case of Uber employees alleging sexual harassment and the company’s CEO having a public meltdown in the
back of a driver’s car, there’s no shortage of ethics-related problems in the business world. Businesses are
more than people working together to offer a product or service. Businesses are often viewed as entities that
should protect stakeholders from unethical behaviors and activities. A set of governing rules should be in
place to set the bar high for ethical compliance in every organization.
Why Is Corporate Ethics So Important in Business?
The idea of business ethics may seem subjective, but it comes down to acceptable levels of behavior for each
individual who makes up the organization. This behavior must start at the top with responsible actions
demonstrated by leadership. By doing so, leaders create a set of rules that are to be followed by others in the
company. These rules can be based on the deep values that the company has concerning the quality of
products and services, the commitment to customers, or how the organization gives something back to the
community. The more a company lives by its set of ethics, the more likely it is to be successful.
Anna Spooner, who writes for LovetoKnow, shares tips on how to evaluate whether or not an organization is
creating ethical practices by determining the impact of each practice. Some examples include:
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Business_Law_I_Essentials_-_WEB.pdf | Executive compensation rates during employee layoffs. Let’s say a company is struggling during an
economic downturn and must lay off a portion of its workforce. Does the CEO of the company take his or her
annual raise or take a pay cut when others are losing their jobs? One could say that to take a raise is unethical
because the CEO should also sacrifice some pay for the good of the company.
Fair compensation for employees. Paying employees minimum wage, or just above minimum wage, is not
always fair compensation. In most regions, the cost of living has not been adjusted in years, meaning that
people are surviving on less money. Ethics can make a difference here.
Ethical business practices, guided by a corporate set of standards, can have many positive outcomes, including
recruitment and retention improvement, better relationships with customers, and positive PR. In 2015, Dan
Price, CEO of the Seattle payment processing firm Gravity Payments, voluntarily took a huge pay cut and
vowed to raise his employees’ wages to $70,000. This move was great for the company, which claims that
revenues and profits skyrocketed, and they experienced a 91 percent employee retention rate over the last few
years.
On the opposite side, unethical business behaviors can have a negative impact on any business. Even if an
unethical decision is made by a single member of the executive team, it can have far-reaching repercussions.
Some possible results of unethical business actions may include:
Poor company reputation. In an increasingly transparent world, unethical decisions made by businesspeople
become permanent stains on the company. Social networks have become sounding boards for anything
deemed unethical or politically incorrect, and everyone from disgruntled employees to dissatisfied customers
can rate companies on public company review websites.
Negative employee relations. If employees continually see a discrepancy between what’s expected of them
and how leadership behaves, this contrast can create serious problems in the management of employees.
Some employees may become disengaged, while others will stop working as hard. After all, if the same rules
don’t apply to everyone, why even bother? The downside to negative employee relations is that the entire
company becomes less productive, less responsive to customers, and less profitable.
Recruitment and retention problems. Once a company has developed a negative reputation, it can be
difficult to recruit new talent, let alone retain the talent that’s already there. Disengaged employees who grow
tired of the double standards will leave. This attrition can impact customers who then have to deal with less
experienced and less interested employees, who are already overworked and frustrated.
Company credibility lost. Customers are savvy enough to follow what’s going on from an ethics standpoint. If
they hear of a problem, they begin to question the actions of every person at the company. For example, if a
member of the board is accepting expensive gifts from clients in exchange for favorable pricing of materials,
this situation could set off major alarms for other customers, and even vendors. The company can expect to
lose business if this unethical behavior continues.
As you can see, poor ethics can quickly spiral downward, destroying every aspect of the business and making it
very difficult to compete. It’s critical for every business to pay attention to ethical standards and continually
remind employees at all levels that their behavior has an impact on the entire organization.
History of Corporate Governance
The concept of corporate governance is relatively new compared to the entire history of free trade and
business formation. There was likely some “code of honor” followed by businesses in the past, but it wasn’t
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Business_Law_I_Essentials_-_WEB.pdf | until the 21st century that greater attention was paid to how companies operate and how the operation
impacts employees and the communities in which they serve.
According to the Ethics and Compliance Initiative, which is comprised of organizations that are committed to
creating best practices in ethics, each decade has been influenced by external factors, such as war or economic
turmoil, combined with major ethical focal areas, and the result has been the development of ethics and
compliance programs. For example, in the mid-1980s, the United States was thrust into a recessionary period.
During this period, government contractors were billing outrageous amounts for equipment and services,
further increasing the government’s deficit.
At the same time, larger companies began downsizing to cut costs, which eroded the trust that employees
once had. People felt the need to look out for themselves. Greed appeared to be everywhere, from political
bribes to the earliest financial schemers. As a result, General Dynamics established the first business ethics
office in 1985 to crack down on this kind of activity, and other companies created ombudsman positions to
help ethics officers identify and prosecute corporate ethics violators.
Ethical Decision-Making Policies
In any organization, sound moral, business, and financial practices must be followed at all times. No one is
above the law or has special privileges when it comes to ethics. Decision making needs to happen with
corporate governance in mind. According to Michigan State University, the six steps to ethical decision making
are:
1.
Make sure leaders understand the issue at hand and have gathered all of the facts related to it.
2.
Leaders should list all of the facts they know, and list any assumptions they are making about the issue.
This step ensures that the leaders keep the facts and assumptions differentiated and in mind.
3.
Note all of the concerns related to the issue, including all of the people concerned, the laws related to the
issue, and any corporate or professional ethical guidelines that may be involved.
4.
Construct a potential solution to the problem.
5.
Evaluate the proposed solution, making sure to consider all of the ethical aspects noted in step 3.
6.
Once leaders have come to a solution, they recommend it, as well as any actions that need to be taken.
Establishing a Code of Conduct
To educate and guide others in the organization, a set of ethics, or a code of conduct, should be developed
and distributed. Kimberlee Leonard, who writes for the Houston Chronicle, states, “A code of ethics is
important for businesses to establish to ensure that everyone in the company is clear on the mission, values
and guiding principles of the company.” While it takes some time to create a code of conduct, the ideals
involved should already be present in the company’s culture.
The elements that belong in a code of conduct, according to Kimberlee Leonard, are:
Legal considerations. The business is a legal entity, and therefore all employees should be thinking about
their behavior and how it could easily turn into a lawsuit. Establishing conduct rules at this level can clear up
any gray areas. For example, a company should define what sexual harassment is and what to do if an
employee experiences it. New items that detail specific codes of conduct can be added as they come up.
Value-based ethics. These are specific ethics that dig under the surface of a corporate culture. A business
should think about how it wants to be viewed by the community. Examples could be a commitment to green
office practices, reduction of a company’s carbon footprint, giving a certain percentage of a company’s profits
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Regulatory ethics. These are designed to maintain certain standards of performance based on the industry.
One example is a commitment to maintaining data privacy at all times, as it pertains to customer records. This
element defines how employees are to handle sensitive data and what will happen if someone doesn’t follow
the rules.
Professional behaviors. One should never assume that just because someone puts on a business suit and
goes to work that he or she will behave professionally. Problems such as bullying, harassment, and abuse can
happen in the workplace. Establishing behavioral standards for professionalism should include what is
acceptable in the office, while traveling, during meetings, and after hours, when colleagues meet with clients
and one another.
A good code of conduct is a working document that can be updated and shared as needed. Many companies
include this document as part of their employee manual, while others use a secure intranet for displaying this
information. No matter where it is housed, employees need to be educated on the code of conduct and refer
to it often, starting on the first day on the job.
What to Do When Something Goes Wrong
It should be noted that along with a code of conduct, there needs to be a clear “whistleblower” policy in which
violators are identified and action is taken. This process should be handled with complete confidentiality and
sensitivity to the company and all parties involved. Retaliation should never be tolerated when it comes to
ethics violations. The company should have a step-by-step plan of action for dealing with ethics problems at all
levels, up to and including the executive leadership of the company. A third-party investigative firm can be
used to handle such matters to remove the burden and influence that internal resources may have.
3.2
Social Responsibility
Over the last few decades, there has been a movement throughout the global business community to improve
the world through smarter use of resources and giving back to communities. This movement is called
corporate social responsibility. The concept is catching on at companies that range in size from small startups
to large Fortune 500 corporations. In the following section, you will learn what social responsibility is and how
it is a win-win for businesses and consumers.
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Business_Law_I_Essentials_-_WEB.pdf | Figure 3.3
Employees often like to participate in volunteer activities through their employer. (Credit:
rawpixel/ pixabay/ License: CC0)
What Is Corporate Responsibility?
Corporate responsibility refers to the idea that a business is given the opportunity and privilege to make the
world a better place. This process can happen through a variety of methods, including the donation of funds,
volunteerism, and implementation of environmentally friendly policies. It is up to each organization to
determine the best way to demonstrate social responsibility.
While certainly not mandatory, corporate social responsibility has become a popular way for companies to
improve their image and promote causes they believe in at the same time. Corporate social responsibility may
involve focusing on the immediate community in which a company does business. However, there are some
organizations that take it a step further and focus on more widespread global issues. For example, the shoe
company TOMS has created a mission to make sure that every boy and girl in underprivileged countries has
proper footwear. Blake Mycoskie, CEO of TOMS, has created a complete business model around social
responsibility. Not stopping at shoes, the company now also helps with bringing fresh water to communities,
as well as making birth safer for babies in developing nations.
The popularity of corporate social responsibility has only increased as millennials and Generation Z employees
enter the workforce. Employees in these generations often care deeply about making a difference in the world
in which they work. Whether they are buying products from brands that give back or promoting a similar
activity in their own place of employment, the youngest of the workforce are making corporate social
responsibility a priority.
Where Did the Concept Originate?
Corporate social responsibility is not a new construct. One could go back hundreds of years and find examples
of corporate philanthropy and social support. However, the earliest published book about the topic is
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Business_Law_I_Essentials_-_WEB.pdf | Corporate Responsibility of the Businessman, published in 1953. This book introduced the concept of
companies giving back as a form of investment in the future. This idea came from a generation that had
survived some of the hardest times in our world and wanted to make it a better place for generations to come.
By the turn of the millennium, companies were actively participating in a variety of corporate social
responsibility projects, from volunteerism to large corporate-matched charitable donations. Nearly every
company has some form of charitable campaign, driven by the values of the culture and the interests of
employees. Today, some 63 million Americans volunteer each year, which is worth around $175 billion in
worker hours annually (Source: Corporation for National and Community Service). On top of volunteering, U.S.
corporations give over $18 billion to charities each year through fundraisers and employee-employer
matching programs (Source: Giving USA).
How Does Corporate Responsibility Benefit a Business?
There are many ways that corporate social responsibility can benefit a business and its objectives. Aside from
being able to promote the causes that are closely connected to the values of the company, a business can
improve its reputation exponentially.
Benefits of corporate social responsibility include many direct and indirect effects. Based on research from the
Kellogg School of Management at Northwestern University, these can include:
Improved perception by investors. If a company reports corporate social responsibility spending that
exceeds the expectations of investors, this dollar amount is a sign that the company itself is in good financial
standing. This perception results in positive stock returns and increased confidence by investors.
Enhanced performance for going green. Researchers have found that when companies focus on eco-friendly
efforts, the positive impact on operational performance heading into the second year is remarkable. Those
that expand their efforts in more complex ways and in collaboration with industry standard-setting
associations (such as LEED), or other eco-friendly companies, increase their performance even more.
Contracting for success. In companies that tie their CEO’s salary to corporate social responsibility results,
also known as contracting, the impact is felt even more. The value of the company increases while the bottom
line of the business is maintained.
The benevolent halo effect. When consumers understand the commitment that an organization has to being
socially responsible, its image becomes more positive. Customers actually perceive the company and its
products in a different way because they expect a better experience.
Consistency of efforts and partnerships. Researchers also found that socially responsible organizations
were consistent with staying focused on the issues that mattered most to their employees and customers. A
higher level of consistency of efforts prompted better results.
There are some other benefits of being a socially responsible company. These may happen as a result of
internal factors, as well as how closely matched the efforts are to the culture. Alison Robins, writer for
OfficeVibe, explains that being socially responsible can help attract positive attention from outside of a
company. Some examples include:
Talent attraction. Many companies offer employees paid time off to participate in volunteer activities,
including travel to other nations. Who wouldn’t want to work for a company that cares so much about a
personal cause? Corporate social responsibility is often used as a recruitment tool to attract people who care
about giving back to their communities and making changes that impact the world.
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Business_Law_I_Essentials_-_WEB.pdf | Consumer influence. A major benefit of engaging in corporate social responsibility efforts is that consumers
regularly check in with their favorite brands to see what they are doing, and they are influenced to make
purchases so they can be part of this community. With the process of posting messages on social networks,
entire movements can take off via the support of loyal consumers.
Promoting Corporate Responsibility with Marketing
After reviewing the benefits of corporate social responsibility and some of the examples provided by popular
companies, it is easy to see how important proper marketing can be to to this effort. As you can see from the
following example of Tom’s One for One™ program, marketing is used as a reminder for consumers that the
company is committed to providing one pair of shoes to a child in an undeveloped nation for every pair
purchased by a consumer.
Marketing is powerful in terms of the consumer market. It has been estimated by the brand marketing news
source Adweek that millennials represent around $2.45 trillion in spending per year. Cone Communications, a
public relations and marketing agency, found that 60 percent more millennials will engage with brands that
discuss and market to social issues. Younger consumers are attracted to brands that authentically market their
products alongside social responsibility campaigns.
However, one should not use corporate social responsibility as a marketing pitch for a company. Consumers
will quickly pick up on this tactic, and it can damage the brand. Nicole Fallon, who contributes to Business News
Daily, reveals, “The motivation behind many companies’ CSR efforts actually provides the very reason that they
shouldn’t take on socially responsible initiatives.” Motivations such as competitive positioning and profitability
are not authentic when it comes to corporate social responsibility.
It is also important to distinguish between corporate social responsibility and social marketing. Often used
interchangeably, there are some key differences. Social marketing attempts to change the attitudes and
behaviors of consumers by using a variety of marketing methods. However, corporate social responsibility is a
sustainable effort that can be measured. Bernard Okhakume, a brand management consultant, advised Daily
Times, “For a corporate social responsibility project to be successful, several factors come into play: the project
needs to be sustainable, its topic and practice abide by ethical standards, sensitive to society’s needs,
embraced and supported by the company’s employees, create the aimed effect on the target audience, and
every year, and the project needs to be evaluated to see how beneficial it is.”
The Financial Impact of the Triple Bottom Line
When examining the value of corporate responsibility, one must understand the concept of the triple bottom
line (TBL), which essentially measures the sustainability of an organization’s social responsibility efforts. The
term includes three dimensions of a giving business—profits, people, and the planet. Without one of these
factors, there cannot be a balance. According to economist Andrew Savitz, the triple bottom line “captures the
essence of sustainability by measuring the impact of an organization’s activities on the world ... including both
its profitability and shareholder values and its social, human and environmental capital.”
The challenge with the TBL model is that while profits can be measured in dollars, and people can be
measured in numbers, it can be difficult to measure the impact of social responsibility. Some argue that this
task is dependent upon what is being measured. For example, if one is saving the rainforest, a reasonable unit
of measurement could be acreage. Progress toward protecting this resource could be recorded as how many
fewer acres have been forested and how many native (people) communities have been saved as a result of the
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Another example could be a social cause, such as creating housing for single parents in poverty-stricken
neighborhoods in a specific city. The impact can be felt in terms of the additional housing that is created (built
or rehabbed from existing homes), and the value that this effort brings to the neighborhood. The number of
people helped can be measured. The city’s rate of homelessness can be measured as it is reduced. Then, there
are other equally important results of social responsibility that can be considered, such as the reduced rate of
crime in areas with homeowners, and an increase in employment for those who own the homes. These
indirect benefits have an impact on the company because it can eventually hire people from these areas of the
city.
Businesses must be continually mindful of the image that they project to the world and be sure to align their
corporate social responsibility campaigns with their culture. An authentic cause that is backed by all is far
better than one that is dreamt up purely for the sake of marketing.
Assessment Questions
1. Define business ethics.
2. Who decides the business ethics for a company?
a.
The HR department.
b.
The employees.
c.
Leadership.
d.
Consultants.
3. All of the following are examples of results of unethical business actions except:
a.
Recruitment and retention problems.
b.
Lower employee salaries.
c.
Negative employee relations.
d.
Poor company reputation.
4. Ethical rules can be based on deep values of an organization which may include:
a.
Quality of products and services.
b.
Commitment to customers.
c.
How the organization gives back to the community.
d.
All of the above.
5. According to Kimberlee Leonard of the Houston Chronicle the elements that belong in a Code of Conduct for
a company include all of the following except:
a.
Office Hours.
b.
Professional behaviors.
c.
Regulatory ethics.
d.
Legal considerations.
6. What’s the definition of Corporate Responsibility?
7. Where did the term Corporate Responsibility originate?
Chapter 3 Business Ethics and Social Responsibility
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Business_Law_I_Essentials_-_WEB.pdf | 8. The benefits of Corporate Responsibility for a business include:
a.
Talent attraction.
b.
Consumer influence.
c.
Improved perception by investors.
d.
All of the above.
9. The three dimensions of the triple bottom line include all of the following except:
a.
Profits.
b.
People.
c.
Planet.
d.
Promotion.
10. Distinguish between corporate social responsibility and social marketing.
Endnotes
Bisk. “6-Step Guide to Ethical Decision-Making” Michigan State University. Retrieved from:
https://www.michiganstateuniversityonline.com/resources/leadership/guide-to-ethical-decision-
making/#.W7KAq2hKiUl.
Ethics and Compliance Initiative. “Business Ethics and Compliance Timeline.” Retrieved from:
https://www.ethics.org/resources/free-toolkit/ethics-timeline/.
Georgescu, Peter. “What Are We Waiting For?” Forbes. Retrieved from: https://www.forbes.com/sites/
petergeorgescu/2018/01/24/what-are-we-waiting-for/#6f5caff856e3.
Isidore, Chris. “Gravity Payments CEO takes 90% pay cut to give workers huge raise.” CNN Money. Retrieved
from: https://money.cnn.com/2015/04/14/news/companies/ceo-pay-cuts-pay-increases/index.html.
Leonard, Kimberlee. “Importance of Creating a Code of Ethics for a Business.” Chron Small Business. Retrieved
from: https://smallbusiness.chron.com/importance-creating-code-ethics-business-3094.html.
Nayab, N. “Real-World Examples of Bad Business Ethics.” Bright Hub. Retrieved from:
https://www.brighthub.com/office/entrepreneurs/articles/115557.aspx.
Shen, Linda. “The 10 Biggest Business Scandals of 2017.” Fortune. Retrieved from: http://fortune.com/2017/12/
31/biggest-corporate-scandals-misconduct-2017-pr/.
Spooner, A. “Importance of Ethics in Business.” Love to Know. Retrieved from:
https://business.lovetoknow.com/business-operations-corporate-management/importance-ethics-business.
“About Tom’s” Retrieved from: https://www.toms.com/corporate-responsibility/.
Ames, Eden. “Millennial Demand for Corporate Social Responsibility Drives Change in Brand Strategies.”
American Marketing Association. Retrieved from: https://www.ama.org/publications/MarketingNews/Pages/
millennial-demand-for-social-responsibility-changes-brand-strategies.aspx.
Anyebe, Godwin. “Between Corporate Social Responsibility and Social Marketing.” The Daily Times. Retrieved
from: https://dailytimes.ng/corporate-social-responsibility-social-marketing/.
Carroll, Archie B. “Corporate Social Responsibility.” Research Gate. Retrieved from:
https://www.researchgate.net/publication/273399199_Corporate_Social_Responsibility.
Corporation for National and Community Service. “Volunteering and Civic Life in America.” Retrieved from:
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Chapter 3 Business Ethics and Social Responsibility
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Business_Law_I_Essentials_-_WEB.pdf | ttps://www.nationalservice.gov/vcla.
Fallon, Nicole. “Why You Shouldn’t Jump on the CSR Bandwagon.” Business News Daily. Retrieved from:
https://www.businessnewsdaily.com/6475-csr-brand-authenticity.html.
Lilly Family School of Philanthropy. “Giving USA 2015 Highlights.” Retrieved from:
https://doublethedonation.com/forms/documents/charitable-giving-report-giving-usa-2015.pdf.
Robins, Alison. “5 Benefits of Having a Socially Responsible Company.” Office Vibe. Retrieved from:
https://www.officevibe.com/blog/socially-responsible-companies.
Slaper, Timothy F., and Hall, Tanya J. “The Triple Bottom Line: What Is It and How Does It Work?” Indiana
Business Review. Retrieved from: http://www.ibrc.indiana.edu/ibr/2011/spring/article2.html.
Stone, Emily. “Take 5: How Companies Benefit from Corporate Social Responsibility.” Kellogg Insight. Retrieved
from: https://insight.kellogg.northwestern.edu/article/benefits-of-corporate-social-responsibility.
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Business_Law_I_Essentials_-_WEB.pdf | 42
Chapter 3 Business Ethics and Social Responsibility
This OpenStax book is available for free at http://cnx.org/content/col30149/1.5 |
Business_Law_I_Essentials_-_WEB.pdf | Chapter Outline
4.1 Commerce Clause
4.2 Constitutional Protections
Introduction
Learning Outcome
•
Explain the impact of the U.S. Constitution on business.
4.1
Commerce Clause
Figure 4.2
The United States Constitution is the supreme law of the land. (Credit: 1778011/ pixabay/ License:
CC0)
Figure 4.1 (Credit: geralt/ pixabay/ Attribution 2.0 Generic (CC BY 2.0))
4
Business and the United States Constitution |
Business_Law_I_Essentials_-_WEB.pdf | The Constitution and the Law
Federal and state constitutions are a major source of business law. The United States Constitution is the
supreme law of the United States. In addition to the individual constitutions established in each state, the U.S.
Constitution sets out the fundamental rules and principles by which the country and individual states are
governed. Constitutional law is the term used to describe the powers and limits of the federal and state
governments as established in the Constitution. The political system that divides authority to govern between
the state and federal governments is known as federalism, and this too is established in the Constitution. The
Tenth Amendment states that any area over which the federal government is not granted authority through
the Constitution is reserved for the state. This statement means that any federal legislation impacting business
and commerce must be established by an expressed constitutional grant of authority.
Federal Preemption
The Founding Fathers created a federal system that would, at times, “preempt” state law through the
supremacy clause, outlined in Article VI of the Constitution. In other words, since the U.S. Constitution is the
“supreme law of the land,” if a state law conflicts with the U.S. Constitution, the state law is declared invalid.
When the federal constitutional law prevails over the state law, it is said that the state law has been
preempted. Before that determination is made, the courts try to determine if Congress intended to preempt
state law in enacting the particular provision in question. If the answer is “no,” then those who are asserting
protections of state law may make claims under state law. If the answer is “yes,” however, federal law prevails.
The Tenth Amendment to the Constitution gives the states powers over areas of law not held exclusively by the
federal government through the U.S. Constitution, e.g., states can make laws about how to get married, who
may get married, or how to dissolve a marriage, as well as which activities are crimes and how the crimes will
be punished. If the U.S. Constitution does give the federal government some power, however, then the federal
government may exercise it, free from state interference. For instance, the U.S. Congress (the legislative
branch of the federal government) has the power, among other things, to coin money, to create a military, to
establish post offices, and to declare war. Since there is specific mention of these powers, states may not
create their own currency, military, or postal service, and they may not declare war.
The Commerce Clause and The Affordable Care Act
After much debate, negotiation, and political wrangling, Congress passed the Patient Protection and
Affordable Care Act (PPACA) in 2010, which was designed to increase the number of Americans who had access
to health insurance (a policy initiative known as Obamacare). The Act included a provision mandating that
individuals not insured through employment or who were otherwise exempt from receiving health insurance
obtain minimum essential health insurance or face a penalty issued through the Internal Revenue Service
(IRS). The National Federation of Independent Business (NFIB), supported by 26 of the 50 states, challenged
the constitutionality of this particular provision, known as the individual mandate. Their argument was upheld
by the 11th Circuit Court of Appeals, which ruled that Congress did not have the authority to enact this
provision. Later, however, the appellate court determined that the individual mandate was severable from the
remainder of the PPACA, so ultimately the Act was upheld.
The main source of authority for the federal regulation of interstate and international commerce is the
commerce clause. This clause is established in Article I, Section 8, of the Constitution. The Article grants
Congress the power to “regulate Commerce with foreign Nations, and among the several States, and with the
Indian Tribes.” Thus, the commerce clause serves to simultaneously empower the federal government, while
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Chapter 4 Business and the United States Constitution
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So long as a federal regulation impacts interstate commerce, that regulation can be described as
constitutional, according to the commerce clause. However, since the Constitution was first written, there have
often been occasions when the judiciary system has needed to step in to interpret the meaning and
implications of the commerce clause. In particular, there have been disputes over the intended meaning of the
phrase “among the several States.” Up until the 1930s, this phrase was interpreted in a literal way, so that
activities subject to federal regulation were required to involve trade between the states. This strict
interpretation actually served to limit the federal regulation of commerce.
The turning point in the interpretation of the commerce clause came with the 1937 case, NLRB v. Jones &
Laughlin Steel Corp. The previous year, in the Carter v. Carter Coal Co case, the court invalidated a program,
initiated under the New Deal, that had tried to regulate the labor practices of coal firms on the basis that these
practices were local, and therefore had only an indirect impact on interstate commerce. In NLRB v. Jones &
Laughlin Steel Corp, the court deviated from that decision by ruling that Congress could regulate employment
practices at a steel plant because any stoppages at that plant would have a serious, detrimental impact on
interstate commerce. The court concluded that since the steel industry is a networked industry that
incorporates mines, plants, and factories from Minnesota to Pennsylvania, the manufacturing of steel properly
falls under the jurisdiction of the commerce clause. In summing up, the court concluded that:
Challenges to and Reinterpretations of the Commerce Clause
Ever since the NLRB v. Jones & Laughlin Steel Corp case, Congress has invoked the commerce clause to rule on
a diverse range of business and commercial activities, as well as to support social reforms that indirectly
impact state commerce. Examination of the United States Code reveals that there are more than 700 legislative
provisions that explicitly refer to foreign or interstate commerce. What is perhaps most remarkable is the
sheer diversity of statutory areas covered by the commerce clause. Areas covered include the regulation of
sporting activities, endangered species, energy regulation, gambling, firearms control, and even terrorism.
Examples of Federal Legislation Passed by Invoking the Commerce Clause
•
The Controlled Substances Act
•
The Federal Mine Safety and Health Act
•
The Civil Rights Act
•
Americans with Disabilities Act
•
The Indian Child Welfare Act
While businesses have often challenged these statutes as existing outside of the realm of congressional
authority, in most cases, the courts have upheld the statutes as being valid exercises of congressional power in
E X A M P L E 4 . 1
“Although activities may be intrastate in character when separately considered, if they have such a close and
substantial relationship to interstate commerce that their control is essential or appropriate to protect that
commerce from burdens or obstructions, Congress cannot be denied the power to exercise that control”
(NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1 1937).
Chapter 4 Business and the United States Constitution
45 |
Business_Law_I_Essentials_-_WEB.pdf | line with the commerce clause. An exception is the 1995 case, United States v. Lopez. The case centered
around the legality of the Gun-Free School Zone Act, which was a federal law that outlawed the possession of
guns within 1,000 feet of a school. In a landmark case, the Court ruled that the Act was outside the scope of
the commerce clause, and that Congress did not have the authority to regulate in an area that had “nothing to
do with commerce, or any sort of enterprise.”
A recent controversy pertaining to the commerce clause relates to the passing of the Affordable Care Act, as
described earlier. Protestors claimed that the individual mandate aspect of the ACA should be treated as a
regulation that affects interstate commerce. According to their argument, after the Act was implemented,
there would be an increase in the sale and purchase of health care insurance, such that the market for health
care should be seen as being significantly impacted by the Act. However, the Chief Justice of the Supreme
Court, Justice Roberts, ruled that actions that create new business activity do not affect interstate commerce.
Police Power and the Dormant Commerce Clause
The authority of the federal government to regulate interstate commerce has, at times, come into conflict with
state authority over the same area of regulation. The courts have tried to resolve these conflicts with reference
to the police power of the states.
Police power refers to the residual powers granted to each state to safeguard the welfare of their inhabitants.
Examples of areas in which states tend to exercise their police power are zoning regulations, building codes,
and sanitation standards for eating places. However, there are times when the states’ use of police power
impacts interstate commerce. If the exercise of the power interferes with, or discriminates against, interstate
commerce, then the action is generally deemed to be unconstitutional. The limitation on the authority of
states to regulate in areas that impact interstate commerce is known as the dormant commerce clause.
In using the dormant commerce clause to resolve conflicts between state and federal authority, the courts
consider the extent to which the state law has a legitimate purpose. If it is determined that the state law has a
legitimate purpose, then the court tries to determine whether the impact on interstate commerce is in the
interest of the citizens of the state, and will rule accordingly. For instance, an ordinance that banned spray
paint, issued in the city of Chicago, was challenged by paint manufacturers under the dormant commerce
clause, but was ultimately upheld by the U.S. Court of Appeals because the ban was intended to reduce graffiti
and related crimes.
Today, Congress uses its authority to regulate commercial activity in four general areas relating to the
commerce clause:
1.
Regulation of the channels of interstate commerce
2.
Regulation of the instrumentalities of interstate commerce
3.
Regulation of intangibles and tangibles that cross state lines
4.
Regulation of activities that are deemed to be both economic and to have a substantial impact on
interstate commerce
Area of
Regulation
Explanation
Examples
Table 4.1
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Chapter 4 Business and the United States Constitution
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Business_Law_I_Essentials_-_WEB.pdf | Regulation of the
channels of
interstate
commerce
Channels of interstate commerce describe the
passages of transportation between the states.
Thus, the commerce clause authorizes Congress
to regulate activities pertaining to the nation’s
airways, waterways, and roadways, and even
where the activity itself takes place entirely in a
single state.
For example, Congress can
pass regulations that restrict
what can be carried on airlines
or on ships.
Regulation of the
instrumentalities
of interstate
commerce
Instrumentalities of commerce are understood to
be any resource employed in the carrying out of
commerce. Examples of these resources are
machines, equipment, vehicles, and personnel.
Thus, Congress has the power to regulate these
areas.
Congress could pass
regulations mandating certain
safety standards for
equipment used in
manufacturing plants.
Regulation of
intangibles and
tangibles that
cross state lines
Any object, tangible or intangible, that crosses
state lines can be regulated under the commerce
clause. Tangible objects include goods purchased
by consumers, as well as raw materials and
equipment used in the production of goods for
sale. Intangible objects include services, as well as
electronic databases.
The Driver’s Privacy Protection
Act (DPPA) regulates the sale
of information contained in
the Department of Motor
Vehicles’ (DMV’s) records.
Regulation of
activities that are
deemed to have a
substantial
impact on
interstate
commerce
Federal regulation of economic commercial
activity expected to have a significant (as opposed
to minor) effect on interstate commerce is
constitutional, according to the commerce clause.
Noneconomic commercial activity is not covered.
The courts in the United States
vs. Lopez case described
earlier deemed the Act to be
unconstitutional because its
terms have “nothing to do
with ‘commerce’ or any sort of
economic enterprise.”
Table 4.1
4.2
Constitutional Protections
The Bill of Rights is the common term given to the first 10 amendments to the U.S. Constitution. These are not
the only set of amendments to the Constitution, but they are considered together as impacting rights because
they limit the ability of the federal government to infringe upon individual freedoms. In addition, a later
amendment, the Fourteenth Amendment, extends the provisions set out in the Bill of Rights to the states, in
addition to federal government. The Bill of Rights has a substantial impact upon government regulation of
commercial activity, and therefore, it is important to fully understand it.
A summary of the provisions of the Bill of Rights is supplied below:
Chapter 4 Business and the United States Constitution
47 |
Business_Law_I_Essentials_-_WEB.pdf | Amendment
Provision
First
Ensures that U.S. citizens have the right to freedom of speech, press, religion, and
peaceable assembly. Provides citizens with the right to appeal to government to redress
grievances.
Second
Establishes that the government cannot infringe upon citizens’ right to bear arms.
Establishes the importance of a militia for national security.
Third
Establishes that the government cannot quarter soldiers in private houses during
peacetime or wartime.
Fourth
States that government can only issue warrants with probable cause and protects U.S.
citizens from unwarranted search and seizure.
Fifth
Establishes rights of due process. Ensures that indictment of a grand jury is necessary to
put a citizen on trial and grants citizens the right not to testify against themselves.
Sixth
Provides citizens with the right to an expeditious public trial, the right to an attorney, and
the right to an impartial jury.
Seventh
States that citizens have the right to a trial by jury for common lawsuits involving monetary
value of $20.
Eighth
Prohibits cruel and unusual punishment, prevents the imposition of excessive fines, and
states that the government cannot set bail at excessive amounts.
Ninth
States that the rights set out in the Bill of Rights do not remove any other rights granted to
citizens.
Tenth
States that any area over which the federal government is not granted authority through
the Constitution is reserved for the states.
Table 4.2
Application of the Bill of Rights to Commercial Activity
The protections afforded the citizenry in the Bill of Rights are also extended to corporations and commercial
activities. In the next sections, some applications of the various amendments in the area of business are
discussed.
The First Amendment
The freedom of speech provisions in the First Amendment have application to corporations. The courts
distinguish between different types of speech, and each has implications for the power of the federal
government and states to regulate in these areas:
1.
Corporate Political Speech. Political speech is any speech used to support political agendas or
candidates. Until the 1970s, several states prevented firms from financially supporting political advertising
because they feared the power of corporate assets. However, since the 1978 case First National Bank of
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Chapter 4 Business and the United States Constitution
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Business_Law_I_Essentials_-_WEB.pdf | Boston v. Bellotti, it has been established that corporate political speech is protected in the same way as
citizens’ free speech.
2.
Unprotected Speech. The 1942 case Chaplinsky v. New Hampshire determined that certain types of
speech—that which could “inflict injury or incite an immediate breach of the peace”—is not protected
under the First Amendment. Therefore, obscenities, defamation, and slanderous speech are not
protected.
3.
Commercial Speech. This type of speech conveys information pertaining to the sale of goods and
services. Ever since the 1980 case Hudson Gas & Electric Corp v. Public Service Commission of New
York, a four-part test has been established to determine whether commercial speech should be regulated
according to the First Amendment. This test is known as The Central Hudson Test for Commercial
Speech.
Figure 4.3
Hudson Gas & Electric Corp v. Public Service Commission of New York established a four-part
test to determine whether commercial speech should be regulated according to the First Amendment.
(Modification of art by BNED/pixabay Credit: CC BY NC SA)
The free exercise clause of the First Amendment states that government is prohibited from making laws that
prohibit the free exercise of religion. Issues pertaining to this clause often arise in organizational settings. For
example, historically, there have been a number of cases in which government employees have challenged
employers’ attempts to inhibit their exercise of religious practice (e.g., the wearing of religious symbols) in the
workplace.
The Fourth Amendment
The Fourth Amendment guarantees that citizens are free from unreasonable searches and seizures, and
requires government officials to obtain search warrants to conduct searches. However, government officials
can only request a search warrant if they have probable cause to believe that criminal activity is occurring at
the location of the search, or that they will locate evidence of criminal activity during the search (except where
Chapter 4 Business and the United States Constitution
49 |
Business_Law_I_Essentials_-_WEB.pdf | the official believes items will be removed prior to obtaining a warrant). The Fourth Amendment protects
individual organizations and places of business, as well as residences. However, under the terms of the
pervasive-regulation exception, administrative agencies can conduct warrantless searches of businesses
attached to industries that have a long history of pervasive regulation. For example, public health agencies are
allowed to conduct warrantless searches of stone quarries, as authorized by the Federal Mine Safety and
Health Act of 1977.
The Fifth Amendment
For commercial enterprises and businesspeople, it is the due process clause of the Fifth Amendment that
offers the most extensive protection. The clause states that the government cannot take an individual’s life,
liberty, or property without due process of law. Specifically, there are two types of due process:
•
Substantive due process means that laws that will deprive an individual of his or her life, liberty, or
property must be fair and not arbitrary. Laws passed should not affect fundamental rights, and
regulations are required to meet the rational-basis test. In other words, the government must
demonstrate that the law bears a rational relationship to a legitimate state interest. Many regulations
affecting commercial activity, such as banking regulations, minimum wage laws, and regulations
inhibiting unfair trade, have been tested against the rational-basis test.
•
Procedural due process means that governments must use fair procedures when depriving an individual
of his or her life, liberty, or property. This status quo does not only apply to federal criminal proceedings.
For example, if a government employer discharges an employee from his job, or if the government
suspends the driver’s license of a worker, the employer must follow procedural due process.
Another clause contained in the Fifth Amendment that is relevant to commercial enterprises is the takings
clause. According to this clause, when the government seizes private property for public use, it is required that
the government pay the owner just compensation for the property. Just compensation is understood to be
equivalent to the market value of the property. This clause has been broadly interpreted. For example, if
environmental or safety regulations significantly impact the way in which a property owner can use his or her
land for economic gain, the regulation can essentially be deemed as depriving the owner of his or her land,
and the owner is entitled to compensation.
It is important to note that the privilege against self-incrimination, established under the Fifth Amendment
(usually interpreted as the right to remain silent), only applies to sole proprietorships that are not legally
distinct from the individual who owns them. Custodians and agents of corporations do not enjoy this privilege.
50
Chapter 4 Business and the United States Constitution
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Business_Law_I_Essentials_-_WEB.pdf | Figure 4.4
The various protections afforded the citizenry in the Bill of Rights are also extended to
corporations and commercial activities. (Credit: Anthony Garand/ unsplash/ License: Unsplash License)
Assessment Questions
1. Explain Police Power and the Dormant Commerce Clause.
2. The Patient Protection and Affordable Care Act’s (also known as Obamacare) provision that mandated that
individuals not insured through employment obtain minimum essential health insurance or face a penalty was
upheld as constitutional by the 11th Circuit.
a.
True.
b.
False.
3. The _____ gives the federal government the authority to regulate interstate and international commerce.
a.
Supremacy Clause.
b.
10th Amendment.
c.
Bill of Rights.
d.
Commerce Clause.
4. The doctrine aimed at dividing the governing powers between the federal governments and the states is:
a.
Judicial review.
b.
Federalism.
c.
Separation of powers.
d.
Preemption.
5. The doctrine aimed at dividing the governing powers between the federal governments and the states is:
a.
Commerce Clause.
b.
Superior Clause.
c.
Supremacy Clause.
d.
Necessary and Proper Clause.
Chapter 4 Business and the United States Constitution
51 |
Business_Law_I_Essentials_-_WEB.pdf | 6. Describe the 2 types of Due Process.
7. The _____ of the constitution offers the most extensive protection for businesses.
a.
Supremacy Clause.
b.
Equal Protection Clause.
c.
Due Process Clause.
d.
Freedom of Speech Clause.
8. The 14th Amendment is a part of the Bill of Rights.
a.
True.
b.
False.
9. Which of the following is correct with regards to the powers of state government in the United States?
a.
All powers not specifically enumerated to the federal government are reserved to the states.
b.
The power over crimes is reserved to the federal government.
c.
The power over the militia is reserved to the states.
d.
The powers over the federal government are superior to every state power.
10. All of the sections of the Bill of Rights apply to corporations and commercial activities.
a.
True.
b.
False.
Endnotes
Beatty, J. F., Samuelson, S. S., & Abril, P. S. (2018). Business law and the legal environment. Cengage Learning.
Driesen, D. M. (2016). The economic/noneconomic activity distinction under the commerce clause. Case W. Res.
L. Rev., 67, 337.
United States v. Lopez, 514 U.S. 549, 558–559 (1995).
Beatty, J. F., Samuelson, S. S., & Abril, P. S. (2018). Business law and the legal environment. Cengage Learning.
McAdams, T., Neslund, N., Zucker, K. D., & Neslund, K. (2015). Law, business, and society. McGraw-Hill Education.
52
Chapter 4 Business and the United States Constitution
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Business_Law_I_Essentials_-_WEB.pdf | Chapter Outline
5.1 Common Business Crimes
5.2 Civil vs. Criminal Liability
Introduction
Learning Outcome
•
Analyze sources of criminal exposure in business.
5.1
Common Business Crimes
People rarely think about their conduct at work as being potentially illegal, or that jail time could result from
poor workplace decisions. However, this fact is the reality. Organizations are fined, and executives are
sentenced to jail, when business laws are broken. Many of the workplace violations are nonviolent crimes,
such as fraud, property crimes, or drug- or alcohol-related infractions. Regardless of the level of violence or
the employee’s motivation for committing the crime, breaking the law can lead to negative consequences for
the business, its employees, and its customers.
Constitutional Authority to Regulate Business
Congress is given the power to “regulate Commerce with foreign Nations, and among the several States, and
with the Indian Tribes.” Our forefathers wanted to facilitate easier trade among the states by allowing
Congress to adopt rules that could be uniformly applied. The theory was that if commercial enterprises knew
that they would be dealing with essentially the same rules across the nation, it would be much easier to run
Figure 5.1 Lady Justice by Arend Ode(Image Credit: AJEL/ pixabay/ Attribution 2.0 Generic (CC BY 2.0))
5
Criminal Liability |
Business_Law_I_Essentials_-_WEB.pdf | their businesses and keep commerce flowing more efficiently.
While federal courts initially interpreted the commerce power narrowly, over time, the federal courts have
decided that the commerce clause gives the federal government broad powers to regulate commerce, not only
on an interstate (between the states) level, but also on an intrastate (within each state) level, as long as
some economic transaction is involved. The federal government does not usually exceed its regulatory
powers.
White Collar Crime
White collar crimes are characterized by deceit, concealment, or violation of trust. They are committed by
business professionals. They generally involve fraud, and the employees committing the crimes are motivated
by the desire for financial gains or fear of losing business standing, money, or property. Fraud is the
intentional misrepresentation of material facts for monetary gain. This type of crime is not dependent on
threats or violence.
Figure 5.2
White collar crimes are committed by business professionals within businesses with the intent of
gaining or maintaining status. (Credit: Rawpixel/ pexels/ License: CC0)
White collar crimes tend to violate state laws, and sometimes federal laws. The violation depends on what is
involved in the crime. For instance, criminal acts involving the United States postal system or interstate
commerce violate federal law.
Although white collar crimes do not need to include physical violence, these types of crimes can destroy
companies, the environment, and the financial stability of clients, employees, and communities. In 2018,
Jeremiah Hand and his brothers, Jehu Hand and Adam Hand, were convicted and sentenced to between 9 and
30 months in prison for their respective roles in a pump-and-dump scheme. In this scheme, they were
dishonest about control over their company’s stock, and even went as far as filing false forms in an effort to
raise the value of the stock. Once the value of the stock was raised, they released their shares into the market.
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Business_Law_I_Essentials_-_WEB.pdf | Types of Business Crimes
Business crimes or white collar crimes are not limited to pump-and-dump schemes; they come in many
different forms. Business crimes come in many different forms. As previously stated, these crimes often
involve deceit, fraud, or misinformation. The types of high-profile crimes include Ponzi schemes,
embezzlement, and crimes that intentionally violate environmental laws and regulations. This section will
explore these three types of crimes and provide examples from the 2000s.
Ponzi Schemes
Ponzi schemes (also known as pyramid schemes) are investing scams that promise investors low-risk
investment opportunities with a high rate of return. The high rates are paid to old investors with money
acquired from the acquisition of new investors. The performance of the market is not a factor in the investors'
rate of return.
Bernie Madoff operated a 20-year Ponzi scheme through his company. He paid high returns (above average)
using the investments of new clients (investors). In 2008, investors attempted to withdraw funds, but the
Madoff organization was not able to provide the reimbursement. Madoff is currently serving a more than
100-year sentence in prison.
Larceny and Embezzlement
Larceny and embezzlement are two forms of theft that can occur within a business. Larceny occurs when a
person unlawfully takes the personal property of another person or a business. For example, if an employee
takes another employee’s computer with the intent of stealing it, he or she may be guilty of larceny. In
contrast, embezzlement occurs when a person has been entrusted with an item of value and then refuses to
return it or does not return the item. For example, if an employee is entrusted with the petty cash at his or her
office and that person purposefully takes some of the money for himself or herself, this would be
embezzlement.
One high-profile example of embezzlement occurred at Koss Corporation in Milwaukee, Wisconsin. Sujata
“Sue” Sachdeva was a Vice President of Finance and Principal Accounting Officer at Koss Corporation.
Sachdeva was convicted of embezzling $34 million over a 5-year period and sentenced to 11 years in federal
prison, as well as restitution to Koss Corporation. Sachdeva was entrusted with the company’s funds and did
not utilize the funds as intended.
Environmental Crimes
Many federal statutes regulate the environment. Many of these laws carry both civil and criminal penalties for
violations.
The following federal laws can carry criminal penalties:
•
Clean Air Act
•
Clean Water Act
•
Resource Conservation and Recovery Act
•
Comprehensive Environmental Response, Compensation and Liability Act
•
Endangered Species Act
The International Petroleum Corporation of Delaware (IPC) is paying restitution for environmental crimes,
which included a scheme to violate the Clean Water Act. From 1992 to 2012, IPC processed oil and wastewater.
Chapter 5 Criminal Liability
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Business_Law_I_Essentials_-_WEB.pdf | The company admitted to altering required water test samples so they met the limits set by their permit
before releasing the waste into the city’s sewer system. The company also admitted to transporting waste that
contained benzene, barium, chromium, cadmium, lead, PCE, and trichloroethene for disposal in South Carolina
without the required reporting of the information, which also violated environmental laws.
Figure 5.3
White collar crimes are generally motivated by the desire to maintain or gain financial status.
(Credit: TheDigitalWay/ pixabay/ License: CC0)
Other Types of Business Crime
The business environment is complex, and some crimes are less common or receive less media attention.
These types of crimes include those that violate antitrust laws, racketeering, bribery, money laundering, and
spamming.
Violations of Antitrust Laws
Antitrust laws do not allow activities that restrain trade or promote market domination. These laws are in
place to provide guidance and supervision of mergers and acquisitions of companies to prevent market abuse.
The goal is to avoid monopolies, or the control of one organization over a specific market. Monopolies reduce
competition and, as a result, can have a detrimental impact on consumer prices. Since the United States is
founded on capitalist principles, anti-competitive business conduct is prohibited by law, and some of those
laws, such as the Sherman Antitrust Act, do include provisions about criminal punishment.
Racketeering
Racketeering activities include loan-sharking, money laundering, and blackmailing. In the past, the term has
been used to describe organized crime. The term is now applied to other entities, as well. RICO, or the
Racketeer Influenced and Corrupt Organizations Act, is a federal law aimed at preventing and prosecuting by
both businesses and organized crime syndicates. “RICO is now used against insurance companies, stock
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Business_Law_I_Essentials_-_WEB.pdf | brokerages, tobacco companies, banks, and other large commercial enterprises.” (Schodolski, 2018).
Racketeering is no longer limited to organized crime. Health insurance companies and other legitimate
businesses are being accused of pressure tactics similar to those used in organized crime racketeering.
These claims involve allegations of lying about the actual cost of care, damaging the business for physicians,
bullying patients, and attempting to control the doctor-patient relationship through lies and pressure tactics.
Bribery
Bribery occurs when monetary payments, goods, services, information, or anything of value is exchanged for
favorable or desired actions. You can be charged with bribery for offering a bribe, or taking a bribe. Bribery is
illegal within the United States and outside of it. The Foreign Corrupt Practices Act prohibits bribery payments
by U.S. companies to foreign government officials with an intent to influence foreign business results. One
example of bribery would be a situation in which a pharmaceutical company offers special benefits to
individuals who agree to prescribe their medications.
Money Laundering
Money laundering refers to taking “dirty”money, or money obtained through criminal activities, and passing
it through otherwise legitimate businesses so that it appears “clean.” The money cannot be tied back to the
illegal acts. Clean money is money that was obtained through legitimate business functions.
Spamming
Sending unsolicited commercial email, or spam, is illegal. While the onus is on consumers to avail themselves
of whatever programs they can to block spam, laws are in place to discourage the sending of spam. The
following points are outlined in the anti-spam legislation in Washington state and are similar to other
legislation:
1.
Individuals may not initiate the sending or plan the sending of an email that misrepresents the sender as
someone he or she is not, represents the sender as being associated with an organization that he or she
has no association, or otherwise hides the identity of the sender or origin of the email. Email messages
may not have false or misleading information in the subject line of the message.
2.
Commercial emails must include the contact information of the sender and the receiver must be aware
that the message is from a commercial source.
States like Washington are putting legislation in place to reduce spam and asking consumers to take an active
role in addressing spam. In general, legislators realize that spam is a nuisance and are finding ways to hold
companies liable for sending spam messages.
Conclusion
It is important to know that not all people charged with business crimes or white collar crimes are necessarily
guilty. A person must be found guilty of the crime before he or she is convicted. Regardless, business crimes
and white collar crimes negatively impact the individual, the organization he or she worked for, the
community, and customers.
5.2
Civil vs. Criminal Liability
A legal case can be civil or criminal. Each case has different components and requirements. Before one can
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Business_Law_I_Essentials_-_WEB.pdf | understand the civil and criminal systems, it is important to understand the aspects of both civil and criminal
laws. The scope, consequences, and treatments of each vary.
Constitutional Rights
It is important to understand the Constitution, which is the basis of all law. States are allowed to create and
categorize crimes and punishment, as long as they do not violate rights protected by the U.S. Constitution. For
example, in a fairly recent United States Supreme Court case, Lawrence v. Texas, the defendants asserted the
unconstitutionality of a Texas law (enacted by the Texas legislature) regarding a particular act. When the
United States Supreme Court ruled it unconstitutional, Texas could no longer enforce it.
Frequent issues litigated in the courts are:
•
Whether evidence must be suppressed (not allowed to be introduced at trial) because it was obtained
pursuant to an unreasonable search and seizure (violating the Fourth Amendment). This category might
involve a sub-issue about whether officers had sufficient probable cause to conduct a warrantless search.
Without a warrant, and without the suspect’s consent, officers generally may only conduct searches if
they have “probable cause” to do so; any evidence obtained without consent or probable cause can be
objected to, and ultimately ruled inadmissible by the court in trial, if illegally obtained.
•
Whether evidence must be suppressed because it was obtained while the suspect was “in custody”
without advising a suspect of his rights to remain silent, to speak to an attorney, and to the appointment
of an attorney if he cannot afford one (Fifth Amendment privilege against self-incrimination and Sixth
Amendment right to counsel), as required by the Supreme Court in the famous Miranda v. Arizona case.
The term often used to describe these rights is “Mirandizing,” which is named after the case.
•
Whether a state law or constitutional provision provides more protection than the U.S. Constitution.
Figure 5.4
Both civil and criminal convictions are based on precedent. (Credit: PactoVisual/ pixabay/ License:
CC0)
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Business_Law_I_Essentials_-_WEB.pdf | Components of Crime
There are usually two components to criminal conduct that must be proven by the prosecutor. The prosecutor
prosecutes the case against the accused: mens rea (the criminal, or guilty, or “wrongful” mind) and actus
reus (the criminal, or guilty, or “wrongful” act).
Each statute creating a crime is supposed to include a description of:
a.
the mental state (mens rea) required to establish that the suspect committed the crime, coupled with
b.
a description of the conduct (actus reus) that the suspect must have done.
The statute generally also indicates the category of crime (felony/misdemeanor/gross misdemeanor).
Criminal Procedures
Generally, the first pleading filed by the prosecutor is called the information. (This step could be described as
the criminal counterpart to a civil “complaint.”)
The next stage is called the arraignment, where the defendant appears in court so that the court can
determine or confirm his or her identity, inform the defendant of the charge the prosecutor has filed against
him or her, and hear the defendant’s plea.
Then, there will be discovery and trial. In criminal cases, the jury will convict only if convinced “beyond a
reasonable doubt” that the defendant committed the crime, and the verdict must be unanimous. This type of
case involves a higher burden of proof than in civil cases.
Criminal and Civil Law
Criminal law addresses behaviors that are offenses against the public, society, or state. Examples of criminal
law offenses include assault, drunk driving, and theft. In contrast, civil laws address behavior that causes an
injury to the private rights of individuals in areas such as child support, divorce, contracts, property, and the
person. Examples of civil law offenses include libel, slander, or contract breaches.
Criminal and civil cases differ in who initiates the case, how the case is decided, what punishments or penalties
are issued, requirements of proof, and legal protections provided.
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Business_Law_I_Essentials_-_WEB.pdf | Figure 5.5
Civil and criminal cases involve the court system. (Credit: Brett Sayles/ pexels/ License: CC0)
Initiation and Roles
Criminal and civil cases are initiated differently, and the titles of the individuals involved differ slightly. Criminal
cases are only initiated by the federal or state government in response to a law being broken. The federal or
state governments are known as the prosecution. The prosecution is an attorney, or group of attorneys, hired
by the government to present a case against the accused. Criminal cases are usually titled something like
“State v. [last name of the defendant accused of a crime].” In criminal prosecutions, the victim is not a party to
the lawsuit, but might be a witness for the state at the trial.
In contrast, private parties initiate civil cases when they feel that someone has injured them. Again, civil cases
stem from breach of contract, custody cases, and attacks on one’s character. Private parties can include an
individual, a group, or a business. The person, group, or business who initiates the case is referred to as the
plaintiff or complainant. The accused is referred to as the defendant, in both criminal and civil proceedings.
Typically, there is a difference in the burden of proof for the two types of cases. In a criminal case, the
defendant must be proven guilty “beyond a reasonable doubt.” In a civil case, the defendant must be proven
liable through a “preponderance of the evidence.” In other words, the prosecution in a civil case must prove
that it is more probable than not that the defendant is liable.
In criminal cases, the defendant is entitled to an attorney and may be appointed an attorney if he or she is not
able to afford one. The state appoints the attorney. In contrast, all parties involved in a civil case are required
to secure their own legal representation.
Typically, civil and criminal laws use different terminology, and being found guilty or accountable in each type
of case results in different consequences.
In a civil action (lawsuit), the plaintiff is the person who is alleging that he or she has actually been harmed
(physically, financially, or in another manner), and the defendant is the one who is asked to pay damages or
otherwise compensate the plaintiff. Outside of financial compensation, the plaintiff may be ordered to do
something or refrain from doing something, which is referred to as injunctive relief.
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Business_Law_I_Essentials_-_WEB.pdf | In the Liebeck v. McDonald’s case, a woman sued McDonald’s for serving hot coffee. The woman spilled hot
coffee on her lap while trying to add cream and sugar. The woman sued McDonald’s for negligence in a civil
suit. The issue centered on whether or not the coffee’s specific temperature was unreasonably hot.
McDonald’s lost the lawsuit. The compensatory verdict was $160,000. McDonald’s was found liable.
Conversely, if a defendant is convicted of committing a crime, the consequences are usually incarceration (jail/
prison) and/or a fine (payment of money to the state).
The word used to describe the legal responsibility for harm in a civil case is liability, not guilt. Guilty is the word
used to describe a person found guilty of committing a crime in a criminal case.
Businesses can be charged with criminal acts as well. In 2017, Oliver Schmidt, former manager of a
Volkswagen engineering office near Detroit, was arrested. He faced years in prison for attempts to defraud the
United States, wire fraud, violation of the Clean Air Act, and a charge of giving an untrue statement under the
Clean Air Act. Schmidt’s actions directly violated a business law and, since his actions violated an established
law, he was held criminally liable. In December of 2017, Schmidt was sentenced to seven years in prison.
Professional Negligence
Professional negligence is often called malpractice. A professional’s duty of care is usually a duty to exercise
the degree of care, skill, diligence, and knowledge commonly possessed and exercised by a reasonable,
careful, and prudent professional of the same type in the state (or sometimes in the community). Along with
attorneys and health care providers, the following professionals might be sued for malpractice: accountants,
architects, engineers, surveyors, insurance brokers, real estate agents and brokers, and clergy.
For negligence, the usual kind of damages recoverable are compensatory, or money to compensate for the
injuries/damages incurred to make the person whole (e.g., money for medical bills, lost wages, loss of future
earning capacity, pain and suffering, emotional distress, property damage, etc.).
Assessment Questions
1. Explain White Collar Crime.
2. What is a pump-and-dump scheme?
3. The crime of larceny includes:
1.
The nontresspassory taking and controlling of personal property.
2.
The trespassory taking and carrying away of real or personal property.
3.
Joyriding.
4.
The trespassory taking and control of personal property.
4. Distinguish between larceny and embezzlement.
5. What is the Foreign Corrupt Practices Act?
6. Businesses can be charged with crimes.
a.
True.
b.
False.
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Business_Law_I_Essentials_-_WEB.pdf | 7. The burden of proof is a criminal case is:
a.
Reasonable suspicion.
b.
Beyond a reasonable doubt.
c.
Preponderance of evidence.
d.
Clear and convincing evidence.
8. Which of the following is a goal of an arraignment?
a.
The defendant is informed of the charge and enters a plea.
b.
Requires the defendant to bear the burden of proof
c.
Begins the inquisitorial system of adjudication.
d.
All of these are correct.
9. The criminal act necessary to commit a crime is known as:
a.
Malice aforethought.
b.
Mens rea.
c.
Subjective fault.
d.
Actus reus.
10. Distinguish between civil and criminal law.
Endnotes
Amadeo, Kimberly. Is Social Security a Ponzi Scheme? The Balance Small Business. Retrieved from:
https://www.thebalance.com/what-is-a-ponzi-scheme-history-examples-vs-pyramid-scheme-3305877.
CEO of “Penny Stock” Company Sentenced for Stock Manipulation Scheme. The United States Department of
Justice. September 11, 2018. Retrieved from: https://www.justice.gov/usao-ma/pr/ceo-penny-stock-company-
sentenced-stock-manipulation-scheme.
Schodolski, Vincent J. INSURERS COME UP AGAINST RICO RULE. Chicago Tribune. August 28, 2018. Retrieved
from: http://www.chicagotribune.com/news/ct-xpm-2000-06-17-0006170102-story.html.
Verschoor, Curtis C. How an Embezzler Stole Millions from a Small Company. AccountingWEB. January 27, 2011.
Retrieved from: https://www.accountingweb.com/aa/law-and-enforcement/how-an-embezzler-stole-millions-
from-a-small-company.
White-Collar Crime. FBI. May 03, 2016. Retrieved from: https://www.fbi.gov/investigate/white-collar-crime.
Work Within the Law. Lumen Learning. Retrieved from: https://courses.lumenlearning.com/workwithinthelaw/
chapter/categories-and-examples-of-business-crime/.
Duignan, Brian. What Is the Difference Between Criminal Law and Civil Law? Encyclopædia Britannica.
Retrieved from: https://www.britannica.com/story/what-is-the-difference-between-criminal-law-and-civil-law.
Civil Law. The Free Dictionary. Retrieved from: https://legal-dictionary.thefreedictionary.com/civil%20law.
Vollman, Brenda, and Borough of Manhattan Community College. Criminal Justice. Lumen Learning. Retrieved
from: https://courses.lumenlearning.com/atd-bmcc-criminaljustice/chapter/1-3-the-difference-between-civil-
and-criminal-law/.
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6.1 Intentional Torts and Negligence
6.2 Product and Strict Liability
Introduction
Learning Outcome
•
Explain torts system application to business.
6.1
Intentional Torts and Negligence
Civil suits arise from damages suffered by one or more persons or entities at the hands of another person or
entity. The damage can happen in a variety of circumstances, and may be intentional or unintentional. Unlike
criminal cases, civil suits seek to provide some form of remedy for the loss suffered by an injured party. Civil
suits are decided by judges and juries based on the specific situation, especially when violation of statutes, or
laws, is not in question.
Figure 6.1 (Credit: Free-Photos/ pixabay/ Attribution 2.0 Generic (CC BY 2.0))
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Business_Law_I_Essentials_-_WEB.pdf | Figure 6.2
Civil suits are decided in court by judges and juries. (Credit: Coffee/ pixabay/ License: CC0)
Torts
Civil suits involve different causes of action, and they are included in one general classification: torts. The word
“tort” means “wrong” in French. Thus, torts are wrongs committed against others who suffer some form of
damage as a result. While these damages could also be the result of criminal action, the criminal element of
the matter is not tried in a civil lawsuit. The standard of proof is lower for civil suits, and a finding of liability in
a tort case does not necessarily translate to guilt in a criminal case.
The actor of the wrongs has historically been called a tortfeasor. When a wrong is committed by a tortfeasor,
damage is done to another. Tort law seeks to address this damage based on the circumstances of the issue,
which is based on fault. Civil lawsuits are used by the injured parties to seek redress for the loss associated
with the tort. Unlike criminal proceedings, redress is often provided in the form of money as opposed to
incarceration. As such, the burden of proof of fault is lower. The offender, or tortfeasor, who commits the act
is the accused in a civil suit. The plaintiff, who is the injured party, files the lawsuit on which the civil court will
make a decision. The offender ultimately becomes the defendant, who must respond to the accusations of the
plaintiff in a civil suit.
During tort litigation, the judge and jury have certain separate functions (Kionka, 2013):
Functions During a Tort Litigation
The Judge Decides Issues of Law
The Jury Decides Questions of Fact
The duty of the defendant to the plaintiff, if any
What happened
Table 6.1
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The Judge Decides Issues of Law
The Jury Decides Questions of Fact
The elements of the defense
Legal consequences of what happened
Application of legal rules
The damages suffered by the plaintiff
Table 6.1
Harm
Two types of torts are intentional torts and negligence. Intentional torts occur as the result of a conscious
and purposeful act. Negligence occurs when an individual does not exercise duty of care. Torts are acts or
omissions that result in injury or harm to an individual in such a way that it leads to a civil wrong that occurs
as liability (WEX, n.d.). In tort law, harm can be defined as a loss or disadvantage suffered as a result of the
actions or omissions of another (WEX, n.d.). This loss can be physical harm, such as slipping and falling on a
wet floor, or personal property harm, such as allowing water to ruin furniture. The damage is the result of
what someone else did, or did not do, either intentionally or based on a lack of reasonable care.
There are two basic elements to torts: damages and compensation (Laws, tort.laws.com). Tort law acts to
compensate persons who have suffered damages at the hands of another (Baime, 2018). Tort law determines
the legal responsibility of the defendant and the value of the harm. Different types of torts look at different
types of circumstances.
Intentional Torts
Intentional torts are committed by an offender who understands that he or she is committing a tort. Intent
does not always equate to directly causing an end result. In some cases, the intent may be something else,
such as the possession of knowledge that some harm may occur. The harm may result from intentional action,
or due to some circumstance that the offender feels will be excusable (Kionka, 2013).
Some circumstances that could allow the defendant to argue that the action is excusable would include:
permission by the injured party, or defense of property, self, or another person (Kionka, 2013). If the injured
party agrees to allow the defendant to juggle knives and one slips and causes harm, the action might be
excusable to some extent. If a defendant caused harm to the plaintiff’s car while trying to avoid being hit by
the car, it would likely be excusable.
Different types of intentional torts are based on different circumstances and face different remedies, or
means of recovering losses (Baime, 2018):
•
Assault is an intentional tort that occurs when an individual has a reasonable apprehension of an
intentional act that is designed to cause harm to himself or herself, or to another person.
•
Malicious prosecution occurs when an individual files groundless complaints to initiate a criminal matter
against another.
•
Defamation occurs when an individual intentionally creates and promotes malicious falsehoods about
another. Defamation can occur in two ways: slander and libel. Slander is, in effect, when falsehoods are
spoken. Libel occurs when falsehoods are expressed in written or other recorded forums.
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Invasion of privacy involves unwanted production of negative public information. Different standards
apply to invasion of privacy based on the status of the individual as a public figure.
Negligence
Negligence is another type of tort that has two meanings. It is the name of a cause of action in a tort, and it is
a form of conduct that does not meet the reasonable standard of care (Kionka, 2013). The cause of action is
the reason for the damage, and the standard of care is based on the care that a reasonable person would
need in a given situation. Negligence is decided by determining the duty of the defendant, whether or not the
defendant committed a breach of that duty, the cause of the injury, and the injury itself.
For an action to be deemed negligent, there must be a legal duty of care, or responsibility to act, based on the
reasonable standard in a situation (Baime, 2018). An individual can be considered negligent if he agreed to
watch a child, but did not do so, and then harm came to the child. An individual would not be considered
negligent if he did not know that he was supposed to watch the child, or did not agree to watch the child.
Figure 6.3
If an individual agrees to watch a child and the child is injured while that person pays attention to
her cell phone, it would be considered negligence. (Credit: JESHOOTScom/ pixabay/ License: CC0)
A reasonable person is defined as someone who must exercise reasonable care based on what he or she
knows about the situation, how much experience he or she has with the situation, and how he or she perceives
the situation (Kionka, 2013). In some cases, this knowledge could be based on common knowledge of
community matters, such as knowing that a bridge is closed for repairs.
In some cases, the duty of care is based on a special relationship, which is a relationship based on an implied
duty of care. This implied duty of care often comes about as a duty to aid, or a duty to protect another, e.g., a
nurse caring for patients in a hospital, or a lifeguard being responsible for swimmers in the guarded area
(Baime, 2018). A passerby does not have a duty to aid, but if the individual tries to help, then he or she is
responsible for acting responsibly.
The elements of a negligence cause of action are (Kionka, 2013):
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A duty by the defendant to either act or refrain from acting
•
A breach of that duty, based on a failure to conform to the standard of care by the defendant
•
A causal connection between the defendant’s action or inaction, and the injury to the plaintiff
•
Measurable harm that can be remedied in monetary damages
Foreseeability
Negligence case decisions are influenced by whether or not a defendant could have predicted that an action or
inaction could have resulted in the tort, or foreseeability (Baime, 2018). Responsibility is often based on
whether or not the harm caused by an action or inaction was reasonably foreseeable, which means that the
result was fairly obvious before it occurred (Baime, 2018). A person assisting an inebriated individual into her
car could be considered negligent due to the likelihood that harm would come to her while she is driving in an
intoxicated state. This situation is an example of the foreseeable probability of harm.
Conclusion
Intentional torts and negligence arise based on intentional and unintentional acts committed by individuals.
Damages are decided in civil courts by first determining fault and harm, and then by assigning a remedy.
Sometimes, the damage can be excused if the circumstances indicate that the defendant acted with
permission, or in his or her own defense. The main standard used to make a decision is the reasonable
standard of care: what would a reasonable person do?
6.2
Product and Strict Liability
Determination of fault and damages for intentional torts and negligence are based on the reasonable
standard of care. Another form of torts looks at liability without fault, or strict liability. Strict liability
determines liability, or harm, based on reasons other than fault (CCBC Legal Studies, n.d.). The mistakes
leading to harm can be completely unintentional, and in some cases, unavoidable. Yet, damage is done, and a
civil suit arises.
Strict Liability
Strict liability provides a remedy when harm is suffered through no intentional fault. The courts needed to
create a standard that would cover this form of tort, or one without fault. The courts came up with the
abnormally dangerous activity standard, which assigns responsibility when an individual engages in some
form of dangerous activity, even if care is taken to avoid mishap (CCBC Legal Studies, n.d.). If a homeowner
has horses in a pasture that is bounded by electric fencing, it can be determined that the homeowner
exercised reasonable care. However, suppose that the electricity goes down, the horses get out onto the road,
and an accident occurs as a result. In this case, the owner is responsible, even though he took reasonable care
and the event was unforeseen.
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If horses get out of a fenced-in area, the owner would be liable for any damage they cause while
loose. (Credit: Slack/ pexels/ License: CC0)
For a court to assign strict liability based on abnormally dangerous activities, the activity must meet certain
criteria. The court must establish that at least four of the following six factors are present (CCBC Legal Studies,
n.d.):
•
The activity poses a high degree of risk of harm to a person, the land of another, or the property owned
by another.
•
The harm resulting from this activity would likely be substantial.
•
The use of reasonable care would not eliminate this risk.
•
The activity is not something that would be considered a matter of common usage.
•
The activity is not appropriate for the place where it occurs.
•
The danger of the activity overshadows the benefit it poses to a given community.
In essence, the basis for determining strict liability is the extent of the risk involved in the activity. This basis
could also apply to the ownership of dangerous pets. A dog that is known to be aggressive would qualify the
owner for strict liability should it get out and bite someone. The courts would find that the owner knew, or
should have known, that the dog was dangerous and had a propensity to cause harm (Kionka, 2013).
Trespass
In some situations, the owner of the dangerous activity might not be held liable. One such situation is
trespassing. Trespassing occurs as an individual enters or remains upon property owned by another without
permission (Kionka, 2013). In the case of trespassing, the owner of the property does not have a duty to make
the premises safe based on reasonable care for the trespasser (Kionka, 2013). Also, the owner does not have a
responsibility to cancel or alter activities on the premises to avoid endangering the trespasser (Kionka, 2013).
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Train tracks are a common area for trespassing. (Credit: Muscat_Coach/ pixabay/ License: CC0)
In some cases, however, the property owner could be held liable (Kionka, 2013):
•
When the area in question is a common place for trespassing
•
When the owner knows a trespasser is present
•
When the trespasser needs aid, then the owner has a duty to rescue him or her
•
When the trespasser is a child, and the dangerous activity is deemed as an attractive nuisance, or an
attraction that a reasonable child would wish to view
Even though trespassing can present an exception to liability in the presence of a dangerous activity, it is not a
given. There are numerous exceptions that allow for liability. In effect, strict liability can occur in a given
situation even when the property owner has provided care that goes above and beyond what is reasonable.
The court does not need to establish proof of lack of due care when applying strict liability to a case (Baime,
2018).
Product Liability
Individuals are not always the defendants involved in civil suits. Manufacturers, wholesalers, distributors, and
retailers can also be named in torts that pertain to products and qualify as strict liability (CCBC Legal Studies,
n.d.). Some products contain flaws that were not intentionally created; such flaws may not be discovered until
an individual suffers harm as a result of using them.
It is not always possible to conclusively prove that an act or omission was responsible for the harm (Baime,
2018). As a result, the courts developed the doctrine of res ipsa loquitor, which means that whatever it is
speaks for itself. The burden of proof shifts from the plaintiff to the defendant, who must disprove negligence.
However, the plaintiff must first establish three factors (Baime, 2018):
•
The defendant had control over the product in question while it was being manufactured.
•
Under normal use and circumstances, the product would not cause damage or harm, but damage or
harm has occurred in the case in question.
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The behavior of the plaintiff did not significantly contribute to the harm caused.
The doctrine of res ipsa loquitor does not establish proof of negligence, but it does allow the jury to infer what
is not explicitly available pertaining to negligent acts or omissions on the part of the defendant (Baime, 2018).
Negligence can occur when products are created because defects can harm consumers. Think about the
potential harm that would occur if brake manufacturers were negligent. This negligence would cause brakes
to have flaws, which would prevent them from doing their job of stopping cars. If a car does not stop, people
will likely be injured. The manufacturing defect would result in a product liability lawsuit, based on legal
responsibility for the harmful consequences proximately caused by the product defect (Baime, 2018). Since the
courts would not be able to see the negligence occurring, the courts would base their decision on res ipsa
loquitor and the fact that the brakes would not normally fail under normal use by the driver.
Figure 6.6
If brakes do not work like they are supposed to, it could be the result of a manufacturing defect
that would result in product liability. (Credit: Valtercirillo/ pixabay/ License: CC0)
The Unreasonably Dangerous Product Standard
In the case of product liability, the court uses an unreasonably dangerous product standard to determine
liability. The unreasonably dangerous product would be so dangerous that the danger would be beyond the
expectation of the user, and a less dangerous option could have been produced instead (Kionka, 2013). This
type of unreasonably dangerous product often falls into one of three categories (Kionka, 2013):
•
A flaw in the manufacturing process that occurred because the manufacturer failed to exercise proper
care during manufacturing
•
A defect in the design of the product, which makes it dangerous, and safer alternatives are available and
economically feasible
•
The product includes insufficient warnings or instructions for the proper use of the product and its
potential dangers
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Business_Law_I_Essentials_-_WEB.pdf | Defenses
There are defenses to product liability claims. In some cases, the plaintiff’s own behaviors contribute to his or
her injuries, based on his or her own negligence. This situation is known as contributory negligence.
Contributory negligence, when determined by the court, prevents any recovery of damages by the plaintiff
(Baime, 2018). So, if the court finds contributory negligence, the plaintiff is unable to recover any damages for
the injury. Two forms of contributory negligence are assumption of risk and misuse.
Assumption of risk is one defense. In some cases, the defendant can argue that the user assumed the risk of
using the product if he or she used the product while knowing that the defect in the product created a risk
(CCBC Legal Studies, n.d.). An individual who purchases a saw and sees that the guard is too small to cover the
teeth, but decides to use it anyway, is assuming the risk of using the product. If the saw cuts the individual,
then the manufacturer could argue that the person assumed the risk because he saw the defect, understood
the risk, and used the saw anyway.
Another defense is product misuse. In some cases, an individual will use a product in ways that it is not meant
to be used (CCBC Legal Studies, n.d.). The user might not be aware of a defect, and he or she proceeds to use
the product incorrectly. Misuse by the individual would be to blame for any resulting harm.
Figure 6.7
Using a chainsaw with bare feet could be dangerous and add to the risk of use without a guard. If
the plaintiff suffered harm because his bare foot could not hold the wood down properly, he could be
responsible for comparative negligence. (Credit: edman_eu/ pixabay/ License: CC0)
Plaintiffs might also be responsible for comparative negligence. With comparative negligence, the plaintiff’s
own actions in the use of the product contributed to the harm caused by the product, but the plaintiff might
still receive damages (CCBC Legal Studies, n.d.). The amount of negligence on behalf of each part (plaintiff and
defendant) is compared to determine the damages to which the plaintiff is entitled (Baime, 2018). If a plaintiff
is found to be 30% responsible, and the defendant 70% responsible, then the plaintiff would be entitled to 70%
of the damages suffered.
Chapter 6 The Tort System
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Business_Law_I_Essentials_-_WEB.pdf | Conclusion
In some cases, a plaintiff suffers harm, but fault is not easily determined, or fault is not the issue. A defendant
can exercise reasonable care while the nature of the activity lends itself to risk of harm. Products could have
obvious or hidden defects that cause harm to another. When defects occur, the plaintiff has the ability to file a
civil suit against the entity that is responsible for the harm-causing defect. The plaintiff might also share some
responsibility in the harm, and based on product liability, the court decision will be adjusted accordingly.
Assessment Questions
1. Define Torts.
2. An example of an intentional tort is:
a.
Defamation.
b.
Assault.
c.
Malicious prosecution.
d.
All of the above.
3. When an individual creates and promotes malicious falsehoods about another that individual may be liable
for:
a.
Libel.
b.
Slander.
c.
Defamation.
d.
All of the above.
4. Describe Negligence.
5. All of the following are elements of negligence except:
a.
A reasonable person.
b.
A duty by the defendant to either act or refrain from acting.
c.
A breach of a duty owed by defendant.
d.
Measurable harm.
6. Which of the following is a special relationship giving rise to a duty to act to aid or protect one in peril?
a.
Hotel and guest.
b.
Cousin to cousin.
c.
School principal and student.
d.
Hotel and guest, and school principal and student.
7. If an activity causes a foreseeable and highly significant risk of physical harm even when reasonable care is
exercised by all actors, and the activity is not one of common usage, it is:
a.
Proximate cause.
b.
Abnormally dangerous.
c.
Negligence.
d.
None of these are correct.
8. What is an attractive nuisance?
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Business_Law_I_Essentials_-_WEB.pdf | 9. The elements of res ipsa loquitor that a plaintiff must establish in a product liability lawsuit include all of the
following except:
a.
The defendant breached his or her duty of care.
b.
The defendant had control over the product in question while it was being manufactured.
c.
Under normal circumstances, the product would not cause damage or harm, but damage or harm has
occurred in the case in question.
d.
The behavior of the plaintiff did not significantly contribute to the harm caused.
10. Describe the differences between contributory and comparative negligence.
Endnotes
Baime. E. (2018). Fundamentals of tort law. Retrieved from: https://nationalparalegal.edu/
FundamentalsTortLaw.aspx.
Cornell Law School. (n.d.). Tort. Retrieved from: https://www.law.cornell.edu/wex/tort.
Kionka, E. J. (2013). Torts (5th ed.). St. Paul, MN: West Academic Publishing. Retrieved from:
https://lscontent.westlaw.com/images/content/Torts5th.pdf.
Baime. E. (2018). Fundamentals of tort law. Retrieved from: https://nationalparalegal.edu/
FundamentalsTortLaw.aspx.
CCBC Legal Studies (n.d.) Strict liability. Retrieved from: https://ccbclegalstudiesbusinesslaw.wordpress.com/
unit-1-foundations-of-law/torts/strict-liability/.
Kionka, E. J. (2013). Torts (5th ed.). St. Paul, MN: West Academic Publishing. Retrieved from:
https://lscontent.westlaw.com/images/content/Torts5th.pdf.
Chapter 6 The Tort System
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Chapter 6 The Tort System
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Business_Law_I_Essentials_-_WEB.pdf | Chapter Outline
7.1 Consideration and Promissory Estoppel
7.2 Capacity and Legality
7.3 Breach of Contract and Remedies
Introduction
Learning Outcome
•
Analyze the principles of contract law and how they apply to businesses.
7.1
Consideration and Promissory Estoppel
A contract is defined as an agreement between two or more parties that is enforceable by law.
To be considered enforceable by law, a contract must contain several elements, including offer and
acceptance, genuine agreement, consideration, capacity, and legality.
Figure 7.1 (Credit: edar/ pixabay/ Attribution 2.0 Generic (CC BY 2.0))
7
Contract Law |
Business_Law_I_Essentials_-_WEB.pdf | Figure 7.2
Before a contract can become legal and enforceable, several elements must first be in place.
(Credit: rawpixel/ pixabay/ License: CC0)
The key to a contract is that there must be an offer, and acceptance of the terms of that offer. An offer is a
proposal made to demonstrate an intent to enter a contract. Acceptance is the agreement to be bound by the
terms of the offer. Offers must be made with intent, must be definite and certain (i.e., the offer must be clearly
expressed for it to be enforceable), and must be communicated to the offeree. An acceptance must
demonstrate the willingness to consent to all of the terms of the offer.
Genuine agreement, i.e., “a meeting of the minds,” is also required. Agreement can be destroyed by fraud,
misrepresentation, mistake, duress, or undue influence.
Consideration must be included in contracts. Consideration is a thing of value promised in exchange for
something else of value. This mutual exchange binds the parties together.
Capacity to contract is the next element required for a valid agreement. The law presumes that anyone
entering a contract has the legal capacity to do so. Minors are generally excused from contractual
responsibility, as are mentally incompetent and drugged or drunk individuals.
Finally, legality is the last element considered. Parties entering into contracts that involve illegal conduct may
not expect judicial relief to have that contract enforced. This theory has also been applied to conduct that
would be considered in opposition to public policy.
Consideration and Promissory Estoppel
Contract law employs the principles of consideration and promissory estoppel.
Consideration
In most cases, consideration need not be pecuniary (monetary). Most contracts are enforceable only if each
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Business_Law_I_Essentials_-_WEB.pdf | party gets consideration from the agreement. Consideration can be money, property, a promise, or some
right. For instance, when a music company sells studio equipment, the promised equipment is the
consideration for the buyer. The seller’s consideration is the money the buyer promises to pay for the
equipment.
Promissory Estoppel
The promissory estoppel doctrine is an exception to the requirement of consideration for contracts.
Promissory estoppel is triggered when one party acts on the other party’s promise. In cases where it is
triggered, there is harm or severe injustice to the party who acted because they relied on the other party’s
broken promise.
The doctrine of promissory estoppel allows aggrieved parties to pursue justice or fairness for the performance
of a contract in court, or other equitable remedies, even in the absence of any consideration. Its legal
application may vary from state to state, but the basic elements include:
•
A legal relationship existed between the parties.
•
A promise was made.
•
There was reliance on the promise that caused one party to act before any real consideration was
exchanged.
•
A substantial and measurable detriment occurred as a result of the failure to perform on the contract.
•
An unconscionable result, or gross injustice, resulted from the broken promise.
If it is found that these elements are satisfied and that the doctrine of estoppel is applicable, then the court will
issue the appropriate damages in the form of reliance damages to restore the aggrieved party to the position
they were in prior to the broken promise. Expectation damages are not usually available if promissory
estoppel is being claimed.
An example of how this principle would apply is:
E X A M P L E 7 . 1
After a bidding war for his services, Bob turns down a job offer with We are the Best, LLC in Miami, Florida
(where he lives), and accepts a dream job offer from MegaCorp Co. in San Francisco, California. The offer
contains a specific start date, compensation terms, benefits outline, and more. However, it does not include
relocation expenses or provisions. The company is aware of his plans to move across the country for the sole
purpose of taking this dream role. Bob breaks his Miami lease with penalty and spends approximately
$13,000 in moving and travel costs. As the cost of living in San Francisco is much higher than in Miami, he
puts down a much pricier first and last month’s rent and security deposit payment than he is used to. Within
two days of his planned start date, he receives a call from management at MegaCorp Co. stating that the
company has changed its mind and decided to go in a different direction. If Bob brings a promissory
estoppel suit, he will likely be entitled to all of the costs that he incurred while anticipating the start of the
promised role (i.e., penalty for the broken lease, moving costs, difference in the rental costs, cost of breaking
the new lease, if necessary, etc.) Following reimbursement of his costs, Bob will be returned to the same
position he was in prior to the broken promise. However, the company will not likely be required to reopen
Chapter 7 Contract Law
77 |
Business_Law_I_Essentials_-_WEB.pdf | The doctrines of consideration and promissory estoppel are essential to an understanding of how contracts
are formed and enforced in the United States.
7.2
Capacity and Legality
For a contract to be legally binding, the parties entering into the contract must have the capacity to do so. As
a legal matter, there are certain classes of people who are presumed to have no capacity to contract. These
include legal minors, the mentally ill, and those who are intoxicated. If people meeting these criteria enter into
a contract, the agreement is considered voidable. If a contract is voidable, then the person who lacked
capacity has the choice to either end the contract or continue with it as agreed upon. This design is meant to
protect the party lacking capacity.
Following are some examples of the application of these rules.
Minors Have No Capacity to Contract
In most states, minors under the age of 18 lack the capacity to make a contract and may therefore either
honor an agreement or void the contract. However, there are a few exceptions to this rule. In most states, a
contract for necessities (i.e. food and clothing) may not be voided. Also, in most states, the contract can no
longer be voided when the minor turns 18.
Mental Incapacity
If a person lacks the mental capacity to enter a contract, then either he or she, or his or her legal guardian,
may void it, except in cases where the contract involved necessities. In most states, mental capacity is
measured against the “cognitive standard” of whether the party understood its meaning and effect.
the role for him or give him the job, as originally anticipated. Also, he will not likely be awarded any damages
for the job that he turned down with We are the Best, LLC, as expectation damages are not usually available.
E X A M P L E 7 . 2
Mary, 16, an athlete, signs a long-term endorsement deal with a well-known brand and is compensated for
several years. At age 20, she decides she wants to take a better endorsement deal, so she tries to void the
agreement on the grounds that it was made when she was a minor and that she lacked capacity at that time.
Mary will not likely succeed in having her agreement voided, as she has passed the period of incapacity.
E X A M P L E 7 . 3
Mr. Williams contracted to sell a patent. Later, however, he claimed that he lacked capacity to enter the
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Business_Law_I_Essentials_-_WEB.pdf | Voluntary Intoxication – Drugs and Alcohol
Courts generally do not find lack of capacity to contract for people who are voluntarily intoxicated. The
rationale for this decision is found in the reasoning that individuals should not be allowed to side-step their
contractual obligations by virtue of their self-induced states. By another token, however, courts also seek to
avoid the undesirable result of allowing the sober party to take advantage of the other person’s condition.
Therefore, if a party is so inebriated that he or she is unable to understand the nature and consequences of
the agreement, then the contract may be voided by the inebriated party.
Legality
Contracts must be created for the exchange of legal goods and services to be enforced. An agreement is void
if it violates the law, or is formed for the purpose of violating the law. Contracts may also be found voidable if
they are found violative of public policy, although this is rarer. Typically, this conclusion is only invoked in clear
cases where the potential harm to the public is substantially incontestable, eluding the idiosyncrasies of
particular judges.
For a contract to be binding, it must not have a criminal or immoral purpose or go against public policy. For
example, a contract to commit murder in exchange for money will not be enforced by the courts. If performing
the terms of the agreement, or if formation of the contract, will cause the parties to engage in activity that is
illegal, then the contract will be deemed illegal and will be considered void or “unenforceable,” similar to a
nonexistent contract. In this case, there will not be any relief available to either party if they breach the
contract. Indeed, it is a defense to a breach of contract claim that the contract itself was illegal.
agreement. He, therefore, sought to have the contract voided. Williams based his claim on the fact that he
had been diagnosed as manic-depressive and had received treatment from a variety of mental hospitals for
this condition. His doctor stated that he was unable to properly evaluate business opportunities and
contracts while in a “manic” state. A California Court of Appeals, evaluating a similar situation, refused to
terminate the contract and stated that even in his manic state, the party was capable of contracting, as his
condition may have impaired his judgment but not his understanding of the contract. With other mental
conditions, a different legal conclusion could be reached.
E X A M P L E 7 . 4
In the late 1900s, the owner of a significant amount of stock went on a three-month drinking binge. A local
bank that was aware of his consistent inebriation hired a third party to contract with him. The third party
succeeded in getting him to sell his stock for about 1.5% of the worth of its total value. When the duped
seller ended his binge a month later, he learned that the third party had sold the stock to the local bank
behind the deal. He then sued the third party. Ultimately, the case was decided by the U.S. Supreme Court,
which found that the agreement was void because both the bank and the third party knew that the plaintiff
was unaware of what he was doing when he entered the contract. The bank was required to return the
shares to the plaintiff, minus the 1.5% amount of real value that he had been paid for the shares.
Chapter 7 Contract Law
79 |
Business_Law_I_Essentials_-_WEB.pdf | Some examples of contracts that would be considered illegal are contracts for the sale or distribution of illegal
drugs, contracts for illegal activities such as loansharking, and employment contracts for the hiring of
undocumented workers.
An understanding of the several theories outlined herein for establishing (or challenging) capacity and legality
in contract law is essential to this area of law.
7.3
Breach of Contract and Remedies
Once a contract is legally formed, both parties are generally expected to perform according to the terms of the
contract. A breach of contract claim arises when either (or both) parties claim that there was a failure, without
legal excuse, to perform on any, or all, parts and promises of the contract.
Several inquiries are triggered when a breach of contract claims is initiated. The first step is to determine
whether a contract existed in the first place. If it did, the following questions may be asked: What did the terms
of the contract require of the parties? Were the contractual terms modified at any point? Did the breach
actually occur? Was the claimed breach material to the contract? Does any legal excuse or defense to
enforcement of the contract exist? What damages were caused by the breach?
Material vs. Minor Breach
The parties’ obligations and remedies for a breach of contract depend on whether the breach is considered
material or minor.
When something substantially different from what was expected under the terms of the contract is delivered,
the breach will be considered material. For example, the breach will be considered material if the contract
promises the delivery of Christmas ornaments, but the buyer receives a box of candies. In the case of a
material breach, the non-breaching party has the right to all remedies for breach of the entire contract and is
no longer expected to perform their obligations. In considering whether a breach is material, courts will
determine whether the non-breaching party still received a benefit, and if so, how much was received,
adequate compensation for the damages, the extent of the performance (if any) by the breaching party, any
hardship to the breaching party, the negligence or intent behind the behavior of the breaching party, and
finally, the possibility that the breaching party will perform the remainder of the contract.
There are times, however, that despite the breaching party’s failure to perform some of the contract, the other
party still receives a majority of the goods or services specified in the contract. In this case, the breach will be
E X A M P L E 7 . 5
In a state where gambling is illegal, two parties enter into an employment contract for the hiring of a
blackjack dealer. The contract would be void because the contract requires the employee to perform illegal
gambling activities. If the blackjack dealer tries to recover any unpaid wages for work completed, his claim
will not be recognized because the courts will treat the contract as if it never existed.
By contrast, parties enter a contract that involves the sale of dice to a known dealer in a state where
gambling is unlawful. The contract would not be considered void because the act of selling dice, in and of
itself, is not illegal.
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