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The future of education.\nopenstax.org\n\n\x0cTABLE OF CONTENTS\nPreface\n1\n\n1\n\nAmerican Law, Legal Reasoning, and the Legal System\n1.1 Basic American Legal Principles 3\n1.2 Sources and Types of Law 5\n1.3 Important Business Laws and Regulations\n\n2\n\nDisputes and Dispute Settlement\n\n7\n\n15\n\n2.1 Negotiation 15\n2.2 Mediation 19\n2.3 Arbitration 22\n\n3\n\nBusiness Ethics and Social Responsibility\n3.1 Business Ethics 31\n3.2 Social Responsibility\n\n4\n\n35\n\nBusiness and the United States Constitution\n4.1 Commerce Clause 43\n4.2 Constitutional Protections\n\n5\n\nCriminal Liability\n\n47\n\n53\n\n5.1 Common Business Crimes 53\n5.2 Civil vs: Criminal Liability 57\n\n6\n\nThe Tort System\n\n63\n\n6.1 Intentional Torts and Negligence\n6.2 Product and Strict Liability 67\n\n7\n\n31\n\nContract Law\n\n63\n\n75\n\n7.1 Consideration and Promissory Estoppel\n7.2 Capacity and Legality 78\n\n75\n\n43\n\n3\n\n\x0c7.3 Breach of Contract and Remedies\n\n8\n\nSales Contracts\n\n80\n\n85\n\n8.1 The Nature and Origins of Sales Contracts\n8.2 Warranties and Sales Contracts 91\n\n9\n\nEmployment and Labor Law\n\n85\n\n97\n\n9.1 Employment, Worker Protection, and Immigration Law\n9.2 Labor Law 101\n9.3 Equal Opportunity in Employment 105\n\n10\n\nGovernment Regulation\n\n97\n\n113\n\n10.1 Administrative Law 113\n10.2 Regulatory Agencies 117\n\n11\n\nAntitrust Law\n\n123\n\n11.1 History of Antitrust Law\n11.2 Antitrust Laws 127\n\n12\n\n123\n\nUnfair Trade Practices and the Federal Trade Commission\n12.1 Unfair Trade Practices 133\n12.2 The Federal Trade Commission\n\n13\n\nInternational Law\n\n136\n\n141\n\n13.1 Introduction to International Law 141\n13.2 Sources and Practice of International Law\n\n14\n\nSecurities Regulation\n\n145\n\n151\n\n14.1 Liability Under the Securities Act 151\n14.2 The Framework of Securities Regulation\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n154\n\n133\n\n\x0cIndex\n\n167\n\n\x0cThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cPreface\n\n1\n\nPreface\nWelcome to Business Law I Essentials, an OpenStax resource. This textbook was written to increase student\naccess to high-quality learning materials, maintaining the highest standards of academic rigor at little to no\ncost.\n\nAbout OpenStax\nOpenStax is a nonprofit based at Rice University, and it\xe2\x80\x99s our mission to improve student access to education.\nOur first openly licensed college textbook was published in 2012, and our library has since scaled to over 30\nbooks for college and AP\xc2\xae courses used by hundreds of thousands of students. OpenStax Tutor, our low-cost\npersonalized learning tool, is being used in college courses throughout the country. Through our partnerships\nwith philanthropic foundations and our alliance with other educational resource organizations, OpenStax is\nbreaking down the most common barriers to learning and empowering students and instructors to succeed.\n\nAbout OpenStax resources\nAttribution and Customization\nBusiness Law I Essentials was developed by Barnes and Noble Education LoudCloud and is licensed under a\nCreative Commons Attribution NonCommercial ShareAlike 4.0 International license (CC-BY-NC-SA), which\nmeans that noncommercial entities can remix and build upon the content, as long as they provide attribution\nto OpenStax and its content contributors and redistribute it under the same license as the original.\nBecause our books are openly licensed, you are free to use the book in its current format or augment it with\nadditional content, cases, or other teaching materials. Feel free to remix the content by assigning your\nstudents certain chapters and sections in your syllabus, in the order that you prefer. You can even provide a\ndirect link in your syllabus to the sections in the web view of your book.\n\nArt attribution\nIn Business Law I Essentials, most art contains attribution to its title, creator, or rights holder, host platform, and\nlicense within the caption. Because the art is openly licensed, anyone may reuse the art as long as they provide\nthe same attribution to its original source and share it under the same license as the original art.\n\nErrata\nAll OpenStax textbooks undergo a review process. However, like any professional-grade textbook, errors\nsometimes occur. Since our books are web based, we can make updates periodically when deemed\npedagogically necessary. If you have a correction to suggest, submit it through the link on your book page on\nopenstax.org. Subject matter experts review all errata suggestions. OpenStax is committed to remaining\ntransparent about all updates, so you will also find a list of past errata changes on your book page on\nopenstax.org.\n\nFormat\nYou can access this textbook for free in web view or PDF through openstax.org, and for a low cost in print.\n\n\x0c2\n\nPreface\n\nAbout Business Law I Essentials\nBusiness Law I Essentials is a brief introductory textbook designed to meet the scope and sequence\nrequirements of courses on Business Law or the Legal Environment of Business. The concepts are presented in\na streamlined manner, and cover the key concepts necessary to establish a strong foundation in the subject.\nThe textbook follows a traditional approach to the study of business law. Each chapter contains learning\nobjectives, explanatory narrative and concepts, references for further reading, and end-of-chapter questions.\nBusiness Law I Essentials may need to be supplemented with additional content, cases, or related materials, and\nis offered as a foundational resource that focuses on the baseline concepts, issues, and approaches.\nOpenStax\xe2\x80\x99s Creative Commons licensing, described above, offers a instructors and course designers a great\ndeal of flexibility in its use.\n\nCommunity Hubs\nOpenStax partners with the Institute for the Study of Knowledge Management in Education (ISKME) to offer\nCommunity Hubs on OER Commons\xe2\x80\x94a platform for instructors to share community-created resources that\nsupport OpenStax books, free of charge. Through our Community Hubs, instructors can upload their own\nmaterials or download resources to use in their own courses, including additional ancillaries, teaching\nmaterial, multimedia, and relevant course content. We encourage instructors to join the hubs for the subjects\nmost relevant to your teaching and research as an opportunity both to enrich your courses and to engage with\nother faculty.\nTo reach the Community Hubs, visit www.oercommons.org/hubs/OpenStax.\n\nTechnology Partners\nAs allies in making high-quality learning materials accessible, our technology partners offer optional low-cost\ntools that are integrated with OpenStax books. To access the technology options for your text, visit your book\npage on openstax.org.\n\nContributing Authors and Reviewers\nMirande Valbrune, Esq. Employment Lawyer\nRenee De Assis Texas Woman\'s University\nSuzanne Cardell, University of Massachusetts Dartmouth\nTess C. Taylor, Walden University\nDr. Natalie Sappleton, Smartly Institute\nC. M. Mitchell, Ashford University\nKenneth Mitchell-Phillips, Portland Community College\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0c1\n\nAmerican Law, Legal Reasoning, and the Legal System\nFigure 1.1 (Credit: MarkThomas /pixabay /Attribution 2.0 Generic (CC BY 2.0))\n\nChapter Outline\n1.1 Basic American Legal Principles\n1.2 Sources and Types of Law\n1.3 Important Business Laws and Regulations\n\nIntroduction\nLearning Outcome\n\xe2\x80\xa2 Describe the foundation and sources that establish American law.\n\n1.1\n\nBasic American Legal Principles\n\nThe American legal system has its roots in the British legal system. It was developed with the purpose of\nestablishing standards for acceptable conduct, proscribing punishment for violations as a deterrent,\nestablishing systems for enforcement, and peacefully resolving disputes. The ultimate goal of the American\nlegal system is promotion of the common good.\n\nEstablishing Standards\nThe American legal system was developed with the goal of establishing a set of standards that outline what is\nto be considered minimally acceptable behavior. Broadly speaking, federal laws are those that all United States\ncitizens are expected to follow. State and local laws may often be similar to federal laws, but they may also\ndiffer quite a bit, and only govern the state\xe2\x80\x99s citizens.\n\n\x0c4\n\nFigure 1.2\n\nChapter 1 American Law, Legal Reasoning, and the Legal System\n\nThe American legal system is designed to establish a set of standards for acceptable behavior.\n\n(Credit: joergelman/ pixabay/ License: CC0)\n\nPromoting Consistency\nThe American legal system follows the British Common Law system, which is designed to leverage past judicial\nreasoning, while also promoting fairness through consistency. Judges in the Common Law system help shape\nthe law through their rulings and interpretations. This body of past decisions is known as case law. Judges use\ncase law to inform their own rulings. Indeed, judges rely on precedent, i.e., previous court rulings on similar\ncases, for ruling on their own cases.\nAll U.S. states, except Louisiana, have enacted \xe2\x80\x9creception statutes,\xe2\x80\x9d stating that the judge-made common law\nof England is the law of the state to the extent that it does not conflict with the state\xe2\x80\x99s current laws.\nHowever, the body of American law is now so robust that American cases rarely cite English materials, except\nfor a British classic or a famous old case. Additionally, foreign law is not cited as binding precedent. Therefore,\nthe current American practice of the common law tradition refers more to the process of judges looking to the\nprecedent set jurisdictionally, and substantially similar to, American case law.\n\nMaintaining Order\nCongruent with the goal of establishing standards and promoting consistency, laws are also used to promote,\nprovide, and maintain order.\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 1 American Law, Legal Reasoning, and the Legal System\n\n5\n\nResolving Disputes\nConflicts are to be expected given people\xe2\x80\x99s varying needs, desires, objectives, values systems, and\nperspectives. The American legal system provides a formal means for resolving conflicts through the courts. In\naddition to the federal court and individual state systems, there are also several informal means for resolving\ndisputes that are collectively called alternative dispute resolution (ADR). Examples of these are mediation and\narbitration.\n\nProtecting Liberties and Rights\nThe United States Constitution and state laws provide people with many liberties and rights. American laws\noperate with the purpose and function of protecting these liberties and rights from violations by persons,\ncompanies, governments, or other entities.\nBased on the British legal system, the American legal system is divided into a federal system and a state and\nlocal system. The overall goal of both systems is to provide order and a means of dispute settlement, as well as\nto protect citizens\xe2\x80\x99 rights.\nClearly, the purposes of the American legal system are broad and well-considered.\n\n1.2\n\nSources and Types of Law\n\nThe American legal system is made up of many types of codified forms of law, with the United States\nConstitution being the pre-eminent source of American law. The Constitution establishes the boundaries of\nfederal law, and it must be followed by all citizens, organizations, and entities. It includes Congressional acts,\nSenate-ratified treaties, executive regulations, and federal case law. The United States Code (\xe2\x80\x9cUSC\xe2\x80\x9d) compiles\nthese laws.\nAmerican law mainly originates from constitutional law, statutory law, treaties, administrative regulations, and\ncommon law (which includes case law).\n\nThe Constitution\nThe United States Constitution is the foremost law of the land. The Constitution\xe2\x80\x99s first ten amendments are\nreferred to as the Bill of Rights, which offers specific protections of individual liberty and justice. Additionally,\nthe Bill of Rights restricts certain powers of government. The Constitution empowers federal law making by\ngiving Congress the power to enact statutes for certain limited purposes, like regulating interstate commerce.\nThe United States Code officially compiles and codifies the federal statutes.\n\n\x0c6\n\nFigure 1.3\n\nChapter 1 American Law, Legal Reasoning, and the Legal System\n\nThe U.S. Constitution is known as the supreme law of the land. (Credit: lynn0101/ pixabay/\n\nLicense: CC0)\n\nAmerican Common Law\nAs discussed in the previous section, the United States follows the common law legal tradition of English law.\nJudges in the Common Law system help shape the law through their rulings and interpretations. This body of\npast decisions is known as case law, which is used by judges to inform their own rulings. In fact, judges rely on\nprecedent, i.e., previous court rulings on similar cases, when determining the ruling in their own cases.\nAn 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.\n2017), cert. granted, 138 S. Ct. 735 (2018)), in which the South Dakota Supreme Court held that a state law\nrequiring internet retailers without an in-state physical presence to remit sales tax was unconstitutional.\nUnless this ruling is overruled by the United States Supreme Court, then it becomes part of the case law and\nprecedent set in that state, and it will be followed by subsequent rulings when similar cases are filed.\n\nFederal Law\nThe Constitution empowers federal law making by giving Congress the power to enact statutes for certain\nlimited purposes, like regulating interstate commerce. Federal law preempts conflicting state and local laws.\nHowever, federal preemption is not without limits, insofar as states each have their own constitution and are\nconsidered sovereign. Therefore, federal law may only preempt state law if it is enacted within the limited\npowers that are enumerated and granted to Congress in the Constitution.\nBroad interpretations of the Constitution\xe2\x80\x99s Commerce and Spending Clauses have expanded the reach of\nfederal law into many areas. Indeed, its reach in some areas, such as aviation and railroads, is now so broad\nthat it preempts virtually all state law. In others areas, such as family law, lawmaking continues to be left to the\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 1 American Law, Legal Reasoning, and the Legal System\n\n7\n\nstates. Finally, a number of powerful federal and state laws coexist in areas such as antitrust, trademark,\nemployment law, and others.\n\nStatutes\nWhen a bill becomes a federal law, it is assigned a law number and prepared for publication by the Office of\nthe Federal Register (OFR) of the National Archives and Records Administration (NARA). Public laws are also\ngiven legal statutory citation by the OFR and are incorporated into the United States Code (USC).\n\nRegulations\nLaws differ from regulations in that laws are passed by either the U.S. Congress or state congresses.\nRegulations, by contrast, are standards and rules adopted by administrative agencies that govern how laws\nwill be enforced.\nFederal agencies often enjoy broad rulemaking authority when Congress acts to grant them this power. Called\n\xe2\x80\x9cregulations,\xe2\x80\x9d these agency rules normally carry the force of law, as long as they demonstrate a reasonable\ninterpretation of the relevant statutes. For example, the Environmental Protection Agency (EPA) has\nestablished regulations for businesses and their emission and disposal of pollutants to protect the\nenvironment. The EPA has the authority to enforce these regulations when a business violates them, and such\nenforcement is usually done by fining the company or by using other means.\nThe Administrative Procedure Act (APA) enables the adoption of regulations, which are codified and\nincorporated into the Code of Federal Regulations (CFR). Federal agencies frequently draft and distribute\nforms, manuals, policy statements, letters, and rulings. Though these may be considered as persuasive\nauthority by the courts, they do not carry the same force as law. In other words, if a person or business\nquestions a regulation of a government agency, saying it is unconstitutional, and that party is successful in\nproving it, then the regulation is not enforced and the agency will need to revise it or remove it.\n\nState Law\nAmerica, as diverse as its fifty states, is also governed by fifty different state constitutions, state governments,\nand state courts. Each has its own legislative, executive, and judicial branches. States are empowered to create\nlegislation that is related to matters not preempted by the federal Constitution and federal laws. Most cases\ninvolve state law issues and are litigated in state courts.\n\nLocal Law\nIn addition to federal and state law, municipalities, towns or cities, and counties may enact their own laws that\ndo not conflict with state or federal laws.\nAs demonstrated, American law does not draw from one source alone; instead, it is derived from many\nsources.\n\n1.3\n\nImportant Business Laws and Regulations\n\nBusiness law is a very expansive area of the law. It primarily addresses issues related to the creation of new\nbusinesses, which arise as existing companies deal with the public, government, and other companies.\n\n\x0c8\n\nChapter 1 American Law, Legal Reasoning, and the Legal System\n\nBusiness law consists of many legal disciplines, including contracts, tax law, corporate law, intellectual\nproperty, real estate, sales, immigration law, employment law, bankruptcy, and others.\n\nFigure 1.4\n\nContract law is just one type of law that businesses need to be concerned about. (Credit: edar/\n\npixabay/ License: CC0)\nAs noted, business law touches upon a number of other legal areas, practices, and concerns. Some of the most\nimportant of these, which are discussed in this section, are disputes and dispute settlement, business ethics\nand social responsibility, business and the United States Constitution, criminal liability, torts, contracts, labor\nand employment law, Unfair Trade Practices and the Federal Trade Commission, international law, and\nsecurities regulation. Though they are discussed in much more depth in later chapters, the following gives a\nbrief overview.\n\nDisputes and Dispute Settlement\nIn addition to the federal court and individual state systems, there are also a variety of mechanisms that\ncompanies can use to resolve disputes. They are collectively called alternative dispute resolution (\xe2\x80\x9cADR\xe2\x80\x9d), and\nthey include mediation, settlement, and arbitration. Many states now require companies to resolve legal\ndisputes using ADR before the initiation of any lawsuit to encourage speedy resolution, cost and time\ncontainment, and reduced judicial dockets. Traditional litigation remains an option in most cases if other\nefforts fail or are refused.\n\nBusiness Ethics and Social Responsibility\nIn the routine course of business, employees are often required to make decisions. Business ethics outline the\nethical model, or framework, that companies expect employees to follow when making these decisions, as well\nas the behavior that the companies deem acceptable. Sound and ethical decision making can also help\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 1 American Law, Legal Reasoning, and the Legal System\n\n9\n\ncompanies avoid legal liability and exposure. Typically, an ethics code and/or a code of conduct details a\ncompany\xe2\x80\x99s requirements and guidelines, while also serving as a key corporate governance tool.\nIn addition to business ethics, companies must also consider their social responsibility and the laws related to\nit, such as consumer and investor protections, environmental ethics, marketing ethics, and ethical issues in\nfinancial management.\n\nBusiness and the United States Constitution\nSince the start of the 20th century, broad interpretations of the Constitution\xe2\x80\x99s Commerce and Spending\nClauses have expanded the reach of federal law into many areas. Indeed, its reach in some areas is now so\nbroad that it preempts virtually all state law. Thus, the Constitution\xe2\x80\x99s Commerce Clause has been interpreted\nto allow federal lawmaking and enforcement that applies to many aspects of business activity. Additionally, the\nConstitution\xe2\x80\x99s Bill of Rights extends some protections to business entities that are also constitutionally\nguaranteed to individuals\nFor example, on January 21, 2010, in Citizens United v. Federal Election Commission, 558 U.S. 310 (2010), the\nU.S. Supreme Court heard the issue of whether the government can ban political spending by corporations in\ncandidate elections. The Court ruled that corporations have the same Constitutional right to free speech as\nindividuals, and thus lifted the restrictions on contributions.\n\nCriminal Liability\nThe imposition of criminal liability is one method used to regulate companies. The extent of corporate liability\nfound in an offensive act determines whether a company will be held liable for the acts and omissions of its\nemployees. Criminal consequences may include penalties, such as prison, fines and/or community service. In\naddition to criminal liability, civil law remedies are usually available, e.g., the award of damages and\ninjunctions, which may include penalties. Most jurisdictions apply both criminal and civil systems.\n\nTorts\nWithin the business law context, torts may involve either intentional torts or negligence. Additionally,\ncompanies involved in certain industries should consider the risk of product liability. Product liability involves a\nlegal action against a company by a consumer for a defective product that caused loss or harm to the\ncustomer. There are several theories regarding recovery under product liability. These include contract\ntheories that deal with the product warranty, which details the promises of the nature of the product sold to\ncustomers. The contract product warranty theories are Express Warranty, Implied Warranty of Merchantability,\nand Implied Warranty of Fitness. Tort theories deal with a consumer claim that the company was negligent,\nand therefore caused either bodily harm, emotional harm, or monetary loss to the plaintiff. The tort liability\ntheories that can be used in this context are negligence (failure to take proper care in something), strict\nliability (imposition of liability without a finding of fault), and acts committed under Restatement (Third) of\nTorts (basic elements of the tort action for liability for accidental personal injury and property damage, as well\nas liability for emotional harm).\n\nContracts\nThe main function of a contract is to document promises that are enforceable by law. The key to an agreement\n\n\x0c10\n\nChapter 1 American Law, Legal Reasoning, and the Legal System\n\nor contract is that there must be an offer and acceptance of the terms of that offer. Sales contracts normally\ninvolve the sale of goods and include price terms, quantity and cost, how the terms of the contract will be\nperformed, and method of delivery.\n\nEmployment and Labor Law\nEmployment and labor law is a very broad discipline that covers a broad array of laws and regulations\ninvolving employer/employee rights and responsibilities in the workplace. This law includes worker protection\nand safety laws, such as OSHA, and worker immigration laws, such as the Immigration Reform and Control Act,\nwhich imposes sanctions on employers for knowingly hiring illegal immigrants. Other notable areas of\nemployment and labor law include, but are not limited to, the National Labor Relations Act, which deals with\nunion and management relations, as well as Equal Opportunity in Employment laws, which provide workers\nwith protections against discrimination in the workplace, e.g., Title VII, the Americans with Disabilities Act, Age\nDiscrimination in Employment Act, and others.\n\nAntitrust Law\nAntitrust legislation includes both federal and state laws regulating companies\xe2\x80\x99 conduct and organization. The\npurpose of such regulation is to allow consumers to benefit from the promotion of fair competition. The main\nstatutes implicated by antitrust law are the Sherman Act of 1890, the Clayton Act of 1914, and the Federal\nTrade Commission Act of 1914. These Acts discourage the restraint of trade by prohibiting the creation of\ncartels and other collusive practices. Additionally, they encourage competition by restricting the mergers and\nacquisitions of certain organizations. Finally, they prohibit the creation and abuse of monopoly power.\nActions may be brought in courts to enforce antitrust laws by the Federal Trade Commission (\xe2\x80\x9cFTC\xe2\x80\x9d), the U.S.\nDepartment of Justice, state governments, and private parties.\n\nUnfair Trade Practices and the Federal Trade Commission\nThe term \xe2\x80\x9cunfair trade practices\xe2\x80\x9d is broadly used and refers to any deceptive or fraudulent business practice\nor act that causes injury to a consumer. Some examples include, but are not limited to, false representations of\na good or service including deceptive pricing, non-compliance with manufacturing standards, and false\nadvertising. The FTC investigates allegations of unfair trade practices raised by consumers and businesses,\npre-merger notification filings, congressional inquiries, or reports in the media and may seek voluntary\ncompliance by offending businesses through a consent order, administrative complaints, or federal litigation.\n\nSecurities Regulation\nSecurities regulation involves both federal and state regulation of securities and stocks by governmental\nregulatory agencies. At times, it may also involve the regulations of exchanges like the New York Stock\nExchange, as well as the rules of self-regulatory organizations like the Financial Industry Regulatory Authority\n(FINRA).\nThe Securities and Exchange Commission (SEC) regulates securities on the federal level. Other instruments\nrelated to securities, such as futures and some derivatives, are regulated by the Commodity Futures Trading\nCommission (CFTC).\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 1 American Law, Legal Reasoning, and the Legal System\n\nAssessment Questions\n1. What country is the United States legal system derived from?\na. Germany.\nb. United Kingdom.\nc. United States of America.\nd. Canada.\n2. What is the function of law in the United States?\na. Establish standards.\nb. Promote consistency.\nc. Promote, provide, and maintain order.\nd. All of the above.\n3. As a judge, Baxter applies common law rules. These rules develop from:\na. decisions of the courts in legal disputes.\nb. regulations issued by administrative agencies.\nc. statutes enacted by Congress and the state legislatures.\nd. uniform laws drafted by legal scholars.\n4. What is the difference between state and federal law?\n5. The legislature of the state of Wyoming enacts a new statute that sets standards for the liability of\nbusinesses selling defective products. This statute applies in:\na. Wyoming only.\nb. only Wyoming and its bordering states.\nc. all states.\nd. all states but only to matters not covered by other states\xe2\x80\x99 laws.\n6. Alex has been sued by Will for failure to pay rent for their apartment which source of law will govern this\nlawsuit?\na. Administrative law.\nb. The Constitution.\nc. Civil Law.\nd. Criminal Law.\n7. Four sources of law in the U.S. legal system are:\na. Constitutional law, criminal law, civil law, and maritime law.\nb. Federal law, state law, international law, and maritime law.\nc. Statutory law, case law, equity, and common law.\nd. Constitutional law, judicial law, legislative law, and administrative law.\n8. Where can you find a codification of federal laws?\na. The library.\nb. Federal Court.\nc. United States Code.\nd. U.S. Library of Congress.\n9. What is the supreme law of the land? What are statutes? What are ordinances? What is an administrative\nrule?\n\n11\n\n\x0c12\n\nChapter 1 American Law, Legal Reasoning, and the Legal System\n\n10. Regulations are:\na. Laws passed by Congress.\nb. Rules made by local governments.\nc. Derived from decisions made by judges.\nd. Rules adopted by administrative agencies.\n11. What is an Unfair Trade Practice and which Administrative Agency regulates it?\n12. Some of the rights in the Constitution\xe2\x80\x99s Bill of Rights extends to Corporations.\na. True.\nb. False.\n13. Forms of Alternative Dispute Resolution (\xe2\x80\x9cADR\xe2\x80\x9d) include all of the following except:\na. Mediation.\nb. Settlement.\nc. Litigation.\nd. Arbitration.\n14. Consequences of being convicted a crime include all of the following except:\na. Prison.\nb. Fines.\nc. Community service.\nd. Damages.\n15. Securities are only regulated by federal laws.\na. True.\nb. False.\n\nEndnotes\nOverview \xe2\x80\x93 Rule of Law. United States Courts. Retrieved from: www.uscourts.gov/educational-resources/\neducational-activities/overview-rule-law.\nPurposes and Functions of Business Law. UpCounsel. Retrieved from: https://www.upcounsel.com/purposesand-functions-of-business-law.\nWilliams, L. and Lumen Learning. The Meaning and Purposes of Law. Lumen Learning \xe2\x80\x93 Introduction to\nBusiness. Retrieved from: https://courses.lumenlearning.com/wmopen-introbusiness/chapter/meaning-andpurposes-of-the-law/.\nFeltes, G. A Guide to the U.S. Federal Legal System - Web-based Public Accessible Sources. 2005. Hauser Global\nLaw School Program. Retrieved from: http://www.nyulawglobal.org/globalex/United_States.html.\nHow Laws Are Made. GovTrack. Retrieved from: https://www.govtrack.us/what-is-the-law.\nPublic Laws. December 28, 2017. National Archives. Retrieved from: https://www.archives.gov/federal-register/\nlaws.\nSteenken, B. & Brooks, T. The United States Legal System. Sources of Law. Retrieved from:\nhttp://sourcesofamericanlaw.lawbooks.cali.org/chapter/the-united-states-legal-system/.\nBusiness Law Courses. edX. Retrieved from: https://www.edx.org/learn/business-law.\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 1 American Law, Legal Reasoning, and the Legal System\n\nIntroductory Business Law. Modern States. Retrieved from: https://modernstates.org/course/introductorybusiness-law/.\n\n13\n\n\x0c14\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\nChapter 1 American Law, Legal Reasoning, and the Legal System\n\n\x0c2\n\nDisputes and Dispute Settlement\nFigure 2.1 (Credit: rawpixel/ pixabay/ Attribution 2.0 Generic (CC BY 2.0))\n\nChapter Outline\n2.1 Negotiation\n2.2 Mediation\n2.3 Arbitration\n\nIntroduction\nLearning Outcome\n\xe2\x80\xa2 Explain the theory, practice, and law of disputes and resolution.\n\n2.1\n\nNegotiation\n\nWe frequently engage in negotiations as we go about our daily activities, often without being consciously\naware that we are doing so. Negotiation can be simple, e.g., two friends deciding on a place to eat dinner, or\ncomplex, e.g., governments of several nations trying to establish import and export quotas across multiple\nindustries. When a formal proceeding is started in the court system, alternative dispute resolution (ADR), or\nways of solving an issue with the intent to avoid litigation, may be employed. Negotiation is often the first\nstep used in ADR. While there are other forms of alternative dispute resolution, negotiation is considered to be\nthe simplest because it does not require outside parties. An article in the Organization Behavior and Human\nDecision Processes defined negotiation as the \xe2\x80\x9cprocess by which parties with nonidentical preferences\nallocate resources through interpersonal activity and joint decision making.\xe2\x80\x9d Analyzing the various\ncomponents of this definition is helpful in understanding the theories and practices involved in negotiation as\na form of dispute settlement.\n\n\x0c16\n\nChapter 2 Disputes and Dispute Settlement\n\nNegotiation Types and Objectives\nPer the above definition, negotiation becomes necessary when two parties hold \xe2\x80\x9cnon-identical\xe2\x80\x9d preferences.\nThis statement seems fairly obvious, since 100% agreement would indicate that there is not any need for\nnegotiation. From this basic starting point, there are several ways of thinking about negotiation, including how\nmany parties are involved. For example, if two small business owners find themselves in a disagreement over\nproperty lines, they will frequently engage in dyadic negotiation. Put simply, dyadic negotiation involves two\nindividuals interacting with one another in an attempt to resolve a dispute. If a third neighbor overhears the\ndispute and believes one or both of them are wrong with regard to the property line, then group negotiation\ncould ensue. Group negotiation involves more than two individuals or parties, and by its very nature, it is often\nmore complex, time-consuming, and challenging to resolve.\nWhile dyadic and group negotiations may involve different dynamics, one of the most important aspects of\nany negotiation, regardless of the quantity of negotiators, is the objective. Negotiation experts recognize two\nmajor goals of negotiation: relational and outcome. Relational goals are focused on building, maintaining, or\nrepairing a partnership, connection, or rapport with another party. Outcome goals, on the other hand,\nconcentrate on achieving certain end results. The goal of any negotiation is influenced by numerous factors,\nsuch as whether or not there will be contact with the other party in the future. For example, when a business\nnegotiates with a supply company that it intends to do business with in the foreseeable future, it will try to\nfocus on \xe2\x80\x9cwin-win\xe2\x80\x9d solutions that provide the most value for each party. In contrast, if an interaction is of a\none-time nature, that same company might approach a supplier with a \xe2\x80\x9cwin-lose\xe2\x80\x9d mentality, viewing its\nobjective as maximizing its own value at the expense of the other party\xe2\x80\x99s value. This approach is referred to as\nzero-sum negotiation, and it is considered to be a \xe2\x80\x9chard\xe2\x80\x9d negotiating style. Zero-sum negotiation is based on\nthe notion that there is a \xe2\x80\x9cfixed pie,\xe2\x80\x9d and the larger the slice that one party receives, the smaller the slice the\nother party will receive. Win-win approaches to negotiation are sometimes referred to as integrative, while\nwin-lose approaches are called distributive.\n\nFigure 2.2\n\nCertain negotiation styles adopt a mindset in which the extent of one\xe2\x80\x99s win is proportional to the\n\nother\xe2\x80\x99s loss. (Credit: Sebastian Voortman/ pexels/ License: CC0)\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 2 Disputes and Dispute Settlement\n\n17\n\nNegotiation Style\nEveryone has a different way of approaching negotiation, depending on the circumstance and the person\xe2\x80\x99s\npersonality. However, the Thomas-Kilmann Conflict Mode Instrument (TKI) is a questionnaire that provides\na systematic framework for categorizing five broad negotiation styles. It is closely associated with work done\nby conflict resolution experts Dean Pruitt and Jeffrey Rubin. These styles are often considered in terms of the\nlevel of self-interest, instead of how other negotiators feel. These five general negotiation styles include:\n\xe2\x80\xa2 Forcing. If a party has high concern for itself, and low concern for the other party, it may adopt a\ncompetitive approach that only takes into account the outcomes it desires. This negotiation style is most\nprone to zero-sum thinking. For example, a car dealership that tries to give each customer as little as\npossible for his or her trade-in vehicle would be applying a forcing negotiation approach. While the party\nusing the forcing approach is only considering its own self-interests, this negotiating style often\nundermines the party\xe2\x80\x99s long-term success. For example, in the car dealership example, if a customer feels\nshe has not received a fair trade-in value after the sale, she may leave negative reviews and will not refer\nher friends and family to that dealership and will not return to it when the time comes to buy another car.\n\xe2\x80\xa2 Collaborating. If a party has high concern and care for both itself and the other party, it will often employ\na collaborative negotiation that seeks to maximum the gain for both. In this negotiating style, parties\nrecognize that acting in their mutual interests may create greater value and synergies.\n\xe2\x80\xa2 Compromising. A compromising approach to negotiation will take place when parties share some\nconcerns for both themselves and the other party. While it is not always possible to collaborate, parties\ncan often find certain points that are more important to one versus the other, and in that way, find ways\nto isolate what is most important to each party.\n\xe2\x80\xa2 Avoiding. When a party has low concern for itself and for the other party, it will often try to avoid\nnegotiation completely.\n\xe2\x80\xa2 Yielding. Finally, when a party has low self-concern for itself and high concern for the other party, it will\nyield to demands that may not be in its own best interest. As with avoidance techniques, it is important to\nask why the party has low self-concern. It may be due to an unfair power differential between the two\nparties that has caused the weaker party to feel it is futile to represent its own interests. This example\nillustrates why negotiation is often fraught with ethical issues.\n\n\x0c18\n\nFigure 2.3\n\nChapter 2 Disputes and Dispute Settlement\n\nConcern for self vs. others leads to the differences in negotiating styles. (Modification of art by\n\nBNED/Rubin Credit: CC BY NC SA)\n\nNegotiation Styles in Practice\nApple\xe2\x80\x99s response to its treatment of warranties in China, i.e., giving one-year warranties instead of two-year\nwarranties as required by law, serves as an example of how negotiation may be used. While Apple products\ncontinued to be successful and popular in China, the issue rankled its customers, and Chinese celebrities\njoined the movement to address the concern. Chinese consumers felt that Apple was arrogant and didn\xe2\x80\x99t\nvalue its customers or the customers\xe2\x80\x99 feedback. In response, Tim Cook issued a public apology in which he\nexpressed regret over the misunderstanding, saying, \xe2\x80\x9cWe are aware that insufficient communications during\nthis process has led to the perception that Apple is arrogant and disregards, or pays little attention to,\nconsumer feedback. We express our sincere apologies for any concern or misunderstanding arising\ntherefrom.\xe2\x80\x9d Apple then listed four ways it intended to resolve the matter. By exhibiting humility and concern\nfor its customers, Apple was able to diffuse a contentious situation that might have resulted in costly litigation.\n\nNegotiation Laws\nNegotiations are covered by a medley of federal and state laws, such as the Federal Arbitration Act and\nUniform Arbitration Act. The Federal Arbitration Act (FAA) is a national policy that favors arbitration and\nenforces situations in which parties have contractually agreed to participate in arbitration. Parties who have\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 2 Disputes and Dispute Settlement\n\n19\n\ndecided to be subject to binding arbitration relinquish their constitutional right to settle their dispute in court.\nIt is the FAA that allows parties to confirm their awards, as will be discussed in the following chapters. When\nconsidering negotiation laws, it is important to keep in mind that each state has laws with their own definitions\nand nuances. While the purpose of the Uniform Arbitration Act in the United States was to provide a uniform\napproach to the way states handle arbitration, it has only been adopted in some form by about 35 states.\n\n2.2\n\nMediation\n\nCourt or Agency-Connected Mediation\nMediation is a method of dispute resolution that relies on an impartial third-party decision-maker, known as a\nmediator, to settle a dispute. While requirements vary by state, a mediator is someone who has been trained\nin conflict resolution, though often, he or she does not have any expertise in the subject matter that is being\ndisputed. Mediation is another form of alternative dispute resolution. It is often used in attempts to resolve a\ndispute because it can help disagreeing parties avoid the time-consuming and expensive procedures involved\nin court litigation. Courts will often recommend that a plaintiff, or the party initiating a lawsuit, and a\ndefendant, or the party that is accused of wrongdoing, attempt mediation before proceeding to trial. This\nrecommendation is especially true for issues that are filed in small claims courts, where judges attempt to\nstreamline dispute resolution. Not all mediators are associated with public court systems. There are many\nagency-connected and private mediation services that disputing parties can hire to help them potentially\nresolve their dispute. The American Bar Association suggests that, in addition to training courses, one of the\nbest ways to start a private mediation business is to volunteer as a mediator. Research has shown that\nexperience is an important factor for mediators who are seeking to cultivate sensitivity and hone their conflict\nresolution skills.\nFor businesses, the savings associated with mediation can be substantial. For example, the energy corporation\nChevron implemented an internal mediation program. In one instance, it cost $25,000 to resolve a dispute\nusing this internal mediation program, far less than the estimated $700,000 it would have incurred through\nthe use of outside legal services. Even more impressive is the amount it saved by not going to court, which\nwould have cost an estimated $2.5 million.\nMediation is distinguished by its focus on solutions. Instead of focusing on discoveries, testimonies, and expert\nwitnesses to assess what has happened in the past, it is future-oriented. Mediators focus on discovering ways\nto solve the dispute in a way that will appease both parties.\n\nOther Benefits of Mediation\n\xe2\x80\xa2 Confidentiality. Since court proceedings become a matter of public record, it can be advantageous to use\nmediation to preserve anonymity. This aspect can be especially important when dealing with sensitive\nmatters, where one or both parties feels it is best to keep the situation private.\n\xe2\x80\xa2 Creativity. Mediators are trained to find ways to resolve disputes and may apply outside-the-box thinking\nto suggest a resolution that the parties had not considered. Since disagreeing parties can be feeling\nemotionally contentious toward one another, they may not be able to consider other solutions. In\naddition, a skilled mediator may be able to recognize cultural differences between the parties that are\ninfluencing the parties\xe2\x80\x99 ability to reach a compromise, and thus leverage this awareness to create a novel\nsolution.\n\xe2\x80\xa2 Control. When a case goes to trial, both parties give up a certain degree of control over the outcome. A\n\n\x0c20\n\nChapter 2 Disputes and Dispute Settlement\n\njudge may come up with a solution to which neither party is in favor. In contrast, mediation gives the\ndisputing parties opportunities to find common ground on their own terms, before relinquishing control\nto outside forces.\n\nRole of the Mediator\nSuccessful mediators work to immediately establish personal rapport with the disputing parties. They often\nhave a short period of time to interact with the parties and work to position themselves as a trustworthy\nadvisor. The Harvard Law School Program on Negotiation reports a study by mediator Peter Adler in which\nmediation participants remembered the mediators as \xe2\x80\x9copening the room, making coffee, and getting\neveryone introduced.\xe2\x80\x9d This quote underscores the need for mediators to play a role beyond mere\nadministrative functions. The mediator\xe2\x80\x99s conflict resolution skills are critical in guiding the parties toward\nreaching a resolution.\n\nSteps of Mediation\nAs explained by nolo.com (http://nolo.com) , mediation, while not being as formal as a court trial, involves the\nfollowing six steps:\n\xe2\x80\xa2 Mediator\xe2\x80\x99s Opening Statement: During the opening statement, the mediator introduces himself or\nherself and explains the goals of mediation.\n\xe2\x80\xa2 Opening Statements of Plaintiff and Defendant: Both parties are given the opportunity to speak,\nwithout interruption. During this opening statement, both parties are afforded the opportunity to\ndescribe the nature of the dispute and their desired solution.\n\xe2\x80\xa2 Joint Discussion: The mediator will try to get the two disagreeing parties to speak to one another and will\nguide the discussion toward a mutually amicable solution. This part of the mediation process usually\nidentifies which issues need to be resolved and explores ways to address the issues.\n\xe2\x80\xa2 Private Caucus: During this stage, each party has the ability to meet and speak privately with the\nmediator. Typically, the mediator will use this time to learn more about what is most important to each\nparty and to brainstorm ways to find a resolution. The mediator may ask the parties to try to put aside\ntheir emotional responses and resentments to work toward an agreement.\n\xe2\x80\xa2 Joint Negotiation: After the private caucuses, the parties are joined again in the same room, and the\nmediator presents any newly discovered insight to guide them toward an agreement.\n\xe2\x80\xa2 Closure: During this final stage, an agreement is reached, or it is determined that the parties cannot\nagree. Either way, the mediator will review the positions of each party and ask them if they would like to\nmeet again or explore escalating options, such as moving the dispute to court.\n\nEthical Issues\nBoth the disputants themselves, and those who attempt to facilitate dispute resolutions, i.e., mediators and\nattorneys, must navigate a myriad of ethical issues, such as deciding whether they should tell the entire truth,\nor only offer a partial disclosure. This conflict has long roots in history and has often been considered in terms\nof consequentialist and deontological ethical theories. Consequentialist ethics, sometimes known as\nsituational ethics, is a way of looking at difficult decisions by considering their implications. Someone who\nfollows consequentialist ethics in mediation or arbitration would consider the impact of his or her decision on\nthe parties in light of their unique circumstances. In contrast, deontologist ethics bases its decision on\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 2 Disputes and Dispute Settlement\n\n21\n\nwhether the action itself is right or wrong, regardless of its consequences.\nImagine a situation in which a professional accountant holds a consequentialist ethical viewpoint and believes\nthat there are certain scenarios in which the disclosure of only part of the truth is a commendable course of\naction. For example, if an accountant is interviewed regarding how the company handled a certain transaction\nin its retirement account, he might choose to withhold certain information because he is afraid it will harm the\nretirees\xe2\x80\x99 ability to retain the full benefits of their pensions. In this case, the accountant is utilizing \xe2\x80\x9cthe ends\njustify the means\xe2\x80\x9d logic because he feels that the omission of truth will result in more benefit than its\nrevelation. A mediator or arbitrator who also follows a consequentialist viewpoint would consider the\naccountant\xe2\x80\x99s motivation and the circumstances, in addition to his or her actions.\nEthical situations like these are not only part of dispute mediation in business law scenarios, but also happen\nin daily life. Consider the case of a parent who is on his way home from work when he receives a call from the\nbabysitter, telling him that his child\xe2\x80\x99s forehead feels hot and that she is complaining of not feeling well. Sitting\nin traffic, the parent remembers that he does not know the whereabouts of the digital thermometer, so he\ndecides to stop and purchase one. The parking lot at the store is extremely busy, so the parent decides to park\nin a handicapped spot, even though he does not have any mobility challenges. These types of situations have\nbeen addressed by philosophers such as Immanuel Kant, who spoke of the categorical imperative, which he\ndefined as, \xe2\x80\x9cAct only according to that maxim whereby you can, at the same time, will that it should become a\nuniversal law.\xe2\x80\x9d In other words, one\xe2\x80\x99s action should be considered in light of what would happen if everyone\nwere to engage in the same action. While it might not seem like a harmful infraction, if everyone were to do it,\nthen it would cause a true inconvenience and possible suffering for mobility-impaired individuals, for whom\nthose spaces were designated. A deontological ethical viewpoint would determine that it is always wrong to\npark in the handicapped space, regardless of the situation. In real life, it is very difficult to adopt a 100%\ndeontological viewpoint for dispute resolution. Often, the reason the dispute has arisen in the first place is\nbecause of some ambiguity inherent in the situation. In these cases, mediators must apply their best\njudgment to help the disagreeing parties see one another\xe2\x80\x99s viewpoints and to guide them toward a mutually\namicable solution.\n\nFigure 2.4\n\nSometimes ethical issues have no clear-cut answers and mediators must rely upon their best\n\njudgement. (Credit: George Becker/ pexels/ License: CC0)\n\n\x0c22\n\nChapter 2 Disputes and Dispute Settlement\n\nFuture Directions in Mediation\nAs technology continues to change the ways we interact with one another, it is likely that we will see advances\nin mediation techniques. For example, there are companies that offer online mediation services, known as emediation. E-mediation can be useful in situations where the parties are geographically far apart, or the\ntransaction in dispute took place online. Ebay uses e-mediation to handle the sheer volume of\nmisunderstandings between parties. Research has shown that one of the benefits of e-mediation is that it\nallows people the time needed to \xe2\x80\x9ccool down\xe2\x80\x9d when they have to explain their feelings in an email, as opposed\nto speaking to others in person.\nIn addition to technological advancements, new findings in psychology are influencing how disputes are\nresolved, such as the rising interest in canine-assisted mediation (CAM), in which the presence of dogs is\nposited to have an impact on human emotional health. Since the presence of dogs has a positive impact on\nmany of the neurophysiological stress markers in humans, researchers are beginning to explore the use of\ntherapy animals to assist in dispute resolution.\n\nFigure 2.5\n\nMediation experts are considering the benefits of therapy dogs for canine-assisted mediation.\n\n(Credit: Garfield Besa/ pexels/ License: CC0)\n\n2.3\n\nArbitration\n\nThe American Bar Association (ABA) defines arbitration as the \xe2\x80\x9cprivate process where disputing parties agree\nthat one or several individuals can make a decision about the dispute after receiving evidence and hearing\narguments.\xe2\x80\x9d Arbitration is overseen by a neutral arbitrator, or an individual who is responsible for making a\ndecision on how to resolve a dispute and who has the ability to decide on an award, or a course of action that\nthe arbiter believes is fair, given the situation. An award can be a monetary payment that one party must pay\nto the other; however, awards need not always be financial in nature. An award may require that one business\nstop engaging in a certain practice that is deemed unfair to the other business. As distinguished from\nmediation, in which the mediator simply serves as a facilitator who is attempting to help the disagreeing\nparties reach an agreement, and arbitrator acts more like a judge in a court trial and often has legal expertise,\nalthough he or she may or may not have subject matter expertise. Many arbitrators are current or retired\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 2 Disputes and Dispute Settlement\n\n23\n\nlawyers and judges.\n\nTypes of Arbitration Agreements\nParties can enter into either voluntary or involuntary arbitration. In voluntary arbitration, the disputing\nparties have decided, of their own accord, to seek arbitration as a way to potentially settle their dispute.\nDepending on the state\xe2\x80\x99s laws and the nature of the dispute, disagreeing parties may have to attempt\narbitration before resorting to litigation; this requirement is known as involuntary arbitration because it is\nforced upon them by an outside party.\nArbitration can be either binding or non-binding. In binding arbitration, the decision of the arbitrator(s) is\nfinal, and except in rare circumstances, neither party can appeal the decision through the court system. In\nnon-binding arbitration, the arbitrator\xe2\x80\x99s award can be thought of as a recommendation; it is only finalized if\nboth parties agree that it is an acceptable solution. This fact is why non-binding arbitration can be useful for\nwhat the American Arbitration Association describes as \xe2\x80\x9cdisputes where the parties may be too far apart in\ntheir viewpoints to mediate or are in need of an objective evaluation of their respective positions.\xe2\x80\x9d Having a\nneutral party assess the situation may help disputants to rethink and reassess their positions and reach a\nfuture compromise.\n\nIssues Covered by Arbitration Agreements\nThere are many instances in which arbitration agreements may prove helpful as a form of alternative dispute\nresolution. While arbitration can be useful for resolving family law matters, such as divorce, custody, and child\nsupport issues, in the domain of business law, it has three major applications:\n\xe2\x80\xa2 Labor. Arbitration has often been used to resolve labor disputes through interest arbitration and\ngrievance arbitration. Interest arbitration addresses disagreements about the terms to be included in a\nnew contract, e.g., workers of a union want their break time increased from 15 to 25 minutes. In contrast,\ngrievance arbitration covers disputes about the implementation of existing agreements. In the example\npreviously given, if the workers felt they were being forced to work through their 15-minute break, they\nmight engage in this type of arbitration to resolve the matter.\n\xe2\x80\xa2 Business Transactions. Whenever two parties conduct business transactions, there is potential for\nmisunderstandings and mistakes. Both business-to-business transactions and business-to-consumer\ntransactions can potentially be solved through arbitration. Any individual or business who is unhappy with\na business transaction can attempt arbitration. Jessica Simpson recently won an arbitration case in which\nshe disputed the release of a fitness video she had made because she felt the editor took too long to\nrelease it.\n\xe2\x80\xa2 Property Disputes. Business can have various types of property disputes. These might include\ndisagreements over physical property, e.g., deciding where one property ends and another begins, or\nintellectual property, e.g., trade secrets, inventions, and artistic works.\nTypically, civil disputes, as opposed to criminal matters, attempt to use arbitration as a means of dispute\nresolution. While definitions can vary between municipalities, states, and countries, a civil matter is generally\none that is brought when on party has a grievance against another party and seeks monetary damages. In\ncontrast, in a criminal matter, a government pursues an individual or group for violating laws meant to\nestablish the best interests of the public. While the word crime often invokes the idea of violence, there are\nmany crimes, such as embezzlement, in which the harm caused is not physical, but rather monetary.\n\n\x0c24\n\nChapter 2 Disputes and Dispute Settlement\n\nEthics of Commercial Arbitration Clauses\nAs previously discussed, going to court to solve a dispute is a costly endeavor, and for large companies, it is\npossible to incur millions of dollars in legal expenses. While arbitration is meant to be a form of dispute\nresolution that helps disagreeing parties find a low-cost, time-efficient solution, it has become increasingly\nimportant to question whose expenses are being lowered, and to what effect. Many consumer advocates are\nfighting against what are known as forced-arbitration clauses, in which consumers agree to settle all\ndisputes through arbitration, effectively waiving their right to sue a company in court. Some of these forced\narbitration clauses cause the other party to forfeit their right to appeal an arbitration decision or participate in\nany kind of class action lawsuit, in which individuals who have a similar issue sue as one collective group. For\nexample, in 2006, Enron investors initiated a class action lawsuit against executives who hid the company\xe2\x80\x99s\nlosses and were awarded $7.2 billion dollars. While this example represents a case where the company being\nsued was clearly in the wrong, it is important for large companies to be ethical in their use of arbitration\nclauses. They should not be used as a way to keep wrongdoings \xe2\x80\x9cquiet\xe2\x80\x9d or to limit consumers\xe2\x80\x99 abilities to\nobtain rightful retribution for products and services that do not perform as promised.\n\nArbitration Procedures\nWhen parties enter into arbitration, certain procedures are followed. First, the number of arbitrators is\ndecided, along with how they will be chosen. Parties that enter into willing arbitration may have more control\nover this decision, while those that do so unwillingly may have a limited pool of arbitrators from which to\nchoose. In the case of willing arbitration, parties may decide to have three arbitrators, one chosen by each of\nthe disputants and the third chosen by the elected arbitrators.\nNext, a timeline is established, and evidence is presented by both parties. Since arbitration is less formal than\ncourt proceedings, the evidence phase typically goes faster than it would in a courtroom setting. Finally, the\narbitrator will make a decision and usually makes one or more awards.\nNot all arbitration agreements have the same procedures. It depends on the types of agreements made in\nadvance by the disputing parties. Consider the following scenario: the owner of a large commercial office\nbuilding uses a lease agreement, which stipulates that arbitration will be used to settle the renewal terms of a\nlease. For example, the lease may state that, at the end of year one, the second year\xe2\x80\x99s lease payment will be at\ncurrent market value, and if the tenants cannot agree on that value, they will then allow an arbitrator to\ndecide. If the building owner feels that the renewal rate should be $40/square foot and the tenant feels it\nshould be $20/square foot, an arbiter who may not be an expert in local real estate values might decide to\nresolve the dispute by using a rule of thumb, such as \xe2\x80\x9csplitting the difference.\xe2\x80\x9d In this case, the arbiter might\ndecide that $30/square foot represents a fair lease renewal rate.\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 2 Disputes and Dispute Settlement\n\nFigure 2.6\n\n25\n\nVarious types of arbitration can be employed depending on what the parties think is best for their\n\nsituation. (Credit: Tim Eiden/ pexels/ License: CC0)\nTo overcome this shortcoming, the building owner could write a lease agreement that stipulates that the\nparties use binding baseball arbitration and use subject matter experts as arbitrators. In this case, that might\ninclude real estate attorneys or commercial real estate investors. In baseball arbitration, each party would\nsubmit a lease renewal figure to an arbitrator. For example, imagine that the renewing tenant submits an offer\nof $10/per square foot, which is very much under market value, while the building owner submits an offer of\n$35/square foot. In this scenario, the arbitrator chooses one offer or the other, without modification. This type\nof arbitration incentivizes both parties to be fair in their dealings with one another because to do otherwise\nwould be to their own detriment.\n\nArbitration Awards\nAn arbiter can issue either a \xe2\x80\x9cbare bones\xe2\x80\x9d or a reasoned award. A bare bones award refers to one in which\nthe arbitrator simply states his or her decision, while a reasoned award lists the rationale behind the decision\nand award amount. The decision of the arbitrator is often converted to a judgement, or legal tool that allows\nthe winning party to pursue collection action on the award. The process of converting an award to a\njudgement is known as confirmation.\n\nJudicial Enforcement of Arbitration Awards\nWhile it might seem that the party that is awarded a settlement by an arbitrator has reason to be relieved that\nthe matter is resolved, sometimes this decision represents just one more step toward actually receiving the\naward. While a party may honor the award and voluntarily comply, this outcome is not always the case. In\ncases where the other party does not comply, the next step is to petition the court to enforce the arbitrator\xe2\x80\x99s\ndecision. This task can be accomplished by numerous mechanisms, depending on the governing laws. These\ninclude writs of execution, garnishment, and liens.\n\n\x0c26\n\nChapter 2 Disputes and Dispute Settlement\n\n\xe2\x80\xa2 Writ of Execution. Cornell Law School defines a writ of execution as \xe2\x80\x9cA court order that directs law\nenforcement personnel to take action in an attempt to satisfy a judgment won by the plaintiff.\xe2\x80\x9d\n\xe2\x80\xa2 Garnishment. A garnishment refers to a court order that seizes the money, typically wages, to satisfy a\ndebt. A myriad of laws apply to wage garnishment, e.g., certain types of income, such as Social Security\nDisability Income (SSDI), cannot be garnished. In addition, depending on state laws, sometimes only\ndebtors who make over a certain amount, e.g. $1,600 gross/month, are subject to wage garnishment.\n\xe2\x80\xa2 Liens. A lien gives the entitled party in a judgement the right to seize the property of another to satisfy a\ndebt. Commonly, liens can be placed on real estate and personal property, such as automobiles and\nboats. Property that has a lien cannot be sold because the title is encumbered and often cannot be legally\ntransferred until the lien is satisfied, or paid. Depending on state laws, only certain property is subject to a\nlien. For example, the winning party in an arbitration case may only be able to place a lien on the other\nparty\xe2\x80\x99s vehicle if it has a market value of over $7,500.\nThe enforcement of arbitration awards is governed by a number of laws, such as Federal Arbitration Act and\nUniform Arbitration Act.\n\nSummary\nNegotiation, mediation, and arbitration are alternatives form of dispute resolution that attempt to help\ndisagreeing parties avoid the time and expense of court litigation. While negotiation is involved in all three\nforms, mediation and arbitration involve a neutral third party to help the parties find a solution. Frameworks\nthat consider self-interest, as opposed to interest in the other party, can help negotiators craft successful\nnegotiation approaches. Mediators, arbitrators, and groups of arbitrators all follow certain steps and play in\nimportant role in trying to help parties reach common ground and avoid court proceedings. Mediators who\nestablish rapport with disputing parties can facilitate dispute resolution, as mediation is very much solutionfocused. Arbitrators must often decide upon awards when parties cannot reach an agreement. Even when an\naggrieved party attains an arbitration award, it may still have to pursue the other party by using a variety of\nlegal techniques to enforce the payment or practice stipulated by the award. Staying current with federal and\nstate laws associated with negotiation proceedings is essential for businesses looking to maximize their\nrelational and outcome goals.\n\nAssessment Questions\n1. A process in which a third party selected by the disputants helps the parties to voluntarily resolve their\ndisagreement is known as:\na. Mediation.\nb. Discovery.\nc. Arbitration.\nd. Settlement.\n2. What\xe2\x80\x99s the first step in Alternative Dispute Resolution?\na. Conciliation.\nb. Mediation.\nc. Negotiation.\nd. Arbitration.\n3. What\xe2\x80\x99s the definition of negotiation?\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 2 Disputes and Dispute Settlement\n\n27\n\n4. How does the process of negotiation work?\n5. Explain the Thomas-Kilmann Conflict Mode Instrument.\n6. A person trained in conflict resolution is considered:\na. An arbitrator.\nb. A mediator.\nc. A negotiator.\nd. A judge.\n7. Mediation focuses on:\na. Solutions.\nb. Testimony.\nc. Expert witnesses.\nd. Discoveries.\n8. Name the steps in Mediation.\n9. What\xe2\x80\x99s the main benefit of e-mediation?\n10. Roger and Larry are having a dispute regarding their joint business. They want to have a binding resolution\nto their dispute, but they would prefer to have the dispute handled privately and by someone with special\nexpertise. The best form of dispute resolution for their problem would be:\na. Arbitration.\nb. Litigation.\nc. Mediation.\nd. Summary Jury Trial.\n11. All of the following are methods to enforce an arbitrator\xe2\x80\x99s decision except:\na. Writs of Execution.\nb. Garnishment.\nc. Fines.\nd. Liens.\n12. Describe the typical steps in Arbitration.\n13. Explain the differences between binding and non-binding arbitration.\n14. All of the following are the most common applications of arbitration in the business context except:\na. Labor.\nb. Business Transactions.\nc. Property Disputes.\nd. Torts.\n15. The following are the type of awards that may be issue by an arbitrator:\na. Bare Bones.\nb. Reasoned.\nc. Both a and b.\nd. Neither a nor b.\n\n\x0c28\n\nChapter 2 Disputes and Dispute Settlement\n\nEndnotes\nHe, L. (April 2013). Tim Cook\xe2\x80\x99s apology letter to Apple customer in China. Forbes. Retrieved from:\nhttps://www.forbes.com/sites/laurahe/2013/04/03/tim-cooks-apology-letter-to-customers-inchina/#510458b51ea3.\nKilmann, R. H., & Thomas, K. W. (1977). Developing a forced-choice measure of conflict-handling behavior: The\n\xe2\x80\x9cMODE\xe2\x80\x9d instrument. Educational and psychological measurement, 37(2), 309\xe2\x80\x93325.\nTop 10 International Business Negotiation Case Studies. Program on Negotiation. Harvard Law School.\nRetrieved from: https://www.pon.harvard.edu/daily/international-negotiation-daily/top-negotiation-casestudies-in-international-negotiations-from-business-and-global-politics/.\nPinkley, R. L., Neale, M. A., & Bennett, R. J. (1994). The impact of alternatives to settlement in dyadic\nnegotiation. Organizational Behavior and Human Decision Processes, 57(1), 97\xe2\x80\x93116.\nPruitt, D. G. (1983). Strategic choice in negotiation. American Behavioral Scientist, 27(2), 167\xe2\x80\x93194.\nPruitt, D. G., & J. Z. Rubin. (1986). Social conflict: Escalation, stalemate, and settlement. New York: Random\nHouse.\nUniform Trusts Act. Cornell University Law School. Retrieved from: https://www.law.cornell.edu/uniform/\nvol7#arbit.\nCarver, T., & Vondra, A. (May\xe2\x80\x93June 1994). Alternative dispute resolution: Why it works and why it doesn\xe2\x80\x99t.\nHarvard Business Review. Retrieved from: https://hbr.org/1994/05/alternative-dispute-resolution-why-itdoesnt-work-and-why-it-does.\nMacKinnon, D. P., Lockwood, C. M., Hoffman, J. M., West, S. G., & Sheets, V. (2002). A comparison of methods to\ntest mediation and other intervening variable effects. Psychological methods, 7(1), 83.\nMcGuire, J. Twelve tips for launching a mediation practice. General Practice, Solo and Small Firm Division The\nAmerican Bar Association. Retrieved from: https://www.americanbar.org/publications/gp_solo/2011/\nseptember/twelve_tips_launching_mediation_practice.html.\nMediation: the six stages. NOLO. Retrieved from: https://www.nolo.com/legal-encyclopedia/mediation-sixstages-30252.html.\nPaul, D. Canine-assisted mediation. Retrieved from: http://www.hnlr.org/wp-content/uploads/HNLR-PaulFinal.pdf.\nUsing E-Mediation and Online Mediation Techniques for Conflict Resolution. Program on Negotiation. Harvard\nLaw School. Retrieved from: https://www.pon.harvard.edu/daily/mediation/dispute-resolution-using-onlinemediation/.\nWhat makes a good mediator? Program on Negotiation. Harvard Law School. Retrieved from:\nhttps://www.pon.harvard.edu/daily/mediation/what-makes-a-good-mediator/.\nArbitration. American Bar Association. Retrieved from: https://www.americanbar.org/groups/\ndispute_resolution/resources/DisputeResolutionProcesses/arbitration.html.\nDunlap, K. (May 2010). Singer Jessica Simpsons wins arbitration case. FindLaw. Retrieved from:\nhttps://blogs.findlaw.com/celebrity_justice/2010/05/singer-jessica-simpson-wins-arbitration-case.html.\nElkouri, F., Elkouri, E. A., Ruben, A. M., American Bar Association, & Employment Law. (1985). How arbitration\nworks. Washington, DC: Bureau of National Affairs.\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 2 Disputes and Dispute Settlement\n\nFarber, H. S. (1981). Splitting-the-difference in interest arbitration. ILR Review, 35(1), 70\xe2\x80\x9377.\nUse \xe2\x80\x98Baseball Arbitration\xe2\x80\x99 to settle rent disputes at renewal time. Commercial Lease Law Insider. Retrieved\nfrom: https://www.stroock.com/siteFiles/Pub391.pdf.\nWhat We Do (n.d.). American Arbitration Association. Retrieved from: https://www.adr.org/Arbitration.\nWrit of Execution (n.d.). Cornell Law School. Retrieved from: https://www.law.cornell.edu/wex/\nwrit_of_execution.\n\n29\n\n\x0c30\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\nChapter 2 Disputes and Dispute Settlement\n\n\x0c3\n\nBusiness Ethics and Social Responsibility\nFigure 3.1 (Credit: rawpixel/ pixabay/ Attribution 2.0 Generic (CC BY 2.0))\n\nChapter Outline\n3.1 Business Ethics\n3.2 Social Responsibility\n\nIntroduction\nLearning Outcome\n\xe2\x80\xa2 Analyze the role of ethics and social responsibility in business.\n\n3.1\n\nBusiness Ethics\n\nBusinesses must establish a clear set of values that promote ethical practices and social responsibility. In\ntoday\xe2\x80\x99s business climate, companies are increasingly under scrutiny by private citizens. A company that builds\nits foundation on sound principles will have a better chance of staying competitive in a volatile market.\n\n\x0c32\n\nFigure 3.2\n\nChapter 3 Business Ethics and Social Responsibility\n\nA group of employees who uphold strong corporate values can be an asset to the company they\n\nwork for. (Credit: rawpixel/ pexels/ License: CC0)\nBusiness ethics are considered to be the blueprint for building a successful organization. If an organization is\nbuilt on socially responsible values, it will be stronger than an organization that is built on profit alone. More\nthan just a positive reputation, the core ethics of a business dictate how every decision, process, and\nprocedure will take place. This steadfast governance applies even if the business faces hard times or difficult\nsituations. Some will even argue that businesses require full transparency in today\xe2\x80\x99s world.\nOver the last few decades, numerous cases of bad business practices have made headlines. From McDonalds\xe2\x80\x99\nfunding of President Nixon\xe2\x80\x99s campaign in an effort to reduce workers\xe2\x80\x99 wages in the 1970s, to the more recent\ncase of Uber employees alleging sexual harassment and the company\xe2\x80\x99s CEO having a public meltdown in the\nback of a driver\xe2\x80\x99s car, there\xe2\x80\x99s no shortage of ethics-related problems in the business world. Businesses are\nmore than people working together to offer a product or service. Businesses are often viewed as entities that\nshould protect stakeholders from unethical behaviors and activities. A set of governing rules should be in\nplace to set the bar high for ethical compliance in every organization.\n\nWhy Is Corporate Ethics So Important in Business?\nThe idea of business ethics may seem subjective, but it comes down to acceptable levels of behavior for each\nindividual who makes up the organization. This behavior must start at the top with responsible actions\ndemonstrated by leadership. By doing so, leaders create a set of rules that are to be followed by others in the\ncompany. These rules can be based on the deep values that the company has concerning the quality of\nproducts and services, the commitment to customers, or how the organization gives something back to the\ncommunity. The more a company lives by its set of ethics, the more likely it is to be successful.\nAnna Spooner, who writes for LovetoKnow, shares tips on how to evaluate whether or not an organization is\ncreating ethical practices by determining the impact of each practice. Some examples include:\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 3 Business Ethics and Social Responsibility\n\n33\n\nExecutive compensation rates during employee layoffs. Let\xe2\x80\x99s say a company is struggling during an\neconomic downturn and must lay off a portion of its workforce. Does the CEO of the company take his or her\nannual raise or take a pay cut when others are losing their jobs? One could say that to take a raise is unethical\nbecause the CEO should also sacrifice some pay for the good of the company.\nFair compensation for employees. Paying employees minimum wage, or just above minimum wage, is not\nalways fair compensation. In most regions, the cost of living has not been adjusted in years, meaning that\npeople are surviving on less money. Ethics can make a difference here.\nEthical business practices, guided by a corporate set of standards, can have many positive outcomes, including\nrecruitment and retention improvement, better relationships with customers, and positive PR. In 2015, Dan\nPrice, CEO of the Seattle payment processing firm Gravity Payments, voluntarily took a huge pay cut and\nvowed to raise his employees\xe2\x80\x99 wages to $70,000. This move was great for the company, which claims that\nrevenues and profits skyrocketed, and they experienced a 91 percent employee retention rate over the last few\nyears.\nOn the opposite side, unethical business behaviors can have a negative impact on any business. Even if an\nunethical decision is made by a single member of the executive team, it can have far-reaching repercussions.\nSome possible results of unethical business actions may include:\nPoor company reputation. In an increasingly transparent world, unethical decisions made by businesspeople\nbecome permanent stains on the company. Social networks have become sounding boards for anything\ndeemed unethical or politically incorrect, and everyone from disgruntled employees to dissatisfied customers\ncan rate companies on public company review websites.\nNegative employee relations. If employees continually see a discrepancy between what\xe2\x80\x99s expected of them\nand how leadership behaves, this contrast can create serious problems in the management of employees.\nSome employees may become disengaged, while others will stop working as hard. After all, if the same rules\ndon\xe2\x80\x99t apply to everyone, why even bother? The downside to negative employee relations is that the entire\ncompany becomes less productive, less responsive to customers, and less profitable.\nRecruitment and retention problems. Once a company has developed a negative reputation, it can be\ndifficult to recruit new talent, let alone retain the talent that\xe2\x80\x99s already there. Disengaged employees who grow\ntired of the double standards will leave. This attrition can impact customers who then have to deal with less\nexperienced and less interested employees, who are already overworked and frustrated.\nCompany credibility lost. Customers are savvy enough to follow what\xe2\x80\x99s going on from an ethics standpoint. If\nthey hear of a problem, they begin to question the actions of every person at the company. For example, if a\nmember of the board is accepting expensive gifts from clients in exchange for favorable pricing of materials,\nthis situation could set off major alarms for other customers, and even vendors. The company can expect to\nlose business if this unethical behavior continues.\nAs you can see, poor ethics can quickly spiral downward, destroying every aspect of the business and making it\nvery difficult to compete. It\xe2\x80\x99s critical for every business to pay attention to ethical standards and continually\nremind employees at all levels that their behavior has an impact on the entire organization.\n\nHistory of Corporate Governance\nThe concept of corporate governance is relatively new compared to the entire history of free trade and\nbusiness formation. There was likely some \xe2\x80\x9ccode of honor\xe2\x80\x9d followed by businesses in the past, but it wasn\xe2\x80\x99t\n\n\x0c34\n\nChapter 3 Business Ethics and Social Responsibility\n\nuntil the 21st century that greater attention was paid to how companies operate and how the operation\nimpacts employees and the communities in which they serve.\nAccording to the Ethics and Compliance Initiative, which is comprised of organizations that are committed to\ncreating best practices in ethics, each decade has been influenced by external factors, such as war or economic\nturmoil, combined with major ethical focal areas, and the result has been the development of ethics and\ncompliance programs. For example, in the mid-1980s, the United States was thrust into a recessionary period.\nDuring this period, government contractors were billing outrageous amounts for equipment and services,\nfurther increasing the government\xe2\x80\x99s deficit.\nAt the same time, larger companies began downsizing to cut costs, which eroded the trust that employees\nonce had. People felt the need to look out for themselves. Greed appeared to be everywhere, from political\nbribes to the earliest financial schemers. As a result, General Dynamics established the first business ethics\noffice in 1985 to crack down on this kind of activity, and other companies created ombudsman positions to\nhelp ethics officers identify and prosecute corporate ethics violators.\n\nEthical Decision-Making Policies\nIn any organization, sound moral, business, and financial practices must be followed at all times. No one is\nabove the law or has special privileges when it comes to ethics. Decision making needs to happen with\ncorporate governance in mind. According to Michigan State University, the six steps to ethical decision making\nare:\n1. Make sure leaders understand the issue at hand and have gathered all of the facts related to it.\n2. Leaders should list all of the facts they know, and list any assumptions they are making about the issue.\nThis step ensures that the leaders keep the facts and assumptions differentiated and in mind.\n3. Note all of the concerns related to the issue, including all of the people concerned, the laws related to the\nissue, and any corporate or professional ethical guidelines that may be involved.\n4. Construct a potential solution to the problem.\n5. Evaluate the proposed solution, making sure to consider all of the ethical aspects noted in step 3.\n6. Once leaders have come to a solution, they recommend it, as well as any actions that need to be taken.\n\nEstablishing a Code of Conduct\nTo educate and guide others in the organization, a set of ethics, or a code of conduct, should be developed\nand distributed. Kimberlee Leonard, who writes for the Houston Chronicle, states, \xe2\x80\x9cA code of ethics is\nimportant for businesses to establish to ensure that everyone in the company is clear on the mission, values\nand guiding principles of the company.\xe2\x80\x9d While it takes some time to create a code of conduct, the ideals\ninvolved should already be present in the company\xe2\x80\x99s culture.\nThe elements that belong in a code of conduct, according to Kimberlee Leonard, are:\nLegal considerations. The business is a legal entity, and therefore all employees should be thinking about\ntheir behavior and how it could easily turn into a lawsuit. Establishing conduct rules at this level can clear up\nany gray areas. For example, a company should define what sexual harassment is and what to do if an\nemployee experiences it. New items that detail specific codes of conduct can be added as they come up.\nValue-based ethics. These are specific ethics that dig under the surface of a corporate culture. A business\nshould think about how it wants to be viewed by the community. Examples could be a commitment to green\noffice practices, reduction of a company\xe2\x80\x99s carbon footprint, giving a certain percentage of a company\xe2\x80\x99s profits\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 3 Business Ethics and Social Responsibility\n\n35\n\nto the local food pantry to support the community, etc.\nRegulatory ethics. These are designed to maintain certain standards of performance based on the industry.\nOne example is a commitment to maintaining data privacy at all times, as it pertains to customer records. This\nelement defines how employees are to handle sensitive data and what will happen if someone doesn\xe2\x80\x99t follow\nthe rules.\nProfessional behaviors. One should never assume that just because someone puts on a business suit and\ngoes to work that he or she will behave professionally. Problems such as bullying, harassment, and abuse can\nhappen in the workplace. Establishing behavioral standards for professionalism should include what is\nacceptable in the office, while traveling, during meetings, and after hours, when colleagues meet with clients\nand one another.\nA good code of conduct is a working document that can be updated and shared as needed. Many companies\ninclude this document as part of their employee manual, while others use a secure intranet for displaying this\ninformation. No matter where it is housed, employees need to be educated on the code of conduct and refer\nto it often, starting on the first day on the job.\n\nWhat to Do When Something Goes Wrong\nIt should be noted that along with a code of conduct, there needs to be a clear \xe2\x80\x9cwhistleblower\xe2\x80\x9d policy in which\nviolators are identified and action is taken. This process should be handled with complete confidentiality and\nsensitivity to the company and all parties involved. Retaliation should never be tolerated when it comes to\nethics violations. The company should have a step-by-step plan of action for dealing with ethics problems at all\nlevels, up to and including the executive leadership of the company. A third-party investigative firm can be\nused to handle such matters to remove the burden and influence that internal resources may have.\n\n3.2\n\nSocial Responsibility\n\nOver the last few decades, there has been a movement throughout the global business community to improve\nthe world through smarter use of resources and giving back to communities. This movement is called\ncorporate social responsibility. The concept is catching on at companies that range in size from small startups\nto large Fortune 500 corporations. In the following section, you will learn what social responsibility is and how\nit is a win-win for businesses and consumers.\n\n\x0c36\n\nFigure 3.3\n\nChapter 3 Business Ethics and Social Responsibility\n\nEmployees often like to participate in volunteer activities through their employer. (Credit:\n\nrawpixel/ pixabay/ License: CC0)\n\nWhat Is Corporate Responsibility?\nCorporate responsibility refers to the idea that a business is given the opportunity and privilege to make the\nworld a better place. This process can happen through a variety of methods, including the donation of funds,\nvolunteerism, and implementation of environmentally friendly policies. It is up to each organization to\ndetermine the best way to demonstrate social responsibility.\nWhile certainly not mandatory, corporate social responsibility has become a popular way for companies to\nimprove their image and promote causes they believe in at the same time. Corporate social responsibility may\ninvolve focusing on the immediate community in which a company does business. However, there are some\norganizations that take it a step further and focus on more widespread global issues. For example, the shoe\ncompany TOMS has created a mission to make sure that every boy and girl in underprivileged countries has\nproper footwear. Blake Mycoskie, CEO of TOMS, has created a complete business model around social\nresponsibility. Not stopping at shoes, the company now also helps with bringing fresh water to communities,\nas well as making birth safer for babies in developing nations.\nThe popularity of corporate social responsibility has only increased as millennials and Generation Z employees\nenter the workforce. Employees in these generations often care deeply about making a difference in the world\nin which they work. Whether they are buying products from brands that give back or promoting a similar\nactivity in their own place of employment, the youngest of the workforce are making corporate social\nresponsibility a priority.\n\nWhere Did the Concept Originate?\nCorporate social responsibility is not a new construct. One could go back hundreds of years and find examples\nof corporate philanthropy and social support. However, the earliest published book about the topic is\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 3 Business Ethics and Social Responsibility\n\n37\n\nCorporate Responsibility of the Businessman, published in 1953. This book introduced the concept of\ncompanies giving back as a form of investment in the future. This idea came from a generation that had\nsurvived some of the hardest times in our world and wanted to make it a better place for generations to come.\nBy the turn of the millennium, companies were actively participating in a variety of corporate social\nresponsibility projects, from volunteerism to large corporate-matched charitable donations. Nearly every\ncompany has some form of charitable campaign, driven by the values of the culture and the interests of\nemployees. Today, some 63 million Americans volunteer each year, which is worth around $175 billion in\nworker hours annually (Source: Corporation for National and Community Service). On top of volunteering, U.S.\ncorporations give over $18 billion to charities each year through fundraisers and employee-employer\nmatching programs (Source: Giving USA).\n\nHow Does Corporate Responsibility Benefit a Business?\nThere are many ways that corporate social responsibility can benefit a business and its objectives. Aside from\nbeing able to promote the causes that are closely connected to the values of the company, a business can\nimprove its reputation exponentially.\nBenefits of corporate social responsibility include many direct and indirect effects. Based on research from the\nKellogg School of Management at Northwestern University, these can include:\nImproved perception by investors. If a company reports corporate social responsibility spending that\nexceeds the expectations of investors, this dollar amount is a sign that the company itself is in good financial\nstanding. This perception results in positive stock returns and increased confidence by investors.\nEnhanced performance for going green. Researchers have found that when companies focus on eco-friendly\nefforts, the positive impact on operational performance heading into the second year is remarkable. Those\nthat expand their efforts in more complex ways and in collaboration with industry standard-setting\nassociations (such as LEED), or other eco-friendly companies, increase their performance even more.\nContracting for success. In companies that tie their CEO\xe2\x80\x99s salary to corporate social responsibility results,\nalso known as contracting, the impact is felt even more. The value of the company increases while the bottom\nline of the business is maintained.\nThe benevolent halo effect. When consumers understand the commitment that an organization has to being\nsocially responsible, its image becomes more positive. Customers actually perceive the company and its\nproducts in a different way because they expect a better experience.\nConsistency of efforts and partnerships. Researchers also found that socially responsible organizations\nwere consistent with staying focused on the issues that mattered most to their employees and customers. A\nhigher level of consistency of efforts prompted better results.\nThere are some other benefits of being a socially responsible company. These may happen as a result of\ninternal factors, as well as how closely matched the efforts are to the culture. Alison Robins, writer for\nOfficeVibe, explains that being socially responsible can help attract positive attention from outside of a\ncompany. Some examples include:\nTalent attraction. Many companies offer employees paid time off to participate in volunteer activities,\nincluding travel to other nations. Who wouldn\xe2\x80\x99t want to work for a company that cares so much about a\npersonal cause? Corporate social responsibility is often used as a recruitment tool to attract people who care\nabout giving back to their communities and making changes that impact the world.\n\n\x0c38\n\nChapter 3 Business Ethics and Social Responsibility\n\nConsumer influence. A major benefit of engaging in corporate social responsibility efforts is that consumers\nregularly check in with their favorite brands to see what they are doing, and they are influenced to make\npurchases so they can be part of this community. With the process of posting messages on social networks,\nentire movements can take off via the support of loyal consumers.\n\nPromoting Corporate Responsibility with Marketing\nAfter reviewing the benefits of corporate social responsibility and some of the examples provided by popular\ncompanies, it is easy to see how important proper marketing can be to to this effort. As you can see from the\nfollowing example of Tom\xe2\x80\x99s One for One\xe2\x84\xa2 program, marketing is used as a reminder for consumers that the\ncompany is committed to providing one pair of shoes to a child in an undeveloped nation for every pair\npurchased by a consumer.\nMarketing is powerful in terms of the consumer market. It has been estimated by the brand marketing news\nsource Adweek that millennials represent around $2.45 trillion in spending per year. Cone Communications, a\npublic relations and marketing agency, found that 60 percent more millennials will engage with brands that\ndiscuss and market to social issues. Younger consumers are attracted to brands that authentically market their\nproducts alongside social responsibility campaigns.\nHowever, one should not use corporate social responsibility as a marketing pitch for a company. Consumers\nwill quickly pick up on this tactic, and it can damage the brand. Nicole Fallon, who contributes to Business News\nDaily, reveals, \xe2\x80\x9cThe motivation behind many companies\xe2\x80\x99 CSR efforts actually provides the very reason that they\nshouldn\xe2\x80\x99t take on socially responsible initiatives.\xe2\x80\x9d Motivations such as competitive positioning and profitability\nare not authentic when it comes to corporate social responsibility.\nIt is also important to distinguish between corporate social responsibility and social marketing. Often used\ninterchangeably, there are some key differences. Social marketing attempts to change the attitudes and\nbehaviors of consumers by using a variety of marketing methods. However, corporate social responsibility is a\nsustainable effort that can be measured. Bernard Okhakume, a brand management consultant, advised Daily\nTimes, \xe2\x80\x9cFor a corporate social responsibility project to be successful, several factors come into play: the project\nneeds to be sustainable, its topic and practice abide by ethical standards, sensitive to society\xe2\x80\x99s needs,\nembraced and supported by the company\xe2\x80\x99s employees, create the aimed effect on the target audience, and\nevery year, and the project needs to be evaluated to see how beneficial it is.\xe2\x80\x9d\n\nThe Financial Impact of the Triple Bottom Line\nWhen examining the value of corporate responsibility, one must understand the concept of the triple bottom\nline (TBL), which essentially measures the sustainability of an organization\xe2\x80\x99s social responsibility efforts. The\nterm includes three dimensions of a giving business\xe2\x80\x94profits, people, and the planet. Without one of these\nfactors, there cannot be a balance. According to economist Andrew Savitz, the triple bottom line \xe2\x80\x9ccaptures the\nessence of sustainability by measuring the impact of an organization\xe2\x80\x99s activities on the world ... including both\nits profitability and shareholder values and its social, human and environmental capital.\xe2\x80\x9d\nThe challenge with the TBL model is that while profits can be measured in dollars, and people can be\nmeasured in numbers, it can be difficult to measure the impact of social responsibility. Some argue that this\ntask is dependent upon what is being measured. For example, if one is saving the rainforest, a reasonable unit\nof measurement could be acreage. Progress toward protecting this resource could be recorded as how many\nfewer acres have been forested and how many native (people) communities have been saved as a result of the\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 3 Business Ethics and Social Responsibility\n\n39\n\nintervention.\nAnother example could be a social cause, such as creating housing for single parents in poverty-stricken\nneighborhoods in a specific city. The impact can be felt in terms of the additional housing that is created (built\nor rehabbed from existing homes), and the value that this effort brings to the neighborhood. The number of\npeople helped can be measured. The city\xe2\x80\x99s rate of homelessness can be measured as it is reduced. Then, there\nare other equally important results of social responsibility that can be considered, such as the reduced rate of\ncrime in areas with homeowners, and an increase in employment for those who own the homes. These\nindirect benefits have an impact on the company because it can eventually hire people from these areas of the\ncity.\nBusinesses must be continually mindful of the image that they project to the world and be sure to align their\ncorporate social responsibility campaigns with their culture. An authentic cause that is backed by all is far\nbetter than one that is dreamt up purely for the sake of marketing.\n\nAssessment Questions\n1. Define business ethics.\n2. Who decides the business ethics for a company?\na. The HR department.\nb. The employees.\nc. Leadership.\nd. Consultants.\n3. All of the following are examples of results of unethical business actions except:\na. Recruitment and retention problems.\nb. Lower employee salaries.\nc. Negative employee relations.\nd. Poor company reputation.\n4. Ethical rules can be based on deep values of an organization which may include:\na. Quality of products and services.\nb. Commitment to customers.\nc. How the organization gives back to the community.\nd. All of the above.\n5. According to Kimberlee Leonard of the Houston Chronicle the elements that belong in a Code of Conduct for\na company include all of the following except:\na. Office Hours.\nb. Professional behaviors.\nc. Regulatory ethics.\nd. Legal considerations.\n6. What\xe2\x80\x99s the definition of Corporate Responsibility?\n7. Where did the term Corporate Responsibility originate?\n\n\x0c40\n\nChapter 3 Business Ethics and Social Responsibility\n\n8. The benefits of Corporate Responsibility for a business include:\na. Talent attraction.\nb. Consumer influence.\nc. Improved perception by investors.\nd. All of the above.\n9. The three dimensions of the triple bottom line include all of the following except:\na. Profits.\nb. People.\nc. Planet.\nd. Promotion.\n10. Distinguish between corporate social responsibility and social marketing.\n\nEndnotes\nBisk. \xe2\x80\x9c6-Step Guide to Ethical Decision-Making\xe2\x80\x9d Michigan State University. Retrieved from:\nhttps://www.michiganstateuniversityonline.com/resources/leadership/guide-to-ethical-decisionmaking/#.W7KAq2hKiUl.\nEthics and Compliance Initiative. \xe2\x80\x9cBusiness Ethics and Compliance Timeline.\xe2\x80\x9d Retrieved from:\nhttps://www.ethics.org/resources/free-toolkit/ethics-timeline/.\nGeorgescu, Peter. \xe2\x80\x9cWhat Are We Waiting For?\xe2\x80\x9d Forbes. Retrieved from: https://www.forbes.com/sites/\npetergeorgescu/2018/01/24/what-are-we-waiting-for/#6f5caff856e3.\nIsidore, Chris. \xe2\x80\x9cGravity Payments CEO takes 90% pay cut to give workers huge raise.\xe2\x80\x9d CNN Money. Retrieved\nfrom: https://money.cnn.com/2015/04/14/news/companies/ceo-pay-cuts-pay-increases/index.html.\nLeonard, Kimberlee. \xe2\x80\x9cImportance of Creating a Code of Ethics for a Business.\xe2\x80\x9d Chron Small Business. Retrieved\nfrom: https://smallbusiness.chron.com/importance-creating-code-ethics-business-3094.html.\nNayab, N. \xe2\x80\x9cReal-World Examples of Bad Business Ethics.\xe2\x80\x9d Bright Hub. Retrieved from:\nhttps://www.brighthub.com/office/entrepreneurs/articles/115557.aspx.\nShen, Linda. \xe2\x80\x9cThe 10 Biggest Business Scandals of 2017.\xe2\x80\x9d Fortune. Retrieved from: http://fortune.com/2017/12/\n31/biggest-corporate-scandals-misconduct-2017-pr/.\nSpooner, A. \xe2\x80\x9cImportance of Ethics in Business.\xe2\x80\x9d Love to Know. Retrieved from:\nhttps://business.lovetoknow.com/business-operations-corporate-management/importance-ethics-business.\n\xe2\x80\x9cAbout Tom\xe2\x80\x99s\xe2\x80\x9d Retrieved from: https://www.toms.com/corporate-responsibility/.\nAmes, Eden. \xe2\x80\x9cMillennial Demand for Corporate Social Responsibility Drives Change in Brand Strategies.\xe2\x80\x9d\nAmerican Marketing Association. Retrieved from: https://www.ama.org/publications/MarketingNews/Pages/\nmillennial-demand-for-social-responsibility-changes-brand-strategies.aspx.\nAnyebe, Godwin. \xe2\x80\x9cBetween Corporate Social Responsibility and Social Marketing.\xe2\x80\x9d The Daily Times. Retrieved\nfrom: https://dailytimes.ng/corporate-social-responsibility-social-marketing/.\nCarroll, Archie B. \xe2\x80\x9cCorporate Social Responsibility.\xe2\x80\x9d Research Gate. Retrieved from:\nhttps://www.researchgate.net/publication/273399199_Corporate_Social_Responsibility.\nCorporation for National and Community Service. \xe2\x80\x9cVolunteering and Civic Life in America.\xe2\x80\x9d Retrieved from:\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 3 Business Ethics and Social Responsibility\n\n41\n\nttps://www.nationalservice.gov/vcla.\nFallon, Nicole. \xe2\x80\x9cWhy You Shouldn\xe2\x80\x99t Jump on the CSR Bandwagon.\xe2\x80\x9d Business News Daily. Retrieved from:\nhttps://www.businessnewsdaily.com/6475-csr-brand-authenticity.html.\nLilly Family School of Philanthropy. \xe2\x80\x9cGiving USA 2015 Highlights.\xe2\x80\x9d Retrieved from:\nhttps://doublethedonation.com/forms/documents/charitable-giving-report-giving-usa-2015.pdf.\nRobins, Alison. \xe2\x80\x9c5 Benefits of Having a Socially Responsible Company.\xe2\x80\x9d Office Vibe. Retrieved from:\nhttps://www.officevibe.com/blog/socially-responsible-companies.\nSlaper, Timothy F., and Hall, Tanya J. \xe2\x80\x9cThe Triple Bottom Line: What Is It and How Does It Work?\xe2\x80\x9d Indiana\nBusiness Review. Retrieved from: http://www.ibrc.indiana.edu/ibr/2011/spring/article2.html.\nStone, Emily. \xe2\x80\x9cTake 5: How Companies Benefit from Corporate Social Responsibility.\xe2\x80\x9d Kellogg Insight. Retrieved\nfrom: https://insight.kellogg.northwestern.edu/article/benefits-of-corporate-social-responsibility.\n\n\x0c42\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\nChapter 3 Business Ethics and Social Responsibility\n\n\x0c4\n\nBusiness and the United States Constitution\nFigure 4.1 (Credit: geralt/ pixabay/ Attribution 2.0 Generic (CC BY 2.0))\n\nChapter Outline\n4.1 Commerce Clause\n4.2 Constitutional Protections\n\nIntroduction\nLearning Outcome\n\xe2\x80\xa2 Explain the impact of the U.S. Constitution on business.\n\n4.1\n\nCommerce Clause\n\nFigure 4.2\nCC0)\n\nThe United States Constitution is the supreme law of the land. (Credit: 1778011/ pixabay/ License:\n\n\x0c44\n\nChapter 4 Business and the United States Constitution\n\nThe Constitution and the Law\nFederal and state constitutions are a major source of business law. The United States Constitution is the\nsupreme law of the United States. In addition to the individual constitutions established in each state, the U.S.\nConstitution sets out the fundamental rules and principles by which the country and individual states are\ngoverned. Constitutional law is the term used to describe the powers and limits of the federal and state\ngovernments as established in the Constitution. The political system that divides authority to govern between\nthe state and federal governments is known as federalism, and this too is established in the Constitution. The\nTenth Amendment states that any area over which the federal government is not granted authority through\nthe Constitution is reserved for the state. This statement means that any federal legislation impacting business\nand commerce must be established by an expressed constitutional grant of authority.\n\nFederal Preemption\nThe Founding Fathers created a federal system that would, at times, \xe2\x80\x9cpreempt\xe2\x80\x9d state law through the\nsupremacy clause, outlined in Article VI of the Constitution. In other words, since the U.S. Constitution is the\n\xe2\x80\x9csupreme law of the land,\xe2\x80\x9d if a state law conflicts with the U.S. Constitution, the state law is declared invalid.\nWhen the federal constitutional law prevails over the state law, it is said that the state law has been\npreempted. Before that determination is made, the courts try to determine if Congress intended to preempt\nstate law in enacting the particular provision in question. If the answer is \xe2\x80\x9cno,\xe2\x80\x9d then those who are asserting\nprotections of state law may make claims under state law. If the answer is \xe2\x80\x9cyes,\xe2\x80\x9d however, federal law prevails.\nThe Tenth Amendment to the Constitution gives the states powers over areas of law not held exclusively by the\nfederal government through the U.S. Constitution, e.g., states can make laws about how to get married, who\nmay get married, or how to dissolve a marriage, as well as which activities are crimes and how the crimes will\nbe punished. If the U.S. Constitution does give the federal government some power, however, then the federal\ngovernment may exercise it, free from state interference. For instance, the U.S. Congress (the legislative\nbranch of the federal government) has the power, among other things, to coin money, to create a military, to\nestablish post offices, and to declare war. Since there is specific mention of these powers, states may not\ncreate their own currency, military, or postal service, and they may not declare war.\n\nThe Commerce Clause and The Affordable Care Act\nAfter much debate, negotiation, and political wrangling, Congress passed the Patient Protection and\nAffordable Care Act (PPACA) in 2010, which was designed to increase the number of Americans who had access\nto health insurance (a policy initiative known as Obamacare). The Act included a provision mandating that\nindividuals not insured through employment or who were otherwise exempt from receiving health insurance\nobtain minimum essential health insurance or face a penalty issued through the Internal Revenue Service\n(IRS). The National Federation of Independent Business (NFIB), supported by 26 of the 50 states, challenged\nthe constitutionality of this particular provision, known as the individual mandate. Their argument was upheld\nby the 11th Circuit Court of Appeals, which ruled that Congress did not have the authority to enact this\nprovision. Later, however, the appellate court determined that the individual mandate was severable from the\nremainder of the PPACA, so ultimately the Act was upheld.\nThe main source of authority for the federal regulation of interstate and international commerce is the\ncommerce clause. This clause is established in Article I, Section 8, of the Constitution. The Article grants\nCongress the power to \xe2\x80\x9cregulate Commerce with foreign Nations, and among the several States, and with the\nIndian Tribes.\xe2\x80\x9d Thus, the commerce clause serves to simultaneously empower the federal government, while\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 4 Business and the United States Constitution\n\n45\n\nlimiting state power.\nSo long as a federal regulation impacts interstate commerce, that regulation can be described as\nconstitutional, according to the commerce clause. However, since the Constitution was first written, there have\noften been occasions when the judiciary system has needed to step in to interpret the meaning and\nimplications of the commerce clause. In particular, there have been disputes over the intended meaning of the\nphrase \xe2\x80\x9camong the several States.\xe2\x80\x9d Up until the 1930s, this phrase was interpreted in a literal way, so that\nactivities subject to federal regulation were required to involve trade between the states. This strict\ninterpretation actually served to limit the federal regulation of commerce.\nThe turning point in the interpretation of the commerce clause came with the 1937 case, NLRB v. Jones &\nLaughlin Steel Corp. The previous year, in the Carter v. Carter Coal Co case, the court invalidated a program,\ninitiated under the New Deal, that had tried to regulate the labor practices of coal firms on the basis that these\npractices were local, and therefore had only an indirect impact on interstate commerce. In NLRB v. Jones &\nLaughlin Steel Corp, the court deviated from that decision by ruling that Congress could regulate employment\npractices at a steel plant because any stoppages at that plant would have a serious, detrimental impact on\ninterstate commerce. The court concluded that since the steel industry is a networked industry that\nincorporates mines, plants, and factories from Minnesota to Pennsylvania, the manufacturing of steel properly\nfalls under the jurisdiction of the commerce clause. In summing up, the court concluded that:\n\nEXAMPLE 4.1\n\xe2\x80\x9cAlthough activities may be intrastate in character when separately considered, if they have such a close and\nsubstantial relationship to interstate commerce that their control is essential or appropriate to protect that\ncommerce from burdens or obstructions, Congress cannot be denied the power to exercise that control\xe2\x80\x9d\n(NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1 1937).\n\nChallenges to and Reinterpretations of the Commerce Clause\nEver since the NLRB v. Jones & Laughlin Steel Corp case, Congress has invoked the commerce clause to rule on\na diverse range of business and commercial activities, as well as to support social reforms that indirectly\nimpact state commerce. Examination of the United States Code reveals that there are more than 700 legislative\nprovisions that explicitly refer to foreign or interstate commerce. What is perhaps most remarkable is the\nsheer diversity of statutory areas covered by the commerce clause. Areas covered include the regulation of\nsporting activities, endangered species, energy regulation, gambling, firearms control, and even terrorism.\n\nExamples of Federal Legislation Passed by Invoking the Commerce Clause\n\xe2\x80\xa2 The Controlled Substances Act\n\xe2\x80\xa2 The Federal Mine Safety and Health Act\n\xe2\x80\xa2 The Civil Rights Act\n\xe2\x80\xa2 Americans with Disabilities Act\n\xe2\x80\xa2 The Indian Child Welfare Act\nWhile businesses have often challenged these statutes as existing outside of the realm of congressional\nauthority, in most cases, the courts have upheld the statutes as being valid exercises of congressional power in\n\n\x0c46\n\nChapter 4 Business and the United States Constitution\n\nline with the commerce clause. An exception is the 1995 case, United States v. Lopez. The case centered\naround the legality of the Gun-Free School Zone Act, which was a federal law that outlawed the possession of\nguns within 1,000 feet of a school. In a landmark case, the Court ruled that the Act was outside the scope of\nthe commerce clause, and that Congress did not have the authority to regulate in an area that had \xe2\x80\x9cnothing to\ndo with commerce, or any sort of enterprise.\xe2\x80\x9d\nA recent controversy pertaining to the commerce clause relates to the passing of the Affordable Care Act, as\ndescribed earlier. Protestors claimed that the individual mandate aspect of the ACA should be treated as a\nregulation that affects interstate commerce. According to their argument, after the Act was implemented,\nthere would be an increase in the sale and purchase of health care insurance, such that the market for health\ncare should be seen as being significantly impacted by the Act. However, the Chief Justice of the Supreme\nCourt, Justice Roberts, ruled that actions that create new business activity do not affect interstate commerce.\n\nPolice Power and the Dormant Commerce Clause\nThe authority of the federal government to regulate interstate commerce has, at times, come into conflict with\nstate authority over the same area of regulation. The courts have tried to resolve these conflicts with reference\nto the police power of the states.\nPolice power refers to the residual powers granted to each state to safeguard the welfare of their inhabitants.\nExamples of areas in which states tend to exercise their police power are zoning regulations, building codes,\nand sanitation standards for eating places. However, there are times when the states\xe2\x80\x99 use of police power\nimpacts interstate commerce. If the exercise of the power interferes with, or discriminates against, interstate\ncommerce, then the action is generally deemed to be unconstitutional. The limitation on the authority of\nstates to regulate in areas that impact interstate commerce is known as the dormant commerce clause.\nIn using the dormant commerce clause to resolve conflicts between state and federal authority, the courts\nconsider the extent to which the state law has a legitimate purpose. If it is determined that the state law has a\nlegitimate purpose, then the court tries to determine whether the impact on interstate commerce is in the\ninterest of the citizens of the state, and will rule accordingly. For instance, an ordinance that banned spray\npaint, issued in the city of Chicago, was challenged by paint manufacturers under the dormant commerce\nclause, but was ultimately upheld by the U.S. Court of Appeals because the ban was intended to reduce graffiti\nand related crimes.\nToday, Congress uses its authority to regulate commercial activity in four general areas relating to the\ncommerce clause:\n1. Regulation of the channels of interstate commerce\n2. Regulation of the instrumentalities of interstate commerce\n3. Regulation of intangibles and tangibles that cross state lines\n4. Regulation of activities that are deemed to be both economic and to have a substantial impact on\ninterstate commerce\n\nArea of\n\nExplanation\n\nRegulation\nTable 4.1\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\nExamples\n\n\x0cChapter 4 Business and the United States Constitution\n\n47\n\nRegulation of the\n\nChannels of interstate commerce describe the\n\nFor example, Congress can\n\nchannels of\n\npassages of transportation between the states.\n\npass regulations that restrict\n\ninterstate\n\nThus, the commerce clause authorizes Congress\n\nwhat can be carried on airlines\n\ncommerce\n\nto regulate activities pertaining to the nation\xe2\x80\x99s\n\nor on ships.\n\nairways, waterways, and roadways, and even\nwhere the activity itself takes place entirely in a\nsingle state.\nRegulation of the\n\nInstrumentalities of commerce are understood to\n\nCongress could pass\n\ninstrumentalities\n\nbe any resource employed in the carrying out of\n\nregulations mandating certain\n\nof interstate\n\ncommerce. Examples of these resources are\n\nsafety standards for\n\ncommerce\n\nmachines, equipment, vehicles, and personnel.\n\nequipment used in\n\nThus, Congress has the power to regulate these\n\nmanufacturing plants.\n\nareas.\nRegulation of\n\nAny object, tangible or intangible, that crosses\n\nThe Driver\xe2\x80\x99s Privacy Protection\n\nintangibles and\n\nstate lines can be regulated under the commerce\n\nAct (DPPA) regulates the sale\n\ntangibles that\n\nclause. Tangible objects include goods purchased\n\nof information contained in\n\ncross state lines\n\nby consumers, as well as raw materials and\n\nthe Department of Motor\n\nequipment used in the production of goods for\n\nVehicles\xe2\x80\x99 (DMV\xe2\x80\x99s) records.\n\nsale. Intangible objects include services, as well as\nelectronic databases.\nRegulation of\n\nFederal regulation of economic commercial\n\nThe courts in the United States\n\nactivities that are\n\nactivity expected to have a significant (as opposed\n\nvs. Lopez case described\n\ndeemed to have a\n\nto minor) effect on interstate commerce is\n\nearlier deemed the Act to be\n\nsubstantial\n\nconstitutional, according to the commerce clause.\n\nunconstitutional because its\n\nimpact on\n\nNoneconomic commercial activity is not covered.\n\nterms have \xe2\x80\x9cnothing to do\n\ninterstate\n\nwith \xe2\x80\x98commerce\xe2\x80\x99 or any sort of\n\ncommerce\n\neconomic enterprise.\xe2\x80\x9d\n\nTable 4.1\n\n4.2\n\nConstitutional Protections\n\nThe Bill of Rights is the common term given to the first 10 amendments to the U.S. Constitution. These are not\nthe only set of amendments to the Constitution, but they are considered together as impacting rights because\nthey limit the ability of the federal government to infringe upon individual freedoms. In addition, a later\namendment, the Fourteenth Amendment, extends the provisions set out in the Bill of Rights to the states, in\naddition to federal government. The Bill of Rights has a substantial impact upon government regulation of\ncommercial activity, and therefore, it is important to fully understand it.\nA summary of the provisions of the Bill of Rights is supplied below:\n\n\x0c48\n\nChapter 4 Business and the United States Constitution\n\nAmendment\n\nProvision\n\nFirst\n\nEnsures that U.S. citizens have the right to freedom of speech, press, religion, and\npeaceable assembly. Provides citizens with the right to appeal to government to redress\ngrievances.\n\nSecond\n\nEstablishes that the government cannot infringe upon citizens\xe2\x80\x99 right to bear arms.\nEstablishes the importance of a militia for national security.\n\nThird\n\nEstablishes that the government cannot quarter soldiers in private houses during\npeacetime or wartime.\n\nFourth\n\nStates that government can only issue warrants with probable cause and protects U.S.\ncitizens from unwarranted search and seizure.\n\nFifth\n\nEstablishes rights of due process. Ensures that indictment of a grand jury is necessary to\nput a citizen on trial and grants citizens the right not to testify against themselves.\n\nSixth\n\nProvides citizens with the right to an expeditious public trial, the right to an attorney, and\nthe right to an impartial jury.\n\nSeventh\n\nStates that citizens have the right to a trial by jury for common lawsuits involving monetary\nvalue of $20.\n\nEighth\n\nProhibits cruel and unusual punishment, prevents the imposition of excessive fines, and\nstates that the government cannot set bail at excessive amounts.\n\nNinth\n\nStates that the rights set out in the Bill of Rights do not remove any other rights granted to\ncitizens.\n\nTenth\n\nStates that any area over which the federal government is not granted authority through\nthe Constitution is reserved for the states.\n\nTable 4.2\n\nApplication of the Bill of Rights to Commercial Activity\nThe protections afforded the citizenry in the Bill of Rights are also extended to corporations and commercial\nactivities. In the next sections, some applications of the various amendments in the area of business are\ndiscussed.\n\nThe First Amendment\nThe freedom of speech provisions in the First Amendment have application to corporations. The courts\ndistinguish between different types of speech, and each has implications for the power of the federal\ngovernment and states to regulate in these areas:\n1. Corporate Political Speech. Political speech is any speech used to support political agendas or\ncandidates. Until the 1970s, several states prevented firms from financially supporting political advertising\nbecause they feared the power of corporate assets. However, since the 1978 case First National Bank of\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 4 Business and the United States Constitution\n\n49\n\nBoston v. Bellotti, it has been established that corporate political speech is protected in the same way as\ncitizens\xe2\x80\x99 free speech.\n2. Unprotected Speech. The 1942 case Chaplinsky v. New Hampshire determined that certain types of\nspeech\xe2\x80\x94that which could \xe2\x80\x9cinflict injury or incite an immediate breach of the peace\xe2\x80\x9d\xe2\x80\x94is not protected\nunder the First Amendment. Therefore, obscenities, defamation, and slanderous speech are not\nprotected.\n3. Commercial Speech. This type of speech conveys information pertaining to the sale of goods and\nservices. Ever since the 1980 case Hudson Gas & Electric Corp v. Public Service Commission of New\nYork, a four-part test has been established to determine whether commercial speech should be regulated\naccording to the First Amendment. This test is known as The Central Hudson Test for Commercial\nSpeech.\n\nFigure 4.3\n\nHudson Gas & Electric Corp v. Public Service Commission of New York established a four-part\n\ntest to determine whether commercial speech should be regulated according to the First Amendment.\n(Modification of art by BNED/pixabay Credit: CC BY NC SA)\nThe free exercise clause of the First Amendment states that government is prohibited from making laws that\nprohibit the free exercise of religion. Issues pertaining to this clause often arise in organizational settings. For\nexample, historically, there have been a number of cases in which government employees have challenged\nemployers\xe2\x80\x99 attempts to inhibit their exercise of religious practice (e.g., the wearing of religious symbols) in the\nworkplace.\n\nThe Fourth Amendment\nThe Fourth Amendment guarantees that citizens are free from unreasonable searches and seizures, and\nrequires government officials to obtain search warrants to conduct searches. However, government officials\ncan only request a search warrant if they have probable cause to believe that criminal activity is occurring at\nthe location of the search, or that they will locate evidence of criminal activity during the search (except where\n\n\x0c50\n\nChapter 4 Business and the United States Constitution\n\nthe official believes items will be removed prior to obtaining a warrant). The Fourth Amendment protects\nindividual organizations and places of business, as well as residences. However, under the terms of the\npervasive-regulation exception, administrative agencies can conduct warrantless searches of businesses\nattached to industries that have a long history of pervasive regulation. For example, public health agencies are\nallowed to conduct warrantless searches of stone quarries, as authorized by the Federal Mine Safety and\nHealth Act of 1977.\n\nThe Fifth Amendment\nFor commercial enterprises and businesspeople, it is the due process clause of the Fifth Amendment that\noffers the most extensive protection. The clause states that the government cannot take an individual\xe2\x80\x99s life,\nliberty, or property without due process of law. Specifically, there are two types of due process:\n\xe2\x80\xa2 Substantive due process means that laws that will deprive an individual of his or her life, liberty, or\nproperty must be fair and not arbitrary. Laws passed should not affect fundamental rights, and\nregulations are required to meet the rational-basis test. In other words, the government must\ndemonstrate that the law bears a rational relationship to a legitimate state interest. Many regulations\naffecting commercial activity, such as banking regulations, minimum wage laws, and regulations\ninhibiting unfair trade, have been tested against the rational-basis test.\n\xe2\x80\xa2 Procedural due process means that governments must use fair procedures when depriving an individual\nof his or her life, liberty, or property. This status quo does not only apply to federal criminal proceedings.\nFor example, if a government employer discharges an employee from his job, or if the government\nsuspends the driver\xe2\x80\x99s license of a worker, the employer must follow procedural due process.\nAnother clause contained in the Fifth Amendment that is relevant to commercial enterprises is the takings\nclause. According to this clause, when the government seizes private property for public use, it is required that\nthe government pay the owner just compensation for the property. Just compensation is understood to be\nequivalent to the market value of the property. This clause has been broadly interpreted. For example, if\nenvironmental or safety regulations significantly impact the way in which a property owner can use his or her\nland for economic gain, the regulation can essentially be deemed as depriving the owner of his or her land,\nand the owner is entitled to compensation.\nIt is important to note that the privilege against self-incrimination, established under the Fifth Amendment\n(usually interpreted as the right to remain silent), only applies to sole proprietorships that are not legally\ndistinct from the individual who owns them. Custodians and agents of corporations do not enjoy this privilege.\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 4 Business and the United States Constitution\n\nFigure 4.4\n\n51\n\nThe various protections afforded the citizenry in the Bill of Rights are also extended to\n\ncorporations and commercial activities. (Credit: Anthony Garand/ unsplash/ License: Unsplash License)\n\nAssessment Questions\n1. Explain Police Power and the Dormant Commerce Clause.\n2. The Patient Protection and Affordable Care Act\xe2\x80\x99s (also known as Obamacare) provision that mandated that\nindividuals not insured through employment obtain minimum essential health insurance or face a penalty was\nupheld as constitutional by the 11th Circuit.\na. True.\nb. False.\n3. The _____ gives the federal government the authority to regulate interstate and international commerce.\na. Supremacy Clause.\nb. 10th Amendment.\nc. Bill of Rights.\nd. Commerce Clause.\n4. The doctrine aimed at dividing the governing powers between the federal governments and the states is:\na. Judicial review.\nb. Federalism.\nc. Separation of powers.\nd. Preemption.\n5. The doctrine aimed at dividing the governing powers between the federal governments and the states is:\na. Commerce Clause.\nb. Superior Clause.\nc. Supremacy Clause.\nd. Necessary and Proper Clause.\n\n\x0c52\n\nChapter 4 Business and the United States Constitution\n\n6. Describe the 2 types of Due Process.\n7. The _____ of the constitution offers the most extensive protection for businesses.\na. Supremacy Clause.\nb. Equal Protection Clause.\nc. Due Process Clause.\nd. Freedom of Speech Clause.\n8. The 14th Amendment is a part of the Bill of Rights.\na. True.\nb. False.\n9. Which of the following is correct with regards to the powers of state government in the United States?\na. All powers not specifically enumerated to the federal government are reserved to the states.\nb. The power over crimes is reserved to the federal government.\nc. The power over the militia is reserved to the states.\nd. The powers over the federal government are superior to every state power.\n10. All of the sections of the Bill of Rights apply to corporations and commercial activities.\na. True.\nb. False.\n\nEndnotes\nBeatty, J. F., Samuelson, S. S., & Abril, P. S. (2018). Business law and the legal environment. Cengage Learning.\nDriesen, D. M. (2016). The economic/noneconomic activity distinction under the commerce clause. Case W. Res.\nL. Rev., 67, 337.\nUnited States v. Lopez, 514 U.S. 549, 558\xe2\x80\x93559 (1995).\nBeatty, J. F., Samuelson, S. S., & Abril, P. S. (2018). Business law and the legal environment. Cengage Learning.\nMcAdams, T., Neslund, N., Zucker, K. D., & Neslund, K. (2015). Law, business, and society. McGraw-Hill Education.\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0c5\n\nCriminal Liability\nFigure 5.1 Lady Justice by Arend Ode(Image Credit: AJEL/ pixabay/ Attribution 2.0 Generic (CC BY 2.0))\n\nChapter Outline\n5.1 Common Business Crimes\n5.2 Civil vs. Criminal Liability\n\nIntroduction\nLearning Outcome\n\xe2\x80\xa2 Analyze sources of criminal exposure in business.\n\n5.1\n\nCommon Business Crimes\n\nPeople rarely think about their conduct at work as being potentially illegal, or that jail time could result from\npoor workplace decisions. However, this fact is the reality. Organizations are fined, and executives are\nsentenced to jail, when business laws are broken. Many of the workplace violations are nonviolent crimes,\nsuch as fraud, property crimes, or drug- or alcohol-related infractions. Regardless of the level of violence or\nthe employee\xe2\x80\x99s motivation for committing the crime, breaking the law can lead to negative consequences for\nthe business, its employees, and its customers.\n\nConstitutional Authority to Regulate Business\nCongress is given the power to \xe2\x80\x9cregulate Commerce with foreign Nations, and among the several States, and\nwith the Indian Tribes.\xe2\x80\x9d Our forefathers wanted to facilitate easier trade among the states by allowing\nCongress to adopt rules that could be uniformly applied. The theory was that if commercial enterprises knew\nthat they would be dealing with essentially the same rules across the nation, it would be much easier to run\n\n\x0c54\n\nChapter 5 Criminal Liability\n\ntheir businesses and keep commerce flowing more efficiently.\nWhile federal courts initially interpreted the commerce power narrowly, over time, the federal courts have\ndecided that the commerce clause gives the federal government broad powers to regulate commerce, not only\non an interstate (between the states) level, but also on an intrastate (within each state) level, as long as\nsome economic transaction is involved. The federal government does not usually exceed its regulatory\npowers.\n\nWhite Collar Crime\nWhite collar crimes are characterized by deceit, concealment, or violation of trust. They are committed by\nbusiness professionals. They generally involve fraud, and the employees committing the crimes are motivated\nby the desire for financial gains or fear of losing business standing, money, or property. Fraud is the\nintentional misrepresentation of material facts for monetary gain. This type of crime is not dependent on\nthreats or violence.\n\nFigure 5.2\n\nWhite collar crimes are committed by business professionals within businesses with the intent of\n\ngaining or maintaining status. (Credit: Rawpixel/ pexels/ License: CC0)\nWhite collar crimes tend to violate state laws, and sometimes federal laws. The violation depends on what is\ninvolved in the crime. For instance, criminal acts involving the United States postal system or interstate\ncommerce violate federal law.\nAlthough white collar crimes do not need to include physical violence, these types of crimes can destroy\ncompanies, the environment, and the financial stability of clients, employees, and communities. In 2018,\nJeremiah Hand and his brothers, Jehu Hand and Adam Hand, were convicted and sentenced to between 9 and\n30 months in prison for their respective roles in a pump-and-dump scheme. In this scheme, they were\ndishonest about control over their company\xe2\x80\x99s stock, and even went as far as filing false forms in an effort to\nraise the value of the stock. Once the value of the stock was raised, they released their shares into the market.\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 5 Criminal Liability\n\n55\n\nTypes of Business Crimes\nBusiness crimes or white collar crimes are not limited to pump-and-dump schemes; they come in many\ndifferent forms. Business crimes come in many different forms. As previously stated, these crimes often\ninvolve deceit, fraud, or misinformation. The types of high-profile crimes include Ponzi schemes,\nembezzlement, and crimes that intentionally violate environmental laws and regulations. This section will\nexplore these three types of crimes and provide examples from the 2000s.\n\nPonzi Schemes\nPonzi schemes (also known as pyramid schemes) are investing scams that promise investors low-risk\ninvestment opportunities with a high rate of return. The high rates are paid to old investors with money\nacquired from the acquisition of new investors. The performance of the market is not a factor in the investors\'\nrate of return.\nBernie Madoff operated a 20-year Ponzi scheme through his company. He paid high returns (above average)\nusing the investments of new clients (investors). In 2008, investors attempted to withdraw funds, but the\nMadoff organization was not able to provide the reimbursement. Madoff is currently serving a more than\n100-year sentence in prison.\n\nLarceny and Embezzlement\nLarceny and embezzlement are two forms of theft that can occur within a business. Larceny occurs when a\nperson unlawfully takes the personal property of another person or a business. For example, if an employee\ntakes another employee\xe2\x80\x99s computer with the intent of stealing it, he or she may be guilty of larceny. In\ncontrast, embezzlement occurs when a person has been entrusted with an item of value and then refuses to\nreturn it or does not return the item. For example, if an employee is entrusted with the petty cash at his or her\noffice and that person purposefully takes some of the money for himself or herself, this would be\nembezzlement.\nOne high-profile example of embezzlement occurred at Koss Corporation in Milwaukee, Wisconsin. Sujata\n\xe2\x80\x9cSue\xe2\x80\x9d Sachdeva was a Vice President of Finance and Principal Accounting Officer at Koss Corporation.\nSachdeva was convicted of embezzling $34 million over a 5-year period and sentenced to 11 years in federal\nprison, as well as restitution to Koss Corporation. Sachdeva was entrusted with the company\xe2\x80\x99s funds and did\nnot utilize the funds as intended.\n\nEnvironmental Crimes\nMany federal statutes regulate the environment. Many of these laws carry both civil and criminal penalties for\nviolations.\nThe following federal laws can carry criminal penalties:\n\xe2\x80\xa2 Clean Air Act\n\xe2\x80\xa2 Clean Water Act\n\xe2\x80\xa2 Resource Conservation and Recovery Act\n\xe2\x80\xa2 Comprehensive Environmental Response, Compensation and Liability Act\n\xe2\x80\xa2 Endangered Species Act\nThe International Petroleum Corporation of Delaware (IPC) is paying restitution for environmental crimes,\nwhich included a scheme to violate the Clean Water Act. From 1992 to 2012, IPC processed oil and wastewater.\n\n\x0c56\n\nChapter 5 Criminal Liability\n\nThe company admitted to altering required water test samples so they met the limits set by their permit\nbefore releasing the waste into the city\xe2\x80\x99s sewer system. The company also admitted to transporting waste that\ncontained benzene, barium, chromium, cadmium, lead, PCE, and trichloroethene for disposal in South Carolina\nwithout the required reporting of the information, which also violated environmental laws.\n\nFigure 5.3\n\nWhite collar crimes are generally motivated by the desire to maintain or gain financial status.\n\n(Credit: TheDigitalWay/ pixabay/ License: CC0)\n\nOther Types of Business Crime\nThe business environment is complex, and some crimes are less common or receive less media attention.\nThese types of crimes include those that violate antitrust laws, racketeering, bribery, money laundering, and\nspamming.\n\nViolations of Antitrust Laws\nAntitrust laws do not allow activities that restrain trade or promote market domination. These laws are in\nplace to provide guidance and supervision of mergers and acquisitions of companies to prevent market abuse.\nThe goal is to avoid monopolies, or the control of one organization over a specific market. Monopolies reduce\ncompetition and, as a result, can have a detrimental impact on consumer prices. Since the United States is\nfounded on capitalist principles, anti-competitive business conduct is prohibited by law, and some of those\nlaws, such as the Sherman Antitrust Act, do include provisions about criminal punishment.\n\nRacketeering\nRacketeering activities include loan-sharking, money laundering, and blackmailing. In the past, the term has\nbeen used to describe organized crime. The term is now applied to other entities, as well. RICO, or the\nRacketeer Influenced and Corrupt Organizations Act, is a federal law aimed at preventing and prosecuting by\nboth businesses and organized crime syndicates. \xe2\x80\x9cRICO is now used against insurance companies, stock\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 5 Criminal Liability\n\n57\n\nbrokerages, tobacco companies, banks, and other large commercial enterprises.\xe2\x80\x9d (Schodolski, 2018).\nRacketeering is no longer limited to organized crime. Health insurance companies and other legitimate\nbusinesses are being accused of pressure tactics similar to those used in organized crime racketeering.\nThese claims involve allegations of lying about the actual cost of care, damaging the business for physicians,\nbullying patients, and attempting to control the doctor-patient relationship through lies and pressure tactics.\n\nBribery\nBribery occurs when monetary payments, goods, services, information, or anything of value is exchanged for\nfavorable or desired actions. You can be charged with bribery for offering a bribe, or taking a bribe. Bribery is\nillegal within the United States and outside of it. The Foreign Corrupt Practices Act prohibits bribery payments\nby U.S. companies to foreign government officials with an intent to influence foreign business results. One\nexample of bribery would be a situation in which a pharmaceutical company offers special benefits to\nindividuals who agree to prescribe their medications.\n\nMoney Laundering\nMoney laundering refers to taking \xe2\x80\x9cdirty\xe2\x80\x9dmoney, or money obtained through criminal activities, and passing\nit through otherwise legitimate businesses so that it appears \xe2\x80\x9cclean.\xe2\x80\x9d The money cannot be tied back to the\nillegal acts. Clean money is money that was obtained through legitimate business functions.\n\nSpamming\nSending unsolicited commercial email, or spam, is illegal. While the onus is on consumers to avail themselves\nof whatever programs they can to block spam, laws are in place to discourage the sending of spam. The\nfollowing points are outlined in the anti-spam legislation in Washington state and are similar to other\nlegislation:\n1. Individuals may not initiate the sending or plan the sending of an email that misrepresents the sender as\nsomeone he or she is not, represents the sender as being associated with an organization that he or she\nhas no association, or otherwise hides the identity of the sender or origin of the email. Email messages\nmay not have false or misleading information in the subject line of the message.\n2. Commercial emails must include the contact information of the sender and the receiver must be aware\nthat the message is from a commercial source.\nStates like Washington are putting legislation in place to reduce spam and asking consumers to take an active\nrole in addressing spam. In general, legislators realize that spam is a nuisance and are finding ways to hold\ncompanies liable for sending spam messages.\n\nConclusion\nIt is important to know that not all people charged with business crimes or white collar crimes are necessarily\nguilty. A person must be found guilty of the crime before he or she is convicted. Regardless, business crimes\nand white collar crimes negatively impact the individual, the organization he or she worked for, the\ncommunity, and customers.\n\n5.2\n\nCivil vs. Criminal Liability\n\nA legal case can be civil or criminal. Each case has different components and requirements. Before one can\n\n\x0c58\n\nChapter 5 Criminal Liability\n\nunderstand the civil and criminal systems, it is important to understand the aspects of both civil and criminal\nlaws. The scope, consequences, and treatments of each vary.\n\nConstitutional Rights\nIt is important to understand the Constitution, which is the basis of all law. States are allowed to create and\ncategorize crimes and punishment, as long as they do not violate rights protected by the U.S. Constitution. For\nexample, in a fairly recent United States Supreme Court case, Lawrence v. Texas, the defendants asserted the\nunconstitutionality of a Texas law (enacted by the Texas legislature) regarding a particular act. When the\nUnited States Supreme Court ruled it unconstitutional, Texas could no longer enforce it.\nFrequent issues litigated in the courts are:\n\xe2\x80\xa2 Whether evidence must be suppressed (not allowed to be introduced at trial) because it was obtained\npursuant to an unreasonable search and seizure (violating the Fourth Amendment). This category might\ninvolve a sub-issue about whether officers had sufficient probable cause to conduct a warrantless search.\nWithout a warrant, and without the suspect\xe2\x80\x99s consent, officers generally may only conduct searches if\nthey have \xe2\x80\x9cprobable cause\xe2\x80\x9d to do so; any evidence obtained without consent or probable cause can be\nobjected to, and ultimately ruled inadmissible by the court in trial, if illegally obtained.\n\xe2\x80\xa2 Whether evidence must be suppressed because it was obtained while the suspect was \xe2\x80\x9cin custody\xe2\x80\x9d\nwithout advising a suspect of his rights to remain silent, to speak to an attorney, and to the appointment\nof an attorney if he cannot afford one (Fifth Amendment privilege against self-incrimination and Sixth\nAmendment right to counsel), as required by the Supreme Court in the famous Miranda v. Arizona case.\nThe term often used to describe these rights is \xe2\x80\x9cMirandizing,\xe2\x80\x9d which is named after the case.\n\xe2\x80\xa2 Whether a state law or constitutional provision provides more protection than the U.S. Constitution.\n\nFigure 5.4\n\nBoth civil and criminal convictions are based on precedent. (Credit: PactoVisual/ pixabay/ License:\n\nCC0)\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 5 Criminal Liability\n\n59\n\nComponents of Crime\nThere are usually two components to criminal conduct that must be proven by the prosecutor. The prosecutor\nprosecutes the case against the accused: mens rea (the criminal, or guilty, or \xe2\x80\x9cwrongful\xe2\x80\x9d mind) and actus\nreus (the criminal, or guilty, or \xe2\x80\x9cwrongful\xe2\x80\x9d act).\nEach statute creating a crime is supposed to include a description of:\na. the mental state (mens rea) required to establish that the suspect committed the crime, coupled with\nb. a description of the conduct (actus reus) that the suspect must have done.\nThe statute generally also indicates the category of crime (felony/misdemeanor/gross misdemeanor).\n\nCriminal Procedures\nGenerally, the first pleading filed by the prosecutor is called the information. (This step could be described as\nthe criminal counterpart to a civil \xe2\x80\x9ccomplaint.\xe2\x80\x9d)\nThe next stage is called the arraignment, where the defendant appears in court so that the court can\ndetermine or confirm his or her identity, inform the defendant of the charge the prosecutor has filed against\nhim or her, and hear the defendant\xe2\x80\x99s plea.\nThen, there will be discovery and trial. In criminal cases, the jury will convict only if convinced \xe2\x80\x9cbeyond a\nreasonable doubt\xe2\x80\x9d that the defendant committed the crime, and the verdict must be unanimous. This type of\ncase involves a higher burden of proof than in civil cases.\n\nCriminal and Civil Law\nCriminal law addresses behaviors that are offenses against the public, society, or state. Examples of criminal\nlaw offenses include assault, drunk driving, and theft. In contrast, civil laws address behavior that causes an\ninjury to the private rights of individuals in areas such as child support, divorce, contracts, property, and the\nperson. Examples of civil law offenses include libel, slander, or contract breaches.\nCriminal and civil cases differ in who initiates the case, how the case is decided, what punishments or penalties\nare issued, requirements of proof, and legal protections provided.\n\n\x0c60\n\nFigure 5.5\n\nChapter 5 Criminal Liability\n\nCivil and criminal cases involve the court system. (Credit: Brett Sayles/ pexels/ License: CC0)\n\nInitiation and Roles\nCriminal and civil cases are initiated differently, and the titles of the individuals involved differ slightly. Criminal\ncases are only initiated by the federal or state government in response to a law being broken. The federal or\nstate governments are known as the prosecution. The prosecution is an attorney, or group of attorneys, hired\nby the government to present a case against the accused. Criminal cases are usually titled something like\n\xe2\x80\x9cState v. [last name of the defendant accused of a crime].\xe2\x80\x9d In criminal prosecutions, the victim is not a party to\nthe lawsuit, but might be a witness for the state at the trial.\nIn contrast, private parties initiate civil cases when they feel that someone has injured them. Again, civil cases\nstem from breach of contract, custody cases, and attacks on one\xe2\x80\x99s character. Private parties can include an\nindividual, a group, or a business. The person, group, or business who initiates the case is referred to as the\nplaintiff or complainant. The accused is referred to as the defendant, in both criminal and civil proceedings.\nTypically, there is a difference in the burden of proof for the two types of cases. In a criminal case, the\ndefendant must be proven guilty \xe2\x80\x9cbeyond a reasonable doubt.\xe2\x80\x9d In a civil case, the defendant must be proven\nliable through a \xe2\x80\x9cpreponderance of the evidence.\xe2\x80\x9d In other words, the prosecution in a civil case must prove\nthat it is more probable than not that the defendant is liable.\nIn criminal cases, the defendant is entitled to an attorney and may be appointed an attorney if he or she is not\nable to afford one. The state appoints the attorney. In contrast, all parties involved in a civil case are required\nto secure their own legal representation.\nTypically, civil and criminal laws use different terminology, and being found guilty or accountable in each type\nof case results in different consequences.\nIn a civil action (lawsuit), the plaintiff is the person who is alleging that he or she has actually been harmed\n(physically, financially, or in another manner), and the defendant is the one who is asked to pay damages or\notherwise compensate the plaintiff. Outside of financial compensation, the plaintiff may be ordered to do\nsomething or refrain from doing something, which is referred to as injunctive relief.\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 5 Criminal Liability\n\n61\n\nIn the Liebeck v. McDonald\xe2\x80\x99s case, a woman sued McDonald\xe2\x80\x99s for serving hot coffee. The woman spilled hot\ncoffee on her lap while trying to add cream and sugar. The woman sued McDonald\xe2\x80\x99s for negligence in a civil\nsuit. The issue centered on whether or not the coffee\xe2\x80\x99s specific temperature was unreasonably hot.\nMcDonald\xe2\x80\x99s lost the lawsuit. The compensatory verdict was $160,000. McDonald\xe2\x80\x99s was found liable.\nConversely, if a defendant is convicted of committing a crime, the consequences are usually incarceration (jail/\nprison) and/or a fine (payment of money to the state).\nThe word used to describe the legal responsibility for harm in a civil case is liability, not guilt. Guilty is the word\nused to describe a person found guilty of committing a crime in a criminal case.\nBusinesses can be charged with criminal acts as well. In 2017, Oliver Schmidt, former manager of a\nVolkswagen engineering office near Detroit, was arrested. He faced years in prison for attempts to defraud the\nUnited States, wire fraud, violation of the Clean Air Act, and a charge of giving an untrue statement under the\nClean Air Act. Schmidt\xe2\x80\x99s actions directly violated a business law and, since his actions violated an established\nlaw, he was held criminally liable. In December of 2017, Schmidt was sentenced to seven years in prison.\n\nProfessional Negligence\nProfessional negligence is often called malpractice. A professional\xe2\x80\x99s duty of care is usually a duty to exercise\nthe degree of care, skill, diligence, and knowledge commonly possessed and exercised by a reasonable,\ncareful, and prudent professional of the same type in the state (or sometimes in the community). Along with\nattorneys and health care providers, the following professionals might be sued for malpractice: accountants,\narchitects, engineers, surveyors, insurance brokers, real estate agents and brokers, and clergy.\nFor negligence, the usual kind of damages recoverable are compensatory, or money to compensate for the\ninjuries/damages incurred to make the person whole (e.g., money for medical bills, lost wages, loss of future\nearning capacity, pain and suffering, emotional distress, property damage, etc.).\n\nAssessment Questions\n1. Explain White Collar Crime.\n2. What is a pump-and-dump scheme?\n3. The crime of larceny includes:\n1. The nontresspassory taking and controlling of personal property.\n2. The trespassory taking and carrying away of real or personal property.\n3. Joyriding.\n4. The trespassory taking and control of personal property.\n4. Distinguish between larceny and embezzlement.\n5. What is the Foreign Corrupt Practices Act?\n6. Businesses can be charged with crimes.\na. True.\nb. False.\n\n\x0c62\n\nChapter 5 Criminal Liability\n\n7. The burden of proof is a criminal case is:\na. Reasonable suspicion.\nb. Beyond a reasonable doubt.\nc. Preponderance of evidence.\nd. Clear and convincing evidence.\n8. Which of the following is a goal of an arraignment?\na. The defendant is informed of the charge and enters a plea.\nb. Requires the defendant to bear the burden of proof\nc. Begins the inquisitorial system of adjudication.\nd. All of these are correct.\n9. The criminal act necessary to commit a crime is known as:\na. Malice aforethought.\nb. Mens rea.\nc. Subjective fault.\nd. Actus reus.\n10. Distinguish between civil and criminal law.\n\nEndnotes\nAmadeo, Kimberly. Is Social Security a Ponzi Scheme? The Balance Small Business. Retrieved from:\nhttps://www.thebalance.com/what-is-a-ponzi-scheme-history-examples-vs-pyramid-scheme-3305877.\nCEO of \xe2\x80\x9cPenny Stock\xe2\x80\x9d Company Sentenced for Stock Manipulation Scheme. The United States Department of\nJustice. September 11, 2018. Retrieved from: https://www.justice.gov/usao-ma/pr/ceo-penny-stock-companysentenced-stock-manipulation-scheme.\nSchodolski, Vincent J. INSURERS COME UP AGAINST RICO RULE. Chicago Tribune. August 28, 2018. Retrieved\nfrom: http://www.chicagotribune.com/news/ct-xpm-2000-06-17-0006170102-story.html.\nVerschoor, Curtis C. How an Embezzler Stole Millions from a Small Company. AccountingWEB. January 27, 2011.\nRetrieved from: https://www.accountingweb.com/aa/law-and-enforcement/how-an-embezzler-stole-millionsfrom-a-small-company.\nWhite-Collar Crime. FBI. May 03, 2016. Retrieved from: https://www.fbi.gov/investigate/white-collar-crime.\nWork Within the Law. Lumen Learning. Retrieved from: https://courses.lumenlearning.com/workwithinthelaw/\nchapter/categories-and-examples-of-business-crime/.\nDuignan, Brian. What Is the Difference Between Criminal Law and Civil Law? Encyclop\xc3\xa6dia Britannica.\nRetrieved from: https://www.britannica.com/story/what-is-the-difference-between-criminal-law-and-civil-law.\nCivil Law. The Free Dictionary. Retrieved from: https://legal-dictionary.thefreedictionary.com/civil%20law.\nVollman, Brenda, and Borough of Manhattan Community College. Criminal Justice. Lumen Learning. Retrieved\nfrom: https://courses.lumenlearning.com/atd-bmcc-criminaljustice/chapter/1-3-the-difference-between-civiland-criminal-law/.\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0c6\n\nThe Tort System\nFigure 6.1 (Credit: Free-Photos/ pixabay/ Attribution 2.0 Generic (CC BY 2.0))\n\nChapter Outline\n6.1 Intentional Torts and Negligence\n6.2 Product and Strict Liability\n\nIntroduction\nLearning Outcome\n\xe2\x80\xa2 Explain torts system application to business.\n\n6.1\n\nIntentional Torts and Negligence\n\nCivil suits arise from damages suffered by one or more persons or entities at the hands of another person or\nentity. The damage can happen in a variety of circumstances, and may be intentional or unintentional. Unlike\ncriminal cases, civil suits seek to provide some form of remedy for the loss suffered by an injured party. Civil\nsuits are decided by judges and juries based on the specific situation, especially when violation of statutes, or\nlaws, is not in question.\n\n\x0c64\n\nFigure 6.2\n\nChapter 6 The Tort System\n\nCivil suits are decided in court by judges and juries. (Credit: Coffee/ pixabay/ License: CC0)\n\nTorts\nCivil suits involve different causes of action, and they are included in one general classification: torts. The word\n\xe2\x80\x9ctort\xe2\x80\x9d means \xe2\x80\x9cwrong\xe2\x80\x9d in French. Thus, torts are wrongs committed against others who suffer some form of\ndamage as a result. While these damages could also be the result of criminal action, the criminal element of\nthe matter is not tried in a civil lawsuit. The standard of proof is lower for civil suits, and a finding of liability in\na tort case does not necessarily translate to guilt in a criminal case.\nThe actor of the wrongs has historically been called a tortfeasor. When a wrong is committed by a tortfeasor,\ndamage is done to another. Tort law seeks to address this damage based on the circumstances of the issue,\nwhich is based on fault. Civil lawsuits are used by the injured parties to seek redress for the loss associated\nwith the tort. Unlike criminal proceedings, redress is often provided in the form of money as opposed to\nincarceration. As such, the burden of proof of fault is lower. The offender, or tortfeasor, who commits the act\nis the accused in a civil suit. The plaintiff, who is the injured party, files the lawsuit on which the civil court will\nmake a decision. The offender ultimately becomes the defendant, who must respond to the accusations of the\nplaintiff in a civil suit.\nDuring tort litigation, the judge and jury have certain separate functions (Kionka, 2013):\n\nFunctions During a Tort Litigation\nThe Judge Decides Issues of Law\nThe duty of the defendant to the plaintiff, if any\nTable 6.1\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\nThe Jury Decides Questions of Fact\nWhat happened\n\n\x0cChapter 6 The Tort System\n\n65\n\nFunctions During a Tort Litigation\nThe Judge Decides Issues of Law\n\nThe Jury Decides Questions of Fact\n\nThe elements of the defense\n\nLegal consequences of what happened\n\nApplication of legal rules\n\nThe damages suffered by the plaintiff\n\nTable 6.1\n\nHarm\nTwo types of torts are intentional torts and negligence. Intentional torts occur as the result of a conscious\nand purposeful act. Negligence occurs when an individual does not exercise duty of care. Torts are acts or\nomissions that result in injury or harm to an individual in such a way that it leads to a civil wrong that occurs\nas liability (WEX, n.d.). In tort law, harm can be defined as a loss or disadvantage suffered as a result of the\nactions or omissions of another (WEX, n.d.). This loss can be physical harm, such as slipping and falling on a\nwet floor, or personal property harm, such as allowing water to ruin furniture. The damage is the result of\nwhat someone else did, or did not do, either intentionally or based on a lack of reasonable care.\nThere are two basic elements to torts: damages and compensation (Laws, tort.laws.com). Tort law acts to\ncompensate persons who have suffered damages at the hands of another (Baime, 2018). Tort law determines\nthe legal responsibility of the defendant and the value of the harm. Different types of torts look at different\ntypes of circumstances.\n\nIntentional Torts\nIntentional torts are committed by an offender who understands that he or she is committing a tort. Intent\ndoes not always equate to directly causing an end result. In some cases, the intent may be something else,\nsuch as the possession of knowledge that some harm may occur. The harm may result from intentional action,\nor due to some circumstance that the offender feels will be excusable (Kionka, 2013).\nSome circumstances that could allow the defendant to argue that the action is excusable would include:\npermission by the injured party, or defense of property, self, or another person (Kionka, 2013). If the injured\nparty agrees to allow the defendant to juggle knives and one slips and causes harm, the action might be\nexcusable to some extent. If a defendant caused harm to the plaintiff\xe2\x80\x99s car while trying to avoid being hit by\nthe car, it would likely be excusable.\nDifferent types of intentional torts are based on different circumstances and face different remedies, or\nmeans of recovering losses (Baime, 2018):\n\xe2\x80\xa2 Assault is an intentional tort that occurs when an individual has a reasonable apprehension of an\nintentional act that is designed to cause harm to himself or herself, or to another person.\n\xe2\x80\xa2 Malicious prosecution occurs when an individual files groundless complaints to initiate a criminal matter\nagainst another.\n\xe2\x80\xa2 Defamation occurs when an individual intentionally creates and promotes malicious falsehoods about\nanother. Defamation can occur in two ways: slander and libel. Slander is, in effect, when falsehoods are\nspoken. Libel occurs when falsehoods are expressed in written or other recorded forums.\n\n\x0c66\n\nChapter 6 The Tort System\n\n\xe2\x80\xa2 Invasion of privacy involves unwanted production of negative public information. Different standards\napply to invasion of privacy based on the status of the individual as a public figure.\n\nNegligence\nNegligence is another type of tort that has two meanings. It is the name of a cause of action in a tort, and it is\na form of conduct that does not meet the reasonable standard of care (Kionka, 2013). The cause of action is\nthe reason for the damage, and the standard of care is based on the care that a reasonable person would\nneed in a given situation. Negligence is decided by determining the duty of the defendant, whether or not the\ndefendant committed a breach of that duty, the cause of the injury, and the injury itself.\nFor an action to be deemed negligent, there must be a legal duty of care, or responsibility to act, based on the\nreasonable standard in a situation (Baime, 2018). An individual can be considered negligent if he agreed to\nwatch a child, but did not do so, and then harm came to the child. An individual would not be considered\nnegligent if he did not know that he was supposed to watch the child, or did not agree to watch the child.\n\nFigure 6.3\n\nIf an individual agrees to watch a child and the child is injured while that person pays attention to\n\nher cell phone, it would be considered negligence. (Credit: JESHOOTScom/ pixabay/ License: CC0)\nA reasonable person is defined as someone who must exercise reasonable care based on what he or she\nknows about the situation, how much experience he or she has with the situation, and how he or she perceives\nthe situation (Kionka, 2013). In some cases, this knowledge could be based on common knowledge of\ncommunity matters, such as knowing that a bridge is closed for repairs.\nIn some cases, the duty of care is based on a special relationship, which is a relationship based on an implied\nduty of care. This implied duty of care often comes about as a duty to aid, or a duty to protect another, e.g., a\nnurse caring for patients in a hospital, or a lifeguard being responsible for swimmers in the guarded area\n(Baime, 2018). A passerby does not have a duty to aid, but if the individual tries to help, then he or she is\nresponsible for acting responsibly.\nThe elements of a negligence cause of action are (Kionka, 2013):\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 6 The Tort System\n\n67\n\n\xe2\x80\xa2 A duty by the defendant to either act or refrain from acting\n\xe2\x80\xa2 A breach of that duty, based on a failure to conform to the standard of care by the defendant\n\xe2\x80\xa2 A causal connection between the defendant\xe2\x80\x99s action or inaction, and the injury to the plaintiff\n\xe2\x80\xa2 Measurable harm that can be remedied in monetary damages\n\nForeseeability\nNegligence case decisions are influenced by whether or not a defendant could have predicted that an action or\ninaction could have resulted in the tort, or foreseeability (Baime, 2018). Responsibility is often based on\nwhether or not the harm caused by an action or inaction was reasonably foreseeable, which means that the\nresult was fairly obvious before it occurred (Baime, 2018). A person assisting an inebriated individual into her\ncar could be considered negligent due to the likelihood that harm would come to her while she is driving in an\nintoxicated state. This situation is an example of the foreseeable probability of harm.\n\nConclusion\nIntentional torts and negligence arise based on intentional and unintentional acts committed by individuals.\nDamages are decided in civil courts by first determining fault and harm, and then by assigning a remedy.\nSometimes, the damage can be excused if the circumstances indicate that the defendant acted with\npermission, or in his or her own defense. The main standard used to make a decision is the reasonable\nstandard of care: what would a reasonable person do?\n\n6.2\n\nProduct and Strict Liability\n\nDetermination of fault and damages for intentional torts and negligence are based on the reasonable\nstandard of care. Another form of torts looks at liability without fault, or strict liability. Strict liability\ndetermines liability, or harm, based on reasons other than fault (CCBC Legal Studies, n.d.). The mistakes\nleading to harm can be completely unintentional, and in some cases, unavoidable. Yet, damage is done, and a\ncivil suit arises.\n\nStrict Liability\nStrict liability provides a remedy when harm is suffered through no intentional fault. The courts needed to\ncreate a standard that would cover this form of tort, or one without fault. The courts came up with the\nabnormally dangerous activity standard, which assigns responsibility when an individual engages in some\nform of dangerous activity, even if care is taken to avoid mishap (CCBC Legal Studies, n.d.). If a homeowner\nhas horses in a pasture that is bounded by electric fencing, it can be determined that the homeowner\nexercised reasonable care. However, suppose that the electricity goes down, the horses get out onto the road,\nand an accident occurs as a result. In this case, the owner is responsible, even though he took reasonable care\nand the event was unforeseen.\n\n\x0c68\n\nChapter 6 The Tort System\n\nFigure 6.4\n\nIf horses get out of a fenced-in area, the owner would be liable for any damage they cause while\n\nloose. (Credit: Slack/ pexels/ License: CC0)\nFor a court to assign strict liability based on abnormally dangerous activities, the activity must meet certain\ncriteria. The court must establish that at least four of the following six factors are present (CCBC Legal Studies,\nn.d.):\n\xe2\x80\xa2 The activity poses a high degree of risk of harm to a person, the land of another, or the property owned\nby another.\n\xe2\x80\xa2 The harm resulting from this activity would likely be substantial.\n\xe2\x80\xa2 The use of reasonable care would not eliminate this risk.\n\xe2\x80\xa2 The activity is not something that would be considered a matter of common usage.\n\xe2\x80\xa2 The activity is not appropriate for the place where it occurs.\n\xe2\x80\xa2 The danger of the activity overshadows the benefit it poses to a given community.\nIn essence, the basis for determining strict liability is the extent of the risk involved in the activity. This basis\ncould also apply to the ownership of dangerous pets. A dog that is known to be aggressive would qualify the\nowner for strict liability should it get out and bite someone. The courts would find that the owner knew, or\nshould have known, that the dog was dangerous and had a propensity to cause harm (Kionka, 2013).\n\nTrespass\nIn some situations, the owner of the dangerous activity might not be held liable. One such situation is\ntrespassing. Trespassing occurs as an individual enters or remains upon property owned by another without\npermission (Kionka, 2013). In the case of trespassing, the owner of the property does not have a duty to make\nthe premises safe based on reasonable care for the trespasser (Kionka, 2013). Also, the owner does not have a\nresponsibility to cancel or alter activities on the premises to avoid endangering the trespasser (Kionka, 2013).\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 6 The Tort System\n\nFigure 6.5\n\n69\n\nTrain tracks are a common area for trespassing. (Credit: Muscat_Coach/ pixabay/ License: CC0)\n\nIn some cases, however, the property owner could be held liable (Kionka, 2013):\n\xe2\x80\xa2 When the area in question is a common place for trespassing\n\xe2\x80\xa2 When the owner knows a trespasser is present\n\xe2\x80\xa2 When the trespasser needs aid, then the owner has a duty to rescue him or her\n\xe2\x80\xa2 When the trespasser is a child, and the dangerous activity is deemed as an attractive nuisance, or an\nattraction that a reasonable child would wish to view\nEven though trespassing can present an exception to liability in the presence of a dangerous activity, it is not a\ngiven. There are numerous exceptions that allow for liability. In effect, strict liability can occur in a given\nsituation even when the property owner has provided care that goes above and beyond what is reasonable.\nThe court does not need to establish proof of lack of due care when applying strict liability to a case (Baime,\n2018).\n\nProduct Liability\nIndividuals are not always the defendants involved in civil suits. Manufacturers, wholesalers, distributors, and\nretailers can also be named in torts that pertain to products and qualify as strict liability (CCBC Legal Studies,\nn.d.). Some products contain flaws that were not intentionally created; such flaws may not be discovered until\nan individual suffers harm as a result of using them.\nIt is not always possible to conclusively prove that an act or omission was responsible for the harm (Baime,\n2018). As a result, the courts developed the doctrine of res ipsa loquitor, which means that whatever it is\nspeaks for itself. The burden of proof shifts from the plaintiff to the defendant, who must disprove negligence.\nHowever, the plaintiff must first establish three factors (Baime, 2018):\n\xe2\x80\xa2 The defendant had control over the product in question while it was being manufactured.\n\xe2\x80\xa2 Under normal use and circumstances, the product would not cause damage or harm, but damage or\nharm has occurred in the case in question.\n\n\x0c70\n\nChapter 6 The Tort System\n\n\xe2\x80\xa2 The behavior of the plaintiff did not significantly contribute to the harm caused.\nThe doctrine of res ipsa loquitor does not establish proof of negligence, but it does allow the jury to infer what\nis not explicitly available pertaining to negligent acts or omissions on the part of the defendant (Baime, 2018).\nNegligence can occur when products are created because defects can harm consumers. Think about the\npotential harm that would occur if brake manufacturers were negligent. This negligence would cause brakes\nto have flaws, which would prevent them from doing their job of stopping cars. If a car does not stop, people\nwill likely be injured. The manufacturing defect would result in a product liability lawsuit, based on legal\nresponsibility for the harmful consequences proximately caused by the product defect (Baime, 2018). Since the\ncourts would not be able to see the negligence occurring, the courts would base their decision on res ipsa\nloquitor and the fact that the brakes would not normally fail under normal use by the driver.\n\nFigure 6.6\n\nIf brakes do not work like they are supposed to, it could be the result of a manufacturing defect\n\nthat would result in product liability. (Credit: Valtercirillo/ pixabay/ License: CC0)\n\nThe Unreasonably Dangerous Product Standard\nIn the case of product liability, the court uses an unreasonably dangerous product standard to determine\nliability. The unreasonably dangerous product would be so dangerous that the danger would be beyond the\nexpectation of the user, and a less dangerous option could have been produced instead (Kionka, 2013). This\ntype of unreasonably dangerous product often falls into one of three categories (Kionka, 2013):\n\xe2\x80\xa2 A flaw in the manufacturing process that occurred because the manufacturer failed to exercise proper\ncare during manufacturing\n\xe2\x80\xa2 A defect in the design of the product, which makes it dangerous, and safer alternatives are available and\neconomically feasible\n\xe2\x80\xa2 The product includes insufficient warnings or instructions for the proper use of the product and its\npotential dangers\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 6 The Tort System\n\n71\n\nDefenses\nThere are defenses to product liability claims. In some cases, the plaintiff\xe2\x80\x99s own behaviors contribute to his or\nher injuries, based on his or her own negligence. This situation is known as contributory negligence.\nContributory negligence, when determined by the court, prevents any recovery of damages by the plaintiff\n(Baime, 2018). So, if the court finds contributory negligence, the plaintiff is unable to recover any damages for\nthe injury. Two forms of contributory negligence are assumption of risk and misuse.\nAssumption of risk is one defense. In some cases, the defendant can argue that the user assumed the risk of\nusing the product if he or she used the product while knowing that the defect in the product created a risk\n(CCBC Legal Studies, n.d.). An individual who purchases a saw and sees that the guard is too small to cover the\nteeth, but decides to use it anyway, is assuming the risk of using the product. If the saw cuts the individual,\nthen the manufacturer could argue that the person assumed the risk because he saw the defect, understood\nthe risk, and used the saw anyway.\nAnother defense is product misuse. In some cases, an individual will use a product in ways that it is not meant\nto be used (CCBC Legal Studies, n.d.). The user might not be aware of a defect, and he or she proceeds to use\nthe product incorrectly. Misuse by the individual would be to blame for any resulting harm.\n\nFigure 6.7\n\nUsing a chainsaw with bare feet could be dangerous and add to the risk of use without a guard. If\n\nthe plaintiff suffered harm because his bare foot could not hold the wood down properly, he could be\nresponsible for comparative negligence. (Credit: edman_eu/ pixabay/ License: CC0)\nPlaintiffs might also be responsible for comparative negligence. With comparative negligence, the plaintiff\xe2\x80\x99s\nown actions in the use of the product contributed to the harm caused by the product, but the plaintiff might\nstill receive damages (CCBC Legal Studies, n.d.). The amount of negligence on behalf of each part (plaintiff and\ndefendant) is compared to determine the damages to which the plaintiff is entitled (Baime, 2018). If a plaintiff\nis found to be 30% responsible, and the defendant 70% responsible, then the plaintiff would be entitled to 70%\nof the damages suffered.\n\n\x0c72\n\nChapter 6 The Tort System\n\nConclusion\nIn some cases, a plaintiff suffers harm, but fault is not easily determined, or fault is not the issue. A defendant\ncan exercise reasonable care while the nature of the activity lends itself to risk of harm. Products could have\nobvious or hidden defects that cause harm to another. When defects occur, the plaintiff has the ability to file a\ncivil suit against the entity that is responsible for the harm-causing defect. The plaintiff might also share some\nresponsibility in the harm, and based on product liability, the court decision will be adjusted accordingly.\n\nAssessment Questions\n1. Define Torts.\n2. An example of an intentional tort is:\na. Defamation.\nb. Assault.\nc. Malicious prosecution.\nd. All of the above.\n3. When an individual creates and promotes malicious falsehoods about another that individual may be liable\nfor:\na. Libel.\nb. Slander.\nc. Defamation.\nd. All of the above.\n4. Describe Negligence.\n5. All of the following are elements of negligence except:\na. A reasonable person.\nb. A duty by the defendant to either act or refrain from acting.\nc. A breach of a duty owed by defendant.\nd. Measurable harm.\n6. Which of the following is a special relationship giving rise to a duty to act to aid or protect one in peril?\na. Hotel and guest.\nb. Cousin to cousin.\nc. School principal and student.\nd. Hotel and guest, and school principal and student.\n7. If an activity causes a foreseeable and highly significant risk of physical harm even when reasonable care is\nexercised by all actors, and the activity is not one of common usage, it is:\na. Proximate cause.\nb. Abnormally dangerous.\nc. Negligence.\nd. None of these are correct.\n8. What is an attractive nuisance?\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 6 The Tort System\n\n73\n\n9. The elements of res ipsa loquitor that a plaintiff must establish in a product liability lawsuit include all of the\nfollowing except:\na. The defendant breached his or her duty of care.\nb. The defendant had control over the product in question while it was being manufactured.\nc. Under normal circumstances, the product would not cause damage or harm, but damage or harm has\noccurred in the case in question.\nd. The behavior of the plaintiff did not significantly contribute to the harm caused.\n10. Describe the differences between contributory and comparative negligence.\n\nEndnotes\nBaime. E. (2018). Fundamentals of tort law. Retrieved from: https://nationalparalegal.edu/\nFundamentalsTortLaw.aspx.\nCornell Law School. (n.d.). Tort. Retrieved from: https://www.law.cornell.edu/wex/tort.\nKionka, E. J. (2013). Torts (5th ed.). St. Paul, MN: West Academic Publishing. Retrieved from:\nhttps://lscontent.westlaw.com/images/content/Torts5th.pdf.\nBaime. E. (2018). Fundamentals of tort law. Retrieved from: https://nationalparalegal.edu/\nFundamentalsTortLaw.aspx.\nCCBC Legal Studies (n.d.) Strict liability. Retrieved from: https://ccbclegalstudiesbusinesslaw.wordpress.com/\nunit-1-foundations-of-law/torts/strict-liability/.\nKionka, E. J. (2013). Torts (5th ed.). St. Paul, MN: West Academic Publishing. Retrieved from:\nhttps://lscontent.westlaw.com/images/content/Torts5th.pdf.\n\n\x0c74\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\nChapter 6 The Tort System\n\n\x0c7\n\nContract Law\nFigure 7.1 (Credit: edar/ pixabay/ Attribution 2.0 Generic (CC BY 2.0))\n\nChapter Outline\n7.1 Consideration and Promissory Estoppel\n7.2 Capacity and Legality\n7.3 Breach of Contract and Remedies\n\nIntroduction\nLearning Outcome\n\xe2\x80\xa2 Analyze the principles of contract law and how they apply to businesses.\n\n7.1\n\nConsideration and Promissory Estoppel\n\nA contract is defined as an agreement between two or more parties that is enforceable by law.\nTo be considered enforceable by law, a contract must contain several elements, including offer and\nacceptance, genuine agreement, consideration, capacity, and legality.\n\n\x0c76\n\nFigure 7.2\n\nChapter 7 Contract Law\n\nBefore a contract can become legal and enforceable, several elements must first be in place.\n\n(Credit: rawpixel/ pixabay/ License: CC0)\nThe key to a contract is that there must be an offer, and acceptance of the terms of that offer. An offer is a\nproposal made to demonstrate an intent to enter a contract. Acceptance is the agreement to be bound by the\nterms of the offer. Offers must be made with intent, must be definite and certain (i.e., the offer must be clearly\nexpressed for it to be enforceable), and must be communicated to the offeree. An acceptance must\ndemonstrate the willingness to consent to all of the terms of the offer.\nGenuine agreement, i.e., \xe2\x80\x9ca meeting of the minds,\xe2\x80\x9d is also required. Agreement can be destroyed by fraud,\nmisrepresentation, mistake, duress, or undue influence.\nConsideration must be included in contracts. Consideration is a thing of value promised in exchange for\nsomething else of value. This mutual exchange binds the parties together.\nCapacity to contract is the next element required for a valid agreement. The law presumes that anyone\nentering a contract has the legal capacity to do so. Minors are generally excused from contractual\nresponsibility, as are mentally incompetent and drugged or drunk individuals.\nFinally, legality is the last element considered. Parties entering into contracts that involve illegal conduct may\nnot expect judicial relief to have that contract enforced. This theory has also been applied to conduct that\nwould be considered in opposition to public policy.\n\nConsideration and Promissory Estoppel\nContract law employs the principles of consideration and promissory estoppel.\n\nConsideration\nIn most cases, consideration need not be pecuniary (monetary). Most contracts are enforceable only if each\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 7 Contract Law\n\n77\n\nparty gets consideration from the agreement. Consideration can be money, property, a promise, or some\nright. For instance, when a music company sells studio equipment, the promised equipment is the\nconsideration for the buyer. The seller\xe2\x80\x99s consideration is the money the buyer promises to pay for the\nequipment.\n\nPromissory Estoppel\nThe promissory estoppel doctrine is an exception to the requirement of consideration for contracts.\nPromissory estoppel is triggered when one party acts on the other party\xe2\x80\x99s promise. In cases where it is\ntriggered, there is harm or severe injustice to the party who acted because they relied on the other party\xe2\x80\x99s\nbroken promise.\nThe doctrine of promissory estoppel allows aggrieved parties to pursue justice or fairness for the performance\nof a contract in court, or other equitable remedies, even in the absence of any consideration. Its legal\napplication may vary from state to state, but the basic elements include:\n\xe2\x80\xa2 A legal relationship existed between the parties.\n\xe2\x80\xa2 A promise was made.\n\xe2\x80\xa2 There was reliance on the promise that caused one party to act before any real consideration was\nexchanged.\n\xe2\x80\xa2 A substantial and measurable detriment occurred as a result of the failure to perform on the contract.\n\xe2\x80\xa2 An unconscionable result, or gross injustice, resulted from the broken promise.\nIf it is found that these elements are satisfied and that the doctrine of estoppel is applicable, then the court will\nissue the appropriate damages in the form of reliance damages to restore the aggrieved party to the position\nthey were in prior to the broken promise. Expectation damages are not usually available if promissory\nestoppel is being claimed.\nAn example of how this principle would apply is:\n\nEXAMPLE 7.1\nAfter a bidding war for his services, Bob turns down a job offer with We are the Best, LLC in Miami, Florida\n(where he lives), and accepts a dream job offer from MegaCorp Co. in San Francisco, California. The offer\ncontains a specific start date, compensation terms, benefits outline, and more. However, it does not include\nrelocation expenses or provisions. The company is aware of his plans to move across the country for the sole\npurpose of taking this dream role. Bob breaks his Miami lease with penalty and spends approximately\n$13,000 in moving and travel costs. As the cost of living in San Francisco is much higher than in Miami, he\nputs down a much pricier first and last month\xe2\x80\x99s rent and security deposit payment than he is used to. Within\ntwo days of his planned start date, he receives a call from management at MegaCorp Co. stating that the\ncompany has changed its mind and decided to go in a different direction. If Bob brings a promissory\nestoppel suit, he will likely be entitled to all of the costs that he incurred while anticipating the start of the\npromised role (i.e., penalty for the broken lease, moving costs, difference in the rental costs, cost of breaking\nthe new lease, if necessary, etc.) Following reimbursement of his costs, Bob will be returned to the same\nposition he was in prior to the broken promise. However, the company will not likely be required to reopen\n\n\x0c78\n\nChapter 7 Contract Law\n\nthe role for him or give him the job, as originally anticipated. Also, he will not likely be awarded any damages\nfor the job that he turned down with We are the Best, LLC, as expectation damages are not usually available.\nThe doctrines of consideration and promissory estoppel are essential to an understanding of how contracts\nare formed and enforced in the United States.\n\n7.2\n\nCapacity and Legality\n\nFor a contract to be legally binding, the parties entering into the contract must have the capacity to do so. As\na legal matter, there are certain classes of people who are presumed to have no capacity to contract. These\ninclude legal minors, the mentally ill, and those who are intoxicated. If people meeting these criteria enter into\na contract, the agreement is considered voidable. If a contract is voidable, then the person who lacked\ncapacity has the choice to either end the contract or continue with it as agreed upon. This design is meant to\nprotect the party lacking capacity.\nFollowing are some examples of the application of these rules.\n\nMinors Have No Capacity to Contract\nIn most states, minors under the age of 18 lack the capacity to make a contract and may therefore either\nhonor an agreement or void the contract. However, there are a few exceptions to this rule. In most states, a\ncontract for necessities (i.e. food and clothing) may not be voided. Also, in most states, the contract can no\nlonger be voided when the minor turns 18.\n\nEXAMPLE 7.2\nMary, 16, an athlete, signs a long-term endorsement deal with a well-known brand and is compensated for\nseveral years. At age 20, she decides she wants to take a better endorsement deal, so she tries to void the\nagreement on the grounds that it was made when she was a minor and that she lacked capacity at that time.\nMary will not likely succeed in having her agreement voided, as she has passed the period of incapacity.\n\nMental Incapacity\nIf a person lacks the mental capacity to enter a contract, then either he or she, or his or her legal guardian,\nmay void it, except in cases where the contract involved necessities. In most states, mental capacity is\nmeasured against the \xe2\x80\x9ccognitive standard\xe2\x80\x9d of whether the party understood its meaning and effect.\n\nEXAMPLE 7.3\nMr. Williams contracted to sell a patent. Later, however, he claimed that he lacked capacity to enter the\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 7 Contract Law\n\n79\n\nagreement. He, therefore, sought to have the contract voided. Williams based his claim on the fact that he\nhad been diagnosed as manic-depressive and had received treatment from a variety of mental hospitals for\nthis condition. His doctor stated that he was unable to properly evaluate business opportunities and\ncontracts while in a \xe2\x80\x9cmanic\xe2\x80\x9d state. A California Court of Appeals, evaluating a similar situation, refused to\nterminate the contract and stated that even in his manic state, the party was capable of contracting, as his\ncondition may have impaired his judgment but not his understanding of the contract. With other mental\nconditions, a different legal conclusion could be reached.\n\nVoluntary Intoxication \xe2\x80\x93 Drugs and Alcohol\nCourts generally do not find lack of capacity to contract for people who are voluntarily intoxicated. The\nrationale for this decision is found in the reasoning that individuals should not be allowed to side-step their\ncontractual obligations by virtue of their self-induced states. By another token, however, courts also seek to\navoid the undesirable result of allowing the sober party to take advantage of the other person\xe2\x80\x99s condition.\nTherefore, if a party is so inebriated that he or she is unable to understand the nature and consequences of\nthe agreement, then the contract may be voided by the inebriated party.\n\nEXAMPLE 7.4\nIn the late 1900s, the owner of a significant amount of stock went on a three-month drinking binge. A local\nbank that was aware of his consistent inebriation hired a third party to contract with him. The third party\nsucceeded in getting him to sell his stock for about 1.5% of the worth of its total value. When the duped\nseller ended his binge a month later, he learned that the third party had sold the stock to the local bank\nbehind the deal. He then sued the third party. Ultimately, the case was decided by the U.S. Supreme Court,\nwhich found that the agreement was void because both the bank and the third party knew that the plaintiff\nwas unaware of what he was doing when he entered the contract. The bank was required to return the\nshares to the plaintiff, minus the 1.5% amount of real value that he had been paid for the shares.\n\nLegality\nContracts must be created for the exchange of legal goods and services to be enforced. An agreement is void\nif it violates the law, or is formed for the purpose of violating the law. Contracts may also be found voidable if\nthey are found violative of public policy, although this is rarer. Typically, this conclusion is only invoked in clear\ncases where the potential harm to the public is substantially incontestable, eluding the idiosyncrasies of\nparticular judges.\nFor a contract to be binding, it must not have a criminal or immoral purpose or go against public policy. For\nexample, a contract to commit murder in exchange for money will not be enforced by the courts. If performing\nthe terms of the agreement, or if formation of the contract, will cause the parties to engage in activity that is\nillegal, then the contract will be deemed illegal and will be considered void or \xe2\x80\x9cunenforceable,\xe2\x80\x9d similar to a\nnonexistent contract. In this case, there will not be any relief available to either party if they breach the\ncontract. Indeed, it is a defense to a breach of contract claim that the contract itself was illegal.\n\n\x0c80\n\nChapter 7 Contract Law\n\nEXAMPLE 7.5\nIn a state where gambling is illegal, two parties enter into an employment contract for the hiring of a\nblackjack dealer. The contract would be void because the contract requires the employee to perform illegal\ngambling activities. If the blackjack dealer tries to recover any unpaid wages for work completed, his claim\nwill not be recognized because the courts will treat the contract as if it never existed.\nBy contrast, parties enter a contract that involves the sale of dice to a known dealer in a state where\ngambling is unlawful. The contract would not be considered void because the act of selling dice, in and of\nitself, is not illegal.\nSome examples of contracts that would be considered illegal are contracts for the sale or distribution of illegal\ndrugs, contracts for illegal activities such as loansharking, and employment contracts for the hiring of\nundocumented workers.\nAn understanding of the several theories outlined herein for establishing (or challenging) capacity and legality\nin contract law is essential to this area of law.\n\n7.3\n\nBreach of Contract and Remedies\n\nOnce a contract is legally formed, both parties are generally expected to perform according to the terms of the\ncontract. A breach of contract claim arises when either (or both) parties claim that there was a failure, without\nlegal excuse, to perform on any, or all, parts and promises of the contract.\nSeveral inquiries are triggered when a breach of contract claims is initiated. The first step is to determine\nwhether a contract existed in the first place. If it did, the following questions may be asked: What did the terms\nof the contract require of the parties? Were the contractual terms modified at any point? Did the breach\nactually occur? Was the claimed breach material to the contract? Does any legal excuse or defense to\nenforcement of the contract exist? What damages were caused by the breach?\n\nMaterial vs. Minor Breach\nThe parties\xe2\x80\x99 obligations and remedies for a breach of contract depend on whether the breach is considered\nmaterial or minor.\nWhen something substantially different from what was expected under the terms of the contract is delivered,\nthe breach will be considered material. For example, the breach will be considered material if the contract\npromises the delivery of Christmas ornaments, but the buyer receives a box of candies. In the case of a\nmaterial breach, the non-breaching party has the right to all remedies for breach of the entire contract and is\nno longer expected to perform their obligations. In considering whether a breach is material, courts will\ndetermine whether the non-breaching party still received a benefit, and if so, how much was received,\nadequate compensation for the damages, the extent of the performance (if any) by the breaching party, any\nhardship to the breaching party, the negligence or intent behind the behavior of the breaching party, and\nfinally, the possibility that the breaching party will perform the remainder of the contract.\nThere are times, however, that despite the breaching party\xe2\x80\x99s failure to perform some of the contract, the other\nparty still receives a majority of the goods or services specified in the contract. In this case, the breach will be\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 7 Contract Law\n\n81\n\nconsidered minor. For example, the breaching party may be late on delivering goods or services promised\nunder a contract that does not specify a firm delivery date and that doesn\xe2\x80\x99t state that time is of the essence. In\nthis case, a reasonably short delay would likely only be considered a minor breach of the contract.\nConsequently, the non-breaching party would still be required to perform as pursuant to the contract.\nHowever, damages may be available to them if they suffered some harm as a result of the delay.\n\nRemedies\nTypically, the remedies that will be available if a breach of contract is found are money damages, restitution,\nrescission, reformation, and specific performance.\n\nFigure 7.3\n\nWhen there is a breach of contract, the courts might get involved to help determine the remedy.\n\n(Credit: succo/ pixabay/ License: CC0)\nMoney damages include compensation for financial losses caused by the breach.\nRestitution restores the injured party to status quo or the position they had prior to the formation of the\ncontract, by returning to the plaintiff any money or property given pursuant to the contract. This type of relief\nis typically sought when a contract is voided by courts due to a finding that the defendant is incompetent or\nlacks capacity.\nRescission or reformation may be available to parties who enter into contracts by mistake, fraud, undue\ninfluence, or duress. Rescission terminates the duties of both parties under the contract, while reformation\nallows courts to equitably change the contract\xe2\x80\x99s substance.\nSpecific performance compels one party to perform the promises stated in the contract as nearly as\npracticable. Specific performance is only mandated when money damages do not adequately compensate for\nthe breach. Personal service, however, may not be used to compel specific performance, since doing so would\n\n\x0c82\n\nChapter 7 Contract Law\n\nconstitute forced labor, i.e. slavery, which is in violation of the U.S. Constitution.\nInevitably, when valid contracts are created, the potential for breach exists. An understanding of what\nhappens when a contract\xe2\x80\x99s terms are breached is fundamental to an understanding of contract law.\n\nAssessment Questions\n1. What is the definition of a contract?\n2. The elements of a contract include all but the following element:\na. Offer and acceptance.\nb. Consideration.\nc. Capacity.\nd. Promissory Estoppel.\n3. What are the ways an agreement can be invalidated?\na. Fraud.\nb. Misrepresentation.\nc. Undue influence.\nd. All of the above.\n4. Describe the concept of Promissory Estoppel.\n5. Consideration may include any of the following except:\na. A promise.\nb. A gift.\nc. Property.\nd. Money.\n6. What happens when a person lacks the legal capacity to enter into a contract?\n7. Which of the following is most likely to be classified as a necessity for which a minor will be held liable on a\ncontract?\na. A television.\nb. School supplies.\nc. Education.\nd. Food.\n8. A minor can avoid a contract to purchase a car if:\na. The car has been destroyed.\nb. The car has been damaged.\nc. He or she grows tired of it.\nd. All of the above.\n9. When can a mentally incompetent person void a contract?\n10. Examples of illegal contracts include all but the following:\na. Contracts for the sale or distribution of heroin.\nb. Contracts for loansharking.\nc. Contracts in consideration of marriage.\nd. Employment contracts for the hiring of undocumented workers.\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 7 Contract Law\n\n83\n\n11. Define a material breach.\n12. Typical remedies available for a breach of contract include:\na. Money damages.\nb. Rescission.\nc. Specific Performance.\nd. All of the above.\n13. Distinguish between rescission and reformation.\n14. Courts of equity will not grant specific performance of contracts:\na. For a personal service contract.\nb. For the sale of real estate.\nc. For the sale of the original manuscript of a rare edition book.\nd. All of these are correct.\n15. Define restitution.\n\nEndnotes\nPromissory Estoppel: Requirements and Limitations of the Doctrine. University of Pennsylvania Law School.\nRetrieved from: https://scholarship.law.upenn.edu/cgi/\nviewcontent.cgi?article=9407&context=penn_law_review.\nPromissory Estoppel as a Substitute for Consideration. LawShelf Educational Media. Retrieved from:\nhttps://lawshelf.com/videos/entry/contract-law-promissory-estoppel-as-a-substitute-for-consideration.\nUS Legal, Inc. Consideration. Contracts. Retrieved from: https://contracts.uslegal.com/consideration/.\nStim, R. Consideration: Every Contract Needs It. Nolo. 23 Apr. 2015. Retrieved from: www.nolo.com/legalencyclopedia/consideration-every-contract-needs-33361.html.\nWhat Is \xe2\x80\x98Consideration\xe2\x80\x99 and How Much Is Required? Findlaw. Retrieved from:\nhttps://smallbusiness.findlaw.com/business-contracts-forms/what-is-consideration-and-how-much-isrequired.html.\nBradley, J. The Legal Capacity of a Contract. November 21, 2017. Retrieved from:\nhttps://smallbusiness.chron.com/legal-capacity-contract-62816.html.\nCapacity To Enter Into Contracts \xe2\x80\x93 Contract Law. https://laws.com/. Retrieved from: https://contractlaw.laws.com/legality/capacity-to-enter-into-contracts.\nCan a Minor Enter into a Contract? HG.org. Retrieved from: https://www.hg.org/legal-articles/can-a-minorenter-into-a-contract-34024.\nBreach of Contract, Remedies that can be Pursued. HG.org. Retrieved from: https://www.hg.org/legal-articles/\nbreach-of-contract-legal-remedies-that-can-be-pursued-22797.\nRemedies for Breaches of Contract. LawTeacher. Retrieved from: https://www.lawteacher.net/free-law-essays/\ncontract-law/remedies-for-breaches-of-contract-law-essay.php.\nContracts\xe2\x80\x94termination and contractual claims and remedies\xe2\x80\x94overview. Lexis PSL. Retrieved from:\nhttps://www.lexisnexis.com/uk/lexispsl/bankingandfinance/document/391289/5FKMGJ81-F185-X1CM-00000-00/Contracts_termination_and_contractual_claims_and_remedies_overview.\n\n\x0c84\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\nChapter 7 Contract Law\n\n\x0c8\n\nSales Contracts\nFigure 8.1 (Credit: JESHOOTS-com/ pixabay/ Attribution 2.0 Generic (CC BY 2.0))\n\nChapter Outline\n8.1 The Nature and Origins of Sales Contracts\n8.2 Warranties and Sales Contracts\n\nIntroduction\nLearning Outcome\n\xe2\x80\xa2 Recognize nuances of contracts pertaining to sales.\n\n8.1\n\nThe Nature and Origins of Sales Contracts\n\nFeatures of Sales Contracts\nCommercial enterprises that engage in buying and selling practices need to be aware of the features and\nnature of sales contracts. A contract of sale is a specific type of contract in which one party is obligated to\ndeliver and transfer ownership of a good to a second party, who in turn is obligated to pay for the good in\nmoney, or its equivalent. The party who is obligated to deliver the good is known as the vendor or seller. The\nparty who is obligated to pay for the good is known as the vendee or buyer.\nIt has generally been established that there are six main features of sales contracts. Sales contracts are:\n1. Consensual: they are perfected by mere consent without the need for any additional acts\n2. Bilateral: both parties in the contract are bound to fulfill reciprocal obligations toward each other\n3. Onerous: the good sold is conveyed in consideration of the price, and the price paid is conveyed in\nconsideration of the good\n\n\x0c86\n\nChapter 8 Sales Contracts\n\n4. Commutative: the good sold is considered to be the equivalent of the price, and vice versa\n5. Nominate: this type of contract has a special designation (i.e., sale)\n6. Principal: the validity does not depend upon the existence of other contracts\n\nSources of Law for Sales Contracts\nOnly in very limited circumstances (such as in the buying and selling of stocks) does federal law govern sales\ncontracts. Until the 1950s, there were two main sources of law for sales contracts: state common law and state\nstatutory law. Thus, the laws governing sales contracts differed from state to state. As interstate commercial\nactivity grew in importance, there was a need for a uniform law for sales transactions that would harmonize\nrules across the states. Therefore, in 1952, the Uniform Commercial Code (UCC)was created to govern\nbusiness transactions. All 50 states have adopted the Code, but each has the power to modify it, in line with\nthe wishes of the state legislature.\n\nThe Uniform Commercial Code\nThe UCC categorizes items that can be bought or sold into three types:\n1. Goods are defined in Section 2-105 of the UCC as tangible items \xe2\x80\x9cwhich are movable at the time of\nidentification to the contract for sale.\xe2\x80\x9d Therefore, the primary features of goods are that they are movable\nand tangible. Refrigerators, paper, and furniture are all examples of goods.\n2. Services are items that are movable but not tangible. Accounting is an example of a service.\n3. Realty describes non-good items that are tangible but not movable. Under this definition, commercial\nand residential property are classed as realty.\nThese definitions have created some grey areas that have been clarified by the courts in their interpretation of\nthe UCC. In the 2008 case Crown Castle Inc. et al. v. Fred Nudd Corporation et al., a case in which the\ntelecommunications company Crown Castle sued a cell phone tower installation firm for the construction of\nfaulty towers, the courts had to determine whether cell phone towers (monopoles) should be classified as\nmovable (and hence goods) or non-movable (and therefore realty). Ultimately, it was determined that\nmonopoles are goods. Items that are attached to realty (e.g. a counter or a bar) and that are used for business\nactivities are described as trade fixtures and treated as goods. Software licenses are not tangible, but they are\nalso not movable, and have been treated in different ways: as goods, a mixed sale (a tangible item tied to an\nintangible item), and pure services. Items such as soil and clay may be treated as goods even if they are part of\nimmovable land because they can be extracted and moved. Crops that are sold while they are still growing on\nthe land are also considered to be goods even though they are technically immovable while growing.\nArticle 2 of the UCC specifically pertains to sales contracts of goods. It defines a sale as a transaction that\ninvolves \xe2\x80\x9cthe passing of title from the seller to the buyer for a price.\xe2\x80\x9d However, merchants are classified as a\nseparate entity under the terms of the UCC. This distinction is important because the Code contains provisions\nthat specifically apply to merchants and place greater duties on merchants to protect private citizens. There\nare four ways in which an entity can be classified as a merchant:\n\nClassification\n\nExamples\n\nTable 8.1\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 8 Sales Contracts\n\n87\n\nAn agent who regularly sells goods as part of\n\nA seller on an online auction site\n\nhis or her business or trade\nAn individual who employs other people to sell\n\nThe owner of a clothing store\n\ngoods\nA person who works for a person who sells\n\nAn employee at a grocery retailer\n\ngoods\nAny entity who self-identifies as a merchant\n\nAn individual who describes himself or herself as a\nmerchant in corporate documents\n\nTable 8.1\n\nFormation of Sales Contracts under the UCC\nSales contracts require most of the same components as general contracts, but the UCC includes some\nprovisions that specifically pertain to the creation of sales contracts. First, the UCC includes a new category of\noffer. Basic contract law states that for an offer to be valid, it has to have \xe2\x80\x9cdefiniteness of terms.\xe2\x80\x9d In the UCC,\nmost of that particular rule is modified for greater flexibility. If the parties have \xe2\x80\x9copen\xe2\x80\x9d (in other words, \xe2\x80\x9cnot\ndefinite\xe2\x80\x9d) terms, the UCC addresses the situation with an overlay of \xe2\x80\x9creasonableness\xe2\x80\x9d\xe2\x80\x94for example, if no time\nfor performance is designated, the performance must occur within a \xe2\x80\x9creasonable\xe2\x80\x9d time. As a result, the\nfollowing terms are legally allowed to be \xe2\x80\x9copen,\xe2\x80\x9d and there is a \xe2\x80\x9cdefault\xe2\x80\x9d provision that will apply under the\nUCC:\n\nOpen Term\n\nDefault\n\nApplicable\nUCC\nProvision\n\nPrice\n\nIf price is not named, the default is \xe2\x80\x9creasonable price.\xe2\x80\x9d\n\nUCC\n2-305(1)\n\nPayment\n\nIf payment is not named, default is \xe2\x80\x9cdue at the time and place at\n\nUCC\n\nwhich the buyer is to receive the goods.\xe2\x80\x9d\n\n2-310(a)\n\nIf delivery is not named, the default is \xe2\x80\x9cbuyer normally takes delivery\n\nUCC\n\nat the seller\xe2\x80\x99s place of business.\xe2\x80\x9d\n\n2-308(a)\n\nDuration of an\n\nIf duration of an ongoing contract is not named, the default is \xe2\x80\x9cbuyer\n\nUCC\n\nOngoing\n\nnormally takes delivery at the seller\xe2\x80\x99s place of business.\xe2\x80\x9d\n\n2-308(a)\n\nDelivery\n\nContract\nTable 8.2\nThe only term that really cannot be left open is the quantity term. The court is not going to second-guess a\nquantity if the parties don\xe2\x80\x99t set one in the contract\xe2\x80\x94for example, why would the court arbitrarily want to force\n\n\x0c88\n\nChapter 8 Sales Contracts\n\nthe parties to buy and sell 15,000 widgets if a quantity wasn\xe2\x80\x99t specified? There are two exceptions to this rule:\nrequirements contracts (\xe2\x80\x9cas much as I need\xe2\x80\x9d) and output contracts (\xe2\x80\x9cas much as you can produce\xe2\x80\x9d). Even\nthough these ideas are illusory, they\xe2\x80\x99re generally allowed in the commercial setting with good-faith limitations\nunder UCC 2-306.\nSometimes, however, the courts will not allow purported \xe2\x80\x9crequirements\xe2\x80\x9d contracts. In one case, a court ruled\nthat the contract was an unenforceable illusory contract instead of an enforceable requirements contract, even\nthough it was a contract for the sale of goods (\xe2\x80\x9cas much as I need\xe2\x80\x9d). The reason for this ruling was that it did\nnot appear that the buyer had any real intention of going through with any purchase.\nUnder Section 2-205 of the UCC, offers made by merchants are considered to be firm offers if the offers are\nmade in writing and explicitly state that there is a three-month irrevocability period. A three-month\nirrevocability period is assumed if no mention is made with the offer. Acceptance of the offer can be made in\nany reasonable manner, but the mirror-image rule does not apply under the UCC. This means that if the\nterms of the acceptance do not mirror those of the offer, the acceptance is treated as a counteroffer and no\nlegal contract is formed. Sale of goods contracts must be in writing if the value of the goods is $500 or more.\nModifications to the contract must be made in good faith, and new consideration is not required. A contract\nprovision, or the entire contract itself, can be considered to be unconscionable if its terms are unfair or\nunreasonable. If a court deems this to be the case, the contract, or certain provisions of it, may be\nunenforceable.\n\nTitle\nTitle means ownership of a good. When the sale is completed, an agent must pass the title for the good to the\nbuyer. There are three types of titles:\n1. Good title describes a title that is obtained from an individual who owns the goods free and clear.\n2. Void title occurs when the title is passed to the buyer from a person who does not legitimately own the\ntitle. An important point is that good faith is irrelevant when a void title is acquired. For example, a person\nwho unknowingly purchased stolen goods has a void title. An exception occurs when an owner entrusts\ngoods to a merchant who ordinarily deals in those goods, and then that merchant sells the goods to a\ngood-faith buyer. In this case, the buyer acquires a good title. For example, if a motorcycle owner takes\nthe motorcycle to a vehicle repair shop and the motorcycle is accidentally sold, the buyer acquires the\ntitle.\n3. Voidable title occurs when the contract would have been good, but certain circumstances make it\nvoidable. For example, if the buyer was deceitful about his or her true identity, the buyer is a minor, or the\nbuyer wrote a bad check in the sale, then the title is deemed voidable.\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 8 Sales Contracts\n\nFigure 8.2\n\n89\n\nA sale is defined as a transaction that involves the passing of a title from the seller to the buyer\n\nfor a price. (Credit: Negative Space/ pexels/ License: CC0)\n\nIssues Associated with Title\nImagine the following scenario: A caf\xc3\xa9 purchases a new coffee machine from a supplier. However, when the\nsupplier tries to deliver the equipment to the caf\xc3\xa9, it is involved in an accident and the coffee machine is\ndestroyed. A question emerging from this scenario is this: Is the supplier legally obligated to replace the\nmachine? Asked differently: Who holds the good title in this scenario?\nPrior to the introduction of the Uniform Common Code, the loss would have fallen on the owner of the caf\xc3\xa9,\nsince he or she paid for the coffee machine prior to taking possession of it. Under the UCC, however, as long\nas the supplier is considered a merchant, the risk of loss remains with the merchant until the buyer takes\npossession of the good.\nGiven problems like the one described above, the UCC separately considers four specific issues relating to\ntitles:\n\xe2\x80\xa2 Ownership. Under consideration is the question of when the title transfers from vendor to vendee, and\nhence when ownership is said to occur.\n\xe2\x80\xa2 The concept of encumbrance considers when the vendee is granted an interest in the good such that the\ngood can be used as collateral for a debt.\n\xe2\x80\xa2 The UCC considers when the risk of loss attaches and what the responsibilities of the buyer and seller are\nto each other, should a loss occur.\n\xe2\x80\xa2 Insurable interest is the right to insure the goods against exposure to risk of loss or damage\nThe UCC allows four scenarios for sales contracts: simple delivery contracts, common-carrier delivery\ncontracts, goods-in-bailment contracts, and conditional sales contracts.\nEach type involves the title, risk of loss, and insurable interest passing at different times.\nA simple delivery contract occurs when the goods are transferred from the buyer to the seller at the time of\nthe sale or later, e.g., if the goods are delivered. Title transfers when the contract is executed, insurable\n\n\x0c90\n\nChapter 8 Sales Contracts\n\ninterest passes at the same time, and risk of loss transfers when the buyer takes possession, unless the seller\nis not a merchant. In the latter case, under the rule of tender of delivery, risk remains with the buyer.\nA common-carrier delivery contract occurs when a common carrier, who is an independent contractor\nrather than an agent of the seller (e.g., a trucking line), delivers the goods. The UCC further categorizes these\ntypes of contracts into shipment contracts and destination contracts:\n1. A shipment contract occurs when it is the responsibility of the seller to make the shipping arrangements\nand to transfer the goods to the common carrier. Under this contract, title passes to the buyer at the time\nof shipment, so the buyer bears the risk of loss, even when he or she has not taken possession of the\ngoods.\n2. A destination contract occurs when the seller is required to deliver the goods to a location that is\nstipulated in the contract. Under this contract, title transfers when the goods are delivered, but the seller\nbears the risk of loss until that time.\nA goods-in-bailment contract occurs when the goods are stored under the control of a third party, such as in\na warehouse or on a ship. Transfer of title and risk of loss depends on whether the seller has a document\nindicating ownership of the goods and whether that document is negotiable or non-negotiable. A negotiable\ndocument contains the words, \xe2\x80\x9cdeliver to the order of [seller].\xe2\x80\x9d As soon as that document is endorsed to the\nbuyer, both title and risk pass to the buyer. A non-negotiable document lacks those words. Under these\ncircumstances, title passes with the endorsement of the document, but risk of loss does not pass until the\ncustodian of the goods is notified of the title. If a document of title is completely absent, title passes at the\nsame time as the execution of the contract, but risk does not pass until the custodian is notified of, and\nacknowledges, the transaction. Insurable interest is created when either the buyer or seller has the title, risk of\nloss, or an economic interest in the goods.\nFinally, a conditional sales contract is a contract that occurs when the sale is dependent on approval. For\nexample, a sale-or-return agreement occurs when both parties agree that the buyer can return the goods at a\nlater date. Insurable interest is created once the goods are identified in the contract. Title and risk of loss\ndepend on whether the goods are delivered by the common carrier, the seller, or in bailment, as described\nabove.\n\nThe International Sale of Goods\nWith globalization, there has been a significant expansion of commercial transactions undertaken across\ninternational borders. The United Nations Convention on Contracts for the International Sale of Goods, or\nthe CISG, is the main legal structure offered for the governance of international commercial transactions. The\nCISG broadly covers the same topics as the UCC, but it preempts the UCC if there is a problem with an\ninternational sale.\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 8 Sales Contracts\n\n8.2\n\n91\n\nWarranties and Sales Contracts\n\nFigure 8.3\n\nThe law provides remedies for breach of sales contracts. (Credit: rawpixel/ pexels/ License: CC0)\n\nWarranties\nA warranty is a guarantee on the good that comes as part of the sales contract, but contract law treats\nwarranties as an additional form of contract that binds the selling party to undertake a certain action.\nTypically, the selling party has an obligation to provide a product that achieves a specified task, or to deliver a\nservice that meets certain minimal standards. Warranties are offered for a range of different goods and\nservices, from manufactured goods to real estate to plumbing services. The warranty assures the buyer that\nthe good or service is free from defects, and it is a legally binding commitment. In the event that the product\nor service fails to meet the standards set out in the warranty, then the contract provides a specific remedy,\nsuch as a replacement or repair.\nAccording to UCC 1-203, the performance and execution of all contracts must be undertaken in good faith.\nGood faith means honesty in fact and the observance of reasonable commercial standards of fair dealing. If\nthe parties in the contract are merchants, the UCC also requires that the contract be undertaken in accordance\nwith commercial reasonableness. This requirement means that the transaction should be undertaken in a\nsensible and prudent way.\n\nExpress and Implied Warranties\nWarranties can be express, implied, or both. Both express and implied warranties provide legal relief for the\npurchaser in the event of a breach of contract.\nAn express warranty is one in which the seller explicitly guarantees the quality of the good or service sold.\nTypically, the vendor provides a statement, or other binding document, as part of the sales contract. What this\nmeans in practice is that the buyer has engaged in the contract on the reasonable assumption that the quality,\nnature, character, purpose, performance, state, use, or capacity of the goods or services are the same as those\n\n\x0c92\n\nChapter 8 Sales Contracts\n\nstated by the seller. Therefore, the sales contract is based, in part, on the understanding that the goods or\nservices being supplied by the seller will conform to the description, or any sample, that has been provided.\nThere are myriad ways in which the seller can make statements as to the characteristics of the goods.\nHere are a few examples of express warranties:\n\xe2\x80\x9cWrinkle-free shirt\xe2\x80\x9d\n\xe2\x80\x9cLifetime guarantee\xe2\x80\x9d\n\xe2\x80\x9cMade in the USA\xe2\x80\x9d\n\xe2\x80\x9cThis orange juice is not from concentrate\xe2\x80\x9d\n\xe2\x80\x9c24k gold\xe2\x80\x9d\nThere is not a specific way that words must be formed to make an express warranty valid. Importantly, the\nsales contract does not need to explicitly state that a warranty is being intended. It is enough that the seller\nasserts facts about the goods that then become part of the contract between the parties. However, the courts\ndo apply a reasonableness test of reliance upon warranties. Puffery, or language used to bolster sales, is\nlawful, and the consumer is required to apply reason when evaluating such statements. For example, buyers\nare expected to use reason when judging seller claims such as \xe2\x80\x9cthis sandwich is the best in the world.\xe2\x80\x9d\nObvious sales talk cannot ordinarily be treated as a legally binding warranty.\nA breach of the warranty occurs when the express warranty has been found to be false. In such\ncircumstances, the warrantor is legally liable just as though the truth of the warranty had been guaranteed.\nThe courts do not accept as a defense:\n\xe2\x80\xa2 Seller claims the warranty was true.\n\xe2\x80\xa2 Seller claims due care was exercised in the production or handling of the product.\n\xe2\x80\xa2 Seller claims there is not any reason to believe that the warranty was false.\n\nImplied Warranties\nIn certain circumstances where no express warranty was made, the law implies a warranty. This statement\nmeans that the warranty automatically arises from the fact that a sale was made. With regard to implied\nwarranties, the law distinguishes between casual sellers and merchant sellers, with the latter held to a higher\nstandard, given that they are in the business of buying or selling the good or service rendered. For example,\nunless otherwise agreed, goods sold by merchants carry an implied warranty against claims by any third party\nby way of trademark infringement, patent infringement, or any other intellectual property law infringement.\nThis type of warranty is known as the warranty against infringement. Another implied warranty provided by\nmerchant sellers is the warranty of fitness for normal use, which means that the goods must be fit for the\nordinary purposes for which they are sold.\nIt is important to note that if express warranties are made, this does not preclude implied warranties. If an\nexpress warranty is made, it should be consistent with implied warranties, and can be treated as cumulative, if\nsuch a construction is reasonable. If the express and implied warranties cannot be construed as consistent\nand cumulative, the express warranty generally prevails over the implied warranty, except in the case of the\nimplied warranty of merchantability, or fitness for purpose.\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 8 Sales Contracts\n\n93\n\nBreaches of Warranty\nIf the buyer believes that there has been a breach of the implied warranty of merchantability, it is their\nresponsibility to demonstrate that the good was defective, that this defect made the good not fit for purpose,\nand that this defect caused the plaintiff harm. Typical examples of defects are:\n\xe2\x80\xa2 Design defects\n\xe2\x80\xa2 Manufacturing defects\n\xe2\x80\xa2 Inadequate instructions on the use of the good\n\xe2\x80\xa2 Inadequate warning against the dangers involved in using the good.\n\nSpecific Examples of Goods Under the Warranty of Merchantability\nType\n\nDescription\n\nSecond-\n\nThe UCC treats warranties arising for used goods in the same way as warranties arising for\n\nhand\n\nnew goods, but second-hand products tend to be held to a lower standard on the warranty of\n\ngoods\n\nmerchantability.\n\nBuyer-\n\nThe same warranties arise for mass manufactured goods as for goods that have been\n\ndesigned\n\nspecified or made to order for the buyer. However, in this case, no warranty of fitness for\n\ngoods\n\npurpose can arise since the buyer is using his or her own decisions, skill, and judgment when\nmaking the purchase.\n\nFood\n\nThe sale of food or drink carries the implied warranty of being fit for human consumption.\n\nand\ndrink\nTable 8.3\nThe buyer might intend to use the goods purchased for a different purpose than that for which it was sold. In\nthis case, the implied warranty holds only if the buyer relies on the seller\xe2\x80\x99s skill or judgment to select the\nproduct, the buyer informs the seller at the time of purchase of his or her intention for the use of the good,\nand the buyer relies on the seller\xe2\x80\x99s judgment and skill in making the final choice. If the seller is not made\naware of the buyer\xe2\x80\x99s true intention, or does not offer his or her skill and judgment in aiding the sale, then\nwarranty of fitness for a particular purpose does not arise. For this reason, it is common for vendors to include\nprovisions in the average terms and conditions of sale with regard to the true and intended purpose of use.\n\nWarranty of Title\nBy the mere act of selling, the vendor implies a warranty that the title is good and that the transfer of title is\nlawful. In addition, the act of the sale creates a warranty that the goods shall be delivered free from any lien of\nwhich the buyer was unaware. In some circumstances, the warranty of title can be excluded from the contract\ndocuments. For instance, when the seller makes the sale in a representative capacity (e.g. as an executor of an\nestate), then a warranty of title will not arise.\n\n\x0c94\n\nChapter 8 Sales Contracts\n\nRemedies to Buyers under the UCC\nRemedy\n\nDescription\n\nCancel the\n\nThe UCC allows buyers to cancel the contract for nonconforming goods and to seek\n\ncontract\n\nremedies that give them the benefit of the bargain.\n\nObtain cover\n\nBuyers are allowed to substitute goods for those due under the sales contract. However,\nsubstitutes must be reasonable, acquired without delay, and obtained in good faith.\n\nObtain\n\nIf the goods are unique or a legal remedy is inadequate, the seller may be required to\n\nspecific\n\ndeliver the goods as identified in the contract.\n\nperformance\nSue\n\nBuyers are entitled to consequential and incidental damages if there is a breach of\ncontract. They may also be able to obtain liquidated damages (damages before the breach\noccurs) or punitive damages.\n\nTable 8.4\n\nAssessment Questions\n1. What is a sales contract?\n2. All of the following are features of sales contracts except:\na. Consensual.\nb. Bilateral.\nc. Cumulative.\nd. Principal.\n3. What source of law governs sales contracts?\na. Common Law.\nb. The Uniform Commercial Code.\nc. Statutory Law.\nd. Federal Law.\n4. What is the definition of a good?\n5. Distinguish a shipment contract from a destination contract.\n6. What is a warranty in a sales contract?\n7. Describe the difference between an express and implied warranty.\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 8 Sales Contracts\n\n95\n\n8. Examples of a defect in a breach of the implied warranty of merchantability, include all of the following\nexcept:\na. Design defect.\nb. Manufacturing defect.\nc. Inadequate instructions.\nd. Product defect.\n9. The following are possible remedies to buyers under the UCC:\na. Cancel the contract.\nb. Obtain Cover.\nc. Sue.\nd. All of the above.\n10. What is a breach of warranty?\n\nEndnotes\nKubasek, N., Browne, M. N., Dhooge, L. J., Herron, D. J., Williamson, C., & Barkacs, L. L. (2015). Dynamic business\nlaw. McGraw-Hill Education.\nKubasek, N., Browne, M. N., Dhooge, L. J., Herron, D. J., Williamson, C., & Barkacs, L. L. (2015). Dynamic business\nlaw. McGraw-Hill Education.\n\n\x0c96\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\nChapter 8 Sales Contracts\n\n\x0c9\n\nEmployment and Labor Law\nFigure 9.1 (Credit: rawpixel/ pixabay/ Attribution 2.0 Generic (CC BY 2.0))\n\nChapter Outline\n9.1 Employment, Worker Protection, and Immigration Law\n9.2 Labor Law\n9.3 Equal Opportunity in Employment\n\nIntroduction\nLearning Outcome\n\xe2\x80\xa2 Analyze various laws governing employer/employee relationships.\n\n9.1\n\nEmployment, Worker Protection, and Immigration Law\n\nCompared to other countries in the West, stringent and extensive employee protections came fairly late to the\nUnited States. Up until 1959, for example, employers had the right to fire a worker without giving any reason.\nThis concept, which was was known as at-will employment, was applicable in all states. The concept of at-will\nemployment does, however, continue today, and all employees are considered to be at-will unless they are\nemployed under a collective bargaining agreement, or under a contract for a set duration. Employers can still\nfire employees for any reason, but they cannot be fired for illegal reasons, as set out in the U.S. or state\nconstitutions, federal law, state statutes, or public policy. In this section, some of the main employee rights\nand company responsibilities will be introduced.\n\n\x0c98\n\nFigure 9.2\n\nChapter 9 Employment and Labor Law\n\nEmployees have various rights in the workplace and companies have various responsibilities\n\ntoward them. (Credit: Raw Pixel/ pexels/ License: CC0)\n\nHealth and Safety\nWorkers have the right to be safe at work, and companies have responsibilities to employees in the event that\nthey are harmed while undertaking work on behalf of the employer. The Occupational Safety and Health\nAct, passed in 1970, is the main legislative action that governs health and safety in the workplace. The Act\nestablished the Occupational Safety and Health Administration (OSHA), which is a federal agency whose\nrole is to \xe2\x80\x9cassure safe and healthy working conditions for working men and women by setting and enforcing\nstandards and by providing training, outreach, education and assistance.\xe2\x80\x9d Private employers and federal\ngovernment agencies are all covered under OSHA protection, although the self-employed and workers at state\nand local governments in most states are not covered. OSHA has adopted thousands of regulations to enforce\nthe Occupational Safety and Health Act. It imposes a number of record-keeping and reporting requirements\non private employers. In addition, employers are required to inform employees of their health and safety\nrights by posting appropriate notices in the workplace.\n\nType of\n\nDescription\n\nExample\n\nSpecific\n\nStandards that apply to specific types of work,\n\nSafe handling of compressed gas\n\nDuty\n\nprocedures, work conditions, and equipment\n\ncylinders\n\nOSHA\nStandard\n\nStandards\nTable 9.1\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 9 Employment and Labor Law\n\n99\n\nGeneral\n\nStandards that apply to all employers and that impose\n\nStandards pertaining to indoor air\n\nDuty\n\na duty to protect workers from known hazards\n\nquality and workplace violence\n\nStandards\nTable 9.1\nWorkers\xe2\x80\x99 Compensation Acts help employees claim compensation for injuries that occur on the job. States\nrequire employers to either purchase workers\xe2\x80\x99 compensation insurance, or have the ability to self-insure\nagainst compensation claims. Workers\xe2\x80\x99 compensation insurance covers a range of different injuries, including\nphysical injuries, mental illnesses that can be shown to be employment-related, and stress.\nUnder the terms of the Acts, a Workers\xe2\x80\x99 Compensation Agency is established at the state level to provide\njudicial and administrative services to help in the resolution of claims for compensation. In the event of a\nclaim, a three-step process is put into place:\n1. The worker files a claim with the agency.\n2. The agency establishes the legitimacy of the claim.\n3. If the injury is determined to be legitimate, compensation benefits are paid accordingly.\nIt is important to note that workers\xe2\x80\x99 compensation is understood to be an exclusive remedy. This term means\nthat workers cannot sue the employer in court for further damages beyond that which is paid out under the\ncompensation claim. An exception is made when the employer intentionally injures the worker, however.\nFurthermore, workers have the right to sue any third party involved in the cause of the injury to recover\nadditional damages.\n\nCase Insight\nIn the case Chad A. Kelley v. Marsha P. Ryan, Administrator, Ohio Bureau of Workers\xe2\x80\x99 Compensation, and CocaCola Enterprises, Chad A. Kelley attended a team-building event held by his employer, Coca-Cola, to celebrate\nthe launch of a new product. All employees attending the event were required to canoe down a river, which\nKelley, with colleagues, achieved without incident. Employees waiting on the river bank began to splash one\nanother, and according to witnesses, Kelley said that it would take more than some splashing to get him wet.\nConsequently, several colleagues tried to throw Kelley into the water, which led him to sustain neck injuries.\nThe Ohio Bureau of Workers\xe2\x80\x99 Compensation denied Kelley\xe2\x80\x99s claim for benefits, however, arguing that Kelley\nhad instigated \xe2\x80\x9chorseplay\xe2\x80\x9d that removed the incident from the scope and course of employment. In 2009, an\nappellate court ruled that this conclusion was incorrect and that the employer was, in fact, responsible. Kelley\nwas entitled to the compensation.\n\nFair Labor Standards Act\nThe Fair Labor Standards Act (FLSA) sets out provisions that delineate fair labor and unfair labor. There are\nthree main categories covered in the Act:\n1. Child labor\n2. Minimum wage provisions\n3. Overtime pay requirements\nThe FLSA prohibits oppressive child labor as well as the shipping of goods produced by firms that make use of\n\n\x0c100\n\nChapter 9 Employment and Labor Law\n\noppressive labor. The FLSA sets the minimum age for non-agricultural work as 14. However, there are some\nexceptions. People under the age of 14 who are classed as minors may deliver newspapers, perform\nbabysitting or chores around the home, and can work in businesses owned by their families, as long as the\nwork is not deemed to be hazardous. In addition, minors may perform in television, radio, movie, or theatrical\nproductions. Once an employee becomes 18, child labor regulations no longer apply.\nUnder the terms of the FLSA, employees in covered industries, with the exception of apprentices and students,\nmust be paid the federal minimum wage. Congress is responsible for reviewing the level of the minimum\nwage on a periodic basis and raising it to compensate for increases in the cost of living caused by inflation. In\n2009, Congress raised the federal minimum wage to $7.25 an hour. This increase was the first in almost a\ndecade (although in 2014, President Obama signed an executive order that increased the minimum wage to\n$10.10 for those employed on new federal contracts).\nFLSA also mandates that employees who work more than 40 hours in a week should receive overtime pay that\nis equal to at least one and one-half times their regular wage for every additional hour worked. Four\ncategories of employees are excluded from this provision, however: executives, administrative employees,\nprofessional employees, and outside salespersons.\n\nFamily and Medical Leave Act\nThe Family and Medical Leave Act (FMLA), enacted in 1993, guarantees all eligible workers up to 12 weeks of\nunpaid leave during any 12-month period for family and medical emergencies. The FMLA applies to all public\nand private employers with 50 or more employees, covers employees who have worked for the employer for at\nleast one year, and applies to employees who have worked at least 25 hours a week for each of 12 months\nprior to the leave. The events that qualify workers for leave are:\n\xe2\x80\xa2 The birth of a child\n\xe2\x80\xa2 The adoption of a child\n\xe2\x80\xa2 The placement of a foster child in the employee\xe2\x80\x99s care\n\xe2\x80\xa2 The care of a seriously ill spouse, parent, or child\n\xe2\x80\xa2 Any serious health condition that prevents the worker from being able to perform any of the essential\nfunctions of the job\nOnce the employee returns to work, he or she must be restored to the same or equivalent position. Social\nSecurity benefits also provide benefits to certain employees and their dependents. The types of benefits that\nfall under Social Security regulations include disability benefits, Medicare benefits, survivors\xe2\x80\x99 benefits, and\nretirement benefits.\n\nEnding Employment\nThere are are also several regulations that cover workers who are terminated or who lose their employment.\nThese are summarized in the following table.\n\nRegulation\n\nDescription\n\nTable 9.2\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 9 Employment and Labor Law\n\nConsolidated\n\nMandates that employees who are terminated must be provided with the opportunity\n\nOmnibus\n\nto continue to participate in group health insurance, so long as they agree to pay the\n\nBudget\n\ngroup rate premium. The employer is required to notify employees of their COBRA\n\nReconciliation\n\nrights.\n\n101\n\nAct (COBRA)\nEmployee\n\nThis Act covers any pension plan offered by employers to their workers, and is designed\n\nRetirement\n\nto prevent abuses and fraudulent use of those plans. Under the terms of ERISA,\n\nIncome\n\nemployers are required to keep certain records pertaining to the plans, and to report on\n\nSecurity Act\n\nthose records at regular intervals. The Act also provides for vesting, which occurs when\n\n(ERISA)\n\nan employee has a nonforfeitable right to receive pension benefits.\n\nUnemployment\n\nUnemployment compensation programs are paid to those who become temporarily\n\ncompensation\n\nunemployed, and are funded by employers through employment taxes. Workers who\nquit voluntarily or who are terminated for bad conduct are not eligible for\ncompensation. In addition, in order to qualify for the benefits, applicants must\ndemonstrate that they are available for work.\n\nTable 9.2\n\nImmigration Law\nThere are vast areas of immigration law that are applicable to employment. The U.S. Citizenship and\nImmigration Service (USCIS) administers a range of different immigration programs that enable U.S.\nemployers to employ foreign national workers. For example, under the EB-1 visa, U.S. employers can employ\nforeign nationals who have extraordinary ability for certain types of work. Under the terms of the\nImmigration Reform and Control Act (IRCA), employers are required to examine evidence of employees\xe2\x80\x99\nidentity and complete mandatory paperwork for each employee. There are serious financial and criminal\npenalties for employers who knowingly hire undocumented workers.\n\n9.2\n\nLabor Law\n\nLabor relations is the general term used to describe the relationship between employers and employees, as\nwell as governance of that relationship. It refers to the micro-level interactions that take place between\nworkers and individual managers, as well as the macro-level relations that occur between the external\ninstitutions that are tasked with governing such relations. This understanding of labor relations acknowledges\nthe fact that there is a plurality of interests that must be taken into account in the processes and procedures of\nnegotiation, bargaining, and dispute settlement relating to the workplace. It also recognizes that employees\nand employers\xe2\x80\x99 representatives are fundamental to the process of industrial relations, and that the state plays\na key role in the development of labor laws, the regulation of collective bargaining, and the administration of\ndisputes. There has been considerable flux and development in the nature of U.S. labor over the past century.\nHowever, the most substantial changes have occurred since the 1950s. Changes have been particularly evident\nin the role that the state has been expected to play in employment relations between workers, their\nrepresentatives, and their employers. This section introduces some of the key milestones in labor relations in\nthe United States, and describes the role played by trade unions in governing the relationship between\n\n\x0c102\n\nChapter 9 Employment and Labor Law\n\nemployers and employees.\n\nWhat Is a Trade Union?\nA trade union, or labor union, is an organized group of workers who come together to lobby employers about\nconditions affecting their work. There currently are around 60 unions representing 14 million workers across\nthe United States. Unions are organized according to the type of work that workers do. For example, the\nAmerican Federation of Teachers is the labor union for teaching personnel, while the the International\nAssociation of Fire Fighters covers fire fighters. Many unions in the United States are organized as local\nunions. This type of union is a locally (i.e., company or region) based group of workers who organize under a\ncharter from a national union. For example, Affiliated Property Craftspersons Local 44 is the Los Angeles union\nof entertainment professional craftpersons, chartered under the International Alliance of Theatrical Stage\nEmployees.\n\nTimeline of Developments in Labor Law\n\xe2\x80\xa2 1886. The American Federation of Labor was formed in Columbus, Ohio. This group was a national\nfederation of labor unions who came together to bolster their power in industrial unionism. The AFL was\nthe largest union grouping in the United States well into the twentieth century. However, the Federation\nwas craft-dominated, such that only craft workers like artisans and silversmiths were allowed to belong.\n\xe2\x80\xa2 1932. The Norris-LaGuardia Act was passed. This Act prohibited yellow-dog contracts, or contracts that\nprevented workers from joining labor unions. In addition, federal courts were barred from issuing\ninjunctions to prevent groups of workers from engaging in boycotts, strikes, and picketing.\n\xe2\x80\xa2 1935. The Congress of Industrial Organizations was established. This establishment extended the union\nmovement because it allowed semi-skilled and unskilled workers to become members.\n\xe2\x80\xa2 1935. The Wagner Act, or National Labor Relations Act, was passed. This Act is the major statute of\nUnited States labor law. The Act established that employees have the right to form, assist, and join labor\norganizations, to engage in collective bargaining with employers, and to engage in concerted activity to\npromote those rights.\n\xe2\x80\xa2 1947. The Labor-Management Relations Act, also known as the Taft-Hartley Act, imposed restrictions on\nthe power of labor unions. It made changes to union election rules and outlined and provided remedies\nfor six unfair practices by labor unions (see box below).\n\xe2\x80\xa2 1959. The Labor Management Reporting and Disclosure Act, or Landrum-Griffin Act, was passed, which\nregulates the internal affairs of trade unions, as well as their officials\xe2\x80\x99 relationships with employers. All\nunion members are granted equal rights to vote for candidates, take part in membership meetings, and\nnominate candidates for office.\n\xe2\x80\xa2 1988. The Worker Adjustment and Retraining Notification (WARN) Act requires that employers with more\nthan 100 employees give workers at least 60 days notice before engaging in layoffs or plant closings.\n\nAmendments\n\nDescription\n\nof the TaftHartley Act\nTable 9.3\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 9 Employment and Labor Law\n\n1\n\n103\n\nProtects employees from unfair coercion by unions that could lead to discrimination\nagainst employees.\n\n2\n\nStates that employers cannot refuse to hire prospective workers because they refuse to\njoin a union. This amendment also grants the employer the right to sign an agreement\nwith a union that requires the employee to join the union before the employee\xe2\x80\x99s 30th day\nof employment.\n\n3\n\nUnions must bargain in good faith with employers.\n\n4\n\nPrevents unions from engaging in secondary boycotts.\n\n5\n\nPrevents unions from taking advantage of either employers or members. For example,\nunions cannot charge members excessive membership dues or cause employers to pay\nfor work that has not been performed.\n\n6\n\nGrants employers the right to free speech. Expressed opinions about labor issues do not\nconstitute unfair labor practices, as long as the employer does not threaten to withhold\nbenefits from, or engage in, retribution against the worker.\n\nTable 9.3\n\nThe National Labor Relations Board\nThe National Labor Relations Board (NLRB) was established to administer, interpret, and enforce the terms of\nthe National Labor Relations Act. It has jurisdiction over all workers, except for government employees and\nemployees in the transportation industry, who are governed under a separate statute (The Railway Labor Act).\nOther workers not covered by the NLRB include agricultural workers, confidential employees (employees who\ndevelop or present management\xe2\x80\x99s position or who have access to confidential information related to\nbargaining employees), independent contractors, and those employed by a spouse or a parent. The NLRB has\nthree main functions:\n1. To monitor the conduct of unions and employers during elections to determine whether employees wish\nto be represented by a union\n2. To remedy and prevent unfair labor practices by unions or employers\n3. To establish rules interpreting the NLRA\n\n\x0c104\n\nChapter 9 Employment and Labor Law\n\nFigure 9.3\n\nUnder the terms of the National Labor Relations Act, employees have the right to strike as part of\n\ntheir efforts to secure better working conditions. (Credit: Geralt/ pixabay/ License: CC0)\n\nOrganizing a Union\nFor a union to be formed and organized, the union must identify an appropriate bargaining unit. This term is\nused to describe the group of workers that the union is looking to represent. Under the terms of the\ninaccessibility exception, employees and union officials have the right to engage in union solicitation on the\nfirm\xe2\x80\x99s property if they cannot otherwise access employees to communicate with them. The next stage is to run\nan election. There are three types of elections:\n\xe2\x80\xa2 Consent election. This election is held when there are not any substantial issues under dispute between\nthe union and the employer. Both parties agree to waive the pre-election hearing.\n\xe2\x80\xa2 Contest election. This election is for a union that is contested by the employer. The NLRB is required to\nsupervise this kind of election.\n\xe2\x80\xa2 A decertification election is held when employees indicate that they wish to vote out the union or join\nanother.\nIn order to try to bolster their power, elected unions often attempt to install a union security agreement. This\nagreement pertains to the extent to which the union can demand that employees join the union, and whether\nthe employer will be required to collect fees and dues on behalf of the union. A closed shop is a workplace\nwhere union membership is a requirement for employment. A union shop is a place of employment where the\nemployee is required to join the union within a specified number of days after being hired. An agency shop is\na workplace that does not require the employee to join the union, but where agency fees to the union must be\npaid. Union security agreements are the outcome of collective bargaining agreements.\n\nCollective Bargaining\nCollective bargaining involves the union and the employer negotiating contract terms. The outcome is known\nas a collective bargaining agreement. The types of terms that are usually negotiated are wages and salaries,\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 9 Employment and Labor Law\n\n105\n\nhours, and the terms and conditions of employment. If union members dispute working conditions, unfair\nlabor practices, or economic benefits, they have the right to participate in a cessation of work activities, known\nas a strike. There is a mandatory cooling off period of sixty days before a strike can commence. Some\ncollective bargaining agreements include no-strike clauses. Although strikes are permitted according to the\nNRLA, some strikes are illegal:\n\xe2\x80\xa2 Violent strikes\n\xe2\x80\xa2 Sit-down strikes\n\xe2\x80\xa2 Wildcat (unauthorized) strikes\n\xe2\x80\xa2 Intermittent, or partial strikes\nIn addition to striking, union members have the right to picket. This process involves walking in front of the\nemployer\xe2\x80\x99s premises with signs that advertise the strike and the union\xe2\x80\x99s demands. Picketing is lawful as long\nas it does not:\n\xe2\x80\xa2 Involve violence\n\xe2\x80\xa2 Prevent customers from entering the premises\n\xe2\x80\xa2 Prevent non-striking workers from entering the premises\n\xe2\x80\xa2 Prevent the business from receiving deliveries or pickups\nSecondary boycott picketing occurs when the union pickets the employer\xe2\x80\x99s customers or suppliers. This type\nof picketing is legal if it is product picketing, but illegal if the picket is directed against a neutral business.\n\n9.3\n\nEqual Opportunity in Employment\n\nA Landmark Case\nIn 1982, the financial services company Price Waterhouse announced a vacancy for the position of partner.\nAnn Hopkins, an employee of the company at the time, applied, but after an assessment, was passed over.\nHopkins sued the company, arguing that she had billed more than $34 million in consulting contracts for the\nfirm, far more than any of the other 87 candidates, who were all male. In rejecting her application, the partners\nat the company argued that Hopkins was \xe2\x80\x9ctoo macho\xe2\x80\x9d and that she should \xe2\x80\x9cwalk more femininely, talk more\nfemininely, dress more femininely, wear makeup, have her hair styled and wear jewelry.\xe2\x80\x9d In the landmark legal\nsuit that followed, Hopkins was awarded $371,000 in back pay, and Price Waterhouse was forced to make her a\npartner.\n\nLaws Governing Equal Opportunity in Employment\nEmployees are protected in the workplace by a number of laws enacted at both the federal and state levels.\nFederal laws are usually considered to be the minimum level of protection, and state laws can provide\nemployees with more, but not less, protection. In this section, the major laws pertaining to equal opportunity\nare discussed.\n\nCivil Rights Act of 1964 \xe2\x80\x93 Title VII (Amended By the Civil Rights Act of 1991)\nThe Civil Rights Act provides broad provisions pertaining to citizens\xe2\x80\x99 civil rights. Title VII of the Civil Rights Act\ndeals with discrimination in employment. It bans employers from discriminating against employees in their\nhiring, firing, and promotion practices on the basis of sex, national origin, color, religion, or race. All employers\n\n\x0c106\n\nChapter 9 Employment and Labor Law\n\nwho are engaged in commercial activity and who employ 15 or more employees for 20 consecutive weeks in a\nyear are covered by the Act. The Act also sets out the two main ways in which discrimination can be proven:\ndisparate treatment and disparate impact.\nDisparate treatment means that the employee believes that he or she has been discriminated against on the\nbasis of one of the protected classes set out in the CRA. Proving that the employer engaged in disparate\ntreatment is a three-step process:\n1. The employee (plaintiff) is required to demonstrate a prima facie (accepted as correct unless proven\notherwise) case of discrimination.\n2. The employer (defendant) must show legitimate, non-discriminatory business reasons for undertaking\nthe action.\n3. The employee must demonstrate that the reason given by the employer is a mere pretext.\nA trier of fact, usually a jury, will use the evidence presented to determine whether discrimination did in fact\noccur. If the jury finds for the employee-plaintiff, damages can be awarded, such as what occurred in the\nlandmark Ann Hopkins case, described in the opening box. If the jury finds for the employer-defendant, no\ndamages are assessed.\n\nDamages Permissible Under Title VII of the CRA\nUp to two years of back pay\nCompensatory damages\nPunitive damages\nRemedial seniority\nCosts (e.g., attorney fees and court costs)\nCourt orders (e.g., reinstatement)\nTable 9.4\nDisparate impact cases are cases of unintentional discrimination. This type of case occurs when the employer\nengages in a practice that has a disproportionately injurious impact on a protected class. Disparate impact\ncases are difficult to prove. The burden of responsibility is on the employee-plaintiff to statistically establish\nthat the action impacts the protected class. The defendant can avoid liability by demonstrating that the\npractice is a business responsibility. The burden of proof then shifts to the employee to prove that the alleged\nbusiness necessity is a mere pretext. These steps were established in Griggs v. Duke Power Co. Duke Power\nrequired all job applicants to have a high school diploma and to reach a certain minimum score on a\nprofessional intelligence test. Willie Griggs, the plaintiff, established that the rule was racially discriminatory\nbecause only 12 percent of black men in the state had high school diplomas (compared to 34 percent of white\nmen), and only 6 percent of blacks had passed similar intelligence tests, compared to 58 percent of whites.\nDuke Power tried to argue that the provisions were necessary to upgrade the quality of the workforce, but the\ncourt did not agree that this defense was an adequate business-related justification, and the plaintiff was\nsuccessful.\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 9 Employment and Labor Law\n\nFigure 9.4\n\n107\n\nEmployees are protected against discrimination by employers by a number of laws enacted at\n\nboth the federal and state level. (Credit: Wokandapix/ pixabay/ License: CC0)\nSexual harassment is also protected under Title VII. This type of harassment is defined as unwelcome sexual\nadvances, requests for sexual favors, and other verbal or physical conduct of a sexual nature. Two types of\nsexual harassment are recognized. Quid pro quo occurs when a manager makes a sexual demand on a\nworker, and this demand is perceived as a condition of employment. Actions that create a hostile work\nenvironment are another type of sexual harassment. These issues have been used in cases of discrimination\nbased on race and religion as well as sex. Since the 1997 case Oncale v. Sundowner Offshore Services Inc., it\nhas been established that sexual harassment undertaken by a member of one sex against a member of the\nsame sex is actionable under Title VII. In some limited circumstances, employers may also be liable for\nharassment of employees by non-employees, e.g., customers. The employer is liable if it does nothing to\nprevent and remedy harassment targeted at one of its employees. The Pregnancy Discrimination Act of 1987\nexpanded the definition of sex discrimination to include discrimination based on pregnancy, childbirth, or\nmedical conditions related to the same.\n\nDefenses to Title VII Claims\nDefense\nTable 9.5\n\nDescription\n\n\x0c108\n\nChapter 9 Employment and Labor Law\n\nThe Bona\n\nUsing this defense, the employer can discriminate if it is deemed to be necessary for the\n\nFide\n\nperformance of the job. Necessity, however, must be determined on the basis of actual\n\nOccupational\n\nqualifications, rather than stereotypes about the abilities of a certain class. For example,\n\nQualification\n\nan employer is not expected to hire a man as a model for women\xe2\x80\x99s clothes. Hires on the\n\nDefense\n\nbasis of sexual privacy are covered under BFOQ. However, there are no BFOQs for\n\n(BFOQ)\n\ndiscrimination on the basis of race or color.\n\nThe Merit\n\nThis defense is used when decisions pertaining to hiring or promotion are made on the\n\nDefense\n\nbasis of the results of test scores. However, tests must be validated in accordance with\nprofessional standards and must be manifestly related to job performance.\n\nThe Seniority\n\nThis defense system occurs when employees are given preferential treatment because of\n\nDefense\n\ntheir length of tenure. As long as the system does not have its genesis in discrimination,\n\nSystem\n\nand is not used to discriminate and applies to all persons equally, it is lawful.\n\nTable 9.5\n\nThe Equal Pay Act\nThe Equal Pay Act (EPA) is a United States federal law that seeks to equalize the salaries and wages paid to\nemployed women with the levels paid to men for work of an equal nature and quantity. The Act amended the\nFair Labor Standard Act of 1938 and was a key element of President F. Kennedy\xe2\x80\x99s New Frontier program. Under\nthe terms of the EPA, women and men performing jobs that demand \xe2\x80\x9cequal skill, effort, and responsibility, and\nwhich are performed under similar working conditions\xe2\x80\x9d must be paid the same. The Act protects the rights of\nboth sexes. An individual who seeks to establish a case under the Act must demonstrate that:\n1. An employer pays one sex more than another\n2. Both sexes perform an equal amount of work that demands equal levels of skill, effort and responsibility\n3. Working conditions for both sexes are equivalent\nAn employer that is accused of discrimination under the EPA can present one of four affirmative defenses. An\nemployer may legally pay employees of one sex more than another sex if wages are based on a system of\nseniority, a system of merit, a system that distinguishes payment on the basis of quality and quantity of\nproduction (e.g., certain piece rates), or if payment is differentiated on \xe2\x80\x9cany other factor other than sex.\xe2\x80\x9d Of\nthese four defenses, the \xe2\x80\x9cfactor other than sex\xe2\x80\x9d defense has been invoked most frequently and has been the\nsubject of intense debate and controversy. Critics have argued that this defense enables employers to\nfabricate other reasons for the wage gap.\n\nAmericans with Disabilities Act\nThe Americans with Disabilities Act (ADA) prevents employers from discriminating against workers on the\nbasis of their physical or mental disabilities. In addition, employers are required to make reasonable\naccommodations to known disabilities, as long as such accommodations do not impose an undue burden on\nthe business. To bring a successful ADA claim, the plaintiff is required to demonstrate that he or she:\n\xe2\x80\xa2 Has a disability\n\xe2\x80\xa2 Suffered an adverse employment decision because of that disability\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 9 Employment and Labor Law\n\n109\n\n\xe2\x80\xa2 Was otherwise qualified for the position\nADA is enforced in a similar way to Title VII, and remedies for ADA violations are also similar.\n\nAge Discrimination Act\nPassed in 1967, this Act prohibits employers from making discriminatory employment decisions against people\nage 40 or older. This Act applies to all employers with 20 or more employees.\n\nAssessment Questions\n1. What does At-Will Employment mean?\n2. Employers are required provide a work environment that is safe and healthy for their employees by which\nlaw?\na. FLSA.\nb. WCA.\nc. OHSA.\nd. FMLA.\n3. How many weeks of unpaid leave does the Family Medical Leave Act guarantee to eligible workers?\na. 12.\nb. 16.\nc. 25.\nd. 40.\n4. What regulation protects employees who are terminated from their employment?\na. COBRA.\nb. ERISA.\nc. Unemployment Compensation.\nd. All of the above.\n5. The Fair Labor Standards Act (FLSA) covers which category?\na. Child Labor.\nb. Minimum wage.\nc. Overtime pay.\nd. All of the above.\n6. Explain the term labor relations.\n7. What is a trade union?\n8. What is the function of the National Labor Relations Board?\na. To monitor the conduct of the unions and employers during union elections.\nb. To remedy and prevent unfair labor practices by unions or employers.\nc. To establish rules interpreting the NLRA.\nd. All of the above.\n\n\x0c110\n\nChapter 9 Employment and Labor Law\n\n9. _____ is a place of employment where the employee is required to join the union within a specified number of\ndays after being hired.\na. A closed shop.\nb. A union shop.\nc. An agency shop.\nd. A secure shop.\n10. Which of the following practices are illegal?\na. Picketing.\nb. No strike clause.\nc. Sit-Down strike.\nd. A secure shop.\n11. Explain Title VII of the Civil Rights Act of 1964.\n12. How do you prove a disparate impact case?\n13. The following is valid defense under Title VII:\na. Quid Pro Quo.\nb. No Merit Defense.\nc. BFOQ\nd. All of the above.\n14. To bring a successful claim under the Americans with Disability Act (\xe2\x80\x9cADA\xe2\x80\x9d), the plaintiff must prove all of\nthe following except:\na. He or she suffered an adverse employment decision because of a disability.\nb. The disability was not a mental disability.\nc. He or she was qualified for a position.\nd. He or she has a disability.\n15. The Age Discrimination Act only applies to employers with 20 or more employees.\na. True.\nb. False.\n\nEndnotes\nBlanpain, R., & Bisom-Rapp, S. (2014). Global Workplace: International and Comparative Employment Law Cases\nand Materials. Wolters Kluwer Law & Business.\nCheeseman, H. (2016). Business Law. Boston: Pearson Education.\nRobinson, T. (2011). \xe2\x80\x9cThe Top 10 Bizarre Workers\xe2\x80\x99 Comp Cases for 2010.\xe2\x80\x9d LexisNexis Legal NewsRoom.\nRetrieved from: https://www.lexisnexis.com/legalnewsroom/workers-compensation/b/workerscompensation-law-blog/posts/the-top-10-bizarre-workers-comp-cases-for-2010\nCheeseman, H. (2016). Business Law. Boston: Pearson Education.\nFeldacker, B. S., & Hayes, M. J. (2014). Labor guide to labor law. Ithaca: Cornell University Press.\nRutherglen, G. (2016). Employment Discrimination Law, Visions of Equality in Theory and Doctrine. West\nAcademic.\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 9 Employment and Labor Law\n\n111\n\nWoloch, N. (2018). Because of Sex: One Law, Ten Cases, and Fifty Years That Changed American Women\xe2\x80\x99s Lives\nat Work by Gillian Thomas. Labor: Studies in Working-Class History, 15(1), 128\xe2\x80\x93129.\n\n\x0c112\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\nChapter 9 Employment and Labor Law\n\n\x0c10\n\nGovernment Regulation\nFigure 10.1 (Credit: JamesDeMers/ pixabay/ Attribution 2.0 Generic (CC BY 2.0))\n\nChapter Outline\n10.1 Administrative Law\n10.2 Regulatory Agencies\n\nIntroduction\nLearning Outcome\n\xe2\x80\xa2 Define the role of administrative bodies and regulation in the governmental rulemaking process.\n\n10.1\n\nAdministrative Law\n\nAdministrative law is also referred to as regulatory and public law. It is the law that is related to\nadministrative agencies. Administrative agencies are established by statutes and governed by rules,\nregulations and orders, court decisions, judicial orders, and decisions.\nAgencies are created by federal or state governments to carry out certain goals or purposes. Federal agencies\nare created by an act of Congress. Congress writes out a law called an organic statute that lays out the\npurpose and structure of the agency. The agency is charged with carrying out that purpose, as described by\nCongress. Organic statutes are utilized to create administrative agencies, as well as to define their\nresponsibilities and authority.\n\n\x0c114\n\nFigure 10.2\n\nChapter 10 Government Regulation\n\nBoth federal and state legislators create agencies to fulfill a specific purpose, usually related to\n\nprotecting the public from a potential threat. (Credit: kbhall17/ pixabay/ License: CC0)\n\nIndustrialization\nAdministrative agencies have been around almost since the founding of the United States. However,\nindustrialization had a big impact on the development of administrative laws. As people moved from farms\nand rural areas to cities to find work and raise families, the economy changed. It became more complex. As a\nresult of this economic change, the government saw a need to expand its regulation to protect and support\nthe public. In the 20th century, the number of agencies expanded very quickly with the addition of the Food\nand Drug Administration (FDA) to regulate food and medication, the Federal Trade Commission (FTC) to\nregulate trade, and the Federal Reserve System (FRS) to regulate banks. These are just a few of the agencies\ncreated to regulate industries. Ultimately, this expansion occurred in response to the complexity of the\neconomy.\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 10 Government Regulation\n\nFigure 10.3\n\n115\n\nIndustrialization increased the number of administrative agencies in the United States. (Credit:\n\nChevanon Photography/ pexels/ License: CC0)\n\nEveryday Impact\nAdministrative law impacts the public on a daily basis. Administrative law is basically the delegated power\ngranted to administrative agencies to carry out specific functions. Government agencies endeavor to protect\nthe rights of citizens, corporations, and any other entity through administrative laws. Administrative agencies\nwere developed to protect consumers and the community. As a result, they are present in all aspects of life,\nincluding medicine, food, environment, and trade.\nOne well-known federal agency is the Food and Drug Administration (FDA). The FDA was created to protect the\npublic\xe2\x80\x99s health. The agency\xe2\x80\x99s responsibilities are very broad. The agency fulfills its role by ensuring the safety\nand effectiveness of drugs consumed by people and animals, biological products, medical devices, food, and\ncosmetics. Specifically, the FDA regulates the things that the public consumes, including supplements, infant\nformula, bottled water, food additives, eggs, some meat, and other food products. The FDA also regulates\nbiological items and medical devices, including vaccines, cellular therapy products, surgical implants, and\ndental devices. This federal agency began in 1906 with the passing of the Pure Food and Drugs Act.\n\n\x0c116\n\nFigure 10.4\n\nChapter 10 Government Regulation\n\nThe Food and Drug Administration (FDA) oversees the safety and effectiveness of medication.\n\n(Credit: Rawpixel/ pexels/ License: CC0)\nEpiPens are automatic injection devices that deliver lifesaving medication that can save an individual in the\nevent of exposure to an allergen, like a bee sting or peanuts. The United States faced a shortage of EpiPens, so\nin 2018, the FDA took action to address this issue. The FDA approved the extension of EpiPen expiration dates\nfor four months on specific lots of the EpiPen. This extension impacted both the public and the organization\nthat produces EpiPens. In the same year, the FDA approved the first generic EpiPen. The new generic version\nwill be produced by a pharmaceutical company that has not previously produced the EpiPen. These two\nactions impact consumers by increasing the supply of lifesaving EpiPens.\nAnother well-known agency is the Federal Trade Commission (FTC). The FTC was formed in 1914 when\nPresident Woodrow Wilson signed the Federal Trade Commission Act into law. The goal of the agency is to\nprotect the consumer, encourage business competition, and further the interests of consumers by\nencouraging innovation. The FTC works within the United States as well as internationally to protect\nconsumers and encourage competition. The agency fulfills this role by developing policies, partnering with law\nenforcement to ensure consumer protection, and helping to ensure that markets are open and free. For\ninstance, management and enforcement of the Do Not Call List is part of the FTC\xe2\x80\x99s consumer protection goals.\nThe FTC protects consumers from unfair or misleading practices. Phone scams are a common issue. Scammers\ngo to great lengths to trick the public into donating to false charities, providing personal information, or giving\naccess to financial information. The FTC is aware of these issues and has put rules in place to punish scammers\nand educate the public. The FTC created a phone scammer reporting process to help collect information about\nscammers so that they can be prosecuted. The agency also collects information about scammers and creates\neducational materials for the public. These materials are designed to help consumers identify possible phone\nscammers, avoid their tactics, and report their activities.\nA complete list of U.S. government agencies can be found at https://www.usa.gov/federal-agencies/a\n(https://www.usa.gov/federal-agencies/a) .\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 10 Government Regulation\n\n10.2\n\n117\n\nRegulatory Agencies\n\nThe power of administrative agencies comes from the executive branch of the government. Congress passes\nlaws to carry out specific directives. The passing of these laws often creates a need for a government agency\nthat will implement and carry out these laws. The government is not able to perform the work itself or manage\nthe employees who will do the work. Instead, it creates agencies to do this. Assigning this authority to\nagencies is called delegation. The agencies have focus and expertise in their specific area of authority.\nHowever, it is important to note that Congress gives these agencies just enough power to fulfill their\nresponsibilities.\nAlthough administrative agencies are created by Congress, most administrative agencies are part of the\nexecutive branch of the government. The executive branch of government of the United States is headed by\nthe president of the United States. Administrative agencies are created to enforce and administer laws, and\nthe executive branch was created to oversee administrative agencies. Administrative agencies conduct exams\nand investigations of the entities they regulate. As a result of being part of the executive branch of\ngovernment, the leaders of administrative agencies are generally appointed by the executive branch.\n\nFigure 10.5\n\nMost administrative agencies are housed in the executive branch. The president of the United\n\nStates appoints leaders to administrative agencies. (Credit: Aaron Kittredge/ pexels/ License: CC0)\nAdministrative agencies also have responsibilities that mirror the responsibilities of the judicial branch of\ngovernment. Administrative law judges (ALJ) have two primary duties. First, they oversee procedural aspects,\nlike depositions of witnesses related to a case. They have the ability to review rules and statutes and review\ndecisions related to their agencies. They also determine the facts and then make a judgment related to\nwhether or not the agency\xe2\x80\x99s rules were broken. They act like a trial judge in a court, but their jurisdiction is\nlimited to evaluating if rules established by certain government agencies were violated. They can award\nmoney, other benefits, and punish those found guilty of violating the rules.\n\n\x0c118\n\nChapter 10 Government Regulation\n\nFederal Agencies\nWell-known federal agencies include the Federal Bureau of Investigations (FBI), Environmental Protection\nAgency (EPA), Food and Drug Administration (FDA), Federal Trade Commission (FTC), Federal Election\nCommission (FEC), and the National Labor Relations Board (NLRB). These agencies were created to serve\nspecific purposes. For instance, the FBI was created to investigate federal crimes. A federal crime is one that\nviolates federal criminal law, rather than a state\xe2\x80\x99s criminal law. The EPA was created to combine federal\nfunctions that were instituted protect the environment. The NLRB was created to carry out the National Labor\nRelations Act of 1935.\nThe goal of federal agencies is to protect the public. The EPA was created in response to concerns about the\ndumping of toxic chemicals in waterways and about air pollution. It began when the Cuyahoga River in Ohio\nburst into flames without warning. President Richard Nixon presented a plan to reduce pollution from cars,\nend the dumping of pollutants into waterways, tax businesses for some environmentally unfriendly practices,\nand reduce pollution in other ways. The EPA was created by Congress in response to these environmental\nconcerns and President Richard Nixon\xe2\x80\x99s plan. It is given the authority and responsibility to protect the\nenvironment from businesses, so that the people can enjoy a clean and safe environment.\nAs mentioned in the previous section, the Federal Trade Commission (FTC) was created to protect the\nconsumer. It investigates and addresses activities that limit competition between businesses. The organization\nenforces antitrust laws that prevent one organization from restraining competition or seeking to maintain\nfull control over a market. In December of 2006, the FTC ruled on the merger of America Online, Inc. (AOL) and\nTime Warner, Inc. The FTC decided that the joining of these two companies would limit the ability of other\norganizations to compete in the cable internet marketplace. The FTC ordered the merged company, AOL Time\nWarner, to do certain things that permitted competitors to engage, including opening its system to\ncompetitors\xe2\x80\x99 internet services and not interfering with the transmission signal being passed through the\nsystem. Doing so prevented the large company from shutting out its competitors. These are just a few\nexamples of administrative agencies that were created to protect the community from business activities that\ncould negatively impact the environment or the consumer.\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 10 Government Regulation\n\nFigure 10.6\n\n119\n\nAlthough administrative agencies have a great deal of power, they are bound by the concept of\n\ndue process at is described in the U.S. Constitution. (Credit: wynpnt/ pixabay/ License: CC0)\n\nAgency Structure\nAdministrative agencies are made up of experts, and they are trusted by Congress to identify the agency\nstructure that best serves their specific goals. Thus, each agency is structured differently.\nThe FTC is a well-known agency and is organized into bureaus. Each bureau is focused on an agency goal. The\nthree bureaus are consumer protection, competition, and economics. The Bureau of Consumer Protection\nfocuses on unfair and deceptive business practices by encouraging consumers to voice complaints,\ninvestigate, and file lawsuits against companies. It also develops rules to maintain fair practices and educates\nconsumers and businesses about rights and responsibilities. The Bureau of Competition focuses on antitrust\nlaws and, by doing so, supports lower prices and choices for the consumer. And, lastly, the Bureau of\nEconomics concentrates on consumer protection investigation, rulemaking, and the economic impact of\ngovernment regulations on businesses and consumers.\n\nAdministrative Procedure Act (APA)\nThese agencies are not unrestrained in their operations. First, there are due process requirements created in\nthe Constitution. Rules must be reasonable and based on facts. Second, rules cannot violate anyone\xe2\x80\x99s\nconstitutional rights or civil liberties. Third, there must be an opportunity for the public to voice its support, or\nlack of support, for a rule. In 1946, the Administrative Procedure Act (APA) was enacted. Under the APA,\nagencies must follow certain procedures to make their rules enforceable statutes. The Act set up a full system\nfor the execution of administrative law by administrative agencies for the federal government. Although\nagencies have power, government agencies must still act within the structures in place, including the\nConstitution, span of authority, statutory limitations, and other restrictions. The APA outlines roles, powers,\nand procedures of agencies. It organizes administrative functions into rulemaking and adjudication.\n\n\x0c120\n\nChapter 10 Government Regulation\n\nAssessment Questions\n1. What is administrative law?\n2. Administrative agencies are created by:\na. The president.\nb. The judicial branch.\nc. The Constitution.\nd. Congress.\n3. The FDA stands for:\na. The First Drug Administration.\nb. The Federal Drug Administration.\nc. The Food and Drug Administration.\nd. The Food and Diet Administration.\n4. Explain the goal of the Federal Trade Commission.\n5. How does the FDA fulfill its role?\n6. Who appoints leaders to run administrative agencies?\na. The President.\nb. Congress.\nc. The judges.\nd. None of these are correct.\n7. The process of assigning authority to administrative agencies is called:\na. An assignment.\nb. A directive.\nc. A passing.\nd. A delegation.\n8. What\xe2\x80\x99s the role of an Administrative Law Judge (ALJ)?\n9. The Bureau of Economics concentrates on all but the following:\na. Consumer protection investigation.\nb. Rulemaking.\nc. Lower prices for consumers.\nd. Economic impact of government regulation.\n10. Explain the purpose of the Administrative Procedure Act (\xe2\x80\x9cAPA\xe2\x80\x9d).\n\nEndnotes\nFTC Approves AOL/Time Warner Merger with Conditions. (December 14, 2000). Federal Trade Commission.\nRetrieved from: https://www.ftc.gov/news-events/press-releases/2000/12/ftc-approves-aoltime-warnermerger-conditions.\nJohnson, C. Y., & McGinley, L. (August 16, 2018). \xe2\x80\x9cFDA Approves First Generic Version of EpiPen.\xe2\x80\x9d The\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 10 Government Regulation\n\n121\n\nWashington Post. Retrieved from: https://www.washingtonpost.com/news/to-your-health/wp/2018/08/16/fdaapproves-first-generic-version-of-epipen/?utm_term=.04ace0ebeaa6.\nPhone Scams. Retrieved from: https://www.consumer.ftc.gov/articles/0076-phone-scams.\nThe Origins of EPA. EPA: United States Environmental Protection Agency. Retrieved from: https://www.epa.gov/\nhistory/origins-epa.\nWhat is Administrative Law? Tech Policy Lab, University of Washington. Retrieved from:\nhttps://www.youtube.com/watch?v=ow5hZmU7Yfw.\nAguirre, D., & Von Post, R. (December 05, 2013). \xe2\x80\x9cCulture\xe2\x80\x99s Critical Role in Change Management.\xe2\x80\x9d Strategy\nBusiness. Retrieved from: https://www.strategy-business.com/blog/Cultures-Critical-Role-in-ChangeManagement?gko=a3f98.\nMungei, V., et al. (February 22, 2012). \xe2\x80\x9cThe Role of Education and Training to the Success of TQM\nImplementation.\xe2\x80\x9d Teamwork and Employee Empowerment. Retrieved from: http://tqmgroups.blogspot.com/p/\nrole-of-education-and-training-to.html.\nNapierala, B. (June 22, 2012). \xe2\x80\x9cFive Important Factors in Total Quality Management.\xe2\x80\x9d Five Important Factors in\nTotal Quality Management. Retrieved from: http://aboutthree.com/blog/five-important-factors-in-total-qualitymanagement/.\nStid, D., & Kramer, K. (N.d). \xe2\x80\x9cThe Effective Organization: Five Questions to Translate Leadership into Strong\nManagement.\xe2\x80\x9d The Bridgespan Group. Retrieved from: https://www.bridgespan.org/insights/library/\norganizational-effectiveness/the-effective-organization-five-questions.\n\n\x0c122\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\nChapter 10 Government Regulation\n\n\x0c11\n\nAntitrust Law\nFigure 11.1 (Credit: witwiccan/ pixabay/ Attribution 2.0 Generic (CC BY 2.0))\n\nChapter Outline\n11.1 History of Antitrust Law\n11.2 Antitrust Laws\n\nIntroduction\nLearning Outcome\n\xe2\x80\xa2 Analyze the tenets of antitrust laws in the United States.\n\n11.1\n\nHistory of Antitrust Law\n\nWhat if the two largest manufacturers of soft drinks, Coca Cola Co. and PepsiCo, merged? It is likely that the\nmega-company that resulted would dominate the soft drink industry, squeezing out all of the other smaller\ncompetitors.\n\n\x0c124\n\nFigure 11.2\n\nChapter 11 Antitrust Law\n\nWithout antitrust laws, the shelves would have fewer products for consumers to choose from.\n\nImage: Beverages, Bottles, Shelf. (Credit: igorovsyannyko/ pixabay/ License: CC0)\nIn the late 1800s, concern over this kind of merger, as well as other attempts by large companies to create\nmonopolies or to control the market, led state and federal lawmakers to take steps to reduce the risks\nassociated with this type of practice.\n\nBusiness Trusts\nDuring the late 1800s, the United States became concerned about the development of corporate monopolies\ndominating the manufacturing and mining industries (Jurist, n.d.). The end of the Civil War marked the\nbeginning of large advances in industrialization. Many large companies formed, especially in the oil and steel\nindustries, which were two industries that the country was beginning to heavily rely on. Manufacturing and\ndistributing companies grew at a fast pace in a wide variety of industries, ranging from sugar to beef to\ntobacco (West, n.d.). The problem was that the growth occurred so rapidly that supply exceeded demand. This\noutcome increased competition, and many companies sought to reduce the number of competitors through\nforms of restraint of trade such as price-fixing, monopolies, and mergers (West, n.d.).\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 11 Antitrust Law\n\nFigure 11.3\n\n125\n\nThe oil industry expanded quicker than demand, causing companies to try to remove\n\ncompetition. (Credit: 15299/ pixabay/ License: CC0)\nSome of the competitors were larger and more powerful than others, and they sought to limit the competition\nin the market by taking steps to reduce the number of smaller companies who were trying to compete with\nthem (Federal Trade Commission, n.d.). Some of the larger companies banded together to create business\ntrusts. A business trust is a trust agreement that allows businesses to maintain profits as beneficiaries, but\nlegal ownership and management of the company\xe2\x80\x99s property is maintained through the power of trustees\n(West, n.d.). These trusts allowed businesses that were members of the trust to grow larger, as they\ncooperated with one another and shut out other competitors (West, n.d.).\n\nUnfair Business Practices\nCompanies tried to create situations that would drive some competitors out of business while solidifying their\nown share of the market. This effort resulted in mergers and consolidation practices that placed the largest\nshare of the industries under the control of just a few, thereby increasing their power. Since the trusts were\nable to fix prices and could afford to take some losses, they would drive prices down until competitors were\nforced out of business because they could not afford to operate at the lower rates (West. n.d.).\nThe markets began to consolidate under just a few companies because the smaller competitors continued to\ngo out of business. The smaller competitors could not compete with the pricing and other practices that the\ntrusts allowed the cooperative businesses to maintain. This design restricted free trade practices for both\nbusinesses and consumers. The few businesses in the trust, in turn, became more powerful, thus prompting\nthe government to look for measures to control the situation (Federal Trade Commission, n.d.). The\ngovernment determined that laws needed to be created to prevent this form of trade restriction.\n\n\x0c126\n\nChapter 11 Antitrust Law\n\nRule of Reason\nUnfair business practices did not reside solely with business trusts. Issues also occurred in agreements\nbetween competitors, contracts entered into between sellers and buyers, and practices that created or\nmaintained cartels, monopolies, and mergers (West, n.d.). There were no specific laws that regulated these\npractices, so the courts were not entirely sure how to deal with them. Initially, courts seemed to swing both\nways, both accepting and condemning certain forms of restraint of trade. Rulings were not consistent from\nstate to state, and guidelines needed to be established. The guiding condition seemed to be whether or not\nthe restraints prevented other merchants from entering the market (West, n.d.).\nThe courts used the rule of reason as the standard. The rule of reason explored the goal of the contract,\nwhich was considered either naked restraint or ancillary restraint. Naked restraint occurs as contracts\npromote a general restraint of competition. If the restraint was created with a goal of long-term impact\nwithout boundaries, it was considered to be a naked restraint (West, nd.). Ancillary restraint occurs as the\nrestriction is limited in time and geography (West, n.d.). With ancillary restraint, the restraint would be shortterm and limited in scope. The courts tended to frown upon naked restraint, but were less consistent with\nancillary restraint. Initially, there did not seem to be a comprehensive common law applied similarly from state\nto state (West, n.d.). This problem was concerning enough to warrant a solution, and in 1890, the first antitrust\nlaw was enacted (Jurist, n.d.).\n\nAntitrust Laws\nAntitrust laws regulate economic competition in an effort to maintain fair trade practices (West, n.d.). They\nwere created to prevent the restraints on trade created by trusts and other large company practices. These\nrestraints often resulted in price-fixing, control of production, and control of geographical markets (Jurist,\nn.d.). Many states recognized these outcomes as a threat to fair business practices. The federal government\nalso recognized this issue and developed antitrust laws in 1887 as a result of a Standard Oil trust that was\nformed. The Standard Oil Trust occurred as oil companies transferred their stocks to a trustee to create a more\npowerful block of oil companies that prevented other oil companies from effectively competing with them\n(West, n.d.).\nThe first antitrust law created was the Sherman Antitrust Act in 1890, which became the basis for subsequent\nantitrust laws (Jurist, 2013). The Sherman Act was a good start, but it was not comprehensive enough to\nprevent trusts, and large companies continued to exert strong control over industries. At the turn of the\ncentury, a few large companies controlled almost half of all of the nation\xe2\x80\x99s manufacturing assets (West, n.d.).\nIt became evident that more legislation was necessary. President Theodore Roosevelt dubbed himself a\n\xe2\x80\x9ctrustbuster,\xe2\x80\x9d and he began a campaign to create more effective legal endeavors (West, n.d.). Additional\nantitrust acts were passed in 1914, including the Clayton Act and the Federal Trade Commission Act. These acts\nare still in effect, and since 1914, they have been amended by Congress to continue to expand upon and\nsolidify the coverage. It is estimated that antitrust laws save consumers millions of dollars a year, as they\nprohibit business practices that unfairly raise prices on goods and services (United States Department of\nJustice, n.d.).\n\nConclusion\nThe original purpose of antitrust legislation, i.e., to foster competition that results in lower prices, more\nproducts, and more equal distribution of wealth between producers, remains relevant today (West, n.d.). Yet,\nlarge companies still seek advantages in trade and work to put competitors out of business. It is important to\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 11 Antitrust Law\n\n127\n\nmaintain unrestrained trade and prevent the few from having too much power over the many.\n\nSources\nFederal Trade Commission (n.d.). The antitrust laws. Retrieved from: https://www.ftc.gov/tips-advice/\ncompetition-guidance/guide-antitrust-laws/antitrust-laws.\nJurist (2013). History of antitrust laws. Retrieved from: https://www.jurist.org/archives/feature/a-history-andthe-main-acts/.\nUnited States Department of Justice (n.d.). Antitrust laws and you. Retrieved from: https://www.justice.gov/\natr/antitrust-laws-and-you.\nWest\xe2\x80\x99s Encyclopedia of American Law (n.d.). Antitrust law. Retrieved from: >http://iris.nyit.edu/~shartman/\nmba0101/trust.htm.\n\n11.2\n\nAntitrust Laws\n\nAntitrust legislation was designed to prevent unfair restrictions on trade and to maintain equal opportunity for\ntrade for businesses and consumers alike. Throughout the history of antitrust laws, legislation has become\nmore comprehensive and structured to keep up with the business practices of larger corporations that\ncontinue to seek advantages and control through trade practices.\n\nWhat Do Antitrust Laws Do?\nAntitrust laws were created to prevent unlawful mergers and business practices that could lead to restraint of\ntrade by others (Federal Trade Commission, n.d.). The laws themselves are somewhat general to allow the\ncourts the ability to make decisions on these practices, based on changing times and markets (Federal Trade\nCommission, n.d.). The three main antitrust laws that are in effect have been in effect for over 100 years and\nthrough many changes in society\xe2\x80\x94from an industrial age to a technological age, and the changing markets\nthey represent. The federal government created and enforces these three main antitrust laws:\n\xe2\x80\xa2 The Sherman Antitrust Act\n\xe2\x80\xa2 The Clayton Act\n\xe2\x80\xa2 The Federal Trade Commission Act\nEach state has its own antitrust laws that pertain to trade practices within each separate state, but federal laws\nare able to reach beyond the states to interstate trade.\n\nThe Sherman Antitrust Act\nThe Sherman Act was passed in 1890 and focused on trade restraints that were considered unreasonable\n(Federal Trade Commission, n.d.). This Act did not prohibit all forms of trade restraint, since the courts did not\nsee temporary limited restraints as an issue at the time. A partnership agreement that limited trade to certain\nareas for certain partners was considered acceptable. The courts deemed some trade restrictions as\nunreasonable, such as price fixing (Federal Trade Commission, n.d.). In some cases, the violation was so\napparent that the violation was considered prima facie, or so evident that it automatically satisfied the\nunreasonable standard (Jurist, 2013).\n\n\x0c128\n\nChapter 11 Antitrust Law\n\nThe Sherman Act prohibits all contracts and interactions that unreasonably restrain foreign trade and trade\nbetween states (United States Department of Justice, n.d.). This prohibition does not mean that companies\ncannot lower prices on goods in an effort to outsell the competition. Doing so would be considered fair\ncompetition and trade. However, when a company is able to suppress the ability of others to compete through\nsome intentional unfair business practice, such as forming agreements with competitors to set prices, it is\nconsidered a violation.\n\nFigure 11.4\n\nCompetitive pricing is a normal part of business until it involves unfair trade practices. (Credit:\n\npixabay/ pexels/ CC0)\nThe Act is a criminal statute, meaning that violation of this Act would result in criminal penalties. Mergers or\nother actions that would create agreements to fix prices or bids or allocate customers are considered criminal\nfelonies (The United States Department of Justice, n.d.). Violations of the Sherman Act could lead to penalties\nof up to $100 million for larger corporations and up to $1 million for individuals (Federal Trade Commission,\nn.d.). Those convicted could also face up to 10 years in prison. If the amount gained by the conspirators, or the\namount lost by the victims of the crime, is over $100 million, the fine could be increased to twice the amount\ngained by the conspirators or lost by the victims\xe2\x80\x94whichever is greater (Federal Trade Commission, n.d.).\nThe Sherman Act did have limitations. It did not provide clear and specific language, which left the courts to\nmake decisions on a case-by-case basis, without any consistent precedent on which to rely (West, n.d.).\nPrecedent occurs as courts make rulings in certain cases, and those rulings are followed in subsequent cases.\nThis lack of precedent left many larger companies in control of their restraint of trade practices, and new\nlegislation seemed necessary.\n\nThe Clayton Act\nThe Clayton Act was passed in 1914. The Clayton Act is a civil statute rather than a criminal statute, meaning\nthat it carries civil penalties rather than prison sentences (United States Department of Justice, n.d.). It\nprimarily focuses on unfair mergers and acquisitions (Jurist, 2013). This Act sought to create more specific\nlanguage to help the courts reduce unfair trade practices. As such, it established four acts as illegal, but not\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 11 Antitrust Law\n\n129\n\ncriminal, meaning that they would be tried as civil matters. The four acts are (West, n.d.):\n\xe2\x80\xa2 Price discrimination, which occurs as the same product is sold to different buyers at different prices\n\xe2\x80\xa2 Exclusive dealing contracts, which require buyers to purchase only from one business and not\ncompetitors\n\xe2\x80\xa2 Corporate mergers, which result in the acquisition of competing companies\n\xe2\x80\xa2 Interlocking directorates, which are boards of competing companies with common members sitting on\neach of the boards\nThe four acts would only be considered illegal when they create monopolies or substantially lessen\ncompetition (West, n.d.). Unions were excluded from mention in the Clayton Act, as Congress did not wish to\ntreat human labor as a commodity (West, n.d.). This Act was still broad enough to rely on the courts for\ninterpretation and decisions on a case-by-case basis.\nThe Clayton Act was amended in 1976 to require companies planning larger mergers and acquisitions to notify\nthe government in advance and seek authorization (Federal Trade Commission, n.d.). This amendment also\nprovides individuals who are victims of these practices with the ability to sue for triple damages after harm is\nestablished (Federal Trade Commission, n.d.).\n\nThe Federal Trade Commission Act\nThe Federal Trade Commission Act (FTC Act), also passed in 1914, focuses on unfair methods of competition\nand deceptive acts or practices that impact commerce (West, n.d.). All acts that violate the Sherman Act also\nviolate the FTC Act (Federal Trade Commission, n.d.). The FTC Act works to fill in the gaps of the unfair practices\nby condemning all anticompetitive behaviors not otherwise covered in the other federal antitrust laws (West,\nn.d.).\n\n\x0c130\n\nChapter 11 Antitrust Law\n\nFigure 11.5\n\nThe Federal Trade Commission was created to oversee fair trade practices. (Credit: Clker-Free-\n\nVector-Images/ pixabay/ License: CC0)\nThe FTC Act is only enforceable by the Federal Trade Commission (FTC), which was created as a result of this\nAct (Jurist, 2013). The FTC implements the Act\xe2\x80\x99s provisions, and the FTC and the U.S. Department of Justice\n(DOJ) are the federal agencies responsible for prosecuting violators in either civil or criminal proceedings,\ndepending on the act violated. One remedy that the FTC or DOJ can seek is divestiture, which forces the\ncompany to give up one or more of its operating functions (West, n.d.). Another remedy is dissolution, which\nwould terminate the right of a partnership to exist (West, n.d.).\n\nExemptions\nThere are limitations on antitrust laws that have been introduced over the years. These include:\n\xe2\x80\xa2 Labor \xe2\x80\x93 A labor union can organize and bargain within the bounds of antitrust laws, as long as it does not\ncombine with a nonlabor group.\n\xe2\x80\xa2 Agriculture and Fisheries \xe2\x80\x93 Collective co-ops of agricultural groups or fisheries can form, as long as they\ndo not engage in restraint of trade.\n\xe2\x80\xa2 Foreign Trade \xe2\x80\x93 Companies can join forces in cooperative activities involving foreign trade exports, as\nlong as trade within the United States is not restrained.\n\xe2\x80\xa2 Cooperative Research and Production \xe2\x80\x93 Small businesses can cooperatively work together on research\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 11 Antitrust Law\n\n131\n\njoint ventures.\nIn essence, exemptions are allowed, as long as they do not act to restrain trade in the United States (West,\nn.d.). Once restraint of trade becomes a factor, the practices are no longer exemptions and are subject to\nantitrust laws.\n\nConclusion\nThe three main antitrust laws, namely the Sherman Act, the Clayton Act, and the Federal Trade Commission\nAct, all work to prevent unfair trade practices that can substantially harm free competition. They also work to\nprotect consumers from practices that would control pricing or the ability to buy or engage in services. They\nprevent companies from taking actions that would allow them to become too big or too powerful, thus\ncontrolling how, and what, consumers and other businesses can do.\n\nAssessment Questions\n1. All of the following are forms of restraint of trade that company might use to reduce competition except:\na. Monopolies.\nb. Oversupply.\nc. Price-fixing.\nd. Mergers.\n2. What is a Business Trust?\n3. Distinguish between naked restraint and ancillary restraint.\n4. What was the first antitrust law enacted?.\na. The Clayton Act.\nb. The Federal Trade Commission Act.\nc. The Antitrust Act.\nd. The Sherman Act.\n5. What was the original purpose of antitrust legislation?\n6. What recourse does the FTC have if an individual or company engages in an unfair trade practice?\na. Consent order.\nb. Administrative complaint.\nc. Litigation.\nd. All of the above.\n7. Each state has its own Antitrust law.\na. True.\nb. Fasle.\n8. Which of the following is not prohibited by the Sherman Act?\na. Temporary limited restraints.\nb. Temporary restraints.\nc. Naked restraints.\nd. Ancillary restraints.\n\n\x0c132\n\nChapter 11 Antitrust Law\n\n9. Which of the following are possible penalties for violation of the Sherman Act?\na. Up to $100 million for corporations and individuals.\nb. Up to $100 million for individuals.\nc. Up to $100 millions for corporations.\nd. None of these are correct.\n10. Which of the following are considered illegal by the Clayton Act?\na. Price discrimination.\nb. Exclusive dealing contracts.\nc. Corporate mergers.\nd. All of the above.\n11. The following are exempt from antitrust laws:\na. Small businesses.\nb. Coops.\nc. Labor unions.\nd. Agriculture groups even if they engage in restraint of trade.\n12. When was the Federal Trade Commission established?\na. 1912.\nb. 1914.\nc. 1916.\nd. 1920.\n13. The following are bureaus of the Federal Trade Commission except:\na. Bureau of Unfair Trade Practices.\nb. Bureau of Consumer Protection.\nc. Bureau of Competition.\nd. Bureau Economics.\n14. What is the mission of the Bureau of Competition?\n15. Explain the Wheeler-Lea Act.\n\nEndnotes\nSources\nFederal Trade Commission (n.d.). The antitrust laws. Retrieved from: https://www.ftc.gov/tips-advice/\ncompetition-guidance/guide-antitrust-laws/antitrust-laws.\nJurist (2013). History of antitrust laws. Retrieved from: https://www.jurist.org/archives/feature/a-history-andthe-main-acts/.\nUnited States Department of Justice (n.d.). Antitrust laws and you. Retrieved from: https://www.justice.gov/\natr/antitrust-laws-and-you.\nWest\xe2\x80\x99s Encyclopedia of American Law (n.d.). Antitrust law. Retrieved from: http://iris.nyit.edu/~shartman/\nmba0101/trust.htm.\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0c12\n\nUnfair Trade Practices and the Federal Trade Commission\nFigure 12.1 (Credit: Carol M. Highsmith collection/ wikimedia/ Attribution 2.0 Generic (CC BY 2.0))\n\nChapter Outline\n12.1 Unfair Trade Practices\n12.2 The Federal Trade Commission\n\nIntroduction\nLearning Outcomes\n\xe2\x80\xa2 Analyze laws pertaining to unfair trade practices and the agency that scrutinizes them.\n\n12.1\n\nUnfair Trade Practices\n\nThe term \xe2\x80\x9cunfair trade practice\xe2\x80\x9d describes the use of deceptive, fraudulent, or unethical methods to gain\nbusiness advantage or to cause injury to a consumer. Unfair trade practices are considered unlawful under the\nConsumer Protection Act. The purpose of the law is to ensure that consumers have the opportunity to make\ninformed, rational decisions about the goods and services they purchase.\nUnfair trade practices include false representation of a good or service, targeting vulnerable populations, false\nadvertising, tied selling, false free prize or gift offers, false or deceptive pricing, and non-compliance with\nmanufacturing standards. Alternative names for unfair trade practices are \xe2\x80\x9cdeceptive trade practices\xe2\x80\x9d or\n\xe2\x80\x9cunfair business practices.\xe2\x80\x9d\nSection 5(a) (https://www.federalreserve.gov/boarddocs/supmanual/cch/ftca.pdf) of the Federal Trade\nCommission Act prohibits \xe2\x80\x9cunfair or deceptive acts or practices in or affecting commerce.\xe2\x80\x9d Per the rule, unfair\npractices are those that cause, or are likely to cause, injury to consumers, those that consumers cannot avoid,\nand those in which the benefits of the product or service do not outweigh the deception. Deceptive practices\nare defined as those in which the seller misrepresents or misleads the consumer, and the misleading practice\n\n\x0c134\n\nChapter 12 Unfair Trade Practices and the Federal Trade Commission\n\nis substantial.\nThe Federal Trade Commission (FTC) is a federal agency that enforces consumer protection laws. Consumers\nmay seek recourse for unfair trade practices by suing for compensatory or punitive damages. Plaintiffs do not\nhave to prove intent. Showing that the practice itself was unfair or deceptive is sufficient.\n\nFigure 12.2\n\nThe Federal Trade Commission (FTC) enforces consumer protection laws. (Credit: U.S.\n\nGovernment/ wikimedia/ License: Public Domain)\n\nUnfair Trade Practices and Examples\nProduct Guarantees and False Endorsements\nCompanies must be prepared to honor product guarantees. For example, if a product is advertised with a 50\npercent money-back guarantee, then that must be provided to customers who meet the requirement(s)\nattached to the guarantee. Similarly, companies may not create false endorsements and testimonials about\ntheir products.\n\nUnfair Advertising\nFalse advertising includes the misrepresentation of a product, service, or price. It may be more expansively\ndefined to include unfair sales strategies, such as advertising one item and then selling another item in its\nplace, e.g., one that is higher priced, lower quality and/or less in demand. This method is most commonly\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 12 Unfair Trade Practices and the Federal Trade Commission\n\n135\n\nreferred to as \xe2\x80\x9cbait and switch.\xe2\x80\x9d Additional examples of unfair advertising include incorrect pricing, fake\nendorsements, deceptive guarantees, making false statements, and providing descriptions that exaggerate\nthe performance of the product or service.\n\nEXAMPLE 12.1\nFor months, Ivan had searched for just the right window curtain to match the d\xc3\xa9cor of his new high rise\ncondo. Finally, while browsing through Amazon, he saw two gray velvet curtains that featured a damask\npattern, with taupe and gold accents and specks of ice blue glitter accents. He could not have designed a\nmore perfect color palette for the window treatments if he tried. Moreover, the velvet blackout touch was\njust what he needed. Excited, he hit the \xe2\x80\x9cBuy Now\xe2\x80\x9d button and waited a couple of days for his order to\narrive. When it did, what a huge disappointment! He could see, if he stared long and hard enough, how\nsomeone with a vivid imagination might consider the curtain to be an abstract interpretation of what was\nadvertised. However, most people would see that the product was not at all close to what was advertised.\nThe velvet was closer to linen, the damask pattern was closer to swirls, and the taupe and gold accents with\nspecks of ice blue were closer to silver and purple, with specks of mauve. After running a Google reverse\nimage search of the original product photo, he saw it featured in an interior design magazine. When Ivan\nlooked up the product endorsements and reviews, he saw that all of the reviewers had only posted reviews\nfor that particular seller\xe2\x80\x99s products, and that they had posted nothing but glowing reviews for each of the\nproducts. It was clear to Ivan that the seller was guilty of false advertising, as well as faking endorsements.\nIvan has enough information to submit a consumer complaint to the Federal Trade Commission.\n\nTaking Advantage of Customers\nThe FTC also pays particular attention to business ventures that target vulnerable populations. For example,\nsome telemarketing efforts employ intense pressuring tactics to target seniors and people who don\xe2\x80\x99t speak\nEnglish.\n\nEXAMPLE 12.2\nDevin is involved in the telemarketing of spy gadgets, such as bugs and bug detectors. He has had a lot of\ntrouble finding a market for these products. One day, he speaks with an older citizen who asks him about\nthe benefits of the bug detector. Devin starts to knowingly make unsubstantiated claims that there have\nbeen news reports that home bugging is on the rise. His false claims works like a charm. Spooked, the\nelderly customer buys the most expensive bug detector product. Seeing his success, Devin purchases a\nreport of households in his geographic selling area that are headed by people over the age of 70. Over the\nnext few months, his sales increase at an explosive rate. When he is recognized by management for his\nleading sales numbers, they also inquire about the secret to his success as they seek to replicate it in\ntraining materials for other sales professionals. When Devin proudly explains his tactics, he is terminated by\nthe company. The company calls the customers impacted by his false claims, explains that there was a\nmisrepresentation by one their sales associates regarding the scope of known bugging activity, allows them\nto keep their bug detectors, and refunds them the money they spent purchasing the products. The sales\nassociate engaged in unfair trade practices, but the company took appropriate steps to correct it.\n\n\x0c136\n\nChapter 12 Unfair Trade Practices and the Federal Trade Commission\n\nMisrepresenting a Product\nAt times, the FTC may be quite technical in its definition of certain terms. For this reason, companies should be\nvery clear about their usage of various phrases and words. For example, the word \xe2\x80\x9cnew\xe2\x80\x9d may only be used to\nrefer to a product that is less than six months old. Other terms may be the subject of debate or litigation, such\nas whether a lotion will actually \xe2\x80\x9crejuvenate\xe2\x80\x9d skin or whether a tablet will actually \xe2\x80\x9ccure\xe2\x80\x9d baldness. Indeed, a\nsweater should not be called \xe2\x80\x9cwool\xe2\x80\x9d unless that is its complete composition. There are many examples, so it is\nimportant for businesses to have an understanding of the FTC\xe2\x80\x99s rules on this topic.\n\nGiving Misleading Price Information\nThe FTC sanctions misleading price information as an unfair trade practice. Examples of misleading price\ninformation include false sales in which a \xe2\x80\x9climited time offer\xe2\x80\x9d might actually be available forever, or running a\n\xe2\x80\x9cGoing Out of Business\xe2\x80\x9d sale without any plans to go out of business while advertising that items are\ndiscounted, although the prices have not changed.\n\nEXAMPLE 12.3\nA brick and mortar store has an online promotion for a \xe2\x80\x9cbuy one, get one\xe2\x80\x9d offer for the season\xe2\x80\x99s hottest\nnew phone, stating that the offer is only available on Black Friday. The store opens at 5:00 a.m., and\ncustomers start lining up with their sleeping bags in tow the evening prior to the morning opening time.\nAfter customers almost stampede one another, they learn that they will have to also purchase a phone plan\nthat is inflated by 100% of its regular price to qualify for the deal. Nowhere in the literature or promotions\nwas the phone plan, or its over-inflated price, mentioned as a requirement to get the buy one get one free\nphone deal.\n\nFailing to Disclose Pertinent Information\nMerchants must disclose facts that would reasonably influence the consumer\xe2\x80\x99s decision to make a purchase.\nWithholding pertinent information from customers may be viewed by the FTC as equal in severity to the\nprocess of using overtly incorrect or deceptive information. For example, sellers should always disclose the full\nprice of their products or services before accepting payment for them.\n\n12.2\n\nThe Federal Trade Commission\n\nThe FTC was created in 1914 to address the problem of monopolies and trusts. Following the Civil War, a wave\nof consolidation and growth among companies triggered increased public debate. Through handshake\nagreements, issuance of stock, and pooling arrangements, companies could fix prices and outputs, thus\neffectively stopping competition and raising consumer prices. A substantial number of mergers gave control\nover key industries to small groups of businesses. Where companies did not merge, other arrangements were\nmade to have a similar effect. Conglomerates controlled most of the relevant industries that produced\nhousehold necessities. Goods used in production were also the product of highly concentrated trusts, such as\nthe United States Steel Corporation and the International Paper Company. Concerns about industrialization\nand a changing economy, with shifting norms for personal lives, triggered antitrust sentiment.\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 12 Unfair Trade Practices and the Federal Trade Commission\n\nFigure 12.3\n\n137\n\nThe Federal Trade Commission prevents monopolies, like that of U.S. Steel in the early 20th\n\ncentury. (Credit: Bruce McAllister/ wikimedia/ License: Public Domain)\nThe perceived unfairness and fears caused by the consolidation of businesses created strong anti-business\nsentiment and increasing cries for price controls to be considered as a remedy for heavily concentrated\nindustries. These organizations posed economic and social problems that became a large social concern. In\nresponse, the Federal Trade Commission (FTC) was created with broad powers to investigate and propose\nformal recommendations to companies about their competitive practices. The FTC did not formally have a\nconsumer protection mission until the passage of the Wheeler-Lea Act in 1938. This act gave the FTC the power\nto combat false advertising for any foods, drugs, medical devices, or cosmetics.\nIn addition to the Wheeler-Lea Act, subsequent amendments to the FTC Act, as well as judicial respect toward\nthe agency, broadened the power and jurisdiction of the FTC.\nToday, in addition to its original antitrust roots, the FTC enforces consumer protection laws.\n\nBureaus of the FTC\nSeveral bureaus now stand in support of the FTC\xe2\x80\x99s efforts.\n\nBureau of Consumer Protection\nThe Bureau of Consumer Protection protects consumers against unfair trade practices. Bureau attorneys\nenforce consumer protection laws issued by the FTC. In addition to enforcement actions, the Bureau\xe2\x80\x99s\nfunctions include investigations and consumer and business training. Unfair trade practices in advertising and\nmarketing are a main focus, as well as privacy, financial products and practices, and identity protection. The\nBureau also manages the United States National Do Not Call Registry and investigates telemarketing fraud.\n\n\x0c138\n\nChapter 12 Unfair Trade Practices and the Federal Trade Commission\n\nBureau of Competition\nThe Bureau of Competition\xe2\x80\x99s purpose is to eliminate and prevent \xe2\x80\x9canticompetitive\xe2\x80\x9d business practices related\nto the enforcement of antitrust laws. The FTC and the Department of Justice share responsibility for\nenforcement of antitrust laws.\n\nBureau of Economics\nThe Bureau of Economics supports the Bureau of Competition and Bureau of Consumer Protection by\nproviding subject matter expertise regarding the economic impacts of FTC legislative activity.\n\nFTC Activities\nThe FTC investigates issues raised through a number of sources, including consumer, business, and media\nreports. If the FTC concludes that there was unlawful conduct, it may seek several forms of recourse. These\ninclude the pursuit of voluntary compliance through a consent order, the submission and filing of\nadministrative complaints, or the initiation of a federal action and litigation.\nThe FTC has the power to create rules regarding widespread industry practices. Rules created in this fashion to\naddress systemic issues are called trade rules.\n\nAssessment Questions\n1. Define unfair trade practices.\n2. All of the following are considered unfair trade practices except:\na. Targeting vulnerable populations.\nb. Charging extremely high prices.\nc. False advertising.\nd. False representation of a good or service.\n3. What is a bait and switch?\n4. Describe the role of the Federal Trade Commission.\n5. The following are examples of a company giving misleading price information except:\na. Advertising \xe2\x80\x9cLimited Time Offer\xe2\x80\x9d when the offer is available forever.\nb. Advertising \xe2\x80\x9cGoing Out of Business\xe2\x80\x9d when the company plans to stay in business.\nc. Advertising the product as \xe2\x80\x9cNew\xe2\x80\x9d when the product is more than 6 months old.\nd. Advertising \xe2\x80\x9cBuy One, Get One\xe2\x80\x9d without informing consumers that they must buy another product or\nservice to get the deal.\n\nEndnotes\nThe Consumer Protection Act: Unfair Trade Practices. Retrieved from: https://www.ftc.gov.bb/library/\n2003-06-13_unfair_trade_practices.pdf.\nLumen Learning. (n.d.). Business and the Legal Environment. Retrieved from:\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 12 Unfair Trade Practices and the Federal Trade Commission\n\n139\n\nhttps://courses.lumenlearning.com/buslegalenv/chapter/27-3-unfair-trade-practices/.\nHolt, W. S. (2010). Federal trade commission: Its history, activities and organization. Gale Ecco, Making Of Mode.\nAbout the FTC. (2018, July 17). Retrieved from: https://www.ftc.gov/about-ftc.\nConsumer Information, Federal Trade Commission. (n.d.). Retrieved from: https://www.consumer.ftc.gov/.\nFederal Trade Commission, USA.gov. (n.d.). Retrieved from: https://www.usa.gov/federal-agencies/federaltrade-commission.\nStatutes Enforced or Administered by the Commission. (n.d.). Retrieved from: https://www.ftc.gov/\nenforcement/statutes.\n\n\x0c140\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\nChapter 12 Unfair Trade Practices and the Federal Trade Commission\n\n\x0c13\n\nInternational Law\nFigure 13.1 (Credit: geralt/ pixabay/ Attribution 2.0 Generic (CC BY 2.0))\n\nChapter Outline\n13.1 Introduction to International Law\n13.2 Sources and Practice of International Law\n\nIntroduction\nLearning Outcome\n\xe2\x80\xa2 Explain international law and its role in business.\n\n13.1\n\nIntroduction to International Law\n\nIn 1945, President Harry Truman stated, \xe2\x80\x9cWhen Kansas and Colorado have a quarrel over the water in the\nArkansas River they don\xe2\x80\x99t call out the National Guard in each state and go to war over it. They bring a suit in\nthe Supreme Court of the United States and abide by the decision. There isn\xe2\x80\x99t a reason in the world why we\ncannot do that internationally\xe2\x80\x9d (Cheeseman, 2016, p. 903). Customs, which vary among global communities\nand international organizations, are a primary reason why the world cannot pursue such an answer to trade\nand commerce dealings. The priorities and aims for Chinese businesses differ from those of Brazil. Each of\nthose two countries have radically different business perspectives from the United States. For this reason,\ninternational law utilizes customs, treaties, and organizations to guide relationships among nations, with the\ngoal of allowing each country as much leverage as possible over its own business dealings.\n\n\x0c142\n\nFigure 13.2\n\nChapter 13 International Law\n\nInternational laws are based on customs, treaties, and organizations that guide partnerships\n\namong nations. (Credit: GDJ/ pixabay/ License: CC0)\n\nInternational Law\nInternational law relates to the policies and procedures that govern relationships among nations (Clarkson,\nMiller, & Cross, 2018). These are crucial for businesses for multiple reasons. First, there is not a single\nauthoritative legislative source for global business affairs, nor a single world court responsible for interpreting\ninternational law (Cheeseman, 2016, p. 903). There is also not a global executive branch that enforces\ninternational law, which leaves global business affairs particularly vulnerable.\nSecondly, if a nation violates an international law and persuasive tactics fail, then the countries that were\nviolated, or international organizations tasked with overseeing global trade, may act. Often these actions use\nforce to correct the offenses and may include economic sanctions, severance of diplomatic relations, boycotts,\nor even war against the offending nation (Clarkson, Miller, & Cross, 2018, p. 439).\nThe purpose of international laws is to permit countries as much authority as possible over their own\ninternational business affairs, while maximizing economic benefits of trade and working relationships with\nother nations. Since many countries have historically allowed governance by international agreements when\nconducting global business, there exists an evolving body of international laws that facilitate global trade and\ncommerce.\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 13 International Law\n\n143\n\nU.S. Constitutional Clauses\nThere are two important clauses in the U.S. Constitution related to international law. First, the Foreign\nCommerce Clause enables Congress to \xe2\x80\x9cregulate commerce with foreign nations\xe2\x80\x9d (Cheeseman, 2016, p. 904).\nThis clause permits U.S. businesses to actively negotiate and implement taxes or other regulations as they\nrelate to international commerce. However, businesses cannot unduly burden foreign commerce. For\nexample, General Motors, which is based in Michigan, cannot suggest that the state impose a 50 percent tax\non foreign-made automobiles sold in the state, while not imposing the same tax on U.S.-made vehicles.\nMichigan can, however, impose a 10 percent tax on all automobile sales in the state to offset the costs of\nforeign trade and commerce.\nThe second important clause related to international law is the Treaty Clause, which states that the president\nhas the power \xe2\x80\x9cby and with the advice and consent of the senate\xe2\x80\x9d to create treaties with other nations\n(Clarkson, Miller, & Cross, 2018, p. 440). This clause restricts treaties to federal authority, meaning that states\ndo not have the power to enter a treaty with another nation. For example, the United States and Mexico can\nsign a treaty to reduce trade barriers between both nations, but the state of Texas cannot sign a treaty with\nMexico to reduce trade barriers between Texas businesses and Mexico. Additionally, any treaties established\nwith other countries become U.S. law, and any conflicting law is null and void.\n\nPrimary Sources of International Law\nInternational customs, treaties, and organizations are the primary sources of international law (Clarkson,\nMiller, & Cross, 2018, p. 439).\n\nFigure 13.3\n\nThree distinct components are sources for how international law is understood, defined, and\n\ninterpreted around the world. (Modification of art by BNED Credit: CC BY NC SA)\nThese three components work together to guide how nations understand, define, and interpret international\nlaws that govern global business affairs.\n\nInternational Customs\nCustoms are general practices between nations that guide their business relationships. According to the\n\n\x0c144\n\nChapter 13 International Law\n\nStatute of the International Court of Justice, international customs are \xe2\x80\x9caccepted as law\xe2\x80\x9d (Clarkson, Miller, &\nCross, 2018, p. 439). While customary international law (CIL) is not written, nor does it require ratification to\nbecome binding, CIL nonetheless provides guidelines for how nations conduct business affairs (Bradley &\nGulati, 2010, p. 204). One example of a custom is the international protection of ambassadors. For thousands\nof years, ambassadors have been protected while serving diplomatic missions. For this reason, countries\nprotect foreign ambassadors with the understanding that any harm caused to ambassadors would be a\nviolation of international law.\n\nInternational Treaties\nTreaties and other agreements between nations are authorized and ratified by the countries that acknowledge\ntheir legality. There are two different types of agreements: bilateral, which is formed by two nations; and\nmultilateral, which is formed by several nations. The Peru-United States Trade Promotion Agreement is an\nexample of a bilateral agreement. It was signed in 2006, ratified by Peru the same year, and ratified by the\nUnited States in 2007. This bilateral agreement is considered beneficial to the United States because it\nimproves access to Peruvian goods, while promoting security and democracy in the South American country.\nThe North American Free Trade Agreement, or NAFTA, is an example of a multilateral agreement. It was\nratified in 1994, when Mexico joined the previous trade agreement between the United States and Canada. In\nSeptember 2018, the Trump administration successfully completed re-negotiations with Mexico and Canada\nthat lasted over one year. Among other aims, these negotiations worked to increase auto industry wages for\nworkers in Mexico and modify pharmaceutical regulations with Canada.\n\nInternational Organizations\nInternational organizations are comprised of officials who represent member nations that have established a\ntreaty to oversee shared interests, including trade and commerce. The U.S. participates in more than 120\nbilateral and multilateral organizations around the world. International organizations adopt resolutions that\nstandardize behavior and create uniform rules related to trade and commerce. Two of the most significant\ninternational organizations established in the twentieth century that significantly impact U.S. trade and\ncommerce are the United Nations and the European Union.\n\nUnited Nations\nThe United Nations (UN) was created as a multilateral treaty in 1945. The UN\xe2\x80\x99s organizational goals include\nmaintaining global peace and security, promoting economic and social cooperation, and protecting human\nrights, especially related to women and children (Cheeseman, 2016, p. 905). The UN General Assembly\nincludes representatives from each member nation. As of 2018, the UN acknowledges 195 sovereign states,\nwith all but two participating as full members. These two, Palestine and the Vatican City, are classified as\n\xe2\x80\x9cobserver states.\xe2\x80\x9d Six additional countries are not UN members, but are recognized as a country by at least\none UN member country: Abkhazia, Kosovo, Northern Cypress, South Ossetia, Taiwan, and Western Sahara.\nThe UN Security Council includes five permanent members and 10 countries selected by the General\nAssembly to serve two-year terms. The five countries that hold permanent membership are China, France,\nRussia, the United Kingdom, and the United States (Cheeseman, 2016, p. 558). This Council is primarily\nresponsible for overseeing global peace and security measures. The World Bank is a UN organization, financed\nby contributions from developed countries and headquartered in Washington, D.C. Its primary functions\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 13 International Law\n\n145\n\ninclude providing money to developing countries to fund projects that relieve suffering, including building\nroads and dams, establishing hospitals, developing agriculture, and other humanitarian efforts. The World\nBank provides both grants and long-term low interest rate loans to countries, often granting debt relief for\noutstanding loans (Cheeseman, 2016, p. 559).\nThe United Nations Commission International Trade Law is one of the most important international\norganizations to date, establishing the 1980 Convention on Contracts for the International Sale of Goods\n(CISG), which will be discussed further in the next section.\n\nEuropean Union\nThe European Union (EU) is a regional international organization that includes many countries in Europe. It\nwas established to create peace across the region and promote economic, social, and cultural development\n(Cheeseman, 2016, p. 561). As of 2018, there are 28 countries affiliated with the EU, although the United\nKingdom has begun steps to withdraw its membership. Additionally, Macedonia is actively seeking a path\ntoward EU membership, although as of September 2018, the country\xe2\x80\x99s citizens remain divided. The EU\norganization has established a treaty for its members that creates open borders for trade among member\nnations, especially for capital, labor, goods, and services. The impact on U.S. commerce is significant, as the EU\nrepresents more than 500 million people and a gross community product that exceeds that of the United\nStates, Canada, and Mexico combined (Cheeseman, 2016, p. 561).\n\nSovereignty\nNational sovereignty defines a nation. While clearly defined borders and independent governments also set\nparameters for a nation, sovereignty is an important legal principle that allows nations to enter negotiated\ntreaties with other countries and honor territorial boundaries. It is among the most important international\nlaw principles, thus greatly impacting international trade and commerce.\nSince the 1800s, most established nations allowed for absolute sovereignty among the global community.\nHowever, by the 1940s, that allowance was significantly reduced, as countries revisited sovereignty in light of\nglobalization, transportation, and communication advances, and the rise of international organizations\n(Goldsmith, 2000, p. 959). Consequentially, doctrines of limited immunity were created that established\nguidelines for how countries may prosecute, or hold foreign nationals accountable, during international trade\nand commerce dealings.\nA doctrine of sovereign immunity states that countries are granted immunity from lawsuits in courts of\nother countries (p. 569). Although the United States initially granted absolute immunity to foreign\ngovernments from lawsuits in U.S. courts, in 1952, the United States adapted federal law to qualified immunity,\nwhich is the immunity regulation adopted in most Western nations. This law led to the Foreign Sovereign\nImmunities Act of 1976, allowing U.S. governance over lawsuits against other nations in the United States in\neither federal- or state-level courts. Simply stated, a foreign country is not immune to lawsuits in the United\nStates when the country has waived its immunity, or if the commercial activity against which the lawsuit is\nintended causes a direct effect in the United States.\n\n13.2\n\nSources and Practice of International Law\n\nInternational law is primarily governed by customs, treaties, and organizations that influence how laws are\nunderstood, interpreted, and enforced around the world. Since there is not a central court to enforce\n\n\x0c146\n\nChapter 13 International Law\n\ninternational law, each country utilizes its own courts to settle disputes. Collective action, reciprocity, and\nshaming are three examples of non-legislative methods that influence trade when enacted against nations\nthat violate international law.\n\nFigure 13.4\n\nInternational laws are enforced through positive and punitive measures that seek to uphold the\n\nglobal integrity of trade and commerce among all nations. (Credit: qimono/ pixabay/ CC0)\n\nSources of International Law\nThe sources of international law are customs, treaties, and organizations, as discussed in the previous section.\nThese three components work synergistically to influence how the international community facilitates\nbusiness trade and commerce. More importantly, international law is enforced when a country violates the\nprinciples set forth by globally shared customs, treaties, and organizations.\nOne of the most important governing documents for international law is the United Nations Convention on\nContracts for the International Sale of Goods (CISG), which was established in 1980. This law governs\ncontracts of countries that have ratified it as the priority contract for trade. By January 2018, 84 countries had\nadopted CISG, including the countries that account for more than two-thirds of all global trade. Those\ncountries include the United States, Canada, China, Japan, Mexico, Argentina, Brazil, and most European\ncountries. The CISG is enforced whenever international transactions occur without the presence of written\ncontracts to govern those transactions. There are limits to the CISG, however, as the CISG does not apply to\nconsumer sales or contracts for services (Clarkson, Miller, & Cross, 2018, p. 376).\n\nInternational Principles and Doctrines\nThere are three significant principles that help establish and enforce international law: the Principle of Comity,\nthe Act of State Doctrine, and the Doctrine of Sovereign Immunity.\nThe Principle of Comity states that nations will defer to the laws and decrees of other nations when those\nlaws are consistent with their own, essentially upholding reciprocity between nations with similar laws. For\nexample, a U.S. court will most likely uphold a business contract as valid even if it was drafted in England, since\nthe United Kingdom\xe2\x80\x99s legal procedures are consistent with U.S. procedures (Cross & Miller, 2018, p. 216).\nThe Act of State Doctrine is a law applicable in England and the United States. It states that these two nations\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 13 International Law\n\n147\n\nwill not pass legal judgement on public acts committed by a recognized government if those acts occur within\nthat government\xe2\x80\x99s own territory (Cross & Miller, 2018, p. 216). For example, the United States will not file a\nlawsuit against Petrobras, a Brazilian oil company, alleging price fixing, since the act of pricing oil occurs in\nBrazil, which is a nation that holds control over its own natural resources.\nThe Doctrine of Sovereign Immunity, which was introduced in the previous section, states that foreign\nnations are immune from U.S. jurisdiction when certain circumstances are applied. However, there are\nexceptions to this law. If a foreign country conducts commercial business activity in the United States and an\nentity in the United States files a lawsuit against the foreign business, then the foreign state is not immune\nfrom U.S. jurisdiction (Cross & Miller, 2018, p. 216).\n\nInternational Law Enforcement\nOne of the most important considerations for international business is understanding that companies\noperating in foreign nations are subject to the laws of those nations (Cross & Miller, 2018, p. 212). When\ninternational laws are violated, disputes are often resolved through the legal systems within individual nations.\nMost countries have either common law or civil law systems. Common law systems operate independently by\ndeveloping their own rules that govern areas of business law, such as torts and contracts. The United States\nhas a common law system. One-third of all people in the world live in nations in which common law is\npracticed. Civil law systems base their legislation on Roman civil law, which utilizes statutory codes as the\nprimary source of law (p. 212).\n\nCommon Law\n\nCivil Law\n\nAustralia\n\nMalaysia\n\nArgentina\n\nIndonesia\n\nBangladesh\n\nNew Zealand\n\nAustria\n\nIran\n\nCanada\n\nNigeria\n\nBrazil\n\nItaly\n\nGhana\n\nSingapore\n\nChile\n\nJapan\n\nIndia\n\nUnited Kingdom\n\nChina\n\nMexico\n\nIsrael\n\nUnited States\n\nEgypt\n\nPoland\n\nJamaica\n\nZambia\n\nFinland\n\nSouth Korea\n\nFrance\n\nSweden\n\nGermany\n\nTunisia\n\nGreece\n\nVenezuela\n\nKenya\n\nTable 13.1\n\nImpact on International Trade\nThere are three international law enforcement methods that can radically impact trade: collective action,\n\n\x0c148\n\nChapter 13 International Law\n\nreciprocity, and shaming.\nCollective action occurs when businesses work collectively to strengthen their resources and achieve a\nshared goal. In February 2018, the UN Conference on Trade and Development Secretary-General argued that\ncollective action can be one of the most effective methods for protecting international trade in the current\nglobal climate. Due to recent trade restructuring from the United States and the United Kingdom (pending its\nwithdrawal from the EU), collective action was promoted as a way to \xe2\x80\x9charness energy that will not fragment\nthe [international trade] system\xe2\x80\x9d (UNCTAD, 2018). By leveraging nations to defend \xe2\x80\x9crules-based multilateral\ntrading systems as a force for creating inclusive prosperity,\xe2\x80\x9d the Secretary-General promoted collective action\nas the primary way to assure continued international peace and economic viability for generations to come.\nReciprocity is central to international trade and at the core of CIL. It happens most commonly in international\nbusiness exchanges as countries lower import duties, or other trade barriers, in exchange for mutual\narrangements extended by the other country. Reciprocity can be beneficial to the nations involved, or it can be\npunitive. In 2016, presidential candidate Donald Trump campaigned for an international trade climate that\nwould produce fairer options for the United States. Since his inauguration, he has increasingly pressured the\nglobal community by imposing taxes on imports from Canada, China, the EU, and Mexico, each of which has\nretaliated in reciprocity. In 2018, China accused the United States of launching the \xe2\x80\x9clargest trade war in\neconomic history,\xe2\x80\x9d of which the final global impacts remain largely unknown (BBC, 2018).\nShaming is a deliberate attempt to negatively impact a state, regime, or governmental leader\xe2\x80\x99s reputation by\npublicizing and targeting violations of international laws, including customary norms, treaty breaches, and\nviolations of organizational expectations (Gopalan & Fuller, 2014, p. 75). However, shaming is not viewed as\nparticularly effective without more concrete measures to accompany it (Klymak, 2017). A recent research study\nconducted by the Department of Economics in Dublin, Ireland, found that there is no evidence to suggest that\nthere has been a decrease in the imports of goods to the United States from countries where foreign goods\nare likely produced by child and forced labor. Despite media coverage and the International Labour\nOrganization\xe2\x80\x99s coverage that routinely shames certain nations for producing goods by child or forced labor,\nthose goods are nonetheless regularly imported for international sale.\n\nAssessment Questions\n1. What is International law?\n2. The following are clauses in the U.S. Constitution that relate to international law.\na. Treaty Clause.\nb. Foreign Commerce Clause.\nc. Both a and b.\nd. Neither a nor b.\n3. Explain the European Union.\n4. What is the Doctrine of Sovereign Immunity?\n5. The UN Security Council is made up of:\na. 5 members and 10 countries.\nb. 10 members and 5 countries.\nc. 10 members and 10 countries.\nd. 5 members and 5 countries.\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 13 International Law\n\n149\n\n6. Sources of international law include:\na. Customs, treaties, and laws.\nb. Customs, treaties, and edict.\nc. Treaties, laws, and edicts.\nd. Customs, treaties, and organizations.\n7. Explain the principle of comity.\n8. Compare and contrast common law systems vs. civil law systems.\n9. How many countries have adopted the United Nations Convention on Contracts for the International Sale of\nGoods (CISG)?\na. 74.\nb. 84.\nc. 94.\nd. 104.\n10. All of the following are international law enforcement methods except:\na. Collective action.\nb. Reciprocity.\nc. Shaming.\nd. All of the above.\n\nEndnotes\nBradley, C. A., & Gulati, M. (2010). Withdrawing from international custom. The Yale Law Journal, 120, 202\xe2\x80\x93275.\nCheeseman, H. (2016). Business law: Legal environment, online commerce, business ethics, and international issues\n(9th ed.). Boston, MA: Pearson Education.\nCheeseman, H. (2016). Legal environment of business: Online commerce, business ethics, and global issues (8th\ned.). Boston, MA: Pearson Education.\nClarkson, K. W., Miller, R. L., & Cross, F. B. (2018). Business law: Texts and cases (14th ed.). Boston, MA: Cengage\nLearning.\nGoldsmith, J. (2000). Review: Sovereignty, international relations theory, and international law. Stanford Law\nReview, 52(4), 959\xe2\x80\x93986.\nBBC. (2018, September 18). US-China trade row: What has happened so far? BBC News. Retrieved from:\nhttps://www.bbc.com/news/business-44529600.\nClarkson, K. W., Miller, R. L., & Cross, F. B. (2018). Business law: Texts and cases (14th ed.). Boston, MA:\nCengage Learning.\nCross, F. B., & Miller, R. L. (2018). The legal environment of business: Texts and cases (10th ed.). Boston, MA:\nCengage Learning.\nGopalan, S., & Fuller, R. (2014). Enforcing international law: States, IOs, and courts as shaming reference\ngroups. Brooklyn Journal of International Law, 39(1), 73\xe2\x80\x93158.\nKlymak, M. (2017). The trade impacts of naming and shaming of forced and child labor. Trinity Economic\nPapers, 1\xe2\x80\x9341. Retrieved from: http://www.tcd.ie/Economics/TEP/2017/tep1517.pdf.\n\n\x0c150\n\nChapter 13 International Law\n\nUN. (2018, February 19). Collective action is key to defending trade, Geneva dialogue hears. UN Conference on\nTrade and Development News. Retrieved from: https://unctad.org/en/pages/\nnewsdetails.aspx?OriginalVersionID=1669.\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0c14\n\nSecurities Regulation\nFigure 14.1 (Credit: Sam Valadi/ flickr/ Attribution 2.0 Generic (CC BY 2.0))\n\nChapter Outline\n14.1 Liability Under the Securities Act\n14.2 The Framework of Securities Regulation\n\nIntroduction\nLearning Outcome\n\xe2\x80\xa2 Describe the Securities Exchange Act of 1934 and its impact on business.\n\n14.1\n\nLiability Under the Securities Act\n\nAs explained in the previous section, many companies were initially irritated by the creation of the Securities\nExchange Act of 1934, as it created a myriad of legal responsibilities and potential liabilities that impacted their\nbusiness models. Companies came to recognize that they needed legal counsel and internal systems in place\nto ensure that they were in compliance. The liabilities for not complying with the Securities and Exchange Act\nof 1934 include not only monetary fines, but also civil penalties, and in some cases, criminal proceedings.\nInsider trading is one violation that can result in criminal charges.\n\nInsider Trading\nWhile laws vary from country to country, insider trading can be understood by what the SEC defines as the\n\xe2\x80\x9cbuying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the\nbasis of material, nonpublic information about the security.\xe2\x80\x9d The word fiduciary comes from the Latin word\n\n\x0c152\n\nChapter 14 Securities Regulation\n\nfor trust and refers to someone who is charged with the responsibility to act in the best interest of the other\nparty. In the case of businesses, fiduciaries are expected to act in the best interests of their investors.\nHowever, they are often aware of information that the public is not. This knowledge has important\nimplications as addressed by Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, which\nprohibits the purchase or sale of securities on the basis of "material nonpublic information,"; meaning\ninformation of any kind that would impact the market price of securities that has not been disclosed to the\npublic, i.e., insider information. The directors, large shareholders, and officers of companies frequently have\naccess to nonpublic information that could affect the future value of a security. While an individual, as\nopposed to an entire company, is often charged as an insider trader, such charges can affect the entire\ncompany\xe2\x80\x99s reputation, putting it in a negative light and eroding investor trust.\nOne instance of insider trading that received widespread media attention involved Martha Stewart, who in\n2003 became the subject of legal scrutiny after selling her shares in the pharmaceutical company ImClone.\nFollowing the advice of her broker, David Bacanovic, Stewart sold all of her shares of ImClone before it lost 16\npercent of its value. Bacanovic represented ImClone CEO Sam Waksal, who was selling $5 million of his\nImClone shares. While Bacanovic claimed he did not know why, he shared this information with Stewart. As it\nturned out, the FDA had not approved ImClone\xe2\x80\x99s primary pharmaceutical product, Erbitux, which was a\nsetback that only insiders were privy to. Stewart avoided a $45,673 loss by selling her shares before the public\nannouncement. Even though Stewart may not have known exactly why ImClone would go down in value, the\ncourt decided that her decision to act upon her broker\xe2\x80\x99s suggestion constituted a wrongdoing. Stewart\xe2\x80\x99s role\nas a public figure was also relevant to this decision, as explained by SEC\xe2\x80\x99s Director of Enforcement Stephen M.\nCutler, who said, \xe2\x80\x9cIt is fundamentally unfair for someone to have an edge on the market just because she has\na stockbroker who is willing to break the rules and give her an illegal tip. It\xe2\x80\x99s worse still when the individual\nengaging in the insider trading is the Chairman and CEO of a public company.\xe2\x80\x9d\n\nFigure 14.2\n\nInsider trading can result in criminal conviction and possibly jail time. (Credit: Suzy Hazelwood/\n\npexels/ License: CC0)\nInsider trading is not always illegal. In certain instances, individuals in possession of insider knowledge can\ndisclose their trading activity to the SEC. However, disclosure alone is not enough to make trading on the basis\nof insider information legally acceptable. Another instance in which the officers of publicly held companies can\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 14 Securities Regulation\n\n153\n\nlegally transact securities involves pre-arranged trading plans. For example, SEC Rule 10b5-1 permits\nexecutives at public companies to transact securities so long as it is arranged in good faith beforehand to take\nplace on certain predetermined future dates and involves pre-set amounts. So long as these criteria are\nfollowed, they are granted safe harbor. Safe harbor, in this context, refers to exemption from insider trading\ncharges for compliant pre-arranged equity trades.\n\nSchedule 13D\nIn 1968, the Williams Act amended the Securities Exchange Act of 1934 so that investors could have advance\nwarning of possible corporate takeovers. If someone (individual/corporation) becomes the beneficial owner\nof more than 5% of a company\xe2\x80\x99s stock, that entity must file a Schedule 13D with the SEC within 10 days of\npurchase. A beneficial owner is anyone with \xe2\x80\x9cvoting and investment power over their shares.\xe2\x80\x9d There are a few\nexceptions that apply, such as qualified institutional investors\xe2\x80\x94large investors who are deemed to have\nsophisticated knowledge of securities such that they do not need the same level of protection as general\ninvestors. Insurance companies, state employee benefits plans, and investment companies are examples of\nqualified institutional investors who are allowed to report their holdings at the end of the calendar year.\n\nInsider Transactions\nCorporate insiders are those officers, directors, and beneficial owners who own more than 10% of a class of\nsecurities, registered under Section 12 of the Securities Exchange Act of 1934. Corporate insiders must file a\nstatement of ownership with the SEC to be in compliance, and as of August 27, 2002, the SEC implemented\nnew rules that shortened the time period to report insider transactions. It is important for a company to have\ninternal controls and a system to ensure their corporate insiders are reporting their trades in a timely fashion.\nCompanies that do not implement and enforce compliance procedures can become liable for the actions of\ntheir employees who fail to follow the law.\n\nReporting Requirements\nPublicly owned companies that meet certain size requirements are called reporting companies, and per\nSection 13(a) of the Securities Exchange Act of 1934, they must file periodic disclosures. The purpose of these\ndisclosures is to help investors make educated decisions regarding how to invest their money. These reports\ninclude information about a company\xe2\x80\x99s line of business, corporate officers and directors, and financial\nstatements.\n\xe2\x80\xa2 Form 10-K. Form 10-K, also known as the annual report, contains audited financial statements. Audited\nfinancial statements have been reviewed by one or more CPAs who are not affiliated with the company\nand who provide an objective opinion about whether or not the financial statements, such as the balance\nsheet, income statement, statement of changes to retained earnings, and cash flow statement, conform\nwith accounting standards known as the Generally Accepted Accounting Principles (GAAP). When the\nSecurities Exchange Act of 1934 was first passed, most companies\xe2\x80\x99 annual reports contained only the bare\nminimum amount of information. However, over time, companies came to view their annual reports as a\nway to not only comply with SEC requirements, but also to attract new investors and impress securities\nanalysts, or financial professionals who study various industries to make recommendations on whether a\nsecurity should be bought, held, or sold. Today, many annual reports contain not only the required facts,\n\n\x0c154\n\nChapter 14 Securities Regulation\n\nbut also compelling narratives that detail the company\xe2\x80\x99s mission and strategic goals. The annual reports\nof certain companies\xe2\x80\x94for example, Berkshire Hathaway, written by Warren Buffett and Charlie\nMunger\xe2\x80\x94provide not only their opinions on their own operations, known as the management\ndiscussion, but also their thoughts on the economy overall. The Form 10-K is a large responsibility for a\ncompany because it must disclose the company\xe2\x80\x99s analysis of its financial conditions, potential market\nrisks, internal controls, legal proceedings, defaults, and other information that is deemed important for\ninvestors to make sound investment decisions.\n\xe2\x80\xa2 Form 10-Q. Form 10-Qs are quarterly unaudited financial statements that contain financial information.\nSince they are unaudited, they are less expensive and time-consuming for the company to prepare;\nhowever, investors do not have the additional assurance that they have been analyzed by a neutral CPA.\n\xe2\x80\xa2 Form 8-K. Certain events require the company to file a Form 8-K, such as a change in the company\xe2\x80\x99s\nofficers, mergers, or declarations of bankruptcy. These are required to be filed within four business days\nwith the SEC.\n\xe2\x80\xa2 Proxy Statements. Proxy statements are documents that the SEC requires that shareholders of\ncompanies with securities registered under Section 12 of the Securities Exchange Act of 1934 receive to\nallow them to vote on issues that will be decided at a stockholder meeting. This process is commonly\napplied when voting for directors or deciding corporate actions. Even shareholders who own just one\nshare of a company receive proxy statements; thus, the process of sending out these statements is a\nlarge undertaking for companies. While some companies still use the mail to deliver proxy statements,\nothers send a \xe2\x80\x9cNotice of Internet Availability of Proxy Materials\xe2\x80\x9d to shareholders a minimum of 40 days\nbefore the shareholders\xe2\x80\x99 meeting.\n\nOngoing Responsibilities\nBusinesses must stay current with changes in securities laws that impact their liabilities and responsibilities.\nThe Exchange Act allows the SEC to make new laws, like it did in 2000 with Regulation FD, which stands for \xe2\x80\x9cfair\ndisclosure\xe2\x80\x9d. In 2013, the SEC started to allow the use of social media channels, in certain circumstances, as a\nmeans of distributing information to shareholders.\n\nSummary\nThese two sections have provided an overview of some of the most important points of the Securities\nExchange Act of 1934. Considering the sheer number of exceptions and complexities, coupled with today\xe2\x80\x99s\nrapidly changing technological and political climates, a successful company needs competent legal counsel to\nhelp it navigate the compliance requirements of the SEC. While certain illegal actions can be due to malicious\nintent, such as insider trading, this situation is not always the case; a corporate insider can fail to comply\nsimply because he or she is not aware of the nuances of the law.\n\n14.2\n\nThe Framework of Securities Regulation\n\nThe Securities Exchange Act of 1934\nIn 1929, the United States stock market crashed and lost $25 billion, which would be approximately $319 billion\ntoday. The Stock Market crash of 1929 was one cause of the American Great Depression of the 1930s, which\ncaused the failure of nearly half of American banks and created unemployment rates of almost 25 percent by\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 14 Securities Regulation\n\n155\n\n1933. These dire economic conditions created the need for breadlines, quite literally, hungry people who\nwaited in line at charitable and government organizations for loaves of bread, and shanty towns, or areas\nwhere families who had lost their homes lived in cloistered tents on the outskirts of cities. Farmers could not\neven afford to harvest their crops.\n\nFigure 14.3\n\nFlorence Owens Thompson and her children were living on frozen vegetables and birds they\n\nkilled in this famous photograph taken in 1936 in California. (Credit: Dorothea Lange/ wikimedia/ License:\nPublic Domain)\nIt was amid this social and economic unrest that Congress passed the Securities Exchange Act of 1934. Signed\nby President Franklin D. Roosevelt, the Securities Exchange Act of 1934 recognized that the stock market crash\nof 1929 was caused by wild speculation, large and sudden fluctuations, and manipulations involving securities.\nAn article in the 1934 California Law Review described the condition of the market at the time by writing,\n\n\x0c156\n\nChapter 14 Securities Regulation\n\n\xe2\x80\x9cArtificial prices of securities were the rule rather than the exception.\xe2\x80\xa6 The result was vast economic power,\nwith all that implies in a democracy, in the hand of men whose ethical standards were substantially those of\ngangsters.\xe2\x80\x9d\nRoosevelt wanted to enact legislature to try to prevent this wild speculation in securities from happening again\nand to restore the public\xe2\x80\x99s faith. He recognized that stock market crashes would not only destroy wealth in\nsecurities markets, but they were also instrumental to the financial security of the nation as a whole. The\npassing of the Security Exchange Act of 1934 was not only a reaction to the market crash, but it also\nrepresented a broad shift in the social and economic paradigms and legal frameworks of the United States.\nPreviously, the United States had largely followed a laissez-faire economic policy. Laissez faire, as popularized\nby Scottish economist Adam Smith and British philosopher Herbert Spencer, describes an economic\nphilosophy that markets function best when left to their own devices, i.e., without, or with minimal,\ngovernment involvement or regulations. The rejection of laissez faire was part of a larger social shift that\nopposed the long hours, unsafe working conditions, and child labor that had become commonplace as a result\nof the Industrial Revolution.\n\nThe SEC\nSection 4 of the Securities Exchange Act of 1934 created the Securities and Exchange Commission (SEC) to\nenforce its ongoing mission. The SEC is an independent agency of the United States federal government. It\nregulates securities laws and regulations. The first chairperson of the SEC was Joseph P. Kennedy, the father of\nPresident John F. Kennedy. The SEC is led by five presidentially appointed commissioners and has five\ndivisions: Division of Corporation Finance, Division of Investment Management, Division of Trading and\nMarkets, Division of Enforcement, and Division of Economic and Risk Analysis.\nThe SEC also oversees self-regulatory organizations (SROs), or private organizations that create and enforce\nindustry standards. These organizations are allowed to \xe2\x80\x9cpolice\xe2\x80\x9d themselves, but are subject to compliance\nwith SEC regulations. The various well-known securities exchanges such as the New York Stock Exchange\n(NYSE), the National Association of Securities Dealers Automated Quotation System (NASDAQ), and the\nChicago Board of Options are SROs. Per Section 12(g), companies with total assets exceeding $10 million and\nwith 500 or more owners of any class of securities must register with the SEC unless they meets exemption\nrequirements.\nThe SEC makes new laws in response to emerging technologies. For example, Title III of the Jumpstart Our\nBusiness Startups (JOBS) Act of 2012 was added, and in it, Section 4(a)(6) allows crowdfunding, or raising\nsmall amounts of money from many people to fund a venture or project, usually over the internet.\nCrowdfunding transactions are exempt from registration as long as the amount raised does not exceed\n$1,070,000 in a 12-month period.\n\nSecondary Markets\nThe Securities Exchange Act of 1934 governs secondary markets, or what is typically referred to as the \xe2\x80\x9cstock\nmarket.\xe2\x80\x9d In contrast to the primary market, which involves the initial sale of a security, such as through an\ninitial public offering (IPO), secondary markets involve subsequent buyers and sellers of securities. One key\ndifference is that primary market prices are set in advance, while secondary market prices are subject to\nconstantly changing market valuations, as determined by supply and demand and investor expectations. For\nexample, when Facebook initiated its IPO in May of 2012, the price was $38 per share, and technical issues on\nthe NASDAQ complicated the offering. After the IPO, the stock traded sideways, meaning that it stayed within\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 14 Securities Regulation\n\n157\n\na range that did not indicate strong upward or downward movement. However, Facebook has gone on to\ntrade at values more than four times its initial IPO valuation, due to investor beliefs and expectations. Not all\nstocks go up in value after their IPO; some vacillate between highs and lows and frustrate investors with their\nunstable valuation swings.\n\nFigure 14.4\n\nStocks on the secondary market fluctuate in value. (Credit: 3844328/ pixabay/ License: CC0)\n\nReporting Requirements\nThe Securities Exchange Act of 1934 created numerous reporting requirements for public companies. The\npurpose of these requirements was transparency, that is, keeping the public up to date and informed of\nchanges that might impact securities prices. Public companies with securities registered under Section 12 or\nthat are subject to Section 15(d) must file reports with the SEC. Section 12 requires the registration of certain\nsecurities and outlines the procedures necessary to do so. Information required by Section 12 includes the\nnature of the business, its financial structure, the different classes of securities, the names of officers and\ndirectors along with their salaries and bonus arrangements, and financial statements. Section 15 requires\nbrokers and dealers to register with the SEC. Individuals who buy and sell securities are considered traders,\nand therefore, are not subject to filing under Section 15. Section 15(d) requires registered companies to file\nperiodic reports, such as the the annual Form 10-K and the quarterly Form 10-Q. These reports will be\nexplained in detail in the next section of this chapter. The SEC Commission makes these reports available to all\ninvestors through the EDGAR website to help them make informed investment decisions.\n\nRegistration Requirements\nThe Securities Act of 1933 required companies initiating securities offers and exchanges to register with the\nSEC, unless they met exemption criteria. Section 5 of the Securities Exchange Act of 1934 built upon this\nfoundation and made it unlawful to transact on unregistered exchanges and specifically extended this\nregulation to the usage of the mail and interstate commerce. 15 U.S. Code \xc2\xa7 78f states that exchanges must\nnot only register with the SEC, but they must also have rules that \xe2\x80\x9cprevent fraudulent and manipulative acts\n\n\x0c158\n\nChapter 14 Securities Regulation\n\nand practices, to promote just and equitable principles of trade, to foster cooperation and coordination with\npersons engaged in regulating, clearing, settling, processing information with respect to, and facilitating\ntransactions in securities, to remove impediments to and perfect the mechanism of a free and open market\nand a national market system, and, in general, to protect investors and the public interest \xe2\x80\xa6\xe2\x80\x9d\n\nBlue Sky Laws\nWhen the Securities Exchange Act is discussed, blue sky laws are often mentioned. In 1911, Kansas bank\ncommissioner J.N. Dolley became concerned about what he called \xe2\x80\x9cswindles,\xe2\x80\x9d in which investors at the time\nlost money by investing in \xe2\x80\x9cfake mines\xe2\x80\x9d or \xe2\x80\x9ca Central American plantation that was nine parts imagination.\xe2\x80\x9d\nTherefore, he lobbied for the first \xe2\x80\x9ccomprehensive\xe2\x80\x9d securities law in the United States because, as he phrased\nit, these investments were backed by nothing except the blue skies of Kansas. So, state-level securities laws\naimed to combat fraud are called blue sky laws. The SEC does not have jurisdiction over activities within states\nand does not enforce blue sky laws.\n\nFigure 14.5\n\nIn addition to the Securities Exchange Act of 1934, blue sky laws provide an additional state-level\n\nlayer of legal protection for the public. (Credit: Elia Clerici/ pexels/ License: CC0)\n\nAssessment Questions\n1. Explain a laissez-faire economic policy.\n2. The following are examples of self-regulatory organizations that the SEC oversees:\na. The New York Stock Exchange.\nb. The National Association of Securities Dealers.\nc. The Chicago Board of Options.\nd. All of the above.\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cChapter 14 Securities Regulation\n\n159\n\n3. Which types of companies must register with the SEC?\na. Companies with over 500 or more owners.\nb. Companies with total assets of $10 million.\nc. Companies with total assets exceeding $10 million and with 500 or more owners.\nd. None of the above.\n4. Explain Blue Sky laws.\n5. Distinguish between primary markets and secondary markets.\n6. Define insider trading.\n7. All of the following are considered reports required by the Securities Exchange Act of 1934 except:\na. Form 8k.\nb. Form 10 k.\nc. Form 10Q.\nd. All of the above.\n8. Corporate insiders include officers, directors, and beneficial owners who own _____ % of a class of securities\nregistered under Section 12 of the Securities Exchange Act of 1934.\na. 5.\nb. 10.\nc. 15.\nd. 20.\n9. Explain Schedule 13D.\n10. What\xe2\x80\x99s the purpose of Proxy Statements?\n\nEndnotes\nFischel, D. R. (1981). Secondary Liability under Section 10 (b) of the Securities Act of 1934. California Law\nReview, 69(1), 80\xe2\x80\x93111.\nHanna, J. (1934). The Securities Exchange Act of 1934. California Law Review, 1\xe2\x80\x9329.\nHorwitz, B., & Kolodny, R. (1977). Line of business reporting and security prices: An analysis of an SEC\ndisclosure rule. The Bell Journal of Economics, 234\xe2\x80\x93249.\nJaffe, J. F. (1974). Special information and insider trading. The Journal of Business, 47(3), 410\xe2\x80\x93428.\nSEC charges Martha Stewart, Peter Bacanovic with illegal insider trading. U.S. Securities and Exchange\nCommission. Retrieved from: https://www.sec.gov/news/press/2003-69.htm.\nMyers, M. (1994). Rhetoric Hewn by Audience and History: The Evolution of the Annual Report as a Business\nDocument. Retrieved from: https://files.eric.ed.gov/fulltext/ED370138.pdf.\nWhat\xe2\x80\x99s the deal with Regulation M. Latham & Watkins Capital Markets Group. Retrieved from:\nhttps://www.lw.com/thoughtLeadership/regulation-m-guide-faq.\nEngle, E. (2006). What you don\xe2\x80\x99t know can hurt you: human rights, shareholder activism and SEC reporting\nrequirements. Syracuse Law. Review, 57, 63.\nIf you had invested right after facebook\xe2\x80\x99s IPO (FB, TWTR). Investopedia. Retrieved from:\n\n\x0c160\n\nChapter 14 Securities Regulation\n\nhttps://www.investopedia.com/articles/markets/081415/if-your-would-have-invested-right-after-facebooksipo.asp.\nMacey, J. R., & Miller, G. P. (1991). Origin of the blue sky laws. Texas. Law Review, 70, 347.\nPayne, W. (1911) How Kansas drove out a set of thieves. The Saturday Evening Post, 184, 23.\nRegulation Crowdfunding: A Small Entity Compliance Guide for Issuers. (n.d). U.S. Securities and Exchange\nCommission. Retrieved from: https://www.sec.gov/info/smallbus/secg/rccomplianceguide-051316.htm#_ftn1.\nSoifer, A. (1987). The Paradox of Paternalism and Laissez-Faire Constitutionalism: United States Supreme\nCourt, 1888\xe2\x80\x931921. Law and History Review, 5(1), 249\xe2\x80\x93279.\nSuddath, C. (October, 2008). The crash of 1929. Time. Retrieved from: http://content.time.com/time/nation/\narticle/0,8599,1854569,00.html.\nWhat we do. (n.d). U.S. Securities and Exchange Commission. Retrieved from: https://www.sec.gov/Article/\nwhatwedo.html.\nWhite, E. N. (1990). The stock market boom and crash of 1929 revisited. Journal of Economic perspectives, 4(2),\n67\xe2\x80\x9383.\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cAnswer Key\n\n161\n\nAnswer Key\nChapter 1\n1. b\n3. a\n5. a\n7. d\n9. What is the supreme law of the land? The federal constitution is the supreme law of the land. What are\nstatutes? Laws enacted by Congress or a state legislative body. What are ordinances? Laws enacted by local\nlegislative bodies. What are administrative rules? Laws issued by administrative agencies under the authority\ngiven to them in statutes.\n11. The term \xe2\x80\x9cunfair trade practices\xe2\x80\x9d is broadly used and refers to any deceptive or fraudulent business\npractice or act that causes injury to a consumer. Some examples include, but are not limited to, false\nrepresentations of a good or service including deceptive pricing, non-compliance with manufacturing\nstandards, and false advertising. The FTC investigates allegations of unfair trade practices raised by consumers\nand businesses, pre-merger notification filings, congressional inquiries, or reports in the media and may seek\nvoluntary compliance by offending businesses through a consent order, administrative complaints, or federal\nlitigation.\n13. c\n15. b\n\nChapter 2\n1. a\n3. The process by which parties with nonidentical preferences allocate resources through interpersonal activity\nand joint decision making.\n5.\nThe Thomas-Kilmann Conflict Mode Instrument (TKI) is a questionnaire that provides a systematic framework\nfor categorizing five broad negotiation styles. It is closely associated with work done by conflict resolution\nexperts Dean Pruitt and Jeffrey Rubin. These styles are often considered in terms of the level of self-interest,\ninstead of how other negotiators feel. These five general negotiation styles include:\nForcing. If a party has high concern for itself, and low concern for the other party, it may adopt a competitive\napproach that only takes into account the outcomes it desires. This negotiation style is most prone to zerosum thinking. For example, a car dealership that tries to give each customer as little as possible for his or her\ntrade-in vehicle would be applying a forcing negotiation approach. While the party using the forcing approach\nis only considering its own selfinterests, this negotiating style often undermines the party\xe2\x80\x99s long-term success.\nFor example, in the car dealership example, if a customer feels she has not received a fair trade-in value after\nthe sale, she may leave negative reviews and will not refer her friends and family to that dealership and will\nnot return to it when the time comes to buy another car. Collaborating.\nCollaborating. If a party has high concern and care for both itself and the other party, it will often employ a\ncollaborative negotiation that seeks to maximum the gain for both. In this negotiating style, parties recognize\nthat acting in their mutual interests may create greater value and synergies.\nCompromising. A compromising approach to negotiation will take place when parties share some concerns for\nboth themselves and the other party. While it is not always possible to collaborate, parties can often find\ncertain points that are more important to one versus the other, and in that way, find ways to isolate what is\nmost important to each party.\n7. a\n9.\nE-mediation can be useful in situations where the parties are geographically far apart, or the transaction in\ndispute took place online. Ebay uses e-mediation to handle the sheer volume of misunderstandings between\n\n\x0c162\n\nAnswer Key\n\nparties. Research has shown that one of the benefits of e-mediation is that it allows people the time needed to\n\xe2\x80\x9ccool down\xe2\x80\x9d when they have to explain their feelings in an email, as opposed to speaking to others in person.\nIn addition to technological advancements, new findings in psychology are influencing how disputes are\nresolved, such as the rising interest in canine-assisted mediation (CAM), in which the presence of dogs is\nposited to have an impact on human emotional health. Since the presence of dogs has a positive impact on\nmany of the neurophysiological stress markers in humans, researchers are beginning to explore the use of\ntherapy animals to assist in dispute resolution.\n11. c\n13. In binding arbitration, the decision of the arbitrator is final, and except in rare circumstances, neither party\ncan appeal the decision through the court system. In non-binding arbitration, the arbitrator\xe2\x80\x99s award can be\nthought of as a recommendation: it is only finalized if both parties agree that it is an acceptable solution.\n15. c\n\nChapter 3\n1. Acceptable levels of behavior for each individual who makes up the organization.\n3. b\n5. a\n7. The earliest published book about the topic is Corporate Responsibility of the Businessman, published in 1953.\nThis book introduced the concept of companies giving back as a form of investment in the future. This idea\ncame from a generation that had survived some of the hardest times in our world and wanted to make it a\nbetter place for generations to come.\n9. d\n\nChapter 4\n1.\nThe authority of the federal government to regulate interstate commerce has, at times, come into conflict with\nstate authority over the same area of regulation. The courts have tried to resolve these conflicts with reference\nto the police power of the states.\nPolice power refers to the residual powers granted to each state to safeguard the welfare of their inhabitants.\nExamples of areas in which states tend to exercise their police power are zoning regulations, building codes,\nand sanitation standards for eating places. However, there are times when the states\xe2\x80\x99 use of police power\nimpacts interstate commerce. If the exercise of the power interferes with, or discriminates against, interstate\ncommerce, then the action is generally deemed to be unconstitutional. The limitation on the authority of\nstates to regulate in areas that impact interstate commerce is known as the dormant commerce clause.\nIn using the dormant commerce clause to resolve conflicts between state and federal authority, the courts\nconsider the extent to which the state law has a legitimate purpose. If it is determined that the state law has a\nlegitimate purpose, then the court tries to determine whether the impact on interstate commerce is in the\ninterest of the citizens of the state, and will rule accordingly. For instance, an ordinance that banned spray\npaint, issued in the city of Chicago, was challenged by paint manufacturers under the dormant commerce\nclause, but was ultimately upheld by the U.S. Court of Appeals because the ban was intended to reduce graffiti\nand related crimes.\n3. d\n5. c\n7. c\n9. a\n\nChapter 5\n1. White collar crimes are characterized by deceit, concealment, or violation of trust. They are committed by\nbusiness professionals. They generally involve fraud, and the employees committing the crimes are motivated\nby the desire for financial gains or fear of losing business standing, money, or property. Fraud is the\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cAnswer Key\n\n163\n\nintentional misrepresentation of material facts for monetary gain. This type of crime is not dependent on\nthreats or violence.\n3. d\n5. The Foreign Corrupt Practices Act prohibits bribery payments by U.S. companies to foreign government\nofficials with an intent to influence foreign business results. One example of bribery would be a situation in\nwhich a pharmaceutical company offers special benefits to individuals who agree to prescribe their\nmedications.\n7. b\n9. d\n\nChapter 6\n1. Torts are wrongs committed against others who suffer some form of damage as a result.\n3. d\n5. a\n7. b\n9. a\n\nChapter 7\n1. A contract is defined as an agreement between two or more parties that is enforceable by law.\n3. d\n5. b\n7. d\n9. If a person lacks the mental capacity to enter a contract, then either he or she, or his or her legal guardian,\nmay void it, except in cases where the contract involved necessities. In most states, mental capacity is\nmeasured against the \xe2\x80\x9ccognitive standard\xe2\x80\x9d of whether the party understood its meaning and effect.\n11. A material breach is when something substantially different from what was expected under the terms of\nthe contract is delivered, the breach is considered material.\n13. Rescission terminates the duties of both parties under the contract, while reformation allows courts to\nequitably change the contracts substance.\n15. Restitution restores the injured party to status quo or the position they had prior to the formation of the\ncontract, by returning the plaintiff any money or property give pursuant to the contract.\n\nChapter 8\n1. A sales contract is s specific type of contract is which one party is obligated to deliver to deliver and transfer\nownership of a good to a second party, who in turn is obligated to pay for the good in money, or its equivalent.\n3. b\n5. A shipment contract occurs when it is the responsibility of the seller to make the shipping arrangements and\nto transfer the goods to the common carrier. Under this contract, title passes to the buyer at the time of\nshipment, so the buyer bears the risk of loss, even when he or she has not taken possession of the goods. A\ndestination contract occurs when the seller is required to deliver the goods to a location that is stipulated in\nthe contract. Under this contract, title transfers when the goods are delivered, but the seller bears the risk of\nloss until that time.\n7. An express warranty is one in which the seller explicitly guarantees the quality of the good or service sold.\nTypically, the vendor provides a statement, or other binding document, as part of the sales contract. In certain\ncircumstances where no express warranty was made, the law implies a warranty. This statement means that\nthe warranty automatically arises from the fact that a sale was made.\n9. d\n\nChapter 9\n1. Compared to other countries in the West, stringent and extensive employee protections came fairly late to\nthe United States. Up until 1959, for example, employers had the right to fire a worker without giving any\nreason. This concept, which was known as at-will employment, was applicable in all states. The concept of atwill employment does, however, continue today, and all employees are considered to be at-will unless they are\nemployed under a collective bargaining agreement, or under a contract for a set duration. Employers can still\nfire employees for any reason, but they cannot be fired for illegal reasons, as set out in the U.S. or state\nconstitutions, federal law, state statutes, or public policy. In this section, some of the main employee rights\nand company responsibilities will be introduced.\n3. a\n5. d\n\n\x0c164\n\nAnswer Key\n\n7. A trade union, or labor union, is an organized group of workers who come together to lobby employers\nabout conditions affecting their work.\n9. b\n11. The Civil Rights Act provides broad provisions pertaining to citizens\xe2\x80\x99 civil rights. Title VII of the Civil Rights\nAct deals with discrimination in employment. It bans employers from discriminating against employees in their\nhiring, firing, and promotion practices on the basis of sex, national origin, color, religion, or race. All employers\nwho are engaged in commercial activity and who employ 15 or more employees for 20 consecutive weeks in a\nyear are covered by the Act.\n13. c\n15. a\n\nChapter 10\n1. Administrative law is also referred to as regulatory and public law. It is the law that is related to\nadministrative agencies. Administrative agencies are established by statutes and governed by rules,\nregulations and orders, court decisions, judicial orders, and decisions.\n3. c\n5. The FDA was created to protect the public\xe2\x80\x99s health. The agency\xe2\x80\x99s responsibilities are very broad. The agency\nfulfills its role by ensuring the safety and effectiveness of drugs consumed by people and animals, biological\nproducts, medical devices, food, and cosmetics.\n7. d\n9. c\n\nChapter 11\n1. b\n3. Naked restraint occurs as contracts promote a general restraint of competition. If the restraint was created\nwith a goal of long-term impact without boundaries, it was considered to be a naked restraint. Ancillary\nrestraint occurs as the restriction is limited in time and geography. With ancillary restraint, the restraint would\nbe short-term and limited in scope. The courts tended to frown upon naked restraint, but were less consistent\nwith ancillary restraint.\n5. The original purpose of antitrust legislation, i.e., to foster competition that results in lower prices, more\nproducts, and more equal distribution of wealth between producers, remains relevant today.\n7. b\n9. c\n11. c\n13. a\n15. The FTC did not formally have a consumer protection mission until the passage of the Wheeler-Lea Act in\n1938. This act gave the FTC the power to combat false advertising for any foods, drugs, medical devices, or\ncosmetics. In addition to the Wheeler-Lea Act, subsequent amendments to the FTC Act, as well as judicial\nrespect toward the agency, broadened the power and jurisdiction of the FTC.\n\nChapter 12\n1. The term \xe2\x80\x9cunfair trade practice\xe2\x80\x9d describes the use of deceptive, fraudulent, or unethical methods to gain\nbusiness advantage or to cause injury to a consumer. Unfair trade practices are considered unlawful under the\nConsumer Protection Act. The purpose of the law is to ensure that consumers have the opportunity to make\ninformed, rational decisions about the goods and services they purchase.\n3. Bait and switch is a form of false advertising whereby the company advertises a product or service and then\nsells another item in its place.\n5. c\n\nChapter 13\n1. International law relates to the policies and procedures that govern relationships among nations.\n3. The European Union (EU) is a regional international organization that includes many countries in Europe. It\nwas established to create peace across the region and promote economic, social, and cultural development.\n5. a\n7. The Principle of Comity states that nations will defer to the laws and decrees of other nations when those\nlaws are consistent with their own, essentially upholding reciprocity between nations with similar laws.\n9. b\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\n\x0cAnswer Key\n\n165\n\nChapter 14\n1. Laissez faire, as popularized by Scottish economist Adam Smith and British philosopher Herbert Spencer,\ndescribes an economic philosophy that markets function best when left to their own devices, i.e., without, or\nwith minimal, government involvement or regulations.\n3. c\n5. The Securities Exchange Act of 1934 governs secondary markets, or what is typically referred to as the \xe2\x80\x9cstock\nmarket.\xe2\x80\x9d In contrast to the primary market, which involves the initial sale of a security, such as through an\ninitial public offering (IPO), secondary markets involve subsequent buyers and sellers of securities. One key\ndifference is that primary market prices are set in advance, while secondary market prices are subject to\nconstantly changing market valuations, as determined by supply and demand and investor expectations.\n7. d\n9. In 1968, the Williams Act amended the Securities Exchange Act of 1934 so that investors could have advance\nwarning of possible corporate takeovers. If someone (individual/corporation) becomes the beneficial owner of\nmore than 5% of a company\xe2\x80\x99s stock, that entity must file a Schedule 13D with the SEC within 10 days of\npurchase. A beneficial owner is anyone with \xe2\x80\x9cvoting and investment power over their shares.\xe2\x80\x9d There are a few\nexceptions that apply, such as qualified institutional investors\xe2\x80\x94large investors who are deemed to have\nsophisticated knowledge of securities such that they do not need the same level of protection as general\ninvestors. Insurance companies, state employee benefits plans, and investment companies are examples of\nqualified institutional investors who are allowed to report their holdings at the end of the calendar year.\n\n\x0c166\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\nAnswer Key\n\n\x0cIndex\n\nIndex\nA\n\nabnormally dangerous activity\nstandard, 67\nAcceptance, 88\nAct of State Doctrine, 146\nactus reus, 59, 59\nAdministrative law, 113\nAdministrative Procedure Act\n(APA), 119\nADR, 15\naffirmative defenses, 108\nagency shop, 104\nalternative dispute resolution, 15\nAncillary restraint, 126\nAntitrust laws , 56, 126\nantitrust laws, 118\nappropriate bargaining unit., 104\narbitrator, 22\narraignment, 59\nAssault, 65\nAssumption of risk, 71\nat-will employment, 97\nattractive nuisance, 69\naudited, 153\nAvoiding, 17\naward, 22\n\nB\n\nbare bones, 25\nbaseball arbitration, 25\nBBC News. , 149\nbeneficial owner, 153\nBilateral, 85\nbinding arbitration, 23\nblue sky laws, 158\nbreach, 92\nbreadlines, 155\nBribery , 57\nBrooklyn Journal of International\nLaw, 39, 149\nBusiness law: Texts and cases ,\n149\nBusiness Transactions, 23\nbusiness trusts, 125\n\nC\n\nCalifornia Law Review, 155\ncapacity, 78\nCarter v. Carter Coal Co, 45\n\n167\n\ncase law, 4, 6\ncategorical imperative, 21\ncause of action, 66\nCentral Hudson Test for\nCommercial Speech., 49\nChad A. Kelley v. Marsha P. Ryan,\nAdministrator, Ohio Bureau of\nWorkers\xe2\x80\x99 Compensation, and\nCoca-Cola Enterprises, 99\nchannels, 47\nChaplinsky v. New Hampshire, 49\nchild labor, 99\nCitizens United v. Federal Election\nCommission, 9\ncivil, 151\nCivil law systems, 147\ncivil laws, 59\ncivil matter, 23\nclass action lawsuit, 24\nclosed shop, 104\nClosure, 20\nCollaborating, 17\nCollective action, 148\ncollective bargaining agreement.,\n104\ncommerce clause, 44\ncommercial reasonableness., 91\nCommercial Speech., 49\nCommon law systems, 147\ncommon-carrier delivery contract,\n90\nCommutative, 86\nCompany credibility lost. , 33\ncomparative negligence, 71\ncompensatory, 61\nCompromising, 17\nconditional sales contract, 90\nConfidentiality, 19\nConsensual, 85\nConsent election., 104\nConsequentialist, 20\nConsistency of efforts and\npartnerships., 37\nconsistent, 92\nConsumer influence., 38\nContest election, 104\nContracting for success, 37\nContracts, 83\ncontributory negligence, 71\nControl, 19\n\nCorporate insiders, 153\nCorporate Political Speech. , 48\nCorporate Responsibility of the\nBusinessman, 37\nCreativity, 19\ncrime, 23\ncriminal, 151\nCriminal law , 59\ncriminal matter, 23\ncross state lines, 47\ncrowdfunding, 156\nCrown Castle Inc. et al. v. Fred\nNudd Corporation et al., 86\ncumulative, 92\n\nD\n\ndecertification election, 104\nDefamation, 65\ndefendant, 19, 64\ndelegation, 117\ndeontologist ethics, 20\ndestination contract, 90\ndirectives, 117\nDisparate impact , 106\nDisparate treatment, 106\ndissolution, 130\ndistributive, 16\ndivestiture, 130\ndoctrine of sovereign immunity,\n145\nDoctrine of Sovereign Immunity,\n147\ndormant commerce clause, 46\ndue process clause, 50\nduty of care, 66\nduty to aid, 66\ndyadic negotiation, 16\n\nE\n\ne-mediation, 22\nembezzlement, 55\nEmployment Discrimination Law,\nVisions of Equality in Theory and\nDoctrine, 110\nencumbrance, 89\nEnhanced performance for going\ngreen., 37\nentrusts, 88\nethics, 20\nEuropean Union (EU), 145\nexclusive remedy, 99\n\n\x0c168\n\nExecutive compensation rates\nduring employee layoffs., 33\nexpress warranty, 91\nextraordinary ability, 101\n\nF\n\nFair compensation for\nemployees., 33\nfault, 64\nFederal and state constitutions,\n44\nFederal Arbitration Act, 18\nfederalism, 44\nfiduciary, 151\nfirm offers, 88\nFirst National Bank of Boston v.\nBellotti, 48\nforced-arbitration clauses, 24\nForcing, 17\nForeign Commerce Clause, 143\nForeign Sovereign Immunities Act\nof 1976, 145\nforeseeability , 67\nforeseeable probability of harm,\n67\nForm 10-K, 153\nForm 10-Q, 154\nForm 8-K, 154, 154\nFraud , 54\nfree exercise clause , 49\n\nG\n\nGarnishment, 26\nGeneral Assembly, 144\nGood faith, 91\nGood title, 88\nGoods, 86\ngoods-in-bailment contract, 90\ngrant of authority, 44\ngrievance arbitration, 23\nGriggs v. Duke Power Co., 106\ngroup negotiation, 16\n\nH\n\nharm , 65\nhostile work environment , 107\nHouston Chronicle, 34\nHudson Gas & Electric Corp v.\nPublic Service Commission of\nNew York, 49, 49\n\nI\n\nillusory, 88\n\nIndex\n\nimplies, 92\nImproved perception by\ninvestors., 37\ninaccessibility exception,, 104\nindustrialization , 114\ninformation, 59\ninitial, 156\ninitial public offering (IPO), 156\ninsider trading, 151\ninstitutional investors, 153\ninstrumentalities, 47\nInsurable interest, 89\nintegrative, 16\nIntentional torts, 65\nInterest arbitration, 23\nInternational law, 142\ninterstate, 54\nintrastate, 54\nInvasion of privacy , 66\ninvoluntary arbitration, 23\n\nJ\n\nJoint Discussion, 20\nJoint Negotiation, 20\njust compensation, 50\n\nL\n\nLabor, 23\nLabor relations, 101\nLabor: Studies in Working-Class\nHistory, 111\nlaissez-faire, 156\nLarceny, 55\nLawrence v. Texas, 58\nLegal considerations., 34\nLibel, 65\nLiebeck v. McDonald\xe2\x80\x99s, 61\nLiens, 26\nlitigation, 15\nlocal unions, 102\nloss, 89\n\nM\n\nMalicious prosecution, 65\nmalpractice, 61\nmanagement discussion, 154\nmaterial nonpublic information,\n152\nMediation, 19\nmediator, 19\nMediator\xe2\x80\x99s Opening Statement,\n20\nmens rea, 59, 59\n\nThis OpenStax book is available for free at http://cnx.org/content/col30149/1.5\n\nmerchants, 86\nMiranda v. Arizona, 58\nmirror-image rule, 88\nmisuse, 71\nmixed sale, 86\nMoney laundering , 57\nmonopolies, 56\n\nN\n\nNaked restraint , 126\nNational Labor Relations Act, 102\nNegative employee relations., 33\nNegligence, 65\nnegotiable, 90\nnegotiation, 15\nNLRB v. Jones & Laughlin Steel\nCorp, 45, 45, 45\nNominate, 86\nnon-binding arbitration, 23\nnon-negotiable, 90\n\nO\n\nOccupational Safety and Health\nAct, 98\nOccupational Safety and Health\nAdministration, 98\noffender, 64\noffer, 87\nOncale v. Sundowner Offshore\nServices Inc., 107\nOnerous, 85\nOpening Statements of Plaintiff\nand Defendant, 20\norganic statute , 113\nOrganic statutes , 113\nOrganization Behavior and\nHuman Decision Processes, 15\nOutcome goals, 16\noutput contracts, 88\nOwnership, 89\n\nP\n\npervasive-regulation exception, ,\n50\nplaintiff, 19, 64\npolice power, 46\nPolice power, 46\nPonzi schemes , 55\nPoor company reputation., 33\npre-arranged trading plans, 153\nprecedent, 4, 6, 128\npreempted, 44\nPregnancy Discrimination Act, 107\n\n\x0cIndex\n\nprima facie, 106, 127\nprimary market, 156\nPrincipal, 86\nPrinciple of Comity, 146\nPrivate Caucus, 20\nprivilege against selfincrimination, 50\nprobable cause, 49\nProcedural due process , 50\nProfessional behaviors., 35\nProperty Disputes, 23\nProxy Statements, 154\npublic law, 113\npump-and-dump , 54\n\nQ\n\nquantity , 87\nQuid pro quo, 107\n\nR\n\nRacketeering, 56\nrational-basis test., 50\nRealty, 86\nreasonable person, 66\nreasonable standard of care, 66\nreasonableness test of reliance,\n92\nreasonably foreseeable, 67\nreasoned, 25\nReciprocity, 148\nRecruitment and retention\nproblems., 33\nregulatory, 113\nRegulatory ethics., 35\nRelational goals, 16\nremedies, 65\nreporting companies, 153\nrequirements contracts, 88\nres ipsa loquitor, 69\nrestraint of trade, 124\nrule of reason, 126\n\nS\n\nSafe harbor, 153\nsales contracts, 85\nsearch warrants, 49\nSecondary boycott picketing, 105\nsecondary markets, 156\nSecurities and Exchange\nCommission (SEC), 156\nSecurity Council, 144\nself-regulatory organizations\n(SROs), 156\n\n169\n\nServices, 86\nSexual harassment, 107\nShaming, 148\nshanty towns, 155\nshipment contract, 90\nsideways, 156\nsimple delivery contract, 89\nSlander, 65\nSocial Security, 100\nsovereignty, 145\nspam, 57\nspecial relationship, 66\nState v. Wayfair Inc., 6\nstatutes, 63\nstrict liability, 67\nstrike, 105\nsubstantial impact, 47\nSubstantive due process, 50\nsupremacy clause, 44\n\nT\n\ntakings clause. , 50\nTalent attraction., 37\ntender of delivery, 90\nThe benevolent halo effect., 37\nThe legal environment of\nbusiness: Texts and cases, 149\nThomas-Kilmann Conflict Mode\nInstrument (TKI) , 17\nTitle, 88\nTort law, 64\ntortfeasor, 64\ntorts, 64\ntrade fixtures, 86\ntrade unions, 101\ntransparency, 157\nTreaty Clause, 143\nTrinity Economic Papers, , 149\n\nU\n\nUCC, 86\nUN Conference on Trade and\nDevelopment News., 150\nunaudited, 154\nunconscionable, 88\nUniform Arbitration Act, 18\nUniform Commercial Code, 86\nunion security agreement. , 104\nunion shop, 104\nUnited Nations (UN), 144\n\nUnited Nations Convention on\nContracts for the International\nSale of Goods, 90\nUnited Nations Convention on\nContracts for the International\nSale of Goods (CISG), 146\nUnited States Constitution, 44\nUnited States v. Lopez, 46\nUnprotected Speech. , 49\n\nV\n\nValue-based ethics., 34\nvendee, 85\nvendor, 85\nvesting, 101\nVoid title, 88\nvoidable, 78\nVoidable title, 88\nvoluntary arbitration, 23\n\nW\n\nwarranty, 91\nwarranty against infringement.,\n92\nwarranty of fitness for normal\nuse, 92\nwarranty of merchantability, 92\nWhite collar crimes , 54\nwhole, 61\nWorkers\xe2\x80\x99 Compensation Acts, 99\nWorkers\xe2\x80\x99 Compensation Agency,\n99\nWrit of Execution, 26\n\nY\n\nyellow-dog contracts, 102\nYielding, 17\n\nZ\n\nzero-sum negotiation, 16\n\n\x0c'