MGMT 5703 Oklahoma City University Social & Legal Environment of Business Questions

OKLAHOMA CITY UNIVERSITY MEINDERS SCHOOL OF BUSINESS
ETHICAL, SOCIAL & LEGAL ENVIRONMENT OF BUSINESS
MGMT 5703-WB
FALL 2021
MEREDITH A. WEGENER, J.D., LL.M.
FINAL EXAM
INSTRUCTIONS:
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This Exam consists of 4 Essay Questions
Answer the Essay Questions in a word processing program on your computer.
The points available for each question are identified next to each question.
While this Final Exam is not a timed exam, it is designed to be taken in three
and a half hours. Upon the conclusion of three and a half hours, you should
consider wrapping up and uploading the exam to the dropbox on D2L. This is
not a research project or thesis writing.
You may access the exam between December 10 at 10:00am—December 17,
2021 at 5:00pm.
YOU MUST UPLOAD YOUR ANSWERS TO THE DROPBOX NO LATER
THAN 5:00pm on December 17, 2021.
You may not share or discuss this exam with ANYONE.
This exam consists of 5 pages. Please ensure that you have all pages.
This exam is open notes and open book. You may NOT use the internet,
email or other external source while taking this exam (even if you
cite the source).
10.If you have questions, please call or email me: [email protected] or (405)
514-4274.
11.Good luck!
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Question 1
25 Points (Suggested Minimum 400 words)
The United States Supreme Court heard a case this fall to determine whether a state’s denial of
individuals’ applications to carry a gun outside the home for self-defense violated the Second
Amendment.
Thinking about these issues broadly, discuss and analyze the legality (Constitutionality) of business
owners and managers being required by their state to apply to carry a gun outside of their home for
self-defense in connection with defending their specific business.
In your own words, describe and discuss what business ethics are and what role business ethics
should play in business decision-making, regardless of industry.
In your own words, describe and discuss an approach a business might take in resolving an ethical
dilemma and how a business can create and maintain an ethical culture.
Choose and utilize an ethical perspective to describe, discuss and analyze the ethical decision a
business owner or manager makes in carrying a gun for self-defense in connection with their
business and/or the decision a business owner or manager makes in recommending an employee
carries a gun for self-defense in connection with the business.
Should your response require additional information, please identify this information and indicate
how this information influences your analysis.
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Question 2
20 Points (Suggested Minimum 350 words)
In this question, you are part of the beef industry. Specifically, you own a large cattle ranch in
northern Oklahoma. In 2021, a new individual was appointed Administrator of the Environmental
Protection Agency and another as Secretary of Agriculture. As a part of these appointments, new
policies and subsequently rules, are being considered concerning methane emissions from cattle.
As an individual in the beef industry, you are very interested in this new potential body of
regulations.
In your own words, please explain how administrative agencies, like the Environmental Protection
Agency and Department of Agriculture, get their authority to make rules with the full force and
effect of laws passed by Congress.
In your own words, please explain why all stakeholders (*stakeholders, not just shareholders)
should pay attention to the rulemaking process and how they may participate in the process.
In your own words, please explain the rulemaking process from start to finish that will take place
as the Environmental Protection Agency and Department of Agriculture work to add rules and
regulations for methane emissions and cattle.
Should your response require additional information, please identify this information and indicate
how this information influences your analysis.
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Question 3
30 Points (Suggested Minimum 500 Words)
GoGo Sandals (GoGo) is a corporation established to make, distribute and sell directly to the
customer stylish, athletic and durable sandals. GoGo Sandals relies on Gary Green (Green) for
many of its designs. GoGo and Green have an employment contract for Green to design shoes for
GoGo for the next twelve months. As a part of the contract, Green does not maintain any of the
intellectual property he creates when creating the sandals for hire. Also, Green has a confidentiality
agreement as a part of his contract. He cannot share with anyone outside of GoGo any trade secrets
held by GoGo, including, price sheets, marketing plans and ideas for new sandals.
Paper Shoes is a corporation established to make, distribute and sell directly to the customer stylish,
athletic and durable shoes. Paper Shoes has run into issues with its shoe designers and is looking
for a new shoe designer.
Paper approached Green to ask him if he would like to design shoes for Paper instead of GoGo. As
part of the new employment with Paper, Green would be allowed to keep part ownership in the
shoes he creates. Paper indicated that they would like to know what GoGo has planned for future
sandal lines, how they will be marketed, and how GoGo prices their supplies used to make their
sandals. They know the details of the employment contract GoGo has with Gary. They are offering
Gary a $50,000 bonus to not follow the contract when he comes to work at Paper.
Ultimately, Gary chooses to go work for Paper. GoGo learned that Gary has shared a new design
he had just created at GoGo with Paper. Gary has also shared price sheets and future marketing
plans with Paper. Gary is also now selling shoes himself online similar to ones he designed for
GoGo in the past.
Identify all contractual and tort claims that GoGo Sandals has in this scenario. FULLY explain and
analyze whether these claims would be successful.
ADDITIONALLY, identify any decisions involving ethics that were made in these events by GoGo,
Gary and Paper. Explain and analyze whether you agree with these decisions and whether or not
they were made ethically.
Should your response require additional information, please identify this information and indicate
how this information influences your analysis.
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Question 4
25 Points (Suggested Minimum 400 Words)
As we already saw with Sam Shepard this fall, starting a business is challenging. Creating a new
dining and food concept is fun, but also carries legal concerns on top of the woes any business
leader finds in launching a new venture. You helped Sam choose an entity that is right for her
restaurant concept, Fun! Now, Sam needs help with intellectual property.
As we saw previously, sometimes eating those foods from childhood provides that combination of
culinary delight and a positive trip down memory lane. After many years of working in the food,
beverage and hospitality industry, Sam Shepard (no relation to the famous actor/writer) plans to
open her own restaurant, Fun! Sam intends to be a hands-on owner at Fun! that will begin as a
delivery service and food truck serving yummy foods from her family’s recipes that she loved as a
child. Sam hopes the future includes traditional restaurant locations, and possibly catering options.
Sam has saved for many years and does not expect to make a large profit for at least the first year
and plans to focus on putting almost all profits back into the business for the first two years, but she
hopes to expand eventually and possibly take on financial and/or business partners.
To help Sam along more, please answer the following questions.
In your own words, describe and discuss what a trademark is and what it protects.
Describe and discuss whether FUN! has the opportunity to seek trademark protection in this
instance and how FUN! should best utilize trademark law protection.
In your own words, describe and discuss what a trade secret is and what trade secret law protects.
Describe and discuss examples of trade secrets Sam may have with Fun!.
Describe and discuss steps that business entities like FUN! should take to protect trade secrets.
In your own words, describe and discuss what a patent is and what it protects.
Discuss whether FUN! possibly has the opportunity to seek a patent at this time.
Discuss what copyright protected works are and whether FUN! should take steps to protect any
copyright protected work like artwork found on FUN! t-shirts or hats.
Should your response require additional information, please identify this information and indicate
how this information influences your analysis.
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Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
T he
l eg a l
e n v i ron m e n t
of b usi n e s s
Te x t a nd C a se s
Eleventh Edition
Frank B. Cross
Herbert D. Kelleher
Centennial Professor in Business Law
University of Texas at Austin
Roger LeRoy Miller
Institute for University Studies
Arlington, Texas
Australia • Brazil • Mexico • Singapore • United Kingdom • United States
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
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The Legal Environment of Business
Text and Cases, Eleventh Edition
Frank B. Cross
Roger LeRoy Miller
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Brief Contents
Unit One
The Foundations 1
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Law and Legal Reasoning 2
Business and the Constitution 26
Ethics in Business 44
Courts and Alternative Dispute Resolution
Court Procedures 86
Unit Two
The Public and International Environment 111
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Tort Law 112
Strict Liability and Product Liability 134
Intellectual Property Rights 150
Internet Law, Social Media, and Privacy 170
Criminal Law and Cyber Crime 187
International and Space Law 211
Unit Three
The Commercial Environment 235
Chapter 12
Chapter 13
Chapter 14
Chapter 15
Formation of Traditional and E-Contracts 236
Contract Performance, Breach, and Remedies 265
Sales and Lease Contracts 287
Creditor-Debtor Relations and Bankruptcy 322
Unit Four
The Business and Employment Environment 353
Chapter 16
Chapter 17
Chapter 18
Chapter 19
Chapter 20
Chapter 21
Chapter 22
Small Businesses and Franchises 354
Limited Liability Business Forms 375
Corporations 392
Agency Relationships 420
Employment Law 442
Employment Discrimination 457
Immigration and Labor Law 478
Unit Five
The Regulatory Environment 499
Chapter 23
Chapter 24
Chapter 25
Chapter 26
Chapter 27
Chapter 28
Administrative Agencies 500
Consumer Protection 517
Environmental Law 534
Real Property and Land-Use Control 550
Antitrust Law 571
Investor Protection and Corporate Governance
65
590
iii
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iv
Brief Conten ts
Appendices
A
B
C
How to Brief Cases and Analyze Case Problems A–1
Answers to the Issue Spotters A–4
Sample Answers for Business Case Problems with Sample Answer A–10
Glossary G–1
Table of Cases Tc–1
Index I–1
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Contents
Unit One
Chapter 4
The Foundations
Courts and Alternative Dispute Resolution 65
1
e Judiciary’s Role in American Government 65
Th
Basic Judicial Requirements 66
Chapter 1
Law and Legal Reasoning 2
Business Activities and the Legal Environment 2
Sources of American Law 3
The Common Law Tradition 6
■ Ethics Today: Stare Decisis versus Spider-Man 9
Case Analysis 4.1 Mala v. Crown Bay Marina, Inc. 68
Spotlight on Gucci
Case 4.2 Gucci America, Inc. v. Wang Huoqing 70
The State and Federal Court Systems 73
Case 4.3 Johnson v. Oxy USA, Inc. 74
■ Managerial Strategy: Should You Consent to Have Your
Business Case Decided by a U.S. Magistrate Judge? 76
Schools of Legal Thought 11
Classifications of Law 12
How to Find Primary Sources of Law 13
How to Read and Understand Case Law 16
Alternative Dispute Resolution 79
International Dispute Resolution 82
Chapter 2
Chapter 5
Business and the Constitution
26
The Constitutional Powers of Government 26
Classic Case 2.1 Heart of Atlanta Motel v. United States 28
Business and the Bill of Rights 30
■ Digital Update: Does Everyone Have a Constitutional Right
to Use Social Media? 32
Case 2.2 Animal Legal Defense Fund v. Wasden 33
Spotlight on Beer Labels
Case 2.3 Bad Frog Brewery, Inc. v. New York State
Liquor Authority 35
Due Process and Equal Protection 39
Privacy Rights 40
Chapter 3
Ethics in Business
44
Court Procedures
86
Procedural Rules 86
Pretrial Procedures 88
■ Digital Update: Using Social Media for Service of
Process 90
Case Analysis 5.1 Espresso Disposition Corp. 1 v. Santana
Sales & Marketing Group, Inc. 91
Case 5.2 Lewis v. Twenty-First Century Bean Processing 93
Case 5.3 Klipsch Group, Inc. v. ePRO E-Commerce Limited 96
The Trial 99
Posttrial Motions 101
The Appeal 102
Enforcing the Judgment 103
Unit One Task-Based Simulation 107
Unit One Application and Ethics:
“Arbitration, No Class Actions” 108
Ethics and the Role of Business 44
■ Digital Update: Should Employees Have a “Right of
Disconnecting”? 47
Case 3.1 Al-Dabagh v. Case Western Reserve University 48
Ethical Principles and Philosophies 49
Sources of Ethical Issues in Business Decisions 52
Case 3.2 Watson Laboratories, Inc. v. State of Mississippi 53
Making Ethical Business Decisions 55
Business Ethics on a Global Level 58
■ Ethics Today: Applying the IDDR Framework 59
Appendix to Chapter 3: Costco Code of Ethics 64
Unit Two
The Public and International
Environment 111
Chapter 6
Tort Law 112
The Basis of Tort Law 112
Intentional Torts against Persons 113
v
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
vi
CONTEN TS
Case Analysis 6.1 Blake v. Giustibelli 115
■ Digital Update: Revenge Porn and Invasion of Privacy 119
Intentional Torts against Property 122
Unintentional Torts—Negligence 124
Case 6.2 Bogenberger v. Pi Kappa Alpha Corporation, Inc. 125
Defenses to Negligence 128
Spotlight on the Seattle Mariners
Case 6.3 Taylor v. Baseball Club of Seattle, LP 129
Chapter 7
Strict Liability and Product Liability 134
Strict Liability 134
Product Liability 135
Criminal Law and Cyber Crime 187
Civil Law and Criminal Law 187
Criminal Liability 189
■ Digital Update: Using Twitter to Cause Seizures—
A Crime? 189
Case 10.1 United States v. Crabtree 190
■ Managerial Strategy: The Criminalization of American
Business 192
Types of Crimes 193
Spotlight on White-Collar Crime
Case 10.2 People v. Sisuphan 195
Defenses to Criminal Liability 199
Criminal Procedures 201
Cyber Crime 204
Case Analysis 7.1 Schwarck v. Arctic Cat, Inc. 136
Strict Product Liability 137
Case 7.2 Stange v. Janssen Pharmaceuticals, Inc. 140
■ Managerial Strategy: When Is a Warning Legally
Bulletproof? 142
Case Analysis 10.3 United States v. Warner 205
Chapter 11
Defenses to Product Liability 143
Case 7.3 VeRost v. Mitsubishi Caterpillar Forklift America, Inc. 144
International and Space Law 211
International Law 211
Chapter 8
Case 11.1 Rubin v. Islamic Republic of Iran 215
Intellectual Property Rights 150
Doing Business Internationally 217
Trademarks and Related Property 150
Classic Case 8.1 The Coca-Cola Co. v. The Koke
Co. of America 150
Case 8.2 Headspace International, LLC v. Podworks Corp. 152
■ Global Insight: ALEVE versus FLANAX—Same Pain Killer,
But in Different Countries 154
Patents 157
Copyrights 159
170
Internet Law 170
Spotlight on Internet Porn
Case 9.1 Hasbro, Inc. v. Internet Entertainment
Group, Ltd. 173
Copyrights in Digital Information 174
■ Digital Update: Riot Games, Inc., Protects Its Online Video
Game Copyrights 175
Case 9.2 BMG Rights Management (US), LLC v. Cox
Communications, Inc. 176
Case Analysis 9.3 David v. Textor 182
Case 11.2 Changzhou Trina Solar Energy Co., Ltd. v.
United States International Trade Commission 220
International Dispute Resolution 222
U.S. Laws in a Global Context 223
Unit Two Task-Based Simulation 230
Unit Two Application and Ethics:
One of the Biggest Data Breaches Ever 231
Chapter 9
Social Media 178
Online Defamation 180
Other Actions Involving Online Posts 181
Regulation of Specific Business Activities 219
Space Law 225
Trade Secrets 164
International Protection for Intellectual Property 164
Internet Law, Social Media, and Privacy
■ Ethics Today: Is It Ethical (and Legal) to Brew
“Imported” Beer Brands Domestically? 217
Spotlight on International Torts
Case 11.3 Daimler AG v. Bauman 223
Case Analysis 8.3 Winstead v. Jackson 161
Privacy 183
Chapter 10
Unit Three
The Commercial Environment
235
Chapter 12
Formation of Traditional and E-Contracts 236
An Overview of Contract Law 236
Agreement 240
Classic Case 12.1 Lucy v. Zehmer 240
Case Analysis 12.2 Hinkal v. Pardoe 245
E-Contracts 247
Consideration 250
Spotlight on Nike
Case 12.3 Already, LLC v. Nike, Inc. 253
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
C ONT E NT S 
Contractual Capacity 254
Legality 256
vii
Liquidation Proceedings 330
Case 12.4 Kennedy v. Shave Barber Co. 257
Form—The Writing Requirement 259
■ Managerial Strategy: Creating Liability Waivers That Are
Not Unconscionable 260
Third Party Rights 261
Chapter 13
Contract Performance, Breach, and
Remedies 265
Voluntary Consent 265
Case 13.1 McCullough v. Allstate Property and Casualty
Insurance Co. 267
Case 15.2 In re Anderson 336
■ Ethics Today: Should There Be More Relief for Student
Loan Defaults? 339
Reorganizations 340
Bankruptcy Relief under Chapter 12 and Chapter 13 341
Case 15.3 In re Chamberlain 343
Unit Three Task-Based Simulation 349
Unit Three Application and Ethics:
Nondisclosure Agreements 350
Unit Four
The Business and Employment
Environment 353
Performance and Discharge 270
Classic Case 13.2 Jacob & Youngs v. Kent 271
■ Ethics Today: When Is Impossibility of Performance
a Valid Defense? 276
Damages 278
Spotlight on Liquidated Damages
Case 13.3 Kent State University v. Ford
280
Equitable Remedies for Contract Breach 281
Contract Provisions Limiting Remedies 283
Chapter 14
Sales and Lease Contracts
287
The Scope of Articles 2 (Sales) and 2A (Leases) 287
■ Digital Update: Taxing Web Purchases 289
The Formation of Sales and Lease Contracts 290
Case 14.1 Toll Processing Services, LLC v. Kastalon, Inc. 291
Classic Case 14.2 Jones v. Star Credit Corp. 296
Title, Risk, and Insurable Interest 297
■ Managerial Strategy: Commercial Use of Drones 299
Chapter 16
Small Businesses and Franchises 354
General Considerations for Small Businesses 354
Sole Proprietorships 355
Case Analysis 16.1 A. Gadley Enterprises, Inc. v. Department of
Labor and Industry, Office of Unemployment Compensation
Tax Services 356
■ Digital Update: A Sole Proprietorship, Facebook Poker,
and Bankruptcy 358
Partnerships 359
Case 16.2 Harun v. Rashid 359
Franchises 367
Case 16.3 S&P Brake Supply, Inc. v. Daimler Trucks North
America, LLC 370
Chapter 17
Limited Liability Business Forms 375
erformance Obligations in Sales and Lease Contracts 302
P
Remedies for Breach of Sales and Lease Contracts 306
The Limited Liability Company 375
Spotlight on Baseball Cards
Case 14.3 Fitl v. Strek 309
LLC Management and Operation 379
Warranties 311
Contracts for the International Sale of Goods 313
Appendix to Chapter 14: An Example of a Contract for the
International Sale of Coffee 318
Chapter 15
Creditor-Debtor Relations and
Bankruptcy 322
Laws Assisting Creditors 322
Mortgages 326
Case 15.1 Banc of California, N.A. v. Madhok 328
Protection for Debtors 329
The Bankruptcy Code 329
Case 17.1 Hodge v. Strong Built International, LLC 377
■ Managerial Strategy: Can a Person Who Is Not a Member
of a Protected Class Sue for Discrimination? 380
Case 17.2 Schaefer v. Orth 381
Dissociation and Dissolution of an LLC 382
Case Analysis 17.3 Reese v. Newman 383
Limited Liability Partnerships 385
Limited Partnerships 386
Chapter 18
Corporations
392
Nature and Classification 392
■ Digital Update: Programs That Predict Employee
Misconduct 394
Case 18.1 Drake Manufacturing Co. v. Polyflow, Inc. 394
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
viii
CONTE NTS
Case 18.2 Greenfield v. Mandalay Shores Community
Association 398
Corporate Formation and Powers 399
■ Global Insight: Does Cloud Computing Have a
Nationality? 403
Piercing the Corporate Veil 403
Corporate Directors and Officers 405
Classic Case 18.3 Guth v. Loft, Inc. 408
Shareholders 410
Major Business Forms Compared 415
Chapter 19
Agency Relationships
420
Agency Law 420
■ Ethics Today: Is It Fair to Classify Uber and Lyft Drivers
as Independent Contractors? 422
Formation of the Agency Relationship 423
Case 19.1 Riedel v. Akron General Health System 424
Duties, Rights, and Remedies of Agents and Principals 425
Agent’s Authority 429
Case 19.2 Dearborn West Village Condominium Association v.
Makki 430
Liability in Agency Relationships 432
■ Global Insight: Islamic Law and Respondeat Superior 434
Case Analysis 19.3 M.J. v. Wisan 435
Termination of an Agency 437
efenses to Employment Discrimination 473
D
Affirmative Action 474
Chapter 22
Immigration and Labor Law 478
Immigration Law 478
Federal Labor Laws 480
Union Organization 482
■ Managerial Strategy: Union Organizing Using a Company’s
E-Mail System 483
Case Analysis 22.1 Contemporary Cars, Inc. v. National Labor
Relations Board 483
Strikes and Lockouts 486
Unfair Labor Practices 487
Case 22.2 Staffing Network Holdings, LLC v. National Labor
Relations Board 488
Case 22.3 Unite Here! Local 5 v. National Labor Relations
Board 490
Unit Four Task-Based Simulation 494
Unit Four Application and Ethics:
Health Insurance and Small Business 495
Unit Five
The Regulatory Environment
499
Chapter 23
Chapter 20
Employment Law
442
Employment at Will 442
Case 20.1 Caterpillar, Inc. v. Sudlow 443
Administrative Agencies 500
The Practical Significance of Administrative Law 500
Agency Creation and Powers 501
Wages, Hours, and Layoffs 445
Case 23.1 Simmons v. Smith 504
■ Ethics Today: Is It Fair to Dock Employees’ Pay
for Bathroom Breaks? 446
Case 20.2 Encino Motorcars, LLC v. Navarro 446
Case 23.2 Craker v. Drug Enforcement Administration 509
Family and Medical Leave 448
Case 20.3 Ballard v. Chicago Park District 449
The Administrative Process 506
Judicial Deference to Agency Decisions 510
Case Analysis 23.3 Olivares v. Transportation Security
Administration 511
ealth, Safety, and Income Security 450
H
Employee Privacy Rights 453
Public Accountability 513
Chapter 21
Consumer Protection
Employment Discrimination 457
Title VII of the Civil Rights Act 457
■ Digital Update: Hiring Discrimination Based on Social
Media Posts 461
Case Analysis 21.1 Bauer v. Lynch 462
Case 21.2 Young v. United Parcel Service, Inc. 463
Case 21.3 Franchina v. City of Providence 467
Discrimination Based on Age 468
Discrimination Based on Disability 470
Discrimination Based on Military Status 472
Chapter 24
517
Advertising, Marketing, and Sales 517
Case 24.1 POM Wonderful, LLC v. Federal Trade
Commission 518
■ Digital Update: Regulating “Native” Ads on the
Internet 521
Case 24.2 Haywood v. Massage Envy Franchising, LLC 522
Labeling and Packaging Laws 524
Protection of Health and Safety 525
Credit Protection 526
Case Analysis 24.3 Santangelo v. Comcast Corp. 528
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C O NT E NT S 
Chapter 25
Case 27.2 Candelore v. Tinder, Inc. 579
Environmental Law
Enforcement and Exemptions 582
534
Case 27.3 TransWeb, LLC v. 3M Innovative Properties Co. 583
Common Law Actions 534
Federal, State, and Local Regulations 535
U.S. Antitrust Laws in the Global Context 584
Case Analysis 25.1 Friends of Animals v. Clay 535
■ Global Insight: Can a River Be a Legal Person? 538
Air Pollution 538
■ Digital Update: The European Union Issues Record Fines
against Google in Antitrust Case 586
Chapter 28
Case 25.2 United States v. O’Malley 540
Case 25.3 United States v. Fox 543
Investor Protection and Corporate
Governance 590
Toxic Chemicals and Hazardous Waste 545
The Securities Act of 1933 590
Water Pollution 542
Chapter 26
Real Property and Land-Use Control
550
The Nature of Real Property 550
Ownership and Other Interests in Real Property 552
Case 26.1 In the Matter of the Estate of Nelson 553
Transfer of Ownership 557
Spotlight on Sales of Haunted Houses
Case 26.2 Stambovsky v. Ackley 558
Case Analysis 26.3 Montgomery County v. Bhatt 561
Limitations on the Rights of Property Owners 563
■ Ethics Today: Should Eminent Domain Be Used to Promote
Private Development? 564
Land-Use Control and Zoning 565
Chapter 27
Antitrust Law
571
The Sherman Antitrust Act 571
Section 1 of the Sherman Act 572
Section 2 of the Sherman Act 575
Case Analysis 27.1 McWane, Inc. v. Federal Trade
Commission 576
The Clayton Act 578
ix
■ Managerial Strategy: The SEC’s Pay-Ratio Disclosure
Rule 592
■ Digital Update: Investment Crowdfunding—Regulations
and Restrictions 594
Case 28.1 Omnicare, Inc. v. Laborers District Council
Construction Industry Pension Fund 596
The Securities Exchange Act of 1934 598
Classic Case 28.2 SEC v. Texas Gulf Sulphur Co. 599
Case 28.3 Singer v. Reali 603
State Securities Laws 605
Corporate Governance 606
Unit Five Task-Based Simulation 612
Unit Five Application and Ethics:
Climate Change 613
Appendices
A How to Brief Cases and Analyze Case Problems A–1
B Answers to the Issue Spotters A–4
C Sample Answers for Business Case Problems with
Sample Answer A–10
Glossary G–1
Table of Cases TC–1
Index I–1
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Concept Summaries
1.1 Sources of American Law 5
1.2 The Common Law Tradition 11
1.3 Schools of Jurisprudential Thought 13
4.1 Jurisdiction 72
4.2 Types of Courts 78
5.1 Pretrial Procedures 98
5.2 Trial Procedures 101
5.3 Posttrial Options 103
6.1 Intentional Torts against Persons 121
6.2 Intentional Torts against Property 124
7.1 Defenses to Product Liability 147
10.1 Types of Crimes 199
12.1 Types of Contracts 239
12.2 Methods by Which an Offer Can Be Terminated 244
14.1 Offer, Acceptance, and Consideration
under the UCC 295
15.1 Forms of Bankruptcy Relief Compared 345
21.1 Coverage of Employment Discrimination Laws 473
x
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Exhibits
1–1 Areas of the Law That Can
Affect Business Decision Making 3
1–2 Equitable Maxims 7
1–3 Procedural Differences between
an Action at Law and an Action in Equity 7
1–4 National Reporter System—Regional/Federal 15
1–5 How to Read Citations 17
1–6 A Sample Court Case 20
2–1 Protections Guaranteed by the Bill of Rights 31
2–2 Federal Legislation Relating to Privacy 41
3–1 An Analysis of Ethical Approaches
to the Sample Dilemma 57
4–1 Exclusive and Concurrent Jurisdiction 70
4–2 The State and Federal Court Systems 73
4–3 Geographic Boundaries of the U.S. Courts
of Appeals and U.S. District Courts 77
4–4 Basic Differences in the Traditional Forms of ADR  80
5–1 Stages in a Typical Lawsuit 87
5–2 A Typical Complaint 89
5–3 Pretrial Motions 91
8–1 Forms of Intellectual Property 165
10–1 Key Differences between Civil Law
and Criminal Law 187
10–2 Civil (Tort) Lawsuit and Criminal
Prosecution for the Same Act 188
10–3 Major Procedural Steps in a Criminal Case 203
11–1 The Legal Systems of Selected Nations 213
11–2 Examples of International Principles and Doctrines 216
12–1 Examples of Agreements That Lack Consideration 252
13–1 Mistakes of Fact 266
13–2 Discharge by Performance 273
13–3 Contract Discharge 277
13–4 Remedies for Breach of Contract 283
14–1 The Law Governing Contracts 288
14–2 Major Differences between Contract Law
and Sales Law 296
15–1 Suretyship and Guaranty Parties 325
15–2 Collection and Distribution of Property
in Most Voluntary Bankruptcies 337
16–1 The FTC’s Franchise Rule Requirements 368
17–1 Management of an LLC 379
17–2 Provisions Commonly Included in an LLC Operating
Agreement 381
17–3 A Comparison of General Partnerships and Limited
Partnerships 387
18–1 Results of Cumulative Voting 412
18–2 Major Forms of Business Compared 415
19–1 Duties of the Agent 426
19–2 Duties of the Principal 427
22–1 Good Faith versus Bad Faith in Collective
Bargaining 485
22–2 Basic Unfair Labor Practices 487
23–1 Executive Departments and Important
Subagencies 502
23–2 Selected Independent Regulatory Agencies 503
23–3 The Formal Administrative Agency Adjudication
Process 508
24–1 Selected Areas of Consumer Law Regulated by
Statutes 518
25–1 Major Federal Environmental Statutes 537
25–2 Environmental Impact Statements 539
25–3 Pollution-Control Equipment Standards under
the Clean Air Act and the Clean Water Act 543
26–1 Interests in Real Property 557
27–1 Required Elements of a Sherman Act Violation 572
27–2 Exemptions to Antitrust Enforcement 585
28–1 Exempt Transactions under the 1933 Securities
Act 593
28–2 Comparison of Coverage, Application, and Liability
under SEC Rule 10b-5 and Section 16(b) 601
28–3 Some Key Provisions of the Sarbanes-Oxley
Act Relating to Corporate Accountability 608
xi
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Preface
The study of the legal environment of business has
­universal applicability. A student entering any field of
business must have at least a passing understanding
of the legal environment in order to function in the real
world. The Legal Environment of Business, Eleventh Edition, provides the information that students need in an
interesting and contemporary way.
Additionally, students preparing for a career in
accounting, government and political science, economics, and even medicine can use much of the information
they learn in a legal environment course. In fact, every
individual throughout his or her lifetime can benefit
from knowledge of contracts, employment law, intellectual property rights, real property, and other legal environment topics. Consequently, we have fashioned this
text as a useful “tool for living” for all of your students
(including those taking the CPA exam).
The Eleventh Edition of this text is more modern,
exciting, and visually appealing than ever before. We
have added new features, cases, concept summaries, and
exhibits. The text also contains hundreds of highlighted
and numbered Cases in Point and Examples, as well as
new case problems and unit-ending Task-Based Simulations. Special pedagogical elements within the text
focus on legal, ethical, global, and corporate issues while
addressing core curriculum requirements.
Highlights of the Eleventh Edition
Instructors have come to rely on the coverage, accuracy,
and ­applicability of The Legal Environment of Business. To
make sure that our text engages your students, solidifies
their understanding of legal concepts, and provides the
best teaching tools available, we offer the following.
The IDDR Approach:
A New Emphasis on Ethics
The ability of businesspersons to reason through ethical
issues is now more important than ever. For the ­Eleventh
Edition of The Legal Environment of Business, we have
created a completely new framework for helping students
(and businesspersons) make ethical decisions. We present
The IDDR Approach in Chapter 3 (Ethics in ­Business).
This systematic approach provides students with a clear
step-by-step process to analyze the legal and ethical
implications of decisions that arise in everyday business
operations.
The new IDDR Approach uses four logical steps:
• STEP 1: Inquiry
• STEP 2: Discussion
• STEP 3: Decision
• STEP 4: Review
Students can remember the first letter of each step easily
by using the phrase: “I Desire to Do Right.”
Completely Revised Chapter 3 on Ethics in
Business A newly revised Chapter 3 details each IDDR
step’s goals and then provides a Sample Scenario to help
students apply this new approach to ethical decision making. In addition to introducing the IDDR Approach, we
have made Chapter 3 more current and more practical,
and reduced the amount of theoretical ethical principles it
presents. The chapter now focuses on real-life application
of ethical principles.
New A Question of Ethics Case Problems
throughout Text After Chapter 3, to reinforce the
application of the IDDR Approach, students are asked
to use its various steps when answering each chapter’s
A Question of Ethics. To challenge students in analyzing
the ethical angles in today’s business legal environment,
we have replaced every A Question of Ethics ­problem
throughout the text to be based on a 2017, 2018,
or 2019 case.
A Variety of Exciting Features
The Eleventh Edition of The Legal Environment of Business is filled with numerous features specifically designed
to cover current legal topics of high interest.
Each feature is related to a topic discussed in the text
and ends with Critical Thinking or Business Questions.
Suggested answers to all of the Critical Thinking and
Business Questions are included in the Answers Manual
for this text.
xiii
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xiv
P refac E
1. Ethics Today. These features focus on the ethical
aspects of a topic discussed in the text to emphasize
that ethics is an integral part of a legal environment
of business course. Examples include the following:
• Applying the IDDR Framework (Chapter 3)
• Is It Ethical (and Legal) to Brew “Imported” Beer
Brands Domestically? (Chapter 11)
• Should There Be More Relief for Student Loan
Defaults? (Chapter 15)
• Is It Fair to Classify Uber and Lyft Drivers as
Independent Contractors? (Chapter 19)
2. Global Insight. These features illustrate how other
nations deal with specific legal concepts to give
students a sense of the global legal environment.
Subjects include the following:
• Aleve versus Flanax—Same Pain Killer, but in
Different Countries (Chapter 8)
• Does Cloud Computing Have a Nationality?
(Chapter 18)
• Islamic Law and Respondeat Superior (Chapter 19)
• Can a River Be a Legal Person? (Chapter 25)
3. Digital Update. These features are designed to
examine cutting-edge cyberlaw topics, such as the
following:
• Does Everyone Have a Constitutional Right to
Use Social Media? (Chapter 2)
• Should Employees Have a “Right of
Disconnecting”? (Chapter 3)
• Revenge Porn and Invasion of Privacy (Chapter 6)
• Riot Games, Inc., Protects Its Online Video
Game Copyrights (Chapter 9)
• Hiring Discrimination Based on Social Media
Posts (Chapter 21)
4. Managerial Strategy. These features emphasize
the management aspects of business law and the
legal environment. Topics include the following:
• Should You Consent to Have Your Business Case
Decided by a U.S. Magistrate Judge? (Chapter 4)
• When Is a Warning Legally Bulletproof? (Chapter 7)
• The Criminalization of American Business
(Chapter 10)
• Commercial Use of Drones (Chapter 14)
• The SEC’s Pay-Ratio Disclosure Rule (Chapter 28)
Entire Chapter on Internet Law,
Social Media, and Privacy
The Eleventh Edition again includes a whole chapter
(Chapter 9) on Internet Law, Social Media, and Privacy.
Social media have entered the mainstream and become
a part of everyday life for many businesspersons. In
this special chapter, we give particular emphasis to the
legal issues surrounding the Internet, social media, and
­privacy. We also recognize this trend throughout the text
by incorporating the Internet and social media as they
relate to the topics under discussion.
Coverage of Topics
on the Revised CPA Exam
In 2016, the American Institute of CPAs (AICPA) issued
its final report on “Maintaining the Relevance of the Uniform CPA Exam.” In addition to more focus on c­ ritical
thinking, authentic applications, and problem solving,
the content of the exam has changed to some extent.
The Eleventh Edition of The Legal Environment of
Business incorporates information on the new topics on
the CPA exam, specifically addressing the following:
• Agency law (worker classification and duties of
principals and agents)
• Employment law (Affordable Care Act)
• Business organizations (corporate governance issues,
including Sarbanes-Oxley compliance and criminal
liability for organizations and management)
In addition, the Eleventh Edition continues to cover
­topics that are essential to new CPAs who are working
with sophisticated business clients, regardless of whether
the CPA exam covers these topics.
We recognize that today’s business leaders must often
think “outside the box” when making business d
­ ecisions.
For this reason, we strongly emphasize business and
­critical thinking elements throughout the text. We have
carefully chosen cases, features, and problems that are relevant to business operations. Almost all of the features
and cases conclude with some type of critical thinking
question. For those teaching future CPAs, this is consistent with the new CPA exam’s focus on higher-order
skills, such as critical thinking and problem solving.
Highlighted and Numbered Examples
and Case in Point Illustrations
Many instructors use cases and examples to illustrate
how the law applies to business. Students understand
legal concepts better in the context of their real-world
application. Therefore, for this edition of The Legal
Environment of Business, we have expanded the number
of highlighted numbered Examples and Cases in Point in
every chapter.
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P reface 
Examples illustrate how the law applies in a specific
situation. Cases in Point present the facts and issues of
an actual case and then describe the court’s decision and
rationale. These two features are uniquely designed
and consecutively numbered throughout each chapter for
easy reference. The Examples and Cases in Point are integrated throughout the text to help students better understand how courts apply legal principles in the real world.
Task-Based Simulations:
A New Unit-Ending Feature
A new Task-Based Simulation feature concludes each of the
five units in the Eleventh Edition. This feature presents a
hypothetical business situation and then asks a series of
questions about how the law applies to various actions
taken by the firm. To answer the questions, the students
must apply the laws discussed throughout the unit.
In addition, each unit ends with an Application and
Ethics feature that provides additional analysis on a topic
related to that unit and explores its ethics ramifications.
Each of the features ends with two questions—a Critical
Thinking question and an Ethics Question. Some topics
covered include the following:
•
•
•
•
One of the Biggest Data Breaches Ever (Unit 2)
Nondisclosure Agreements (Unit 3)
Health Insurance and Small Business (Unit 4)
Climate Change (Unit 5)
Suggested answers to the questions in the new Task-Based
Simulation features (and the Application and Ethics features) are included in the Answers Manual for this text.
New Cases and Case Problems
For the Eleventh Edition of The Legal Environment of
Business, we have added thirty-one new cases, thirtyfive new regular case problems, and twenty-eight new A
Question of Ethics case problems from 2017, 2018, and
2019. The new cases and problems have been carefully
selected to illustrate important points of law and to be of
high interest to students and instructors. We have made
it a point to find recent cases that enhance learning and
are relatively easy to understand.
1. Spotlight Cases and Classic Cases. Certain cases
and case problems that are exceptionally good
teaching cases are labeled as Spotlight Cases and
Spotlight Case Problems. Examples include Spotlight
on Beer Labels, Spotlight on Gucci, Spotlight on
Nike, Spotlight on the Seattle Mariners and Spotlight
on Verizon. Instructors will find these Spotlight
xv
Cases and Spotlight Case Problems useful to
illustrate the legal concepts under discussion, and
students will enjoy studying the cases because they
involve interesting and memorable facts. Other
cases have been chosen as Classic Cases because
they establish a legal precedent in a particular area
of law.
2. Critical Thinking Section. Each case concludes
with a Critical Thinking section, which normally
includes two questions. The questions may address
Legal Environment, E-Commerce, Economic,
Environmental, Ethical, Global, Political, or
Technological issues, or they may ask What If the
Facts Were Different? Each Classic Case ends with an
Impact of This Case on Today’s Law discussion and a
Critical Thinking question.
3. Longer Excerpts for Case Analysis. We have also
included one longer case excerpt in many chapters—
labeled Case Analysis—followed by three Legal
Reasoning Questions. The questions are designed to
guide students’ analysis of the case and build their
legal reasoning skills. These Case Analysis features
may be used for case-briefing assignments.
Suggested answers to all case-ending questions and case
problems are included in the Answers Manual for this
text.
Business Case Problem with Sample Answer
In response to those instructors who would like students
to have sample answers available for some of the questions
and case problems, we include a Business Case Problem
with Sample Answer in each chapter. The Business Case
Problem with Sample Answer is based on an actual case,
and students can find a sample answer in Appendix C at
the end of this text.
Exhibits and Concept Summaries
We have spent considerable effort developing and designing all of the exhibits and concept summaries in this text
to achieve better clarity and more visual appeal.
Practice and Review
In the Eleventh Edition of The Legal Environment of
Business, we offer a Practice and Review feature at the end
of every chapter to help solidify students’ understanding
of the chapter materials. Each Practice and Review feature
presents a hypothetical scenario and then asks a series of
questions that require students to identify the issues and
apply the legal concepts discussed in the chapter.
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xvi
P refac E
These features are designed to help students review
the chapter topics in a simple and interesting way and
see how the legal principles discussed in the chapter
affect the world in which they live. An instructor can
use these features as the basis for in-class discussion or
encourage students to use them for self-study prior to
completing homework assignments. Suggested answers
to the questions posed in the Practice and Review features can be found in the Answers Manual for this text.
At the conclusion of each chapter, we have included a
special section with two Issue Spotters related to the chapter’s topics. These questions facilitate student learning
and review of the chapter materials. Sample answers to
the Issue Spotters in every chapter are provided in Appendix B and in the Answers Manual for this text.
and assessments into a singular Learning Path, MindTap guides students through their course with ease and
engagement.
Instructors can personalize the experience by customizing Cengage Learning resources and adding their
own content via apps that integrate into the MindTap
framework seamlessly with Learning Management Systems (LMS).
The MindTap product provides a four-step Learning Path, Case Repository, Adaptive Test Prep, and an
Interactive eBook designed to meet instructors’ needs
while also allowing instructors to measure skills and
outcomes with ease. Each item is assignable and gradable. This gives instructors knowledge of class standings
and students’ mastery of concepts that may be difficult.
Additionally, students gain knowledge about where they
stand—both individually and compared to the highest
performers in class.
Time-Limited Group Assignment
Cengage Testing Powered by Cognero
Issue Spotters
For instructors who want their students to engage in
group projects, each chapter of the Eleventh Edition
includes a special Time-Limited Group Assignment. Each
activity begins by describing a business scenario and then
poses several questions pertaining to the scenario. Each
question is to be answered by a different group of students based on the information in the chapter. These
projects may be used in class to spur discussion or as
homework assignments. Suggested answers to the TimeLimited Group Assignments are included in the Answers
Manual for this text.
Supplements/Digital Learning
Systems
The Legal Environment of Business, Eleventh Edition,
provides a comprehensive supplements package designed
to make the tasks of teaching and learning more enjoyable and efficient. The following supplements and digital
products are offered in conjunction with the text.
MindTap for
The Legal Environment of Business
MindTap™ for The Legal Environment of Business,
­Eleventh Edition, is a fully online, highly personalized learning experience built upon Cengage Learning
­content. By combining readings, multimedia, activities,
Cengage Testing Powered by Cognero is a flexible, online
system that allows you to do the following:
• Author, edit, and manage Test Bank content from
multiple Cengage Learning solutions.
• Create multiple test versions in an instant.
• Deliver tests from your LMS, your classroom,
or wherever you want.
Start Right Away! Cengage Testing Powered by Cognero works on any operating system or browser.
• Use your standard browser; no special installs or
downloads are needed.
• Create tests from school, home, the coffee shop—
anywhere with Internet access.
What Will You Find?
• Simplicity at every step. A desktop-inspired
interface features drop-down menus and familiar
intuitive tools that take you through content
creation and management with ease.
• Full-featured test generator. Create ideal
assessments with your choice of fifteen question
types—including true/false, multiple choice,
opinion scale/Likert, and essay. Multi-language
support, an equation editor, and unlimited
metadata help ensure your tests are complete and
compliant.
• Cross-compatible capability. Import and export
content to and from other systems.
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P reface 
Instructor’s Companion Website
The Instructor’s Companion Website for the Eleventh
Edition of The Legal Environment of Business contains the
following supplements:
• Instructor’s Manual. Includes sections entitled
“Additional Cases Addressing This Issue” at the
end of selected case synopses.
• Answers Manual. Provides answers to all
questions presented in the text, including the
questions in each case and feature, the Practice
and Review, the Issue Spotters, the Business
Scenarios and Case Problems, and the unit-ending
Task-Based Simulation and Application and Ethics
features.
• Test Bank. A comprehensive test bank that
contains multiple-choice, true/false, and short
essay questions.
• Case-Problem Cases.
• Case Printouts.
• PowerPoint Slides.
• Lecture Outlines.
• MindTap Integrated Syllabus.
•
•
For Users of the Previous Edition
First of all, we want to thank you for helping make The
Legal Environment of Business one of the best-selling legal
environment texts in America today. Second, we want to
make you aware of the numerous additions and changes
that we have made in this edition—many in response to
comments from reviewers.
Every chapter of the Eleventh Edition has been revised
as necessary to incorporate new developments in the law
or to streamline the presentations. Other major changes
and additions for this edition include the following:
• Chapter 2 (Business and the Constitution)—The
chapter has been revised and updated to be more
business oriented. It has a new case, two new case
problems, and a new Digital Update feature on a
United States Supreme Court decision concerning
whether everyone has a constitutional right to use
social media.
• Chapter 3 (Ethics in Business)—The chapter
contents have been revised and updated to be
more practical for businesspersons. A new section
introduces a systematic approach to resolving
ethical issues called the IDDR Approach.
(“I Desire to Do Right” is a useful mnemonic
device for remembering the individual steps:
•
•
•
xvii
Inquiry, Discussion, Decision, and Review.)
There is a new Exhibit and a new Ethics Today
feature that illustrates how to apply the IDDR
framework. The step-by-step IDDR Approach is
then reiterated in the problems labeled A Question
of Ethics that appear in every subsequent chapter.
There are five new Cases in Point, seven new
Examples, a new case, and four new case problems
in the chapter. A Digital Update feature explores
whether employees have a right to disconnect
from their electronic devices after work hours.
The chapter concludes with a new TimeLimited Group Assignment on corporate social
responsibility.
Chapter 8 (Intellectual Property Rights)—The
materials on intellectual property rights have
been thoroughly revised and updated to reflect
the most current laws and trends. A new Global
Insight feature discusses confusion in the context
of trademark infringement. There is a new case,
a new Example, and two new case problems.
Chapter 9 (Internet Law, Social Media, and
Privacy)— This chapter, which covers legal
issues that are unique to the Internet, has been
thoroughly revised and updated for the Eleventh
Edition. It includes a new case, four new Cases in
Point, and a new Digital Update feature on how
copyright law applies to video games.
Chapter 11 (International and Space Law)—The
chapter now includes a section on space law—
international and domestic. There are two new
cases presented, as well as an updated discussion
of NAFTA (now called USMCA) and of a United
States Supreme Court decision concerning the
Alien Tort Statute. The chapter also includes an
updated Ethics Today feature on the domestic
brewing of imported beer brands.
Chapter 14 (Sales and Lease Contracts)—We
have streamlined and simplified our coverage of
the Uniform Commercial Code and added a new
case, a new Example, six new Cases in Point, and
one new case problem.
Chapter 20 (Employment Law), Chapter 21
(Employment Discrimination), and Chapter 22
(Immigration and Labor Law)—These three
chapters covering employment law have been
thoroughly updated to include discussions of
legal issues facing employers today. Chapter 20
a new case, three new Cases in Point, one new
Example, and two new case problems. It also
includes an Ethics Today feature on whether
employees should receive paid bathroom breaks.
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Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
xviii
P refac E
Chapter 21 has a new case, five new Cases in
Point, a new concept summary, and two new
case problems. A revised Digital Update feature
discusses hiring discrimination based on social
media posts. Chapter 22 includes a new case and
a Managerial Strategy feature on union organizing
using company e-mail systems. We discuss
relevant United States Supreme Court decisions
affecting employment issues throughout these
chapters.
• Chapter 24 (Consumer Protection)—The chapter
has been revised and updated and includes a
new subsection on state laws concerning false
advertising. It has a new case, three new Cases in
Point, and three new case problems.
• Chapter 28 (Investor Protection and Corporate
Governance)—The contents of this chapter
have been thoroughly revised and updated
in light of the amendments to Regulation A
(Regulation A1). There is a new Digital Update
feature titled Investment Crowdfunding—
Regulations and Restrictions, as well as a new
example and a new exhibit on this topic.
In addition, there is a new subsection, a new
case, three new Cases in Point, and two new case
problems.
Acknowledgments for Previous Editions
Since we began this project many years ago, a sizable number of legal environment of business professors and others
have helped us in revising the book, including the following:
Peter W. Allan
Victor Valley College, California
Paul F. Dwyer
Siena College, New York
David Redle
University of Akron, Ohio
William Dennis Ames
Indiana University of Pennsylvania
Nena Ellison
Florida Atlantic University
Larry A. Strate
University of Nevada, Las Vegas
Thomas M. Apke
California State University, Fullerton
Joan Gabel
Florida State University
Dawn Swink
Minnesota State University
Linda Axelrod
Metropolitan State University, Minnesota
Gamewell Gant
Idaho State University
Jane Bennett
Orange Coast College, California
Jacqueline Hagerott
Franklin University, Ohio
Brian Terry
Johnson and Wales University,
Rhode Island
Robert C. Bird
University of Connecticut
Arlene M. Hibschweiler
State University of New York at Fredonia
Dean Bredeson
University of Texas at Austin
Barbara W. Kincaid
Southern Methodist University, Texas
Sam Cassidy
University of Denver, Colorado
Marty P. Ludlum
Oklahoma City Community College
Thomas D. Cavenagh
North Central College, Illinois
Diane May
Winona State University, Minnesota
Angela Cerino
Villanova University, Pennsylvania
Marty Salley McGee
South Carolina State University
LeVon E. Wilson
Western Carolina University,
North Carolina
Corey Ciocchetti
University of Denver, Colorado
Robert Mitchum
Arkansas State University Beebe
John A. Wrieden
Florida International University
David Cooper
Fullerton College, California
Melanie Morris
Raritan Valley Community College, New Jersey
Eric D. Yordy
Northern Arizona University
Steven R. Donley
Cypress College, California
Kathleen A. Phillips
University of Houston, Texas
Mary-Kathryn Zachary
State University of West Georgia
John Theis
Colorado Mesa University
William H. Volz
Wayne State University, Michigan
Michael G. Walsh
Villanova University, Pennsylvania
Glynda White
College of Southern Nevada
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P reface 
As in all past editions, we owe a debt of extreme gratitude to the numerous individuals who worked directly
with us or at Cengage. In particular, we wish to thank
Vicky True-Baker and Michael Giffen, senior product
managers; Joe Sabatino, product director; Martha Conway and Julia Chase, senior content managers; and Lisa
Elliot, Cengage subject matter expert. We also thank Sarah
Huber and Courtney Wolstoncroft, learning designers;
Jennifer Chinn and Stephen McMillian, digital delivery
leads; Christian Wood and Nick Perez, product assistants;
Chris Doughman, designer; Carly Belcher, intellectual
property project manager; and Ashley Maynard, intellectual property analyst. We are indebted as well to the staff
at SPi Global, our compositor, as well as Ann Borman,
project manager, for accurately generating pages for this
text and making it possible for us to meet our ambitious
schedule for print and digital products.
We especially wish to thank Katherine Marie Silsbee
for her management of the entire project, as well as for the
xix
application of her superb research and editorial skills. We
also wish to thank William Eric Hollowell, who coauthored the Instructor’s Manual and the Test Bank, for his
excellent research efforts. We were fortunate enough to
have the copyediting of Jeanne Yost and the proofreading
of Kristi Wiswell. We are grateful for the many efforts of
Vickie Reierson, Roxanna Lee, and Suzanne Jasin, which
helped to ensure an error-free text.
Through the years, we have enjoyed an ongoing correspondence with many of you who have found points
on which you wish to comment. We continue to welcome all comments and promise to respond promptly.
By incorporating your ideas, we can continue to write a
legal environment text that is best for you and best for
your students.
F.B.C.
R.L.M.
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To my parents and sisters.
F.B.C.
For Vicky,
We’ve had so many years
working together, and they
have been wonderful,
productive, and exciting.
I have always valued
your professionalism.
R.L.M.
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Unit One
The Foundations
1. Law and Legal Reasoning
2. Business and the Constitution
3. Ethics in Business
4. Courts and Alternative Dispute Resolution
5. Court Procedures
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C h a p te r 1
Law and Legal Reasoning
O
ne of the most important functions of law in any society is to
provide stability, predictability,
and continuity so that people can know
how to order their affairs. If any society
is to survive, its citizens must be able
to determine what is legally right and
legally wrong. They must know what
sanctions will be imposed on them if
they commit wrongful acts. If they suffer harm as a result of others’ wrongful acts, they must know how they can
seek compensation. By setting forth the
rights, obligations, and privileges of citizens, the law enables individuals to go
about their business with confidence
and a certain degree of predictability.
Although law has various definitions, they all are based on the general observation that law consists of
enforceable rules governing relationships among individuals and between
individuals and their society. In some
societies, these enforceable rules may
consist of unwritten principles of
behavior. In other societies, they are
set forth in ancient or contemporary
law codes. In the United States, our
rules consist of written laws and cour
decisions created by modern legislative
and judicial bodies. Regardless of how
such rules are created, they all have
one feature in common: they establish
rights, duties, and privileges that are
consistent with the values and beliefs
of their society or its ruling group.
In this introductory chapter, we
look at how business law and the
legal environment affect business
decisions. For instance, suppose that
1–1 Business
Activities and the
Legal Environment
Laws and government regulations affect almost all business
activities—from hiring and firing decisions to workplace
safety, the manufacturing and marketing of products,
business financing, and more. To make good business
decisions, a basic knowledge of the laws and regulations
governing these activities is beneficial—if not essential.
Realize also that, in today’s business world, knowing
what conduct can lead to legal liability is not enough.
Businesspersons must develop critical thinking and legal
reasoning skills so that they can evaluate how various
laws might apply to a given situation and determine the
best course of action.
Our goal in this text is not only to teach you about
specific laws, but also to teach you how to think
about the law and the legal environment and to develop
Hellix Communications, Inc., wants
to buy a competing cellular company.
It also wants to offer unlimited data
plans once it has acquired this competitor. Management fears that if
the company does not expand, one
of its bigger rivals will put it out of
business. But Hellix Communications
cannot simply buy its rivals. Nor can
it just offer a low-cost cell-phone
plan to its customers. It has to follow
the laws pertaining to its proposed
actions. Some of these laws (or regulations) depend on interpretations
by those running various regulatory
agencies. The rules that control H
­ ellix
Communications’ actions reflect past
and current thinking about how
large telecommunications companies
should and should not act.
your critical-thinking and legal-reasoning skills. The laws
may change, but the ability to analyze and evaluate the
legal (and ethical) ramifications of situations as they arise
is an invaluable and lasting skill.
1–1a Many
Different Laws May Affect
a Single Business Decision
As you will note, each chapter in this text covers specific
areas of the law and shows how the legal rules in each
area affect business activities. Although compartmentalizing the law in this fashion promotes conceptual clarity,
it does not indicate the extent to which a number of different laws may apply to just one decision. Exhibit 1–1
illustrates the various areas of the law that may influence
business decision making.
■ Example 1.1 When Mark Zuckerberg, as a ­Harvard
student, first launched Facebook, others claimed that
Zuckerberg had stolen their ideas for a social networking
2
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C h a p te r 1
Law and Legal Reasoning
3
Exhibit 1–1 Areas of the Law That Can Affect Business Decision Making
Contracts
Environmental
Law and Sustainability
Intellectual
Property
Business
Decision
Making
Internet Law,
Social Media,
and Privacy
Torts
Product
Liability
Sales
site. They filed a lawsuit against him alleging theft of
intellectual property, fraudulent misrepresentation, and
violations of partnership law and securities law. Facebook
ultimately paid $65 million to settle those claims out of
court. Since then, Facebook has been sued repeatedly for
violating users’ privacy (and federal laws) by tracking their
website usage and by scanning private messages for purposes of data mining and user profiling. Facebook’s business decisions have also come under scrutiny by federal
regulators, such as the Federal Trade Commission (FTC),
and by international authorities, such as the European
Union. The company settled a complaint filed by the
FTC alleging that Facebook had failed to keep “friends”
lists and other user information private. ■
the types of ethical questions that arise in business. For
instance, all of the unit-ending Application and Ethics features include an Ethical Connection section that explores the
ethical dimensions of a topic treated within the unit. We
have also included Ethical Questions for each unit, as well as
within many of the cases presented in this text. Ethics Today
features, which focus on ethical considerations in today’s
business climate, appear in selected chapters, including this
chapter. A Question of Ethics case problem is included at the
end of every chapter to introduce you to the ethical aspects
of specific cases involving real-life situations.
Ethics and Business Decision Making
American law has numerous sources. Often, these sources
of law are classified as either primary or secondary.
Primary sources of law, or sources that establish the
law, include the following:
1–1b
Merely knowing the areas of law that may affect a business decision is not sufficient in today’s business world.
Today, business decision makers need to consider not just
whether a decision is legal, but also whether it is ethical.
Ethics generally is defined as the principles governing what constitutes right or wrong behavior. Often, as
in several of the claims against Facebook just discussed,
disputes arise in business because one party feels that he
or she has been treated unfairly. Thus, the underlying
reason for bringing some lawsuits is a breach of ethical
duties (such as when a partner or employee attempts to
secretly take advantage of a business opportunity).
Throughout this text, you will learn about the relationship between the law and ethics, as well as about some of
1–2
Sources of American Law
1. The U.S. Constitution and the constitutions of the
various states.
2. Statutory law—including laws passed by Congress,
state legislatures, or local governing bodies.
3. Regulations created by administrative agencies, such
as the Federal Trade Commission.
4. Case law and common law doctrines.
Next, we will describe each of these important sources
of law.
Secondary sources of law are books and articles that
summarize and clarify the primary sources of law.
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4
Un it One
The Foundations
Examples include legal encyclopedias, treatises, articles
in law reviews, and compilations of law, such as the
Restatements of the Law (which will be discussed later).
Courts often refer to secondary sources of law for guidance in interpreting and applying the primary sources of
law discussed here.
1–2a
Constitutional Law
The federal government and the states have separate
written constitutions that set forth the general organization, powers, and limits of their respective governments.
Constitutional law is the law as expressed in these
constitutions.
According to Article VI of the U.S. Constitution, the
Constitution is the supreme law of the land. As such, it
is the basis of all law in the United States. A law in violation of the Constitution, if challenged, will be declared
unconstitutional and will not be enforced, no matter
what its source.
The Tenth Amendment to the U.S. Constitution
reserves to the states all powers not granted to the federal
government. Each state in the union has its own constitution. Unless it conflicts with the U.S. Constitution or
a federal law, a state constitution is supreme within the
state’s borders.
1–2b
Statutory Law
Laws enacted by legislative bodies at any level of government, such as statutes passed by Congress or by state
legislatures, make up the body of law known as statutory
law. When a legislature passes a statute, that statute
­ultimately is included in the federal code of laws or the
relevant state code of laws.
Statutory law also includes local ordinances—regulations passed by municipal or county governing units
to deal with matters not covered by federal or state law.
Ordinances commonly have to do with city or county
land use (zoning ordinances), building and safety codes,
and other matters affecting the local community.
A federal statute, of course, applies to all states. A state
statute, in contrast, applies only within the state’s borders. State laws thus may vary from state to state. No
federal statute may violate the U.S. Constitution, and no
state statute or local ordinance may violate the U.S. Constitution or the relevant state constitution.
Statutory Conflicts Tension may sometimes arise
between federal, state, and local laws. ■ Example 1.2 This
tension is evident in the national debate over so-called
sanctuary cities—cities that limit their cooperation with
federal immigration authorities. Normally, local law
enforcement officials are supposed to alert federal immigration authorities when they come into contact with
undocumented immigrants, so that the immigrants can
be detained for possible deportation. But a number of
cities across the United States have adopted either local
ordinances or explicit policies that do not follow this procedure. Police in these cities often do not ask or report the
immigration status of individuals with whom they come
into contact. Other places refuse to detain undocumented
immigrants who are accused of low-level offenses. ■
Uniform Laws During the 1800s, the differences
among state laws frequently created difficulties for businesspersons conducting trade and commerce among
the states. To counter these problems, a group of legal
scholars and lawyers formed the National Conference of
Commissioners on Uniform State Laws, or NCCUSL
(www.uniformlaws.org), in 1892. The NCCUSL still
exists today. Its object is to draft uniform laws (model
statutes) for the states to consider adopting.
Each state has the option of adopting or rejecting a
uniform law. Only if a state legislature adopts a uniform
law does that law become part of the statutory law of that
state. Note that a state legislature may adopt all or part
of a uniform law as it is written, or the legislature may
rewrite the law however the legislature wishes. Hence,
even though many states may have adopted a uniform
law, those states’ laws may not be entirely “uniform.”
The earliest uniform law, the Uniform Negotiable
Instruments Law, was completed by 1896 and adopted in
every state by the 1920s (although not all states used exactly
the same wording). Over the following decades, other acts
were drawn up in a similar manner. In all, more than two
hundred uniform acts have been issued by the NCCUSL
since its inception. The most ambitious uniform act of all,
however, was the Uniform Commercial Code.
The Uniform Commercial Code One of the most
important uniform acts is the Uniform Commercial Code
(UCC), which was created through the joint efforts of the
NCCUSL and the American Law Institute.1 The UCC
was first issued in 1952 and has been adopted in all fifty
states,2 the District of Columbia, and the Virgin Islands.
The UCC facilitates commerce among the states by
providing a uniform, yet flexible, set of rules governing
commercial transactions. Because of its importance in
the area of commercial law, we cite the UCC frequently
in this text.
1. This institute was formed in the 1920s and consists of practicing attorneys,
legal scholars, and judges.
2. Louisiana has not adopted Articles 2 and 2A (covering contracts for the
sale and lease of goods), however.
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C h a p te r 1
1–2c
Administrative Law
Another important source of American law is administrative law, which consists of the rules, orders, and
decisions of administrative agencies. An administrative
agency is a federal, state, or local government agency
established to perform a specific function. Administrative law and procedures constitute a dominant element
in the regulatory environment of business.
Rules issued by various administrative agencies now
affect almost every aspect of a business’s operations. Regulations govern a business’s capital structure and financing, its hiring and firing procedures, its relations with
employees and unions, and the way it manufactures and
markets its products. Regulations enacted to protect the
environment also often play a significant role in business
operations.
Federal Agencies At the national level, the cabinet
departments of the executive branch include numerous
executive agencies. The U.S. Food and Drug Administration, for instance, is an agency within the U.S. Department of Health and Human Services. Executive agencies
are subject to the authority of the president, who has the
power to appoint and remove their officers.
There are also major independent regulatory agencies
at the federal level, such as the Federal Trade Commission, the Securities and Exchange Commission, and the
Federal Communications Commission. The president’s
Law and Legal Reasoning
power is less pronounced in regard to independent agencies, whose officers serve for fixed terms and cannot be
removed without just cause.
State and Local Agencies There are administrative
agencies at the state and local levels as well. Commonly,
a state agency (such as a state pollution-control agency) is
created as a parallel to a federal agency (such as the Environmental Protection Agency). Just as federal statutes take
precedence over conflicting state statutes, federal agency regulations take precedence over conflicting state regulations.
1–2d
Case Law and Common Law Doctrines
The rules of law announced in court decisions constitute another basic source of American law. These rules
include interpretations of constitutional provisions, of
statutes enacted by legislatures, and of regulations created by administrative agencies.
Today, this body of judge-made law is referred to
as case law. Case law—the doctrines and principles
announced in cases—governs all areas not covered by
statutory law or administrative law and is part of our
common law tradition. We look at the origins and characteristics of the common law tradition in some detail in
the pages that follow.
See Concept Summary 1.1 for a review of the sources
of American law.
ETHICS
TODAY1.1
Concept
Summary
Sources of American Law
Constitutional Law
●
●
●
Statutory Law
●
●
●
5
Law as expressed in the U.S. Constitution or state constitutions.
The U.S. Constitution is the supreme law of the land.
State constitutions are supreme within state borders to the extent that
they do not conflict with the U.S. Constitution.
Statutes (including uniform laws) and ordinances enacted by federal, state,
and local legislatures.
Federal statutes may not violate the U.S. Constitution.
State statutes and local ordinances may not violate the U.S. Constitution
or the relevant state constitution.
Administrative Law
●
The rules, orders, and decisions of federal, state, and local
administrative agencies.
Case Law and Common
Law Doctrines
●
Judge-made law, including interpretations of constitutional provisions,
of statutes enacted by legislatures, and of regulations created by
administrative agencies.
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6
Un it One
1–3
The Foundations
The Common Law Tradition
Because of our colonial heritage, much of American law
is based on the English legal system. Knowledge of this
tradition is crucial to understanding our legal system
today because judges in the United States still apply common law principles when deciding cases.
1–3a
Early English Courts
After the Normans conquered England in 1066, William
the Conqueror and his successors began the process of
unifying the country under their rule. One of the means
they used to do this was the establishment of the king’s
courts, or curiae regis.
Before the Norman Conquest, disputes had been settled according to the local legal customs and traditions in
various regions of the country. The king’s courts sought
to establish a uniform set of customs for the country as
a whole. What evolved in these courts was the beginning of the common law—a body of general rules that
applied throughout the entire English realm. Eventually,
the common law tradition became part of the heritage of
all nations that were once British colonies, including the
United States.
Courts of Law and Remedies at Law The early
English king’s courts could grant only very limited kinds
of remedies (the legal means to enforce a right or redress
a wrong). If one person wronged another in some way, the
king’s courts could award as compensation one or more of
the following: (1) land, (2) items of value, or (3) money.
The courts that awarded this compensation became
known as courts of law, and the three remedies were
called remedies at law. (Today, the remedy at law normally takes the form of monetary damages—an amount
given to a party whose legal interests have been injured.)
This system made the procedure for settling disputes
more uniform. When a complaining party wanted a remedy other than economic compensation, however, the
courts of law could do nothing, so “no remedy, no right.”
Courts of Equity When individuals could not obtain
an adequate remedy in a court of law, they petitioned the
king for relief. Most of these petitions were decided by an
adviser to the king, called a chancellor, who had the power
to grant new and unique remedies. Eventually, formal
chancery courts, or courts of equity, were established.
Equity is a branch of law—founded on notions of justice
and fair dealing—that seeks to supply a remedy when no
adequate remedy at law is available.
Remedies in Equity The remedies granted by the
equity courts became known as remedies in equity, or
equitable remedies. These remedies include specific performance, injunction, and rescission. Specific performance
involves ordering a party to perform an agreement as
promised. An injunction is an order to a party to cease
engaging in a specific activity or to undo some wrong or
injury. Rescission is the cancellation of a contractual obligation. We will discuss these and other equitable remedies
in more detail in later chapters.
As a general rule, today’s courts, like the early
­English courts, will not grant equitable remedies unless
the remedy at law—monetary damages—is inadequate. ■ Example 1.3 Ted forms a contract (a legally
binding agreement) to purchase a parcel of land that
he thinks will be perfect for his future home. The seller
breaches (fails to fulfill) this agreement. Ted could sue
the seller for the return of any deposits or down payment he might have made on the land, but this is not
the remedy he really wants. What Ted wants is to have
a court order the seller to perform the contract. In other
words, Ted will seek the equitable remedy of specific performance because monetary damages are inadequate in
this situation. ■
Equitable Maxims In fashioning appropriate remedies, judges often were (and continue to be) guided by
so-called equitable maxims—propositions or general
statements of equitable rules. Exhibit 1–2 lists some
important equitable maxims.
The last maxim listed in the exhibit—“Equity aids
the vigilant, not those who rest on their rights”—­merits
special attention. It has become known as the equitable
doctrine of laches (a term derived from the Latin laxus,
meaning “lax” or “negligent”), and it can be used as a
defense. A defense is an argument raised by the defendant
(the party being sued) indicating why the plaintiff (the
suing party) should not obtain the remedy sought. (Note
that in equity proceedings, the party bringing a lawsuit is
called the petitioner, and the party being sued is referred
to as the respondent.)
The doctrine of laches arose to encourage people to
bring lawsuits while the evidence was fresh. What constitutes a reasonable time, of course, varies according to the
circumstances of the case. Time periods for different types
of cases are now usually fixed by statutes of limitations.
After the time allowed under a statute of limitations has
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C h a p te r 1
Law and Legal Reasoning
7
Exhibit 1–2 Equitable Maxims
1. Whoever seeks equity must do equity. (Anyone who wishes to be treated fairly must treat others fairly.)
2. Where there is equal equity, the law must prevail. (The law will determine the outcome of a controversy in which the
merits of both sides are equal.)
3. One seeking the aid of an equity court must come to the court with clean hands. (The plaintiff must have acted
fairly and honestly.)
4. Equity will not suffer a wrong to be without a remedy. (Equitable relief will be awarded when there is a right to
relief and there is no adequate remedy at law.)
5. Equity regards substance rather than form. (Equity is more concerned with fairness and justice than with legal
­technicalities.)
6. Equity aids the vigilant, not those who rest on their rights. (Equity will not help those who neglect their rights for an
unreasonable period of time.)
expired, no action (lawsuit) can be brought, no matter
how strong the case was originally.
1–3b
Legal and Equitable Remedies Today
The establishment of courts of equity in medieval England
resulted in two distinct court systems: courts of law and
courts of equity. The courts had different sets of judges
and granted different types of remedies. During the nineteenth century, however, most states in the United States
adopted rules of procedure that resulted in the combining of courts of law and equity. A party now may request
both legal and equitable remedies in the same action, and
the trial court judge may grant either or both forms of
relief.
The distinction between legal and equitable remedies
remains relevant to students of business law, however,
because these remedies differ. To seek the proper remedy
for a wrong, you must know what remedies are available.
Additionally, certain vestiges of the procedures used when
there were separate courts of law and equity still exist. For
instance, a party has the right to demand a jury trial in an
action at law, but not in an action in equity. Exhibit 1–3
summarizes the procedural differences (applicable in most
states) between an action at law and an action in equity.
1–3c
The Doctrine of Stare Decisis
One of the unique features of the common law is that it
is judge-made law. The body of principles and doctrines
that form the common law emerged over time as judges
decided legal controversies.
Case Precedents and Case Reporters When
possible, judges attempted to be consistent and to base
their decisions on the principles suggested by earlier
cases. They sought to decide similar cases in a similar
way, and they considered new cases with care because
they knew that their decisions would make new law.
Each interpretation became part of the law on the subject and thus served as a legal precedent. A precedent
is a decision that furnishes an example or authority for
deciding subsequent cases involving identical or similar
legal principles or facts.
In the early years of the common law, there was no
single place or publication where court opinions, or written decisions, could be found. By the fourteenth century,
portions of the most important decisions from each year
were being gathered together and recorded in Year Books,
which became useful references for lawyers and judges. In
the sixteenth century, the Year Books were discontinued,
Exhibit 1–3 Procedural Differences between an Action at Law and an Action in Equity
Procedure
Action at Law
Action in Equity
Initiation of lawsuit
By filing a complaint
By filing a petition
Decision
By jury or judge
By judge (no jury)
Result
Judgment
Decree
Remedy
Monetary damages or property
Injunction, specific performance, or
rescission
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