Debate 1

We're the ideal place for homework help. If you are looking for affordable, custom-written, high-quality and non-plagiarized papers, your student life just became easier with us. Click either of the buttons below to place your order.

Order a Similar Paper Order a Different Paper


  • Debate This: Security Interests
  • Chapter 25, Page 602

Paul Barton owned a small property-management company, doing business as Brighton Homes. In October, Barton went on a spending spree. First, he bought a Bose surround-sound system for his home from KDM Electronics. The next day, he purchased a Wilderness Systems kayak from Outdoor Outfitters, and the day after that he bought a new Toyota 4-Runner financed through Bridgeport Auto. Two weeks later, Barton purchased six new iMac computers for his office, also from KDM Electronics. Barton bought all of these items under installment sales contracts. Six months later, Barton’s property-management business was failing. He could not make the payments due on any of these purchases and thus defaulted on the loans. Using the information presented in the chapter, answer the following questions. 

  1. For which of Barton’s purchases (the surround-sound system, the kayak, the 4-Runner, and the six iMacs) would the creditor need to file a financing statement to perfect its security interest?
  2. Suppose that Barton’s contract for the office computers mentioned only the name, Brighton Homes. What would be the consequences if KDM Electronics filed a financing statement that listed only Brighton Homes as the debtor’s name?
  3. Which of these purchases would qualify as a PMSI in consumer goods?
  4. Suppose that after KDM Electronics repossesses the surround-sound system, it decides to keep the system rather than sell it. Can KDM do this under Article 9? Why or why not?

Debate This: 
A financing statement that does not have the debtor’s exact name should still be effective because creditors should always be protected when debtors default

Comprehensive Edition
Text & Cases

Roger LeRoy Miller
Institute for University Studies

Arlington, Texas

Australia • Brazil • Mexico • Singapore • United Kingdom • United States



12th Edition

30301_fm_hr_i-xxii.indd 1 8/31/18 3:11 PM

© 2020, 2017 Cengage Learning, Inc.

Unless otherwise noted, all content is © Cengage.

ALL RIGHTS RESERVED. No part of this work covered by the copyright herein
may be reproduced or distributed in any form or by any means, except as
permitted by U.S. copyright law, without the prior written permission of the
copyright owner.

For product information and technology assistance, contact us at
Cengage Customer & Sales Support, 1-800-354-9706 or

For permission to use material from this text or product, submit all
requests online at

Library of Congress Control Number: 2018953610

Soft-cover Edition:
ISBN: 978-0-357-03818-5

Loose-leaf Edition:
ISBN: 978-0-357-03030-1

20 Channel Center Street
Boston, MA 02210

Cengage is a leading provider of customized learning solutions with
employees residing in nearly 40 different countries and sales in more
than 125 countries around the world. Find your local representative

Cengage products are represented in Canada by
Nelson Education, Ltd.

To learn more about Cengage platforms and services, register or access
your online learning solution, or purchase materials for your course,

Business Law Today, Comprehensive Edition
Text & Cases
12th Edition
Roger LeRoy Miller

Senior Vice President, Higher Ed Product,
Content, and Market Development: Erin Joyner

Product Director: Bryan Gambrel

Senior Product Manager: Vicky True-Baker

Senior Content Manager: Martha Conway

Cengage Subject Matter Expert: Lisa Elliott

Learning Designer: Sarah Huber

Digital Delivery Lead: Jennifer Chinn

Product Assistant: Christian Wood

Marketing Manager: Andrew Miller

Intellectual Property Analyst: Jennifer Bowes

Intellectual Property Project Manager:
Jillian Shafer

Production Service: SPi Global

Designer: Chris Doughman

Cover and Internal Designer: Ke Design/Ted Knapke

Cover Image: Ditty_about_summer/

Design Images: Front & back matter header:
Ditty_about_summer /;
Unit-opener statue of Lady Justice: Michal
Kalasek/; Case: silvae/; Classic Case: Orhan Cam/; Spotlight Case: Kozlik/; Linking Business Law: Hekla/; Unit-ending Task-Based
Simulation: Kamil Fazrin Rauf/;
Adapting the Law to the Online Environment:
Artem Samokhvalov/;
Landmark in the Law: Yuriy Kulik/Shutterstock.
com; Business Law Analysis: winui/Shutterstock.
com; Business Web Log: Creative Images/; Beyond Our Borders: iDEAR
Replay/; Ethical Issue puzzle
piece: Gary Lanfer/; Managerial

Printed in the United States of America
Print Number: 01 Print Year: 2018

30301_fm_hr_i-xxii.indd 2 8/31/18 3:11 PM

Unit 1 The Legal Environment of Business 1
1 Law and Legal Reasoning 2
2 Constitutional Law 31
3 Ethics in Business 57
4 Courts and Alternative Dispute Resolution 86
5 Tort Law 123
6 Product Liability 151
7 Intellectual Property Rights 172
8 Internet Law, Social Media, and Privacy 200
9 Criminal Law and Cyber Crime 224

Unit 2 Contracts and E-Contracts 257
10 Nature and Classification 258
11 Agreement 277
12 Consideration 302
13 Capacity and Legality 316
14 Voluntary Consent 335
15 The Statute of Frauds—Writing Requirement 350
16 Performance and Discharge 366
17 Breach and Remedies 382
18 Third Party Rights 402

Unit 3 Commercial Transactions 419
19 The Formation of Sales and Lease Contracts 420
20 Title and Risk of Loss 448
21 Performance and Breach of Sales and Lease Contracts 464
22 Negotiable Instruments 496
23 International and Space Law 532
24 Banking in the Digital Age 554
25 Security Interests and Creditors’ Rights 577
26 Bankruptcy 607

Unit 4 Agency and Employment Law 637
27 Agency Relationships in Business 638
28 Employment, Immigration, and Labor Law 666
29 Employment Discrimination 694

Unit 5 Business Organizations 725
30 Sole Proprietorships and Franchises 726
31 All Forms of Partnership 743
32 Limited Liability Companies and Special Business Forms 767
33 Corporate Formation and Financing 785
34 Corporate Directors, Officers, and Shareholders 807
35 Corporate Mergers, Takeovers, and Termination 826
36 Investor Protection, Insider Trading, and Corporate

Governance 841

Unit 6 Government Regulation 871
37 Administrative Law 872
38 Antitrust Law and Promoting Competition 893
39 Consumer and Environmental Law 918
40 Liability of Accountants and Other Professionals 948

Unit 7 Property and Its Protection 971
41 Personal Property and Bailments 972
42 Real Property and Landlord-Tenant Law 994
43 Insurance, Wills, and Trusts 1017

A How to Brief Cases and Analyze Case Problems A–1
B The Constitution of the United States A–3
C The Uniform Commercial Code A–3
D Answers to the Issue Spotters A–4
E Sample Answers for Business Case Problems with Sample

Answer A–13

Glossary G–1
Table of Cases TC–1

Index I–1

Contents in Brief


30301_fm_hr_i-xxii.indd 3 8/31/18 3:11 PM


Unit 1 The Legal Environment of Business 1

Chapter 1

Law and Legal Reasoning 2
Business Activities and the Legal Environment 3

Sources of American Law 4

The Common Law 7
■ Landmark in the Law: Equitable Maxims 12

Classifications of Law 13
■ Beyond Our Borders: National Law Systems 14

Appendix to Chapter 1: Finding and Analyzing the Law 19
■ Business Law Analysis: Case Briefing and IRAC Legal Reasoning 30

Chapter 2

Constitutional Law 31
The Constitutional Powers of Government 32

■ Managerial Strategy: Marriage Equality and the Constitution 33

■ Landmark in the Law: Gibbons v. Ogden (1824) 35

Classic Case 2.1: Heart of Atlanta Motel v. United States (1964) 36

Business and the Bill of Rights 38
■ Beyond Our Borders: The Impact of Foreign Law

on the United States Supreme Court 40

■ Adapting the Law to the Online Environment:
Does Everyone Have a Constitutional Right to Use
Social Media? 41

Case 2.2: Animal Legal Defense Fund v. Wasden (2018) 42

■ Ethical Issue: Can a high school suspend teenagers from
extracurricular activities because they posted suggestive
photos of themselves online at social networking sites? 43

Spotlight on Beer Labels: Case 2.3: Bad Frog Brewery, Inc. v.
New York State Liquor Authority (1998) 45

■ Business Law Analysis: Determining When Public
Religious Displays Violate the Establishment Clause 48

Due Process and Equal Protection 49

Privacy Rights 51

Chapter 3

Ethics in Business 57
Ethics and the Role of Business 58

■ Business Web Log: Bogus Bank and Credit Card
Accounts at Wells Fargo Bank 59

■ Adapting the Law to the Online Environment:
Should Employees Have a “Right of Disconnecting”? 62

Case 3.1: Al-Dabagh v. Case Western Reserve University (2015) 63

Ethical Principles and Philosophies 65

Sources of Ethical Issues in Business Decisions 69

Case 3.2: Watson Laboratories, Inc. v. State of Mississippi (2018) 70

Making Ethical Business Decisions 73
■ Business Law Analysis: Applying the IDDR Framework 77

Business Ethics on a Global Level 78

Appendix to Chapter 3: Costco Code of Ethics 85

Chapter 4

Courts and
Alternative Dispute Resolution 86

■ Business Web Log: Samsung and Forced Arbitration 87

The Judiciary’s Role in American Government 87
■ Landmark in the Law: Marbury v. Madison (1803) 88

Basic Judicial Requirements 89

Spotlight on Gucci: Case 4.1: Gucci America, Inc. v. Wang Huoqing (2011) 94

The State and Federal Court Systems 96
■ Beyond Our Borders: Islamic Law Courts Abroad and at Home 97

Case 4.2: Johnson v. Oxy USA, Inc. (2016) 99

■ Managerial Strategy: Should You Consent to Have Your
Business Case Decided by a U.S. Magistrate Judge? 101

■ Ethical Issue: Should Supreme Court justices follow the
Code of Conduct for United States Judges? 103

Following a State Court Case 103


30301_fm_hr_i-xxii.indd 4 8/31/18 3:11 PM

■ Adapting the Law to the Online Environment:
Using Social Media for Service of Process 105

Case 4.3: Klipsch Group, Inc. v. ePRO E-Commerce Limited (2018) 109

Courts Online 113

Alternative Dispute Resolution 113

Chapter 5

Tort Law 123
The Basis of Tort Law 123

Intentional Torts against Persons 125
■ Business Law Analysis: Analyzing Intentional Infliction

of Emotional Distress Claims 127

Case 5.1: Blake v. Giustibelli (2016) 129

■ Ethical Issue: When does an online criticism of a physician
become defamation? 131

■ Adapting the Law to the Online Environment:
Revenge Porn and Invasion of Privacy 132

Intentional Torts against Property 136

Negligence 138

Case 5.2: Bogenberger v. Pi Kappa Alpha Corporation, Inc. (2018) 139

■ Landmark in the Law: Palsgraf v. Long Island Railroad Co. (1928) 142

Spotlight on the Seattle Mariners: Case 5.3: Taylor v. Baseball
Club of Seattle, L.P. (2006) 144

Strict Liability 145

Chapter 6

Product Liability 151
Product Liability Claims 151

■ Business Web Log: Johnson & Johnson Faces Continuing
Lawsuits over Its Talcum Powder 152

■ Landmark in the Law: MacPherson v. Buick Motor Co. (1916) 153

Case 6.1: Schwarck v. Arctic Cat, Inc. (2016) 154

Strict Product Liability 155
■ Linking Business Law to Corporate Management:

Quality Control 157

■ Business Law Analysis: How State Legislation Can Limit
Recovery for Design Defects 159

■ Ethical Issue: Can a Taser be considered unreasonably
dangerous as designed? 159

Case 6.2: Stange v. Janssen Pharmaceuticals, Inc. (2018) 161

■ Managerial Strategy: When Is a Warning Legally Bulletproof? 162

Defenses to Product Liability 164

Spotlight on Injuries from Vaccinations: Case 6.3:
Bruesewitz v. Wyeth, LLC (2011) 165

Chapter 7

Intellectual Property Rights 172
Trademarks 173

■ Linking Business Law to Marketing: Trademarks
and Service Marks 173

Classic Case 7.1: Coca-Cola Co. v. Koke Co. of America (1920) 174

■ Ethical Issue: Should the law allow offensive trademark names? 176

■ Beyond Our Borders: ALEVE versus FLANAx—
Same Pain Killer, But in Different Countries 177

Case 7.2: LFP IP, LLC v. Hustler Cincinnati, Inc. (2016) 178

■ Business Web Log: Amazon Faces Fake Products 182

Patents 183

Copyrights 186
■ Business Law Analysis: Licensing Is a Defense to

Copyright Infringement 189

■ Adapting the Law to the Online Environment:
Beyoncé, Sampling, and a $20 Million Lawsuit 190

Case 7.3: Oracle USA, Inc. v. Rimini Street, Inc. (2018) 192

Trade Secrets 193

International Protections 193

Chapter 8

Internet Law,
Social Media, and Privacy 200
Internet Law 201

Spotlight on Internet Porn: Case 8.1: Hasbro, Inc. v.
Internet Entertainment Group, Ltd. (1996) 205

Copyrights in Digital Information 206
■ Landmark In the Law: The Digital Millennium Copyright Act 207

■ Adapting the Law to the Online Environment:
Riot Games, Inc., Protects Its Online Video Game Copyrights 208

Case 8.2: BMG Rights Management (US), LLC v.
Cox Communications, Inc. (2018) 209

Social Media 210

Online Defamation 214
■ Business Law Analysis: Immunity of ISPs under

the Communications Decency Act 215

Case 8.3: David v. Textor (2016) 216

Privacy 217
■ Beyond Our Borders: “The Right to Be Forgotten”

in the European Union 218

■ Ethical Issue: Should smart-TV manufacturers collect
consumer-use data? 219


30301_fm_hr_i-xxii.indd 5 8/31/18 3:11 PM

Chapter 9

Criminal Law and Cyber Crime 224
Civil Law and Criminal Law 224

Criminal Liability 227
■ Adapting the Law to the Online Environment:

Using Twitter to Cause Seizures—A Crime? 227

Case 9.1: United States v. Crabtree (2018) 228

■ Managerial Strategy: The Criminalization of American Business 230

Types of Crimes 231

■ Business Law Analysis: Proof of Credit-Card Theft 233

Spotlight on White-Collar Crime: Case 9.2: People v. Sisuphan (2010) 235

Defenses to Criminal Liability 239

Constitutional Safeguards and Criminal Procedures 241
■ Ethical Issue: Should police be able to force you to unlock

your mobile phone? 243

■ Landmark in the Law: Miranda v. Arizona (1966) 244

Cyber Crime 247

Case 9.3: United States v. Warner (2016) 248

Unit One: Task-Based Simulation 256

Unit 2 Contracts and E-Contracts 257
Chapter 10

Nature and Classification 258
An Overview of Contract Law 258

Elements of a Contract 260

Case 10.1: Weston v. Cornell University (2016) 261

Types of Contracts 262
■ Ethical Issue: Does a “You break it, you buy it” sign

create a unilateral contract? 263

Case 10.2: Boswell v. Panera Bread Co. (2018) 264

Quasi Contracts 267
■ Business Law Analysis: Deciding If a Court Would Impose

a Quasi Contract 268

Interpretation of Contracts 269

Spotlight on Columbia Pictures: Case 10.3: Wagner v.
Columbia Pictures Industries, Inc. (2007) 270

Chapter 11

Agreement 277
Offer 277

Classic Case 11.1: Lucy v. Zehmer (1954) 278

Spotlight on Case 11.2: Basis Technology Corp. v., Inc. (2008) 281

■ Business Law Analysis: Offers of a Reward 283

Acceptance 285
■ Adapting the Law to the Online Environment: Can Your

E-Mails or Instant Messages Create a Valid Contract? 286

E-Contracts 289
■ Linking Business Law to Marketing: Customer

Relationship Management 290

Case 11.3: Bailey v. Kentucky Lottery Corp. (2018) 293

■ Ethical Issue: How enforceable are click-on agreements
to donate funds to a charity? 294

The Uniform Electronic Transactions Act 296

Chapter 12

Consideration 302
Elements of Consideration 302

■ Landmark in the Law: Hamer v. Sidway (1891) 303

Case 12.1: USS–POSCO Industries v. Case (2016) 304

Agreements That Lack Consideration 306

Case 12.2: Baugh v. Columbia Heart Clinic, P.A. (2013) 307

Settlement of Claims 309

Spotlight on Nike: Case 12.3: Already, LLC v. Nike, Inc. (2013) 310

Promissory Estoppel 311

Chapter 13

Capacity and Legality 316
Contractual Capacity 316

Spotlight on KFC: Case 13.1: PAK Foods Houston, LLC v. Garcia (2014) 317

Legality 321
■ Business Law Analysis: Determining If a Contract with

an Unlicensed Party Is Enforceable 322

Case 13.2: Woischke v. Stursberg & Fine, Inc. (2018) 322

■ Ethical Issue: Are expansive noncompete agreements
reducing worker mobility? 324

■ Managerial Strategy: Creating Liability Waivers
that are not Unconscionable 327

Case 13.3: Holmes v. Multimedia KSDK, Inc. (2013) 328

The Effect of Illegality 329

vi Contents

30301_fm_hr_i-xxii.indd 6 8/31/18 3:11 PM

Chapter 14

Voluntary Consent 335
Mistakes 335

■ Ethical Issue: Should a surviving member of Lynyrd Skynyrd
abide by a thirty-year-old consent decree? 337

Fraudulent Misrepresentation 338

Case 14.1: McCullough v. Allstate Property and Casualty
Insurance Co. (2018) 339

Case 14.2: Cronkelton v. Guaranteed Construction Services, LLC (2013) 342

■ Adapting the Law to the Online Environment: “Catfishing”:
Is That Online “Friend” for Real? 343

Case 14.3: Fazio v. Cypress/GR Houston I, LP (2013) 344

Undue Influence and Duress 346

Chapter 15

The Statute of Frauds—
Writing Requirement 350
The Writing Requirement 350

Case 15.1: Sloop v. Kiker (2016) 351

Exceptions to the Statute of Frauds 355
■ Beyond Our Borders: The Statute of Frauds and International

Sales Contracts 355

Sufficiency of the Writing or Electronic Record 357

Case 15.2: Moore v. Bearkat Energy Partners, LLC (2018) 358

The Parol Evidence Rule 359

Case 15.3: Frewil, LLC v. Price (2015) 361

Chapter 16

Performance and Discharge 366
Conditions of Performance 366

Discharge by Performance 368
■ Business Law Analysis: Determining When a Breach Is Material 370

Case 16.1: Kohel v. Bergen Auto Enterprises, LLC (2013) 371

■ Ethical Issue: Is it a material breach of contract for a hospital
to accept a donation and then refuse to honor part of its
commitment? 372

Discharge by Agreement 373

Case 16.2: DWB, LLC v. D&T Pure Trust (2018) 374

Discharge by Operation of Law 375

Case 16.3: Hampton Road Bankshares, Inc. v. Harvard (2016) 376

■ Beyond Our Borders: Impossibility or Impracticability
of Performance in Germany 378

Chapter 17

Breach and Remedies 382
Damages 383

Case 17.1: Baird v. Owens Community College (2016) 384

■ Landmark in the Law: Hadley v. Baxendale (1854) 387

Spotlight on Liquidated Damages: Case 17.2:
Kent State University v. Ford (2015) 389

■ Business Law Analysis: Enforceability of Liquidated
Damages Provisions 390

Equitable Remedies 391

Case 17.3: Cipriano Square Plaza Corp. v. Munawar (2018) 391

Recovery Based on Quasi Contract 395

Contract Provisions Limiting Remedies 396
■ Ethical Issue: Can contracts for mixed martial arts

fighters limit a fighter’s right to stop fighting? 396

Chapter 18

Third Party Rights 402
Assignments 402

Case 18.1: Bass-Fineberg Leasing, Inc. v. Modern Auto Sales, Inc. (2015) 405

Delegations 407

Case 18.2: Mirandette v. Nelnet, Inc. (2018) 409

Third Party Beneficiaries 410

Case 18.3: Bozzio v. EMI Group, Ltd. (2016) 410

Unit Two: Task-Based Simulation 418

Unit 3 Commercial Transactions 419

Chapter 19

The Formation of Sales
and Lease Contracts 420

■ Landmark in the Law: The Uniform Commercial Code 421

The Scope of Articles 2 and 2A 421

■ Adapting the Law to the Online Environment:
Taxing Web Purchases 423

The Formation of Sales and Lease Contracts 425

Case 19.1: Toll Processing Services, LLC v. Kastalon, Inc. (2018) 426


30301_fm_hr_i-xxii.indd 7 8/31/18 3:11 PM

Case 19.2: C. Mahendra (N.Y.), LLC v. National Gold & Diamond
Center, Inc. (2015) 430

■ Business Law Analysis: Additional Terms between Merchants 432

Classic Case 19.3: Jones v. Star Credit Corp. (1969) 437

Contracts for the International Sale of Goods 437

Appendix to Chapter 19: An Example of a Contract for the
International Sale of Coffee 444

Chapter 20

Title and Risk of Loss 448
Identification 449

Case 20.1: BMW Group, LLC v. Castle Oil Corp. (2016) 450

Passage of Title 451
■ Managerial Strategy: Commercial Use of Drones 451

Case 20.2: Louisiana Department of Revenue v. Apeck
Construction, LLC (2018) 452

Spotlight on Andy Warhol: Case 20.3: Lindholm v. Brant (2007) 456

Risk of Loss 457

Insurable Interest 460

Chapter 21

Performance and Breach
of Sales and Lease Contracts 464
Obligations of the Seller or Lessor 465

Case 21.1: All the Way Towing, LLC v. Bucks County
International, Inc. (2018) 467

Obligations of the Buyer or Lessee 470

Remedies of the Seller or Lessor 472

Remedies of the Buyer or Lessee 475
■ Beyond Our Borders: The CISG’s Approach to

Revocation of Acceptance 479

Spotlight on Baseball Cards: Case 21.2: Fitl v. Strek (2005) 480

Warranties 482

Classic Case 21.3: Webster v. Blue Ship Tea Room, Inc. (1964) 485

■ Business Law Analysis: Implied Warranties 487

Chapter 22

Negotiable Instruments 496
Formation of Negotiable Instruments 497

■ Adapting the Law to the Online Environment:
Pay with Your Smartphone 499

Case 22.1: OneWest Bank, FSB v. Nunez (2016) 503

■ Business Law Analysis: Deciding If an Instrument
Is Negotiable 505

Case 22.2: Charles R. Tips Family Trust v. PB Commercial, LLC (2015) 508

Transfer of Instruments 509
■ Beyond Our Borders: Severe Restrictions on Check

Indorsements in France 510

Holder in Due Course (HDC) 513

Case 22.3: Jarrell v. Conerly (2018) 516

Signature and Warranty Liability 518

Defenses, Limitations, and Discharge 523
■ Landmark in the Law: Federal Trade Commission Rule 433 525

Chapter 23

International and Space Law 532
International Law 532

■ Beyond Our Borders: Border Searches of Your
Electronic Devices 533

Case 23.1: Rubin v. Islamic Republic of Iran (2018) 537

■ Business Law Analysis: Sovereign Immunity Claims 539

Doing Business Internationally 539
■ Ethical Issue: Is it ethical (and legal) to brew “imported”

beer brands domestically? 539

Regulation of Specific Business Activities 542

Case 23.2: Changzhou Trina Solar Energy Co., Ltd. v. International
Trade Commission (2018) 543

U.S. Laws in a Global Context 545

Spotlight on International Torts: Case 23.3: Daimler AG v.
Bauman (2014) 546

Space Law 548

Chapter 24

Banking in the Digital Age 554
Checks and the Bank-Customer Relationship 555

The Bank’s Duty to Honor Checks 558

Case 24.1: Legg v. West Bank (2016) 558

Case 24.2: Horton v. JPMorgan Chase Bank, N.A. (2018) 561

The Bank’s Duty to Accept Deposits 564

Case 24.3: Shahin v. Delaware Federal Credit Union (2015) 565

■ Landmark in the Law: Check Clearing for the 21st Century
Act (Check 21) 568

Electronic Fund Transfers 569

viii Contents

30301_fm_hr_i-xxii.indd 8 8/31/18 3:11 PM

Unit 4 Agency and Employment Law 637

Chapter 27

Agency Relationships in Business 638
Agency Law 639

■ Ethical Issue: Is it fair to classify Uber and Lyft drivers
as independent contractors? 640

Formation of an Agency 642

Case 27.1: Reidel v. Akron General Health System (2018) 643

Duties of Agents and Principals 644

Spotlight on Taser International: Case 27.2: Taser International,
Inc. v. Ward (2010) 646

Agent’s Authority 649

Liability in Agency Relationships 651
■ Business Law Analysis: Liability of Disclosed Principals 652

■ Landmark in the Law: The Doctrine of Respondeat Superior 655

■ Beyond Our Borders: Islamic Law and Respondeat Superior 657

Case 27.3: M.J. v. Wisan (2016) 657

Termination of an Agency 659

Chapter 28

Employment, Immigration,
and Labor Law 666
Employment at Will 667

Case 28.1: Caterpillar, Inc. v. Sudlow (2016) 668

Wages, Hours, and Leave 669
■ Ethical Issue: Are employees entitled to receive wages

for all the time they spend at work, including times when
they are taking a personal break? 670

■ Beyond Our Borders: Brazil Requires Employers to Pay
Overtime for Use of Smartphones after Work Hours 671

Case 28.2: Encino Motorcars, LLC v. Navarro (2018) 671

Health, Safety, Income Security, and Privacy 674
■ Business Law Analysis: Workers’ Compensation Claims 675

■ Adapting the Law to the Online Environment:
Social Media in the Workplace Come of Age 679

Immigration Law 680

Online Banking and E-Money 571
■ Adapting the Law to the Online Environment:

Electronic Payment Systems and the Use of Checks 571

Chapter 25

Security Interests and
Creditors’ Rights 577
Creating and Perfecting a Security Interest 577

Spotlight on Wedding Rings: Case 25.1: Royal Jewelers,
Inc. v. Light (2015) 579

■ Adapting the Law to the Online Environment:
Secured Transactions Online 581

■ Business Law Analysis: Perfecting a Security Interest 583

Scope of a Security Interest 586

Case 25.2: In re T usa–Expo Holdings, Inc. (2016) 587

Priorities, Rights, and Duties 590

Default 592

Case 25.3: SunTrust Bank v. Monroe (2018) 594

■ Ethical Issue: How long should a secured party have to
seek a deficiency judgment? 596

Other Laws Assisting Creditors 596

Chapter 26

Bankruptcy 607
The Bankruptcy Code 607

■ Business Web Log: Online Retail Competition
Causes Yet Another Brick-and-Mortar Retailer
to File for Bankruptcy 608

■ Landmark in the Law: The Bankruptcy Abuse Prevention
and Consumer Protection Act 609

Chapter 7—Liquidation 610
■ Business Law Analysis: Violations of the Automatic Stay 614

Case 26.1: In re Anderson (2016) 619

■ Ethical Issue: Should there be more relief for student
loan defaults? 621

Case 26.2: In re Cummings (2015) 622

Chapter 11—Reorganization 624
■ Linking Business Law to Corporate Management:

What Can You Do to Prepare for a Chapter 11
Reorganization? 625

Bankruptcy Relief under Chapter 13
and Chapter 12 627

Case 26.3: In re Chamberlain (2018) 629

Unit Three: Task-Based Simulation 635


30301_fm_hr_i-xxii.indd 9 8/31/18 3:11 PM

Labor Law 683

■ Managerial Strategy: Union Organizing Using a Company’s
E-Mail System 686

Case 28.3: Contemporary Cars, Inc. v. National Labor
Relations Board (2016) 687

Chapter 29

Employment Discrimination 694
Title VII of the Civil Rights Act 695

■ Linking Business Law to Corporate Management:
Human Resource Management 696

■ Adapting the Law to the Online Environment:
Hiring Discrimination Based on Social Media Posts 700

Case 29.1: Bauer v. Lynch (2016) 701

Case 29.2: Young v. United Parcel Service, Inc. (2015) 703

■ Ethical Issue: Should corporations be forced
to publicize the ratio of CEO-to-worker pay? 704

■ Business Law Analysis: Retaliation Claims 707

Case 29.3: Franchina v. City of Providence (2018) 708

■ Beyond Our Borders: Sexual Harassment in Other Nations 709

Discrimination Based on Age, Disability, or Military Status 710

Defenses to Employment Discrimination 716

Affirmative Action 717

Unit Four: Task-Based Simulation 723

Unit 5 Business Organizations 725

Chapter 30

Sole Proprietorships
and Franchises 726
Sole Proprietorships 727

Case 30.1: A. Gadley Enterprises, Inc. v. Department of Labor and
Industry Office of Unemployment Compensation
Tax Services (2016) 727

■ Ethical Issue: Can the religious beliefs of a small business
owner justify the business refusing to provide services
to members of the LGBT community? 728

■ Adapting the Law to the Online Environment:
A Sole Proprietorship, Facebook Poker, and Bankruptcy 730

Franchises 730
■ Beyond Our Borders: Franchising in Foreign Nations 731

The Franchise Contract 734

Franchise Termination 735

Case 30.2: S&P Brake Supply, Inc. v. Daimler Trucks
North America, LLC (2018) 736

Spotlight on Holiday Inns: Case 30.3: Holiday Inn Franchising,
Inc. v. Hotel Associates, Inc. (2011) 738

Chapter 31

All Forms of Partnership 743
Basic Partnership Concepts 744

Case 31.1: Harun v. Rashid (2018) 745

Formation and Operation 747
■ Beyond Our Borders: Doing Business with

Foreign Partners 748

Classic Case 31.2: Meinhard v. Salmon (1928) 751

Dissociation and Termination 753

Limited Liability Partnerships 757

Limited Partnerships 758

Case 31.3: DeWine v. Valley View Enterprises, Inc. (2015) 759

■ Ethical Issue: Should an innocent general partner be
jointly liable for fraud? 761

Chapter 32

Limited Liability Companies
and Special Business Forms 767
The Limited Liability Company 767

■ Landmark in the Law: Limited Liability Company
(LLC) Statutes 768

Case 32.1: Hodge v. Strong Built International, LLC (2015) 771

■ Beyond Our Borders: Limited Liability Companies in
Other Nations 772

LLC Operation and Management 773
■ Managerial Strategy: Can a Person Who Is Not a Member

of a Protected Class Sue for Discrimination? 774

Case 32.2: Schaefer v. Orth (2018) 775

Dissociation and Dissolution of an LLC 776

x Contents

30301_fm_hr_i-xxii.indd 10 8/31/18 3:11 PM

Chapter 37

Administrative Law 872
Practical Significance 872

■ Linking Business Law to Corporate Management:
Dealing with Administrative Law 875

Agency Creation and Powers 875

Case 37.1: Simmons v. Smith (2018) 877

The Administrative Process 879
■ Ethical Issue: Do administrative agencies exercise

too much authority? 880

Case 37.2: Craker v. Drug Enforcement Administration (2013) 884

Case 32.3: Reese v. Newman (2016) 777

■ Business Law Analysis: When Will a Court Order the
Dissolution of an LLC? 778

Special Business Forms 779

Chapter 33

Corporate Formation and Financing 785
Nature and Classification 785

■ Adapting the Law to the Online Environment:
Programs That Predict Employee Misconduct 787

Case 33.1: Drake Manufacturing Co. v. Polyflow, Inc. (2015) 788

Case 33.2: Pantano v. Newark Museum (2016) 790

Case 33.3: Greenfield v. Mandalay Shores Community
Association (2018) 793

Formation and Powers 793
■ Beyond Our Borders: Does Cloud Computing

Have a Nationality? 797

Piercing the Corporate Veil 798
■ Business Law Analysis: Piercing the Corporate Veil 799

Corporate Financing 800

Chapter 34

Corporate Directors,
Officers, and Shareholders 807
Directors and Officers 807

Duties and Liabilities of Directors and Officers 810

Case 34.1: Oliveira v. Sugarman (2016) 811

Classic Case 34.2: Guth v. Loft, Inc. (1939) 813

Shareholders 815

Rights and Duties of Shareholders 818

Case 34.3: Hammoud v. Advent Home Medical, Inc. (2018) 820

Chapter 35

Corporate Mergers, Takeovers,
and Termination 826
Merger, Consolidation, and Share Exchange 826

Case 35.1: In re Trulia, Inc. Stockholder Litigation (2016) 828

Purchase of Assets 830

Case 35.2: Heavenly Hana, LLC v. Hotel Union & Hotel Industry
of Hawaii Pension Plan (2018) 832

Takeovers 833

Corporate Termination 834

Major Business Forms Compared 836

Chapter 36

Investor Protection, Insider
Trading, and Corporate Governance 841
Securities Act of 1933 842

■ Managerial Strategy: The SEC’s New Pay-Ratio
Disclosure Rule 844

■ Adapting the Law to the Online Environment: Investment
Crowdfunding—Regulations and Restrictions 846

■ Landmark in the Law: Changes to Regulation A: “Reg A+” 847

Case 36.1: Omnicare, Inc. v. Laborers District Council Construction
Industry Pension Fund (2015) 850

Securities Exchange Act of 1934 851

Classic Case 36.2: Securities and Exchange Commission v. Texas
Gulf Sulphur Co. (1968) 853

Case 36.3: Singer v. Reali (2018) 857

State Securities Laws 860

Corporate Governance 861
■ Beyond Our Borders: Corporate Governance in Other Nations 861

Unit Five: Task-Based Simulation 869

Unit 6 Government Regulation 871


30301_fm_hr_i-xxii.indd 11 8/31/18 3:11 PM

Judicial Deference to Agency Decisions 885

Case 37.3: Olivares v. Transportation Security Administration (2016) 886

Public Accountability 887

Chapter 38

Antitrust Law
and Promoting Competition 893
The Sherman Antitrust Act 894

■ Business Web Log: Facebook and Google in a World
of Antitrust Law 894

■ Landmark in the Law: The Sherman Antitrust Act 895

Section 1 of the Sherman Act 897

Section 2 of the Sherman Act 900

Case 38.1: McWane, Inc. v. Federal Trade Commission (2015) 902

The Clayton Act 904

Case 38.2: Candelore v. Tinder, Inc. (2018) 905

Enforcement and Exemptions 909

Case 38.3: TransWeb, LLC v. 3M Innovative Properties Co. (2016) 910

U.S. Antitrust Laws in the Global Context 911
■ Adapting the Law to the Online Environment:

The European Union Issues Record Fine against
Google in Antitrust Case 913

Chapter 39

Consumer and Environmental Law 918
Advertising, Marketing, Sales, and Labeling 919

Case 39.1: POM Wonderful, LLC v. Federal Trade Commission (2015) 920

■ Adapting the Law to the Online Environment:
Regulating “Native” Ads on the Internet 922

Case 39.2: Haywood v. Massage Envy Franchising, LLC (2018) 923

Protection of Health and Safety 927

Credit Protection 929

Case 39.3: Santangelo v. Comcast Corp. (2016) 931

■ Ethical Issue: Can a company that provides background checks
willfully violate the Fair Credit Reporting Act? 933

Protecting the Environment 934
■ Beyond Our Borders: Can a River Be a Legal Person? 935

Air and Water Pollution 937

Toxic Chemicals and Hazardous Waste 941

Chapter 40

Liability of Accountants
and Other Professionals 948
Potential Liability to Clients 949

■ Landmark in the Law: The SEC Adopts Global
Accounting Rules 950

■ Ethical Issue: What are an attorney’s responsibilities
with respect to protecting data stored on the cloud? 952

Potential Liability to Third Parties 954

Liability of Accountants under Other Federal Laws 956

Case 40.1: Laccetti v. Securities and Exchange Commission (2018) 958

Potential Criminal Liability 962

Confidentiality and Privilege 963

Case 40.2: Commonwealth of Pennsylvania v. Schultz (2016) 963

Unit Six: Task-Based Simulation 970

Unit 7 Property and Its Protection 971

Chapter 41

Personal Property
and Bailments 972
Personal Property versus Real Property 972

Acquiring Ownership of Personal Property 974
■ Adapting the Law to the Online Environment:

The Exploding World of Digital Property 974

■ Ethical Issue: Who owns the engagement ring? 975

■ Business Law Analysis: Effective Gift of a
Brokerage Account 976

Classic Case 41.1: In re Estate of Piper (1984) 977

Mislaid, Lost, and Abandoned Property 979

Case 41.2: State of Washington v. Preston (2018) 981

Bailments 982

Case 41.3: Zissu v. IH2 Property Illinois, L.P. (2016) 986

xii Contents

30301_fm_hr_i-xxii.indd 12 8/31/18 3:11 PM

Chapter 42

Real Property and
Landlord-Tenant Law 994
The Nature of Real Property 994

Ownership Interests and Leases 996

Case 42.1: In the Matter of the Estate of Nelson (2018) 997

Transfer of Ownership 1002

Spotlight on Sales of Haunted Houses: Case 42.2:
Stambovsky v. Ackley (1991) 1003

■ Business Law Analysis: When Possession of Property
Is Not “Adverse” 1006

Case 42.3: Montgomery County v. Bhatt (2016) 1007

■ Ethical Issue: Should eminent domain be used
to promote private development? 1009

Landlord-Tenant Relationships 1009

Chapter 43

Insurance, Wills, and Trusts 1017
Insurance 1017

Case 43.1: Breeden v. Buchanan (2015) 1020

Wills 1025

Case 43.2: In re Navarra (2018) 1029

■ Adapting the Law to the Online Environment:
Social Media Estate Planning 1032

Trusts 1035

Case 43.3: Dowdy v. Dowdy (2016) 1036

Unit Seven: Task-Based Simulation 1046

A How to Brief Cases and Analyze Case Problems A–1
B The Constitution of the United States A–3
C The Uniform Commercial Code A–3
D Answers to the Issue Spotters A–4
E Sample Answers for Business Case Problems with

Sample Answer A–13

Glossary G–1
Table of Cases TC–1

Index I–1


30301_fm_hr_i-xxii.indd 13 8/31/18 3:11 PM

he study of business law and the legal environment has universal applicability.
A student entering any field of business must have at least a passing understanding
of business law in order to function in the real world. Business Law Today: Comprehensive

Edition, provides the information in an interesting and contemporary way. The Twelfth Edition
continues its established tradition of being the most up-to-date text on the market.

Instructors have come to rely on the coverage, accuracy, and applicability of Business Law
Today: Comprehensive Edition. This best-selling text engages your students, solidifies their
understanding of legal concepts, and provides the best teaching tools available. I have spent
a great deal of effort making this edition more contemporary, exciting, and visually appealing
than ever before. Special pedagogical devices within the text focus on legal, ethical, global,
and corporate issues, while addressing core curriculum requirements.

The Twelfth Edition incorporates the latest legal developments and United States Supreme
Court decisions. It also includes more than fifty new features and sixty new cases, hundreds
of new examples and case examples, new exhibits, learning objectives, margin definitions,
and case problems.

New and Updated Features
The Twelfth Edition of Business Law Today: Comprehensive Edition is filled with exciting new
and updated features designed to cover current legal topics of high interest.

1. Entirely new Business Web Log features underscore the importance of the text material to
real-world businesses. Each of these features discusses a major U.S. company that is engaged
in a dispute involving a topic covered in the chapter. Some examples include:

• Samsung and Forced Arbitration (Chapter 4)

• Amazon Faces Fake Products (Chapter 7)

• Facebook and Google in a World of Antitrust Law (Chapter 38)

2. Entirely new Business Law Analysis features appear in numerous chapters of the text. These fea-
tures are useful tools to help students master the legal analysis skills that they will need to answer
questions and case problems in the book, on exams, and in business situations. Subjects include:

• Deciding If a Court Would Impose a Quasi Contract (Chapter 10)

• Enforceability of Liquidated Damages Provisions (Chapter 17)

• When Will a Court Order the Dissolution of an LLC? (Chapter 32)

3. Entirely new hypotheticals in many chapter introductions provide a real-world link that generates
student interest and highlights specific legal concepts that will be discussed in the chapter. These
hypotheticals—often based on real cases or business situations—help to introduce and illustrate
legal issues facing managers, companies, and even industries.

4. Adapting the Law to the Online Environment features examine cutting-edge cyberlaw topics, such as:

• Does Everyone Have a Constitutional Right to Use Social Media? (Chapter 2)

• Using Twitter to Cause Seizures—A Crime? (Chapter 9)

• Programs That Predict Employee Misconduct (Chapter 33)



30301_fm_hr_i-xxii.indd 14 8/31/18 3:11 PM

5. Ethical Issue features focus on the ethical aspects of a topic being discussed in order to emphasize
that ethics is an integral part of a business law course. Examples include:

• How Enforceable Are Click-on Agreements to Donate Funds to Charity? (Chapter 11)

• Is It Ethical (and Legal) to Brew “Imported” Beer Brands Domestically? (Chapter 23)

• Is It Fair to Classify Uber and Lyft Drivers as Independent Contractors? (Chapter 27)

6. Beyond Our Borders features illustrate how other nations deal with specific legal issues to give
students a sense of the global legal environment. Topics include:

• Does Cloud Computing Have a Nationality? (Chapter 33)

• Can a River Be a Legal Person? (Chapter 39)

7. Managerial Strategy features emphasize the management aspects of business law and the legal
environment, such as:

• Marriage Equality and the Constitution (Chapter 2)

• The Criminalization of American Business (Chapter 9)

• The SEC’s New Pay-Ratio Disclosure Rule (Chapter 36)

8. Landmark in the Law features discuss a landmark case, statute, or development that has significantly
affected business law. Examples include:

• Palsgraf v. Long Island Railroad Co. (Chapter 5)

• The Bankruptcy Abuse Prevention and Consumer Protection Act (Chapter 26)

• Changes to Regulation A: “Reg A+” (Chapter 36)

9. Linking Business Law to [one of the six functional fields of business] features appear in select
chapters to underscore how the law relates to other fields of business. For instance, Chapter 7
has a feature titled Linking Business Law to Marketing: Trademarks and Service Marks, and
Chapter 37 has a feature called Linking Business Law to Corporate Management: Dealing with
Administrative Law.

New Emphasis on Making Ethical
Business Decisions—The IDDR Approach
The ability of businesspersons to reason through ethical issues is now more important than
ever. For the Twelfth Edition of Business Law Today: Comprehensive Edition, I have created
a completely new framework for helping students (and businesspersons) make ethical
decisions—the IDDR approach, which is introduced in Chapter 3. This systematic approach
provides students with a clear step-by-step process to analyze the legal and ethical implica-
tions of decisions that arise in everyday business operations. The IDDR approach uses four
logical steps:

• Step 1: Inquiry

• Step 2: Discussion

• Step 3: Decision

• Step 4: Review

Students can easily remember the first letter of each step by using the phrase “I Desire to Do
Right.” A completely revised Chapter 3 (Ethics in Business) details the goals of each IDDR
step and then provides a sample scenario to show students how to apply this new approach to
ethical decision making. In addition to introducing the IDDR approach, I have made Chapter 3
more current and more practical and reduced the amount of theoretical ethical principles it
presents. The text now focuses on real-life application of ethical principles.


30301_fm_hr_i-xxii.indd 15 8/31/18 3:11 PM

After Chapter 3, to reinforce the application of the IDDR approach, students are asked
to use its steps when answering each chapter’s A Question of Ethics problem. Each of these
problems has been updated and is based on a 2017 case. In addition, the Twelfth Edition
retains the Ethical Issue feature in most chapters, many of which have been refreshed with
timely topics involving the ever-evolving technologies and trends in business.

New Cases and Case Problems
The Twelfth Edition of Business Law Today: Comprehensive Edition has new cases and case
problems from 2018 and 2017 in every chapter. The new cases have been carefully selected
to illustrate important points of law and to be of high interest to students and instructors.
I have made it a point to find recent cases that enhance learning and are straightforward
enough for business law students to understand.

Certain cases and case problems have been carefully chosen as good teaching cases and are
designated as Spotlight Cases and Spotlight Case Problems. Some examples include Spotlight
on Apple, Spotlight on Beer Labels, Spotlight on Nike, and Spotlight on the Seattle Mariners.
Instructors will find these Spotlight decisions 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.

Each case concludes with a section, called Critical Thinking, that includes at least one
question. Each question is labeled Ethical, Economic, Legal Environment, Political, Social, or
What If the Facts Were Different? In addition, Classic Cases include an Impact of This Case on
Today’s Law section that clarifies how the case has affected the legal environment. Suggested
answers to all case-ending questions can be found in the Solutions Manual for this text.

Many New Highlighted and Numbered Case Examples
Many instructors use cases and examples to illustrate how the law applies to business. This
edition of Business Law Today: Comprehensive Edition offers hundreds of highlighted and con-
secutively numbered Examples and Case Examples. Examples illustrate how the law applies
in a specific situation, and Case Examples present the facts and issues of an actual case and
then describe the court’s decision and rationale.

New to this edition are Spotlight Case Examples, which deal with especially high-interest
cases, and Classic Case Examples, which discuss older, landmark decisions. The numbered
Examples and Case Examples features are integrated throughout the text to help students
better understand how courts apply legal principles in the real world.

Critical Thinking and Legal Reasoning Elements
For this edition of Business Law Today: Comprehensive Edition I have included a discussion of
legal reasoning in Chapter 1. The all-new Business Law Analysis features that can be found
throughout the text emphasize legal reasoning skills as well. Critical thinking questions
conclude most of the features and cases in this text. Also, at the end of each chapter, a Debate
This question requires students to think critically about the rationale underlying the law on
a particular topic.

The chapter-ending materials also include a separate section of questions that focus on
critical thinking and writing. This section always includes a Time-Limited Group Assignment
and may also include a Critical Legal Thinking question requiring students to think critically
about some aspect of the law discussed in the chapter or a Business Law Writing question
requiring students to compose a written response.

xvi Preface

30301_fm_hr_i-xxii.indd 16 8/31/18 3:11 PM

Answers to all critical thinking questions, as well as to the Business Scenarios and Case
Problems at the end of every chapter, are presented in the Twelfth Edition’s Solutions Manual.
In addition, the answers to one case problem in each chapter, called the Business Case
Problem with Sample Answer, appear in Appendix E.

Other Pedagogical Devices within Each Chapter
• Learning Objectives (questions listed at the beginning of each chapter and repeated in the margins of

the text provide a framework of main chapter concepts for the student).

• Margin definitions of each boldfaced Key Term.

• Quotations and Know This (margin features).

• Exhibits (in most chapters).

• Photographs (with critical-thinking questions) and cartoons.

Chapter-Ending Pedagogy
• Practice and Review (in every chapter).

• Debate This (a statement or question at the end of Practice and Review).

• Key Terms (with appropriate page references to their margin definitions).

• Chapter Summary (in table format).

• Issue Spotters (in every chapter with answers in Appendix D).

• Business Scenarios and Case Problems (including in every chapter, a Business Case Problem with
Sample Answer that is answered in Appendix E ; in selected chapters, a Spotlight Case Problem ;
and in every chapter, a new A Question of Ethics problem—based on a 2017 case—that applies this
Twelfth Edition’s IDDR approach to business ethics).

• Critical Thinking and Writing Assignments (including a Time-Limited Group Assignment in every
chapter, and a Business Law Writing or a Critical Legal Thinking question in selected chapters).

Unit-Ending Pedagogy
Each of the seven units in the Twelfth Edition of Business Law Today: Comprehensive Edition
concludes with a Task-Based Simulation. This feature presents a hypothetical business situ-
ation and then asks a series of questions about how the law applies to various actions taken
by the firm. To answer the questions, the student must apply the laws discussed throughout
the unit. (Answers are provided in the Solutions Manual.)

Business Law Today: Comprehensive Edition provides a substantial supplements package
designed to make the tasks of teaching and learning more enjoyable and efficient. The fol-
lowing supplements are available for instructors.

MindTap Business Law for Business Law Today:
Comprehensive Edition, Twelfth Edition
MindTap™ is a fully online, highly personalized learning experience built on authoritative
Cengage Learning content. By combining readings, multimedia, activities, and assessments
into a singular Learning Path, MindTap Business Law guides students through their course
with ease and engagement. Instructors personalize the Learning Path by customizing


30301_fm_hr_i-xxii.indd 17 8/31/18 3:11 PM

Cengage Learning resources and adding their own content via apps that integrate into the
MindTap framework seamlessly with Learning Management Systems.

The MindTap Business Law 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 and every 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.

Cengage Testing Powered by Cognero
Cengage Testing Powered by Cognero is a flexible online system that allows instructors 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 their Learning Management System (LMS), classroom, or wherever they 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 Instructors Will Find
• Simplicity at every step. A desktop-inspired interface features drop-down menus and familiar, intui-

tive tools that take instructors through content creation and management with ease.

• Full-featured test generator. Create ideal assessments with a 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 instructor tests are complete
and compliant.

• Cross-compatible capability. Import and export content into other systems.

Instructor’s Companion Website
The Instructor’s Companion Website contains the following supplements:

• Instructor’s Manual. Includes sections entitled “Additional Cases Addressing This Issue” at the end of
selected case synopses.

• Solutions Manual. Provides answers to all questions presented in the text, including the Learning
Objectives, the questions in each case and feature, the Issue Spotters, the Business Scenarios
and Case Problems, Critical Thinking and Writing Assignments, and the unit-ending Task-Based
Simulation features.

• Test Bank. A comprehensive test bank contains multiple choice, true/false, and short essay

• Case-Problem Cases.

• Case Printouts.

• PowerPoint Slides.

• Lecture Outlines.

• MindTap Integrated Syllabus.

• MindTap Answer Key.

xviii Preface

30301_fm_hr_i-xxii.indd 18 8/31/18 3:11 PM

John J. Balek
Morton College, Illinois

John Jay Ballantine
University of Colorado, Boulder

Lorraine K. Bannai
Western Washington University

Marlene E. Barken
Ithaca College, New York

Laura Barnard
Lakeland Community College, Ohio

Denise A. Bartles, J.D.
Missouri Western State University

Daryl Barton
Eastern Michigan University

Merlin Bauer
Mid State Technical College, Wisconsin

Donna E. Becker
Frederick Community College, Maryland

Richard J. Bennet
Three Rivers Community College,

Dr. Anne Berre
Schreiner University, Texas

Robert C. Bird
University of Connecticut

Bonnie S. Bolinger
Ivy Tech Community College, Wabash Valley
Region, Indiana

Brad Botz
Garden City Community College, Kansas

Teresa Brady
Holy Family College, Pennsylvania

Dean Bredeson
University of Texas at Austin

Lee B. Burgunder
California Polytechnic University,
San Luis Obispo

Thomas D. Cavenagh
North Central College, Illinois

Bradley D. Childs
Belmont University, Tennessee

Corey Ciocchetti
University of Denver, Colorado

Peter Clapp
St. Mary’s College, California

Dale Clark
Corning Community College, New York

Tammy W. Cowart
University of Texas, Tyler

Stanley J. Dabrowski
Hudson County Community College,
New Jersey

Sandra J. Defebaugh
Eastern Michigan University

Patricia L. DeFrain
Glendale College, California

Julia G. Derrick
Brevard Community College, Florida

Joe D. Dillsaver
Northeastern State University, Oklahoma

Claude W. Dotson
Northwest College, Wyoming

Larry R. Edwards
Tarrant County Junior College,
South Campus, Texas

Jacolin Eichelberger
Hillsborough Community College, Florida

George E. Eigsti
Kansas City, Kansas, Community College

Florence E. Elliott-Howard
Stephen F. Austin State University, Texas

Tony Enerva
Lakeland Community College, Ohio

Benjamin C. Fassberg
Prince George’s Community College, Maryland

Joseph L. Flack
Washtenaw Community College, Michigan

Jerry Furniss
University of Montana

Joan Gabel
Florida State University

Elizabeth J. Guerriero
Northeast Louisiana University

Phil Harmeson
University of South Dakota

Nancy L. Hart
Midland College, Texas

Mo Hassan
Cabrillo College, California

Andy E. Hendrick
Coastal Carolina University, South Carolina

Janine S. Hiller
Virginia Polytechnic Institute & State University

Karen A. Holmes
Hudson Valley Community College, New York

Fred Ittner
College of Alameda, California

Susan S. Jarvis
University of Texas, Pan American

Jack E. Karns
East Carolina University, North Carolina

Sarah Weiner Keidan
Oakland Community College, Michigan

Richard N. Kleeberg
Solano Community College, California

Bradley T. Lutz
Hillsborough Community College, Florida

Diane MacDonald
Pacific Lutheran University, Washington

Darlene Mallick
Anne Arundel Community College, Maryland

John D. Mallonee
Manatee Community College, Florida

Joseph D. Marcus
Prince George’s Community College, Maryland

Woodrow J. Maxwell
Hudson Valley Community College, New York

Diane May
Winona State University, Minnesota

Beverly McCormick
Morehead State University, Kentucky

William J. McDevitt
Saint Joseph’s University, Pennsylvania

John W. McGee
Aims Community College, Colorado

James K. Miersma
Milwaukee Area Technical Institute, Wisconsin

Susan J. Mitchell
Des Moines Area Community College, Iowa

Jim Lee Morgan
West Los Angeles College, California

Jack K. Morton
University of Montana

Annie Laurie I. Myers
Northampton Community College, Pennsylvania

Solange North
Fox Valley Technical Institute, Wisconsin

Jamie L. O’Brien
South Dakota State University

Ruth R. O’Keefe
Jacksonville University, Florida

Robert H. Orr
Florida Community College at Jacksonville

George Otto
Truman College, Illinois

Thomas L. Palmer
Northern Arizona University

David W. Pan
University of Tulsa, Oklahoma

Victor C. Parker, Jr.
North Georgia College and State University

Donald L. Petote
Genesee Community College, New York

Francis D. Polk
Ocean County College, New Jersey

Gregory Rabb
Jamestown Community College, New York

Brad Reid
Abilene Christian University, Texas

Anne Montgomery Ricketts
University of Findlay, Ohio

Donald A. Roark
University of West Florida

Hugh Rode
Utah Valley State College

Gerald M. Rogers
Front Range Community College, Colorado

Dr. William J. Russell
Northwest Nazarene University, Idaho


ince I began this project many years ago, numerous business law professors and users
of Business Law Today: Comprehensive Edition have been kind enough to help me revise
the book, including the following:


30301_fm_hr_i-xxii.indd 19 8/31/18 3:11 PM

William M. Rutledge
Macomb Community College, Michigan

Martha Wright Sartoris
North Hennepin Community College, Minnesota

Anne W. Schacherl
Madison Area Technical College, Wisconsin

Edward F. Shafer
Rochester Community College, Minnesota

Lance Shoemaker, J.D.,
M.C.P., M.A.
West Valley College, California

Lou Ann Simpson
Drake University, Iowa

Denise Smith
Missouri Western State College

Hugh M. Spall
Central Washington University

Catherine A. Stevens
College of Southern Maryland

Maurice Tonissi
Quinsigamond Community College,

James D. Van Tassel
Mission College, California

Russell A. Waldon
College of the Canyons, California

Frederick J. Walsh
Franklin Pierce College, New Hampshire

James E. Walsh, Jr.
Tidewater Community College, Virginia

Randy Waterman
Richland College, Texas

Jerry Wegman
University of Idaho

Edward L. Welsh, Jr.
Phoenix College, Arizona

Clark W. Wheeler
Santa Fe Community College, Florida

Lori Whisenant
University of Houston, Texas

Kay O. Wilburn
The University of Alabama at Birmingham

John G. Williams, J.D.
Northwestern State University, Louisiana

James L. Wittenbach
University of Notre Dame, Indiana

Eric D. Yordy
Northern Arizona University

Joseph Zavaglia, Jr.
Brookdale Community College,
New Jersey

In addition, I give my thanks to the staff at Cengage Learning, especially Vicky True-Baker, senior
product manager; Bryan Gambrel, product director; Martha Conway, senior content manager;
Sarah Huber, learning designer; Jennifer Chinn, digital delivery lead; Lisa Elliott, subject
matter expert; and Christian Wood, product assistant. I also thank Andy Miller in marketing;
Jillian Shafer, permissions project manager; and Jennifer Bowes, permissions analyst. Addi-
tionally, I would like to thank project managers Ann Borman and Phil Scott at SPi Global,
our compositor, for accurately generating pages for the text and making it possible for me
to meet my ambitious schedule for the print and digital products.

I give special thanks to Katherine Marie Silsbee for managing the project and providing
exceptional research and editorial skills. I also thank William Eric Hollowell, co- author of
the Solutions Manual and Test Bank, for his excellent research efforts. I am grateful for the
copyediting services of Jeanne Yost and proofreading services of Beverly Peavler. I also thank
Vickie Reierson, Roxanna Lee, and Suzanne Jasin for their many efforts on this project and
for helping to ensure an error-free text.

Roger LeRoy Miller

xx Preface

30301_fm_hr_i-xxii.indd 20 8/31/18 3:11 PM


To Darlene Young,

The memories will always be there.
The good thoughts from the past, too.
We are all richer because of them.


30301_fm_hr_i-xxii.indd 21 8/31/18 3:11 PM

30301_fm_hr_i-xxii.indd 22 8/31/18 3:11 PM

1 Law and Legal Reasoning
2 Constitutional Law
3 Ethics in Business
4 Courts and Alternative Dispute Resolution
5 Tort Law
6 Product Liability
7 Intellectual Property Rights
8 Internet Law, Social Media, and Privacy
9 Criminal Law and Cyber Crime

Unit 1
The Legal
Environment of


l K








30301_ch01_hr_001-030.indd 1 8/31/18 3:08 PM

1 Law and Legal Reasoning
Learning Objectives
The four Learning Objectives below are
designed to help improve your under-
standing. After reading this chapter, you
should be able to answer the following

1. What are four primary
sources of law in the
United States?

2. What is a precedent? When
might a court depart from

3. What is the difference
between remedies at law
and remedies in equity?

4. What are some important
differences between civil
law and criminal law?

In the chapter-opening quotation, Clarence Darrow
asserts that law should be created to serve the public.
Because you are part of that public, the law is important
to you. In particular, those entering the world of busi-
ness will find themselves subject to numerous laws and
government regulations. A basic knowledge of these laws
and regulations is beneficial—if not essential—to any-
one contemplating a successful career in today’s business

Although the law has various definitions, all of them are
based on the general observation that law consists of enforce-

able rules governing relationships among individuals and between individuals and their society.
In some societies, these enforceable rules 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 court 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 a 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 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 federal agencies. The rules

Law A body of enforceable rules
governing relationships among
individuals and between individuals
and their society.









Clarence Darrow
(American lawyer)

“Laws should be like
clothes. They should
be made to fit the
people they are
meant to serve.”


30301_ch01_hr_001-030.indd 2 8/31/18 3:08 PM

that control Hellix Communications’ actions reflect past and current thinking about how
large telecommunications companies should and should not act.

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 legal environment, and to develop 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.

1–1 Business Activities and the Legal Environment
Laws and government regulations affect almost all business activities—from hiring and fir-
ing decisions to workplace safety, the manufacturing and marketing of products, business
financing, and more. To make good business decisions, businesspersons need to understand
the laws and regulations governing these activities.

Realize also that in today’s business world, simply being aware of 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. Businesspersons are also pressured to make ethical
decisions. Thus, the study of business law necessarily involves an ethical dimension.

1–1a Many Different Laws May Affect a Single Business Transaction
As you will note, each chapter in this text covers a specific area of the law and shows how
the legal rules in that area affect business activities. Although compartmentalizing the law
in this fashion facilitates learning, it does not indicate the extent to which many different
laws may apply to just one transaction. Exhibit 1–1 illustrates
the various areas of the law that may influence business deci-
sion 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 site. They filed a law-
suit against him alleging theft of intellectual property, fraudu-
lent 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 min-
ing 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. ■

1–1b Linking Business Law to the Six Functional Fields of Business
In all likelihood, you are taking a business law or legal environment course because you
intend to enter the business world, though some of you may plan to become attorneys.
Many of you are taking other business school courses and may therefore be familiar with
the functional fields of business listed below:

1. Corporate management.

2. Production and transportation.

Liability The state of being legally
responsible (liable) for something,
such as a debt or obligation.

Mark Zuckerberg, founder of Facebook, has faced numerous
legal challenges. These include privacy issues and the alleged
theft of intellectual property. Can large Internet firms completely 
avoid such legal problems?








3CHAPTER 1: Law and Legal Reasoning

30301_ch01_hr_001-030.indd 3 8/31/18 3:08 PM

3. Marketing.

4. Research and development.

5. Accounting and finance.

6. Human resource management.

One of our goals in this text is to show how legal concepts can be useful for man-
agers and businesspersons, whether their activities focus on management, marketing,
accounting, or some other field. To that end, numerous chapters, including this chapter,
contain a special feature called “Linking Business Law to [one of the six functional fields
of business].”

1–2 Sources of American Law
There are numerous sources of American law. Primary sources of law, or sources that establish
the law, include the following:

• The U.S. Constitution and the constitutions of the various states.

• Statutory law—including laws passed by Congress, state legislatures, and local governing bodies.

• Regulations created by administrative agencies, such as the federal Food and Drug Administration.

• Case law (court decisions).

We describe each of these important primary sources of law in the following pages. (See
the appendix at the end of this chapter for a discussion of how to find statutes, regulations,
and case law.)

Learning Objective 1
What are four primary
sources of law in the
United States?

Primary Source of Law A
document that establishes the
law on a particular issue, such
as a constitution, a statute, an
administrative rule, or a court

Exhibit 1–1 Areas of the Law That May Affect Business Decision Making

Sales and










Courts and
Court Procedures



4 UNIT ONE: The Legal Environment of Business

30301_ch01_hr_001-030.indd 4 8/31/18 3:08 PM

Secondary sources of law are books and articles that summarize and clarify the primary
sources of law. Legal encyclopedias, compilations (such as Restatements of the Law,
which summarize court decisions on a particular topic), official comments to statutes,
treatises, articles in law reviews published by law schools, and articles in other legal
journals are examples of secondary sources of law. 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 written constitutions that set forth the general
organization, powers, and limits of their respective governments. Constitutional law, which
deals with the fundamental principles by which the government exercises its authority, is
the law as expressed in these constitutions.

The U.S. Constitution is the basis of all law in the United States. It provides a framework
for statutes and regulations, and thus is the supreme law of the land. A law in violation of the
U.S. 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
that state’s borders.

1–2b Statutory Law
Laws enacted by legislative bodies at any level of government, such as the statutes passed by
Congress or by state legislatures, make up the body of law generally referred to 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.

Whenever a particular statute is mentioned in this text, we usually provide a footnote
showing its citation (a reference to a publication in which a legal authority—such as a statute
or a court decision—or other source can be found). In the appendix following this chapter,
we explain how you can use these citations to find statutory law.

Local Ordinances Statutory law also includes local
ordinances—regulations passed by municipal or county govern-
ing 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 mat-
ters affecting only the local governing unit.

Applicability of Statutes 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.

Example 1.2 The tension between federal, state, and local laws
is evident in the national debate over so-called sanctuary cities—
cities that limit their cooperation with federal immigration
authorities. Normally, law enforcement officials are supposed
to alert federal immigration authorities when they come into

Secondary Source of Law A
publication that summarizes or
interprets the law, such as a legal
encyclopedia, a legal treatise, or an
article in a law review.

Constitutional Law The body
of law derived from the U.S.
Constitution and the constitutions
of the various states.

Statutory Law The body of law
enacted by legislative bodies (as
opposed to constitutional law,
administrative law, or case law).

Citation A reference to a
publication in which a legal
authority—such as a statute or a
court decision—or other source
can be found.

Ordinance A regulation enacted
by a city or county legislative body
that becomes part of that state’s
statutory law.

How have local “sanctuary cities” frustrated federal immigration







5CHAPTER 1: Law and Legal Reasoning

30301_ch01_hr_001-030.indd 5 8/31/18 3:08 PM

contact with undocumented immigrants. Then, immigration officials request the state and
local authorities to detain the individual 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 Confer-
ence of Commissioners on Uniform State Laws (NCCUSL, online at
in 1892 to draft uniform laws (“model statutes”) for the states to consider adopting. The
NCCUSL still exists today and continues to issue uniform laws.

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. Furthermore,
a state legislature may choose to adopt only part of a uniform law or to rewrite the sections
that are adopted. Hence, even though many states may have adopted a uniform law, those
laws may not be entirely “uniform.”

The Uniform Commercial Code (UCC) 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. From time to time, the NCCUSL
revises the articles contained in the UCC and submits the revised versions to the states
for adoption.

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. Rules issued
by various administrative agencies now affect almost every aspect of a business’s operations,
including the firm’s capital structure and financing, its hiring and firing procedures, its rela-
tions with employees and unions, and the way it manufactures and markets its products.
We will discuss administrative law in greater detail in a later chapter.

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 of law 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 adminis-
trative 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.

Uniform Law A model law
developed by the National
Conference of Commissioners on
Uniform State Laws for the states
to consider enacting into statute.

1. This institute was formed in the 1920s and consists of practicing attorneys, legal scholars, and judges.
2. Louisiana has adopted only Articles 1, 3, 4, 5, 7, 8, and 9.

Case Law The rules of law
announced in court decisions. Case
law interprets statutes, regulations,
and constitutional provisions, and
governs all areas not covered by
statutory or administrative law.

Henry Ward Beecher
(American clergyman and abolitionist)

“Laws and institutions,
like clocks, must
occasionally be
cleaned, wound up, and
set to true time.”

6 UNIT ONE: The Legal Environment of Business

30301_ch01_hr_001-030.indd 6 8/31/18 3:08 PM

1–3 The Common Law
Because of our colonial heritage, much American law is based on the English legal system.
Knowledge of this system 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 rules 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 developed the common law rules from the principles underlying judges’ decisions
in actual legal controversies. Judges attempted to be consistent, and whenever possible, they
based their decisions on the principles suggested by earlier cases. They sought to decide
similar cases in a similar way and considered new cases with care because they knew that
their decisions would make new law. Each interpretation became part of the law on the sub-
ject and served as a legal precedent—that is, a court decision that furnished 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. Beginning in the late thirteenth and early
fourteenth centuries, however, portions of significant decisions from each year were gath-
ered together and recorded in Year Books. The Year Books were useful references for lawyers
and judges. In the sixteenth century, the Year Books were discontinued, and other reports of
cases became available. (See the appendix to this chapter for a discussion of how cases are
reported, or published, in the United States today.)

1–3b Stare Decisis
The practice of deciding new cases with reference to former decisions, or precedents, even-
tually became a cornerstone of the English and U.S. judicial systems. The practice forms a
doctrine called stare decisis 3 (a Latin phrase meaning “to stand on decided cases”).

Under the doctrine of stare decisis, judges are obligated to follow the precedents estab-
lished within their jurisdictions. (The term jurisdiction refers to a geographic area in which
a court or courts have the power to apply the law.) Once a court has set forth a principle of
law as being applicable to a certain set of facts, that court must apply the principle in future
cases involving similar facts. Courts of lower rank (within the same jurisdiction) must do
likewise. Thus, stare decisis has two aspects:
1. A court should not overturn its own precedents unless there is a strong reason to do so.
2. Decisions made by a higher court are binding on lower courts.

Controlling Precedents Precedents that must be followed within a jurisdiction are known as
controlling precedents. Controlling precedents are binding authorities. A binding authority is any
source of law that a court must follow when deciding a case. Binding authorities include
constitutions, statutes, and regulations that govern the issue being decided, as well as court deci-
sions that are controlling precedents within the jurisdiction. United States Supreme Court case
decisions, no matter how old, remain controlling until they are overruled by a subsequent deci-
sion of the Supreme Court, by a constitutional amendment, or by congressional legislation.

Learning Objective 2
What is a precedent? When
might a court depart from

Common Law The body of law
developed from custom or judicial
decisions in English and U.S. courts,
not attributable to a legislature.

Precedent A court decision that
furnishes an example or authority for
deciding subsequent cases involving
identical or similar facts.

Stare Decisis A common law
doctrine under which judges are
obligated to follow the precedents
established in prior decisions.

3. Pronounced stahr-ee dih-si-sis.

Binding Authority Any source of
law that a court must follow when
deciding a case.

Know This
Courts normally must
follow the rules set forth
by higher courts in decid-
ing cases with similar
fact patterns.

7CHAPTER 1: Law and Legal Reasoning

30301_ch01_hr_001-030.indd 7 8/31/18 3:08 PM

Stare Decisis and Legal Stability The doctrine of stare decisis helps the courts to be
more efficient because if other courts have carefully reasoned through a similar case, their
legal reasoning and opinions can serve as guides. Stare decisis also makes the law more
stable and predictable. If the law on a given subject is well settled, someone bringing a case
to court can usually rely on the court to make a decision based on what the law has been.

Departures from Precedent Although courts are obligated to follow precedents, some-
times a court will depart from the rule of precedent. If a court decides that a precedent is
simply incorrect or that technological or social changes have rendered the precedent inap-
plicable, the court may rule contrary to the precedent. Cases that overturn precedent often
receive a great deal of publicity.

Classic Case Example 1.3 In Brown v. Board of Education of Topeka,4 the United States
Supreme Court expressly overturned precedent. The Court concluded that separate educa-
tional facilities for whites and blacks, which had previously been upheld as constitutional,5
were inherently unequal. The Supreme Court’s departure from precedent in the Brown deci-
sion received a tremendous amount of publicity as people began to realize the ramifications
of this change in the law. ■

When There Is No Precedent Occasionally, courts must decide cases for which no prec-
edents exist, called cases of first impression. For instance, as you will read throughout this
text, the Internet and certain other technologies have presented many new and challenging
issues for the courts to decide.

Example 1.4 Google Glass is a Bluetooth-enabled, hands-free, wearable computer. A per-
son using Google Glass can take photos and videos, surf the Internet, and do other things
through voice commands. When it was first sold, many people expressed concerns about
this wearable technology because it makes it much easier to secretly film or photograph
others. Numerous bars and restaurants banned the use of Google Glass to protect their
patrons’ privacy. Police officers were concerned about driver safety. A California woman was
ticketed for wearing Google Glass while driving. But the court dismissed this case of first
impression because it was not clear whether the device had been in operation at the time of
the offense. ■

When deciding cases of first impression, courts often look at persuasive authorities
(legal authorities that a court may consult for guidance but that are not binding on the
court). A court may consider precedents from other jurisdictions, for instance, although
those precedents are not binding. A court may also consider legal principles and policies
underlying previous court decisions or existing statutes. Additionally, a court might look
at fairness, social values and customs, and public policy (governmental policy based on
widely held societal values). Federal courts can also look at unpublished opinions (those
not intended for publication in a printed legal reporter) as sources of persuasive

Stare Decisis and Legal Reasoning In deciding what law applies to a given dispute
and then applying that law to the facts or circumstances of the case, judges rely on the
process of legal reasoning. Through the use of legal reasoning, judges harmonize their deci-
sions with those that have been made before, as the doctrine of stare decisis requires.

Students of business law and the legal environment also engage in critical thinking and
legal reasoning. For instance, you may be asked to provide answers for some of the case
problems that appear at the end of every chapter in this text. Each problem describes the

4. 347 U.S. 483, 74 S.Ct. 686, 98 L.Ed. 873 (1954).
5. See Plessy v. Ferguson, 163 U.S. 537, 16 S.Ct. 1138, 41 L.Ed. 256 (1896).

Persuasive Authority Any legal
authority or source of law that a court
may look to for guidance but need not
follow when making its decision.

6. Rule 32.1 of the Federal Rules of Appellate Procedure.

Legal Reasoning The process
of reasoning by which a judge
harmonizes his or her opinion with
the judicial decisions in previous

Under what circumstances
could a user of Google Glass
be violating the right to privacy
of others?






8 UNIT ONE: The Legal Environment of Business

30301_ch01_hr_001-030.indd 8 8/31/18 3:08 PM

facts of a particular dispute and the legal question at issue. If you are assigned a case problem,
you will be asked to determine how a court would answer that question, and why. In other
words, you will need to give legal reasons for whatever conclusion you reach.

Basic Steps in Legal Reasoning. At times, the legal arguments set forth in court opin-
ions are relatively simple and brief. At other times, the arguments are complex and lengthy.
Regardless of the length of a legal argument, however, the basic steps of the legal reasoning
process remain the same. These steps, which you can also follow when analyzing cases and
case problems, form what is commonly referred to as the IRAC method of legal reasoning.
IRAC is an acronym formed from the first letters of the words Issue, Rule, Application, and
Conclusion. To apply the IRAC method, ask the following questions:

1. Issue—What are the key facts and issues? This may sound obvious, but before you can analyze or
apply the relevant law to a specific set of facts, you must clearly understand those facts. In other
words, you should read through the case problem carefully—more than once, if necessary. Make
sure that you understand the identities of the plaintiff (the one who initiates the lawsuit) and the
defendant (the one being sued) in the case, and the progression of events that led to the lawsuit.

Suppose that a plaintiff, Anna Tovar, comes before the court claiming assault (words or acts that
wrongfully and intentionally make another person apprehensive of harmful or offensive contact).
Tovar claims that the defendant, Bryce Maddis, threatened her while she was sleeping. Although the
plaintiff was unaware that she was being threatened, her roommate, Jan Simon, heard the defendant
make the threat. So, in this scenario, the identities of the parties are obvious. Tovar is the plaintiff, and
Maddis is the defendant.

The legal issue in this case is whether the defendant’s action constitutes the tort of assault
even though the plaintiff was unaware of that threat at the time it occurred. (A tort is a wrongful act
brought under civil rather than criminal law.)

2. Rule—What rule of law applies to the case? A rule of law may be a rule stated by the courts in previ-
ous decisions, by a state or federal statute, or by a state or federal administrative agency regulation.
Often, more than one rule of law will be applicable to a case.

In our hypothetical case, Tovar alleges (claims) that Maddis committed a tort. Therefore, the
applicable law is the common law of torts—specifically, tort law governing assault. Case precedents
involving similar facts and issues thus would be relevant.

3. Application—How does the rule of law apply to the particular facts and circumstances of this
case? This step is often the most difficult because each case presents a unique set of facts,
circumstances, and parties. Although cases may be similar, no two cases are ever identical in
all respects.

Normally, judges (and lawyers and law students) try to find cases on point—previously decided
cases that are as similar as possible to the one under consideration. In this situation, there might be
case precedents showing that if a victim is unaware of the threat of harmful or offensive contact,
then no assault occurred. These would be cases on point that tend to prove that the defendant did
not commit assault and should win the case.

There might, however, also be cases showing that a sexual assault, at least, can occur even if
the victim is asleep. These would be cases on point in the plaintiff’s favor. You will need to carefully
analyze if there are any missing facts in Tovar’s claim. For instance, you might want to know the
specific threat that Maddis made (and Tovar’s roommate overheard). Did he threaten to rape, kill,
or beat her? Did he know that she was asleep when he made the threat? Did he know that her
roommate heard the threat and would relay it to her when she awoke? Sometimes, you will want
to obtain additional facts before analyzing which case precedents should apply and control the
outcome of the case.

4. Conclusion—What conclusion should be drawn? This step normally presents few problems. Usually,
the conclusion is evident if the previous three steps have been followed carefully. In our sample
problem, for instance, you may determine that Maddis did not commit a tort because Tovar could not
prove all of the required elements of assault.

Plaintiff One who initiates a lawsuit.

Defendant One against whom a
lawsuit is brought or the accused
person in a criminal proceeding.

Allege To state, recite, assert,
or charge.

Case on Point A previous case
involving factual circumstances and
issues that are similar to those in the
case before the court.

9CHAPTER 1: Law and Legal Reasoning

30301_ch01_hr_001-030.indd 9 8/31/18 3:08 PM

There Is No One “Right” Answer. Many people believe that there is one “right” answer to
every legal question. In many legal controversies, however, there is no single correct result.
Good arguments can usually be made to support either side of a legal controversy. Quite
often, a case does not involve a “good” person suing a “bad” person. In many cases, both
parties have acted in good faith in some measure or in bad faith to some degree. Addition-
ally, each judge has her or his own personal beliefs and philosophy. To some extent, these
personal factors shape the legal reasoning process.

1–3c Equitable Remedies and Courts of Equity
A remedy is the means given to a party to enforce a right or to compensate for the violation
of a right. Example 1.5 Elena is injured because of Rowan’s wrongdoing. If Elena files a lawsuit
and is successful, a court can order Rowan to compensate Elena for the harm by paying her
a certain amount. The compensation is Elena’s remedy. ■

The kinds of remedies available in the early king’s courts of England were severely
restricted. If one person wronged another, the king’s courts could award either money
or property, including land, as compensation. These courts became known as courts of
law, and the remedies were called remedies at law. Even though this system introduced
uniformity in the settling of disputes, when a person wanted a remedy other than prop-
erty or economic compensation, the courts of law could do nothing, so “no remedy,
no right.”

Remedies in Equity 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. When
individuals could not obtain an adequate remedy in a court of law, they petitioned the king
for relief. Most of these petitions were referred to the chancellor, an adviser to the king who
had the power to grant new and unique remedies. Eventually, formal chancery courts, or
courts of equity, were established. The remedies granted by the chancery courts were called
remedies in equity.

Plaintiffs (those bringing lawsuits) had to specify whether they were bringing an “action
at law” or an “action in equity,” and they chose their courts accordingly. A plaintiff might ask
a court of equity to order the defendant to perform within the terms of a contract. A court
of law could not issue such an order because its remedies were limited to the payment of
money or property as compensation for damages.

A court of equity, however, could issue a decree for specific performance—an order to
perform what was promised. A court of equity could also issue an injunction, directing a party
to do or refrain from doing a particular act. In certain cases, a court of equity could allow for
the rescission (cancellation) of the contract, thereby returning the parties to the positions
that they held prior to the contract’s formation. Equitable remedies will be discussed in
greater detail in the chapters covering contracts.

The Merging of Law and Equity Today, in most states, the courts of law and equity have
merged, and thus the distinction between the two courts has largely disappeared. A plaintiff
may now request both legal and equitable remedies in the same action, and the trial court
judge may grant either form—or both forms—of relief.

The distinction between legal and equitable remedies remains significant, however,
because a court normally will grant an equitable remedy only when the remedy at law
(property or monetary damages) is inadequate. To request the proper remedy, a business-
person (or her or his attorney) must know what remedies are available for the specific kinds
of harms suffered. Exhibit 1–2 summarizes the procedural differences (applicable in most
states) between an action at law and an action in equity.

Learning Objective 3
What is the difference
between remedies at law
and remedies in equity?

Remedy The relief given to an
innocent party to enforce a right
or compensate for the violation of
a right.

Know This
Even though courts of
law and equity have
merged, the principles
of equity still apply, and
courts will not grant an
equitable remedy unless
the remedy at law is

10 UNIT ONE: The Legal Environment of Business

30301_ch01_hr_001-030.indd 10 8/31/18 3:08 PM

Equitable Maxims Over time, the courts have developed a number of equitable maxims
that provide guidance in deciding whether plaintiffs should be granted equitable relief.
Because of their importance, both historically and in our judicial system today, these max-
ims are set forth in this chapter’s Landmark in the Law feature.

1–3d Schools of Legal Thought
How judges apply the law to specific cases, including disputes relating to the
business world, depends on their philosophical approaches to law, among other
things. The study of law, often referred to as jurisprudence, includes learning
about different schools of legal thought and discovering how each school’s
approach to law can affect judicial decision making.

The Natural Law School According to the natural law theory, a higher, or
universal, law exists that applies to all human beings. Each written law
should reflect the principles inherent in natural law. If it does not, then it
loses its legitimacy and need not be obeyed.

The natural law tradition is one of the oldest and most significant schools
of jurisprudence. It dates back to the days of the Greek philosopher Aristotle
(384–322 b.c.e.), who distinguished between natural law and the laws governing
a particular nation. According to Aristotle, natural law applies universally to all

The notion that people have “natural rights” stems from the natural law tradi-
tion. Those who claim that certain nations, such as China and North Korea, are
depriving many of their citizens of their human rights are implicitly appealing
to a higher law that has universal applicability.

The question of the universality of basic human rights also comes into
play in the context of international business operations. For instance, U.S. companies
that have operations abroad often hire foreign workers as employees. Should the same
laws that protect U.S. employees apply to these foreign employees? This question is
rooted implicitly in a concept of universal rights that has its origins in the natural law

Legal Positivism Positive, or national, law is the written law of a given society at a par-
ticular point in time. In contrast to natural law, it applies only to the citizens of that nation
or society. Those who adhere to legal positivism believe that there can be no higher law than
a nation’s positive law.

According to the positivist school, there is no such thing as “natural rights.” Rather,
human rights exist solely because of laws. If the laws are not enforced, anarchy will result.

Equitable Maxims General
propositions or principles of law that
have to do with fairness (equity).

Jurisprudence The science or
philosophy of law.

Natural Law The oldest school of
legal thought, based on the belief
that the legal system should reflect
universal (“higher”) moral and
ethical principles that are inherent in
human nature.

Legal Positivism A school of legal
thought centered on the assumption
that there is no law higher than the
laws created by a national government.
Laws must be obeyed, even if they are
unjust, to prevent anarchy.


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

Exhibit 1–2 Procedural Differences between an Action at Law and an Action in Equity

What is the basic premise of Aristotle’s natural
law theory?












11CHAPTER 1: Law and Legal Reasoning

30301_ch01_hr_001-030.indd 11 8/31/18 3:08 PM

Thus, whether a law is morally “bad” or “good” is irrelevant. The law is the law and must be
obeyed until it is changed—in an orderly manner through a legitimate lawmaking process.

A judge who takes this view will probably be more inclined to defer to an existing law
than would a judge who adheres to the natural law tradition.

The Historical School The historical school of legal thought emphasizes the evolutionary
process of law by concentrating on the origin and history of the legal system. This school
looks to the past to discover what the principles of contemporary law should be. The legal
doctrines that have withstood the passage of time—those that have worked in the past—are
deemed best suited for shaping present laws. Hence, law derives its legitimacy and author-
ity from adhering to the standards that historical development has shown to be

Followers of the historical school are more likely than those of other schools to adhere
strictly to decisions made in past cases.

Historical School A school of
legal thought that looks to the past
to determine what the principles of
contemporary law should be.

In medieval England, courts of equity were expected to use discretion in supplement-
ing the common law. Even today, when the
same court can award both legal and equi-
table remedies, it must exercise discretion.

Students of business law and the legal
environment should know that courts often
invoke equitable maxims when making
their decisions. Here are some of the most
significant 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. (Plaintiffs 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

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.)

The last maxim has come to be known
as the equitable doctrine of laches. The
doctrine arose to encourage people to
bring lawsuits while the evidence was
fresh. If they failed to do so, they would
not be allowed to bring a lawsuit. 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—that is, statutes that set
the maximum time period during which a
certain action can be brought. After the
time allowed under a statute of limitations
has expired, no action can be brought,
no matter how strong the case was

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

For instance, in the contracts mate-
rials, you will read about the doctrine of
promissory estoppel. Under this doctrine,
a person who has reasonably and substan-
tially relied on the promise of another may
be able to obtain some measure of recov-
ery, even though no enforceable contract
exists. The court will estop (bar) the one
making the promise from asserting the lack
of a valid contract as a defense. The ratio-
nale underlying the doctrine of promissory
estoppel is similar to that expressed in the
fourth and fifth maxims just listed.

Equitable Maxims Landmark
in the Law

12 UNIT ONE: The Legal Environment of Business

30301_ch01_hr_001-030.indd 12 8/31/18 3:08 PM

Legal Realism In the 1920s and 1930s, a number of jurists and scholars, known as
legal realists, rebelled against the historical approach to law. Legal realism is based on the
idea that law is just one of many institutions in society and that it is shaped by social
forces and needs. This school reasons that because the law is a human enterprise, judges
should look beyond the law and take social and economic realities into account when
deciding cases.

Legal realists also believe that the law can never be applied with total uniformity.
Given that judges are human beings with unique experiences, personalities, value systems,
and intellects, different judges will obviously bring different reasoning processes to the
same case. Female judges, for instance, might be more inclined than male judges to con-
sider whether a decision might have a negative impact on the employment of women
or minorities.

1–4 Classifications of Law
The law may be broken down according to several classification systems. One classification
system divides law into substantive law (all laws that define, describe, regulate, and create
legal rights and obligations) and procedural law (all laws that establish the methods of enforc-
ing the rights established by substantive law).

Example 1.6 A state law that provides employees with the right to workers’ compensation
benefits for any on-the-job injuries they sustain is a substantive law because it creates legal
rights. Procedural laws, in contrast, establish the method by which an employee must notify
the employer about an on-the-job injury, prove the injury, and periodically submit additional
proof to continue receiving workers’ compensation benefits. ■ Note that a law may contain
both substantive and procedural provisions.

Other classification systems divide law into federal law and state law, and private law
(dealing with relationships between persons) and public law (addressing the relationship
between persons and their governments). Frequently, people use the term cyberlaw to refer
to the emerging body of law that governs transactions conducted via the Internet, but cyber-
law is not really a classification of law. Rather, it is an informal term used to refer to both
new laws and modifications of traditional legal principles that relate to the online

1–4a Civil Law and Criminal Law
Civil law spells out the rights and duties that exist between persons and between persons and
their governments, as well as the relief available when a person’s rights are violated. Typically,
in a civil case, a private party sues another private party who has failed to comply with a
duty. Much of the law that we discuss in this text—including contract law and tort law—is
civil law.

Note that civil law is not the same as a civil law system. As you will read shortly, a civil law
system is a legal system based on a written code of laws. (See this chapter’s Beyond Our Borders
feature for a discussion of the different legal systems used in other nations.)

Criminal law has to do with wrongs committed against society for which society demands
redress. Criminal acts are proscribed by local, state, or federal government statutes. Thus,
criminal defendants are prosecuted by public officials, such as a district attorney (D.A.), on
behalf of the state, not by their victims or other private parties.

Whereas in a civil case the object is to obtain a remedy (such as monetary damages) to
compensate the injured party, in a criminal case the object is to punish the wrongdoer in
an attempt to deter others from similar actions. Penalties for violations of criminal statutes
consist of fines and/or imprisonment—and, in some cases, death.

Legal Realism A school of legal
thought that holds that the law is only
one factor to be considered when
deciding cases, and that social and
economic circumstances should also
be taken into account.

Substantive Law Law that defines,
describes, regulates, and creates
legal rights and obligations.

Procedural Law Law that
establishes the methods of enforcing
the rights established by substantive

Cyberlaw An informal term used to
refer to all laws governing electronic
communications and transactions,
particularly those conducted via the

Learning Objective 4
What are some important
differences between civil
law and criminal law?

Civil Law The branch of law dealing
with the definition and enforcement
of all private or public rights, as
opposed to criminal matters.

Civil Law System A system of law
derived from Roman law that is based
on codified laws (rather than on case

Criminal Law The branch of law
that defines and punishes wrongful
actions committed against the public.

13CHAPTER 1: Law and Legal Reasoning

30301_ch01_hr_001-030.indd 13 8/31/18 3:08 PM

Despite their varying cultures and cus-toms, almost all countries have laws
governing torts, contracts, employment,
and other areas. Two types of legal sys-
tems predominate around the globe today.
One is the common law system of England
and the United States, which we dis-
cussed earlier. The other system is based
on Roman civil law, or “code law,” which
relies on the legal principles enacted into
law by a legislature or governing body.

Civil Law Systems
Although national law systems share many
commonalities, they also have distinct dif-
ferences. In a civil law system, the primary
source of law is a statutory code, and case
precedents are not judicially binding, as
they normally are in a common law sys-
tem. Although judges in a civil law system
commonly refer to previous decisions as
sources of legal guidance, those decisions
are not binding precedents (stare decisis
does not apply).

Common Law and
Civil Law Systems Today
Exhibit 1–3 lists some countries that fol-
low either the common law system or the
civil law system. Generally, countries that
were once colonies of Great Britain have
retained their English common law heri-
tage. The civil law system, which is used
in most continental European nations,
has been retained in the countries that
were once colonies of those nations. In
the United States, the state of Louisiana,
because of its historical ties to France,
has in part a civil law system, as do Haiti,
Québec, and Scotland.

Islamic Legal Systems
A third, less prevalent legal system is com-
mon in Islamic countries, where the law is
often influenced by sharia, the religious
law of Islam. Islam is both a religion and
a way of life. Sharia is a comprehensive
code of principles that governs the public
and private lives of Islamic persons and

directs many aspects of their day-to-day
lives, including politics, economics, bank-
ing, business law, contract law, and social

Although sharia affects the legal codes
of many Muslim countries, the extent of its
impact and its interpretation vary widely. In
some Middle Eastern nations, aspects of
sharia have been codified in modern legal
codes and are enforced by national judicial

Critical Thinking
Does the civil law system offer any advan-
tages over the common law system, or vice
versa? Explain.

National Law Systems Beyond Our Borders


Argentina Indonesia Australia Nigeria

Austria Iran Bangladesh Singapore

Brazil Italy Canada United Kingdom

Chile Japan Ghana United States

China Mexico India Zambia

Egypt Poland Israel

Finland South Korea Jamaica

France Sweden Kenya

Germany Tunisia Malaysia

Greece Venezuela New Zealand

Exhibit 1–3 The Legal Systems of Selected Nations

14 UNIT ONE: The Legal Environment of Business

30301_ch01_hr_001-030.indd 14 8/31/18 3:08 PM

1–4b National and International Law
U.S. businesspersons increasingly engage in transactions that
extend beyond our national borders. For this reason, those
who pursue a career in business today should have an under-
standing of the global legal environment.

The law of a particular nation, such as Japan or Germany,
is national law. National law, of course, varies from country to
country because each country’s law reflects the interests, cus-
toms, activities, and values that are unique to that nation’s
culture. Even though the laws and legal systems of various
countries differ substantially, broad similarities do exist.

In contrast, international law applies to more than one
nation. International law can be defined as a body of written
and unwritten laws observed by independent nations and
governing the acts of individuals as well as governments. It
is a mixture of rules and constraints derived from a variety
of sources, including the laws of individual nations, customs developed among nations, and
international treaties and organizations.

The key difference between national law and international law is that government author-
ities can enforce national law. If a nation violates an international law, however, enforcement
is up to other countries or international organizations, which may or may not choose to
act. If persuasive tactics fail, the only option is to take coercive actions against the violating
nation. Coercive actions range from the severance of diplomatic relations and boycotts to
sanctions and, as a last resort, war.

National Law Law that pertains
to a particular nation (as opposed to
international law).

International Law Law that
governs relations among nations.

Practice and Review

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

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

2. Are the plaintiffs seeking a legal remedy or an equitable remedy? Why?

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

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

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











A witness points out someone in the courtroom to the judge.

15CHAPTER 1: Law and Legal Reasoning

30301_ch01_hr_001-030.indd 15 8/31/18 3:08 PM

Key Terms
allege 9
binding authority 7
case law 6
case on point 9
citation 5
civil law 13
civil law system 13
common law 7
concurring opinion 25
constitutional law 5
criminal law 13
cyberlaw 13
defendant 9
dissenting opinion 25

equitable maxims 11
historical school 12
international law 15
jurisprudence 11
law 2
legal positivism 11
legal realism 13
legal reasoning 8
liability 3
majority opinion 25
national law 15
natural law 11
ordinance 5
per curiam opinion 25

persuasive authority 8
plaintiff 9
plurality opinion 25
precedent 7
primary source of law 4
procedural law 13
remedy 10
secondary source of law 5
stare decisis 7
statutory law 5
substantive law 13
uniform law 6

Chapter Summary: Law and Legal Reasoning
Sources of American Law 1. Constitutional law—The law as expressed in the U.S. Constitution and the various state constitu-

tions. 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 violate the U.S. Constitution or a federal law.

2. Statutory law—Laws or ordinances created by federal, state, and local legislatures. None of these laws
can violate the U.S. Constitution, and no state statute or local ordinance can violate the relevant state
constitution. Uniform laws, when adopted by a state legislature, become statutory law in that state.

3. Administrative law—The rules, orders, and decisions of federal or state government administrative
agencies. Federal administrative agencies are created by enabling legislation enacted by the U.S.
Congress. Agency functions include rulemaking, investigation and enforcement, and adjudication.

4. 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 agen-
cies. Case law governs all areas not covered by statutory law or administrative law, and is part of
our common law tradition.

The Common Law 1. Common law—Law that originated in medieval England with the creation of the king’s courts, or
curiae regis, and the development of a body of rules that were common to (or applied in) all regions
of the country.

2. Stare decisis—A doctrine under which judges “stand on decided cases”—or follow the rule of
precedent—in deciding cases. Stare decisis is the cornerstone of the common law tradition.

3. Stare decisis and legal reasoning—Judges use legal reasoning to harmonize their decisions with
those that have been made before, as required by the doctrine of stare decisis. The basic steps of
legal reasoning form what is often referred to as the IRAC method of legal reasoning. IRAC stands for
Issue, Rule, Application, and Conclusion. First, clearly grasp the relevant facts and identify the issue.
Second, determine the rule of law that applies to the case. Third, analyze (using cases on point) how
the rule of law applies to the particular facts of the dispute, and fourth, arrive at a conclusion.

4. Remedies—A remedy is the means by which a court enforces a right or compensates for a violation
of a right. Courts typically grant legal remedies (monetary damages or property) but may also grant
equitable remedies (specific performance, injunction, or rescission) when the legal remedy is inad-
equate or unavailable.

16 UNIT ONE: The Legal Environment of Business

30301_ch01_hr_001-030.indd 16 9/3/18 9:15 AM

5. Schools of legal thought—Judges’ decision making is influenced by their philosophy of law. The
following are four important schools of legal thought, or legal philosophies:
a. Natural law—One of the oldest and most significant schools of legal thought. Those who believe

in natural law hold that there is a universal law applicable to all human beings and that this law
is of a higher order than positive, or conventional, law.

b. Legal positivism—A school of legal thought centered on the assumption that there is no law
higher than the laws created by the government. Laws must be obeyed, even if they are unjust,
to prevent anarchy.

c. Historical school—A school of legal thought that stresses the evolutionary nature of law and
looks to doctrines that have withstood the passage of time for guidance in shaping present laws.

d. Legal realism—A school of legal thought that generally advocates a less abstract and more real-
istic approach to the law. This approach takes into account customary practices and the social
and economic circumstances in which transactions take place.

Classifications of Law The law may be broken down according to several classification systems, such as substantive or
procedural law, federal or state law, and private or public law. Two broad classifications are civil and
criminal law, and national and international law. Cyberlaw is not really a classification of law but a term
that refers to the growing body of case and statutory law that applies to Internet transactions.

Issue Spotters
1. The First Amendment to the U.S. Constitution provides protection for the free exercise of religion. A state legislature enacts a law that

outlaws all religions that do not derive from the Judeo-Christian tradition. Is this law valid within that state? Why or why not? (See
Sources of American Law.)

2. Under what circumstances might a judge rely on case law to determine the intent and purpose of a statute? (See Sources of
American Law.)
—Check your answers to the Issue Spotters against the answers provided in Appendix D at the end of this text.

Business Scenarios and Case Problems
1–1. Binding versus Persuasive Authority. A county court

in Illinois is deciding a case involving an issue that has never
been addressed before in that state’s courts. The Iowa Supreme
Court, however, recently decided a case involving a very sim-
ilar fact pattern. Is the Illinois court obligated to follow the
Iowa  Supreme Court’s decision on the issue? If the United
States Supreme Court had decided a similar case, would that
decision be binding on the Illinois court? Explain. (See The
Common Law.)

1–2. Sources of Law. This chapter discussed a number of
sources of American law. Which source of law takes priority
in the following situations, and why? (See Sources of American
1. A federal statute conflicts with the U.S. Constitution.
2. A federal statute conflicts with a state constitutional

3. A state statute conflicts with the common law of that state.
4. A state constitutional amendment conflicts with the U.S.


1–3. Remedies. Arthur Rabe is suing Xavier Sanchez for breach-
ing a contract in which Sanchez promised to sell Rabe a
Van Gogh painting for $150,000. (See The Common Law.)
1. In this lawsuit, who is the plaintiff, and who is the defendant?
2. If Rabe wants Sanchez to perform the contract as promised,

what remedy should Rabe seek?
3. Suppose that Rabe wants to cancel the contract because

Sanchez fraudulently misrepresented the painting as an
original Van Gogh when in fact it is a copy. In this situation,
what remedy should Rabe seek?

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

1–4. Philosophy of Law. After World War II ended in 1945,
an international tribunal of judges convened at Nuremberg,
Germany. The judges convicted several Nazi war criminals of
“crimes against humanity.” Assuming that the Nazis who were
convicted had not disobeyed any law of their country and had
merely been following their government’s (Hitler’s) orders, what
law had they violated? Explain. (See The Common Law.)

17CHAPTER 1: Law and Legal Reasoning

30301_ch01_hr_001-030.indd 17 9/3/18 9:15 AM

1–5. Spotlight on AOL—Common Law. AOL, LLC, mistak-
enly made public the personal information of 650,000 of
its members. The members filed a suit, alleging viola-
tions of California law. AOL asked the court to dismiss

the suit on the basis of a “forum-selection” clause in its member
agreement that designates Virginia courts as the place where
member disputes will be tried. Under a decision of the United
States Supreme Court, a forum-selection clause is unenforce-
able “if enforcement would contravene a strong public policy of
the forum in which suit is brought.” California has declared in
other cases that the AOL clause contravenes a strong public
policy. If the court applies the doctrine of stare decisis, will it
dismiss the suit? Explain. [Doe 1 v. AOL, LLC, 552 F.3d 1077 (9th
Cir. 2009)] (See The Common Law.)

1–6. Business Case Problem with Sample Answer—
Reading Citations. Assume that you want to read
the entire court opinion in the case of Worldwide
TechServices, LLC v. Commissioner of Revenue,

479 Mass. 20, 91 N.E.3d 650 (2018).
Refer to the appendix to this chapter, and then explain

specifically where you would find the court’s opinion. (See
Finding Case Law.)
— For a sample answer to Problem 1–6, go to Appendix E at the

end of this text.

1–7. A Question of Ethics—The Doctrine of Precedent.
Sandra White operated a travel agency. To obtain
lower airline fares for her nonmilitary clients, she
booked military-rate travel by forwarding fake military

identification cards to the airlines. The government charged
White with identity theft, which requires the “use” of another’s
identification. The trial court had two cases that represented

In the first case, David Miller obtained a loan to buy land
by representing that certain investors had approved the loan
when, in fact, they had not. Miller’s conviction for identity theft
was overturned because he had merely said that the investors
had done something when they had not. According to the court,
this was not the “use” of another’s identification.

In the second case, Kathy Medlock, an ambulance service
operator, had transported patients for whom there was no medi-
cal necessity to do so. To obtain payment, Medlock had forged a
physician’s signature. The court concluded that this was “use”
of another person’s identity. [ United States v. White, 846 F.3d 170
(6th Cir. 2017)] (See Sources of American Law.)

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

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

Critical Thinking and Writing Assignments
1–8. Business Law Writing. John’s company is involved in a

lawsuit with a customer, Beth. John argues that for
fifty years higher courts in that state have decided
cases involving circumstances similar to his case in

a way that indicates he can expect a ruling in his company’s
favor. Write at least one paragraph discussing whether this is
a valid argument. Write another paragraph discussing whether
the judge in this case must rule as those other judges did, and
why. (See The Common Law.)

1–9. Time-Limited Group Assignment—Court Opinions.
Read through the subsection entitled “Decisions and
Opinions” in the appendix following this chapter. (See
Reading and Understanding Case Law.)

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

2. Another group will outline the difference between a concur-
ring opinion and a dissenting opinion.

3. The third group will explain why judges and justices write
concurring and dissenting opinions, given that these opin-
ions will not affect the outcome of the case at hand, which
has already been decided by majority vote.

18 UNIT ONE: The Legal Environment of Business

30301_ch01_hr_001-030.indd 18 8/31/18 3:08 PM

Appendix to Chapter 1

Finding and Analyzing the Law
This text includes numerous references, or citations, to primary sources of law—federal and
state statutes, the U.S. Constitution and state constitutions, regulations issued by admin-
istrative agencies, and court cases. A citation identifies the publication in which a legal
authority—such as a statute or court decision—can be found. In this appendix, we explain
how you can use citations to find primary sources of law. Note that in addition to being
published in sets of books, as described next, most federal and state laws and case decisions
are available online.

Finding Statutory and Administrative Law
When Congress passes laws, they are collected in a publication titled United States Statutes
at Large. When state legislatures pass laws, they are collected in similar state publications.
Most frequently, however, laws are referred to in their codified form—that is, the form
in which they appear in the federal and state codes. In these codes, laws are compiled by

United States Code
The United States Code (U.S.C.) arranges all existing federal laws of a public and permanent
nature by subject. Each of the fifty-two subjects into which the U.S.C. arranges the laws
is given a title and a title number. For example, laws relating to commerce and trade are
collected in “Title 15, Commerce and Trade.” Titles are subdivided by sections.

A citation to the U.S.C. includes title and section numbers. Thus, a reference to “15
U.S.C. Section 1” means that the statute can be found in Section 1 of Title 15. (“Section”
may be designated by the symbol §, and “Sections” by §§.) In addition to the print publi-
cation of the U.S.C., the federal government also provides a searchable online database of
the United States Code at (click on “Libraries” and then “Core Documents of
Our Democracy” to find the United States Code).

Commercial publications of these laws are available and are widely used. For example,
Thomson Reuters publishes the United States Code Annotated (U.S.C.A.). The U.S.C.A.
contains the complete text of laws included in the U.S.C., notes of court decisions that inter-
pret and apply specific sections of the statutes, and the text of presidential proclamations
and executive orders. The U.S.C.A. also includes research aids, such as cross-references to
related statutes, historical notes, and other references. A citation to the U.S.C.A. is similar
to a citation to the U.S.C.: “15 U.S.C.A. Section 1.”

State Codes
State codes follow the U.S.C. pattern of arranging laws by subject. The state codes may be
called codes, revisions, compilations, consolidations, general statutes, or statutes, depending
on the state.


30301_ch01_hr_001-030.indd 19 8/31/18 3:08 PM

In some codes, subjects are designated by number. In others, they are designated by name.
For example, “13 Pennsylvania Consolidated Statutes Section 1101” means that the statute
can be found in Title 13, Section 1101, of the Pennsylvania code. “California Commercial
Code Section 1101” means the statute can be found in Section 1101 under the subject head-
ing “Commercial Code” of the California code. Abbreviations may be used. For example,
“13 Pennsylvania Consolidated Statutes Section 1101” may be abbreviated “13 Pa. C.S. § 1101,”
and “California Commercial Code Section 1101” may be abbreviated “Cal. Com. Code § 1101.”

Administrative Rules
Rules and regulations adopted by federal administrative agencies are initially published in
the Federal Register, a daily publication of the U.S. government. Later, they are incorporated
into the Code of Federal Regulations (C.F.R.).

Like the U.S.C., the C.F.R. is divided into titles. Rules within each title are assigned section
numbers. A full citation to the C.F.R. includes title and section numbers. For example, a reference
to “17 C.F.R. Section 230.504” means that the rule can be found in Section 230.504 of Title 17.

Finding Case Law
Before discussing the case reporting system, we need to look briefly at the court system.
There are two types of courts in the United States: federal courts and state courts.

Both the federal and the state court systems consist of several levels, or tiers, of courts.
Trial courts, in which evidence is presented and testimony is given, are on the bottom tier
(which also includes lower courts handling specialized issues). Decisions from a trial court
can be appealed to a higher court, which commonly is an intermediate court of appeals, or an
appellate court. Decisions from these intermediate courts of appeals may be appealed to
an even higher court, such as a state supreme court or the United States Supreme Court.

State Court Decisions
Most state trial court decisions are not published (except in New York and a few other states,
which publish selected trial court opinions). Decisions from state trial courts are typically
filed in the office of the clerk of the court, where the decisions are available for public inspec-
tion. (Increasingly, they can be found online as well.)

Written decisions of the appellate, or reviewing, courts, however, are published and dis-
tributed (in print and online). Many of the state court cases presented in this book are from
state appellate courts. The reported appellate decisions are published in volumes called
reports or reporters, which are numbered consecutively. State appellate court decisions are
found in the state reporters of that particular state. Official reports are published by the state,
whereas unofficial reports are published by nongovernment entities.

Regional Reporters State court opinions appear in regional units of the National Reporter
System, published by Thomson Reuters. Most lawyers and libraries have these reporters
because they report cases more quickly and are distributed more widely than the state-
published reports. In fact, many states have eliminated their own reporters in favor of the
National Reporter System.

The National Reporter System divides the states into the following geographic areas:
Atlantic (A., A.2d, or A.3d), North Eastern (N.E., N.E.2d, or N.E.3d), North Western (N.W. or
N.W.2d), Pacific (P., P.2d, or P.3d), South Eastern (S.E. or S.E.2d), South Western (S.W., S.W.2d,
or S.W.3d), and Southern (So., So.2d, or So.3d). (The 2d and 3d in the abbreviations refer
to Second Series and Third Series, respectively.) The states included in each of these regional
divisions are indicated in Exhibit 1A–1, which illustrates the National Reporter System.

20 UNIT ONE: The Legal Environment of Business

30301_ch01_hr_001-030.indd 20 8/31/18 3:08 PM

Exhibit 1A–1 The National Reporter System—Regional/Federal

Connecticut, Delaware, District of Columbia, Maine, Maryland,
New Hampshire, New Jersey, Pennsylvania, Rhode Island, and Vermont.
Illinois, Indiana, Massachusetts, New York, and Ohio.

Iowa, Michigan, Minnesota, Nebraska, North Dakota, South Dakota, and
Alaska, Arizona, California, Colorado, Hawaii, Idaho, Kansas, Montana,
Nevada, New Mexico, Oklahoma, Oregon, Utah, Washington, and Wyoming.
Georgia, North Carolina, South Carolina, Virginia, and West Virginia.
Arkansas, Kentucky, Missouri, Tennessee, and Texas.

Alabama, Florida, Louisiana, and Mississippi.

U.S. Circuit Courts from 1880 to 1912; U.S. Commerce Court from 1911 to
1913; U.S. District Courts from 1880 to 1932; U.S. Court of Claims (now called
U.S. Court of Federal Claims) from 1929 to 1932 and since 1960; U.S. Courts
of Appeals since 1891; U.S. Court of Customs and Patent Appeals since 1929;
U.S. Emergency Court of Appeals since 1943.
U.S. Court of Claims from 1932 to 1960; U.S. District Courts since 1932;
U.S. Customs Court since 1956.
U.S. District Courts involving the Federal Rules of Civil Procedure since 1939
and Federal Rules of Criminal Procedure since 1946.
United States Supreme Court since the October term of 1882.
Bankruptcy decisions of U.S. Bankruptcy Courts, U.S. District Courts, U.S.
Courts of Appeals, and the United States Supreme Court.
U.S. Court of Military Appeals and Courts of Military Review for the Army,
Navy, Air Force, and Coast Guard.












Atlantic Reporter (A., A.2d, or A.3d)

North Eastern Reporter (N.E., N.E.2d, or
North Western Reporter (N.W. or N.W.2d)

Pacific Reporter (P., P.2d, or P.3d)

South Eastern Reporter (S.E. or S.E.2d)
South Western Reporter (S.W., S.W.2d, or
Southern Reporter (So., So.2d, or So.3d)

Federal Reporters
Federal Reporter (F., F.2d, or F.3d)

Federal Supplement (F.Supp., F.Supp.2d,
or F.Supp.3d)
Federal Rules Decisions (F.R.D.)

Supreme Court Reporter (S.Ct.)
Bankruptcy Reporter (Bankr.)

Military Justice Reporter (M.J.)

Regional Reporters













































North Western
South Western
North Eastern
South Eastern


21APPENDIX TO CHAPTER 1: Law and Legal Reasoning

30301_ch01_hr_001-030.indd 21 8/31/18 3:08 PM

Case Citations After appellate decisions have been published, they are normally referred
to (cited) by the name of the case and the volume, name, and page number of the report-
er(s) in which the opinion can be found. The citation first lists information from the state’s
official reporter (if different from the National Reporter System), then the National Reporter,
and then any other selected reporter. (Citing a reporter by volume number, name, and page
number, in that order, is common to all citations.) When more than one reporter is cited for
the same case, each reference is called a parallel citation.

Note that some states have adopted a “public domain citation system” that uses a some-
what different format for the citation. For example, in Ohio, an Ohio court decision might
be designated “2018 -Ohio- 79,” meaning that the decision was the 79th decision issued
by the Ohio Supreme Court in 2018. Parallel citations to the Ohio Appellate Court Reporter
and the North Eastern Reporter are included after the public domain citation.

Consider the following citation: Connecticut Coalition for Justice in Education Funding,
Inc. v. Rell, 327 Conn. 650, 176 A.3d 28 (2018). We see that the opinion in this case can be
found in Volume 327 of the official Connecticut Reports, on page 650. The parallel citation is
to Volume 176 of the Atlantic Reporter, Third Series, page 28.

When we present opinions in this text (starting in Chapter 2), in addition to the reporter,
we give the name of the court hearing the case and the year of the court’s decision. Sample
citations to state court decisions are listed and explained in Exhibit 1A–2.

Federal Court Decisions
Federal district (trial) court decisions are published unofficially in the Federal Supplement
(F.Supp., F.Supp.2d, or F.Supp.3d), and opinions from the circuit courts of appeals (federal review-
ing courts) are reported unofficially in the Federal Reporter (F., F.2d, or F.3d). Cases concerning
federal bankruptcy law are published unofficially in the Bankruptcy Reporter (Bankr. or B.R.).

The official edition of United States Supreme Court decisions is the United States Reports
(U.S.), which is published by the federal government. Unofficial editions of Supreme Court
cases include the Supreme Court Reporter (S.Ct.) and the Lawyers’ Edition of the Supreme
Court Reports (L.Ed. or L.Ed.2d). Sample citations for federal court decisions are also listed
and explained in Exhibit 1A–2.

Unpublished Opinions
Many court opinions that are not yet published or that are not intended for publication can be
accessed through Westlaw® (abbreviated in citations as “WL”), an online legal database. When
no citation to a published reporter is available for cases cited in this text, we give the WL citation
(such as 2018 WL 266332, which means it was case number 266332 decided in the year 2018).
In addition, federal appellate court decisions that are designated as unpublished may appear in
the Federal Appendix (Fed.Appx.) of the National Reporter System.

Sometimes, both in this text and in other legal sources, you will see blanks left in a cita-
tion. This occurs when the decision will be published, but the particular volume number or
page number is not yet available.

Old Cases
On a few occasions, this text cites opinions from old, classic cases dating to the nineteenth
century or earlier. Some of these cases are from the English courts. The citations to these
cases may not conform to the descriptions given above.

Reading and Understanding Case Law
The cases in this text have been condensed from the full text of the courts’ opinions and
paraphrased by the authors. For those wishing to review court cases for future research
projects or to gain additional legal information, the following sections will provide useful
insights into how to read and understand case law.

22 UNIT ONE: The Legal Environment of Business

30301_ch01_hr_001-030.indd 22 8/31/18 3:08 PM

Exhibit 1A–2 How to Read Citations

157 A.D.3d 486, 69 N.Y.S.3d 26 (2018)

343 Ga.App. 889, 808 S.E.2d 891 (2018)

___ U.S. ___ , 138 S.Ct. 617, 199 L.Ed.2d 501 (2018)

a. The case names have been deleted from these citations to emphasize the publications. It should be kept in mind, however, that the name of a case
is as important as the specific page numbers in the volumes in which it is found. If a citation is incorrect, the correct citation may be found in a
publication’s index of case names. In addition to providing a check on errors in citations, the date of a case is important because the value of a recent
case as an authority is likely to be greater than that of older cases from the same court.

298 Neb. 630, 905 N.W.2d 523 (2018)a


N.Y.S. is the abbreviation for the unofficial reports—titled New York
Supplement—of the decisions of New York courts.

A.D. is the abbreviation for the New York Appellate Division Reports, which hears appeals
from the New York Supreme Court—the state’s general trial court. The New York Court
of Appeals is the state’s highest court, analogous to other states’ supreme courts.

Ga.App. is the abbreviation for Georgia Appeals Reports, Georgia’s official reports of the
decisions of its court of appeals.

L.Ed. is an abbreviation for Lawyers’ Edition of the Supreme
Court Reports, an unofficial edition of decisions of the
United States Supreme Court.

S.Ct. is the abbreviation for Supreme Court Reporter, an unofficial edition
of decisions of the United States Supreme Court.

U.S. is the abbreviation for United States Reports, the official edition of the
decisions of the United States Supreme Court. The blank lines in this citation (or
any other citation) indicate that the appropriate volume of the case reporter has
not yet been published and no page number is available.

19 Cal.App.5th 495, 228 Cal.Rptr.3d 169 (2018)

Cal.Rptr. is the abbreviation for the unofficial reports—titled California Reporter—
of the decisions of California courts.

N.W. is the abbreviation for the publication of state court decisions
rendered in the North Western Reporter of the National Reporter System.
2d indicates that this case was included in the Second Series of that

Neb. is an abbreviation for Nebraska Reports, Nebraska’s official reports of the
decisions of its highest court, the Nebraska Supreme Court.

23APPENDIX TO CHAPTER 1: Law and Legal Reasoning

30301_ch01_hr_001-030.indd 23 8/31/18 3:08 PM

879 F.3d 1052 (9th Cir. 2018)

___ F.Supp.3d ___ , 2018 WL 388590 (W.D.Wash. 2018)

18 U.S.C. Section 1961(1)(A)

UCC 2–206(1)(b)

Restatement (Third) of Torts, Section 6

17 C.F.R. Section 230.505

2018 WL 416255

b. Many court decisions that are not yet published or that are not intended for publication can be accessed through Westlaw, an online legal database.




9th Cir. is an abbreviation denoting that this case was decided in the
U.S. Court of Appeals for the Ninth Circuit.

W.D.Wash. is an abbreviation indicating that the U.S. District Court for the
Western District of Washington decided this case.

U.S.C. denotes United States Code, the codification of United States
Statutes at Large. The number 18 refers to the statute’s U.S.C. title number
and 1961 to its section number within that title. The number 1 in parentheses
refers to a subsection within the section, and the letter A in parentheses
to a subsection within the subsection.

UCC is an abbreviation for Uniform Commercial Code. The first number 2 is
a reference to an article of the UCC, and 206 to a section within that article.
The number 1 in parentheses refers to a subsection within the section, and
the letter b in parentheses to a subsection within the subsection.

Restatement (Third) of Torts refers to the third edition of the American
Law Institute’s Restatement of the Law of Torts. The number 6 refers to a
specific section.

C.F.R. is an abbreviation for Code of Federal Regulations, a compilation of
federal administrative regulations. The number 17 designates the regulation’s
title number, and 230.505 designates a specific section within that title.

WL is an abbreviation for Westlaw. The number 2018 is the year of the document that can be found with this citation in the
Westlaw database. The number 416255 is a number assigned to a specific document. A higher number indicates that a document
was added to the Westlaw database later in the year.

Exhibit 1A–2 How to Read Citations—Continued

24 UNIT ONE: The Legal Environment of Business

30301_ch01_hr_001-030.indd 24 8/31/18 3:08 PM

Case Titles and Terminology
The title of a case, such as Adams v. Jones, indicates the names of the parties to the lawsuit. The
v. in the case title stands for versus, which means “against.” In the trial court, Adams was
the plaintiff—the person who filed the suit. Jones was the defendant.

If the case is appealed, however, the appellate court will sometimes place the name of the
party appealing the decision first, so the case may be called Jones v. Adams. Because some
reviewing courts retain the trial court order of names, it is often impossible to distinguish
the plaintiff from the defendant in the title of a reported appellate court decision. You must
carefully read the facts of each case to identify the parties.

The following terms and phrases are frequently encountered in court opinions and legal
publications. Because it is important to understand what these terms and phrases mean, we
define and discuss them here.

Parties to Lawsuits The party initiating a lawsuit is referred to as the plaintiff or petitioner,
depending on the nature of the action, and the party against whom a lawsuit is brought
is the defendant or respondent. Lawsuits frequently involve more than one plaintiff and/or

When a case is appealed from the original court or jurisdiction to another court or jurisdic-
tion, the party appealing the case is called the appellant. The appellee is the party against whom
the appeal is taken. (In some appellate courts, the party appealing a case is referred to as the
petitioner, and the party against whom the suit is brought or appealed is called the respondent.)

Judges and Justices The terms judge and justice are usually synonymous and are used
to refer to the judges in various courts. All members of the United States Supreme Court, for
instance, are referred to as justices. Justice is the formal title usually given to judges of appel-
late courts, although this is not always the case. In New York, a justice is a judge of the trial
court (which is called the Supreme Court), and a member of the Court of Appeals (the state’s
highest court) is called a judge. The term justice is commonly abbreviated to J., and justices
to JJ. A Supreme Court case might refer to Justice Sotomayor as Sotomayor, J., or to Chief
Justice Roberts as Roberts, C.J.

Decisions and Opinions Most decisions reached by reviewing, or appellate, courts are
explained in written opinions. The opinion contains the court’s reasons for its decision, the
rules of law that apply, and the judgment. You may encounter several types of opinions as
you read appellate cases, including the following:

• When all the judges (or justices) agree, a unanimous opinion is written for the entire court.

• When there is not unanimous agreement, a majority opinion is generally written. It outlines the
views of the majority of the judges deciding the case.

• A judge who agrees (concurs) with the majority opinion as to the result but not as to the legal
reasoning often writes a concurring opinion. In it, the judge sets out the reasoning that he or she
considers correct.

• A dissenting opinion presents the views of one or more judges who disagree with the majority view.

• Sometimes, no single position is fully supported by a majority of the judges deciding a case. In this
situation, we may have a plurality opinion. This is the opinion that has the support of the largest
number of judges, but the group in agreement is less than a majority.

• Finally, a court occasionally issues a per curiam opinion (per curiam is Latin for “of the court”),
which does not indicate which judge wrote the opinion.

Majority Opinion A court opinion
that represents the views of the
majority (more than half) of the judges
or justices deciding the case.

Concurring Opinion A court
opinion by one or more judges or
justices who agree with the majority
but want to make or emphasize
a point that was not made or
emphasized in the majority’s opinion.

Dissenting Opinion A court
opinion that presents the views of
one or more judges or justices who
disagree with the majority’s decision.

Plurality Opinion A court opinion
that is joined by the largest number
of the judges or justices hearing the
case, but less than half of the total

Per Curiam Opinion A court
opinion that does not indicate which
judge or justice authored the opinion.

25APPENDIX TO CHAPTER 1: Law and Legal Reasoning

30301_ch01_hr_001-030.indd 25 8/31/18 3:08 PM

A Sample Court Case
To illustrate the various elements contained in a court opinion, we present an annotated
court opinion in Exhibit 1A–3. The opinion is from an actual case that the United States
Court of Appeals for the Tenth Circuit decided in 2018.

Yeasin v. Durham

United States Court of Appeals, Tenth Circuit,

719 Fed.Appx. 844 (2018).

Gregory A. phillips, Circuit Judge.

* * * *


* * * *

[Navid] Yeasin and A.W. [were students at the University of Kansas when they] dated from

the fall of 2012 through June 2013. On June 28, 2013, Yeasin physically restrained A.W. in his

car, took her phone from her, threatened to commit suicide if she broke up with him, threat-

ened to spread rumors about her, and threatened to make the University of Kansas’s “campus

environment so hostile, that she would not attend any university in the state of Kansas.”

For this conduct, Kansas charged Yeasin with * * * battery * * * . A.W. * * * obtained

a protection order against Yeasin.

*  *  * A.W. filed a complaint against Yeasin with the university’s Office of Insti-

tutional Opportunity and Access (IOA). *  *  * The IOA *  *  * issued *  *  * a

no-contact order * * * [that] “prohibited [Yeasin] from initiating, or contributing through

third-parties, to any physical, verbal, electronic, or written communication with A.W., her

family, her friends or her associates.”

[Despite the order,] Yeasin posted more than a dozen tweets about A.W., including

disparaging comments about her body.

[The university held a hearing to adjudicate A.W.’s complaint against Yeasin. Both

parties testified. The hearing panel submitted the record to Dr. Tammara Durham, the

university’s vice provost for student affairs, for a decision regarding whether and how to

sanction Yeasin’s conduct.]

A no-contact order prohibits a person from
being in contact with another person.

A hearing is a proceeding before a deci-
sion-making body. Testimony and other evi-
dence can be presented to help determine
the issue.

To adjudicate is to hear evidence and argu-
ments in order to determine and resolve a

A protection order is an order issued by a
court that protects a person by requiring
another person to do, or not to do, some-
thing. The order can protect someone from
being physically or sexually threatened or

The court divides the opinion into sections,
each headed by an explanatory heading.
The first section summarizes the facts of
the case.

This line provides the name of the judge (or
justice) who authored the court’s opinion.

This section contains the citation—the
name of the case, the name of the court that
heard the case, the reporters in which the
court’s opinion can be found, and the year
of the decision.

Battery is an unexcused and harmful or
offensive physical contact intentionally

A record is a written account of proceedings.

Exhibit 1A–3 A Sample Court Case

26 UNIT ONE: The Legal Environment of Business

30301_ch01_hr_001-030.indd 26 8/31/18 3:08 PM

* * * Durham found that Yeasin’s June 28, 2013 conduct and his tweets were “so severe,

pervasive and objectively offensive that it interfered with A.W.’s academic performance and

equal opportunity to participate in or benefit from University programs or activities.” She

found that his tweets violated the [university’s] sexual-harassment policy because they were

“unwelcome comments about A.W.’s body.” And she found that his conduct “threatened the

physical health, safety and welfare of A.W., making the conduct a violation of * * * the [uni-

versity’s Student] Code.”

* * * Durham * * * expelled Yeasin from the university and banned him from campus.

* * * *

Yeasin contested his expulsion in a Kansas state court. The court set aside Yeasin’s expul-

sion, reasoning that * * * “KU and Dr. Durham erroneously interpreted the Student Code

of Conduct by applying it to off-campus conduct.”

* * * *

Yeasin then brought this suit in federal court, claiming that Dr. Durham had violated his

First amendment rights by expelling him for * * * off-campus speech. * * * Dr. Durham

moved to dismiss * * * Yeasin’s claim * * * . The * * * court granted the motion after con-

cluding that Dr. Durham hadn’t violated Yeasin’s clearly established rights.

[Yeasin appealed to the U.S. Court of Appeals for the Tenth Circuit.]


* * * *

Yeasin’s case presents interesting questions regarding the tension between some stu-

dents’ free-speech rights and other students’ * * * rights to receive an education absent

* * * sexual harassment.

Colleges and universities are not enclaves immune from the sweep of the First

Amendment. * * * The [courts] permit schools to circumscribe students’ free-speech rights

in certain contexts [particularly in secondary public schools].

* * * *

Sexual harassment can consist of language
or conduct that is so offensive it creates a
hostile environment.

First Amendment rights include the freedom
of speech, which is the right to express one-
self without government interference. This
right is guaranteed under the First Amend-
ment to the U.S. Constitution.

Moved to dismiss means that a party filed
a motion (applied to the court to obtain an
order) to dismiss a claim on the ground that
it had no basis in law.

To appeal is to request an appellate court to
review the decision of a lower court.

The second major section of the opinion
responds to the party’s appeal.

To circumscribe is to restrict.

An enclave is a distinct group within a larger

Exhibit 1A–3 A Sample Court Case, Continued


27APPENDIX TO CHAPTER 1: Law and Legal Reasoning

30301_ch01_hr_001-030.indd 27 8/31/18 3:08 PM

Yeasin argues that [three United States Supreme Court cases—Papish v. Board of Curators

of the University of Missouri, Healy v. James, and Widmar v. Vincent] clearly establish * * *

that universities may not restrict university-student speech in the same way secondary

public school officials may restrict secondary-school student speech. * * * Yeasin argues

these cases clearly establish his right to tweet about A.W. without the university being able

to place restrictions on, or discipline him for, * * * his tweets.

But none of the * * * cases present circumstances similar to his own. Papish, Healy,

and Widmar don’t concern university-student conduct that interferes with the rights of other

students or risks disrupting campus order.

* * * *

* * * In those cases no student had been charged with a crime against another student

and followed that up with sexually-harassing comments affecting her ability to feel safe while

attending classes. Dr. Durham had a reasonable belief based on the June 28, 2013 incident

and on Yeasin’s tweets that his continued enrollment at the university threatened to disrupt

A.W.’s education and interfere with her rights.

At the intersection of university speech and social media, First Amendment doctrine is

unsettled. Compare Keefe v. Adams [in which a federal appellate court concluded] that a col-

lege’s removal of a student from school based on off-campus statements on his social media

page didn’t violate his First Amendment free-speech rights, with J.S. v. Blue Mountain School

District [in which a different federal appellate court held] that a school district violated the First

Amendment rights of a plaintiff when it suspended her for creating a private social media profile

mocking the school principal.

In conclusion, Yeasin can’t establish that Dr. Durham violated clearly established law

when she expelled him, in part, for his * * * off-campus tweets.

* * * *


For the reasons stated, we aFFirm the [lower] court’s grant of Dr. Durham’s motion to


A reasonable belief exists when there is
a reasonable basis to believe that a crime
or other violation is being or has been

A doctrine is a rule, principle, or tenet of
the law.

Judges are obligated to follow the precedents
established in prior court decisions.
A  precedent is a decision that stands as
authority for deciding a subsequent case
involving identical or similar facts. Otherwise,
the decision may be persuasive, but it is not

In the third major section of the opinion, the
court states its decision.

To affirm a lower court’s ruling is to validate
the decision and give it legal force.

Here, establish means to settle firmly.

Exhibit 1A–3 A Sample Court Case, Continued

28 UNIT ONE: The Legal Environment of Business

30301_ch01_hr_001-030.indd 28 8/31/18 3:08 PM

Cases Presented in This Text Note that the cases in this text have already been ana-
lyzed and partially briefed by the author. The essential aspects of each case are presented in
a convenient format consisting of three basic sections: Background and Facts, In the Words of
the Court (excerpts from the court’s opinion), and Decision and Remedy.

In addition to this basic format, each case is followed by one or two Critical Thinking
questions regarding some issue raised by the case. We offer these questions as tools to help
you develop your critical-thinking and legal reasoning skills. Finally, a section entitled Impact
of This Case on Today’s Law concludes the Classic Cases that appear in selected chapters to
indicate the significance of the case for today’s legal landscape.

Editorial Practice You will note that triple asterisks (* * *) and quadruple asterisks (* * * *)
frequently appear in the excerpted court opinions. The triple asterisks indicate that we have
deleted a few words or sentences from the opinion for the sake of readability or brevity.
Quadruple asterisks mean that an entire paragraph (or more) has been omitted. Addition-
ally, when the opinion cites another case or legal source, the citation to the case or source
has been omitted, again for the sake of readability and brevity. These editorial practices are
continued in the other court opinions presented in this book. Lastly, whenever we present
a court opinion that includes a term or phrase that may not be readily understandable, a
bracketed definition or paraphrase has been added.

How to Brief Cases
Knowing how to read and understand court opinions and the legal reasoning used by the
courts is an essential step in performing legal research. A further step is “briefing,” or sum-
marizing, the case. Briefing cases facilitates the development of critical-thinking skills that
are crucial for businesspersons when evaluating relevant business law.

Legal researchers routinely brief cases by reducing the texts of the opinions to their
essential elements. Generally, when you brief a case, you first summarize the background
and facts of the case, as the authors have done for most of the cases presented in this text.
You then indicate the issue (or issues) before the court. An important element in the case
brief is, of course, the court’s decision on the issue and the legal reasoning used by the court
in reaching that decision.

There is a fairly standard procedure that you follow when you “brief” any court case. You
must first read the case opinion carefully. When you feel that you understand the case, you
can prepare a brief of it. Although the format of the brief may vary, typically it will present
the essentials of the case under headings such as the following:

1. Citation. Give the full citation for the case, including the name of the case, the court that decided it,
and the year it was decided.

2. Facts. Briefly indicate (a) the reasons for the lawsuit, (b) the identity and arguments of the plaintiff(s)
and defendant(s), respectively, and (c) the lower court’s decision—if the decision is from a reviewing

3. Issue. Concisely phrase, in the form of a question, the essential issue before the court. (If more than
one issue is involved, you may have two—or even more—questions.)

4. Decision. Indicate here—with a “yes” or “no,” if possible—the court’s answer to the question (or
questions) in the Issue section.

5. Reason. Summarize as briefly as possible the reasons given by the court for its decision (or deci-
sions) and the case or statutory law relied on by the court in arriving at its decision.

See this chapter’s Business Law Analysis feature for a sample case brief and a discussion of
how the brief relates to the IRAC method of legal reasoning.

29APPENDIX TO CHAPTER 1: Law and Legal Reasoning

30301_ch01_hr_001-030.indd 29 8/31/18 3:08 PM

Here is a sample case brief of the opin-ion shown in Exhibit 1A–3.
1. Citation. Yeasin v. Durham, United

States Court of Appeals for the Tenth
Circuit, 719 Fed.Appx. 844 (2018).

2. Facts. Navid Yeasin and A.W. were
students at the University of Kansas
(KU). They dated for about nine months.
When A.W. tried to end the relation-
ship, Yeasin restrained her in his car,
took her phone, and threatened to make
the “campus environment so hostile
that she would not attend any university
in the state of Kansas.” He repeatedly
tweeted disparaging comments about
her. Tammara Durham, the university’s
vice provost for student affairs, found
that Yeasin’s conduct and tweets vio-
lated the school’s student code of
conduct and sexual-harassment policy.
She expelled him. Yeasin filed a suit in
a Kansas state court against Durham,
and the university reinstated him. He
then filed a suit in a federal district
court against Durham, claiming that she
had violated his First Amendment rights
by expelling him for the content of his
off-campus speech. The court dismissed
the claim. Yeasin appealed to the U.S.
Court of Appeals for the Tenth Circuit.

3. Issue. Could KU and Dr. Durham expel
Yeasin for his tweets?

4. Decision. Yes. The U.S. Court
of Appeals for the Tenth Circuit
affirmed the lower court’s dismissal of
Yeasin’s suit. “Yeasin can’t establish
that Dr. Durham violated clearly estab-
lished law when she expelled him.”

5. Reason. Taken together, court deci-
sions show that “at the intersection
of university speech and social media,

First Amendment doctrine is unset-
tled.” In some cases, the courts permit
schools to circumscribe students’ free-
speech rights in certain contexts. Yea-
sin argued, however, that three cases
decided by the United States Supreme
Court clearly established his right to
tweet about A.W. without the univer-
sity being able to place restrictions
on, or discipline him for, his tweets.
In response, the court here pointed
out that those cases did not involve
circumstances similar to Yeasin’s situ-
ation. In those cases, no student had
been charged with a crime against
another student and then made sex-
ually harassing comments affecting
her ability to feel safe while attending
classes. And, the court concluded, in
this case Dr. Durham could reasonably
believe, based on Yeasin’s conduct and
his tweets, that his presence at the uni-
versity would disrupt A.W.’s education
and interfere with her rights.

Analysis: Notice how the sections in
a case brief include the information nec-
essary to perform IRAC legal reasoning.
(Recall from the chapter that IRAC stands
for Issue, Rule of Law, Application, and
Conclusion.) Step 1 in IRAC reasoning is
Issue. You need to understand the relevant
facts, identify the plaintiff and defendant,
and determine the specific issue presented
by the case. You will find this information
in the first two sections of your brief. The
Facts section identifies the plaintiff and
the defendant. Yeasin is the plaintiff.
Dr. Tammara Durham is the defendant. The
Facts also describes the events leading up
to this suit and the allegations made by
the plaintiff in the suit. Because this case
is a decision of one of the U.S. courts of

appeals, the lower court’s ruling, the party
appealing, and the appellant’s contention
on appeal are included here.

It is important to carefully frame the
issue so that you can look for the appropri-
ate Rule of law that will guide a decision.
In this case, the court considers whether the
University of Kansas, where Yeasin was a
student, and Dr. Durham, the university’s vice
provost for student affairs, violated clearly
established law when they expelled him.

Result and Reasoning: The Reason
section includes references to the relevant
laws and legal principles that the court
applied in coming to the conclusion arrived
at in the case. The Rule of Law in this case
included court decisions on whether, and in
what circumstances, schools can circum-
scribe students’ free-speech rights. The
Reason section also explains the court’s
Application of the law to the facts in this
case. Because Yeasin was charged with a
crime for sexually harassing tweets that
caused another student to fear for her
safety, the court reasoned that the univer-
sity had legitimate reasons for disciplining
him. Dr. Durham could reasonably believe
that Yeasin’s presence at the university
would disrupt A.W.’s education and inter-
fere with her rights. The court arrived at
the Conclusion that this was one of those
contexts in which a court will permit a
school to circumscribe students’ free-
speech rights.

Case Briefing and IRAC Legal Reasoning Business Law

30 UNIT ONE: The Legal Environment of Business

30301_ch01_hr_001-030.indd 30 8/31/18 3:08 PM






Constitutional Law 2
Learning Objectives
The four Learning Objectives below are
designed to help improve your understand-
ing. After reading this chapter, you should
be able to answer the following questions:

1. What constitutional clause
gives the federal government
the power to regulate com-
mercial activities among the

2. What is the Bill of Rights?
What freedoms does the First
Amendment guarantee?

3. Where in the Constitution can
the due process clause be

4. Which constitutional amend-
ments have been interpreted
as implying a right to privacy?

“The United States
Constitution has
proved itself the
most marvelously
elastic compilation of
rules of government
ever written.”

Franklin D. Roosevelt
(Thirty-second president of the
United States, 1933–1945)

The U.S. Constitution is brief. It contains only about seven
thousand words—less than one-third as many as the average
state constitution. Its brevity explains, in part, why the Con-
stitution has proved to be so “marvelously elastic,” as Franklin
Roosevelt described it in the chapter-opening quotation.
It might also explain why the U.S. Constitution has survived
for more than two hundred years—longer than any other
written constitution in the world.

Laws that govern business have their origin in the lawmak-
ing authority granted by the Constitution. Neither Congress nor
any state can enact a law that conflicts with the Constitution.

Disputes over constitutional rights frequently come before
the courts. Consider Norman’s, Inc., a family-owned pharmacy
in Olympia, Washington. The owners of Norman’s have reli-
gious objections to the use of Plan B emergency contraception

(“the morning-after pill”). Never theless, Washington state requires every pharmacy to stock
an assortment of drugs approved by the Food and Drug Administration (FDA). In addition,
Washington state has enacted new administrative rules that effectively prevent pharmacies
from refusing to provide FDA-approved devices or drugs (such as Plan B contraception) to
patients for religious reasons.

Norman’s owners believe that these state administrative rules violate their constitutional
rights to freedom of religion and equal protection, and file a suit against Washington State
Department of Health. Do these rules violate the free exercise clause? Do they violate the
equal protection clause? In this chapter, we examine these and other constitutional issues
that businesses and courts must deal with in today’s world.








30301_ch02_hr_031-056.indd 31 8/30/18 12:40 PM

2–1 The Constitutional Powers of Government
Following the Revolutionary War, the United States created a confederal form of government
in which the states had the authority to govern themselves and the national government could
exercise only limited powers. When problems arose because the nation was facing an
economic crisis and state laws interfered with the free flow of commerce, a national con-
vention was called. The delegates drafted the U.S. Constitution. This document, after its
ratification by the states in 1789, became the basis for an entirely new form of government.

2–1a A Federal Form of Government
The new government created by the Constitution reflected a series of compromises made
by the convention delegates on various issues. Some delegates wanted sovereign power to
remain with the states, whereas others wanted the national government alone to exercise
sovereign power. The end result was a compromise—a federal form of government in which the
national government and the states share sovereign power.

Federal Powers The Constitution sets forth specific powers that can be exercised by the
national government. It also provides that the national government has the implied power
to undertake actions necessary to carry out its expressly designated powers. All other pow-
ers are “reserved” to the states.

Regulatory Powers of the States As part of their inherent
sovereignty (power to govern themselves), state governments
have the authority to regulate certain affairs within their bor-
ders. This authority stems, in part, from the Tenth Amendment,
which reserves all powers not delegated to the national govern-
ment to the states or to the people.

State regulatory powers are often referred to as police
powers. The term encompasses more than just the enforce-
ment of criminal laws. Police powers also give a state govern-
ment broad rights to regulate private activities to protect or
promote the public order, health, safety, morals, and general
welfare. Fire and building codes, antidiscrimination laws,
parking regulations, zoning restrictions, licensing require-
ments, and thousands of other state statutes have been
enacted pursuant to states’ police powers. Local govern-
ments, such as cities, also exercise police powers.

2–1b Relations among the States
The U.S. Constitution also includes provisions concerning
relations among the states in our federal system. Particularly
important are the privileges and immunities clause and the full
faith and credit clause.

The Privileges and Immunities Clause Article IV, Section 2, of the Constitution pro-
vides that the “Citizens of each State shall be entitled to all Privileges and Immunities of
Citizens in the several States.” This clause is often referred to as the interstate privileges
and immunities clause. It prevents a state from imposing unreasonable burdens on citizens of
another state—particularly with regard to means of livelihood or doing business.

When a citizen of one state engages in basic and essential activities in another state (the
“foreign state”), the foreign state must have a substantial reason for treating the nonresi-
dent differently than its own residents. Basic activities include transferring property, seeking

Federal Form of Government A
system of government in which the
states form a union and the sovereign
power is divided between the central
government and the member states.

Sovereignty The power of a state
to do what is necessary to govern
itself. Individual state sovereignty is
determined by the U.S. Constitution.

Police Powers Powers possessed
by the states as part of their inherent
sovereignty. These powers may be
exercised to protect or promote the
public order, health, safety, morals,
and general welfare.

Privileges and Immunities
Clause Article IV, Section 2, of the
U.S. Constitution requires states not
to discriminate against one another’s
citizens. A resident of one state,
when in another state, cannot be
denied the privileges and immunities
of that state.

Because the Constitution reserves to the states all powers not
delegated to the national government, the states can and do regulate
many types of commercial activities within their borders. So, too,
do municipalities. One of these powers is the imposition of building
codes. What is the general term that applies to such powers?









32 UNIT ONE: The Legal Environment of Business

30301_ch02_hr_031-056.indd 32 8/30/18 12:40 PM

employment, and accessing the court system. The foreign state must also establish that its
reason for the discrimination is substantially related to the state’s ultimate purpose in adopt-
ing the legislation or regulating the activity.

The Full Faith and Credit Clause Article IV, Section 1, of the U.S. Constitution provides
that “Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial
Proceedings of every other State.” This clause, which is referred to as the full faith and credit clause,
applies only to civil matters. It ensures that rights established under deeds, wills, contracts, and
similar instruments in one state will be honored by other states. It also ensures that any judicial
decision with respect to such property rights will be honored and enforced in all states.

The legal issues raised by same-sex marriage involve, among other things, the full faith and
credit clause, because that clause requires each state to honor marriage decrees issued by another
state. See this chapter’s Managerial Strategy feature for a discussion of marriage equality laws.

Full Faith and Credit Clause
A provision in Article IV, Section 1, of
the U.S. Constitution that ensures that
rights established under deeds, wills,
contracts, and similar instruments in
one state will be honored by other
states and that judicial decisions will
be honored and enforced in all states.

The debate over same-sex marriage has been raging across the country for years.
The legal issues raised by marriage equality
involve privacy rights and equal protection.
Although marriage equality may not appear
at first glance to be business related, it is an
important legal issue for managers. Com-
panies like Barilla USA, Chick-fil-A, Exxon
Mobil, and Target Corporation have lost sig-
nificant business for purportedly supporting
antigay organizations and legislation.

The Definition of Marriage
Before 1996, federal law did not define
marriage, and the U.S. government recog-
nized any marriage that was recognized by
a state. Then Congress passed the Defense
of Marriage Act (DOMA), which explicitly
defined marriage as the union of one man
and one woman. DOMA was later chal-
lenged, and a number of federal courts
found it to be unconstitutional in the con-
text of bankruptcy, public employee bene-
fits, and estate taxes. In 2013, the United
States Supreme Court struck down part of
DOMA as unconstitutional.a Today, once
again, no federal law defines marriage.

Bans on Same-Sex
Marriage Eliminated by
the Supreme Court
Over time, federal courts became increas-
ingly likely to invalidate state bans on
same-sex marriage. In 2013, a federal
district court held that Utah’s same-sex
marriage ban was unconstitutional.b In
2014, federal district courts in Arkansas,
Mississippi, and Oklahoma struck down
state same-sex marriage bans.c Moreover,
public sentiment on the issue had shifted,
and more states recognized the rights of
same-sex couples. By 2015, thirty-seven
states, as well as the District of Columbia,
had legalized same-sex marriage.

Ultimately, the United States Supreme
Court determined that the remaining
state-level prohibitions on same-sex mar-
riage were unconstitutional. In a land-
mark decision, the Court ruled that the
Fourteenth Amendment requires individ-
ual states to (1) issue marriage licenses
to same-sex couples and (2) recognize

same-sex marriages performed in other

The landmark Supreme Court decision
requiring all states to recognize same-sex
marriage means that businesses must
make adjustments. Company policies need
to be revised to specify how same-sex
partners will be treated in terms of family
and medical leave, health-insurance cover-
age, pensions, and other benefits.

Business Questions
1. Can a business manager’s religious beliefs
legally factor into the business’s hiring and
treatment of same-sex partners? Why or
why not?

2. Must business owners in all states provide
the same benefits to employees in a same-
sex union as they do to heterosexual couples?

Marriage Equality and the Constitution Managerial Strategy

a. United States v. Windsor, 570 U.S. 744, 133 S.Ct. 2675, 186
L.Ed.2d 808 (2013).

c. Campaign for Southern Equality v. Bryant, 64 F.Supp.3d
906 (S.D.Miss. 2014); Jernigan v. Crane, 64 F.Supp.3d
1260 (E.D.Ark. 2014); and Bishop v. U.S. ex rel. Holder, 962
F.Supp.2d 1252 (N.D.Okla. 2014).

d. Obergefell v. Hodges, ___ U.S. ___, 135 S.Ct. 2584, 192
L.Ed.2d 609 (2015). See also, Pavan v. Smith, ___ U.S. ___,
137 S.Ct. 2075, 198 L.Ed.2d 636 (2017).

b. Kitchen v. Herbert, 961 F.Supp.2d 1181 (D.Utah 2013).

33CHAPTER 2: Constitutional Law

30301_ch02_hr_031-056.indd 33 8/30/18 12:40 PM

The full faith and credit clause has contributed to the
unity of American citizens because it protects their legal
rights as they move about from state to state. It also pro-
tects the rights of those to whom they owe obligations,
such as persons who have been awarded monetary damages
by courts. The ability to enforce such rights is extremely
important for the conduct of business in a country with a
very mobile citizenry.

2–1c The Separation of Powers
To make it difficult for the national government to use its
power arbitrarily, the Constitution divided the national gov-
ernment’s powers among the three branches of government.
The legislative branch makes the laws, the executive branch
enforces the laws, and the judicial branch interprets the laws.
Each branch performs a separate function, and no branch
may exercise the authority of another branch.

Additionally, a system of checks and balances allows each branch to limit the actions of the
other two branches, thus preventing any one branch from exercising too much power. The
following are examples of these checks and balances:

1. The legislative branch (Congress) can enact a law, but the executive branch (the president) has the
constitutional authority to veto that law.

2. The executive branch is responsible for foreign affairs, but treaties with foreign governments require
the advice and consent of the Senate.

3. Congress determines the jurisdiction of the federal courts, and the president appoints federal judges,
with the advice and consent of the Senate. The judicial branch has the power to hold actions of the
other two branches unconstitutional.

2–1d The Commerce Clause
To prevent states from establishing laws and regulations that would interfere with trade and
commerce among the states, the Constitution explicitly gave the national government the
power to regulate interstate commerce. Article I, Section 8, of the U.S. Constitution expressly
permits Congress “[t]o regulate Commerce with foreign Nations, and among the several
States, and with the Indian Tribes.” This clause, referred to as the commerce clause, has had
a greater impact on business than any other provision in the Constitution.

Initially, the commerce power was interpreted as being limited to interstate commerce
(commerce among the states) and not applicable to intrastate commerce (commerce within
a state). In 1824, however, the United States Supreme Court decided the case of Gibbons
v. Ogden (see this chapter’s Landmark in the Law feature). The Court ruled that commerce
within a state could also be regulated by the national government as long as the commerce
substantially affected commerce involving more than one state.

The Expansion of National Powers under the Commerce Clause As the nation
grew and faced new kinds of problems, the commerce clause became a vehicle for the addi-
tional expansion of the national government’s regulatory powers. Even activities that
seemed purely local came under the regulatory reach of the national government if those
activities were deemed to substantially affect interstate commerce. In 1942, the Supreme








How did the U.S. Constitution’s full faith and credit clause affect the
issue of equality for same-sex marriages?

Checks and Balances The system
under which the powers of the national
government are divided among three
separate branches—the executive,
legislative, and judicial branches—
each of which exercises a check on
the actions of the others.

Commerce Clause The provision
in Article I, Section 8, of the U.S.
Constitution that gives Congress the
power to regulate interstate commerce.

Learning Objective 1
What constitutional clause
gives the federal government
the power to regulate
commercial activities among
the states?

34 UNIT ONE: The Legal Environment of Business

30301_ch02_hr_031-056.indd 34 8/30/18 12:40 PM

Court held that wheat production by an individual farmer intended wholly for consumption
on his own farm was subject to federal regulation.1

The following Classic Case involved a challenge to the scope of the national government’s
constitutional authority to regulate local activities.

1. Wickard v. Filburn, 317 U.S. 111, 63 S.Ct. 82, 87 L.Ed. 122 (1942).

The commerce clause of the U.S. Consti-tution gives Congress the power “[t]o
regulate Commerce with foreign Nations,
and among the several States, and with
the Indian Tribes.” Before the commerce
clause came into existence, states tended
to restrict commerce within and beyond
their borders, which made trade more costly
and inefficient. The goal of the clause was
to unify the states’ commerce policies and
improve the efficiency of exchanges.

The problem was that although
the commerce clause gave Congress
some authority to regulate trade among
the states, the extent of that power was
unclear. What  exactly does “to regulate
commerce” mean? What does “commerce”
entail? These questions came before
the United States Supreme Court in 1824
in the case of Gibbons v. Ogden.a

Background In 1803, Robert Fulton,
the inventor of the steamboat, and Robert
Livingston, who was the ambassador
to France, secured a monopoly from the
New York legislature on steam navigation
on the waters in the state of New York.
Their monopoly extended to interstate
waters—waterways between New York
and another state. Fulton  and Livingston
licensed Aaron Ogden, a  former governor
of New Jersey and a U.S. senator, to

operate steam- powered ferryboats bet-
ween New York and New Jersey.

Thomas Gibbons already operated a
ferry service between New Jersey and New
York, which had been licensed by Congress
under a 1793 act regulating trade along the
coast. Although the federal government
had licensed Gibbons to operate boats in
interstate waters, he did not have the state
of New York’s permission to compete with
Ogden in that area. Ogden sued Gibbons.
The New York state courts granted Ogden’s
request for an injunction—an order prohib-
iting Gibbons from operating in New York
waters. Gibbons appealed the decision to
the United States Supreme Court.

Marshall’s Decision The issue before
the Court was whether the law regulated
commerce that was “among the several
states.” The chief justice on the Supreme
Court was John Marshall, an advocate of
a strong national government. Marshall
defined the word commerce as used in the
commerce clause to mean all commercial
intercourse—that is, all business deal-
ings that affect more than one state. This
broader definition included navigation.

In addition to expanding the definition
of commerce, Marshall also validated
and increased the power of the national
legislature to regulate commerce. Said
Marshall, “What is this power? It is the
power . . . to prescribe the rule by which
commerce is to be governed.”

Marshall held that the power to regu-
late interstate commerce is an exclusive
power  of  the  national government. This
power includes the power to regulate any
intrastate commerce that substantially
affects interstate commerce. Accordingly,
the Court decided in favor of Gibbons.

Application to Today’s World
Marshall’s broad definition of the com-
merce power established the foundation
for the expansion of national powers in the
years to come. Today, the national govern-
ment continues to rely on the commerce
clause for its constitutional authority to
regulate business activities.

Marshall’s conclusion that the power
to regulate interstate commerce was an
exclusive power of the national government
has also had significant consequences. By
implication, this means that a state cannot
regulate activities that extend beyond its
borders, such as out-of-state online gam-
bling operations that affect the welfare of
in-state citizens. It also means that state
regulations over in-state activities normally
will be invalidated if the regulations sub-
stantially burden interstate commerce.

Gibbons v. Ogden (1824) Landmark
in the Law

a. 22 U.S. (9 Wheat.) 1, 6 L.Ed. 23 (1824).

35CHAPTER 2: Constitutional Law

30301_ch02_hr_031-056.indd 35 8/30/18 12:40 PM

Background and Facts In the 1950s, the
United States Supreme Court ruled that racial
segregation imposed by the states in school
systems and other public facilities violated the
Constitution. Privately owned facilities were not
affected until Congress passed the Civil Rights Act
of 1964, which prohibited racial discrimination in
“establishments affecting interstate commerce.”

The owner of the Heart of Atlanta Motel, in
violation of the Civil Rights Act of 1964, refused to rent rooms to
African Americans. The motel owner brought an action in a fed-
eral district court to have the Civil Rights Act declared unconstitu-
tional on the ground that Congress had exceeded its constitutional
authority to regulate commerce by enacting the statute.

The owner argued that his motel was not engaged in interstate
commerce but was “of a purely local character.” The motel, how-
ever, was accessible to state and interstate highways. The owner
advertised nationally, maintained billboards throughout the state,
and accepted convention trade from outside the state (75 percent
of the guests were residents of other states).

The district court ruled that the act did not violate the Consti-
tution and enjoined (prohibited) the owner from discriminating on
the basis of race. The owner appealed. The case ultimately went
to the United States Supreme Court.

In the Words of the Court
Mr. Justice CLARKE delivered the opinion of the Court.

* * * *
While the Act as adopted carried no congressional findings,

the record of its passage through each house is replete with evi-
dence of the burdens that discrimination by race or color places
upon interstate commerce * * * . This testimony included the fact
that our people have become increasingly mobile with millions of
all races traveling from State to State; that Negroes in particular
have been the subject of discrimination in transient accommoda-
tions, having to travel great distances to secure the same; that
often they have been unable to obtain accommodations and have
had to call upon friends to put them up overnight. * * * These
exclusionary practices were found to be nationwide, the Under
Secretary of Commerce testifying that there is “no question that
this discrimination in the North still exists to a large degree” and
in the West and Midwest as well * * * .

This testimony indicated a qualitative as
well as quantitative effect on interstate travel
by Negroes. The former was the obvious impair-
ment of the Negro traveler’s pleasure and con-
venience that resulted when he continually was
uncertain of finding lodging. As for the latter,
there was evidence that this uncertainty stem-
ming from racial discrimination had the effect
of discouraging travel on the part of a substan-

tial portion of the Negro community * * * . We shall not burden
this opinion with further details since the voluminous testimony
presents overwhelming evidence that discrimination by hotels and
motels impedes interstate travel.

* * * *
It is said that the operation of the motel here is of a purely

local character. But, assuming this to be true, “if it is interstate
commerce that feels the pinch, it does not matter how local the
operation that applies the squeeze.’’ * * * Thus the power of Con-
gress to promote interstate commerce also includes the power to
regulate the local incidents thereof, including local activities in
both the States of origin and destination, which might have a sub-
stantial and harmful effect upon that commerce. [Emphasis added.]

Decision and Remedy The United States Supreme Court
upheld the constitutionality of the Civil Rights Act of 1964. The power
of Congress to regulate interstate commerce permitted the enact-
ment of legislation that could halt local discriminatory practices.

Critical Thinking

• What If the Facts Were Different? If this case had
involved a small, private retail business that did not advertise
nationally, would the result have been the same? Why or why not?
• Impact of This Case on Today’s Law If the United States
Supreme Court had invalidated the Civil Rights Act of 1964, the legal
landscape of the United States would be much different today. The
act prohibits discrimination based on race, color, national origin,
religion, or gender in all “public accommodations,” including hotels
and restaurants. The act also prohibits discrimination in employment
based on these criteria. Although state laws now prohibit many of
these forms of discrimination as well, the protections available vary
from state to state—and it is not certain whether such laws would
have been passed had the outcome in this case been different.

Heart of Atlanta Motel v. United States
Supreme Court of the United States, 379 U.S. 241, 85 S.Ct. 348, 13 L.Ed.2d 258 (1964).

Classic Case 2.1

President Lyndon Johnson signs the
1964 Civil Rights Act.










36 UNIT ONE: The Legal Environment of Business

30301_ch02_hr_031-056.indd 36 8/30/18 12:40 PM

The Commerce Clause Today Today, at least theoretically, the power over commerce autho-
rizes the national government to regulate almost every commercial enterprise in the United
States. The breadth of the commerce clause permits the national government to legislate in areas
in which Congress has not explicitly been granted power. Only occasionally has the Supreme
Court curbed the national government’s regulatory authority under the commerce clause.

The Supreme Court has, for instance, allowed the federal government to regulate non-
commercial activities relating to medical marijuana that take place wholly within a state’s
borders. Spotlight Case Example 2.1 More than half the states, including California, have
adopted laws that legalize marijuana for medical purposes (and a handful of states now
permit the recreational use of marijuana). Marijuana possession, however, is illegal under
the federal Controlled Substances Act (CSA).2

After the federal government seized the marijuana that two seriously ill California women
were using on the advice of their physicians, the women filed a lawsuit. They argued that
it was unconstitutional for the federal statute to prohibit them from using marijuana for
medical purposes that were legal within the state.

The Supreme Court, though, held that Congress has the authority to prohibit the intra-
state possession and noncommercial cultivation of marijuana as part of a larger regulatory
scheme (the CSA).3 In other words, the federal government may still prosecute individuals
for possession of marijuana regardless of whether they reside in a state that allows the use
of marijuana. ■

The “Dormant” Commerce Clause The United States Supreme Court has interpreted
the commerce clause to mean that the national government has the exclusive authority to
regulate commerce that substantially affects trade and commerce among the states. This
express grant of authority to the national government, which is often referred to as the
“positive” aspect of the commerce clause, implies a negative aspect—that the states do not
have the authority to regulate interstate commerce. This negative aspect of the commerce
clause is often referred to as the “dormant” (implied) commerce clause.

The dormant commerce clause comes into play when state regulations affect interstate
commerce. In this situation, the courts normally weigh the state’s interest in regulating a
certain matter against the burden that the state’s regulation places on interstate commerce.
Because courts balance the interests involved, predicting the outcome in a particular case
can be extremely difficult.

Case Example 2.2 Maryland imposed personal income taxes on its residents at the state level
and the county level. Maryland residents who paid income tax in another state were allowed
a credit against the state portion of their Maryland taxes, but not the county portion. Several
Maryland residents who had earned profits in and paid taxes to other states but had not
received a credit against their county tax liability sued. They claimed that Maryland’s system
discriminated against interstate commerce because those who earned income in other states
paid more taxes than residents whose only income came from within Maryland. When the
case reached the United States Supreme Court in 2015, the Court held that Maryland’s per-
sonal income tax scheme violated the dormant commerce clause.4 ■

2–1e The Supremacy Clause
Article VI of the Constitution provides that the Constitution, laws, and treaties of the United
States are “the supreme Law of the Land.” This article, commonly referred to as the supremacy
clause, is important in the ordering of state and federal relationships.

2. 21 U.S.C. Sections 801 et seq.
3. Gonzales v. Raich, 545 U.S. 1, 125 S.Ct. 2195, 162 L.Ed.2d 1 (2005).
4. Comptroller of Treasury of Maryland v. Wynne, ___ U.S. ___, 135 S.Ct. 1787, 191 L.Ed.2d 813 (2015). Also see State of South Dakota v. Wayfair,

Inc., 2017 S.D. 56, 901 N.W.2d 754 (2017), cert. granted, 138 S.Ct. 735 (2018).

Supremacy Clause The provision
in Article VI of the U.S. Constitution
that the Constitution, laws, and
treaties of the United States are “the
supreme Law of the Land.”

37CHAPTER 2: Constitutional Law

30301_ch02_hr_031-056.indd 37 8/30/18 12:40 PM

Preemption Under the supremacy clause, when there is a direct conflict between a federal
law and a state law, the state law is rendered invalid. Because some powers are concurrent
(shared by the federal government and the states), however, it is necessary to determine
which law governs in a particular circumstance.

Preemption occurs when Congress chooses to act exclusively in a concurrent area. In this
circumstance, a valid federal statute or regulation will take precedence over a conflicting
state or local law or regulation on the same general subject.

Congressional Intent Often, it is not clear whether Congress, in pass-
ing a law, intended to preempt an entire subject area against state regula-
tion. In these situations, the courts determine whether Congress intended
to exercise exclusive power.

Generally, congressional intent to preempt will be found if a federal law
regulating an activity is so pervasive, comprehensive, or detailed that the
states have little or no room to regulate in that area. Also, when a federal
statute creates an agency—such as the National Labor Relations Board—
to enforce the law, the agency’s decisions in matters that come within its
jurisdiction will likely preempt state laws.

Classic Case Example 2.3 A man who alleged that he had been injured
by a faulty medical device (a balloon catheter that had been inserted into
his artery following a heart attack) sued the manufacturer. The case ulti-
mately came before the United States Supreme Court. The Court noted
that the relevant federal law (the Medical Device Amendments) included
a preemption provision.

Furthermore, the device had passed the U.S. Food and Drug
Administration’s rigorous premarket approval process. Therefore, the
Court ruled that the federal regulation of medical devices preempted
the man’s state law claims for negligence, strict liability, and implied
warranty.5 ■

2–2 Business and the Bill of Rights
The importance of having a written declaration of the rights of individuals eventually
caused the first Congress of the United States to enact twelve amendments to the Constitution
and submit them to the states for approval. The first ten of these amendments, commonly
known as the Bill of Rights, were adopted in 1791.

The Bill of Rights embodies a series of protections for the individual against various types
of conduct by the federal government.6 Some constitutional protections apply to business
entities as well. For example, corporations exist as separate legal entities, or legal persons,
and enjoy many of the same rights and privileges as natural persons do.

Summarized next are the protections guaranteed by the first ten amendments:

1. The First Amendment guarantees the freedoms of religion, speech, and the press and the rights to
assemble peaceably and to petition the government.

2. The Second Amendment guarantees the right to keep and bear arms.

3. The Third Amendment prohibits, in peacetime, the lodging of soldiers in any house without the
owner’s consent.

5. Riegel v. Medtronic, Inc., 552 U.S. 312, 128 S.Ct. 999, 169 L.Ed.2d 892 (2008); see also Mink v. Smith & Nephew, Inc., 860 F.3d 1319 (11th Cir. 2017).

Learning Objective 2
What is the Bill of Rights?
What freedoms does the
First Amendment guarantee?

6. One of the proposed amendments was ratified more than two hundred years later (in 1992) and became the Twenty-seventh Amendment to the

Preemption A doctrine under
which certain federal laws preempt,
or take precedence over, conflicting
state or local laws.

Bill of Rights The first ten
amendments to the U.S. Constitution.








How can preemption affect lawsuits against manu-
facturers of medical devices—such as a balloon
catheter used in heart procedures—when those
suits are based on state laws?

38 UNIT ONE: The Legal Environment of Business

30301_ch02_hr_031-056.indd 38 8/30/18 12:40 PM

4. The Fourth Amendment prohibits unreasonable searches and
seizures of persons or property.

5. The Fifth Amendment guarantees the rights to indictment (formal
accusation) by a grand jury, to due process of law, and to fair
payment when private property is taken for public use. The Fifth
Amendment also prohibits compulsory self-incrimination and
double jeopardy (prosecution for the same crime twice).

6. The Sixth Amendment guarantees the accused in a criminal
case the right to a speedy and public trial by an impartial jury
and with counsel. The accused has the right to cross-examine
witnesses against him or her and to solicit testimony from wit-
nesses in his or her favor.

7. The Seventh Amendment guarantees the right to a trial by jury in
a civil (noncriminal) case involving at least twenty dollars.7

8. The Eighth Amendment prohibits excessive bail and fines, as well
as cruel and unusual punishment.

9. The Ninth Amendment establishes that the people have rights in addition to those specified in the

10. The Tenth Amendment establishes that those powers neither delegated to the federal government
nor denied to the states are reserved for the states.

We will look more closely at several of these amendments in a later chapter. In this chapter,
we examine two important guarantees of the First Amendment—freedom of speech and freedom
of religion. First, though, we look at how the Bill of Rights puts certain limits on government.

2–2a Limits on Federal and State Governmental Actions
As originally intended, the Bill of Rights limited only the powers of the national government.
Over time, however, the United States Supreme Court “incorporated” most of these rights into
the protections against state actions afforded by the Fourteenth Amendment to the Constitution.

The Fourteenth Amendment Passed in 1868 after the Civil War, the Fourteenth Amend-
ment provides, in part, that “[n]o State shall . . . deprive any person of life, liberty, or prop-
erty, without due process of law.”

Starting in 1925, the Supreme Court began to define various rights and liberties guaran-
teed in the national Constitution as constituting “due process of law,” which was required of
state governments under the Fourteenth Amendment. Today, most of the rights and liberties
set forth in the Bill of Rights apply to state governments as well as to the national government.

Judicial Interpretation The rights secured by the Bill of Rights are not absolute. Many
of the rights guaranteed by the first ten amendments are described in very general terms.
For instance, the Second Amendment states that people have a right to keep and bear arms,
but it does not explain the extent of this right. As the Supreme Court once stated, the right
does not extend so far that people can “keep and carry any weapon whatsoever in any
manner whatsoever and for whatever purpose.”8 Legislatures can prohibit the carrying of
concealed weapons or certain types of weapons, such as machine guns.

Ultimately, the Supreme Court, as the final interpreter of the Constitution, gives mean-
ing to constitutional rights and determines their boundaries. (For a discussion of how the
Supreme Court may consider other nations’ laws when determining the appropriate balance
of individual rights, see this chapter’s Beyond Our Borders feature.)

7. Twenty dollars was forty days’ pay for the average person when the Bill of Rights was written.

Know This
Although most of the
rights in the Bill of
Rights apply to actions of
the states, some of them
apply only to actions of
the federal government.

8. District of Columbia v. Heller, 554 U.S. 570, 128 S.Ct. 2783, 171 L.Ed.2d 637 (2008).







39CHAPTER 2: Constitutional Law

30301_ch02_hr_031-056.indd 39 8/30/18 12:40 PM

2–2b The First Amendment—Freedom of Speech
A democratic form of government cannot survive unless people can freely voice their polit-
ical opinions and criticize government actions or policies. Freedom of speech, particularly
political speech, is thus a prized right, and traditionally the courts have protected this right
to the fullest extent possible.

Symbolic speech—gestures, movements, articles of clothing, and other forms of
expressive conduct—is also given substantial protection by the courts. The burning

of the American flag to protest government policies, for
instance, is a constitutionally protected form of expression.
Similarly, wearing a T-shirt with a photo of a presidential
candidate or taking a knee during the national anthem at a
sporting event would be a constitutionally protected form
of expression.

The test is whether a reasonable person would interpret the
conduct as conveying some sort of message. Example 2.4 As
a form of expression, Eric has gang signs tattooed on his torso,
arms, neck, and legs. If a reasonable person would interpret
this conduct as conveying a message, then it might be a pro-
tected form of symbolic speech. ■

Reasonable Restrictions Expression—oral, written, or
symbolized by conduct—is subject to reasonable restrictions.
A balance must be struck between a government’s obligation
to protect its citizens and those citizens’ exercise of their













Can a tattoo be considered symbolic speech? Why or why not?

Symbolic Speech Nonverbal
expressions of beliefs. Symbolic
speech, which includes gestures,
movements, and articles of clothing,
is given substantial protection by the

The United States Supreme Court inter-prets the rights provided in the U.S.
Constitution. Changing public views on
controversial topics, such as privacy in an
era of terrorist threats or the rights of gay
men and lesbians, may affect the way the
Supreme Court decides a case. But should
the Court also consider other nations’ laws
and world opinion when balancing individ-
ual rights in the United States?

Justices on the Supreme Court have
increasingly considered foreign law when
deciding issues of national importance. This
trend started in 2003 when, for the first
time ever, foreign law was cited in a major-
ity opinion of the Supreme Court. The case
was a controversial one in which the Court
struck down laws that prohibited oral and

anal sex between consenting adults of the
same gender. In the majority opinion, Jus-
tice Anthony Kennedy mentioned that the
European Court of Human Rights and other
foreign courts have consistently acknowl-
edged that homosexuals have a right “to
engage in intimate, consensual conduct.”a

The practice of looking at foreign law
has many critics, including some conserva-
tive members of the Supreme Court, who
believe that foreign views are irrelevant
to rulings on U.S. law. Other Supreme
Court justices, however, including Justice
Stephen Breyer and Justice Ruth Bader
Ginsburg, have publicly stated that in our

increasingly global community we should
not ignore the opinions of courts in the rest
of the world.

Critical Thinking
Should U.S. courts, and particularly the
United States Supreme Court, look to other
nations’ laws for guidance when deciding
important issues—including those involv-
ing rights granted by the Constitution? If
so, what impact might this have on their
decisions? Explain.a. Lawrence v. Texas, 539 U.S. 558, 123 S.Ct. 2472, 156

L.Ed.2d 508 (2003).

The Impact of Foreign Law on the
United States Supreme Court

Beyond Our Borders

40 UNIT ONE: The Legal Environment of Business

30301_ch02_hr_031-056.indd 40 8/30/18 12:40 PM

rights. Reasonableness is analyzed on a case-by-case basis. (See this chapter’s Adapting the
Law to the Online Environment feature for a discussion of how the United States Supreme
Court balanced the government’s obligation against the rights of a convicted sex offender.)

Content-Neutral Laws. Laws that regulate the time, manner, and place, but not the content,
of speech receive less scrutiny by the courts than do laws that restrict the content of expression.
If a restriction imposed by the government is content neutral, then a court may allow it. To be
content neutral, the restriction must be aimed at combating some secondary societal problem,
such as crime, and not be aimed at suppressing the expressive conduct or its message.

Courts have often protected nude dancing as a form of symbolic expression. Nevertheless,
the courts typically allow content-neutral laws that ban all public nudity. Case Example 2.5 Rita
Ora was charged with dancing nude at an annual “anti-Christmas” protest in Harvard Square
in Cambridge, Massachusetts. Ora argued that the statute was overly broad and unconstitu-
tional, and a trial court agreed. On appeal, a state appellate court reversed. The court found
that the statute was constitutional because it banned public displays of open and gross lewd-
ness in situations in which there was an unsuspecting or unwilling audience.9 ■

Laws That Restrict the Content of Speech. If a law regulates the content of the expres-
sion, it must serve a compelling state interest and must be narrowly written to achieve that
interest. Under the compelling government interest test, the government’s interest is balanced

9. Commonwealth of Massachusetts v. Ora, 451 Mass. 125, 883 N.E.2d 1217 (2008).

Compelling Government
Interest A test of constitutionality
that requires the government to
have convincing reasons for passing
any law that restricts fundamental
rights, such as free speech, or
distinguishes between people based
on a suspect trait.

Social media have become the predomi-nant means by which many Americans
communicate, obtain news updates, and dis-
cover what is “trending.” At least one state,
though, legislated a ban on the use of social
media by convicted sex offenders. One sex
offender chose to challenge the law.

North Carolina and
the Use of Social Media
North Carolina’s legislature passed the
“Protect Children from Sexual Predators
Act” in 2008. The goal, of course, was to
prevent predators from finding potential
victims on the Internet. Part of that act was
codified as North Carolina General Statute
14-202.5. About one thousand sex offend-
ers have been prosecuted for violating it.

A Long Road through the Courts
When convicted sex offender Lester
Packingham, Jr., wrote a Facebook post

about a traffic ticket, a police officer
saw the post and reported it, and
Packingham was convicted of violating a
criminal statute. He fought his conviction,
and on appeal it was overturned.a The
state, though, continued to fight the appel –
late decision. The North Carolina Supreme
Court ruled in favor of the state.

Packingham then appealed to the
United States Supreme Court, where he
prevailed.b The Court pointed out that pro-
hibiting sex offenders from accessing all
social media violates their First Amendment
rights to free speech. Further, this prohibi-
tion “bars access to what for many are the
principle sources of knowing current
events, checking ads for  employment,

speaking and listening in a modern public
square, and otherwise exploring the vast
realms of human thought and knowledge.”

Critical Thinking
The Court said in its opinion that “specific
criminal acts are not protected speech even
if speech is the means for their commis-
sion.” What use of social media and the
Internet might therefore still be unlawful
(and not protected free speech) for
registered sex offenders?

a. North Carolina v. Packingham, 229 N.C.App. 293, 748 S.E.2d
146 (2013).

b. Packingham v. North Carolina, ___ U.S. ___, 137 S.Ct.
1730, 198 L.Ed.2d 273 (2017).

Does Everyone Have a Constitutional
Right to Use Social Media?

Adapting the Law to the
Online Environment

41CHAPTER 2: Constitutional Law

30301_ch02_hr_031-056.indd 41 8/30/18 12:40 PM

against the individual’s constitutional right to be free of government interference. For the
statute to be valid, there must be a compelling governmental interest that can be furthered
only by the law in question.

The United States Supreme Court has held that schools may restrict students’ speech at
school events. Spotlight Case Example 2.6 Some high school students held up a banner saying
“Bong Hits 4 Jesus” at an off-campus but school-sanctioned event. The majority of the Court
ruled that school officials did not violate the students’ free speech rights when they confiscated
the banner and suspended the students for ten days. Because the banner could reasonably be
interpreted as promoting drugs, the Court concluded that the school’s actions were justified.
Several justices disagreed, however, noting that the majority’s holding creates a special excep-
tion that will allow schools to censor any student speech that mentions drugs.10 ■

In the following case, the issue before the court was whether a restriction on the making
of audio and video recordings of an agricultural production facility could meet the narrow
tailoring requirement.

10. Morse v. Frederick, 551 U.S. 393, 127 S.Ct. 2618, 168 L.Ed.2d 290 (2007).

Background and Facts An animal rights activist, who
worked at an Idaho dairy farm, secretly filmed ongoing animal
abuse. After being posted online, the film attracted national atten-
tion. The dairy owner fired the abusive employees, established a
code of conduct, and undertook an animal welfare audit of the
farm. Meanwhile, the Idaho state legislature enacted the Interfer-
ence with Agricultural Production statute targeted at undercover
investigation of agricultural operations. The statute’s “Recordings
Clause” criminalized making audio and video recordings of an agri-
cultural production facility without the owner’s consent.

The Animal Legal Defense Fund filed a suit in a federal dis-
trict court against Lawrence Wasden, the Idaho attorney general,
alleging that the statute’s Recordings Clause violated the First
Amendment of the U.S. Constitution. The court issued an injunc-
tion against its enforcement. The state appealed this order to the
U.S. Court of Appeals for the Ninth Circuit.

In the Words of the Court
McKEOWN, Circuit Judge:

* * * *
* * * The Recordings Clause regulates speech protected by

the First Amendment and is a classic example of a content-based
restriction that cannot survive strict scrutiny.

We easily dispose of Idaho’s claim that the act of creating
an audiovisual recording is not speech protected by the First
Amendment. This argument is akin to saying that even though
a book is protected by the First Amendment, the process of
writing the book is not. Audiovisual recordings are protected
by the First Amendment as recognized organs of public opinion
and as a significant medium for the communication of ideas.
[Emphasis added.]

* * * *
The Recordings Clause prohibits the recording of a defined

topic—“the conduct of an agricultural production facility’s oper-
ations.” * * * A regulation is content-based when it draws a
distinction on its face regarding the message the speaker con-
veys or when the purpose and justification for the law are con-
tent based. The Recordings Clause checks both boxes. * * * A
videographer could record an after-hours birthday party among
co-workers, a farmer’s antique car collection, or a historic maple
tree but not the animal abuse, feedlot operation, or slaughter-
house conditions.

* * * *
As a content-based regulation, the Recordings Clause is

constitutional only if it * * * is necessary to serve a compelling
state interest and is narrowly drawn to achieve that end. * * *

Animal Legal Defense Fund v. Wasden
United States Court of Appeals, Ninth Circuit, 878 F.3d 1184 (2018).

Case 2.2

42 UNIT ONE: The Legal Environment of Business

30301_ch02_hr_031-056.indd 42 8/30/18 12:40 PM

Idaho asserts that the Recordings Clause protects both property
and privacy interests. Even assuming a compelling government
interest, Idaho has not satisfied the narrow tailoring requirement
because the statute is both under-inclusive and over-inclusive.
[Emphasis added.]

[For example,] prohibiting only “audio or video recordings,” but
saying nothing about photographs, is suspiciously under-inclusive.
Why the making of audio and video recordings of operations would
implicate property or privacy harms, but photographs of the same
content would not, is a mystery.

* * * *
The Recordings Clause is also over-inclusive and suppresses

more speech than necessary to further Idaho’s stated goals of
protecting property and privacy. Because there are various other
laws at Idaho’s disposal that would allow it to achieve its stated
interests while burdening little or no speech, the law is not nar-
rowly tailored. For example, agricultural production facility owners
can vindicate their rights through tort laws against theft of trade
secrets, * * * invasion of privacy, [and] defamation.

Decision and Remedy The U.S. Court of Appeals for the
Ninth Circuit affirmed the lower court’s order preventing the
enforcement of the statute. A law that concerns rights under
the First Amendment must be narrowly tailored to accomplish
its objective. The federal appellate court concluded that Idaho’s
Recordings Clause could not “survive First Amendment scrutiny”
and was unconstitutional.

Critical Thinking

• Legal Environment How does the making of “audio and
video recordings of an agricultural production facility” fall under
the protection of the First Amendment?

• What If the Facts Were Different? Suppose that instead
of banning recordings of an agricultural production facility’s oper-
ations, the state had criminalized misrepresentations by journal-
ists to gain access to such a facility. Would the result have been
different? Explain.

Can a high school suspend teenagers from extracurricular
activities because they posted suggestive photos of them-
selves online at social networking sites? T.V. and M.K. were students at a public high school.
During summer sleepovers, the girls took photos of each other pretending to suck penis-shaped,
rainbow-colored lollipops and holding them in various suggestive positions. They later posted the
photos on Facebook, MySpace, and Photo Bucket to be seen by persons granted “friend” status or
given a password. When a parent complained to the school about the provocative online display,
school officials suspended both girls from the high school volleyball team. M.K. was also suspended
from the cheerleading squad and the show choir. Through their parents, the girls filed a lawsuit
claiming that the school had violated their First Amendment rights.

A federal judge in Indiana ruled that a high school did not have the right to punish students for
posting suggestive photos of themselves on the Internet. Expressive conduct is entitled to First
Amendment protection if it is intended to convey a particular message and is likely to be understood
by those viewing it as expressing a message. Here, both girls testified that they were just trying to
be funny when they took the photos and posted them online for their friends to see. The court rea-
soned that the conduct depicted in the photos was intended to be humorous and would be under-
stood as such by their teenage audience. Therefore, the photos were entitled to First Amendment
protection as symbolic speech.11

11. T.V. ex rel. B.V. v. Smith-Green Community School Corp., 807 F.Supp.2d 767 (N.D.Ind. 2011).

Ethical Issue

43CHAPTER 2: Constitutional Law

30301_ch02_hr_031-056.indd 43 8/30/18 12:40 PM

Corporate Political Speech Political speech by corporations also falls within the pro-
tection of the First Amendment. Many years ago, the United States Supreme Court reviewed
a Massachusetts statute that prohibited corporations from making political contributions or
expenditures that individuals were permitted to make. The Court ruled that the Massachusetts
law was unconstitutional because it violated the right of corporations to freedom of speech.12
The Court has also held that a law prohibiting a corporation from using bill inserts to express
its views on controversial issues violated the First Amendment.13

Corporate political speech continues to be given significant protection under the First
Amendment. Classic Case Example 2.7 In Citizens United v. Federal Election Commission,14
the Supreme Court overturned a twenty-year-old precedent on campaign financing. The case
involved Citizens United, a nonprofit corporation.

Citizens United had produced a film called Hillary: The Movie that was critical of Hillary
Clinton, who was seeking the Democratic presidential nomination. Campaign-finance law
prohibited Citizens United from broadcasting the movie, however. The Court ruled that the
restrictions were unconstitutional and that the First Amendment prevents limits from being
placed on independent political expenditures by corporations. ■

Commercial Speech The courts also give sub-
stantial protection to commercial speech, which
consists of communications— primarily advertising
and marketing—made by business firms that involve
only their commercial interests. The protection given
to commercial speech under the First Amendment is
not as extensive as that afforded to noncommercial
speech,  however. A state may restrict certain kinds
of  advertising, for instance, in the interest of protect-
ing consumers from being misled.

States also have a legitimate interest in the
beautification of roadsides, and this interest allows
states to place restraints on billboard advertising.
Example 2.8 Café Erotica, a nude dancing establish-
ment, sues the state after being denied a permit
to erect a billboard along an interstate highway in
Florida. Because of the state’s legitimate interest
in highway beautification and safety, a court will
likely rule that it is not an unconstitutional restraint
on commercial speech. ■

Generally, a restriction on commercial speech will be considered valid as long as it
(1)  seeks to implement a substantial government interest, (2) directly advances that
interest, and (3) goes no further than necessary to accomplish its objective. A substantial
government interest exists when the government has an important stake in the matter at
hand. For instance, the substantial-interest requirement limits the power of the government
to regulate commercial speech.

At issue in the following Spotlight Case was whether a government agency had unconsti-
tutionally restricted commercial speech when it prohibited the use of a certain illustration
on beer labels.

12. First National Bank of Boston v. Bellotti, 435 U.S. 765, 98 S.Ct. 1407, 55 L.Ed.2d 707 (1978).
13. Consolidated Edison Co. v. Public Service Commission, 447 U.S. 530, 100 S.Ct. 2326, 65 L.Ed.2d 319 (1980).
14. Citizens United v. Federal Election Commission, 558 U.S. 310, 130 S.Ct. 876, 175 L.Ed.2d 753 (2010).

“If the freedom of
speech is taken away,
then dumb and silent
we may be led like
sheep to the slaughter.”

George Washington
(First president of the
United States, 1789–1797)

The U.S. Supreme Court decision Citizens United allows corporations to spend
to elect or defeat candidates for president and Congress. Why did this decision
upset some people?











44 UNIT ONE: The Legal Environment of Business

30301_ch02_hr_031-056.indd 44 8/30/18 12:40 PM

Bad Frog Brewery, Inc. v. New York State Liquor Authority
United States Court of Appeals, Second Circuit, 134 F.3d 87 (1998).

Background and Facts Bad Frog Brew-
ery, Inc., makes and sells alcoholic beverages.
Some of the beverages feature labels with a
drawing of a frog making the gesture gener-
ally known as “giving the finger.” Renaissance
Beer Company was Bad Frog’s authorized
New York distributor. Renaissance applied to
the New York State Liquor Authority (NYSLA)
for brand label approval, as required by state
law before the beer could be sold in New York.
The NYSLA denied the application, in part, because “the label
could appear in grocery and convenience stores, with obvious
exposure on the shelf to children of tender age.”

Bad Frog filed a suit in a federal district court against the
NYSLA, asking for, among other things, an injunction against the
denial of the application. The court granted summary judgment
in favor of  the NYSLA. Bad Frog appealed to the U.S. Court of
Appeals for the Second Circuit.

In the Words of the Court
Jon O. NEWMAN, Circuit Judge.

* * * *
* * * To support its asserted power to ban Bad Frog’s labels

[NYSLA advances] * * * the State’s interest in “protecting children
from vulgar and profane advertising” * * * .

[This interest is] substantial * * * . States have a compelling
interest in protecting the physical and psychological well-being of
minors * * * . [Emphasis added.]

* * * *
* * * NYSLA endeavors to advance the state interest in pre-

venting exposure of children to vulgar displays by taking only the
limited step of barring such displays from the labels of alcoholic
beverages. In view of the wide currency of vulgar displays through-
out contemporary society, including comic books targeted directly
at children, barring such displays from labels for alcoholic bever-
ages cannot realistically be expected to reduce children’s exposure
to such displays to any significant degree. [Emphasis added.]

* * * If New York decides to make a substantial effort to insu-
late children from vulgar displays in some significant sphere of

activity, at least with respect to materials likely
to be seen by children, NYSLA’s label prohibition
might well be found to make a justifiable contri-
bution to the material advancement of such an
effort, but its currently isolated response to the
perceived problem, applicable only to labels on a
product that children cannot purchase, does not
suffice. * * * A state must demonstrate that its
commercial speech limitation is part of a substan-
tial effort to advance a valid state interest, not

merely the removal of a few grains of offensive sand from a beach
of vulgarity.

* * * *
* * * Even if we were to assume that the state materially

advances its asserted interest by shielding children from viewing
the Bad Frog labels, it is plainly excessive to prohibit the labels
from all use, including placement on bottles displayed in bars and
taverns where parental supervision of children is to be expected.
Moreover, to whatever extent NYSLA is concerned that children
will be harmfully exposed to the Bad Frog labels when wander-
ing without parental supervision around grocery and convenience
stores where beer is sold, that concern could be less intrusively
dealt with by placing restrictions on the permissible locations
where the appellant’s products may be displayed within such stores.

Decision and Remedy The U.S. Court of Appeals for the
Second Circuit reversed the judgment of the district court and
remanded the case for the entry of a judgment in favor of Bad Frog.
The NYSLA’s ban on the use of the labels lacked a “reasonable
fit” with the state’s interest in shielding minors from vulgarity, and
the NYSLA did not adequately consider alternatives to the ban.

Critical Thinking

• Legal Environment Whose interests are advanced by the
banning of certain types of advertising?

• What If the Facts Were Different? If Bad Frog had
sought to use the label to market toys instead of beer, would the
court’s ruling likely have been the same? Explain your answer.

Spotlight on Beer Labels: Case 2.3








Can a label be too offensive?

45CHAPTER 2: Constitutional Law

30301_ch02_hr_031-056.indd 45 8/30/18 12:40 PM

Unprotected Speech The United States Supreme Court has made it clear that certain
types of speech will not be given any protection under the First Amendment. Speech that
harms the good reputation of another, or defamatory speech, will not be protected. Also,
speech that violates criminal laws (such as obscene speech) is not constitutionally protected.

Threatening Speech. Note that in the case of threatening speech, the speaker must have posed
a “true threat.” In other words, the speaker must have meant to communicate a serious intent
to commit an unlawful, violent act against a particular person or group. Case Example 2.9 After
Anthony Elonis’s wife, Tara, left him and took their two children, Elonis was upset and
experienced problems at work. A coworker filed five sexual harassment reports against
him. When Elonis posted a photograph of himself in a Halloween costume holding a toy
knife to the coworker’s neck, he was fired from his job. He then began posting violent state-
ments on his Facebook page, mostly focusing on his former wife. After posting statements
about killing his former wife, Elonis eventually was arrested and prosecuted for the posts.

Elonis was convicted by a jury of violating a statute and ordered to serve time in prison.
He appealed to the United States Supreme Court, which held that it is not enough that a
reasonable person might view the defendant’s Facebook posts as threats. Elonis must have
intended to issue threats or known that his statements would be viewed as threats to be
convicted of a crime. The Court reversed Elonis’s conviction and remanded the case back to
the lower court to determine if there was sufficient evidence of intent.15 ■

Obscene Speech. The First Amendment, as interpreted by the Supreme Court, also does
not protect obscene speech. Numerous state and federal statutes make it a crime to dis-
seminate and possess obscene materials, including child pornography. Objectively defining
obscene speech has proved difficult, however. It is even more difficult to prohibit the dis-
semination of obscenity and pornography online.

Most of Congress’s attempts to pass legislation protecting minors from pornographic
materials on the Internet have been struck down on First Amendment grounds when chal-
lenged in court. One exception is a law that requires public schools and libraries to install
filtering software on computers to keep children from accessing adult content.16 Such software
is designed to prevent persons from viewing certain websites based on their Internet
addresses or meta tags, or key words. This act does not unconstitutionally burden free speech
because it is flexible and libraries can disable the filters for any patrons who ask.

Another exception is a law that makes it a crime to intentionally distribute virtual child
pornography—which uses computer-generated images, not actual people—without indicat-
ing that it is computer-generated.17 In a case challenging the law’s constitutionality, the
Supreme Court held that the statute is valid because it does not prohibit a substantial amount
of protected speech.18 Nevertheless, because of the difficulties of policing the Internet, as
well as the constitutional complexities of prohibiting online obscenity through legislation,
it remains a problem worldwide.

2–2c The First Amendment—Freedom of Religion
The First Amendment states that the government may neither establish any religion nor
prohibit the free exercise of religious practices. The first part of this constitutional pro-
vision is referred to as the establishment clause, and the second part is known as the free
exercise clause. Government action, both federal and state, must be consistent with this
constitutional mandate.

15. Elonis v. United States, ___ U.S. ___, 135 S.Ct. 2001, 192 L.Ed.2d 1 (2015).
16. Children’s Internet Protection Act (CIPA), 17 U.S.C. Sections 1701–1741.

18. United States v. Williams, 553 U.S. 285, 128 S.Ct. 1830, 170 L.Ed.2d 650 (2008).
17. The Prosecutorial Remedies and Other Tools to End the Exploitation of Children Today Act (Protect Act), 18 U.S.C. Section 2252A(a)(5)(B).

Filtering Software A computer
program that is designed to block
access to certain websites, based
on their content. The software blocks
the retrieval of a site whose URL or
key words are on a list within the

Meta Tag A key word in a document
that can serve as an index reference
to the document. On the Web, search
engines return results based, in part,
on the tags in Web documents.

46 UNIT ONE: The Legal Environment of Business

30301_ch02_hr_031-056.indd 46 8/30/18 12:40 PM

The Establishment Clause The establishment clause prohibits the government from
establishing a state-sponsored religion, as well as from passing laws that promote (aid or
endorse) religion or show a preference for one religion over another. Although the estab-
lishment clause involves the separation of church and state, it does not require a complete

Applicable Standard. Establishment clause cases often involve such issues as the legality
of allowing or requiring school prayers, using state-issued vouchers to pay tuition at religious
schools, and teaching creation theories versus evolution in public schools. Federal or state
laws that do not promote or place a significant burden on religion are constitutional even if
they have some impact on religion. For a government law or policy to be constitutional, it
must not have the primary effect of promoting or inhibiting religion.

Religious Displays. Religious displays on public property have often been challenged as
violating the establishment clause. The United States Supreme Court has ruled on a number
of such cases, often focusing on the proximity of the religious display to nonreligious sym-
bols or on the balance of symbols from different religions. The Supreme Court eventually
decided that public displays having historical, as well as religious, significance do not nec-
essarily violate the establishment clause.

Case Example 2.10 Mount Soledad is a prominent hill near San Diego. There has been a
forty-foot cross on top of Mount Soledad since 1913. In the 1990s, a war memorial was con-
structed next to the cross that included six walls listing the names of veterans. The site was
privately owned until 2006, when Congress authorized the property’s transfer to the federal
government “to preserve a historically significant war memorial.”

Steve Trunk and the Jewish War Veterans filed lawsuits claiming that the cross display
violated the establishment clause because it endorsed the Christian religion. A federal appel-
late court agreed, finding that the primary effect of the memorial as a whole sent a strong
message of endorsement and exclusion (of non-Christian veterans). The court noted that
although not all cross displays at war memorials violate the establishment clause, the cross
in this case physically dominated the site. Additionally, the cross was originally dedicated to
religious purposes, had a long history of religious use, and was the only portion visible to
drivers on the freeway below.19 ■ To gain a better understanding of how courts analyze
whether public displays violate the establishment clause, see this chapter’s Business Law
Analysis feature.

The Free Exercise Clause The free exercise clause guarantees that people can hold any
religious beliefs they want or can have no religious beliefs. The constitutional guarantee of
personal religious freedom restricts only the actions of the government, however, and not
those of individuals or private businesses.

Restrictions Must Be Necessary. The government must have a compelling state interest
for restricting the free exercise of religion, and the restriction must be the only way to further
that interest. Case Example 2.11 Gregory Holt, an inmate in an Arkansas state prison, was a
devout Muslim who wished to grow a beard in accord with his religious beliefs. The state
corrections department prohibited inmates from growing beards. Holt asked for an exemp-
tion to grow a half-inch beard on religious grounds, and prison officials denied his request.
Holt filed a suit in a federal court against Ray Hobbs, the director of the department, and
others. A federal statute prohibits the government from taking any action that substantially
burdens the religious exercise of a prisoner unless it is the least restrictive means of further-
ing a compelling governmental interest.

Know This
The free exercise clause
applies only to the
actions of the state and
federal governments,
not to private
employers. Private
employers may
nonetheless be required
to accommodate their
employees’ religious

19. Trunk v. City of San Diego, 629 F.3d 1099 (9th Cir. 2011).

Establishment Clause The
provision in the First Amendment
that prohibits the government from
establishing any state-sponsored
religion or enacting any law that
promotes religion or favors one
religion over another.

Free Exercise Clause The
provision in the First Amendment
that prohibits the government from
interfering with people’s religious
practices or forms of worship.

47CHAPTER 2: Constitutional Law

30301_ch02_hr_031-056.indd 47 8/30/18 12:40 PM

The defendants argued that beards compromise prison safety—a compelling government
interest—because contraband can be hidden in them and because an inmate can quickly
shave his beard to disguise his identity. The case ultimately reached the United States
Supreme Court, which noted that “an item of contraband would have to be very small indeed
to be concealed by a 1/2-inch beard.” Furthermore, the Court reasoned, the department
could simply search the beard, the way it already searched prisoners’ hair and clothing.
Therefore, the department’s policy, which prevented Holt from growing a half-inch beard,
violated his right to exercise his religious beliefs.20 ■

Restrictions Must Not Be a Substantial Burden. To comply with the free exercise clause,
a government action must not be a substantial burden on religious practices. A burden is
substantial if it pressures an individual to modify his or her behavior and to violate his or
her beliefs.

Case Example 2.12 Michael Thompson, a Muslim, was an inmate at a prison in Wisconsin.
A central practice of the Islamic faith is a sunrise-to-sunset fast during the month of Ramadan.
The prison accommodates this practice by providing “meal bags” at sunset to each Muslim
prisoner listed as eligible. Ten days into Ramadan, Randall Lashock, a prison guard, withheld
Thompson’s meal bags for two days. Thompson felt pressure to break his fast by going to the
prison cafeteria, but under prison policy he would thereby forfeit meal bags for the rest of
the fast. He did not know when—or even if—he would again be added to the Ramadan list
and be given a meal bag. Meanwhile, hunger caused him to miss prayers and anxiety

20. Holt v. Hobbs, ___ U.S. ___, 135 S.Ct. 853, 190 L.Ed.2d 747 (2015).

Judge James DeWeese hung a poster in his courtroom showing the Ten Com-
mandments. The poster also included a
number of editorial statements made by
DeWeese, such as “God is the final author-
ity, and we acknowledge His unchanging
standards of behavior.”

The American Civil Liberties Union
(ACLU) filed a suit, alleging that the
poster violated the establishment clause.
DeWeese responded that his purpose
was not to promote religion but to edu-
cate others about two conflicting legal
philosophies—moral relativism and moral
absolutism. DeWeese expressed his view
that “our legal system is based on moral
absolutes from divine law handed down
by God through the Ten Commandments.”

Does displaying this poster in a courtroom
violate the establishment clause?

Analysis: The establishment clause pro-
hibits the government from passing laws
or taking actions that promote religion or
show a preference for one religion over
another. In assessing a government action
(in this case, displaying a religious poster
in a courtroom), the courts look at the pre-
dominant purpose for the action and ask
whether the action has the effect of endors-
ing religion. Although DeWeese claimed to
have a nonreligious (educational) purpose
for displaying the poster of the Ten Com-
mandments, his own statements showed a
religious purpose. DeWeese was trying to
teach others to believe as he believes, that

our legal system is based on moral truths
handed down by God.

Result and Reasoning: DeWeese’s
statements reflected his views about “war-
ring” legal philosophies and his belief that
“our legal system is based on moral abso-
lutes from divine law handed down by God
through the Ten Commandments.” Based
on his statements, DeWeese’s poster
had the religious purpose of endorsing
Judeo-Christian religious views, which
violated the establishment clause.

Determining When Public Religious
Displays Violate the Establishment Clause

Business Law

48 UNIT ONE: The Legal Environment of Business

30301_ch02_hr_031-056.indd 48 8/30/18 12:40 PM

undercut his experience of Ramadan. Thompson sued several
prison guards for violating his right to exercise his religion
freely. A federal appellate court ultimately ruled in his favor.
“Forcing an inmate to choose between daily nutrition and
religious practice is a substantial burden” on the inmate’s free
exercise right.21 ■

Public Welfare Exception. When religious practices work
against public policy and the public welfare, the government
can act. For instance, the government can require that a child
receive certain types of vaccinations or receive medical treat-
ment when the child’s life is in danger—regardless of the
child’s or parent’s religious beliefs.

In other words, when public safety is an issue, an individ-
ual’s religious beliefs often must give way to the government’s
interests in protecting the public. Example 2.13 In public, a
woman of the Muslim faith may choose to wear a scarf,
known as a hijab, over her head. Nevertheless, due to public safety concerns, many courts
today do not allow the wearing of any headgear (hats or scarves) in courtrooms. ■

2–3 Due Process and Equal Protection
Two other constitutional guarantees of great significance to Americans are mandated by the
due process clauses of the Fifth and Fourteenth Amendments and the equal protection clause
of the Fourteenth Amendment.

2–3a Due Process
Both the Fifth and the Fourteenth Amendments provide that no person shall be deprived “of
life, liberty, or property, without due process of law.” The due process clause of each of these
constitutional amendments has two aspects—procedural and substantive. Note that the due
process clause applies to “legal persons,” such as corporations, as well as to individuals.

Procedural Due Process Procedural due process requires that any government decision
to take life, liberty, or property must be made fairly. This means that the government must
give a person proper notice and an opportunity to be heard. The government must also use
fair procedures in determining whether a person will be subjected to punishment or have
some burden imposed on him or her.

Fair procedure has been interpreted as requiring that the person have at least an oppor-
tunity to object to a proposed action before a fair, neutral decision maker (who need not
be a judge). Example 2.14 Doyle Burns, a nursing student in Kansas, poses for a photograph
standing next to a placenta used as a lab specimen. Although she quickly deletes the photo
from her library, it ends up on Facebook. When the director of nursing sees the photo, Burns
is expelled. She sues for reinstatement and wins. The school violated Burns’s due process
rights by expelling her from the nursing program for taking a photo without giving her an
opportunity to present her side to school authorities. ■

Substantive Due Process Substantive due process focuses on the content of the legis-
lation rather than the fairness of the procedures. Substantive due process limits what the

21. Thompson v. Holm, 809 F.3d 376 (7th Cir. 2016).

Learning Objective 3
Where in the Constitution
can the due process clause
be found?

Due Process Clause The
provisions in the Fifth and Fourteenth
Amendments that guarantee that
no person shall be deprived of life,
liberty, or property without due
process of law. State constitutions
often include similar clauses.

Can prison policy prevent a devout Muslim from keeping a short beard?









49CHAPTER 2: Constitutional Law

30301_ch02_hr_031-056.indd 49 8/30/18 12:40 PM

government may do in its legislative and executive capacities. Legislation must be fair and
reasonable in content and must further a legitimate governmental objective.

If a law or other governmental action limits a fundamental right, the courts will hold
that it violates substantive due process unless it promotes a compelling state interest. Fun-
damental rights include interstate travel, privacy, voting, marriage and family, and all First
Amendment rights. Thus, for instance, a state must have a substantial reason for taking any
action that infringes on a person’s free speech rights.

In situations not involving fundamental rights, a law or action does not violate substantive
due process if it rationally relates to any legitimate governmental end. It is almost impossi-
ble for a law or action to fail the “rationality” test. Under this test, almost any government
regulation of business will be upheld as reasonable.

2–3b Equal Protection
Under the Fourteenth Amendment, a state may not “deny to any person within its jurisdic-
tion the equal protection of the laws.” The United States Supreme Court has used the due
process clause of the Fifth Amendment to make the equal protection clause applicable to the
federal government as well. Equal protection means that the government must treat similarly
situated individuals in a similar manner.

Equal protection, like substantive due process, relates to the substance of the law or other
governmental action. When a law or action limits the liberty of all persons to do something,
it may violate substantive due process. When a law or action limits the liberty of some per-
sons but not others, it may violate the equal protection clause. Example 2.15 If a law prohibits
all advertising on the sides of trucks, it raises a substantive due process question. If the law
makes an exception to allow truck owners to advertise their own businesses, it raises an
equal protection issue. ■

In an equal protection inquiry, when a law or action distinguishes between or among
individuals, the basis for the distinction—that is, the classification—is examined. Depending
on the classification, the courts apply different levels of scrutiny, or “tests,” to determine
whether the law or action violates the equal protection clause. The courts use one of three
standards: strict scrutiny, intermediate scrutiny, or the “rational basis” test.

Strict Scrutiny If a law or action prohibits or inhibits some persons from exercising a
fundamental right, the law or action will be subject to “strict scrutiny” by the courts. A clas-
sification based on a suspect trait—such as race, national origin, or citizenship status—will
also be subject to strict scrutiny. Under this standard, the classification must be necessary

to promote a compelling government interest.
Compelling state interests include remedying past uncon-

stitutional or illegal discrimination, but do not include
correcting the general effects of “society’s discrimination.”
Example 2.16 For a city to give preference to minority appli-
cants in awarding construction contracts, it normally must
identify past unconstitutional or illegal discrimination
against minority construction firms. Because the policy is
based on suspect traits (race and national origin), it will
violate the equal protection clause unless it is necessary to
promote a compelling state interest. ■ Generally, few laws
or actions survive strict-scrutiny analysis by the courts.

Intermediate Scrutiny Another standard, that of “inter-
mediate scrutiny,” is applied in cases involving discrimi-
nation based on gender or legitimacy. Laws using these
classifications must be substantially related to important

Does the equal protection clause protect the homeless? If so, how?









Equal Protection Clause
The provision in the Fourteenth
Amendment that requires state
governments to treat similarly
situated individuals in a similar

Will Rogers
(American humorist)

“Our Constitution
protects aliens, drunks,
and U.S. senators.”

50 UNIT ONE: The Legal Environment of Business

30301_ch02_hr_031-056.indd 50 8/30/18 12:40 PM

government objectives. Example 2.17 An important government objective is preventing
illegitimate teenage pregnancies. Males and females are not similarly situated in this
regard because only females can become pregnant. Therefore, a law that punishes men
but not women for statutory rape will be upheld even though it treats men and women
unequally. ■

The state also has an important objective in establishing time limits (called statutes of lim-
itation) for how long after an event a particular type of action can be brought. Nevertheless,
the limitation period must be substantially related to the important objective of preventing
fraudulent or outdated claims. Example 2.18 A state law requires illegitimate children (born
out of wedlock) to bring paternity suits within six years of their births in order to seek sup-
port from their fathers. A court will strike down this law if legitimate children are allowed to
seek support from their parents at any time. This is because distinguishing between support
claims on the basis of legitimacy is not related to the important government objective of
preventing fraudulent or outdated claims. ■

The “Rational Basis” Test In matters of economic and social welfare, a classification will
be considered valid if there is any conceivable “rational basis” on which the classification
might relate to a legitimate government interest. It is almost impossible for a law or action
to fail the rational basis test.

Case Example 2.19 A Kentucky statute prohibits businesses that sell substantial amounts
of staple groceries or gasoline from selling wine and liquor. Maxwell’s Pic-Pac (a grocer)
filed suit against the state, alleging that the statute was unconstitutional under the equal
protection clause. The court applied the rational basis test and ruled that the statute was
rationally related to a legitimate government interest in reducing access to products with
high alcohol content.

The court cited the problems caused by alcohol, including drunk driving, and noted that
the state’s interest in limiting access to such products extends to the general public. Grocery
stores and gas stations pose a greater risk of exposing members of the public to alcohol than
do other retailers. For these and other reasons, the state can restrict these places from selling
wine and liquor.22 ■

2–4 Privacy Rights
The U.S. Constitution does not explicitly mention a general right to privacy. In a 1928
Supreme Court case, Olmstead v. United States,23 Justice Louis Brandeis stated in his dissent
that the right to privacy is “the most comprehensive of rights and the right most valued by
civilized men.” The majority of the justices at that time, however, did not agree with Brandeis.

It was not until the 1960s that a majority on the Supreme Court endorsed the view that
the Constitution protects individual privacy rights. In a landmark 1965 case, Griswold v.
Connecticut,24 the Supreme Court invalidated a Connecticut law that effectively prohibited
the use of contraceptives on the ground that it violated the right to privacy. The Supreme
Court held that a constitutional right to privacy was implied by the First, Third, Fourth,
Fifth, and Ninth Amendments.

Today, privacy rights receive protection under various federal statutes as well as the
U.S. Constitution. State constitutions and statutes also secure individuals’ privacy rights,
often to a significant degree. In addition, privacy rights are protected to an extent under tort
law, consumer law, and employment law.

22. Maxwell’s Pic-Pac, Inc. v. Dehner, 739 F.3d 936 (6th Cir. 2014).
23. 277 U.S. 438, 48 S.Ct. 564, 72 L.Ed. 944 (1928).
24. 381 U.S. 479, 85 S.Ct. 1678, 14 L.Ed.2d 510 (1965).

Learning Objective 4
Which constitutional
amendments have been
interpreted as implying a
right to privacy?

51CHAPTER 2: Constitutional Law

30301_ch02_hr_031-056.indd 51 8/30/18 12:40 PM

2–4a Federal Privacy Legislation
Congress has enacted a number of statutes that protect the privacy of individuals in
various areas of concern. Most of these statutes deal with personal information collected
by governments or private businesses.

In the 1960s, Americans were sufficiently alarmed by the accumulation of personal
information in government files that they pressured Congress to pass laws permitting
individuals to access their files. Congress responded by passing the Freedom of Infor-
mation Act, which allows any person to request copies of any information on her or him
contained in federal government files. Congress later enacted the Privacy Act, which
also gives persons the right to access such information.

In the 1990s, responding to the growing need to protect the privacy of individuals’
health records—particularly computerized records—Congress passed the Health Insur-
ance Portability and Accountability Act (HIPAA).25 This act defines and limits the cir-
cumstances in which an individual’s “protected health information” may be used or
disclosed by health-care providers, health-care plans, and others. These and other major
federal laws protecting privacy rights are listed and briefly described in Exhibit 2–1.

2–4b The USA Patriot Act
The USA Patriot Act was passed by Congress in the wake of the terrorist attacks of Sep-
tember 11, 2001, and then reauthorized twice.26 The Patriot Act has given government

officials increased authority to monitor Internet activities (such as e-mail and website visits)
and to gain access to personal financial information and student information. Law enforce-
ment officials can track the telephone and e-mail communications of one party to find out the
identity of the other party or parties. Privacy advocates argue that this law adversely affects the
constitutional rights of all Americans, and it has been widely criticized in the media.








Most medical records are being put
online. What law protects patients’
right to privacy with respect to their
online medical files?

Exhibit 2–1 Federal Legislation Relating to Privacy


Freedom of Information Act (1966) Provides that individuals have a right to access information about them collected in
government files.

Family Educational Rights and
Privacy Act (1974)

Limits access to computer-stored records of education-related evaluations and grades in
private and public colleges and universities.

Privacy Act (1974) Protects the privacy of individuals about whom the federal government has information.
Regulates agencies’ use and disclosure of data, and gives individuals access to and a means
to correct inaccuracies.

Electronic Communications Privacy
Act (1986)

Prohibits the interception of information communicated by electronic means.

Driver’s Privacy Protection Act

Prevents states from disclosing or selling a driver’s personal information without the driver’s

Health Insurance Portability and
Accountability Act (1996)

Requires health-care providers and health-care plans to inform patients of their privacy rights
and of how their personal medical information may be used. States that medical records may
not be used for purposes unrelated to health care or disclosed without permission.

Financial Services Modernization
Act (Gramm-Leach-Bliley Act) (1999)

Prohibits the disclosure of nonpublic personal information about a consumer to an unaffiliated
third party unless strict disclosure and opt-out requirements are met.

26. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, also known
as the USA Patriot Act, was enacted as Pub. L. No. 107-56 (2001), and last reauthorized by Pub. L. No. 112-114 (2011).

25. HIPAA was enacted as Pub. L. No. 104-191 (1996) and is codified in 29 U.S.C.A. Sections 1181 et seq.

52 UNIT ONE: The Legal Environment of Business

30301_ch02_hr_031-056.indd 52 8/30/18 12:40 PM

To gain access to these communications, the government must certify that the information
likely to be obtained is relevant to an ongoing criminal investigation, but it does not need to
provide proof of any wrongdoing. Example 2.20 General David Petraeus, who ran the wars in
Iraq and Afghanistan, resigned as director of the Central Intelligence Agency in 2012 after his
extramarital affair with Paula Broadwell, his biographer, became public. Apparently, after
Petraeus broke off the affair with Broadwell, she sent harassing e-mails to another woman,
who reported the harassment. The FBI investigated, accessed Petraeus’s e-mail accounts, and
discovered that he had communicated with Broadwell via messages left in a draft folder on
his e-mail account. Although there was no evidence that Petraeus had done anything illegal,
he was urged to resign and did so. ■

“There was, of course,
no way of knowing
whether you were
being watched at any
given moment.”

George Orwell
(English author, from his
famous novel 1984)

Practice and Review

A state legislature enacted a statute that required any motorcycle operator or passenger on the
state’s highways to wear a protective helmet. Jim Alderman, a licensed motorcycle operator, sued
the state to block enforcement of the law. Alderman asserted that the statute violated the equal
protection clause because it placed requirements on motorcyclists that were not imposed on other
motorists. Using the information presented in the chapter, answer the following questions.

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

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

3. Which level of scrutiny or test would apply to this situation? Why?

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

Debate This
Legislation aimed at protecting people from themselves concerns the individual as well as the public
in general. Protective helmet laws are just one example of such legislation. Should individuals be
allowed to engage in unsafe activities if they choose to do so?

Bill of Rights 38
checks and balances 34
commerce clause 34
compelling government interest 41
due process clause 49
equal protection clause 50

establishment clause 47
federal form of government 32
filtering software 46
free exercise clause 47
full faith and credit clause 33
meta tags 46

police powers 32
preemption 38
privileges and immunities clause 32
sovereignty 32
supremacy clause 37
symbolic speech 40

Key Terms

53CHAPTER 2: Constitutional Law

30301_ch02_hr_031-056.indd 53 8/30/18 12:40 PM

Chapter Summary: Constitutional Law

The Constitutional Powers
of Government

The U.S. Constitution established a federal form of government, in which government powers are
shared by the national government and the state governments. At the national level, government
powers are divided among the legislative, executive, and judicial branches. The Tenth Amendment
reserves to the states all powers not expressly delegated to the national government. Under their
police powers, state governments may regulate private activities in order to protect or promote the
public order, health, safety, morals, and general welfare.

The Commerce Clause 1. The expansion of national powers—The commerce clause expressly permits Congress to regulate
commerce. Over time, courts expansively interpreted this clause, thereby enabling the national
government to wield extensive powers over the economic life of the nation.

2. The commerce clause today—Today, the commerce clause authorizes the national government,
at least theoretically, to regulate almost every commercial enterprise in the United States.

3. The “dormant” commerce clause—If state regulations substantially interfere with interstate
commerce, they will be held to violate the “dormant” commerce clause of the U.S. Constitution.
The positive aspect of the commerce clause, which gives the national government the exclusive
authority to regulate interstate commerce, implies a “dormant” aspect—that the states do not have
this power.

The Supremacy Clause The U.S. Constitution provides that the Constitution, laws, and treaties of the United States are “the
supreme Law of the Land.” Whenever a state law directly conflicts with a federal law, the state law
is rendered invalid.

Business and the Bill
of Rights

The Bill of Rights, which consists of the first ten amendments to the U.S. Constitution, embodies a
series of protections for individuals—and, in some instances, business entities—against various
types of interference by the federal government. Today, most of the protections apply against state
governments as well. Freedoms guaranteed by the First Amendment that affect businesses include
the following:
1. Freedom of speech—Speech, including symbolic speech, is given the fullest possible protection

by the courts. Corporate political speech and commercial speech also receive substantial
protection under the First Amendment. Certain types of speech, such as defamatory speech
and obscene speech, are not protected under the First Amendment. Government attempts to
regulate unprotected forms of speech in the online environment have, to date, met with numerous

2. Freedom of religion—Under the First Amendment, the government may neither establish any
religion (the establishment clause) nor prohibit the free exercise of religion (the free exercise

Due Process and Equal

1. Due process—Both the Fifth and the Fourteenth Amendments provide that no person shall be
deprived of “life, liberty, or property, without due process of law.” Procedural due process requires
that any government decision to take life, liberty, or property must be made fairly, using fair
procedures. Substantive due process focuses on the content of legislation. Generally, a law that
limits a fundamental right violates substantive due process unless the law promotes a compelling
state interest, such as public safety.

2. Equal protection—Under the Fourteenth Amendment, a law or action that limits the liberty of
some persons but not others may violate the equal protection clause. Such a law may be upheld,
however, if there is a rational basis for the discriminatory treatment of a given group or if the law
substantially relates to an important government objective.

Privacy Rights The Constitution does not contain a specific guarantee of a right to privacy, but such a right has been
derived from guarantees found in several constitutional amendments. A number of federal statutes
protect privacy rights. Privacy rights are also protected by many state constitutions and statutes,
as well as under tort law, consumer law, and employment law.

54 UNIT ONE: The Legal Environment of Business

30301_ch02_hr_031-056.indd 54 9/3/18 9:18 AM

Issue Spotters
1. South Dakota wants its citizens to conserve energy. To help reduce consumer consumption of electricity, the state passes a law that

bans all advertising by power utilities within the state. What argument could the power utilities use as a defense to the enforcement
of this state law? (See Business and the Bill of Rights.)

2. Suppose that a state imposes a higher tax on out-of-state companies doing business in the state than it imposes on in-state companies.
Is this a violation of the equal protection clause if the only reason for the tax is to protect the local firms from out-of-state competition?
Explain. (See Due Process and Equal Protection.)
—Check your answers to the Issue Spotters against the answers provided in Appendix D at the end of this text.

Business Scenarios and Case Problems
2–1. The Free Exercise Clause. Thomas worked in the non-

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

2–2. Spotlight on Plagiarism—Due Process. The Russ
College of Engineering and Technology of Ohio Uni-
versity announced in a press conference that it had
found “rampant and flagrant plagiarism” in the theses

of mechanical engineering graduate students. Faculty singled
out for “ignoring their ethical responsibilities” included Jay
Gunasekera, chair of the department. Gunasekera was prohib-
ited from advising students. He filed a suit against Dennis Irwin,
the dean of Russ College, for violating his due process rights.
What does due process require in these circumstances? Why?
[Gunasekera v. Irwin, 551 F.3d 461 (6th Cir. 2009)] (See Due Pro-
cess and Equal Protection.)

2–3. Business Case Problem with Sample Answer—
Freedom of Speech. Mark Wooden sent an
e-mail to an alderwoman for the city of St. Louis.
Attached was a nineteen-minute audio that com-

pared her to the biblical character, Jezebel—she was a “bitch
in the Sixth Ward,” spending too much time with the rich and
powerful and too little time with the poor. In a menacing, mani-
acal tone, Wooden said that he was “dusting off a sawed-off
shotgun,” called himself a “domestic terrorist,” and referred to
the assassination of President John F. Kennedy, the murder of
a federal judge, and the shooting of Congresswoman Gabrielle
Giffords. Feeling threatened, the alderwoman called the police.

Wooden was convicted of harassment under a state criminal
statute. Was this conviction unconstitutional under the First
Amendment? Discuss. [State v. Wooden, 388 S.W.3d 522 (Mo.
2013)] (See Business and the Bill of Rights.)
— For a sample answer to Problem 2–3, go to Appendix E at the

end of this text.

2–4. Equal Protection. Abbott Laboratories licensed SmithKline
Beecham Corp. to market an Abbott human immunodeficiency
virus (HIV) drug in conjunction with one of SmithKline’s drugs.
Abbott then increased the price of its drug fourfold, forcing
SmithKline to increase its prices and thereby driving business to
Abbott’s own combination drug. SmithKline filed a suit in a fed-
eral district court against Abbott. During jury selection, Abbott
struck the only self-identified gay person among the potential
jurors. (The pricing of HIV drugs is of considerable concern
in the gay community.) Could the equal protection clause be
applied to prohibit discrimination based on sexual orientation
in jury selection? Discuss. [SmithKline Beecham Corp. v. Abbott
Laboratories, 740 F.3d 471 (9th Cir. 2014)] (See Due Process and
Equal Protection.)

2–5. Procedural Due Process. Robert Brown applied for admis-
sion to the University of Kansas School of Law. Brown answered
“no” to questions on the application asking if he had a crimi-
nal history and acknowledged that a false answer constituted
“cause for . . . dismissal.” In fact, Brown had criminal convic-
tions for domestic battery and driving under the influence. He
was accepted for admission to the school. When school offi-
cials discovered his history, however, he was notified of their
intent to dismiss him and given an opportunity to respond in
writing. He demanded a hearing. The officials refused to grant
Brown a hearing and then expelled him. Did the school’s actions
deny Brown due process? Discuss. [Brown v. University of Kan-
sas, 599 Fed.Appx. 833 (10th Cir. 2015)] (See Due Process and
Equal Protection.)

2–6. The Commerce Clause. Regency Transportation, Inc.,
operates a freight business throughout the eastern United
States. Regency maintains its corporate headquarters, four

55CHAPTER 2: Constitutional Law

30301_ch02_hr_031-056.indd 55 8/30/18 12:40 PM

warehouses, and a maintenance facility and terminal location
for repairing and storing vehicles in Massachusetts. All of the
vehicles in Regency’s fleet were bought in other states. Mas-
sachusetts imposes a use tax on all taxpayers subject to its
jurisdiction, including those that do business in interstate com-
merce, as Regency does. When Massachusetts imposed the tax
on the purchase price of each tractor and trailer in Regency’s
fleet, the trucking firm challenged the assessment as discrim-
inatory under the commerce clause. What is the chief consid-
eration under the commerce clause when a state law affects
interstate commerce? Is Massachusetts’s use tax valid? Explain.
[Regency Transportation, Inc. v. Commissioner of Revenue, 473
Mass. 459, 42 N.E.3d 1133 (2016)] (See The Constitutional Powers
of Government.)

2–7. Freedom of Speech. Wandering Dago, Inc. (WD) operates
a food truck in Albany, New York. WD brands itself and the food
it sells with language generally viewed as ethnic slurs. Own-
ers Andrea Loguidice and Brandon Snooks, however, view the
branding as giving a “nod to their Italian heritage” and “weak-
ening the derogatory force of the slur.” Twice, WD applied to
participate as a vendor in a summer lunch program in a state-
owned plaza. Both times, the New York State Office of General
Services (OGS) denied the application because of WD’s brand-
ing. WD filed a suit in a federal district court against RoAnn
Destito, the commissioner of OGS, contending that the agency

had violated WD’s right to free speech. What principles apply
to the government’s regulation of the content of speech? How
do those principles apply in WD’s case? Explain. [Wandering
Dago, Inc. v. Destito, 879 F.3d 20 (2d Cir. 2018)] (See Business
and the Bill of Rights.)

2–8. A Question of Ethics—Free Speech. Michael Mayfield,
the president of Mendo Mill and Lumber Co., in Califor-
nia, received a “notice of a legal claim” from Edward
Starski. The “claim” alleged that a stack of lumber
fell on a customer as a result of a Mendo employee’s

“incompetence.” The “notice” presented a settlement offer on
the customer’s behalf in exchange for a release of liability for
Mendo. In a follow-up phone conversation with Mayfield, Starski
said that he was an attorney—which, in fact, he was not. Starski
was arrested and charged with violating a state criminal statute
that prohibited the unauthorized practice of law. [ People v. Star-
ski, 7 Cal.App.5th 215, 212 Cal.Rptr.3d 622 (1 Dist. Div. 2 2017)] (See
Business and the Bill of Rights.)

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

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

2–9. Business Law Writing. Puerto Rico enacted a law that
required specific labels on cement sold in Puerto Rico
and imposed fines for any violations of these require-
ments. The law prohibited the sale or distribution of

cement manufactured outside Puerto Rico that does not carry a
required label warning and barred that cement from being used
in government-financed construction projects.

Antilles Cement Corp., a Puerto Rican firm that imports for-
eign cement, filed a complaint in federal court. Antilles claimed
that this law violated the dormant commerce clause. (The dor-
mant commerce clause doctrine applies not only to commerce
among the states and U.S. territories, but also to international
commerce.) Write three paragraphs discussing whether the
Puerto Rican law violates the dormant commerce clause.
Explain your reasons why or why not. (See The Constitutional
Powers of Government.)

2–10. Time-Limited Group Assignment—Free Speech
and Equal Protection. For many years, New York
City has had to deal with the vandalism and deface-
ment of public property caused by unauthorized

graffiti. In an effort to stop the damage, the city banned the
sale of aerosol spray-paint cans and broad-tipped indelible
markers to persons under twenty-one years of age. The new

rules also prohibited people from possessing these items on
property other than their own. Within a year, five people under
age twenty-one were cited for violations of these regulations,
and nearly nine hundred individuals were arrested for actually
making graffiti.

Lindsey Vincenty and other artists wished to create graf-
fiti on legal surfaces, such as canvas, wood, and clothing.
Unable to buy supplies in the city or to carry them in the city if
they were bought elsewhere, Vincenty and others filed a law-
suit on behalf of themselves and other young artists against
Michael Bloomberg, the city’s mayor, and others. The plaintiffs
claimed that, among other things, the new rules violated their
right to freedom of speech. (See The Constitutional Powers of
1. One group will argue in favor of the plaintiffs and provide

several reasons why the court should hold that the city’s new
rules violate the plaintiffs’ freedom of speech.

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

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

Critical Thinking and Writing Assignments

56 UNIT ONE: The Legal Environment of Business

30301_ch02_hr_031-056.indd 56 8/30/18 12:40 PM















3Ethics in Business
One of the most complex issues that businesspersons and
corporations face is ethics. Ethics is not as clearly defined as
the law, and yet it can substantially impact a firm’s finances
and reputation, especially when the firm is involved in a well-
publicized scandal. Some scandals arise from conduct that is
legal but ethically questionable. At other times, the conduct is
both illegal and unethical. Business law and legal environment

students must be able to think critically about both legal and ethical issues. As noted in the
chapter-opening quotation, “New occasions teach new duties.”

Suppose that Finn Clayborn dropped out of Harvard University to start a company in
Silicon Valley that developed and sold finger-prick blood-test kits. Clayborn raised millions
from investors by claiming that his new technology would revolutionize blood testing by
providing a full range of laboratory tests from a few drops of blood. The kits were marketed
as a better alternative to traditional, more expensive lab tests ordered by physicians. They
were sold at drugstores for a few dollars each and touted as a way for consumers to test
their blood type and monitor their cholesterol, iron, and many other conditions. Within
six years, Clayborn and his company were making millions. But complaints started rolling
in that the test kits didn’t work and the results were not accurate (because more blood was
needed). Numerous consumers, drugstores, and government agencies sued the company
for fraudulent and misleading marketing practices. Clayborn’s profitable start-up now faces
an uncertain future.

The goal of business ethics is not to stifle innovation. There is nothing unethical about
a company selling an idea or technology that is still being developed. In fact, that’s exactly
what many successful start-ups do—take a promising idea and develop it into a reality.
But businesspersons also need to consider what will happen if new technologies do not

James Russell Lowell
(American editor, poet, and

“New occasions
teach new duties.”

Learning Objectives
The five Learning Objectives below
are designed to help improve your
understanding. After reading this chapter,
you should be able to answer the following

1. What are two different views
of the role of business in

2. How do duty-based ethical
standards differ from
outcome-based ethical

3. What is short-term profit
maximization, and why does
it lead to ethical problems?

4. What are the four steps in
the IDDR approach to ethical
decision making?

5. What ethical issues might
arise in the context of global
business transactions?


30301_ch03_hr_057-085.indd 57 8/30/18 12:25 PM

work. Do they go ahead with production and sales? What are the ethical problems with
putting a product on the market that does not function as advertised? To be sure, there is
not always one clear answer to an ethical question. What is clear is that rushing to pro-
duction and not thinking through the ethical ramifications of decisions can be disastrous
for a business.

3–1 Ethics and the Role of Business
At the most basic level, the study of ethics is the study of what constitutes right or wrong
behavior. It is a branch of philosophy focusing on morality and the way moral principles are
derived and implemented. Ethics has to do with the fairness, justness, rightness, or wrong-
ness of an action.

The study of business ethics typically looks at the decisions businesses make or have to
make and whether those decisions are right or wrong. It has to do with how businesspersons
apply moral principles in making their decisions. Those who study business ethics also
evaluate what duties and responsibilities exist or should exist for businesses.

In this textbook, we include Ethical Issues in most chapters to emphasize the importance
of ethics in business law. In addition, at the end of every chapter is a case problem, called A
Question of Ethics, that relates to that chapter’s contents.

3–1a The Relationship of Law and Ethics
The government has institutionalized some ethical rights and duties through the passage
of laws and regulations. Many laws are designed to prevent fraudulent (misleading, decep-
tive) conduct in various contexts, including contracts, health care, financial reporting,

mortgages, and sales. Example 3.1 The Fraud Reduction
and Data Analytics Act was passed by Congress in 2016
to identify and assess fraud risks in federal government
agencies. The purpose of the law is to prevent, detect, and
respond to fraud (including improper payments) in federal
programs. ■ (This chapter’s Business Web Log feature out-
lines a well-publicized fraud scandal.)

Sometimes, major legislation is passed after well-
publicized ethical transgressions by industries or compa-
nies result in harm to the public. Example 3.2 After alleged
ethical lapses on Wall Street contributed to a financial cri-
sis, Congress passed the Dodd-Frank Wall Street Reform
and Consumer Protection Act.1 Dodd-Frank made sweep-
ing changes to the United States’ financial regulatory
environment in an attempt to promote financial stability
and protect consumers from abusive financial services

Similarly, Congress enacted the Sarbanes-Oxley Act2
(SOX) after Enron, a major energy company, engaged in risky
financial maneuvers that resulted in the loss of billions of
dollars to shareholders. SOX was designed to help reduce
corporate fraud and unethical management decisions by set-
ting up accountability measures for publicly traded

Ethics Moral principles and values
applied to social behavior.

Business Ethics The application
of moral principles and values in a
business context.

1. Pub. L. No. 111–203, 124 Stat. 1376, July 21, 2010, 12 U.S.C. Sections 5301 et seq.
2. 15 U.S.C. Sections 7201 et seq.







r C








58 UNIT ONE: The Legal Environment of Business

30301_ch03_hr_057-085.indd 58 8/30/18 12:25 PM

Wells Fargo Bank discovered in 2016 that its employees had opened
2  million fake bank and credit card accounts
for current customers without their authori-
zation. The scam occurred over a period of
five years. The bogus accounts generated
extra fees for the bank and helped employ-
ees artificially inflate their sales (of new
accounts) figures to meet company goals
and earn bonuses.

Wells Fargo fired 5,300 employees
who were involved, paid $185 million in
fines to the government, and refunded
$5 million to customers. No executives
were terminated initially, but the bank
later fired four mid-level executives, and
took stock awards and bonuses away
from four other executives. Wells Fargo’s
accreditation rating with the Better
Business Bureau dropped, and a number

of state and local governments (as well
as consumers) pulled their business from
the bank. After an internal investigation,
Wells Fargo announced in 2017 that it
would take back an additional $75 million
in compensation from two top executives.

Angry customers filed lawsuits against
Wells Fargo alleging fraud, invasion of pri-
vacy, negligence, and breach of contract.
They claim that Wells Fargo managers
acted unethically and pushed employees
into committing fraud by requiring them
to meet unreasonably high sales quotas
and create eight new customer accounts
per day. Federal and state governments
and agencies continued to investigate
the wrongdoing. In 2018, federal govern-
ment regulators decided on an additional
punishment: Until Wells Fargo makes
significant improvements, the bank will

be restricted from growing any larger
than it was (in total asset size) at the end
of 2017.

Key Point
The employees’ conduct was both uneth-
ical and illegal, but Wells Fargo’s manag-
ers may not have acted illegally (assuming
that they had no knowledge of the fraud).
Nonetheless, management may have
acted unethically by fostering a culture
that encouraged questionable, and even
illegal, sales practices. Not all unethical
conduct is illegal.

Bogus Bank and Credit Card Accounts
at Wells Fargo Bank

Business Web Log

companies. Company heads must verify that they have read
quarterly and annual reports and vouch for their accuracy. SOX
also requires companies to set up confidential systems so that
employees and others can “raise red flags” about suspected ille-
gal or unethical auditing and accounting practices.3 Laws can-
not, however, codify all ethical requirements. ■

Gray Areas in the Law For a number of reasons, laws
may sometimes be difficult to interpret and apply. When
legislatures draft laws, they typically use broad language so
that the provisions will apply in a variety of circumstances.
It can be hard to determine how such broad provisions apply
to specific situations. In addition, laws intended to address
one situation may apply to other situations as well. And the
legislative body that passes a law may not give clear guid-
ance on the purpose of the law or the definition of terms in
the law.

3. In one such system, employees can click on an on-screen icon that anonymously links them with NAVEX Global to report suspicious accounting
practices, sexual harassment, and other possibly unethical behavior.

What ethical lessons can be drawn from the scandal involving
Wells Fargo Bank’s fraudulent company practices?








59CHAPTER 3: Ethics in Business

30301_ch03_hr_057-085.indd 59 8/30/18 12:25 PM

Other issues arise because laws are created through the political process. They therefore
often involve compromises among competing interests and industries. As a result, a law’s
provisions may be ambiguous, may be weaker than intended by the original drafters, or may
lack a means of enforcement. In short, the law is not always clear, and these “gray areas”
in the law make it difficult to predict with certainty how a court will apply a given law to a
particular action.

The Moral Minimum Compliance with the law is sometimes called the moral minimum. If
people and entities merely comply with the law, they are acting at the lowest ethical level
that society will tolerate.

Failure to meet the moral minimum can have significant consequences, especially in the
context of litigation. A businessperson who fails to respond to a lawsuit filed against him
or her can be held liable. Case Example 3.3 Rick Scott deposited $2 million into an escrow
account maintained by a company owned by Salvatore Carpanzano. Immediately after the
deposit was made, the funds were withdrawn in violation of the escrow agreement. When
Scott was unable to recover his money, he filed a suit against Salvatore Carpanzano and
others, including Salvatore’s daughter, Carmela. In the complaint, Scott made no allegations
of acts or knowledge on Carmela’s part. (The complaint claimed only that she had received
a $46,600 Land Rover Range Rover purchased with the funds.)

Salvatore failed to cooperate with discovery and did not respond to attempts to contact him
by certified mail, regular mail, and e-mail. He also refused to make an appearance in court and
did not finalize a settlement negotiated between the parties’ attorneys. Carmela denied that she
was involved in her father’s business or the Scott transaction. The court found that the defen-
dants had intentionally failed to respond to the litigation and issued a judgment for more than
$6 million in Scott’s favor. On appeal, a federal appellate court affirmed the district court’s
judgment against Salvatore but reversed the judgment against Carmela. The court reasoned
that there was no evidence that Carmela was willfully involved in her father’s wrongdoing.4 ■

Although the moral minimum is important, the study of ethics goes well beyond these
legal requirements to evaluate what is right for society. Businesspersons must remember that
an action that is legal is not necessarily ethical. For instance, a company can legally refuse to
negotiate liability claims for injuries allegedly caused by a faulty product. But if the compa-
ny’s refusal is meant to increase the injured party’s legal costs and force the party to drop a
legitimate claim, the company is not acting ethically.

Private Company Codes of Ethics Most companies attempt to link ethics and law through
the creation of internal codes of ethics. (We present the code of ethics of Costco Wholesale
Corporation as an example in the appendix following this chapter.) Company codes are not
laws. Instead, they are rules that the company sets forth and that it can enforce (by terminat-
ing an employee who does not follow them, for instance). Codes of conduct typically outline
the company’s policies on particular issues and indicate how employees are expected to act.

Example 3.4 Google’s code of conduct starts with the motto “Don’t be evil.” The code
then makes general statements about how Google promotes integrity, mutual respect, and
the highest standard of ethical business conduct. Google’s code also provides specific rules
on a number of issues, such as privacy, drugs and alcohol, conflicts of interest, co-worker
relationships, and confidentiality—it even includes a dog policy. The company takes a stand
against employment discrimination that goes further than the law requires. It prohibits dis-
crimination based on sexual orientation, gender identity or expression, and veteran status. ■

Industry Ethical Codes Numerous industries have also developed codes of ethics. The
American Institute of Certified Public Accountants (AICPA) has a comprehensive Code of
Professional Conduct for the ethical practicing of accounting. The American Bar Association

Know This
When it is not entirely
clear how a law applies,
a company’s best defense
to allegations of miscon-
duct is to show that the
firm acted honestly and
responsibly under the

Moral Minimum The minimum
level of ethical behavior expected by
society, which is usually defined as
compliance with the law.

4. Scott v. Carpanzano, 556 Fed.Appx. 288 (5th Cir. 2014).

60 UNIT ONE: The Legal Environment of Business

30301_ch03_hr_057-085.indd 60 8/30/18 12:25 PM

(ABA) has model rules of professional conduct for attorneys, and the American Nurses
Association (ANA) has a code of ethics that applies to nurses. These codes can give guid-
ance to decision makers facing ethical questions. Violation of a code may result in the
discipline of an employee or sanctions against a company from the industry organization.
Remember, though, that these internal codes are not laws, so their effectiveness is deter-
mined by the commitment of the industry or company leadership to enforcing the codes.

3–1b The Role of Business in Society
Over the last two hundred years, public perception has moved toward expecting corporations
to participate in society as corporate citizens. Originally, though, the only perceived duty
of a corporation was to maximize profits and generate revenues for its owners. Although
many people today may view this idea as greedy or ruthless, the rationale for the profit-
maximization theory is still valid.

Business as a Pure Profit Maximizer In theory, if all firms strictly adhere to the goal
of  maximizing profits, resources flow to where they are most highly valued by society.
Corporations can focus on their strengths. Other entities that are better suited to deal with
social problems and perform charitable acts can specialize in those activities. The gov-
ernment, through taxes and other financial allocations, can shift resources to those other
entities to perform public services. Thus, profit maximization can lead to the most efficient
allocation of scarce resources.

Even when profit maximization is the goal, companies benefit by ethical behavior. For
instance, customer satisfaction with a company is key to its profitability. Repeat customers
are good for business. When customers are happy, word gets around, and it generates more
business for the firm. Unsatisfied customers go elsewhere for the goods or services that the
firm provides. When a business behaves badly, customers quickly report this online by post-
ing bad reviews on such sites as Angie’s List, Yelp, and TripAdvisor. Bad reviews obviously
hurt a business’s profits, while good reviews lead to higher profits.

Business as a Corporate Citizen Over the years, many people became dissatisfied with
profit-maximization theory. Investors and others began to look beyond profits and divi-
dends and to consider the triple bottom line—a corporation’s profits, its impact on people,
and its impact on the planet. Magazines and websites began to rank companies based on
their environmental impacts and their ethical decisions. Corporations came to be viewed
as “citizens” that were expected to participate in bettering communities and society.

A Four-Part Analysis Whether one believes in profit-maximization theory or corporate
citizenship, ethics is important in business decision making. When making decisions, a
business should evaluate each of the following:

1. The legal implications of each decision.

2. The public relations impact.

3. The safety risks for consumers and employees.

4. The financial implications.

This four-part analysis will assist the firm in making decisions that not only maximize profits
but also reflect good corporate citizenship.

3–1c Ethical Issues in Business
Ethical issues can arise in numerous aspects of doing business. A fundamental ethical issue
for business is developing integrity and trust. Businesspersons should exhibit integrity in
their dealings with other people in the company, other businesses, clients, and the commu-
nity. Be honest and treat people fairly. Earn their trust.

Learning Objective 1
What are two different views
of the role of business in

Triple Bottom Line A measure that
includes a corporation’s profits, its
impact on people, and its impact on
the planet.

Tom Brokaw
(American television journalist)

“It’s easy to make a
buck. It’s a lot tougher
to make a difference.”

61CHAPTER 3: Ethics in Business

30301_ch03_hr_057-085.indd 61 8/30/18 12:25 PM

Businesses should also ensure that the workplace respects diversity and enforces equal
opportunity employment and civil rights laws. In addition, businesses must comply with a host
of federal and state laws and regulations, including those pertaining to the environment, finan-
cial reporting, and safety standards. Compliance with these rules can involve ethical issues. See
this chapter’s Adapting the Law to the Online Environment feature for a discussion of an ethical
issue that has arisen from employees’ work-related use of digital technology after work hours.

Almost all jobs today involve digital technology, whether it be e-mails,
Internet access, or smartphone use. Most
employees, when interviewed, say that
digital technology increases their pro-
ductivity and flexibility. The downside is
what some call an “electronic leash”—
employees are constantly connected
and therefore end up working when they
are not “at work.” Over one-third of full-
time workers, for example, say that they
frequently check e-mails outside normal
working hours.

Do Workers Have the Right
to Disconnect?
Because the boundaries between being
“at work” and being “at leisure” can be so
hazy, some labor unions in other countries
have attempted to pass rules that allow
employees to disconnect from e-mail and
other work-related digital communication
during nonworking hours. For example, a
French labor union representing high-tech
workers signed an agreement with a large
business association recognizing a “right
of disconnecting.”

In Germany, Volkswagen and BMW no
longer forward e-mail to staff from
company servers after the end of the
working day. Other German firms have
declared that workers are not expected
to check e-mail on weekends and holidays.
The government is considering legislating
such restrictions nationwide.

The Thorny Issue of Overtime
and the Fair Labor Standards Act
In the United States, payment for overtime
work is strictly regulated under the Fair
Labor Standards Act (FLSA). According to
the Supreme Court, in this context, work
is “physical or mental exertion (whether
burdensome or not) controlled or required
by the employer and pursued necessarily
for the benefit of the employer and his
business.”a This definition was extended
to off-duty work if such work is an “inte-
gral and indispensible part of [employees’]
activities.”b For example, a court recently
ruled that Hormel Foods Corporation had to
pay its factory workers for the time it took
them to change into and out of the required
white clothes before and after their shifts.c

Today’s modern digital connectivity raises
issues about the definition of work. Employees
at several major companies, including Black &
Decker, T-Mobile, and Verizon, have sued for
unpaid overtime related to smartphone use. In
another case, a police sergeant has sued the
city of Chicago, claiming that he should have
been paid overtime for hours spent using his

personal digital assistant (PDA). The police
department had issued PDAs to officers and
required them to respond to work- related
communications even while off duty. The court
agreed that some of the officers’ off-duty PDA
activities were compensable. Nevertheless, it
ruled in favor of the city because the officers
had failed to follow proper procedures for
filing overtime claims.d

Not All Employees Demand the
“Right to Disconnect”
In a recent Gallup poll, 79 percent of full-
time employees had either strongly positive
or somewhat positive views of using com-
puters, e-mail, tablets, and smartphones to
work remotely outside of normal business
hours. According to the same poll, 17 per-
cent of them report “better overall lives”
because of constant online connectivity with
their work. Working remotely after business
hours apparently does not necessarily result
in additional work- related stress.

Critical Thinking
From an ethical point of view, is there any
difference between calling subordinates
during off hours for work-related questions
and sending them e-mails or text messages?

a. Tennessee Coal, Iron & R. Co. v. Muscoda Local No. 123,
321 U.S. 590, 64 S.Ct. 698, 8 L.Ed. 949 (1944). Although
Congress later passed a statute that superseded the holding
in this case, the statute gave the courts broad authority to
interpret the FLSA’s definition of work. 29 U.S.C. Section
251(a). See Integrity Staffing Solutions, Inc. v. Busk,
___ U.S. ___, 135 S.Ct. 513, 190 L.Ed.2d 410 (2014).

b. Steiner v. Mitchell, 350 U.S. 247, 76 S.Ct. 330, 100 L.Ed.
267 (1956).

c. United Food & Commercial Workers Union, Local 1473 v.
Hormel Food Corp., 367 Wis.2d 131, 876 N.W.2d 99 (2016). d. Allen v. City of Chicago, 2015 WL 8493996 (N.D.Ill. 2015).

Should Employees Have a “Right
of Disconnecting”?

Adapting the Law to the
Online Environment

62 UNIT ONE: The Legal Environment of Business

30301_ch03_hr_057-085.indd 62 8/30/18 12:25 PM

The most difficult aspect of ethics that businesses face is in decision making, which is the
focus of this text. Businesspersons must learn to recognize ethical issues, get the pertinent
facts, evaluate the alternatives, and then make a decision. Decision makers should also test
and reflect on the outcome of their decisions.

3–1d The Importance of Ethical Leadership
In ethics, as in other areas, employees take their cues from management. Talking about ethi-
cal business decision making is meaningless if management does not set standards. Further-
more, managers must apply the same standards to themselves as they do to the company’s
employees. This duty starts with top management.

Attitude of Top Management One of the most important ways to create and maintain an
ethical workplace is for top management to demonstrate its commitment to ethical decision
making. A manager who is not totally committed to an ethical workplace will rarely succeed in
creating one. More than anything else, top management’s behavior sets the ethical tone of a firm.

Managers have found that discharging even one employee for ethical reasons has a tre-
mendous impact as a deterrent to unethical behavior in the workplace. This is true even
if the company has a written code of ethics. If management does not enforce the company
code, the code is essentially nonexistent.

The administration of a university may have had this concept in mind in the following
case when it applied the school’s professionalism standard to a student who had engaged in
serious misconduct.

Know This
One of the best ways to
encourage good business
ethics at a workplace
is to take immediate
corrective action in
response to any unethical

Background and Facts The curric-
ulum at Case Western Reserve University
School of Medicine identifies nine “core
competencies.” At the top of the list is
professionalism, which includes “ethical,
honest, responsible and reliable behavior.”
The university’s Committee on Students
determines whether a student has met the
professionalism requirements.

Amir Al-Dabagh enrolled at the school
and did well academically. But he sexually
harassed fellow students, often asked an
instructor not to mark him late for class, received complaints from
hospital staff about his demeanor, and was convicted of driving
while intoxicated. The Committee on Students unanimously refused
to certify him for graduation and dismissed him from the university.

He filed a suit in a federal district court against Case Western,
alleging a breach of good faith and fair dealing. The court ordered
the school to issue a diploma. Case Western appealed.

In the Words of the Court
SUTTON, Circuit Judge.

* * * *
* * * Case Western’s student handbook

* * * makes clear that the only thing stand-
ing between Al-Dabagh and a diploma is the
Committee on Students’s finding that he lacks
professionalism. Unhappily for Al-Dabagh, that
is an academic judgment. And we can no more
substitute our personal views for the Commit-
tee’s when it comes to an academic judgment
than the Committee can substitute its views

for ours when it comes to a judicial decision. [Emphasis added.]
* * * *
* * * The Committee’s professionalism determination is an

academic judgment. That conclusion all but resolves this case.
We may overturn the Committee only if it substantially departed
from accepted academic norms when it refused to approve
Al-Dabagh for graduation. And given Al-Dabagh’s track

Al-Dabagh v. Case Western Reserve University
United States Court of Appeals, Sixth Circuit, 777 F.3d 355 (2015).

Case 3.1

Under what circumstances can a medical
school withhold a diploma from one of its







(Continues )

63CHAPTER 3: Ethics in Business

30301_ch03_hr_057-085.indd 63 8/30/18 12:25 PM

Unrealistic Goals for Employees Certain types of behavior on the part of managers and
owners contribute to unethical behavior among employees. Managers who set unrealistic
production or sales goals increase the probability that employees will act unethically. If

a sales quota can be met only through high-pressure, unethical sales tactics,
employees will try to act “in the best interest of the company” and behave
unethically. A manager who looks the other way when she or he knows about
an employee’s unethical behavior also sets an example—one indicating that
ethical transgressions will be accepted.

Note that even when large companies have policies against sales incentives,
individual branches may still promote them. Case Example 3.5 The financial
firm Morgan Stanley Smith Barney, LLC, has an internal policy barring sales
contests. Nevertheless, Morgan Stanley branches in Massachusetts and Rhode
Island held a sales contest in which brokers were given cash incentives of up
to $5,000 for selling securities-based loans, or SBLs (loans that allow clients
to borrow against their investments). Thirty financial advisers participated in
the sales contest for almost a year until Morgan Stanley’s compliance office
noticed and halted the practice. One regional branch reportedly tripled its
loans as a result of the contest. In 2016, the state of Massachusetts sued
Morgan Stanley, claiming that the practice violated state securities rules.5 ■

Fostering of Unethical Conduct Business owners and managers sometimes
take more active roles in fostering unethical and illegal conduct, with negative

5. In re Morgan Stanley Smith Barney, LLC, Docket No. E-2016-0055. 3 Oct. 2016. Web.

record—one member of the Committee does not recall encountering
another student with Al-Dabagh’s “repeated professionalism issues”
in his quarter century of experience—we cannot see how it did.
[Emphasis added.]

To the contrary, Al-Dabagh insists: The Committee’s decision
was a “punitive disciplinary measure” that had nothing to do with
academics. * * * His argument fails to wrestle with the prominent
place of professionalism in the university’s academic curriculum—
which itself is an academic decision courts may not lightly disturb.

Even if professionalism is an academic criterion, Al-Dabagh
persists that the university defined it too broadly. As he sees it,
the only professional lapses that matter are the ones linked to aca-
demic performance. That is not how we see it or for that matter
how the medical school sees it. That many professionalism-related
cases involve classroom incidents does not establish that only
classroom incidents are relevant to the professionalism inquiry
*  *  * . Our own standards indicate that professionalism does
not end at the courtroom door. Why should hospitals operate
any differently?

As for the danger that an expansive view of professionalism
might forgive, or provide a cloak for, arbitrary or discriminatory

behavior, we see no such problem here. Nothing in the record
suggests that the university had impermissible motives or acted
in bad faith in this instance. And nothing in our deferential stan-
dard prevents us from invalidating genuinely objectionable actions
when they occur.

The U.S. Court of Appeals for the Sixth Circuit reversed the
lower court’s order to issue a diploma to Al-Dabagh. The federal
appellate court found nothing to indicate that Case Western had
“impermissible motives,” acted in bad faith, or dealt unfairly with

Decision and Remedy The federal appellate court reversed
the lower court’s order to issue a diploma to Al-Dabagh. The court
found nothing to indicate that Case Western had “impermissible
motives,” acted in bad faith, or dealt unfairly with Al-Dabagh.

Critical Thinking

• What If the Facts Were Different? Suppose that Case
Western had tolerated Al-Dabagh’s conduct and awarded him a
diploma. What impact might that have had on other students at
the school? Why?

Why is a sales contest not a good idea for
many companies?










64 UNIT ONE: The Legal Environment of Business

30301_ch03_hr_057-085.indd 64 8/30/18 12:25 PM

consequences for their businesses. Case Example 3.6 Dr. Rajendra Gandhi and his wife were
devout Hindus who wanted to redecorate their entire home with high-quality custom
designer furniture and draperies. They hired Sonal Furniture and Custom Draperies, LLC,
because Sonal’s owner, Shyam Garg, represented himself to be culturally and religiously
like-minded. Garg told the Gandhis that he would use only the highest-quality materials
in their home, and Dr. Gandhi gave Garg a $20,000 deposit. Garg later showed up at the
couple’s home unannounced with four trucks full of furniture. The Gandhis paid Garg
$190,000 (for a total of $210,000).

Within weeks, the Gandhis began noticing that the items provided were of inferior quality.
Nearly every piece was damaged in some way. Eventually, Dr. Gandhi demanded a full refund
from Garg. Garg threatened to pursue criminal action against Dr. Gandhi, among other
things. The Gandhis sued Sonal Furniture and Garg. An expert testified that the furniture
was “not actually intended for functional use, almost like movie set furniture,” and “would
be very difficult to repair.” The court ruled in favor of the Gandhis and awarded a full refund
of the price, plus $100,000 in damages. The court found that Garg had misrepresented the
quality of the furniture and had preyed on the Ghandis’ cultural and religious heritage, using
outrageous threats, coercion, and extortion. The judgment was affirmed on  appeal.6 ■

3–2 Ethical Principles and Philosophies
How do business decision makers decide whether a given action is the “right” one for their
firms? What ethical standards should be applied? Broadly speaking, ethical reasoning—the
application of moral convictions or ethical standards to a situation—applies to businesses
just as it does to individuals. As businesses make decisions, they must analyze the alterna-
tives in a variety of ways, one of which is from an ethical perspective. In analyzing
alternatives in this way, businesses may take one of two approaches.

Generally, the study of ethics is divided into two major categories—duty-based ethics
and outcome-based ethics. Duty-based ethics is rooted in the idea that every person (and
business) has certain duties to others, including humans and the planet. Outcome-based ethics
determines what is ethical by looking at the consequences, or outcomes, of any given action.
Most companies have written codes or policies that outline their approach to ethics.

3–2a Duty-Based Ethics
Duty-based ethics focuses on the obligations of the corporation. It deals with standards
for behavior that traditionally were derived from revealed truths, religious authorities, and
philosophical reasoning. These standards involve concepts of right and wrong, duties owed,
and rights to be protected. Corporations today often describe these values or duties in their
mission statements or strategic plans. Some companies base their statements on a nonreli-
gious rationale. Others still derive their values from religious doctrine.

Religious Ethical Principles Nearly every religion has principles or beliefs about how
one should treat others. In the Judeo-Christian tradition, which is the dominant religious
tradition in the United States, the Ten Commandments of the Old Testament establish these
fundamental rules for moral action. The principles of the Muslim faith are set out in the
Qur’an, and Hindus find their principles in the four Vedas.

Religious rules generally are absolute with respect to the behavior of their adherents.
Example 3.7 The commandment “Thou shalt not steal” is an absolute mandate for a person
who believes that the Ten Commandments reflect revealed truth. Even a benevolent motive
for stealing (such as Robin Hood’s) cannot justify the act, because the act itself is inherently
immoral and thus wrong. ■

6. Gandhi v. Sonal Furniture and Custom Draperies, LLC, 192 So.3d 783 (La.App. 2015).

Learning Objective 2
How do duty-based ethical
standards differ from
outcome-based ethical

Ethical Reasoning A reasoning
process in which an individual links
his or her moral convictions or ethical
standards to the situation at hand.

Duty-Based Ethics An ethical
philosophy rooted in the idea that
every person (and every business)
has certain duties to others, including
both humans and the planet.

Outcome-Based Ethics An ethical
philosophy that focuses on the
consequences of any given action
in order to maximize benefits and
minimize harms.

Abraham Lincoln
(Sixteenth president of the United
States, 1861–1865)

“When I do good, I feel
good. When I do bad,
I feel bad. And that’s
my religion.”

65CHAPTER 3: Ethics in Business

30301_ch03_hr_057-085.indd 65 8/30/18 12:25 PM

For businesses, religious principles can be a unifying force
for employees or a rallying point to increase employee motiva-
tion. They can also present problems, however, when owners,
suppliers, employees, and customers have varying religious
backgrounds. Taking an action based on religious principles,
especially when those principles address socially or politically
controversial topics, can lead to negative publicity and even
to protests or boycotts.

Example 3.8 Bright Futures, a family-owned educational
supply business in California, hires Jamie as a bookkeeper.
When Jamie tells the owners that she is transgender, she is
fired because of their religious beliefs. When Jamie’s story
is published in the local media, Bright Futures loses many
customers. Eventually, Bright Futures closes down. ■

The Principle of Rights Another view of duty-based eth-
ics focuses on basic rights. The principle that human beings
have certain fundamental rights (to life, freedom, and the

pursuit of happiness, for instance) is deeply embedded in Western culture. As discussed
in Chapter 1, the natural law tradition embraces the concept that certain actions (such as
killing another person) are morally wrong because they are contrary to nature (the natural
desire to continue living).

Those who adhere to the principle of rights, or “rights theory,” believe that a key factor in
determining whether a business decision is ethical is how that decision affects the rights of
others. These others include the firm’s owners, its employees, the consumers of its products
or services, its suppliers, the community in which it does business, and society as a whole.

Conflicting Rights. A potential dilemma for those who support rights theory is that they
may disagree on which rights are most important. When considering all those affected by
a business decision to downsize a firm, for instance, how much weight should be given to
employees relative to shareholders? Which employees should be laid off first—those with
the highest salaries or those who have worked for the firm for a shorter time (and have less
seniority)? How should the firm weigh the rights of customers relative to the community, or
of employees relative to society as a whole?

Resolving Conflicts. In general, rights theorists believe that whichever right is stronger
in a particular circumstance takes precedence. Example 3.9 Murray Chemical Corporation
has to decide whether to keep a chemical plant in Utah open, thereby saving the jobs of a
hundred and fifty workers, or shut it down. Closing the plant will prevent the contamination
of a river with pollutants that would endanger the health of tens of thousands of people. In
this situation, a rights theorist can easily choose which group to favor because the value of
the right to health and well-being is obviously stronger than the basic right to work. Not all
choices are so clear-cut, however. ■

Kantian Ethical Principles Duty-based ethical standards may be derived solely from
philosophical reasoning. The German philosopher Immanuel Kant (1724–1804) identified
some general guiding principles for moral behavior based on what he thought to be the
fundamental nature of human beings. Kant believed that human beings are qualitatively
different from other physical objects and are endowed with moral integrity and the capacity
to reason and conduct their affairs rationally.

People Are Not a Means to an End. Based on his view of human beings, Kant said that
when people are treated merely as a means to an end, they are being treated as the equiv-
alent of objects and are being denied their basic humanity. For instance, a manager who
treats subordinates as mere profit-making tools is less likely to retain motivated and loyal

Principle of Rights The belief that
human beings have certain funda-
mental rights.

How can religious beliefs complicate or enhance a business owner’s
operations and decisions?









66 UNIT ONE: The Legal Environment of Business

30301_ch03_hr_057-085.indd 66 8/30/18 12:25 PM

employees than a manager who respects subordinates. Management research has shown
that emplo yees who feel empowered to share their thoughts, opinions, and solutions to
problems are happier and more productive.

The Categorical Imperative. When a business makes unethical decisions, it often ratio-
nalizes its actions by saying that the company is “just one small part” of the problem or
that its decision would have “only a small impact.” A central theme in Kantian ethics
is that individuals should evaluate their actions in light of the consequences that would
follow if everyone in society acted in the same way. This categorical imperative can be applied
to any action.

Example 3.10 CHS Fertilizer is deciding whether to invest in expensive equipment that will
decrease profits but will also reduce pollution from its factories. If CHS has adopted Kant’s
categorical imperative, the decision makers will consider the consequences if every company
invested in the equipment (or if no company did so). If the result would make the world a
better place (less polluted), CHS’s decision would be clear. ■

3–2b Outcome-Based Ethics: Utilitarianism
In contrast to duty-based ethics, outcome-based ethics focuses on
the consequences of an action, not on the nature of the action itself
or on any set of preestablished moral values or religious beliefs.
Outcome-based ethics looks at the impacts of a decision in an attempt
to maximize benefits and minimize harms.

The premier philosophical theory for outcome-based decision
making is utilitarianism, a philosophical theory developed by Jeremy
Bentham (1748–1832) and modified by John Stuart Mill (1806–
1873)—both British philosophers. “The greatest good for the greatest
number” is a paraphrase of the major premise of the utilitarian
approach to ethics.

Cost-Benefit Analysis Under a utilitarian model of ethics, an
action is morally correct, or “right,” when, among the people it
affects, it produces the greatest amount of good for the greatest num-
ber (or creates the least amount of harm). When an action affects the majority adversely, it
is morally wrong. Applying the utilitarian theory thus requires the following steps:

1. A determination of which individuals will be affected by the action in question.

2. A cost-benefit analysis, which involves an assessment of the negative and positive effects of alter-
native actions on these individuals.

3. A choice among alternative actions that will produce maximum societal utility (the greatest positive
net benefits for the greatest number of individuals).

For instance, assume that expanding a factory would provide hundreds of jobs but generate
pollution that could endanger the lives of thousands of people. A utilitarian analysis would
find that saving the lives of thousands creates greater good than providing jobs for hundreds.

Problems with the Utilitarian Approach There are problems with a strict utilitarian
analysis. In some situations, an action that produces the greatest good for the most people
may not seem to be the most ethical.

Example 3.11 Phazim Company is producing a drug that will cure a disease in 99
percent of patients, but the other 1 percent will experience agonizing side effects and a
horrible, painful death. A quick utilitarian analysis would suggest that the drug should
be produced and marketed because the majority of patients will benefit. Many people,
however, have significant concerns about manufacturing a drug that will cause serious
harm to anyone. ■

Categorical Imperative An ethical
guideline developed by Immanuel Kant
under which an action is evaluated
in terms of what would happen if
everybody else in the same situation,
or category, acted the same way.

Utilitarianism An approach to
ethical reasoning in which an action
is evaluated in terms of its conse-
quences for those whom it will affect.
A “good” action is one that results
in the greatest good for the greatest
number of people.

Cost-Benefit Analysis
A decision-making technique that
involves weighing the costs of a
given action against the benefits of
that action.

How might a company use Kant’s categorical imperative to
decide whether to voluntarily reduce pollution?









67CHAPTER 3: Ethics in Business

30301_ch03_hr_057-085.indd 67 8/30/18 12:25 PM

3–2c Corporate Social Responsibility
In pairing duty-based concepts with outcome-based concepts, strategists and theorists devel-
oped the idea of the corporate citizen, which we touched on earlier, and the concept of
corporate social responsibility. Corporate social responsibility (CSR) combines a commitment to
good citizenship with a commitment to making ethical decisions, improving society, and
minimizing environmental impact. CSR is not imposed on a corporation by law but is instead
a form of self-regulation by the company.

CSR is a relatively new concept in the history of business, but it is a concept that becomes
more important every year. A survey of U.S. executives undertaken by the Boston College
Center for Corporate Citizenship found that more than 70 percent of those polled agreed
that corporate citizenship must be treated as a priority. More than 60 percent said that good
corporate citizenship added to their companies’ profits.

CSR can be a successful strategy for companies, but corporate decision makers must not
lose track of the two descriptors in the title: corporate and social. The company must link
the responsibility of citizenship with the strategy and key principles of the business. Incor-
porating both the social and the corporate components of CSR and making ethical decisions
can help companies grow and prosper.

CSR is most successful when a company undertakes activities that are significant and
related to its business operations. Some types of activities that businesses are practicing
today include the following:

1. Environmental efforts, such as using efficient building materials and reducing the size of the firm’s
carbon footprint.

2. Ethical labor practices, including treating all employees fairly and ethically in international as well as
domestic operations.

3. Charitable donations to local and national causes.

4. Volunteering for specific issues and organizations. As an incentive, many companies now pay
employees to perform volunteer work.

The Corporate Aspects of CSR Arguably, any socially
responsible activity will benefit a corporation. A corporation
may see an increase in goodwill from the local community for
creating a sports park, for instance. A corporation that is viewed
as a good citizen may see a rise in sales. Example 3.12 Sales have
increased for Ben & Jerry’s ice cream since the 1980s when
the company became known for its socially responsible busi-
ness practices. The company uses only fair trade ingredients
and opposes the use of growth hormones in cows. It promotes
sustainability programs for dairy farmers and supports family
farms. ■

At times, the benefit may not be immediate. It may cost more
initially to construct a new plant that meets the high standards
necessary to be certified as environmentally friendly by the
LEED program, for example. (LEED stands for Leadership in
Energy and Environmental Design.) Nevertheless, over the life
of the building, the savings in maintenance and utilities may
more than make up for the extra cost of construction.

Surveys of college students about to enter the job market confirm that young people are
looking for socially responsible employers. While socially responsible activities may cost
a corporation now, they may also lead to more talented and more committed employees.
Corporations that engage in meaningful social activities retain workers longer, particularly

Corporate Social Responsibility
(CSR) The idea that corporations
can and should act ethically and
be accountable to society for their








How did Ben & Jerry’s benefit from promoting sustainability in its

68 UNIT ONE: The Legal Environment of Business

30301_ch03_hr_057-085.indd 68 8/30/18 12:25 PM

younger ones. Example 3.13 Google’s focus on social responsibility attracts many young
workers. Google has worked to reduce its carbon footprint and to make its products and
services better for the environment. The company promotes green commuting, recycling,
and reducing energy consumption at its data centers. ■

The Social Aspects of CSR Because business controls so much of the wealth and power
in this country, it has a responsibility to use that wealth and power in socially beneficial
ways. Thus, the social aspect requires that corporations demonstrate that they are promot-
ing goals that society deems worthwhile and are moving toward solutions to social prob-
lems. Companies may be judged on how much they donate to social causes, as well as how
they conduct their operations with respect to employment discrimination, human rights,
environmental concerns, and similar issues. Millennials, in particular, are concerned about
corporate social responsibility.

Some corporations publish annual social responsibility reports, which may also be called
citizenship or sustainability reports. Example 3.14 The multinational technology company
Cisco Systems, Inc., issues corporate responsibility reports to demonstrate its focus on peo-
ple, society, and the planet. In a recent report, Cisco outlined its commitment to develop-
ing its employees’ skills, ethical conduct, and charitable donations (including matching
employee contributions and giving employees time off for volunteer work). Cisco also
reported on the social and economic impact of its business globally, in the areas of human
rights, labor, privacy and data security, and responsible manufacturing. The report indicated
that Cisco had completed more than a hundred energy-efficient projects and was on track to
meet its goals of reducing emissions from its worldwide operations by 40 percent. ■

Stakeholders and CSR One view of CSR stresses that corporations have a duty not just
to shareholders, but also to other groups affected by corporate decision making, called
stakeholders. The rationale for this “stakeholder view” is that, in some circumstances,
one  or  more of these groups may have a greater stake in company decisions than the
shareholders do.

A corporation’s stakeholders include its employees, customers, creditors, suppliers, and
the community in which it operates. Advocacy groups, such as environmental groups and
animal rights groups, may also be stakeholders. Under the stakeholder approach, a corpo-
ration considers the impact of its decision on these stakeholders, which helps it to avoid
making a decision that may appear unethical and may result in negative publicity.

The most difficult aspect of the stakeholder analysis is determining which group’s interests
should receive greater weight if the interests conflict. For instance, companies that are strug –

gling financially sometimes lay off workers to reduce labor costs. But some corporations have
found ways to avoid slashing their workforces and to prioritize their employees’ interests.
Companies finding alternatives to layoffs include Dell (extended unpaid holidays), Cisco
(four-day end-of-year shutdowns), Motorola (salary cuts), and Honda (voluntary unpaid
vacation time). These alternatives not only benefit the employees who get to keep their
jobs, but also the community as whole. Working people can afford to go out to local
restaurants and shops and use local service providers. Thus, other businesses in the com-
munity benefit.

3–3 Sources of Ethical Issues in Business Decisions
A key to avoiding unethical conduct is to recognize how certain situations may lead indi-
viduals to act unethically. In this section, we first consider some specific areas in which eth-
ical decisions may often arise. We then discuss some additional problems in making ethical
business decisions.

Stakeholders Groups that are
affected by corporate decisions.
Stakeholders include employees,
customers, creditors, suppliers, and
the community in which the corpora-
tion operates.

69CHAPTER 3: Ethics in Business

30301_ch03_hr_057-085.indd 69 8/30/18 12:25 PM

3–3a Short-Term Profit Maximization
Businesspersons often commit ethical violations because they are too focused on one issue or
one needed result, such as increasing profits or outperforming the competition. Some studies
indicate that top-performing companies may actually be more likely to behave unethically
than less successful companies, because employees feel they are expected to continue per-
forming at a high level. Thus, abnormally high profits and stock prices may lead to unethical

In attempting to maximize profits, corporate executives and employees have to distin-
guish between short-run and long-run profit maximization. In the short run, a company may
increase its profits by continuing to sell a product even though it knows that the product is
defective. In the long run, though, because of lawsuits, large settlements, and bad publicity,
such unethical conduct will cause profits to suffer. An overemphasis on short-run profit
maximization is perhaps the most common reason that ethical problems occur in business.

Case Example 3.15 Volkswagen’s corporate executives were
accused of cheating on the pollution emissions tests of mil-
lions of vehicles that were sold in the United States. Volkswagen
(VW) eventually admitted that it had installed “defeat device”
software in its diesel models. The software detected when the
car was being tested and changed its performance to improve
the test outcome. As a result, the diesel cars showed low
emissions—a feature that made the cars more attractive to
today’s consumers.

Ultimately, Volkswagen agreed to plead guilty to criminal
charges and pay $2.8 billion in fines. The company also agreed
to pay $1.5 billion to the Environmental Protection Agency to
settle the federal investigation into its “clean diesel” emissions
fraud. Overall, the scandal has cost VW nearly $15 billion (in
fines and to compensate consumers or buy back their vehicles).
Even though the company has settled, six top executives at VW
were charged with criminal wire fraud, conspiracy, and viola-
tions of the Clean Air Act. In the end, the company’s focus on

maximizing profits in the short run (with increased sales) led to unethical conduct that will
hurt profits in the long run.7 ■

In the following case, a drug manufacturer was accused of fabricating the “average whole-
sale prices” for its drugs to maximize its profits and receive an overpayment from Medicaid.

Learning Objective 3
What is short-term profit
maximization, and why does
it lead to ethical problems?

7. In re Volkswagen “Clean Diesel” Marketing, Sales Practices, and Product Liability Litigation, 229 F.Supp.3d 1052 and 2017 WL 66281
(N.D.Cal. 2017).

How did short-term profit maximization backfire on German car
manufacturer Volkswagen?

Background and Facts Watson Laboratories, Inc., makes
generic drugs, which are provided by pharmacies to Medicaid
patients. In the state of Mississippi, a claim is submitted for the
cost of the drug to Mississippi Medicaid. The claim is paid accord-
ing to a percentage of the drug’s average wholesale price (AWP).
Like other drug makers, Watson published its products’ AWPs. But

for more than a dozen years, Watson set each AWP to meet the
requirements to obtain a generic designation for the drug, without
regard to the actual price.

When Mississippi Medicaid learned that the actual prices
were much lower than the published AWPs, the state filed a law-
suit in a Mississippi state court against Watson, alleging fraud.

Watson Laboratories, Inc. v. State of Mississippi
Supreme Court of Mississippi, __ So.3d __, 2018 WL 372297 (2018).

Case 3.2










70 UNIT ONE: The Legal Environment of Business

30301_ch03_hr_057-085.indd 70 8/30/18 12:25 PM

The court concluded that Watson caused the state to overpay for
the drugs and ordered the payment of more than $30 million in
penalties, damages, and interest. Watson appealed.

In the Words of the Court . . .
CHAMBERLIN, Justice, for the court:

* * * *
* * * The elements of an intentional * * * fraudulent repre-

sentation are:

(1) a representation, (2) its falsity, (3) its materiality, (4) the speak-
er’s knowledge of its falsity or ignorance of its truth, (5) his intent
that it should be acted on by the hearer and in the manner rea-
sonably contemplated, (6) the hearer’s ignorance of its falsity,
(7) his reliance on its truth, (8) his right to rely thereon, and (9) his
consequent and proximate injury.

* * * *
* * * The numbers [published] by Watson * * * were not “sug-

gested wholesale prices” or “list prices.” They were fabricated num-
bers tied to nothing more than a ceiling amount it was necessary to
stay under in order to obtain a generic designation. [Emphasis added.]

* * * Thus, Watson did make a false representation.
* * * *
* * * Watson knew that Mississippi Medicaid would rely on

its false statements and benefitted from this reliance. It is evident
that Watson intended to deceive Mississippi Medicaid.

* * * *
Mississippi Medicaid had every right to rely on AWP [average

wholesale price] as a “starting point” or “benchmark” for deter-
mining appropriate reimbursement rates. They were held out as a
“suggested wholesale price.”

* * * *
Evidence in the record is sufficient to show the overpayment

for the drugs in question. The extent of the damages, through just
and reasonable inference, has been supported by the evidence.
[Emphasis added.]

* * * *
In sum, * * * Watson defrauded the State. For years, Watson

intentionally published its AWPs * * * with the knowledge and
intent that Mississippi Medicaid would rely on the figures for its
reimbursement formulas. * * * Mississippi Medicaid did not know
that the AWPs had no relation to the actual prices paid for the
drugs. As such, Mississippi Medicaid continued to reasonably
rely on the AWPs * * * . All the while, Watson * * * exploited
Mississippi Medicaid’s lack of knowledge at the expense of the
taxpayers of the State of Mississippi.

Decision and Remedy The Mississippi Supreme Court
affirmed the lower court’s order. Watson falsely misrepresented
its AWPs, and it “knew that Mississippi Medicaid would rely
on its false statements, and [Watson] benefitted from this

Critical Thinking

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

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

3–3b Social Media
Advancements in technology have created various new ethical issues for companies. Here, we
focus on those involving social media. Most people think of social media—Facebook, Flickr,
Instagram, Snapchat, Tumblr, Twitter, Pinterest, WhatsApp, LinkedIn, and the like—as simply
ways to communicate rapidly. But everyone knows that they can quickly encounter ethical and
legal disputes for posting statements that others interpret as harassing, inappropriate, insult-
ing, or racist. Businesses often face ethical issues with respect to these social media platforms.

The Use of Social Media to Make Hiring Decisions In the past, to learn about a
prospective employee, an employer would ask the candidate’s former employers for refer-
ences. Today, employers are likely to also conduct Internet searches to discover what job
candidates have posted on their Facebook pages, blogs, and tweets.

On the one hand, job candidates may be judged by what they post on social media. On the
other hand, though, they may be judged because they do not participate in social media. Given
that the vast majority of younger people use social media, some employers have decided that
the failure to do so raises a red flag. In either case, many people believe that judging a job
candidate based on what she or he does outside the work environment is unethical.

71CHAPTER 3: Ethics in Business

30301_ch03_hr_057-085.indd 71 8/30/18 12:25 PM

The Use of Social Media to Discuss Work-Related Issues Because so many
Americans use social media daily, they often discuss work-related issues there. Numer-
ous companies have strict guidelines about what is appropriate and inappropriate
for employees to say when posting on their own or others’ social media accounts. A num-
ber of companies have fired employees for such activities as criticizing other employees
or managers through social media outlets. Until recently, such disciplinary measures were
considered ethical and legal.

The Responsibility of Employers. A ruling by the National Labor Relations Board (NLRB—
the federal agency that investigates unfair labor practices) has changed the legality of such
actions. Example 3.16 At one time, Costco’s social media policy specified that its employees
should not make statements that would damage the company, harm another person’s repu-
tation, or violate the company’s policies. Employees who violated these rules were subject
to discipline and could be fired.

The NLRB ruled that Costco’s social media policy violated federal labor law, which pro-
tects employees’ right to engage in “concerted activities.” Employees can freely associate
with each other and have conversations about common workplace issues without employer
interference. This right extends to social media posts. Therefore, an employer cannot broadly
prohibit its employees from criticizing the company or co-workers, supervisors, or managers
via social media. ■

The Responsibility of Employees. While most of the discussion in this chapter concerns
the ethics of business management, employee ethics is also an important issue. For instance, is
it ethical for employees to make negative posts in social media about other employees or, more
commonly, about managers? After all, negative comments about managers reflect badly on those
managers, who often are reluctant to respond via social media to such criticism. Disgruntled
employees may exaggerate the negative qualities of managers whom they do not like.

Some may consider the decision by the National Labor Relations Board outlined in
Example 3.16 to be too lenient toward employees and too stringent toward management. There
is likely to be an ongoing debate about how to balance employees’ right to free expression
against employers’ right to prevent the spreading of inaccurate negative statements online.

3–3c Awareness
Regardless of the context in which a decision is called for, sometimes businesspersons are not
even aware that the decision has ethical implications. Perhaps they are focused on something

else, for instance, or perhaps they do not take the time to think
through their actions.

Case Example 3.17 Japanese airbag maker Takata Corporation
manufactured some airbags that used an ammonium nitrate-
based propellant without a chemical drying agent. It was later
discovered that these airbags tended to deploy explosively,
especially in higher temperatures, higher humidity, and older
vehicles. When the airbags deployed, metal inflator cartridges
inside them sometimes ruptured, sending metal shards into
the passenger cabin.

By the beginning of 2017, these defective airbags had caused
11 deaths and 180 injuries in the United States. The federal gov-
ernment ordered recalls of the devices in nearly 42 million vehi-
cles nationwide. Takata executives likely did not intend to hurt
consumers and may not even have considered the ethics of their
decision. Takata, however, continued to produce airbags with this
defect for years. A class-action lawsuit has been filed against the
company. (Takata filed for bankruptcy protection in 2017.)8 ■

8. In re Takata Airbag Products Liability Litigation, 84 F.Supp.3d 1371 (2015).

Takata Corporation knew about its defective airbags, yet it contin-
ued to use them in production. How can business managers learn
from Takata’s situation?









72 UNIT ONE: The Legal Environment of Business

30301_ch03_hr_057-085.indd 72 8/30/18 12:25 PM

3–3d Rationalization
Assuming that is unacceptable to claim ignorance of the ethical dimensions of a business
decision, the difficult challenge of making an ethical decision still exists. Sometimes,
businesspersons make a decision that benefits them or their company that they know is
ethically questionable. Afterward, they rationalize their bad behavior. For instance, an
employee might rationalize that it is acceptable to take company property for personal
use or to lie to a client just this one time, because she or he normally does not steal and
is usually honest. An executive might rationalize that unethical conduct directed against
a certain competitor is acceptable because that company deserves it. Individuals might
rationalize that their conduct is simply a part of doing business and is not personal or

One suggestion that is useful in counteracting rationalization is for businesspersons to
first decide the right thing to do on an ethical level before making a business decision. Then they
can figure out how to mitigate the costs of doing the right thing. This works much better
to prevent unethical conduct than making decisions based solely on a financial or business
basis and then trying to make that result seem ethical (by rationalizing).

3–3e Uncertainty
One common denominator identified by businesspersons who have faced ethical problems
is the feeling of uncertainty. They may be uncertain as to what they should do, what they
should have done, or (as mentioned) whether there was even an ethical issue or ethical
breach involved. Such uncertainty is practically unavoidable, but it should be treated as an
indicator of a potential ethical problem.

When employees or executives express uncertainty about a particular decision, it is there-
fore best to treat the situation as involving an ethical issue. Decision makers should try to
identify what the ethical dilemma is and why the individual or group is feeling uneasy. They
should also take the time to think through the decision completely and discuss various
options. They might want to consider whether the company would be pleased if the deci-
sion were reported to its clients or to the public. Building a process that supports and assists
those facing ethical dilemmas can be key to avoiding unethical business practices (and any
corresponding negative publicity).

3–4 Making Ethical Business Decisions
Even if officers, directors, and others in a company want to make ethical decisions, it is
not always clear what is ethical in a given situation. Thinking beyond things that are easily
measured, such as profits, can be challenging. Although profit projections are not always
accurate, they may be more objective than considering the personal impacts of decisions on
employees, shareholders, customers, and the community. But this subjective component of
decision making can be equally important to a company’s long-run profits.

Individuals entering the global corporate community, even in entry-level positions, must
be prepared to make hard decisions. Sometimes, there is no “good” answer to the questions
that arise. Therefore, it is important to have tools to help in the decision-making process and
a framework for organizing those tools.

Several frameworks exist to help businesspersons make ethical decisions. Some frame-
works, for instance, focus more on legal than ethical implications. This approach tends to be
primarily outcome-based and, as such, may not be appropriate for a company that is values
driven or committed to corporate social responsibility (or has a consumer or investor base
that is focused on CSR). Other models, such as the Business Process Pragmatism™ proce-
dure developed by ethics consultant Leonard H. Bucklin, set out a series of steps to follow.
In this text, we present a modified version of this system that we call IDDR. (“I Desire to Do
Right” is a useful mnemonic device for remembering the name.)

Warren E. Buffett
(American businessperson and

“If you are uncertain
about an issue, it’s
useful to ask yourself,
‘Would I be absolutely
comfortable for my
actions to be disclosed
on the front page
of my hometown

73CHAPTER 3: Ethics in Business

30301_ch03_hr_057-085.indd 73 8/30/18 12:25 PM

3–4a A Systematic Approach: IDDR (“I Desire to Do Right”)
Using the IDDR approach involves organizing the issues and approaching them systemat-
ically. This process can help eliminate various alternatives and identify the strengths and
weaknesses of the remaining alternatives. Often, the best approach is for a group (rather
than an individual) to carry out the process, which comprises the following steps. Thus,
if an individual employee is facing an ethical issue, she or he should talk with her or his
supervisor, and then they should perform the following steps together.

Step 1: Inquiry The first step in making an ethical decision is to understand the problem.
If an employee feels uneasy about a particular decision, pay attention. Ask questions. People
generally know when something does not “feel” right, and this is often a good indicator that
there may be an ethical problem. The decision makers must identify the ethical problem
and all the parties involved—the stakeholders. It is important that they not frame the issue
in a way that gives them the answer they might prefer. After gathering the relevant facts,
the decision makers can also consider which ethical theories can help them analyze the
problem thoroughly. Making a list of the ethical principles that will guide the decision may
be helpful at this point.

Step 2: Discussion Once the ethical problem or problems have been clarified, a list of
possible actions can be compiled. In discussing these alternatives, the decision makers
should take time to think through each alternative completely and analyze its potential
impact on various groups of stakeholders. They must evaluate the strengths and weaknesses
of each option, along with its ethical and legal consequences. It is helpful to discuss with
management the ultimate goals for the decision. At this point, too, the decision makers
need to consider what they should do (what is the most ethical) before considering what
they can or will do.

Step 3: Decision With all the relevant facts collected and the alternatives thoroughly ana-
lyzed and discussed, it’s time to make a decision. Those participating in the decision-making
process now work together to craft a consensus decision or plan of action for the company.
Once the decision has been made, the decision makers should use the analysis from the
discussion step to articulate the reasons they arrived at the decision. This results in docu-
mentation that can be shared with stakeholders to explain why the course of action is an
ethical solution to the problem.

Step 4: Review After the decision has been made and implemented, it is important for the
decision maker(s) to review the outcome to determine whether the solution was effective.
Did the action solve the ethical problem? Were the stakeholders satisfied with the result?
Could anything have been handled better? The results of this evaluation can be used in
making future decisions. Successful decision makers learn from their mistakes and continue
to improve.

3–4b Applying the IDDR Approach—A Sample Scenario
To really understand the IDDR approach, it is helpful to work through the process by ana-
lyzing an ethical problem. Here, as a sample, we present a scenario that is based on a real
story but contains fictional elements as well. The conversations and analyses included in the
scenario are fictional. Because any discussions that may have happened took place behind
closed doors, we cannot know if any ethical analysis or discussions about ethics occurred.

Example 3.18 Assume that you are an intern working on a social media campaign for Duane
Reade, a New York pharmacy chain. As part of your internship, you follow several celebrity
gossip Web pages and do regular Internet searches looking for any picture or mention of the

Learning Objective 4
What are the four steps
in the IDDR approach to
ethical decision making?

74 UNIT ONE: The Legal Environment of Business

30301_ch03_hr_057-085.indd 74 8/30/18 12:25 PM

stores. In the course of these searches, you find a picture of Katherine Heigl leaving a Duane
Reade store carrying bags imprinted with the company logo. (Katherine Heigl is a recog-
nizable actress from television’s Grey’s Anatomy and several major movies.) You can easily
copy the picture to the company’s Twitter account and add a caption about her shopping at
one of the stores. Having customers or potential customers seeing this well-known person
carrying Duane Reade bags and leaving the store could increase store visits and sales.

The question is this: Is it appropriate to use Heigl’s photo without her permission as part
of an advertising campaign? Use the IDDR approach to analyze what you should do. Assume
that you, your supervisor, and a few other members of the marketing department engage in
this analysis. ■

Step 1: Inquiry To begin, clarify the nature of the problem. You want to use a picture of
Heigl from a celebrity gossip Web page to potentially increase profits for the company. The
problem could be phrased in this way: “Is it ethical to use a picture of a famous person to try
to improve sales without contacting her or the photographer first?” Note that the way you
frame the question will affect how you answer it. For example, if the question was phrased,
“Should we steal this picture?” the answer would be obvious. Remember not to frame the
issue in a way that gives you the answer you might want.

You also need to identify the stakeholders. Here, the stakeholders include Heigl, the
photographer who took the picture, Heigl’s fans, and the potential customers of Duane
Reade. Other stakeholders include your boss (who will get credit if sales increase due to the
marketing campaign), Duane Reade stockholders, and store employees (who might see an
increase in customers).

When gathering the facts, determine whether there are any legal issues. Given these facts,
there may be state and federal laws that would guide a decision. For instance, reproducing a pho-
tograph without the owner’s permission might violate federal copyright laws. In addition, most
states have laws (sometimes called right to publicity laws) that protect a person’s name, voice,
or likeness (image or picture) from being used for advertising without the person’s consent.

You can also consider which ethical theories can help you analyze the problem. The
ethical theories may include religious values, rights theory, the categorical imperative, and
utilitarianism. Ask yourself whether it is right, or ethical, to use Heigl’s name or face without
her permission as part of an advertising campaign.

Step 2: Discussion Several actions could be taken in this sample situation. Each action
should be thoroughly analyzed using the various ethical approaches identified by the deci-
sion makers. The ultimate goals for the decision are to increase sales and do the least
amount of harm to the business and its reputation without compromising the values of
the business. We will analyze three alternatives here, though it is important as a decision
maker to brainstorm and find as many options as possible. Exhibit 3–1 shows how our three
alternatives could be analyzed.

It is important to note that different ethical perspectives will be more or less helpful in
different situations. In the sample scenario, a strong argument can be made that Heigl’s rights
to privacy and to control her image are very important. Under other circumstances, however,
the right to privacy might be outweighed by some other right, such as another person’s right
to safety. Using multiple theories will help ensure that the decision maker can work through
the analytical process and find a result.

Step 3: Decision After a lively discussion concerning Heigl’s rights to privacy and to
compensation for the use of her image, the decisions makers come to a consensus. Given
the potential for increased income, the company decides to use the picture. It will be posted
on the company’s Twitter account with a caption that reads, “Love a quick #DuaneReade
run? Even @KatieHeigl can’t resist shopping #NYC’s favorite drugstore.”

75CHAPTER 3: Ethics in Business

30301_ch03_hr_057-085.indd 75 8/30/18 12:25 PM

Make sure to articulate the reasons you arrived at the decision to serve as documentation
explaining why the plan of action was ethical. In this meeting, the persuasive evidence was
the projection for increased revenue balanced by the minimal harm to Heigl. Because the
picture was taken on a public street, the people in the room did not feel that it involved a vio-
lation of any privacy right. The company would not have paid Heigl to do an advertisement.
Also, because only people who followed Duane Reade on Twitter could view the tweet, the
group felt the likelihood of any damage to Heigl was small. Most people felt that the worst
that could happen would be that Heigl would ask them to remove it.

Step 4: Review You and the other decision makers at Duane Reade need to review the
effectiveness of your decision. Assume that after the picture and caption are posted on
Twitter, Heigl sees it and sues Duane Reade for “no less than $6 million.” She argues
that the company violated her rights by falsely claiming that she had endorsed its stores
and that it misappropriated her name and likeness for a profit. The case is settled out of
court, with Duane Reade paying an undisclosed amount to a foundation that Heigl created.



1. Use the Pic-
ture without

How does this alter-
native comply with
copyright law? Are
there any excep-
tions to copyright
law that would
allow this use?

Is this stealing? If
so, it violates reli-
gious principles. Is
it stealing to use a
picture taken on a
public street?

If everyone did this,
then the images and
names of famous
people would often
be used to promote
products. Is this a
good thing or not?

Using the picture
may negatively
impact the Web
page or Heigl’s
ability to make
money using her
image. It also may
violate some right to

If we use the pic-
ture, we may see
an increase in sales
and an improve-
ment in reputation.
We may, however,
be sued for using
her image without

2. Contact the
Web Page and/
or Heigl for

Are there any laws
that would make
this alternative
illegal? Are there
any precautions
we should take
when asking for
permission to
avoid any appear-
ance of threat or

This alternative
clearly is not steal-
ing and thus would
align with religious

If everyone asked
for permission, then
such material would
not be used without
permission. This
would seem to make
the world a better

Getting permission
would not seem to
violate anyone’s
rights. In fact, giving
someone the oppor-
tunity to decide
might enhance that
person’s rights.

If we contact the
parties for per-
mission, we may
be able to use the
image, make more
money, and improve
our reputation. But
the parties might
refuse to give per-
mission or demand
payment, which
would cost the com-
pany money.

3. Do Not Use the

There are no legal
implications to not
using the picture.

This alternative
clearly is not steal-
ing and thus would
align with religious

If companies
never used public,
candid images of
famous people,
then all advertising
would be staged.
This might not
make the world
a better place.

Not using the pic-
ture may damage
the stockholders’
right to maximum
income or the
company’s right
to advertise as it
sees fit.

If we do not use the
picture, we avoid
potential lawsuits.
Alternatively, we
won’t have the
potential increase
in sales associated
with the use of the
famous face.

Exhibit 3–1 An Analysis of Ethical Approaches to the Sample Dilemma

76 UNIT ONE: The Legal Environment of Business

30301_ch03_hr_057-085.indd 76 8/30/18 12:25 PM

Here, the decision did not solve the ethical problem and, in fact, led to liability. Decision
makers need to determine what they could have done better. Perhaps they should change
their practices and obtain legal counsel for their marketing department—or at least hire a
legal consultant when ethical issues arise. Perhaps they need to establish an internal process
for getting permission to use pictures from social media or other sources. In any event, it
is likely that the company should change some of its policies and practices related to social
media marketing.

The decision-making process is not easy or precise. It may entail repeating steps as deci-
sion makers recognize new alternatives or as unforeseen stakeholders appear. Sometimes,
the analysis will lead to a clear decision, and other times it will not. Even if it does not, the
process will allow decision makers to enter the public phase of the decision (action) with a
better idea of what consequences to expect.

For more on the IDDR approach to ethical decision making, see the Business Law Analysis

Pfizer, Inc., developed a new antibiotic called Trovan (trovafloxacinmesylate).
Tests in animals showed that Trovan had
life-threatening side effects, including joint
disease, abnormal cartilage growth, liver
damage, and a degenerative bone condi-
tion. Pfizer was seeking approval from the
Food and Drug Administration (FDA) to
market Trovan for use in the United States
when an epidemic of bacterial meningitis
swept across Nigeria.

Pfizer sent three U.S. physicians to test
Trovan on children who were patients in
Nigeria’s Infectious Disease Hospital.
Pfizer’s representatives obtained all
necessary approvals from the Nigerian
government and had Nigerian nurses
explain the details of the study to par-
ents and inform them that participation
was voluntary. They did not, however,
alert the parents or patients about the
serious risks involved, or tell them about
an effective conventional treatment that
Doctors without Borders was providing
at the same site. The results of the study
showed that Trovan had a success rate
of 94.4 percent in treating the children’s

condition. Nevertheless, eleven children
died in the experiment, and others were
left blind, deaf, paralyzed, or brain dam-
aged. Rabi Abdullahi and other Nigerian
children filed a suit in a U.S. federal court
against Pfizer, alleging a violation of a
customary international law norm prohib-
iting involuntary medical experimentation
on humans.

Analysis: Pfizer could have applied
the IDDR approach to review the ethical
conflicts in a test of Trovan. (1) In the
inquiry step, decision makers ask ques-
tions to understand the ethical dilemma,
identify the stakeholders, gather relevant
facts, and articulate the ethical principles
at issue. (2) In the discussion step, the
decision makers further explore poten-
tial actions and their effects. (3) The next
step is to come to a consensus decision
as to what to do. This consensus should
withstand moral scrutiny and fulfill cor-
porate, community, and individual values.
(4) The last step is to review the outcome
to determine whether it was effective and
what the company could do better. In this

instance, for example, fully informing the
patients and their parents about the risks
of the treatment would have been a better
course of action.

Result and Reasoning: It seems
unlikely that a proposed Trovan test on
children, based on the facts described
here, would have survived an IDDR anal-
ysis, under either a duty-based or an out-
come-based ethical standard. It also would
appear that Pfizer was rushing to test and
market Trovan as soon as possible. This
focus on short-run profit maximization
took precedence over any ethical consid-
erations. It is often easier to see ethical
lapses in retrospect than it is to identify
potential ethical problems in advance,

Applying the IDDR Framework Business Law

77CHAPTER 3: Ethics in Business

30301_ch03_hr_057-085.indd 77 8/30/18 12:25 PM

3–5 Business Ethics on a Global Level
Just as individual religions have different moral codes, individual countries and regions have
different ethical expectations and priorities. Some of these differences are based on religious
values, whereas others are cultural in nature. Such differences can make it even more difficult
to determine what is ethical in a particular situation.

3–5a World Religions, Cultural Norms, and Ethics
Global businesses need to be conscious of the impact of different religious principles and
cultural norms on ethics. For instance, in certain countries the consumption of alcohol is
forbidden for religious reasons. It would be considered unethical for a U.S. business to pro-
duce alcohol in those countries and employ local workers to assist in alcohol production.

In other countries, women may not be treated as equals because of cultural norms
or religion. In contrast, discrimination against employees on the basis of sex (or race,
national origin, age, or disability) is prohibited in the United States. The varying roles of
women can give rise to ethical issues regarding how women working for a U.S. company
should dress or behave in certain regions of the world. Should female executives have to
cover their heads? Should they avoid involvement in certain business transactions? How
will various stakeholders react to whatever decisions companies make in these situations?

How far should companies go to cater to business partners in other nations? Going too far
to please clients in another country can alienate a firm’s employees and domestic customers
and generate bad press. Decision makers in charge of global business operations should
consider these ethical issues and make some decisions from the outset.

3–5b Outsourcing
Outsourcing is the practice by which a company hires an outside firm or individual to perform
work rather than hiring employees to do it. Ethical problems involving outsourcing most often
arise when global companies outsource work to other countries in an attempt to save on labor
costs. This type of outsourcing elicits an almost automatic negative reaction in the U.S. public.

Some people feel that companies should protect American jobs
above all else. Furthermore, ethical questions often arise as to
the employment practices of the foreign companies to which
the work is outsourced.

Outsourcing covers a wide spectrum of ethical gray areas
and is not always clearly unethical. Outsourcing domestically,
for instance—such as when companies hire outside firms to
transport goods—generally does not raise ethical issues. None-
theless, companies involved in global operations need to be
careful when outsourcing to make sure that employees in other
nations are being treated fairly.

3–5c Avoiding Corruption
Another ethical problem in global business dealings has to do
with corruption in foreign governments. Under the Foreign
Corrupt Practices Act,9 U.S. businesses are prohibited from

Learning Objective 5
What ethical issues might
arise in the context of global
business transactions?

Outsourcing The practice by which
a company hires an outside firm or
individual to perform work rather than
hiring employees to do it.

9. 15 U.S.C. Sections 78dd-1 et seq. This act will be discussed in more detail in the context of criminal law.

Outsourcing is not inherently unethical, but under what circum-
stances could the practice cause problems for a company?









78 UNIT ONE: The Legal Environment of Business

30301_ch03_hr_057-085.indd 78 8/30/18 12:25 PM

making payments to (bribing) foreign officials to secure beneficial contracts, with certain
exceptions. If such payments are lawful within the foreign country, then they are permitted.
It is also acceptable to pay small amounts to minor officials to facilitate or speed up the
performance of administrative services (such as approval of construction). Payments to
private foreign companies or other third parties are also permissible.

Corruption is widespread in some nations, however, and it can be the norm in dealing
with both government and private businesses in certain locations. Global companies must
take special care when doing business in countries where corruption is common. Discuss
potential ethical problems with employees in advance and again when situations arise. The
company’s goal should be to ensure that it supports management and employees in doing
the right thing and following the firm’s anticorruption policies.

3–5d Monitoring the Employment Practices of Foreign Suppliers
Many businesses contract with companies in developing nations to produce goods, such
as shoes and clothing, because the wage rates in those nations are significantly lower
than those in the United States. But what if one of those contractors hires women and
children at below-minimum-wage rates or requires its employees to work long hours
in a workplace full of health hazards? What if the company’s supervisors routinely engage
in workplace conduct that is offensive to women? What if factories located abroad routinely
violate U.S. labor and environmental standards?

Wages and Working Conditions Allegations that a business allows its suppliers to
engage in unethical practices hurt the firm’s reputation. Example 3.19 Noi Supalai, a gar-
ment worker in Thailand, came forward in 2016 with reports about how harshly she and
other workers had been treated at Eagle Speed factory, which produced apparel for Nike
Corporation. Because the workers did not produce all of the “Just Do the Right Thing” line of
products by a set deadline, Nike fined the factory and barred it from paying its workers. The
factory then forced some two thousand employees to work sixteen-hour days or longer, and
to take turns going home to shower. Workers eventually formed a union and named Supalai
as president, but they were unsuccessful in getting the conditions improved. A meeting was
set up between Supalai and a Nike representative, but Nike did not even show up. Supalai
later learned that Nike chose to use other suppliers. ■

Corporate Watch Groups Given today’s global communications network, few compa-
nies can assume that their actions in other nations will go unnoticed by “corporate watch”
groups that discover and publicize unethical corporate behavior. As a result, U.S. businesses
today usually take steps to avoid such adverse publicity—either by refusing to deal with
certain suppliers or by arranging to monitor their suppliers’ workplaces to make sure that
employees are not being mistreated.

Example 3.20 A Chinese factory supplied parts for certain Apple products. After Apple
discovered that the factory had violated labor and environmental standards, it began eval-
uating the practices at all the companies in its supply chain. Apple’s audits revealed numer-
ous violations, such as withholding worker pay as a disciplinary measure, falsifying pay
records, and forcing workers to use unsafe machines. Apple terminated its relationship
with one foreign supplier and turned over its findings to the Fair Labor Association, a
nonprofit organization that promotes adherence to national and international labor laws,
for further inquiry. ■

Margaret Mead
(American anthropologist)

“Never doubt that
a small group of
committed citizens
can change the world;
indeed, it is the only
thing that ever has.”

79CHAPTER 3: Ethics in Business

30301_ch03_hr_057-085.indd 79 8/30/18 12:25 PM

Practice and Review

James Stilton is the chief executive officer (CEO) of RightLiving, Inc., a company that buys life
insurance policies at a discount from terminally ill persons and sells the policies to investors.
RightLiving pays the terminally ill patients a percentage of the future death benefit (usually
65  percent) and then sells the policies to investors for 85 percent of the value of the future
benefit. The patients receive the cash to use for medical and other expenses, and the investors are
“guaranteed” a positive return on their investment. The difference between the purchase and sale
prices is Right Living’s profit. Stilton is aware that some sick patients may obtain insurance policies
through fraud (by not revealing their illness on the insurance application). An insurance company
that discovers such fraud will cancel the policy and refuse to pay. Stilton believes that most of
the policies he has purchased are legitimate, but he knows that some probably are not. Using the
information presented in this chapter, answer the following questions.

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

2. Using Immanuel Kant’s categorical imperative, are the actions of RightLiving ethical? Why or
why not?

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

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

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

business ethics 58
categorical imperative 67
corporate social responsibility

(CSR) 68
cost-benefit analysis 67

duty-based ethics 65
ethical reasoning 65
ethics 58
moral minimum 60
outcome-based ethics 65

outsourcing 78
principle of rights 66
stakeholders 69
triple bottom line 61
utilitarianism 67

Key Terms

Chapter Summary: Ethics in Business

Ethics and the Role
of Business

1. The relationship of law and ethics—The government has created some ethical rights and duties
through the passage of laws and regulations. Many laws are designed to prevent fraudulent
conduct, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the
Sarbanes-Oxley Act.
a. Gray areas in the law—Sometimes legislation includes language that is overly broad or provi-

sions that are ambiguous. Such gray areas make it difficult to predict how the law will apply or
should be applied to a situation, complicating determinations of what is legal or ethical.

80 UNIT ONE: The Legal Environment of Business

30301_ch03_hr_057-085.indd 80 9/3/18 9:19 AM

b. The moral minimum—Lawful behavior is the moral minimum. The law has its limits, though, and
some actions may be legal but not ethical. The study of ethics goes beyond legal requirements
to evaluate what is right for society.

c. Codes of ethics—Most large firms have internal ethical codes. Many industry associations also
have codes of ethics for their members. Because these internal codes are not laws, their effec-
tiveness is determined by the commitment of the company leadership or industry to enforcing
the codes.

2. The role of business in society— The public perception of corporations has changed from entities
that primarily generate profits for their owners to entities that participate in society as corporate
citizens. Whether one believes in profit maximization or corporate citizenship, ethics is important
in making business decisions—such as by looking to the triple bottom line. Decision makers must
evaluate (a) the legal implications, (b) the public relations impact, (c) any safety risks, and (d) the
financial implications.

3. Ethical issues in business—A fundamental ethical issue for business is developing integrity and
trust. Businesspersons should exhibit integrity in their dealings with other people in the company,
other businesses, clients, and the community.

4. The importance of ethical leadership—Management’s commitment and behavior are essential in
creating an ethical workplace. Management’s behavior, more than anything else, sets the ethical
tone of a firm and influences the behavior of employees.

Ethical Principles and

1. Duty-based ethics—Ethics based on religious beliefs; the basic rights of human beings (the prin-
ciple of rights); and philosophical reasoning, such as that of Immanuel Kant. A potential problem
for those who support this ethical approach is deciding which rights are more important in a given
situation. Management constantly faces ethical conflicts and trade-offs when considering all those
affected by a business decision.

2. Outcome-based ethics (utilitarianism)—Ethics based on philosophical reasoning, such as that of
Jeremy Bentham and John Stuart Mill. Applying this theory requires a cost-benefit analysis, weigh-
ing the negative effects against the positive and deciding which course of action produces the
better outcome.

3. Corporate social responsibility—Corporate social responsibility (CSR) combines a commitment to
good citizenship with a commitment to making ethical decisions, improving society, and minimizing
environmental impact. Although there are different theories, the basic idea is that corporations can
and should act ethically and be accountable to society for their actions. One view of CSR stresses
that corporations have a duty not just to shareholders, but also to other groups affected by corpo-
rate decisions, called stakeholders.

Sources of Ethical Issues
in Business Decisions

1. Short-term profit maximization—Executives should distinguish between short-run and long-run
profit goals and focus on maximizing profits over the long run. An overemphasis on short-run profit
maximization is perhaps the most common reason that ethical problems occur in business.

2. Social media—Advances in technology have created new ethical problems for companies. Issues
involving social media include how to use social media in the hiring process and how to monitor
employees’ online activities.

3. Awareness—Whatever the context, businesspersons must be aware of the possibility that ethical
issues will arise.

4. Rationalization—Sometimes, businesspersons make a decision that they know is not particularly
ethical but that will benefit them or their company. After the fact, they rationalize their bad behavior
and unethical decision.

5. Uncertainty—When making a business decision, businesspersons may be uncertain as to what
they should do, what they should have done, or whether an ethical issue or breach is even involved.
Such uncertainty is unavoidable, but it should be treated as an indicator of a potential ethical

(Continues )

81CHAPTER 3: Ethics in Business

30301_ch03_hr_057-085.indd 81 9/3/18 9:19 AM

Making Ethical Business

Making ethical business decisions is crucial in today’s legal environment. Business decisions can be
complex. Several frameworks exist to help businesspersons make ethical decisions. One such frame-
work is the four-step IDDR (“I Desire to Do Right”) approach.
1. I = Inquiry—Involves identifying the ethical problem and all of the stakeholders, gathering the rele-

vant facts, and considering which ethical theories can help in analyzing the problem.
2. D = Discussion—Involves making a list of possible actions and evaluating the strengths and weak-

nesses of each option, including its ethical and legal consequences.
3. D = Decision—Involves crafting a consensus decision or a company’s plan of action. Decision mak-

ers should use the analysis from Step 2 to articulate the reasons behind the decision.
4. R = Review—Involves reviewing the decision outcome to determine whether the solution was

effective and satisfied the stakeholders. The results of this evaluation may be used in making future

Business Ethics on
a Global Level

Global businesses need to be conscious of the impact of different religious principles and cultural
norms on ethics. In addition, ethical concerns may arise in the areas of outsourcing, avoiding corrup-
tion, and monitoring the employment practices of foreign suppliers.

Issue Spotters
1. Acme Corporation decides to respond to what it sees as a moral obligation to correct for past discrimination by adjusting pay differ-

ences among its employees. Does this raise an ethical conflict between Acme and its employees? Between Acme and its shareholders?
Explain your answers. (See Ethical Principles and Philosophies.)

2. Delta Tools, Inc., markets a product that under some circumstances is capable of seriously injuring consumers. Does Delta have an
ethical duty to remove this product from the market, even if the injuries result only from misuse? Why or why not? (See Making Ethical
Business Decisions.)
—Check your answers to the Issue Spotters against the answers provided in Appendix D at the end of this text.

Business Scenarios and Case Problems
3–1. Business Ethics. Jason Trevor owns a commercial bakery

in Blakely, Georgia, that produces a variety of goods sold in gro-
cery stores. Trevor is required by law to perform internal tests
on food produced at his plant to check for contamination. On
three occasions, tests of food products containing peanut but-
ter were positive for salmonella contamination. Trevor was not
required to report the results to U.S. Food and Drug Administra-
tion officials, however, so he did not. Instead, Trevor instructed
his employees to simply repeat the tests until the results were
negative. Meanwhile, the products that had originally tested
positive for salmonella were eventually shipped out to retailers.
Five people who ate Trevor’s baked goods that year became
seriously ill, and one person died from a salmonella infection.
Even though Trevor’s conduct was legal, was it unethical for
him to sell goods that had once tested positive for salmonella?
Why or why not? (See Ethics and the Role of Business.)

3–2. Ethical Conduct. Internet giant Zoidle, a U.S. company, gen-
erated sales of £2.5 billion in the United Kingdom (UK) in 2013
(roughly $4 billion in U.S. dollars). The U.K. corporate tax rate is
usually between 20 percent and 24 percent, but Zoidle paid only

3 percent (£6 million). At a press conference, company officials
touted how the company took advantage of tax loopholes and
sheltered profits to avoid paying the full corporate income tax.
They justified their practices as ethical, declaring that it would
be verging on illegal to tell shareholders that the company paid
more taxes than it should.

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

3–3. Consumer Rights. Best Buy, a national electronics retailer,
offered a credit card that allowed users to earn “reward points”
that could be redeemed for discounts on Best Buy goods. After
reading a newspaper advertisement for the card, Gary Davis
applied for, and was given, a credit card. As part of the appli-
cation process, he visited a Web page containing Frequently
Asked Questions as well as terms and conditions for the card.
He clicked on a button affirming that he understood the terms

82 UNIT ONE: The Legal Environment of Business

30301_ch03_hr_057-085.indd 82 9/3/18 9:19 AM

and conditions. When Davis received his card, it came with
seven brochures about the card and the reward point program.
As he read the brochures, he discovered that a $59 annual fee
would be charged for the card. Davis went back to the Web
pages he had visited and found a statement that the card “may”
have an annual fee. Davis sued, claiming that the company did
not adequately disclose the fee. Is it unethical for companies
to put terms and conditions, especially terms that may cost the
consumer money, in an electronic document that is too long to
read on one screen? Why or why not? Assuming that the Best
Buy credit-card materials were legally sufficient, discuss the
ethical aspects of businesses strictly following the language
of the law as opposed to following the intent of the law. [Davis
v. HSBC Bank Nevada, N.A., 691 F.3d 1152 (9th Cir. 2012)] (See
Ethics and the Role of Business.)

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

3–5. Ethical Principles. Stephen Glass made himself infamous
as a dishonest journalist by fabricating material for more than
forty articles for The New Republic magazine and other publi-
cations. He also fabricated supporting materials to delude The
New Republic’s fact checkers. At the time, he was a law stu-
dent at Georgetown University. Once suspicions were aroused,
Glass tried to avoid detection. Later, Glass applied for admission
to the California bar. The California Supreme Court denied his
application, citing “numerous instances of dishonesty and dis-
ingenuousness” during his “rehabilitation” following the expo-
sure of his misdeeds. How do these circumstances underscore
the importance of ethics? Discuss. [In re Glass, 58 Cal.4th 500,
316 P.3d 1199 (2014)] (See Ethical Principles and Philosophies.)

3–6. Business Case Problem with Sample Answer—
Business Ethics. Operating out of an apartment
in Secane, Pennsylvania, Hratch Ilanjian convinced
Vicken Setrakian, the president of Kenset Corp., that

he was an international businessman who could help turn
around Kenset’s business in the Middle East. At Ilanjian’s insis-
tence, Setrakian provided confidential business documents.
Claiming that they had an agreement, Ilanjian demanded full,
immediate payment and threatened to disclose the confidential

information to a Kenset supplier if payment was not forthcom-
ing. Kenset denied that there was a contract and filed a suit in
a federal district court against Ilanjian, seeking return of the
documents. During discovery, Ilanjian was uncooperative. Who
behaved unethically in these circumstances? Explain. [Kenset
Corp. v. Ilanjian, 600 Fed.Appx. 827 (3d Cir. 2015)] (See Making
Ethical Business Decisions.)
— For a sample answer to Problem 3–6, go to Appendix E at the

end of this text.

3–7. Spotlight on Bed, Bath & Beyond—Ethics and the
Role of Business. Bed Bath & Beyond Inc. sold a
ceramic pot, called the “FireBurners” Pot, with a
stainless steel fuel reservoir at its center and a bottle

of gelled fuel for use with the fire pot called “FireGel.” A red
sticker on the fire pot warned, “DON’T REFILL UNTIL FLAME IS
the product cautioned, in a “WARNINGS” section, “Do not add
fuel when lit and never pour gel on an open fire or hot surface.”
The label on the back of the fuel gel bottle instructed, “NEVER
add fuel to a burning fire,” and under a bold “WARNING” stated,
injured when a fire pot in one of the products—bought from Bed
Bath & Beyond—was refueled with the gel and an explosion
occurred. Safer alternatives for the design of the fire pot existed,
but its manufacturer chose not to use them. In these circum-
stances, is Bed, Bath & Beyond ethically responsible for the
injury to M.H.? Discuss. [M.H. v. Bed, Bath & Beyond, Inc., 156
A.D.3d 33, 64 N.Y.S.3d 205 (1 Dept. 2017)] (See Ethics and the
Role of Business.)

3–8. A Question of Ethics—Applying the IDDR Frame-
work. Priscilla Dickman worked as a medical tech-
nologist at the University of Connecticut Health Center
for twenty-eight years. Early in her career at the

Health Center, Dickman sustained a back injury while at work.
The condition eventually worsened, causing her significant
back pain and disability. Her physician ordered restrictions on
her work duties for several years. Then Dickman’s supervisor
received complaints that Dickman was getting personal phone
calls and was frequently absent from her work area. Based
on e-mails and other documents found on her work computer,
it appeared that she had been running two side businesses
(selling jewelry and providing travel agent services) while at
work. The state investigated, and she was convicted of a civil
ethics violation for engaging in “personal business for financial
gain on state time utilizing state resources.” Separate investi-
gations resulted in criminal convictions for forgery and the
filing of an unrelated fraudulent insurance claim. Dickman
“retired” from her job (after she obtained approval for disability
retirement) and filed a claim with the state of Connecticut
against the health center. She alleged that her former employer

83CHAPTER 3: Ethics in Business

30301_ch03_hr_057-085.indd 83 8/30/18 12:25 PM

had initiated the investigations to harass her and force her to
quit. She claimed that the Health Center was unlawfully retali-
ating against her for being disabled and being put on workplace
restrictions. [ Dickman v. University of Connecticut Health Cen-
ter, 162 Conn.App. 441, 132 A.3d 739 (2016)] ( See Making Ethical
Business Decisions.)
1. Assume that you are Dickman’s supervisor and have been

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

the ethical dilemma that the Health Center faced in this case,
and who are the stakeholders? What ethical theories would
you use to guide your decision?

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

Critical Thinking and Writing Assignments
3–9. Business Law Writing. Assume that you are a high-level

manager for a shoe manufacturer. You know that
your firm could increase its profit margin by produc-
ing shoes in Indonesia, where you could hire women

for $100 a month to assemble them. You also know that human
rights advocates recently accused a competing shoe manu-
facturer of engaging in exploitative labor practices because
the manufacturer sold shoes made by Indonesian women for
similarly low wages. You personally do not believe that paying
$100 a month to Indonesian women is unethical because you
know that in their country, $100 a month is a better-than-aver-
age wage rate.

Write one page explaining whether you would have the
shoes manufactured in Indonesia and make higher profits for
the company, or avoid the risk of negative publicity and its
potential adverse consequences for the firm’s reputation. Are
there other alternatives? Discuss fully. (See Business Ethics on
a Global Level.)

3–10. Time-Limited Group Assignment—Corporate
Social Responsibility. Methamphetamine (meth)
is an addictive drug made chiefly in small toxic labs
(STLs) in homes, tents, barns, and hotel rooms. The

manufacturing process is dangerous, often resulting in explo-
sions, burns, and toxic fumes. Government entities spend time
and resources to find and destroy STLs, imprison meth dealers
and users, treat addicts, and provide services for affected

Meth cannot be made without ingredients that are also used
in cold and allergy medications. Arkansas has one of the highest
numbers of STLs in the United States. To recoup the costs of fight-
ing the meth epidemic, twenty counties in Arkansas filed a suit
against Pfizer, Inc., which makes cold and allergy medications.
They argued that it was Pfizer’s ethical responsibility to either stop
using the ingredients in their cold and allergy medications that can
be used to make meth or to compensate the government for the
amount it spends closing down meth labs. (See Ethics and the Role
of Business, Ethical Principles and Philosophies, and Making Ethical
Business Decisions.)

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

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

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

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

84 UNIT ONE: The Legal Environment of Business

30301_ch03_hr_057-085.indd 84 8/30/18 12:25 PM

Obey the law
The law is irrefutable! Absent a moral imperative to challenge a law, we must conduct

our business in total compliance with the laws of every community where we
do business.

• Comply with all statutes.

• Cooperate with authorities.

• Respect all public officials and their positions.

• Avoid all conflict of interest issues with public officials.

• Comply with all disclosure and reporting requirements.

• Comply with safety and security standards for all products sold.

• Exceed ecological standards required in every community where we do business.

• Comply with all applicable wage and hour laws.

• Comply with all applicable anti-trust laws.

• Protect “inside information” that has not been released to the general public.

take Care Of Our MeMbers
The member is our key to success. If we don’t keep our members happy,

little else that we do will make a difference.

• Provide top-quality products at the best prices in the market.

• Provide a safe shopping environment in our warehouses.

• Provide only products that meet applicable safety and health standards.

• Sell only products from manufacturers who comply with “truth in advertising/
packaging” standards.

• Provide our members with a 100% satisfaction guaranteed warranty on every product and
service we sell, including their membership fee.

• Assure our members that every product we sell is authentic in make and in representation of

• Make our shopping environment a pleasant experience by making our members feel welcome
as our guests.

• Provide products to our members that will be ecologically sensitive.

Costco Code of Ethics
Costco Wholesale Corporation takes a strong position on behaving ethically in all transactions and relationships. It also expects employees to
behave ethically, according to domestic ethical standards, in any country in which it operates. Costco’s Code of Ethics outlines its commitment
to business ethics.

take Care Of Our eMplOyees
To claim “people are our most important asset” is true and an

understatement. Each employee has been hired for a very important job.
Jobs such as stocking the shelves, ringing members’ orders, buying products,
and paying our bills are jobs we would all choose to perform because of
their importance. The employees hired to perform these jobs are performing
as management’s “alter egos.” Every employee, whether they are in a Costco
warehouse, or whether they work in the regional or corporate offices, is a Costco
ambassador trained to give our members professional, courteous treatment.

Today we have warehouse managers who were once stockers and callers, and vice presidents
who were once in clerical positions for Costco. We believe that Costco’s future executive officers
are currently working in our warehouses, depots, buying offices, and accounting departments, as
well as in our home offices.

To that end, we are committed to these principles:

• Provide a safe work environment.

• Pay a fair wage.

• Make every job challenging, but make it fun!

• Consider the loss of any employee as a failure on the part of the company and a loss to the

• Teach our people how to do their jobs and how to improve personally and professionally.

• Promote from within the company to achieve the goal of a minimum of 80% of management
positions being filled by current employees.

• Create an “open door” attitude at all levels of the company that is dedicated to “fairness and

respeCt Our vendOrs
Our vendors are our partners in business and for us to prosper as a company, they must proper

with us. It is important that our vendors understand that we will be tough negotiators, but fair in our
treatment of them.

• Treat all vendors and their representatives as you would expect to be
treated if visiting their places of business.

• Pay all bills within the allocated time frame.

• Honor all commitments.

• Protect all vendor property assigned to Costco as though it were our own.

• Always be thoughtful and candid in negotiations.

• Provide a careful review process with at least two levels of authorization before terminating
business with an existing vendor of more than two years.

• Do not accept gratuities of any kind from a vendor.Our member is our reason for being. If they fail to show up, we cannot survive. Our
members have extended a “trust” to Costco by virtue of paying a fee to shop with us. We can’t
let them down or they will simply go away. We must always operate in the following manner
when dealing with our members:

Rule #1 – The member is always right.
Rule #2 – In the event the member is ever wrong, refer to rule #1.

There are plenty of shopping alternatives for our members. We will succeed only if we
do not violate the trust they have extended to us. We must be committed at every level of our
company, with every once of energy and grain of creativity we have, to constantly strive to
“bring goods to market at a lower price.”

If we do these four things throughout our organization,
we will realize our ultimate goal, which is to

reward Our sharehOlders.

These guidelines are exactly that – guidelines, some common sense rules for the
conduct of our business. Intended to simplify our jobs, not complicate our lives, these
guidelines will not answer every question or solve every problem. At the core of our
philosophy as a company must be the implicit understanding that not one of us is required to
lie or cheat on behalf of PriceCostco. In fact, dishonest conduct will not be tolerated. To do
any less would be unfair to the overwhelming majority of our employees who support and
respect Costco’s commitment to ethical business conduct.

If your are ever in doubt as to what course of action to take on a business matter that is
open to varying ethical interpretations, take the high road and do what is right.

If you want our help, we are always available for advice and counsel. That’s our job and
we welcome your questions or comments.

Our continued success depends on you. We thank each of you for your contribution to
our past success and for the high standards you have insisted upon in our company.

Appendix to Chapter 3:


30301_ch03_hr_057-085.indd 85 8/30/18 12:25 PM

4 Courts and Alternative Dispute Resolution
Every society needs to have an established method for
resolving disputes. Without one, as Mahatma Gandhi
implied in the chapter-opening quotation, the biblical “eye
for an eye” would lead to anarchy. This is particularly true in
the business world—almost every businessperson will face
a lawsuit at some time in his or her career. For this reason,
anyone involved in business needs to have an understand-
ing of court systems in the United States, as well as the
various methods of dispute resolution that can be pursued
outside the courts.

Assume that Evan Heron is a top executive at Des Moines Semiconductor Manu-
facturing Company, Inc. (DSMC), and that DSMC is one of the largest U.S. makers
of mobile phone processors. Heron negotiates some of its most lucrative contracts,
under which DSMC provides companies like Apple, Inc., with the chips they use in

A dispute arises between DSMC and one of its customers, a Canadian smartphone com-
pany, concerning the price the Canadian company was charged for chips. The Canadian
firm threatens litigation, but Heron convinces his colleagues at DSMC to agree to arbitrate,
rather than litigate, the dispute. The arbitration panel ends up deciding that DSMC over-
charged for the chips and awards the Canadian company $800 million. Heron and DSMC
are dissatisfied with the result. Is the panel’s decision binding? Can DSMC appeal the
arbitration award to a court? These are a few of the concerns discussed in this chapter.
(This chapter’s Business Web Log feature deals with an arbitration clause Samsung sought
to impose on buyers of its smartphones.)

Mahatma Gandhi
(Indian political and
spiritual leader)

“An eye for an eye
will make the whole
world blind.”







Learning Objectives
The six Learning Objectives below are
designed to help improve your understand-
ing. After reading this chapter, you should
be able to answer the following questions:

1. What is judicial review? How
and when was the power of
judicial review established?

2. How are the courts applying
traditional jurisdictional
concepts to cases involving
Internet transactions?

3. What is the difference between
the focus of a trial court and
that of an appellate court?

4. What is discovery, and how
does electronic discovery differ
from traditional discovery?

5. What is an electronic court
filing system?

6. What are three alternative
methods of resolving disputes?


30301_ch04_hr_086-122.indd 86 8/30/18 12:37 PM

Samsung, like other smartphone manu-facturers, does not want to go to court
to address every consumer complaint.
Consequently, in each new smartphone
box, it includes a Product Safety & War-
ranty Information brochure containing the
following statement:

ARISInG In Any WAy fRom thIS
CondItIon, oR PERfoRmAnCE of
thE PRoduCtS ShALL bE RESoLvEd
ExCLuSIvELy thRouGh fInAL And
bIndInG ARbItRAtIon, And not
by A CouRt oR juRy.

In the same 101-page brochure,
Samsung explains the procedures for arbi-
tration and notes that purchasers can opt
out of the arbitration agreement by calling a
toll-free number or sending an e-mail within
thirty days of purchase. the lead plaintiff
in what became a class-action suit against
Samsung did not take any steps to opt out.

the class-action suit alleged that the
company misrepresented its smartphone’s
storage capacity and “rigged the phone to
operate at a higher speed when it was being
tested.” Samsung moved to compel arbitra-
tion by invoking the arbitration provision in
its Product Safety & Warranty Information
brochure. A federal district court denied
Samsung’s motion to compel arbitration. on
appeal, the trial court’s reasoning was
accepted. there was no evidence that the
plaintiff had expressly agreed to submit to
arbitration. the mere fact that an arbitration
clause was included in the Product Safety &
Warranty Information brochure did not cre-
ate a binding contract between the plaintiff
and Samsung. further, even though the
plaintiff had signed a Customer Agreement
with the seller of the smartphone (verizon
Wireless), Samsung was not a signatory to
that agreement.a

Key Point
It is understandable that companies wish
to avoid the high cost of going to court for
every customer grievance. Binding arbitra-
tion offers businesses numerous advan-
tages over litigation. A business must be
certain, though, that a binding arbitration
requirement is part of an actual contractual
agreement between the business and its
customers. Placing an arbitration clause,
even in all capital letters, in a multi-page
document that customers may never read
is usually not sufficient.

a. Norcia v. Samsung Telecommunications America, LLC, 845
f.3d 1279 (9th Cir. 2017).

Samsung and Forced Arbitration Business Web Log

4–1 The Judiciary’s Role in American Government
The body of American law includes the federal and state constitutions, statutes
passed by legislative bodies, administrative law, and the case decisions and legal
principles that form the common law. These laws would be meaningless, however,
without the courts to interpret and apply them. This is the essential role of the
judiciary—the courts—in the American governmental system: to interpret and
apply the law.

4–1a Judicial Review
As the branch of government entrusted with interpreting the laws, the judiciary
can decide, among other things, whether the laws or actions of the other two
branches are constitutional. The process for making such a determination is known
as judicial review.

Judicial Review The process
by which a court decides on the
constitutionality of legislative
enactments and actions of the
executive branch.










Each Samsung phone comes with a
brochure requiring arbitration.

87CHAPTER 4: Courts and Alternative Dispute Resolution

30301_ch04_hr_086-122.indd 87 8/30/18 12:37 PM

The power of judicial review enables the judicial branch to act as a check on the other
two branches of government, in line with the checks-and-balances system established by the
U.S. Constitution. (Today, nearly all nations with constitutional democracies, including
Canada, France, and Germany, have some form of judicial review.)

4–1b The Origins of Judicial Review in the United States
The U.S. Constitution does not mention judicial review (although many constitutional
scholars believe that the founders intended the judiciary to have this power). How was the
doctrine of judicial review established? See this chapter’s Landmark in the Law feature for
the answer.

Learning Objective 1
What is judicial review? How
and when was the power of
judicial review established?

the power of judicial review was estab-lished in the Supreme Court’s decision
in the case of Marbury v. Madison.a
Although the decision is widely viewed as
a cornerstone of constitutional law, the
case had its origins in early u.S. politics.

When thomas jefferson defeated the
incumbent president, john Adams, in the
presidential elections of 1800, Adams
feared the jeffersonians’ antipathy toward
business and toward a strong national gov-
ernment. Adams thus rushed to “pack” the
judiciary with loyal federalists (those who
believed in a strong national government)
by appointing what came to be called
“midnight judges” just before he left office.

but Adams’s secretary of state (john
marshall) was able to deliver only forty-two
of the fifty-nine judicial appointment let-
ters by the time jefferson took over as
president. jefferson refused to order his
secretary of state, james madison, to
deliver the remaining commissions.

M a r s h a l l ’s D i l e m m a W i l l i a m
marbury and three others to whom the
commissions had not been delivered sought
a writ of mandamus (an order directing a
government official to fulfill a duty) from

the united States Supreme Court, as autho-
rized by the judiciary Act in 1789.

As fate would have it, john marshall had
just been appointed as chief justice of the
Supreme Court. marshall faced a dilemma:
If he ordered the commissions delivered, the
new secretary of state (madison) could sim-
ply refuse to deliver them—and the Court
had no way to compel him to act. At the same
time, if marshall simply allowed the new
administration to do as it wished, the
Court’s power would be severely eroded.

Marshall’s Decision marshall mas-
terfully fashioned his decision to enlarge
the power of the Supreme Court by affirm-
ing the Court’s power of judicial review. he
stated, “It is emphatically the province and
duty of the judicial department to say what
the law is. . . . If two laws conflict with each
other, the Courts must decide on the oper-
ation of each. . . . [I]f both [a] law and the
Constitution apply to a particular case, . . .
the Court must determine which of these
conflicting rules governs the case.”

marshall’s decision did not require any-
one to do anything. he concluded that the
highest court did not have the power to
issue a writ of mandamus in this particular
case. Although the judiciary Act specified
that the Supreme Court could issue writs of

mandamus as part of its original jurisdiction,
Article III of the Constitution, which spelled
out the Court’s original jurisdiction, did not
mention such writs. because Congress did
not have the right to expand the Supreme
Court’s jurisdiction, this section of the judi-
ciary Act was unconstitutional—and thus
void. the Marbury decision stands to this
day as a judicial and political masterpiece.

Application to Today’s World Since
the marbury v. madison decision, the
power of judicial review has remained
unchallenged and today is exercised
by both federal and state courts. If the
courts did not have the power of judicial
review, the constitutionality of Congress’s
acts could not be challenged in court—a
congressional statute would remain law
unless changed by Congress. The courts of
other countries that have adopted a consti-
tutional democracy often cite this decision
as a justification for judicial review.a. 5 u.S. (1 Cranch) 137, 2 L.Ed. 60 (1803).

Marbury v. Madison (1803) Landmark
in the Law

88 UNIT ONE: The Legal Environment of Business

30301_ch04_hr_086-122.indd 88 8/30/18 12:37 PM

4–2 Basic Judicial Requirements
Before a court can hear a lawsuit, certain requirements must be met. These
requirements relate to jurisdiction, venue, and standing to sue. We examine
each of these important concepts here.

4–2a Jurisdiction
In Latin, juris means “law,” and diction means “to speak.” Thus, “the power to
speak the law” is the literal meaning of the term jurisdiction. Before any court can
hear a case, it must have jurisdiction over the person or company against whom
the suit is brought (the defendant) or over the property involved in the suit. The
court must also have jurisdiction over the subject matter of the dispute.

Jurisdiction over Persons or Property Generally, a court with jurisdiction
over a particular geographic area can exercise personal jurisdiction (in personam
jurisdiction) over any person or business that resides in that area. A state trial
court, for instance, normally has jurisdictional authority over residents (includ-
ing businesses) in a particular area of the state, such as a county or district.
A state’s highest court (often called the state supreme court)1 has jurisdiction
over all residents of that state.

A court can also exercise jurisdiction over property that is located within
its boundaries. This kind of jurisdiction is known as in rem jurisdiction, or
“jurisdiction over the thing.” Example 4.1 A dispute arises over the ownership of a boat in
dry dock in Fort Lauderdale, Florida. The boat is owned by an Ohio resident, over whom
a Florida court normally cannot exercise personal jurisdiction. The other party to the dis-
pute is a resident of Nebraska. In this situation, because the boat is in Florida, a lawsuit
concerning the boat could be brought in a Florida state court on the basis of the court’s in
rem jurisdiction. ■

Long Arm Statutes. Under the authority of a state long arm statute, a court can exercise
personal jurisdiction over certain out-of-state defendants based on activities that took place
within the state. Before exercising long arm jurisdiction over a nonresident, however, the
court must be convinced that the defendant had sufficient contacts, or minimum contacts,
with the state to justify the jurisdiction.2 Generally, this means that the defendant must have
enough of a connection to the state for the judge to conclude that it is fair for the state to
exercise power over the defendant.

If an out-of-state defendant caused an automobile accident or sold defective goods within
the state, for instance, a court will usually find that minimum contacts exist to exercise
jurisdiction over that defendant. Spotlight Case Example 4.2 An Xbox game system caught
fire in Bonnie Broquet’s home in Texas and caused substantial personal injuries. Broquet filed
a lawsuit in a Texas court against Ji-Haw Industrial Company, a nonresident company that
made the Xbox components. Broquet alleged that Ji-Haw’s components were defective and
had caused the fire. Ji-Haw argued that the Texas court lacked jurisdiction over it, but a state
appellate court held that the Texas long arm statute authorized the exercise of jurisdiction
over the out-of-state defendant.3 ■

Similarly, a state may exercise personal jurisdiction over a nonresident defendant who is
sued for breaching a contract that was formed within the state. This is true even when that
contract was negotiated over the phone or through correspondence.

Jurisdiction The authority of a
court to hear and decide a specific

1. As will be discussed shortly, a state’s highest court is frequently referred to as the state supreme court, but there are exceptions. for example,
in new york, the supreme court is a trial court.

Long Arm Statute A state statute
that permits a state to exercise
jurisdiction over nonresident

2. the minimum-contacts standard was established in International Shoe Co. v. State of Washington, 326 u.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945).
3. Ji-Haw Industrial Co. v. Broquet, 2008 WL 441822 (tex.App.—San Antonio 2008).














In 1803, James Madison was a party in the
Marbury v. Madison case. What did that
case say about judicial review?

89CHAPTER 4: Courts and Alternative Dispute Resolution

30301_ch04_hr_086-122.indd 89 8/30/18 12:37 PM

Corporate Contacts. Because corporations are considered legal persons, courts use
the same principles to determine whether it is fair to exercise jurisdiction over a cor-
poration. A corporation normally is subject to personal jurisdiction in the state in
which it is incorporated, has its principal office, and is doing business. Courts apply
the minimum-contacts test to determine if they can exercise jurisdiction over out-of-
state corporations.

In the past, corporations were usually subject to jurisdiction in states in which they were
doing business, such as advertising or selling products. The United States Supreme Court
has now clarified that large corporations that do business in many states are not automati-
cally subject to jurisdiction in all of them. A corporation is subject to jurisdiction only in
states where it does such substantial business that it is “at home” in that state.4 The courts

look at the amount of business the corporation does within the
state relative to the amount it does elsewhere.

Case Example 4.3 Norfolk Southern Railway Company is a
Virginia corporation. Russell Parker, a resident of Indiana and
a former employee of Norfolk, filed a lawsuit against the
railroad in Missouri. Parker claimed that while working
for  Norfolk in Indiana he had sustained a cumulative injury.
Norfolk argued that Missouri courts did not have jurisdiction
over the company. The Supreme Court of Missouri agreed.
Simply having train tracks running through Missouri was not
enough to meet the minimum-contacts requirement. Norfolk
also had tracks and operations in twenty-one other states. The
plaintiff worked and was allegedly injured in Indiana, not
Missouri. Even though Norfolk did register its corporation
in Missouri, the amount of business that it did in Missouri was
not so substantial that it was “at home” in that state.5 ■

Jurisdiction over Subject Matter Jurisdiction over subject matter is a limitation on
the types of cases a court can hear. In both the federal and the state court systems, there are
courts of general (unlimited) jurisdiction and courts of limited jurisdiction. An example of a
court of general jurisdiction is a state trial court or a federal district court.

An example of a state court of limited jurisdiction is a probate court. Probate courts are
state courts that handle only matters relating to the transfer of a person’s assets and obliga-
tions after that person’s death, including matters relating to the custody and guardianship of
children. An example of a federal court of limited subject-matter jurisdiction is a bankruptcy
court. Bankruptcy courts handle only bankruptcy proceedings, which are governed by federal
bankruptcy law.

A court’s jurisdiction over subject matter is usually defined in the statute or constitution
creating the court. In both the federal and the state court systems, a court’s subject-matter
jurisdiction can be limited by any of the following:

1. The subject of the lawsuit.

2. The sum in controversy.

3. Whether the case involves a felony (a more serious type of crime) or a misdemeanor (a less serious
type of crime).

4. Whether the proceeding is a trial or an appeal.

4. Daimler AG v. Bauman, 571 u.S. 117, 134 S.Ct. 746, 187 L.Ed. 624 (2014).
5. State ex rel. Norfolk Southern Railway Co. v. Dolan, 512 S.W.3d 41 (Sup.Ct. mo. 2017).

Probate Court A state court of
limited jurisdiction that conducts
proceedings relating to the settlement
of a deceased person’s estate.

Bankruptcy Court A federal court
of limited jurisdiction that handles
only bankruptcy proceedings,
which are governed by federal
bankruptcy law.









Is the presence of a railroad company’s tracks in one state enough
to satisfy the minimum-contacts requirement?

90 UNIT ONE: The Legal Environment of Business

30301_ch04_hr_086-122.indd 90 8/30/18 12:37 PM

Original and Appellate Jurisdiction The distinction between courts of original juris-
diction and courts of appellate jurisdiction normally lies in whether the case is being heard
for the first time. Courts having original jurisdiction are courts of the first instance, or trial
courts—that is, courts in which lawsuits begin, trials take place, and evidence is presented.
In the federal court system, the district courts are trial courts. In the various state court
systems, the trial courts are known by various names, as will be discussed shortly.

The key point here is that any court having original jurisdiction is normally known as a
trial court. Courts having appellate jurisdiction act as reviewing courts, or appellate courts.
In general, cases can be brought before appellate courts only on appeal from an order or a
judgment of a trial court or other lower court.

Jurisdiction of the Federal Courts Because the federal government is a government
of limited powers, the jurisdiction of the federal courts is limited. Federal courts have
subject-matter jurisdiction in two situations: those involving federal questions and diversity
of citizenship.

Federal Questions. Article III of the U.S. Constitution establishes the boundaries of federal
judicial power. Section 2 of Article III states that “[t]he judicial Power shall extend to all
Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and
Treaties made, or which shall be made, under their Authority.” This clause means that when-
ever a plaintiff’s cause of action is based, at least in part, on the U.S. Constitution, a treaty,
or a federal law, then a federal question arises, and the federal courts have jurisdiction.

Any lawsuit involving a federal question, such as a person’s rights under the U.S. Con-
stitution, can originate in a federal court. Note that in a case based on a federal question, a
federal court will apply federal law.

Diversity of Citizenship. Federal district courts can also exercise original jurisdiction over
cases involving diversity of citizenship. The most common type of diversity jurisdiction requires
both of the following:6

1. The plaintiff and defendant must be residents of different states.

2. The dollar amount in controversy must exceed $75,000.

For purposes of diversity jurisdiction, a corporation is a citizen of both the state in which
it is incorporated and the state in which its principal place of business is located. A case
involving diversity of citizenship can be filed in the appropriate federal district court. If
the case starts in a state court, it can sometimes be transferred, or “removed,” to a federal
court. A large percentage of the cases filed in federal courts each year are based on diversity
of citizenship.

As noted, a federal court will apply federal law in cases involving federal questions. In a
case based on diversity of citizenship, in contrast, a federal court will apply the relevant state
law (which is often the law of the state in which the court sits).

Case Example 4.4 Kelley Mala, a U.S. citizen of the Virgin Islands, was driving his power-
boat near St. Thomas, Virgin Islands. When he stopped at Crown Bay Marina to buy gas,
a pump malfunctioned, and gas overflowed and spilled into Mala’s boat. Later, when he
left the dock, Mala’s engine caught fire and exploded, severely burning him and destroying
the boat.

Mala sued the marina for negligence in a federal district court in the Virgin Islands. He
claimed that the court had diversity jurisdiction (which would mean that the court would
apply state law and he would be entitled to a jury trial). The court found that it did not have
diversity jurisdiction because Crown Bay and the plaintiff were both citizens of the Virgin

Federal Question A question that
pertains to the U.S. Constitution,
an act of Congress, or a treaty
and provides a basis for federal
jurisdiction in a case.

Diversity of Citizenship A basis
for federal court jurisdiction over a
lawsuit between citizens of different
states or a lawsuit involving a U.S.
citizen and a citizen of a different

6. diversity jurisdiction also exists in cases between (1) a foreign country and citizens of a state or of different states and (2) citizens of a state
and citizens or subjects of a foreign country. these bases for diversity jurisdiction are less commonly used.

91CHAPTER 4: Courts and Alternative Dispute Resolution

30301_ch04_hr_086-122.indd 91 8/30/18 12:37 PM

Islands. A federal appellate court affirmed. Therefore, Mala
had to sue the marina under admiralty law (law governing
transportation on the seas and ocean waters) and did not
have a right to a jury trial.7 ■

Exclusive versus Concurrent Jurisdiction When
both federal and state courts have the power to hear a case,
as is true in lawsuits involving diversity of citizenship,
concurrent jurisdiction exists. When cases can be tried only in
federal courts or only in state courts, exclusive jurisdiction

Federal courts have exclusive jurisdiction in cases involv-
ing federal crimes, bankruptcy, most patent and copyright
claims, suits against the United States, and some areas
of admiralty law. State courts also have exclusive juris-
diction over certain subject matter—for instance, divorce
and adoption.

When concurrent jurisdiction exists, a party may bring
a suit in either a federal court or a state court. A number of

factors can affect the decision of whether to litigate in a federal or a state court, such as the
availability of different remedies, the distance to the respective courthouses, or the experi-
ence or reputation of a particular judge.

A resident of a state other than the one with jurisdiction might also choose a federal
court over a state court if he or she is concerned that a state court might be biased against
an out-of-state plaintiff. In contrast, a plaintiff might choose to litigate in a state court if it
has a reputation for awarding substantial amounts of damages or if the judge is perceived
as being pro-plaintiff. The concepts of exclusive and concurrent jurisdiction are illustrated
in Exhibit 4–1.

7. Mala v. Crown Bay Marina, Inc., 704 f.3d 239 (2013).

Concurrent Jurisdiction
Jurisdiction that exists when two
different courts have the power to
hear a case.

Exclusive Jurisdiction
Jurisdiction that exists when a case
can be heard only in a particular
court or type of court.

Exhibit 4–1 Exclusive and Concurrent Jurisdiction

Exclusive Federal

Concurrent Jurisdiction Exclusive State Jurisdiction

(cases involving federal
crimes, federal antitrust law,
bankruptcy, patents, copyrights,
trademarks, suits against the
United States, some areas of
admiralty law, and certain other
matters specified in federal

(most cases involving
federal questions,
diversity-of-citizenship cases)

(cases involving all matters
not subject to federal
jurisdiction—for example,
divorce and adoption







If a marina employee commits a negligent act while servicing a boat
owned by someone whose legal residence is nearby, can the injured
boat owner have the case removed to a federal court?

92 UNIT ONE: The Legal Environment of Business

30301_ch04_hr_086-122.indd 92 8/30/18 12:37 PM

4–2b Jurisdiction in Cyberspace
The Internet’s capacity to bypass political and geographic boundaries undercuts the tradi-
tional basis on which courts assert personal jurisdiction. As already discussed, for a court
to compel a defendant to come before it, there must be at least minimum contacts—the
presence of a salesperson within the state, for example. Today, however, courts frequently
have to decide what constitutes sufficient minimum contacts when a defendant’s only con-
nection to a jurisdiction is through an ad on a website.

The “Sliding-Scale” Standard The courts have developed a standard—called a
“sliding-scale” standard—for determining when the exercise of jurisdiction over an out-
of-state defendant is proper. The sliding-scale standard identifies three types of Internet
business contacts and outlines the following rules for jurisdiction:

1. When the defendant conducts substantial business over the Internet (such as contracts and sales),
jurisdiction is proper. This is true whether the business is conducted with traditional computers,
smartphones, or other means of Internet access.

2. When there is some interactivity through a website, jurisdiction may be proper, depending on the
circumstances. It is up to the courts to decide how much online interactivity is enough to satisfy the
minimum- contacts requirement. Case Example 4.5 Dr. Arthur Delahoussaye, a Louisiana resident,
bought a special racing bicycle he saw listed on eBay from Frederick Boelter, who lived in Wisconsin.
Later, while Delahoussaye was riding the bike, he had to “bunny hop” (jump) over a gap in the
pavement. When he landed, the front wheel disconnected, pushing the forks of the bicycle into
the ground and propelling him over the handlebars and onto the pavement. Delahoussaye suffered
serious injuries. He sued Boelter in a Louisiana court, alleging that Boelter had negligently removed
the secondary retention devices designed to prevent the detachment of the front wheel.

The Louisiana court ruled that the state did not have jurisdiction over Boelter, and a state appel-
late court affirmed. Boelter did not have any prior relationship with Delahoussaye, did not initiate
communications with Delahoussaye, and discussed the transaction with Delahoussaye only over the
Internet. Payment was made through an intermediary, PayPal, and Boelter shipped the bicycle to
Louisiana. The sale of a single bicycle to Delahoussaye over eBay was not enough to give Louisiana
state jurisdiction over Boelter, so the plaintiff’s case was dismissed.8 ■

3. When a defendant merely engages in passive advertising on the Web, jurisdiction is never

International Jurisdictional Issues Because the Internet is global in scope, it raises
international jurisdictional issues. The world’s courts seem to be developing a standard that
echoes the minimum-contacts requirement applied by U.S. courts.

Most courts are indicating that minimum contacts—doing business within the jurisdic-
tion, for instance—are enough to compel a defendant to appear. The effect of this standard
is that a business firm has to comply with the laws in any jurisdiction in which it targets
customers for its products. This situation is complicated by the fact that many countries’ laws
on particular issues—such as free speech—are very different from U.S. laws.

The following case illustrates how federal courts apply a sliding-scale standard to deter-
mine if they can exercise jurisdiction over a foreign defendant whose only contact with the
United States is through a website.

Learning Objective 2
How are the courts applying
traditional jurisdictional
concepts to cases involving
Internet transactions?

8. Delahoussaye v. Boelter, 199 So.3d 633 (La.App. 2016).
9. for a leading case on this issue, see Zippo Manufacturing Co. v. Zippo Dot Com, Inc., 952 f.Supp. 1119 (W.d.Pa. 1997).

93CHAPTER 4: Courts and Alternative Dispute Resolution

30301_ch04_hr_086-122.indd 93 8/30/18 12:37 PM

Gucci America, Inc. v. Wang Huoqing
united States district Court, northern district of California, 2011 WL 30972 (2011).

Background and Facts Wang huoqing,
a resident of the People’s Republic of China,
operates numerous websites. When Gucci dis-
covered that huoqing’s websites were selling
counterfeit goods— products that carried
Gucci’s trademarks but were not genuine Gucci
articles—it hired a private investigator (Robert
holmes) in San jose, California, to buy goods
from the websites. the investigator purchased a
wallet that was labeled Gucci but was counterfeit.

Gucci filed a trademark infringement lawsuit
against huoqing in a federal district court in California seeking
damages and an injunction to prevent further infringement.
huoqing was notified of the lawsuit via e-mail but did not appear
in court. Gucci asked the court to enter a default judgment—that
is, a judgment entered when the defendant fails to appear. the
court first had to determine whether it had personal jurisdiction
over huoqing based on the Internet sales.

In the Words of the Court
joseph C. SPERO, united States magistrate judge.

* * * *
* * * under California’s long-arm statute, federal courts in

California may exercise jurisdiction to the extent permitted by the
due Process Clause of the Constitution. the due Process Clause
allows federal courts to exercise jurisdiction where * * * the defend-
ant has had sufficient minimum contacts with the forum to subject
him or her to the specific jurisdiction of the court. the courts apply
a three-part test to determine whether specific jurisdiction exists:

(1) the nonresident defendant must do some act or consum-
mate some transaction with the forum or perform some act by
which he purposefully avails himself of the privilege of con-
ducting activities in the forum, thereby invoking the benefits
and protections of its laws; (2) the claim must be one which
arises out of or results from the defendant’s forum-related
activities; and (3) exercise of jurisdiction must be reasonable.

* * * *
In order to satisfy the first prong of the test for specific juris-

diction, a defendant must have either purposefully availed itself

of [taken advantage of] the privilege of con-
ducting business activities within the forum
or purposefully directed activities toward
the forum. Purposeful availment [advantage]
typically consists of action taking place
in the forum that invokes the benefits and
protections of the laws of the forum, such
as executing or performing a contract within
the forum. to show purposeful availment,
a plaintiff must show that the defendant
“engage[d] in some form of affirmative con-

duct allowing or promoting the transaction of business within the
forum state.” [Emphasis added.]

“In the Internet context, the ninth Circuit utilizes a sliding scale
analysis under which ‘passive’ websites do not create sufficient
contacts to establish purposeful availment, whereas interactive
websites may create sufficient contacts, depending on how inter-
active the website is.” * * * Personal jurisdiction is appropriate
where an entity is conducting business over the Internet and has
offered for sale and sold its products to forum [California] resi-
dents. [Emphasis added.]

here, the allegations and evidence presented by Plaintiffs in
support of the motion are sufficient to show purposeful availment
on the part of defendant Wang huoqing. Plaintiffs have alleged
that defendant operates “fully interactive Internet websites
operating under the Subject domain names” and have presented
evidence in the form of copies of web pages showing that the
websites are, in fact, interactive.

* * * Additionally, Plaintiffs allege defendant is conducting
counterfeiting and infringing activities within this judicial district
and has advertised and sold his counterfeit goods in the State
of California. * * * Plaintiffs have also presented evidence of
one actual sale within this district, made by investigator Robert
holmes from the website

* * * finally, Plaintiffs have presented evidence that defendant
Wang huoqing owns or controls the twenty-eight websites listed
in the motion for default judgment. * * * Such commercial activ-
ity in the forum amounts to purposeful availment of the privilege
of conducting activities within the forum, thus invoking the bene-
fits and protections of its laws. Accordingly, the Court concludes

Spotlight on Gucci: Case 4.1











Gucci luxury leather products
are often counterfeited.

Can Gucci sue an
Asian company in the

United States nonetheless?

94 UNIT ONE: The Legal Environment of Business

30301_ch04_hr_086-122.indd 94 8/30/18 12:37 PM

4–2c Venue
Jurisdiction has to do with whether a court has authority to hear a case involving specific
persons, property, or subject matter. Venue10 is concerned with the most appropriate physical
location for a trial. Two state courts (or two federal courts) may have the authority to exercise
jurisdiction over a case, but it may be more appropriate or convenient to hear the case in
one court than in the other.

Basically, the concept of venue reflects the policy that a court
trying a suit should be in the geographic neighborhood (usually
the county) where the incident leading to the lawsuit occurred
or where the parties involved in the lawsuit reside. Venue in
a civil case typically is where the defendant resides, whereas
venue in a criminal case normally is where the crime occurred.
Pretrial publicity or other factors, though, may require a
change of venue to another community, especially in criminal
cases when the defendant’s right to a fair and impartial jury
has been impaired.

Note that venue has lost some significance in today’s world
because of the Internet and 24/7 news reporting. Courts now
rarely grant requests for a change of venue. Because every-
one has instant access to the same information about a pur-
ported crime, courts reason that no community is more or
less informed about the matter or prejudiced for or against the

4–2d Standing to Sue
Before a person can bring a lawsuit before a court, the party must have standing to sue, or a
sufficient “stake” in the matter to justify seeking relief through the court system. Standing
means that the party that filed the action in court has a legally protected interest at stake in
the litigation. The party bringing the lawsuit must have suffered a harm, such as physical
injury or economic loss, as a result of the action about which she or he has complained.

At times, a person can have standing to sue on behalf of another person, such as a minor
(child) or a mentally incompetent person. Standing to sue also requires that the controversy
at issue be a justiciable11 controversy—a controversy that is real and substantial, as opposed to
hypothetical or academic.

Case Example 4.6 Harold Wagner obtained a loan through M.S.T. Mortgage Group to buy
a house in Texas. After the sale, M.S.T. transferred its interest in the loan to another lender,

Venue The geographic district in
which a legal action is tried and
from which the jury is selected.

10. Pronounced ven-yoo.

Standing to Sue The legal
requirement that an individual
must have a sufficient stake in a
controversy before he or she can
bring a lawsuit.

Justiciable Controversy A
controversy that is not hypothetical
or academic but real and substantial.
It is a requirement that must be
satisfied before a court will hear
a case.

11. Pronounced jus-tish-uh-bul.


t C







In a criminal trial involving comedian Bill Cosby, the venue
was changed from his hometown of Philadelphia to western
Pennsylvania. Why do courts sometimes change venue?

that defendant’s contacts with California are sufficient to show
purposeful availment.

Decision and Remedy the u.S. district Court for the north-
ern district of California held that it had personal jurisdiction over
the foreign defendant, huoqing. the court entered a default judg-
ment against huoqing and granted Gucci an injunction.

Critical Thinking

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

95CHAPTER 4: Courts and Alternative Dispute Resolution

30301_ch04_hr_086-122.indd 95 8/30/18 12:37 PM

which assigned it to another lender, as is common in the mortgage industry. Eventually, when
Wagner failed to make the loan payments, CitiMortgage, Inc., notified him that it was going
to foreclose on the property and sell the house. Wagner filed a lawsuit claiming that the
lenders had improperly assigned the mortgage loan. A federal district court ruled that Wagner
lacked standing to contest the assignment. Under Texas law, only the parties directly involved
in an assignment can challenge its validity. In this case, the assignment was between two
lenders and did not directly involve Wagner.12 ■

4–3 The State and Federal Court Systems
Each state has its own court system. Additionally, there is a system of federal courts. Even
though there are fifty-two court systems—one for each of the fifty states, one for the District
of Columbia, and a federal system—similarities abound. Exhibit 4–2 illustrates the basic
organizational structure characteristic of the court systems in many states. The exhibit also
shows how the federal court system is structured.

Keep in mind that the federal courts are not superior to the state courts. They are simply
an independent system of courts, which derives its authority from Article III, Sections 1
and 2, of the U.S. Constitution.

4–3a The State Court Systems
No two state court systems are exactly the same. Typically, a state court system will
include several levels, or tiers, of courts. As indicated in Exhibit 4–2, state courts may include
(1) trial courts of limited jurisdiction, (2) trial courts of general jurisdiction, (3) appellate
courts, and (4) the state’s highest court (often called the state supreme court).

12. Wagner v. CitiMortgage, Inc., 995 f.Supp.2d 621 (n.d.tex. 2014).

Exhibit 4–2 The State and Federal Court Systems

Supreme Court
of the United States

U.S. Courts

• Bankruptcy Courts
• Court of
Federal Claims

• Court of International

• Tax Court

State Courts

State Courts
of Appeals

State Trial Courts
of General Jurisdiction

Local Trial Courts of
Limited Jurisdiction

State Administrative

U.S. Courts
of Appeals



U.S. District

96 UNIT ONE: The Legal Environment of Business

30301_ch04_hr_086-122.indd 96 8/30/18 12:37 PM

Generally, any person who is a party to a lawsuit has the opportunity to plead the case
before a trial court and then, if he or she loses, before at least one level of appellate court.
If the case involves a federal statute or a federal constitutional issue, the decision of a state
supreme court on that issue may be further appealed to the United States Supreme Court.

Trial Courts Trial courts are courts in which trials are held and testimony taken. State trial
courts have either general or limited jurisdiction. Trial courts that have general jurisdiction
as to subject matter may be called county, district, superior, or circuit courts.13 These courts
have jurisdiction over a wide variety of subjects, including both civil disputes and criminal
prosecutions. (In some states, trial courts of general jurisdiction may hear appeals from
courts of limited jurisdiction.)

Courts of limited jurisdiction may be called special inferior trial courts or minor
judiciary courts. Limited jurisdiction courts might include local municipal courts (which
could include separate traffic courts and drug courts) and domestic relations courts
(which  handle divorce and child-custody disputes). Small claims courts are inferior
trial courts that hear only civil cases involving claims of less than a certain amount, such
as $5,000 (the amount varies from state to state). Suits brought in small claims courts
are generally conducted informally, and lawyers are not required (in a few states, lawyers
are not even allowed). Decisions of small claims courts and municipal courts may some-
times be appealed to a state trial court of general jurisdiction.

A few states have even tried to establish Islamic law courts, which are courts of limited
jurisdiction that serve the American Muslim community. (See this chapter’s Beyond Our
Borders feature for a discussion of Islamic law courts.)

13. the name in ohio is court of common pleas, and the name in new york is supreme court.

Small Claims Court A special
court in which parties can litigate
small claims without an attorney.

Learning Objective 3
What is the difference
between the focus of a
trial court and that of an
appellate court?

Islamic law is one of the world’s three most common legal systems, along with
civil law and common law systems. In
most Islamic countries, the law is based
on sharia, a system of law derived from
the Qur’an and the sayings and doings of
muhammad and his companions. today,
many non-Islamic countries are establish-
ing Islamic courts for their muslim citizens.

Islamic Law in Britain,
Canada, and Belgium
for several years, Great britain has had
councils that arbitrate disputes between
british muslims involving child custody,
property, employment, and housing. these

councils do not deal with criminal law or
with any civil issues that would put sharia
in direct conflict with british statutory law.
most Islamic law cases involve marriage
or divorce. britain officially sanctioned the
authority of sharia judges to rule on divorce
and financial disputes of muslim individu-
als. britain now has more than one hundred
officially recognized sharia courts that have
the full power of equivalent courts within
the traditional british judicial system.

In ontario, Canada, a group of Cana-
dian muslims established a judicial tribu-
nal using sharia. to date, this tribunal has
resolved only marital disagreements and
some other civil disputes. under ontario

law, the regular judicial system must
uphold such agreements as long as they
are voluntary and negotiated through an
arbitrator. Any agreements that violate
Canada’s Charter of Rights and freedoms
will not be upheld.

belgium has also established a sharia
court that handles primarily family law
matters for muslim immigrants. other

Islamic Law Courts Abroad and at Home Beyond Our Borders

(Continues )

97CHAPTER 4: Courts and Alternative Dispute Resolution

30301_ch04_hr_086-122.indd 97 8/30/18 12:37 PM

Appellate, or Reviewing, Courts Every state has at least
one court of appeals (appellate court, or reviewing court),
which may be an intermediate appellate court or the state’s
highest court. About three-fourths of the states have intermedi-
ate appellate courts. Generally, courts of appeals do not conduct
new trials, in which evidence is submitted and witnesses are
examined. Rather, an appellate court panel of three or more
judges reviews the record of the case on appeal, which includes
a transcript of the trial proceedings, and determines whether
the trial court committed an error.

Focus on Questions of Law. Appellate courts generally focus
on questions of law, not questions of fact. A question of fact deals
with what really happened in regard to the dispute being tried—
such as whether a party actually burned a flag. A question of law
concerns the application or interpretation of the law—such as
whether flag-burning is a form of speech protected by the First
Amendment to the U.S. Constitution. Only a judge, not a jury,
can rule on questions of law.

Defer to the Trial Court’s Findings of Fact. Appellate courts normally defer (give signifi-
cant weight) to a trial court’s findings on questions of fact, because the trial court judge and
jury were in a better position to evaluate testimony. The trial court could directly observe
witnesses’ gestures, demeanor, and nonverbal behavior during the trial. An appellate court
cannot. At the appellate level, the judges review the written transcript of the trial.

An appellate court will challenge a trial court’s finding of fact only when the finding is
clearly erroneous (that is, when it is contrary to the evidence presented at trial or when no
evidence was presented to support the finding). In the following case, neither the admin-
istrative agency that initially ruled on the dispute nor the trial court to which the agency’s
decision was appealed made a finding on a crucial question of fact. Faced with that circum-
stance, what should a state appellate court do?

Question of Fact In a lawsuit, an
issue that involves only disputed
facts, and not what the law is on a
given point.

Question of Law In a lawsuit, an
issue involving the application or
interpretation of a law.




i b







Can a U.S. court ever use the Qur’an as a basis for reaching
a decision?

European nations, including france,
Germany, and Sweden, allow their courts
to consider sharia law when deciding dis-
putes involving muslims.

Islamic Law Courts
in the United States
the use of Islamic courts in the united States
has been controversial. the legality of arbi-
tration clauses that require disputes to be
settled in Islamic courts has been upheld by
regular state courts in some states, including
minnesota and texas. In some other states,
however, there has been a public backlash
against the use of Islamic courts.

for instance, in detroit, michigan,
which has a large American muslim
population, a controversy erupted over the
community’s attempt to establish Islamic
courts. Legislators in michigan and many
other states started introducing bills to
limit consideration of foreign or religious
laws in state court decisions. voters in
oklahoma enacted a referen dum banning
courts from considering sharia law, but the
ban was later held to be unconstitutional.a

a. Awad v. Zirax, 670 f.3d 1111 (10th Cir. 2012). A lower court
later issued a permanent injunction to prevent the ban from
being enforced. Awad v. Zirax, 966 f.Supp.2d 1198 (2013).

Legislation enacted in Arizona, Kansas,
Louisiana, north Carolina, oklahoma,
South dakota, and tennessee bans judi-
cial consideration of foreign law. (these
laws do not explicitly mention Islamic, or
sharia, law, because that might be ruled

Critical Thinking
One of the arguments against allowing
sharia courts in the United States is that
we would no longer have a common legal
framework within our society. Do you agree
or disagree? Why?

98 UNIT ONE: The Legal Environment of Business

30301_ch04_hr_086-122.indd 98 8/30/18 12:37 PM

Background and Facts jennifer
johnson was working as a finance analyst
for oxy uSA, Inc., when oxy changed the
job’s requirements. to meet the new stan-
dards, johnson took courses to become
a certified public accountant. johnson
and oxy signed an agreement regarding
reimbursement from oxy to johnson for
the cost of the courses.

When johnson resigned less than a
year after having been reimbursed for the coursework, oxy withheld
the amount of the reimbursement from her last check. oxy argued
that under the agreement, it was entitled to do this because johnson
had worked less than a year from the date of reimbursement.

johnson contended that the agreement did not apply because
the funds should have been classified as a business expense, which
did not have to be repaid under oxy’s Educational Assistance Pol-
icy. johnson filed a claim for the amount with the texas Workforce
Commission (tWC). the tWC ruled that she was not entitled to the
unpaid wages. She filed a suit in a texas state court against oxy,
alleging breach of contract. the court affirmed the tWC’s ruling.
johnson appealed.

In the Words of the Court
Ken WISE, justice

* * * *
* * * the trial court * * * held that johnson’s [claim for breach

of contract was] barred by res judicata [“a matter judged”]. In a
court of law, a claimant typically cannot pursue one remedy to an
unfavorable outcome and then seek the same remedy in another
proceeding before the same or a different tribunal. Res judicata
bars the relitigation of claims that have been finally adjudicated
or that could have been litigated in the prior action. [Emphasis

johnson argues that res judicata does not apply here because
the tWC did not render a final judgment on the merits of her
claim that oxy misinterpreted its Educational Assistance Policy.
Specifically, johnson claims she was “denied the right of full adju-
dication of her claim because the tWC refused to consider her
arguments at the administrative level as beyond its jurisdiction.”

to support this contention, johnson
points to the following excerpt from
the * * * decision:

* * * the tWC does not interpret
contracts between employers and
employee but only enforces the
texas Payday Law [the texas state
law that governs the timing of
employees’ paychecks]. * * * the
question of whether the employer

properly interpreted their policy on reimbursed educational
expenses versus a business expense is a question for a different

According to johnson, this language shows that the tWC
refused to consider the merits of the issue she raised as “beyond
its reach.” In contrast, the defendants contend that johnson’s
claims are barred by res judicata because they are based on claims
previously decided by the tWC.

* * * *
In Johnson’s case, however, the TWC did not decide the key

question of fact in dispute—whether Oxy violated its own Educa-
tional Assistance Policy when it withheld Johnson’s final wages
as reimbursement for the CPA courses. In fact, the tWC explic-
itly refused to do so, stating that the agency “does not interpret
contracts between employers and employee.” * * * because this
question goes to the heart of johnson’s breach of contract * * *
claim, we hold that res judicata does not bar [that] claim. [Empha-
sis added.]

the defendants argue that because johnson seeks to recover
the same wages in this suit as she did in her claim with the tWC,
res judicata must bar her common law cause of action. however,
* * * res judicata would only bar a claim if tWC’s order is consid-
ered final. * * * here, the order in johnson’s case made no such
findings with regard to the Educational Assistance Policy. the
order expressly declined to address that issue. therefore, * * *
res judicata will not bar johnson’s breach of contract * * * claim.
Decision and Remedy A state intermediate appellate court
reversed the lower court’s decision. “the tWC did not decide the
key question of fact in dispute—whether oxy violated its own Edu-
cational Assistance Policy when it withheld johnson’s final wages.

Johnson v. Oxy USA, Inc.
Court of Appeals of texas, houston—14th district, 533 S.W.3d 395 (2016).

Case 4.2








(Continues )

99CHAPTER 4: Courts and Alternative Dispute Resolution

30301_ch04_hr_086-122.indd 99 8/30/18 12:37 PM

Highest State Courts The highest appellate
court in a state is usually called the supreme court
but may be called by some other name. For
instance, in both New York and Maryland, the
highest state court is called the court of appeals.
The decisions of each state’s highest court are
final on all questions of state law. Only when
issues of federal law are involved can a decision
made by a state’s highest court be overruled by
the United States Supreme Court.

Example 4.7 A city enacts an ordinance that
prohibits citizens from engaging in door-to-door
advocacy without first registering with the mayor’s
office and receiving a permit. A religious group
then sues the city, arguing that the law violates the
freedoms of speech and religion guaranteed by
the First Amendment. If the state supreme court
upholds the law, the group could appeal the deci-
sion to the United States Supreme Court, because
a constitutional (federal) issue is involved. ■

4–3b The Federal Court System
The federal court system is basically a three-tiered model consisting of (1) U.S. district courts
(trial courts of general jurisdiction) and various courts of limited jurisdiction, (2) U.S.
courts of appeals (intermediate courts of appeals), and (3) the United States Supreme Court.

Unlike state court judges, who are usually elected, federal court judges—including the jus-
tices of the Supreme Court—are appointed by the president of the United States and confirmed
by the U.S. Senate. Under Article III, federal judges “hold their offices during Good Behavior.”
In the entire history of the United States, only seven federal judges have been removed from
office through impeachment proceedings.

Certain federal court officers are not appointed by the president and approved by the Senate.
This chapter’s Managerial Strategy feature describes how U.S. magistrate judges are selected.

U.S. District Courts At the federal level, the equivalent of a state trial court of general
jurisdiction is the district court. There is at least one federal district court in every state.
The number of judicial districts can vary over time, primarily owing to population changes
and corresponding caseloads. Today, there are ninety-four federal judicial districts.

U.S. district courts have original jurisdiction in federal matters. Federal cases typically
originate in district courts. Federal courts with original, but specialized (or limited), juris-
diction include the bankruptcy courts and others that were shown in Exhibit 4–2.

In fact, the tWC explicitly refused to do so, stating that the agency
‘does not interpret contracts between employers and employee.’“
the appellate court remanded the case for a trial on the merits.

Critical Thinking

• Legal Environment Who can decide questions of fact? Who
can rule on questions of law? Why?

• Global In some cases, a court may be asked to determine
and interpret the law of a foreign country. Some states con-
sider the issue of what the law of a foreign country requires
to be a question of fact. Federal rules of procedure provide
that this is a question of law. Which position seems more
appropriate? Why?










Trial decisions are normally determined by juries. Under what types of
circumstances might an appellate court reverse a jury’s decision?

100 UNIT ONE: The Legal Environment of Business

30301_ch04_hr_086-122.indd 100 8/30/18 12:37 PM

you have a strong case in a contract dis-pute with one of your business’s sup-
pliers. the supplier is located in another
state. your attorney did everything neces-
sary to obtain your “day in court.” the court
in question is a federal district court. but
you have just found out that your case may
not be heard for several years—or even
longer. your attorney tells you that the case
can be heard in just a few months if you
consent to place it in the hands of a u.S.
magistrate judge.a Should you consent?

A Short History of U.S. Magistrate
Congress authorized the creation of a new
federal judicial officer, the u.S. magis-
trate, in 1968 to help reduce delays in the
u.S. district courts.b these junior federal
officers were to conduct a wide range
of judicial proceedings as set out by
statute and as assigned by the district
judges under whom they served. In 1979,
Congress gave u.S. magistrates consent
jurisdiction, which authorized them to con-
duct all civil trials as long as the parties

consented.c Currently, magistrate judges
dispose of over one million civil and crim-
inal district court matters, which include
motions and hearings.

The Selection and Quality
of Magistrate Judges
As mentioned, federal district judges are
nominated by the president, confirmed by
the Senate, and appointed for life. In con-
trast, u.S. magistrate judges are selected
by federal district court judges based on
the recommendations of a screening com-
mittee. they serve an eight-year term
(which can be renewed).

by statute, magistrate judges must be
chosen through a merit selection process.
Applicants are interviewed by a screening
committee of lawyers and others from the
district in which the position will be filled.d
the committee is not allowed to consider
an applicant’s political party affiliation.

A variety of experienced attorneys,
administrative law judges, state court
judges, and others apply for magistrate
judge positions. A typical opening receives
about a hundred applicants. the merit

selection panel selects the
five most qualified, who are then voted on
by federal district court judges.

because the selection process for a
magistrate judge is not the same as for
a district judge, some critics have expressed
concerns about the quality of magistrate
judges. Some groups, such as People for
the American Way, are not in favor of
allowing magistrate judges the power to
decide cases. these critics believe that
because of their limited terms, they are not
completely immune from outside pressure.

Business Questions
1. If you were facing an especially complex
legal dispute—one involving many facets
and several different types of law—would
you consent to allowing a U.S. magistrate
judge to decide the case? Why or why not?

2. If you had to decide whether to allow a
U.S. magistrate judge to hear your case,
what information might you ask your attor-
ney to provide concerning that individual?

Should You Consent to Have Your Business
Case Decided by a U.S. Magistrate Judge?

Managerial Strategy

a. 28 u.S.C. Sec 636(c); see also Coleman v. Labor and Industry
Review Commission of Wisconsin, 830 f.3d 461 (7th Cir. 2017).

b. federal magistrates Act, 82 Stat. 1107, october 17, 1968.
c. u.S.C. Section 636(c)(1).
d. 28 u.S.C. Section 631(b)(5).

U.S. Courts of Appeals In the federal court system, there are thirteen U.S. courts of
appeals—also referred to as U.S. circuit courts of appeals. The federal courts of appeals
for twelve of the circuits, including the U.S. Court of Appeals for the District of Columbia
Circuit, hear appeals from the federal district courts located within their respective judicial

The Court of Appeals for the Thirteenth Circuit is called the Federal Circuit. It has
national appellate jurisdiction over certain types of cases, such as cases involving patent law
and cases in which the U.S. government is a defendant.

The decisions of the circuit courts of appeals are final in most cases, but appeal to the
United States Supreme Court is possible. Exhibit 4–3 shows the boundaries of both
the district courts and the U.S. courts of appeals within each circuit.

101CHAPTER 4: Courts and Alternative Dispute Resolution

30301_ch04_hr_086-122.indd 101 8/30/18 12:37 PM

The United States Supreme Court The highest level of the three-tiered model of the
federal court system is the United States Supreme Court. According to Article III of the U.S.
Constitution, there is only one national Supreme Court. All other courts in the federal
system are considered “inferior.” Congress is empowered to create inferior courts as it
deems necessary. The inferior courts that Congress has created include the second tier in
our model—the U.S. courts of appeals—as well as the district courts and any other courts
of limited, or specialized, jurisdiction.

The United States Supreme Court consists of nine justices. Although the Supreme Court
has original, or trial, jurisdiction in rare instances (set forth in Article III, Section 2), most of
its work is as an appeals court. The Supreme Court can review any case decided by any of the
federal courts of appeals, and it also has appellate authority over some cases decided in
the state courts.

Appeals to the Supreme Court. To bring a case before the Supreme Court, a party requests
that the Court issue a writ of certiorari. A writ of certiorari 14 is an order issued by the Supreme
Court to a lower court requiring that court to send the record of the case for review. Under
the rule of four, the Court will not issue a writ unless at least four of the nine justices approve.

Whether the Court will issue a writ of certiorari is entirely within its discretion. The Court
is not required to issue one, and most petitions for writs are denied. (Although thousands
of cases are filed with the Supreme Court each year, it hears, on average, fewer than one

Writ of Certiorari A writ from a
higher court asking a lower court for
the record of a case.

Rule of Four A rule of the United
States Supreme Court under which
the Court will not issue a writ of
certiorari unless at least four justices
approve of the decision to issue
the writ.

14. Pronounced sur-shee-uh-rah-ree.

Exhibit 4–3 Boundaries of the U.S. Courts of Appeals and U.S. District Courts





































































Puerto Rico






Washington, D.C.

Washington, D.C.

Circuit boundaries

State boundaries

District boundaries

Location of U.S.
Court of Appeals





Rhode Island






New York


District of Columbia
Washington, D.C.

New Orleans



St. Louis





















No. Dakota Minnesota






No. Carolina

W. Va.










Source: Administrative Office of the United States Courts.

102 UNIT ONE: The Legal Environment of Business

30301_ch04_hr_086-122.indd 102 8/30/18 12:37 PM

hundred of these cases.)15 A denial is not a decision on the merits of a case, nor does it indi-
cate agreement with the lower court’s opinion. Furthermore, a denial of the writ has no value
as a precedent.

Petitions Granted by the Court. Typically, the Court grants petitions when cases raise
important constitutional questions or when the lower courts are issuing conflicting decisions
on a significant issue. The justices, however, never explain their reasons for hearing certain
cases and not others, so it is difficult to predict which type of case the Court might select.

15. from the mid-1950s through the early 1990s, the united States Supreme Court reviewed more cases per year than it has in the last few years.
In the Court’s 1982–1983 term, for instance, the Court issued opinions in 151 cases. In contrast, in its 2016–2017 term, the Court issued opin-
ions in only 70 cases.

4–4 Following a State Court Case
To illustrate the procedures that would be followed in a civil lawsuit brought in a state court,
we present a hypothetical case and follow it through the state court system. The case involves
an automobile accident in which Kevin Anderson, driving a Lexus, struck Lisa Marconi,
driving a Hyundai Genesis. The accident occurred at the intersection of Wilshire Boulevard
and Rodeo Drive in Beverly Hills, California. Marconi suffered personal injuries and incurred
medical and hospital expenses as a result, as well as lost wages for four months. Anderson
and Marconi are unable to agree on a settlement, and Marconi sues Anderson. Marconi is the
plaintiff, and Anderson is the defendant. Both are represented by lawyers.

During each phase of the litigation (the process of working a lawsuit through the court sys-
tem), Marconi and Anderson will have to observe strict procedural requirements. A large body
of law—procedural law—establishes the rules and standards for determining disputes in courts.

Litigation The process of resolving
a dispute through the court system.

Ambrose Bierce
(American journalist)

“Lawsuit: A machine
which you go into as a
pig and come out of as
a sausage.”

Should Supreme Court justices follow the Code of Conduct
for United States Judges? Every member of the u.S. judiciary is
subject to the published Code of Conduct for United States Judges, except the nine justices of the
united States Supreme Court. there is no code of conduct for them, except their consciences. two
main ethical issues are often in question with respect to Supreme Court justices.

the first ethical issue involves accepting gifts and payments from outside sources other than the
u.S. government. just before his death, justice Antonin Scalia took seventeen international trips,
justice Stephen breyer took fourteen, and justice Ruth bader Ginsburg took six. Someone else paid
for all of these trips. do the individuals or organizations paying for those trips anticipate getting
favorable treatment if a case involving them ever comes before the Court?

the other ethical issue involves when it is appropriate for a Supreme Court justice to remove
(recuse) herself or himself from a case because of a conflict of interest. Certain members of the Court
have investments in private corporations that have, at times, written amicus briefs (legal arguments
submitted by friends of the court). Should a justice recuse herself or himself in such a situation?
because there is no code of conduct for the Court, we will never know.

u.S. representative Louise Slaughter (d-ny) wants to change this situation. Every year since
2013, she has introduced a bill called the Supreme Court Ethics Act. She wants the Court to “adopt
clear, written rules that establish standards by which justices’ behavior can be guided and assessed
by both themselves and the American people.”

Ethical Issue

103CHAPTER 4: Courts and Alternative Dispute Resolution

30301_ch04_hr_086-122.indd 103 8/30/18 12:37 PM

Procedural rules are very complex, and they vary from court to court and from state to
state. In addition to the various sets of rules for state courts, the federal courts have their
own rules of procedure. Additionally, the applicable procedures will depend on whether the
case is a civil or criminal proceeding. Generally, the Marconi-Anderson civil lawsuit will
involve the procedures discussed in the following subsections. Keep in mind that attempts
to settle the case may be ongoing throughout the trial.

4–4a The Pleadings
The complaint and answer (and other legal documents discussed here) are known as the
pleadings. The pleadings inform each party of the other’s claims and specify the issues (dis-
puted questions) involved in the case. The style and form of the pleadings may be quite
different in different states.

The Plaintiff’s Complaint Marconi’s suit against Anderson commences when her lawyer
files a complaint with the appropriate court. The complaint contains statements alleging:

1. Jurisdiction. The facts necessary for the court to take jurisdiction.

2. Legal theory. A brief summary of the facts necessary to show that the plaintiff is entitled to relief (a

3. Remedy. A statement of the remedy the plaintiff is seeking.

Complaints may be lengthy or brief, depending on the complexity of the case and the rules
of the jurisdiction.

Service of Process Before the court can exercise personal jurisdiction over the defendant
(Anderson)—in effect, before the lawsuit can begin—the court must have proof that the
defendant was notified of the lawsuit. Formally notifying the defendant of a lawsuit is called
service of process. The plaintiff must deliver, or serve, a copy of the complaint and a summons
(a notice requiring the defendant to appear in court and answer the complaint) to the

The summons notifies Anderson that he must file an answer to the complaint within a
specified time period (twenty days in the federal courts) or suffer a default judgment against
him. A default judgment in Marconi’s favor would mean that she would be awarded the dam-
ages alleged in her complaint because Anderson failed to respond to the allegations. In our
legal system, no case can proceed to trial unless the plaintiff can prove that he or she has
properly served the defendant.

Method of Service. How service of process occurs depends on the rules of the court or
jurisdiction in which the lawsuit is brought. Under the Federal Rules of Civil Procedure,
anyone who is at least eighteen years of age and is not a party to the lawsuit can serve pro-
cess in federal court cases. In state courts, the process server is often a county sheriff or an
employee of an independent company that provides process service in the local area.

Usually, the server hands the summons and complaint to the defendant personally or
leaves it at the defendant’s residence or place of business. In cases involving corporate defen-
dants, the summons and complaint may be served on an officer or on a registered agent
(representative) of the corporation. The name of a corporation’s registered agent can usually
be obtained from the secretary of state’s office in the state where the company incorporated
its business. Process can be served by mail in some states if the defendant consents (accepts
service). When the defendant cannot be reached, special rules provide for alternative means
of service, such as publishing a notice in the local newspaper.

Pleadings Statements by the
plaintiff and the defendant that detail
the facts, charges, and defenses of
a case.

Complaint The pleading made by
a plaintiff alleging wrongdoing on
the part of the defendant. When filed
with a court, the complaint initiates
a lawsuit.

16. the factual allegations in a complaint must be enough to raise a right to relief above the speculative level. they must plausibly suggest that
the plaintiff is entitled to a remedy. See Bell Atlantic Corp. v. Twombly, 550 u.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).

Service of Process The delivery
of the complaint and summons to a

Summons A document informing
a defendant that a legal action has
been commenced against her or him
and that the defendant must appear
in court on a certain date to answer
the plaintiff’s complaint.

Default Judgment A judgment
entered by a court against a
defendant who has failed to appear in
court to answer or defend against the
plaintiff’s claim.

104 UNIT ONE: The Legal Environment of Business

30301_ch04_hr_086-122.indd 104 8/30/18 12:37 PM

In some situations, courts allow service of process via
e-mail, as long as it is reasonably calculated to provide notice
and an opportunity to respond. Case Example 4.8 A county in
New York filed a petition to remove a minor child, J.T., from
his mother’s care due to neglect. The child’s father had been
deported to Jordan, and the county sought to terminate the
father’s parental rights. Although the father’s exact whereabouts
were unknown, the county caseworker had been in contact
with him via e-mail. Therefore, the court allowed the father
to be served via e-mail because it was reasonably calculated to
inform him of the proceedings and allow him an opportunity
to respond.17 ■

Today, some judges have even allowed defendants to be
served legal documents via social media, as discussed in this
chapter’s Adapting the Law to the Online Environment feature.

17. In re J.T., 53 misc.3d 888, 37 n.y.S.3d 846 (2016).







Usually, a summons is hand-delivered to the defendant.
What other ways could a summons be served using today’s

historically, when process servers failed to reach a defendant at home, they
attempted to serve process at the defen-
dant’s workplace, by mail, and by publica-
tion. In our digital age, does publication via
social media qualify as legitimate service
of process?

facebook has over 2 billion active users
per month. Assume that a man has a face-
book account and so does his spouse. he
has moved out and is intentionally avoid-
ing service of a divorce summons. Even a
private investigator has not been able to
deliver that summons. What to do? Accord-
ing to some courts today, the lawyer for
the woman can serve the divorce summons
through a private message from her face-
book account.

An Increasing Use of Social
Media for Service of Process
more and more courts are allowing service
of process via facebook and other social
media. one new york City family court
judge ruled that a divorced man could

serve his ex-wife through her active
facebook account. She had moved out
of the house and provided no forwarding
address. A u.S. district Court in virginia
allowed a plaintiff in a trademark case to
serve a defendant residing in turkey using
facebook, LinkedIn, and e-mail.a A federal
judge in San francisco allowed a plaintiff
to use twitter accounts to serve several
defendants located in Kuwait who had
allegedly financed terrorism using their
twitter accounts.b

the key requirement appears to be that
the plaintiff has diligently and reasonably
attempted to serve process by traditional
means. once the plaintiff has exhausted
the usual means to effect service, then a
court is likely to allow service via social

Not All Courts Agree, Though
In spite of these examples, the courts have
not uniformly approved of using social
media to serve process. After all, it is rel-
atively simple to create a fake facebook
account and nearly impossible to verify the
true owner of that account. Some judges
have voiced concerns that serving process
via facebook and other social media raises
significant questions of whether that ser-
vice comports with due process.d

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

Using Social Media for Service of Process Adapting the Law to the
Online Environment

d. FTC v. PCCare247, Inc., 2013 WL 841037 (S.d.n.y. 2013);
and In re Adoption of K.P.M.A., 341 P.3d 38 (Sup.Ct.okla.

b. St. Francis Assisi v. Kuwait Finance House, 2016 WL
5725002 (n.d.Cal. 2016).

a. WhosHere, Inc. v. Orun, 2014 WL 670817 (E.d. virginia

c. MetroPCS v. Devor, 256 f.Supp.3d 807 (n.d.Ill. 2017).

105CHAPTER 4: Courts and Alternative Dispute Resolution

30301_ch04_hr_086-122.indd 105 8/30/18 12:37 PM

Waiver of Formal Service of Process. In many instances, the defendant is already aware
that a lawsuit is being filed and is willing to waive (give up) her or his right to be served per-
sonally. The Federal Rules of Civil Procedure (FRCP) and many states’ rules allow defendants
to waive formal service of process, provided that certain procedures are followed.

In the Marconi-Anderson case, for instance, Marconi’s attorney could mail a copy of the
complaint to defendant Anderson, along with “Waiver of Service of Summons” forms for
Anderson to sign. If Anderson signs and returns the forms within thirty days, formal service
of process is waived.

Under the FRCP, defendants who agree to waive formal service of process receive addi-
tional time to respond to the complaint (sixty days, instead of twenty days). Some states
provide similar incentives to encourage defendants to waive formal service of process, and
thereby reduce associated costs and foster cooperation between the parties.

The Defendant’s Answer The defendant’s answer either admits the statements or alle-
gations set forth in the complaint or denies them and outlines any defenses that the defen-
dant may have. If Anderson admits to all of Marconi’s allegations in his answer, the court
will enter a judgment for Marconi. If Anderson denies any of Marconi’s allegations, the
litigation will go forward.

Anderson can deny Marconi’s allegations and set forth his own claim that Marconi was
negligent and therefore owes him compensation for the damage to his Lexus. This is appro-
priately called a counterclaim. If Anderson files a counterclaim, Marconi will have to answer
it with a pleading, normally called a reply, which has the same characteristics as an answer.

Anderson can also admit the truth of Marconi’s complaint but raise new facts that may
result in dismissal of the action. This is called raising an affirmative defense. For instance,
Anderson could assert that Marconi was driving negligently at the time of the accident and
thus was partially responsible for her own injuries. In some states, a plaintiff’s contributory
negligence operates as a complete defense, whereas in others it simply reduces the amount
of damages that Marconi can recover.

Motion to Dismiss A motion is a procedural request submitted to the court by an attorney
on behalf of her or his client. A motion to dismiss requests the court to dismiss the case for
stated reasons. Grounds for dismissal of a case include improper delivery of the complaint
and summons, improper venue, and the plaintiff’s failure to state a claim for which a court
could grant relief. For instance, suppose that Marconi had suffered no injuries or losses as
a result of Anderson’s negligence. In that situation, Anderson could move to have the case
dismissed because Marconi would not have stated a claim for which relief could be granted.

If the judge grants the motion to dismiss, the plaintiff generally is given time to file an
amended complaint. If the judge denies the motion, the suit will go forward, and the defen-
dant must then file an answer. Note that if Marconi wishes to discontinue the suit because,
for instance, an out-of-court settlement has been reached, she can likewise move for dis-
missal. The court can also dismiss the case on its own motion.

Case Example 4.9 Espresso Disposition Corporation 1 entered into a contract with Santana
Sales & Marketing Group, Inc. The agreement included a mandatory forum-selection clause,
which was a provision designating that any disputes arising under the contract would be
decided by a court in Illinois. When Santana Sales filed a lawsuit against Espresso in a Florida
state court, Espresso filed a motion to dismiss based on the agreement’s forum selection
clause. Santana claimed that the forum-selection clause had been a mistake. The court denied
Espresso’s motion to dismiss. Espresso appealed. A state intermediate appellate court reversed
the trial court’s denial of Espresso’s motion to dismiss and remanded the case to the lower
court for the entry of an order of dismissal.18 ■

Answer Procedurally, a defendant’s
response to the plaintiff’s complaint.

Counterclaim A claim made by a
defendant in a civil lawsuit against
the plaintiff. In effect, the defendant is
suing the plaintiff.

Reply Procedurally, a plaintiff’s
response to a defendant’s answer.

Motion to Dismiss A pleading in
which a defendant admits the facts
as alleged by the plaintiff but asserts
that the plaintiff’s claim to state a
cause of action has no basis in law.

18. Espresso Disposition Corp. 1 v. Santana Sales & Marketing Group, Inc., 105 So.3d 592 (fla.App. 3 dist. 2013).

106 UNIT ONE: The Legal Environment of Business

30301_ch04_hr_086-122.indd 106 8/30/18 12:37 PM

4–4b Pretrial Motions
Either party may attempt to get the case dismissed before trial through the use of various
pretrial motions. We have already mentioned the motion to dismiss. Two other important
pretrial motions are the motion for judgment on the pleadings and the motion for summary

At the close of the pleadings, either party may make a motion for judgment on the pleadings,
or on the merits of the case. The judge will grant the motion only when there is no dispute over
the facts of the case and the sole issue to be resolved is a question of law. In deciding on the
motion, the judge may consider only the evidence contained in the pleadings.

In contrast, in a motion for summary judgment, the court may consider evidence outside the
pleadings, such as sworn statements (affidavits) by parties or witnesses, or other documents
relating to the case. Either party can make a motion for summary judgment. Like the motion
for judgment on the pleadings, a motion for summary judgment will be granted only if there
are no genuine questions of fact and the sole question is a question of law. When a party
appeals a court’s grant or denial of a summary judgment motion, the appellate court engages
in a de novo review, which means it applies the same standard that the trial court applied.

4–4c Discovery
Before a trial begins, each party can use a number of procedural devices to obtain information
and gather evidence about the case from the other party or from third parties. The process
of obtaining such information is known as discovery. Discovery includes gaining access to
witnesses, documents, records, and other types of evidence.

The Federal Rules of Civil Procedure and similar rules in the states set forth the guidelines
for discovery. Generally, discovery is allowed regarding any matter that is not privileged
and is relevant to the claim or defense of any party. Discovery rules also attempt to protect
witnesses and parties from undue harassment and to safeguard privileged or confidential
material from being disclosed.

If a discovery request involves privileged or confidential business information, a court can
deny the request and can limit the scope of discovery in a number of ways. For instance, a
court can require the party to submit the materials to the judge in a sealed envelope so that
the judge can decide if they should be disclosed to the opposing party.

Discovery prevents surprises at trial by giving parties access to evidence that might oth-
erwise be hidden. This allows both parties to learn what to expect during a trial before they
reach the courtroom. Discovery also serves to narrow the issues so that trial time is spent on
the main questions in the case.

Depositions and Interrogatories Discovery can involve the use of depositions, inter-
rogatories, or both. A deposition is sworn testimony by a party to the lawsuit or any witness.
The person being deposed (the deponent) answers questions asked by the attorneys, and
the questions and answers are recorded by an authorized court official and sworn to
and signed by the deponent. (Occasionally, written depositions are taken when witnesses
are unable to appear in person.) The answers given to depositions will, of course, help the
attorneys prepare for the trial. They can also be used in court to impeach (challenge the cred-
ibility of) a party or a witness who changes her or his testimony at the trial. In addition, a
witness’s deposition can be used as testimony if he or she is not available for the trial.

Interrogatories are written questions for which written answers are prepared and then
signed under oath. The main difference between interrogatories and written depositions is
that interrogatories are directed to a party to the lawsuit (the plaintiff or the defendant), not
to a witness, and the party can prepare answers with the aid of an attorney. In addition, the
scope of interrogatories is broader because parties are obligated to answer the questions, even
if that means disclosing information from their records and files.

Motion for Judgment on the
Pleadings A motion by either
party to a lawsuit at the close of
the pleadings requesting the court
to decide the issue solely on the
pleadings without proceeding to trial.
The motion will be granted only if no
facts are in dispute.

Motion for Summary Judgment
A motion requesting the court to
enter a judgment without proceeding
to trial. The motion can be based on
evidence outside the pleadings and
will be granted only if no facts are in

Discovery A method by which the
opposing parties obtain information
from each other to prepare for trial.

Deposition The testimony of a party
to a lawsuit or a witness taken under
oath before a trial.

Interrogatories A series of written
questions for which written answers
are prepared by a party to a lawsuit,
usually with the assistance of the
party’s attorney, and then signed
under oath.

Learning Objective 4
What is discovery, and how
does electronic discovery
differ from traditional

107CHAPTER 4: Courts and Alternative Dispute Resolution

30301_ch04_hr_086-122.indd 107 8/30/18 12:37 PM

Note that, as with other discovery requests, a court can impose sanctions on a party
who fails to answer interrogatories. Case Example 4.10 Construction Laborers Trust Funds
for Southern California Administrative Company (the plaintiff), which administers
various Southern California employee benefit plans, sued Mario Miguel Montalvo in a
federal district court in California. The plaintiff alleged that the defendant, Montalvo,
had failed to pay required benefit contributions for every hour that his employees worked
(as required under federal law). The plaintiff also claimed that Montalvo refused to allow
an audit of his payroll and business records and failed to submit monthly employment
records needed to determine the amounts due.

Montalvo did not respond to plaintiff’s interrogatories. The court ordered Montalvo to
answer the interrogatories and produce the necessary documents three times. The defendant
continued to disobey the court’s orders and told the plaintiff’s attorney that he was “too busy”
to comply with the discovery requests. Eventually, the court entered a default judgment
against Montalvo noting that he had willfully disobeyed multiple court orders.19 ■

Requests for Other Information A party can serve a written request on the other party
for an admission of the truth on matters relating to the trial. Any matter admitted under
such a request is conclusively established for the trial. For instance, Marconi can ask
Anderson to admit that he was driving at a speed of forty-five miles an hour. A request for
admission saves time at trial because the parties will not have to spend time proving facts
on which they already agree.

A party can also gain access to documents and other items not in her or his possession in
order to inspect and examine them. Likewise, a party can gain “entry upon land” to inspect
the premises. Anderson’s attorney, for instance, normally can gain permission to inspect and
photocopy Marconi’s car repair bills.

When the physical or mental condition of one party is in question, the opposing party
can ask the court to order a physical or mental examination, but the court will do so only if
the need for the information outweighs the right to privacy of the person to be examined.
If the court issues the order, the opposing party can obtain the results of the examination.

Electronic Discovery Any relevant material, including information stored electronically,
can be the object of a discovery request. The federal rules and most state rules now specif-
ically allow all parties to obtain electronic “data compilations.” Electronic evidence, or
e-evidence, includes all types of computer-generated or electronically recorded information.
This might include e-mail, voice mail, tweets, blogs, social media posts, and spreadsheets,
as well as documents and other data stored on computers.

E-evidence can reveal significant facts that are not discoverable by other means. Computers,
smartphones, cameras, and other devices automatically record certain information about files—
such as who created a file and when, and who accessed, modified, or transmitted it—on their hard
drives. This information is called metadata, which can be thought of as “data about data.” Metadata
can be obtained only from the file in its electronic format—not from printed-out versions.

Example 4.11 John McAfee, the programmer responsible for creating McAfee antivirus
software, was wanted for questioning in the murder of his neighbor in Belize. McAfee left
Belize and was on the run from police, but he allowed a journalist to come with him and
photograph him. When the journalist posted photos of McAfee online, some metadata were
attached to a photo. The police used the metadata to pinpoint the latitude and longitude of
the image and subsequently arrested McAfee in Guatemala. ■

E-Discovery Procedures. The Federal Rules of Civil Procedure deal specifically with the
preservation, retrieval, and production of electronic data. Although parties may still use
traditional means, such as interrogatories and depositions, to find out about the e-evidence,

19. Construction Laborers Trust Funds for Southern California Administrative Co. v. Montalvo, 2011 WL 1195892 (C.d.Cal. 2011); see also, Loop Al
Labs Inc. v. Gatti, 2017 WL 934599 (n.d.Cal. 2017).

E-Evidence A type of evidence that
consists of computer-generated or
electronically recorded information.

Metadata Data that are
automatically recorded by electronic
devices and provide information
about who created a file and when,
and who accessed, modified,
or transmitted the file. It can be
described as data about data.

108 UNIT ONE: The Legal Environment of Business

30301_ch04_hr_086-122.indd 108 8/30/18 12:37 PM

they must usually hire an expert to retrieve evidence in its electronic for-
mat. The expert uses software to reconstruct e-mail exchanges and estab-
lish who knew what and when they knew it. The expert can even recover
files that the user thought had been deleted from a computer.

Advantages and Disadvantages. E-discovery has significant advantages
over paper discovery. Back-up copies of documents and e-mail can provide
useful—and often quite damaging—information about how a particular
matter progressed over several weeks or months. E-discovery can uncover
the proverbial smoking gun that will win the lawsuit, but it is also time con-
suming and expensive, especially when lawsuits involve large firms with
multiple offices. Many companies have found it challenging to fulfill their
duty to preserve electronic evidence from a vast number of sources. Failure
to do so, however, can lead to sanctions and even force companies to agree to
settlements that are not in their best interests.

A failure to provide e-evidence in response to a discovery request does not always arise
from an unintentional failure to preserve documents and e-mail. The following case involved
a litigant that delayed a response to gain time to intentionally alter and destroy data. At issue
was the amount of sanctions imposed for this spoliation. (Spoliation of evidence occurs when
a document or information that is required for discovery is destroyed or altered significantly.)

E-discovery may involve examining social media
accounts, such as those on Instagram.









Background and Facts Klipsch Group, Inc., makes sound
equipment, including headphones. Klipsch filed a suit in a federal
district court against ePRo E-Commerce Limited, a Chinese cor-
poration. Klipsch alleged that ePRo had sold $5 million in coun-
terfeit Klipsch products. ePRo claimed that the sales of relevant
products amounted to less than $8,000 worldwide. In response
to discovery requests, ePRo failed to timely disclose the majority
of the responsive documents in its possession. In addition, ePRo
restricted Klipsch’s access to its e-data. the court directed
ePRo to impose a litigation hold on the custodians of the data to
preserve evidence, but the defendant failed to do so. this led to the
deletion of thousands of documents and significant quantities of
data. to determine what data had been blocked or lost, and what
might and might not be recovered, Klipsch spent $2.7 million on a
forensic examination.

the federal district court concluded that ePRo had willingly
engaged in spoliation of e-evidence. for this misconduct, the court
imposed sanctions, including an order to pay Klipsch the entire
$2.7 million for its restorative discovery efforts. ePRo appealed,
contending that the sanctions were “disproportionate.”

In the Words of the Court
Gerard E. LYNCH, Circuit judge:

*  *  *  *
ePRo argues that the monetary sanctions imposed against it

are so out of proportion to the value of the evidence uncovered
by Klipsch’s efforts or to the likely ultimate value of the case as
to be impermissibly punitive [punishing] and a violation of due
process. that position, although superficially sympathetic given
the amount of the sanction, overlooks the fact that ePRo caused
Klipsch to accrue those costs by failing to comply with its discov-
ery obligations. Such compliance is not optional or negotiable;
rather, the integrity of our civil litigation process requires that the
parties before us, although adversarial to one another, carry out
their duties to maintain and disclose the relevant information in
their possession in good faith. [Emphasis added.]

the extremely broad discovery permitted by the federal Rules
depends on the parties’ voluntary participation. the system functions
because, in the vast majority of cases, we can rely on each side to
preserve evidence and to disclose relevant information when asked
(and sometimes even before then) without being forced to proceed

Klipsch Group, Inc. v. ePRO E-Commerce Limited
united States Court of Appeals, Second Circuit, 880 f.3d 620 (2018).

Case 4.3

(Continues )

109CHAPTER 4: Courts and Alternative Dispute Resolution

30301_ch04_hr_086-122.indd 109 8/30/18 12:37 PM

4–4d Pretrial Conference
Either party or the court can request a pretrial conference, or hearing. Usually, the hearing
consists of an informal discussion between the judge and the opposing attorneys after
discovery has taken place. The purpose of the hearing is to explore the possibility of a set-
tlement without a trial and, if this is not possible, to identify the matters that are in dispute
and to plan the course of the trial.

4–4e Jury Selection
A trial can be held with or without a jury. The Seventh Amendment to the U.S. Constitution
guarantees the right to a jury trial for cases in federal courts when the amount in controversy
exceeds $20, but this guarantee does not apply to state courts. Most states have similar guar-
antees in their own constitutions (although the threshold dollar amount is higher than $20).
The right to a trial by jury does not have to be exercised, and many cases are tried without
a jury. In most states and in federal courts, one of the parties must request a jury in a civil
case, or the judge presumes that the parties waive the right.

Before a jury trial commences, a jury must be selected. The jury selection process is
known as voir dire.20 During voir dire in most jurisdictions, attorneys for the plaintiff and the
defendant ask prospective jurors oral questions to determine whether a potential jury mem-
ber is biased or has any connection with a party to the action or with a prospective witness.
In some jurisdictions, the judge may do all or part of the questioning based on written
questions submitted by counsel for the parties.

During voir dire, a party may challenge a prospective juror peremptorily—that is, ask
that an individual not be sworn in as a juror without providing any reason. Alternatively, a
party may challenge a prospective juror for cause—that is, provide a reason why an individual
should not be sworn in as a juror. If the judge grants the challenge, the individual is
asked to step down. A prospective juror may not be excluded from the jury by the use of
discriminatory challenges, however, such as those based on racial criteria or gender.

Know This
Picking the “right” jury
is often an important
aspect of litigation
strategy, and a number of
firms now specialize in
jury-selection consulting

Voir Dire An important part of the
jury selection process in which the
attorneys question prospective jurors
about their backgrounds, attitudes,
and biases to ascertain whether they
can be impartial jurors.

20. Pronounced vwahr deehr.

at the point of a court order. the courts are ill-equipped to address
parties that do not voluntarily comply: we do not have our own inves-
tigatory powers, and even if we did, the spoliation of evidence would
frequently be extremely difficult for any outsider to detect.

moreover, noncompliance vastly increases the cost of
litigation *    *    *  . Accordingly, we have held that discovery
sanctions are proper *  *  * , because an alternative rule would
encourage dilatory tactics, and compliance with discovery orders
would come only when the backs of counsel and the litigants were
against the wall.

When we apply those principles to the case at hand, it is clear that
the district court did not abuse its discretion by imposing monetary
sanctions calculated to make Klipsch whole for the extra cost and
efforts it reasonably undertook in response to ePRo’s recalcitrance.

*  *  *  *
In sum, we see nothing in ePRo’s proportionality arguments

compelling us to conclude that the district court abused its dis-
cretion by awarding full compensation for efforts that were *  *  *

a reasonable response to ePRo’s own evasive conduct. the pro-
portionality that matters here is that the amount of the sanctions
was plainly proportionate—indeed, it was exactly equivalent—
to the costs ePRo inflicted on Klipsch in its reasonable efforts to
remedy ePRo’s misconduct.

Decision and Remedy the u.S. Court of Appeals for the
Second Circuit affirmed the sanctions. “the district court’s award
properly reflects the additional costs ePRo imposed on its oppo-
nent by refusing to comply with its discovery obligations.”

Critical Thinking

• Economic Should the cost of corrective discovery efforts be
imposed on an uncooperative party if those efforts turn up nothing
of real value to the case? Explain.

• Legal Environment Should it be inferred from a business’s
failure to keep backup copies of its database that the business
must therefore have destroyed the data? Discuss.

110 UNIT ONE: The Legal Environment of Business

30301_ch04_hr_086-122.indd 110 8/30/18 12:37 PM

4–4f At the Trial
Once the trial begins, it follows the specific procedures discussed next.

Opening Arguments and Examination of Witnesses At the beginning of the trial, the
attorneys present their opening arguments, setting forth the facts that they expect to prove
during the trial. Then the plaintiff’s case is presented. In our hypothetical case, Marconi’s
lawyer would introduce evidence (relevant documents, exhibits, and the testimony of wit-
nesses) to support Marconi’s position. The defendant has the opportunity to challenge any
evidence introduced and to cross-examine any of the plaintiff’s witnesses.

At the end of the plaintiff’s case, the defendant’s attorney has the opportunity to ask the
judge to direct a verdict for the defendant on the ground that the plaintiff has presented no
evidence that would justify the granting of the plaintiff’s remedy. This is called a motion for a
directed verdict (known in federal courts as a motion for judgment as a matter of law).

If the motion is not granted (it seldom is granted), the defendant’s attorney then
presents the evidence and witnesses for the defendant’s case. At the conclusion of the
defendant’s case, the defendant’s attorney has another opportunity to make a motion for
a directed verdict. The plaintiff ’s attorney can challenge any evidence introduced and
cross-examine the defendant’s witnesses.

Closing Arguments and Awards After the defense concludes its presentation, the attor-
neys present their closing arguments, each urging a verdict in favor of her or his client.
The judge instructs the jury in the law that applies to the case (these instructions are often
called charges), and the jury retires to the jury room to deliberate a verdict. Typically, jurors
are instructed that they must decide the case based only on the information that they learned
during the trial.

In the Marconi-Anderson case, the jury will decide in favor of either the plaintiff or the
defendant. In addition, if the jury finds for the plaintiff, it will also decide on the amount of
the award (the monetary compensation to be paid to her).

4–4g Posttrial Motions
After the jury has rendered its verdict, either party may make a posttrial motion. If Marconi
wins and Anderson’s attorney has previously moved for a directed verdict, Anderson’s attor-
ney may make a motion for judgment n.o.v. (from the Latin non obstante veredicto, which means
“notwithstanding the verdict”—called a motion for judgment as a matter of law in the federal
courts). Such a motion will be granted only if the jury’s verdict was unreasonable and erro-
neous. If the judge grants the motion, the jury’s verdict will be set aside, and a judgment will
be entered in favor of the opposite party (Anderson).

Alternatively, Anderson could make a motion for a new trial, asking the judge to set aside
the adverse verdict and to hold a new trial. The motion will be granted if, after looking at
all the evidence, the judge is convinced that the jury was in error but does not feel that it is
appropriate to grant judgment for the other side. A judge can also grant a new trial on the
basis of newly discovered evidence, misconduct by the participants or the jury during
the trial, or error by the judge.

4–4h The Appeal
Assume here that any posttrial motion is denied and that Anderson appeals the case. (If
Marconi wins but receives a smaller monetary award than she sought, she can appeal also.)
Keep in mind, though, that a party cannot appeal a trial court’s decision simply because he
or she is dissatisfied with the outcome of the trial.

A party must have legitimate grounds to file an appeal. In other words, he or she must be able
to claim that the lower court committed an error. If Anderson has grounds to appeal the case, a
notice of appeal must be filed with the clerk of the trial court within a prescribed time. Anderson
now becomes the appellant, or petitioner, and Marconi becomes the appellee, or respondent.

Motion for a Directed Verdict
A motion for the judge to take the
decision out of the hands of the jury
and to direct a verdict for the party
making the motion on the ground
that the other party has not produced
sufficient evidence to support her or
his claim.

Award The monetary compensation
given to a party at the end of a trial or
other proceeding.

Motion for Judgment n.o.v. A
motion requesting the court to grant
judgment in favor of the party making
the motion on the ground that the
jury’s verdict against him or her was
unreasonable and erroneous.

Motion for a New Trial A motion
asserting that the trial was so
fundamentally flawed (because of
error, newly discovered evidence,
prejudice, or another reason) that a
new trial is necessary to prevent a
miscarriage of justice.

111CHAPTER 4: Courts and Alternative Dispute Resolution

30301_ch04_hr_086-122.indd 111 8/30/18 12:37 PM

Filing the Appeal Anderson’s attorney files the record on appeal with the appellate court.
The record includes the pleadings, the trial transcript, the judge’s rulings on motions made
by the parties, and other trial-related documents. Anderson’s attorney will also provide the
reviewing court with a condensation of the record, known as an abstract, and a brief.
The brief is a formal legal document outlining the facts and issues of the case, the judge’s
rulings or jury’s findings that should be reversed or modified, the applicable law, and argu-
ments on Anderson’s behalf (citing applicable statutes and relevant cases as precedents).

Marconi’s attorney will file an answering brief. Anderson’s attorney can file a reply to
Marconi’s brief, although it is not required. The reviewing court then considers the case.

Appellate Review As explained earlier, a court of appeals does not hear evidence.
Instead, the court reviews the record for errors of law. Its decision concerning a case is
based on the record on appeal, the abstracts, and the attorneys’ briefs. The attorneys can
present oral arguments, after which the case is taken under advisement.

After reviewing a case, an appellate court has the following options:

1. The court can affirm the trial court’s decision.

2. The court can reverse the trial court’s judgment if it concludes
that the trial court erred or that the jury did not receive proper

3. The appellate court can remand (send back) the case to the trial
court for further proceedings consistent with its opinion on the

4. The court might also affirm or reverse a decision in part. For
instance, the court might affirm the jury’s finding that Anderson
was negligent but remand the case for further proceedings on
another issue (such as the extent of Marconi’s damages).

5. An appellate court can also modify a lower court’s decision. If
the appellate court decides that the jury awarded an excessive
amount in damages, for instance, the court might reduce the
award to a more appropriate, or fairer, amount.

Appeal to a Higher Appellate Court If the reviewing court is an intermediate appellate
court, the losing party may decide to appeal to the state supreme court (the highest state court).
Such a petition corresponds to a petition for a writ of certiorari from the United States Supreme
Court. Although the losing party has a right to ask (petition) a higher court to review the case,
the party does not have a right to have the case heard by the higher appellate court.

Appellate courts normally have discretionary power and can accept or reject an appeal.
Like the United States Supreme Court, state supreme courts generally deny most appeals. If
the appeal is granted, new briefs must be filed before the state supreme court, and the attor-
neys may be allowed or requested to present oral arguments. Like the intermediate appellate
court, the supreme court may reverse or affirm the appellate court’s decision or remand the
case. At this point, the case typically has reached its end (unless a federal question is at issue
and one of the parties has legitimate grounds to seek review by a federal appellate court).

4–4i Enforcing the Judgment
The uncertainties of the litigation process are compounded by the lack of guarantees that
any judgment will be enforceable. Even if a plaintiff wins an award of damages in court, the
defendant may not have sufficient assets or insurance to cover that amount. Usually, one of
the factors considered before a lawsuit is initiated is whether the defendant will be able to
pay the damages sought, should the plaintiff win the case.

Brief A written summary or
statement prepared by one side in
a lawsuit to explain its case to the

Do parties to a trial decision always have a right to appeal that








112 UNIT ONE: The Legal Environment of Business

30301_ch04_hr_086-122.indd 112 8/30/18 12:37 PM

4–5 Courts Online
Most courts today have websites. Of course, each court decides what to make available at its
site. Some courts display only the names of court personnel and office phone numbers.
Others add court rules and forms. Many appellate court sites include judicial decisions,
although the decisions may remain online for only a limited time. In addition, in some states,
including California and Florida, court clerks offer information about the court’s docket (its
schedule of cases to be heard) and other searchable databases online.

Appellate court decisions are often posted online immediately after they are rendered.
Recent decisions of the U.S. courts of appeals, for instance, are available online at their
websites. The United States Supreme Court also has an official website and publishes its
opinions there immediately after they are announced to the public. In fact, even decisions
that are designated as “unpublished” opinions by the appellate courts are usually published
(posted) online.

4–5a Electronic Filing
A number of state and federal courts now allow parties to file litigation-related documents
with the courts via the Internet or other electronic means. In fact, the federal court sys-
tem has implemented its electronic filing system, Case Management/Electronic Case Files
(CM/ECF), in nearly all federal courts. The system is available in federal district, appellate,
and bankruptcy courts, as well as the U.S. Court of International Trade and the U.S. Court
of Federal Claims. More than 41 million cases are on the CM/ECF system. Access to the
electronic documents filed on CM/ECF is available through a system called PACER (Public
Access to Court Electronic Records), which is a service of the U.S. courts.

A majority of the states have some form of electronic filing, although often it is not yet
available in state appellate courts. Some states, including Arizona, California, Colorado,
Delaware, Mississippi, New Jersey, New York, and Nevada, offer statewide e-filing systems.
Generally, when electronic filing is made available, it is optional. Nonetheless, some state
courts have now made e-filing mandatory in certain types of disputes, such as complex
civil litigation.

4–5b Cyber Courts and Proceedings
Eventually, litigants may be able to use cyber courts, in which judicial proceedings take place
only on the Internet. The parties to a case could meet online to make their arguments and
present their evidence. Cyber proceedings might use e-mail submissions, video cameras,
designated chat rooms, closed sites, or other Internet facilities. The promise of these virtual
proceedings is greater efficiency and lower costs.

Electronic courtroom projects have already been developed in some federal and state
courts. The state of Michigan has cyber courts that hear cases involving technology issues
and high-tech businesses. Other states that have introduced cyber courts include Califor-
nia, Delaware, Louisiana, and North Carolina. The Federal Rules of Civil Procedure also
authorize video conferencing, and some federal bankruptcy courts offer online chatting at
their websites.

4–6 Alternative Dispute Resolution
Litigation is expensive. It is also time consuming. Because of the backlog of cases pending
in many courts, several years may pass before a case is actually tried. For these and other
reasons, more and more businesspersons are turning to alternative dispute resolution (ADR) as a
means of settling their disputes.

Docket The list of cases entered
on a court’s calendar and thus
scheduled to be heard by the court.

Learning Objective 5
What is an electronic court
filing system?

Alternative Dispute Resolution
(ADR) The resolution of disputes
in ways other than those involved in
the traditional judicial process,
such as negotiation, mediation,
and arbitration.

113CHAPTER 4: Courts and Alternative Dispute Resolution

30301_ch04_hr_086-122.indd 113 8/30/18 12:37 PM

The great advantage of ADR is its flexibility. Methods of ADR range from the parties sitting
down together and attempting to work out their differences to multinational corporations
agreeing to resolve a dispute through a formal hearing before a panel of experts. Normally,
the parties themselves can control how they will attempt to settle their dispute, what pro-
cedures will be used, whether a neutral third party will be present or make a decision, and
whether that decision will be legally binding or nonbinding.

Today, more than 90 percent of cases are settled before trial through some form of ADR.
Indeed, most states either require or encourage parties to undertake ADR prior to trial. Many
federal courts have instituted ADR programs as well.

4–6a Negotiation
The simplest form of ADR is negotiation, in which the parties attempt to settle their dispute
informally, with or without attorneys to represent them. Attorneys frequently advise their
clients to negotiate a settlement voluntarily before they proceed to trial. Parties may even try
to negotiate a settlement during a trial or after the trial but before an appeal.

Negotiation traditionally involves just the parties themselves and (if attorneys are involved)
their attorneys. The attorneys still act as advocates—they are obligated to put their clients’
interests first. In contrast, other forms of ADR typically also involve neutral third parties.

4–6b Mediation
In mediation, a neutral third party acts as a mediator and works with both sides in the dis-
pute to facilitate a resolution. The mediator talks with the parties separately as well as
jointly and emphasizes their points of agreement in an attempt to help them evaluate their
options. Although the mediator may propose a solution (called a mediator’s proposal), he
or she does not make a decision resolving the matter. States that require parties to undergo
ADR before trial often offer mediation as one of the ADR options or (as in Florida) the
only option.

One of the biggest advantages of mediation is that it is not as adversarial as litigation.
In a trial, the parties “do battle” with each other in the courtroom, trying to prove each
other wrong, while the judge is usually a passive observer. In mediation, the mediator
takes an active role and attempts to bring the parties together so that they can come to
a mutually satisfactory resolution. The mediation process tends to reduce the hostility
between the disputants, allowing them to resume their former relationship without bad
feelings. For this reason, mediation is often the preferred form of ADR for disputes involv-
ing business partners, employers and employees, or other parties involved in long-term

Example 4.12 Two business partners, Mark Shalen and Charles Rowe, have a dispute over
how the profits of their firm should be distributed. If the dispute is litigated, Shalen and Rowe
will be adversaries, and their respective attorneys will emphasize how the parties’ positions
differ, not what they have in common. In contrast, if the dispute is mediated, the mediator
will emphasize the common ground shared by Shalen and Rowe and help them work toward
agreement. The two men can work out the distribution of profits without damaging their
continuing relationship as partners. ■

4–6c Arbitration
In arbitration, a more formal method of ADR, an arbitrator (a neutral third party or a panel of
experts) hears a dispute and imposes a resolution on the parties. Arbitration differs from
other forms of ADR in that the third party hearing the dispute makes a decision for the
parties. Exhibit 4–4 outlines the basic differences among the three traditional forms of ADR.

Negotiation A process in which
parties attempt to settle their dispute
informally, with or without attorneys
to represent them.

Mediation A method of settling
disputes outside the courts by using
the services of a neutral third party,
who acts as a communicating agent
between the parties and assists them
in negotiating a settlement.

Learning Objective 6
What are three alternative
methods of resolving

Arbitration The settling of a dispute
by submitting it to a disinterested
third party (other than a court), who
renders a decision.

114 UNIT ONE: The Legal Environment of Business

30301_ch04_hr_086-122.indd 114 8/30/18 12:37 PM

Exhibit 4–4 Basic Differences in the Traditional Forms of ADR

Who Decides
the Resolution?


Neutral Third
Party Present?

Type of ADR

Negotiation Mediation Arbitration

Parties meet informally with or
without their attorneys and
attempt to agree on a resolution.
This is the simplest and least
expensive method of ADR.

A neutral third party meets
with the parties and emphasizes
points of agreement to bring
them toward resolution of their
dispute, reducing hostility
between the parties.

The parties present their
arguments and evidence
before an arbitrator at a
formal hearing. The arbitrator
renders a decision to resolve
the parties’ dispute.

No Yes Yes

The parties themselves
reach a resolution.

The parties, but the mediator
may suggest or propose a

The arbitrator imposes
a resolution on the
parties that may be either
binding or nonbinding.

Usually, the parties in arbitration agree that the third party’s decision will be legally bind-
ing, although the parties can also agree to nonbinding arbitration. (Arbitration that is man-
dated by the courts often is nonbinding.) In nonbinding arbitration, the parties can go
forward with a lawsuit if they do not agree with the arbitrator’s decision.

In some respects, formal arbitration resembles a trial, although usually the procedural
rules are much less restrictive than those governing litigation. In the typical arbitration, the
parties present opening arguments and ask for specific remedies. Both sides present evidence
and may call and examine witnesses. The arbitrator then renders a decision.

The Arbitrator’s Decision The arbitrator’s decision is called an award. It is usually the
final word on the matter. Although the parties may appeal an arbitrator’s decision, a court’s
review of the decision will be much more restricted in scope than an appellate court’s review
of a trial court’s decision. The general view is that because the parties were free to frame the
issues and set the powers of the arbitrator at the outset, they cannot complain about
the results. A court will set aside an award only in the event of one of the following:

1. The arbitrator’s conduct or “bad faith” substantially prejudiced the rights of one of the parties.

2. The award violates an established public policy.

3. The arbitrator exceeded her or his powers—that is, arbitrated issues that the parties did not agree to
submit to arbitration.

Arbitration Clauses Just about any commercial matter can be submitted to arbitration.
Parties can agree to arbitrate a dispute after it arises. Frequently, though, parties include an
arbitration clause in a contract. The clause provides that any dispute that arises under the
contract will be resolved through arbitration rather than through the court system.

Arbitration Statutes Most states have statutes (often based in part on the Uniform Arbi-
tration Act) under which arbitration clauses will be enforced. Some state statutes compel
arbitration of certain types of disputes, such as those involving public employees.

Arbitration Clause A clause in
a contract that provides that, in the
event of a dispute, the parties will
submit the dispute to arbitration
rather than litigate the dispute
in court.







What are the steps in a typical
arbitration proceeding?

115CHAPTER 4: Courts and Alternative Dispute Resolution

30301_ch04_hr_086-122.indd 115 8/30/18 12:37 PM

At the federal level, the Federal Arbitration Act (FAA) enforces arbitration clauses in
contracts involving maritime activity and interstate commerce (though its applicability to
employment contracts has been controversial, as discussed later). Because of the breadth of
the commerce clause, arbitration agreements involving transactions only slightly connected
to the flow of interstate commerce may fall under the FAA.

Case Example 4.13 Cable subscribers sued Cox Communications, Inc., in federal court. They
claimed that Cox violated antitrust law by tying premium cable service to the rental of set-
top cable boxes. Cox filed a motion to compel arbitration based on an agreement it had sent
to its subscribers. A district court granted the motion to compel, and the subscribers
appealed. A federal appellate court affirmed, based on the Federal Arbitration Act. The sub-
scribers’ antitrust claims fell within the scope of the arbitration agreement.21 ■

The Issue of Arbitrability The terms of an arbitration agreement can limit the types of
disputes that the parties agree to arbitrate. Disputes can arise, however, when the parties
do not specify limits or when the parties disagree on whether a particular matter is covered
by their arbitration agreement.

When one party files a lawsuit to compel arbitration, it is up to the court to resolve the
issue of arbitrability. That is, the court must decide whether the matter is one that must
be resolved through arbitration. If the court finds that the subject matter in controversy is
covered by the agreement to arbitrate, then it may compel arbitration. Usually, a court will
allow the claim to be arbitrated if the court finds that the relevant statute (the state arbitra-
tion statute or the FAA) does not exclude such claims.

No party, however, will be ordered to submit a particular dispute to arbitration unless
the court is convinced that the party has consented to do so. Additionally, the courts will
not compel arbitration if it is clear that the arbitration rules and procedures are inherently
unfair to one of the parties.

Mandatory Arbitration in the Employment Context A significant question for busi-
nesspersons concerns mandatory arbitration clauses in employment contracts. Many
employees claim they are at a disadvantage when they are forced, as a condition of being
hired, to agree to arbitrate all disputes and thus waive their rights under statutes designed
to protect employees. The United States Supreme Court, however, has held that mandatory
arbitration clauses in employment contracts are generally enforceable.

Classic Case Example 4.14 In a landmark decision, Gilmer v. Interstate/Johnson Lane
Corp.,22 the Supreme Court held that a claim brought under a federal statute prohibiting age
discrimination could be subject to arbitration. The Court concluded that the employee had
waived his right to sue when he agreed, as part of a required registration application to be a
securities representative with the New York Stock Exchange, to arbitrate “any dispute, claim,
or controversy” relating to his employment. ■

Since the Gilmer decision, some courts have refused to enforce one-sided arbitration
clauses. Nevertheless, the policy favoring enforcement of mandatory arbitration agreements
remains strong.23

4–6d Other Types of ADR
The three forms of ADR just discussed are the oldest and traditionally the most commonly used.
In addition, a variety of newer types of ADR have emerged, including those described here.

21. In re Cox Enterprises, Inc. Set-top Cable Television Box Antitrust Litigation, 835 f.3d 1195 (10th Cir. 2016).
22. 500 u.S. 20, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991).
23. See, for example, Cruise v. Kroger Co., 233 Cal.App.4th 390, 193 Cal.Rptr.3d 17 (2015).

116 UNIT ONE: The Legal Environment of Business

30301_ch04_hr_086-122.indd 116 8/30/18 12:37 PM

1. In early neutral case evaluation, the parties select a neutral third party (generally an expert in the
subject matter of the dispute) and then explain their respective positions to that person. The case
evaluator assesses the strengths and weaknesses of each party’s claims.

2. In a mini-trial, each party’s attorney briefly argues the party’s case before the other party and a
panel of representatives from each side who have the authority to settle the dispute. Typically, a
neutral third party (usually an expert in the area being disputed) acts as an adviser. If the parties
fail to reach an agreement, the adviser renders an opinion as to how a court would likely decide
the issue.

3. Numerous federal courts now hold summary jury trials (SJTs), in which the parties present their
arguments and evidence and the jury renders a verdict. The jury’s verdict is not binding, but it does
act as a guide to both sides in reaching an agreement during the mandatory negotiations that imme-
diately follow the trial.

4–6e Providers of ADR Services
ADR services are provided by both government agencies and private organizations. A major pro-
vider of ADR services is the American Arbitration Association (AAA), which handles more than
200,000 claims a year in its numerous offices worldwide. Most of the largest U.S. law firms are
members of this nonprofit association. Cases brought before the AAA are heard by an expert or a
panel of experts in the area relating to the dispute and are usually settled quickly. The
AAA has a special team devoted to resolving large, complex disputes across a wide range
of industries.

Hundreds of for-profit firms around the country also provide various dispute-resolution
services. Typically, these firms hire retired judges to conduct arbitration hearings or other-
wise assist parties in settling their disputes. The judges follow procedures similar to those
of the federal courts and use similar rules. Usually, each party to the dispute pays a filing fee
and a designated fee for a hearing session or conference.

4–6f Online Dispute Resolution
An increasing number of companies and organizations offer dispute-resolution services using
the Internet. The settlement of disputes in these online forums is known as online dispute
resolution (ODR). The disputes have most commonly involved disagreements over the rights
to domain names or over the quality of goods sold via the Internet, including goods sold
through Internet auction sites.

Rules being developed in online forums may ultimately become a code of conduct for
everyone who does business in cyberspace. Most online forums do not automatically apply
the law of any specific jurisdiction. Instead, results are often based on general, universal
legal principles. As with most offline methods of dispute resolution, any party may appeal
to a court at any time.

ODR may be best suited for resolving small- to medium-sized business liability claims,
which may not be worth the expense of litigation or traditional ADR. In addition, some
local governments are using ODR to resolve claims. Example 4.15 New York City has used to resolve auto accident, sidewalk, and other personal-injury claims made
against the city. Parties with complaints submit their demands, and the city submits its offers
confidentially online. If an offer exceeds a demand, the claimant keeps half the difference
as a bonus. ■

Summary Jury Trial (SJT) A
method of settling disputes by holding
a trial in which the jury’s verdict is not
binding but instead guides the parties
toward reaching an agreement during
the mandatory negotiations that
immediately follow.

Online Dispute Resolution
(ODR) The resolution of disputes
with the assistance of organizations
that offer dispute-resolution services
via the Internet.

117CHAPTER 4: Courts and Alternative Dispute Resolution

30301_ch04_hr_086-122.indd 117 8/30/18 12:37 PM

Key Terms
alternative dispute resolution

(ADR) 113
answer 106
arbitration 114
arbitration clause 115
award 111
bankruptcy court 90
brief 112
complaint 104
concurrent jurisdiction 92
counterclaim 106
default judgment 104
deposition 107
discovery 107
diversity of citizenship 91
docket 113
e-evidence 108

exclusive jurisdiction 92
federal question 91
interrogatories 107
judicial review 87
jurisdiction 89
justiciable controversy 95
litigation 103
long arm statute 89
mediation 114
metadata 108
motion for a directed verdict 111
motion for a new trial 111
motion for judgment n.o.v. 111
motion for judgment on the

pleadings 107
motion for summary judgment 107
motion to dismiss 106

negotiation 114
online dispute resolution (ODR) 117
pleadings 104
probate court 90
question of fact 98
question of law 98
reply 106
rule of four 102
service of process 104
small claims court 97
standing to sue 95
summary jury trial (SJT) 117
summons 104
venue 95
voir dire 110
writ of certiorari 102

Practice and Review

Stan Garner resides in Illinois and promotes boxing matches for SuperSports, Inc., an Illinois cor-
poration. Garner created the promotional concept of the “Ages” fights—a series of three boxing
matches pitting an older fighter (George foreman) against a younger fighter, such as john Ruiz or
Riddick bowe. the concept included titles for each of the three fights (“Challenge of the Ages,”
“battle of the Ages,” and “fight of the Ages”), as well as promotional epithets to characterize the
two fighters (“the foreman factor”).

Garner contacted George foreman and his manager, who both reside in texas, to sell the idea, and
they arranged a meeting at Caesar’s Palace in Las vegas, nevada. At some point in the negotiations,
foreman’s manager signed a nondisclosure agreement prohibiting him from disclosing Garner’s promo-
tional concepts unless they signed a contract. nevertheless, after negotiations between Garner and
foreman fell through, foreman used Garner’s “battle of the Ages” concept to promote a subsequent
fight. Garner filed a lawsuit against foreman and his manager in a federal district court in Illinois, alleg-
ing breach of contract. using the information presented in the chapter, answer the following questions.

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

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

3. Suppose that Garner had filed his action in an Illinois state court. Could an Illinois state court have
exercised personal jurisdiction over Foreman or his manager? Why or why not?

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

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

118 UNIT ONE: The Legal Environment of Business

30301_ch04_hr_086-122.indd 118 8/30/18 12:37 PM

Chapter Summary: Courts and Alternative Dispute Resolution

The Judiciary’s Role in
American Government

The role of the judiciary—the courts—in the American governmental system is to interpret
and apply the law. Through the process of judicial review—determining the constitutionality of
laws—the judicial branch acts as a check on the executive and legislative branches of

Basic Judicial

1. Jurisdiction—Before a court can hear a case, it must have jurisdiction over the person against
whom the suit is brought or the property involved in the suit, as well as jurisdiction over the subject
a. Limited versus general jurisdiction—Limited jurisdiction exists when a court is limited to a

specific subject matter, such as probate or divorce. General jurisdiction exists when a court can
hear any kind of case.

b. Original versus appellate jurisdiction—Original jurisdiction exists when courts have authority
to hear a case for the first time (trial courts). Appellate jurisdiction is exercised by courts of
appeals, or reviewing courts, which generally do not have original jurisdiction.

c. Federal jurisdiction—Arises (1) when a federal question is involved (when the plaintiff’s cause of
action is based, at least in part, on the U.S. Constitution, a treaty, or a federal law), or (2) when a
case involves diversity of citizenship (citizens of different states, for example) and the amount in
controversy exceeds $75,000.

d. Concurrent versus exclusive jurisdiction—Concurrent jurisdiction exists when both federal and
state courts have authority to hear the same case. Exclusive jurisdiction exists when only state
courts or only federal courts have authority to hear a case.

2. Jurisdiction in cyberspace—Because the Internet does not have physical boundaries,
traditional jurisdictional concepts have been difficult to apply in cases involving activities
conducted via the Web. Gradually, the courts are developing standards to use in determining
when jurisdiction over an Internet business operator located in another state (or even another
country) is proper.

3. Venue—Venue has to do with the most appropriate location for a trial, which is usually the
geographic area where the event leading to the dispute took place or where the parties

4. Standing to sue—A requirement that a party must have a legally protected interest at stake
sufficient to justify seeking relief through the court system. The controversy at issue must also
be a justiciable controversy—one that is real and substantial, as opposed to hypothetical or

The State and Federal Court

1. Trial courts—Courts of original jurisdiction, in which legal actions are initiated.
a. State—Courts of general jurisdiction can hear any case. Courts of limited jurisdiction include

domestic relations courts, probate courts, traffic courts, and small claims courts.
b. Federal—The federal district court is the equivalent of the state trial court of general jurisdiction.

Federal courts of limited jurisdiction include the U.S. Tax Court, the U.S. Bankruptcy Court, and
the U.S. Court of Federal Claims.

2. Appellate courts—Courts of appeals, or reviewing courts, which generally do not have original
jurisdiction. Every state has at least one court of appeals, and many have intermediate appellate
courts. In the federal court system, the U.S. circuit courts of appeals are the intermediate
appellate courts.

3. Supreme (highest) courts—Each state has a supreme court, although it may be called by some
other name. Appeal from the state supreme court to the United States Supreme Court is possible
only if the case involves a federal question. As the highest court in the federal court system, the
United States Supreme Court is the final arbiter of the U.S. Constitution and federal law, as well as
resolving conflicting decisions by lower courts on a significant issue.

(Continues )

119CHAPTER 4: Courts and Alternative Dispute Resolution

30301_ch04_hr_086-122.indd 119 9/3/18 9:21 AM

Following a State Court

Rules of procedure prescribe the way in which disputes are handled in the courts. Rules differ from
court to court, and separate sets of rules exist for federal and state courts, as well as for criminal and
civil cases. A civil court case in a state court would involve the following procedures:
1. The pleadings—

a. Complaint—Filed by the plaintiff with the court to initiate the lawsuit. The complaint is served
with a summons on the defendant.

b. Answer—A response to the complaint in which the defendant admits or denies the allegations
made by the plaintiff. The answer may assert a counterclaim or an affirmative defense.

c. Motion to dismiss—A request to the court to dismiss the case for stated reasons, such as the
plaintiff’s failure to state a claim for which relief can be granted.

2. Pretrial motions (in addition to the motion to dismiss)—
a. Motion for judgment on the pleadings—May be made by either party. It will be granted if the par-

ties agree on the facts and the only question is how the law applies to the facts. The judge bases
the decision solely on the pleadings.

b. Motion for summary judgment—May be made by either party. It will be granted if the parties
agree on the facts and the sole question is a question of law. The judge can consider evidence
outside the pleadings when evaluating the motion.

3. Discovery—The process of gathering evidence concerning the case and obtaining information from
the opposing party. Discovery involves depositions (sworn testimony by a party to the lawsuit or any
witness), interrogatories (written questions and answers to these questions made by parties to the
action with the aid of their attorneys), and various requests (for admissions, documents, and med-
ical examinations, for instance). Discovery may also involve electronically recorded information,
such as e-mail, voice mail, social media posts, and other data compilations. Although electronic
discovery has significant advantages over paper discovery, it is also more time consuming and
expensive and often requires the parties to hire experts.

4. Pretrial conference—Either party or the court can request a pretrial conference to identify the mat-
ters in dispute after discovery has taken place and to plan the course of the trial. Also, the confer-
ence may explore the possibility of a settlement without a trial.

5. Trial—Following jury selection (voir dire), the trial begins with opening statements from both parties’
attorneys. The following events then occur:
a. The plaintiff’s introduction of evidence (including the testimony of witnesses) supporting the plain-

tiff’s position. The defendant’s attorney can challenge evidence and cross-examine witnesses.
b. The defendant’s introduction of evidence (including the testimony of witnesses) supporting

the defendant’s position. The plaintiff’s attorney can challenge evidence and cross-examine

c. Closing arguments by the attorneys in favor of their respective clients, the judge’s instructions to
the jury, and the jury’s verdict.

6. Posttrial motions—
a. Motion for judgment n.o.v. (“notwithstanding the verdict”)—Will be granted if the judge is con-

vinced that the jury’s verdict was in error.
b. Motion for a new trial—Will be granted if the judge is convinced that the jury’s verdict was in

error. The motion can also be granted on the grounds of newly discovered evidence, misconduct
by the participants during the trial, or error by the judge.

7. Appeal—Either party can appeal the trial court’s judgment to an appropriate court of appeals. After
reviewing the record on appeal, the abstracts, and the attorneys’ briefs, the appellate court holds a
hearing and renders its opinion.

Courts Online Almost every court has a website offering information about the court and its procedures, and increas-
ingly courts are publishing their opinions online. In the future, we may see cyber courts, in which all
trial proceedings are conducted online. A number of state and federal courts allow parties to file
litigation-related documents with the courts via the Internet or other electronic means. Nearly all of the
federal appellate courts and bankruptcy courts and a majority of the federal district courts have imple-
mented electronic filing systems.

120 UNIT ONE: The Legal Environment of Business

30301_ch04_hr_086-122.indd 120 9/3/18 9:21 AM

Alternative Dispute

1. Negotiation—The parties come together, with or without attorneys to represent them, to try to reach
a settlement without the involvement of a third party.

2. Mediation—The parties themselves reach an agreement with the help of a neutral third party, called
a mediator. The mediator may propose a solution but does not make a decision resolving the matter.

3. Arbitration—The parties submit their dispute to a neutral third party, the arbitrator, who renders a
decision. The decision may or may not be legally binding, depending on the circumstances.

4. Other types of ADR—These include early neutral case evaluation, mini-trials, and summary jury
trials (SJTs).

5. Providers of ADR services—The leading nonprofit provider of ADR services is the American Arbitra-
tion Association. Hundreds of for-profit firms also provide ADR services.

6. Online dispute resolution—A number of organizations and firms are now offering negotiation, medi-
ation, and arbitration services through online forums. These forums have been a practical alterna-
tive for the resolution of domain name disputes and e-commerce disputes in which the amount in
controversy is relatively small.

Issue Spotters
1. At the trial, after Sue calls her witnesses, offers her evidence, and otherwise presents her side of the case, Tom has at least two choices

between courses of action. Tom can call his first witness. What else might he do? (See Following a State Court Case.)

2. Lexi contracts with Theo to deliver a quantity of computers to Lexi’s Computer Store. They disagree over the amount, the delivery date,
the price, and the quality. Lexi files a suit against Theo in a state court. Their state requires that their dispute be submitted to mediation
or nonbinding arbitration. If the dispute is not resolved, or if either party disagrees with the decision of the mediator or arbitrator, will
a court hear the case? Explain. (See Alternative Dispute Resolution.)
—Check your answers to the Issue Spotters against the answers provided in Appendix D at the end of this text.

Business Scenarios and Case Problems
4–1. Standing to Sue. Jack and Maggie Turton bought a house in

Jefferson County, Idaho, located directly across the street from a
gravel pit. A few years later, the county converted the pit to a land-
fill. The landfill accepted many kinds of trash that cause harm to the
environment, including major appliances, animal carcasses, con-
tainers with hazardous content warnings, leaking car batteries, and
waste oil. The Turtons complained to the county, but the county did
nothing. The Turtons then filed a lawsuit against the county alleging
violations of federal environmental laws pertaining to groundwater
contamination and other pollution. Do the Turtons have standing to
sue? Why or why not? (See Basic Judicial Requirements.)

4–2. Discovery. Advance Technology Consultants, Inc. (ATC), con-
tracted with RoadTrac, LLC, to provide software and client soft-
ware systems for products using global positioning satellite (GPS)
technology being developed by RoadTrac. RoadTrac agreed to
provide ATC with hardware with which ATC’s software would
interface. Problems soon arose, however, and RoadTrac filed
a lawsuit against ATC alleging breach of contract. During dis-
covery, RoadTrac requested ATC’s customer lists and marketing
procedures. ATC objected to providing this information because
RoadTrac and ATC had become competitors in the GPS indus-
try. Should a party to a lawsuit have to hand over its confidential
business secrets as part of a discovery request? Why or why not?
What limitations might a court consider imposing before requiring
ATC to produce this material? (See Following a State Court Case.)

4–3. Arbitration. Horton Automatics and the Industrial Division of
the Communications Workers of America—the union that rep-
resented Horton’s workers—negotiated a collective bargaining
agreement. If an employee’s discharge for a workplace-rule vio-
lation was submitted to arbitration, the agreement limited the
arbitrator to determining whether the rule was reasonable and
whether the employee had violated it. When Horton discharged
its employee Ruben de la Garza, the union appealed to arbitra-
tion. The arbitrator found that de la Garza had violated a rea-
sonable safety rule, but “was not totally convinced” that Horton
should have treated the violation more seriously than other rule
violations. The arbitrator ordered de la Garza reinstated to his
job. Can a court set aside this order from the arbitrator? Explain.
[Horton Automatics v. The Industrial Division of the Communica-
tions Workers of America, AFL-CIO, 506 Fed.Appx. 253 (5th Cir.
2013)] (See Alternative Dispute Resolution.)

4–4. Discovery. Jessica Lester died from injuries suffered in an
auto accident caused by the driver of a truck owned by Allied
Concrete Co. Jessica’s widower, Isaiah, filed a suit against
Allied for damages. The defendant requested copies of all of
Isaiah’s Facebook photos and other postings. Before respond-
ing, Isaiah “cleaned up” his Facebook page. Allied suspected
that some of the items had been deleted, including a photo of
Isaiah holding a beer can while wearing a T-shirt that declared
“I [heart] hotmoms.” Can this material be recovered? If so, how?

121CHAPTER 4: Courts and Alternative Dispute Resolution

30301_ch04_hr_086-122.indd 121 9/3/18 9:21 AM

What effect might Isaiah’s “misconduct” have on the result in
this case? Discuss. [Allied Concrete Co. v. Lester, 736 S.E.2d 699
(Va. 2013)] (See Following a State Court Case.)

4–5. Electronic Filing. Betsy Faden worked for the U.S. Department
of Veterans Affairs. Faden was removed from her position in April
2012 and was given until May 29 to appeal the removal decision.
She submitted an appeal through the Merit Systems Protection
Board’s e-filing system seven days after the deadline. Ordered
to show good cause for the delay, Faden testified that she had
attempted to e-file the appeal while the board’s system was down.
The board acknowledged that its system had not been functioning
on May 27, 28, and 29. Was Faden sufficiently diligent in ensuring
a timely filing? Discuss. [Faden v. Merit Systems Protection Board,
553 Fed.Appx. 991 (Fed. Cir. 2014)] (See Courts Online.)

4–6. Business Case Problem with Sample Answer—
Corporate Contacts. LG Electronics, Inc., a South
Korean company, and nineteen other foreign compa-
nies participated in the global market for cathode ray

tube (CRT) products. CRTs were integrated as components in
consumer goods, including television sets, and sold for many
years in high volume in the United States, including the state of
Washington. The state filed a suit against LG and the others, alleg-
ing a conspiracy to raise prices and set production levels in the
market for CRTs in violation of a state consumer protection stat-
ute. The defendants filed a motion to dismiss the suit for lack of
personal jurisdiction. Should this motion be granted? Explain your
answer. [State of Washington v. LG Electronics, Inc., 185 Wash.
App. 394, 341 P.3d 346 (2015)] (See Basic Judicial Requirements.)
— For a sample answer to Problem 4–6, go to Appendix E at the

end of this text.

4–7. Appellate, or Reviewing, Courts. Angelica Westbrook
was employed as a collector for Franklin Collection Service, Inc.
During a collection call, Westbrook told a debtor that a $15 pro-
cessing fee was an “interest” charge. This violated company pol-
icy, and Westbrook was fired. She filed a claim for unemployment
benefits, which the Mississippi Department of Employment Secu-
rity (MDES) approved. Franklin objected. At an MDES hearing, a
Franklin supervisor testified that she had heard Westbrook make
the false statement, although she admitted that there had been no

similar incidents with Westbrook. Westbrook denied making the
statement but added that, if she had said it, she did not remember
it. The agency found that Franklin’s reason for terminating West-
brook did not amount to the misconduct required to disqualify
her for benefits and upheld the approval. Franklin appealed to a
state intermediate appellate court. Is the court likely to uphold the
agency’s findings of fact? Explain. [Franklin Collection Service,
Inc. v. Mississippi Department of Employment Security, 184 So.3d
330 (Miss.App. 2016)] (See The State and Federal Court Systems.)

4–8. Service of Process. Bentley Bay Retail, LLC, filed a suit in
a Florida state court against Soho Bay Restaurant LLC, and its
corporate officers, Luiz and Karine Queiroz, in their individual
capacities. The charge against the Queirozes was for a breach
of their personal guaranty for Soho Bay’s debt to Bentley Bay.
The plaintiff filed notices with the court to depose the Queirozes,
who reside in Brazil. The Queirozes argued that they could
not be deposed in Brazil. The court ordered them to appear
in Florida to provide depositions in their corporate capacity.
Witnesses appearing in court outside the jurisdiction of their
residence are immune from service of process while in court.
On the Queirozes’ appearance in Florida, can they be served
with process in their individual capacities? Explain. [Queiroz v.
Bentley Bay Retail, LLC, 43 Fla.L.Weekly D85, __ So.3d __ (3 Dist.
2018)] (See The State and Federal Court Systems.)

4–9. A Question of Ethics—The IDDR Approach and
Complaints. John Verble worked as a financial
advisor for Morgan Stanley Smith Barney, LLC. After
nearly seven years, Verble was fired. He filed a suit in
a federal district court against his ex-employer. In his

complaint, Verble alleged that he had learned of illegal activity
by Morgan Stanley and its clients. He claimed that he had
reported the activity to the Federal Bureau of Investigation, and
that he was fired in retaliation. His complaint contained no addi-
tional facts. [Verble v. Morgan Stanley Smith Barney LLC, 676
Fed.Appx. 421 (6th Cir. 2017) ] (See Following a State Court Case.)

1. To avoid a dismissal of his suit, does Verble have a legal
obligation to support his claims with more facts? Explain.

2. Does Verble owe an ethical duty to back up his claims with
more facts? Use the IDDR approach to express your answer.

Critical Thinking and Writing Assignments
4–10. Time-Limited Group Assignment—Access to

Courts. Assume that a statute in your state requires
that all civil lawsuits involving damages of less than
$50,000 be arbitrated. Such a case can be tried in court

only if a party is dissatisfied with the arbitrator’s decision. The
statute also provides that if a trial does not result in an improve-
ment of more than 10 percent in the position of the party who
demanded the trial, that party must pay the entire cost of the
arbitration proceeding. (See Alternative Dispute Resolution.)

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

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

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

122 UNIT ONE: The Legal Environment of Business

30301_ch04_hr_086-122.indd 122 8/30/18 12:37 PM

Tort Law 5
English Proverb

“Two wrongs do not
make a right.”

Most of us agree with the chapter-opening quotation—two
wrongs do not make a right. In this chapter, we consider a
particular type of wrongful actions called torts (the word tort is
French for “wrong”).

Part of doing business today—and indeed, part of everyday
life—is the risk of being involved in a lawsuit. The list of circumstances in which business-
persons can be sued is long and varied. Anytime one party’s allegedly wrongful conduct
causes injury to another, an action may arise under the law of torts. Through tort law, society
compensates those who have suffered injuries as a result of the wrongful conduct of others.

Sheila Dearning is a reporter for the National Post who has gained notoriety by writing a num-
ber of articles that exposed the misconduct of powerful public officials. A competing publication,
the Tribunal, knows that Dearning has a five-year contract with her current employer. Neverthe-
less, the Tribunal offers to hire Dearning as a reporter and to pay her twice the amount she is being
paid at the National Post. Dearning accepts. Has the Tribunal committed a tort? As you will learn
in this chapter, the tort of wrongful interference with a contractual relationship is one of many
that can lead to liability for businesses. In this situation, the Tribunal can be sued for wrongfully
interfering with Dearning’s contract with her employer. (The National Post can also sue Dearning
personally for breaching the contract, as will be discussed in a later chapter.)

5–1 The Basis of Tort Law
Two notions serve as the basis of all torts: wrongs and compensation. Tort law is designed to
compensate those who have suffered a loss or injury due to another person’s wrongful act.
In a tort action, one person or group brings a personal suit against another person or group
to obtain compensation (monetary damages) or other relief for the harm suffered.

Tort A wrongful act (other than a
breach of contract) that results in
harm or injury to another and leads to
civil liability.

Learning Objectives
The five Learning Objectives below are
designed to help improve your understand-
ing. After reading this chapter, you should
be able to answer the following questions:

1. What types of damages are
available in tort lawsuits?

2. What is defamation? Name
two types of defamation.

3. What conduct constitutes

4. Identify the four elements of

5. What is meant by strict liabil-
ity? In what circumstances is
strict liability applied?










30301_ch05_hr_123-150.indd 123 8/30/18 12:38 PM

5–1a The Purpose of Tort Law
Generally, the purpose of tort law is to provide remedies for the invasion of various protected
interests. Society recognizes an interest in personal physical safety, and tort law provides
remedies for acts that cause physical injury or interfere with physical security and freedom.
Society also recognizes an interest in protecting property, and tort law provides remedies for
acts that cause destruction of or damage to property.

Note that in legal usage, the singular damage is used to refer to harm or injury to persons or
property. The plural damages is used to refer to monetary compensation for such harm
or injury.

5–1b Damages Available in Tort Actions
Because the purpose of tort law is to compensate the injured party for the damage suffered,
it is important to have a basic understanding of the types of damages that plaintiffs seek in
tort actions.

Compensatory Damages Plaintiffs are awarded compensatory damages to compensate or
reimburse them for actual losses. Thus, the goal is to make the plaintiffs whole and put
them in the same position that they would have been in had the tort not occurred. Com-
pensatory damages awards are often broken down into special damages and general

Special damages compensate plaintiffs for quantifiable monetary losses, such as medical
expenses, lost wages and benefits (now and in the future), extra costs, the loss of irreplace-
able items, and the costs of repairing or replacing damaged property. General damages com-
pensate individuals (not companies) for the nonmonetary aspects of the harm suffered, such
as pain and suffering. A court might award general damages for physical or emotional pain
and suffering, loss of companionship, loss of consortium (losing the emotional and physical
benefits of a spousal relationship), disfigurement, loss of reputation, or loss or impairment
of mental or physical capacity.

Case Example 5.1 While working as a seaman in Louisiana, Chedrick Starks was
injured when a piece of equipment broke free and struck him. After undergoing
several surgeries, Starks sued his employer for past and future medical expenses,
and pain and suffering. At trial, a jury awarded him damages for past and future
medical expenses and past pain and suffering, but did not award him damages
for future pain and suffering. Starks appealed, claiming that the damages awarded
were inadequate. A federal district court held that the jury’s  damages award was
inconsistent. Starks had presented sufficient proof that his injuries and future
medical treatment could result in future pain and suffering. Therefore, Starks was
entitled to a new trial on the issue of damages.1 ■

Punitive Damages Occasionally, the courts also award punitive damages in
tort cases to punish the wrongdoers and deter others from similar wrongdoing.
Punitive damages are appropriate only when the defendant’s conduct was par-
ticularly egregious (flagrant) or reprehensible (blameworthy).

Thus, punitive damages are normally available mainly in intentional tort
actions and only rarely in negligence lawsuits (intentional torts and negligence
will be explained later in the chapter). They may be awarded, however, in suits
involving gross negligence, which can be defined as an intentional failure to
perform a manifest duty in reckless disregard of the effect on the life or property
of another.

Learning Objective 1
What types of damages are
available in tort lawsuits?

Damages A monetary award sought
as a remedy for a breach of contract
or a tortious action.

Compensatory Damages A
monetary award equivalent to the
actual value of injuries or damage
sustained by the aggrieved party.

Special Damages In a tort case,
an amount awarded to compensate
the plaintiff for quantifiable monetary
losses, such as medical expenses,
property damage, and lost wages and
benefits (now and in the future).

General Damages In a tort case,
an amount awarded to compensate
individuals for the nonmonetary
aspects of the harm suffered, such as
pain and suffering. Not available to

1. Starks v. Advantage Staffing, LLC, 217 F.Supp.3d 917 (E.D.La. 2016).

Punitive Damages Monetary
damages that may be awarded to a
plaintiff to punish the defendant and
deter similar conduct in the future.







Do tort lawsuits end up in civil or criminal

124 UNIT ONE: The Legal Environment of Business

30301_ch05_hr_123-150.indd 124 8/30/18 12:38 PM

Courts exercise great restraint in granting punitive damages to plaintiffs in tort actions
because punitive damages are subject to the limitations imposed by the due process clause
of the U.S. Constitution. In a landmark decision, the United States Supreme Court held that
when an award of punitive damages is grossly excessive, it furthers no legitimate purpose
and violates due process requirements.2 Consequently, an appellate court will sometimes
reduce the amount of punitive damages awarded to a plaintiff because the amount was
excessive and thereby violates the due process clause.

Legislative Caps on Damages State laws may limit the amount of damages—both puni-
tive and general—that can be awarded to the plaintiff. More than half of the states have
placed caps ranging from $250,000 to $750,000 on noneconomic general damages (such
as for pain and suffering), especially in medical malpractice suits. More than thirty states
have limited punitive damages, with some imposing outright bans.

5–1c Classifications of Torts
There are two broad classifications of torts: intentional torts and unintentional torts (torts
involving negligence). Intentional torts result from the intentional violation of person or
property (fault with intent). Negligence results from the breach of a duty to act reasonably
(fault without intent). The classification of a particular tort depends largely on how the tort
occurs (intentionally or negligently) and the surrounding circumstances.

5–1d Defenses
Even if a plaintiff proves all the elements of a tort, the defendant can raise a number of legally
recognized defenses—reasons why the plaintiff should not obtain damages. The defenses
available may vary depending on the specific tort involved. A successful defense releases the
defendant from partial or full liability for the tortious act.

A common defense to intentional torts against persons, for instance, is consent. When a
person consents to the act that damages her or him, there is generally no tort liability. The
most widely used defense in negligence actions is comparative negligence (discussed later in
this chapter).

Most states also have a statute of limitations that establishes the time limit (often two years
from the date of discovering the harm) within which a particular type of lawsuit can be filed.
After that time period, the plaintiff can no longer file a claim.

5–2 Intentional Torts against Persons
An intentional tort, as just mentioned, requires intent. The tortfeasor (the one committing the
tort) must intend to commit an act, the consequences of which interfere with the personal
or business interests of another in a way not permitted by law. An evil or harmful motive is
not required—in fact, the person committing the action may even have a beneficial motive
for committing what turns out to be a tortious act.

In tort law, intent means only that the person intended the consequences of his or her act or
knew with substantial certainty that certain consequences would result from the act. The law
generally assumes that individuals intend the normal consequences of their actions. Thus,
forcefully pushing another—even if done in jest and without any evil motive—is an inten-
tional tort if injury results, because the object of a strong push can ordinarily be expected
to fall down.

2. State Farm Mutual Automobile Insurance Co. v. Campbell, 538 U.S. 408, 123 S.Ct. 1513, 155 L.Ed.2d 585 (2003).

Know This
Damage refers to harm
or injury to persons
or property. Damages
is a legal term that
refers to the monetary
compensation awarded
to a plaintiff who has
suffered such harm or

Defense A reason offered by a
defendant in an action or lawsuit as
to why the plaintiff should not recover
or establish what she or he seeks.

Intentional Tort A wrongful act
knowingly committed.

Tortfeasor One who commits a tort.

125CHAPTER 5: Tort Law

30301_ch05_hr_123-150.indd 125 8/30/18 12:38 PM

Intent can be transferred when a defendant intends to harm one individual but uninten-
tionally harms a different person. This is called transferred intent. Example 5.2 Alex swings a
bat intending to hit Blake but misses and hits Carson instead. Carson can sue Alex for the
tort of battery (discussed shortly) because Alex’s intent to harm Blake can be transferred to
Carson. ■

5–2a Assault
An assault is any intentional and unexcused threat of immediate harmful or offensive contact—
words or acts that create in another person a reasonable apprehension of harmful contact. An
assault can be completed even if there is no actual contact with the plaintiff, provided the
defendant’s conduct causes the plaintiff to have a reasonable apprehension of imminent harm.
Tort law aims to protect individuals from having to expect harmful or offensive contact.

5–2b Battery
If the act that created the apprehension is completed and results in harm to the plaintiff, it is a
battery, which is defined as an unexcused and harmful or offensive physical contact intentionally
performed. Example 5.3 Ivan threatens Jean with a gun and then shoots her. The pointing of the
gun at Jean is an assault. The firing of the gun (if the bullet hits Jean) is a battery. ■

The contact can be harmful, or it can be merely offensive (such as an unwelcome kiss).
Physical injury need not occur. The contact can be made by the defendant or by some force
set in motion by the defendant, such as a rock thrown by the defendant. Whether the contact
is offensive or not is determined by the reasonable person standard.3

If the plaintiff shows that there was contact, and the jury (or judge, if there is no jury)
agrees that the contact was offensive, the plaintiff has a right to compensation. A plaintiff
may be compensated for the emotional harm resulting from a battery, as well as for physical
harm. The defendant may raise a number of legally recognized defenses to justify his or her
conduct, including self-defense and defense of others.

5–2c False Imprisonment
False imprisonment is the intentional confinement or restraint of another person’s activi-
ties without justification. False imprisonment interferes with the freedom to move without

restraint. The confinement can be accomplished through the use of physical
barriers, physical restraint, or threats of physical force. It is essential that
the person under restraint does not wish to be restrained. (The plaintiff’s
consent to the restraint bars any liability.)

Businesspersons may face suits for false imprisonment after they
have attempted to confine a suspected shoplifter for questioning. Under
the “privilege to detain” granted to merchants in most states, a merchant
can use reasonable force to detain or delay a person suspected of shoplifting
the merchant’s property. Although the details of the privilege vary from
state to state, generally laws require that any detention be conducted in a
reasonable manner and for only a reasonable length of time. Undue force or
unreasonable detention can lead to liability for the business.

Case Example 5.4 Justin Mills was playing blackjack at the Maryland Live!
Casino when two casino employees approached him, grabbed his arm, and
led him into a back hallway. The employees (who were off-duty police
officers moonlighting for the casino) accused Mills of counting cards and

Transferred Intent A legal
principle under which a person who
intends to harm one individual, but
unintentionally harms a different
individual, can be liable to the second
victim for an intentional tort.

Assault Any word or action
intended to make another person
fearful of immediate physical
harm—a reasonably believable

Battery Physical contact with
another that is unexcused, harmful
or offensive, and intentionally

3. The reasonable person standard is an objective test of how a reasonable person would have acted under the same circumstances. See “The
Duty of Care and Its Breach” later in this chapter.











Under what circumstances can a person in jail sue
for false imprisonment?

126 UNIT ONE: The Legal Environment of Business

30301_ch05_hr_123-150.indd 126 8/30/18 12:38 PM

demanded his identification. They detained Mills and told him that they would not let him
go unless he produced his ID so that the casino could ban him from the premises.

Mills gave the employees his passport and was eventually allowed to leave, but he secretly
recorded the audio from the interaction using the smartphone in his pocket. Mills later filed
a lawsuit alleging, in part, false imprisonment. A federal district court granted Mills a sum-
mary judgment on the false imprisonment claim, because the casino personnel had no legal
justification for detaining him.4 ■ Cities and counties may also face liability for false impris-
onment if they detain individuals without reason.

5–2d Intentional Infliction of Emotional Distress
The tort of intentional infliction of emotional distress can be defined as extreme and outrageous
conduct resulting in severe emotional distress to another. To be actionable (capable of serving
as the ground for a lawsuit), the conduct must be so extreme and outrageous that it exceeds
the bounds of decency accepted by society.

Outrageous Conduct Courts in most jurisdictions are wary of emotional distress claims
and confine them to truly outrageous behavior. Generally, repeated annoyances (such as
those experienced by a person who is being stalked), coupled with threats, are sufficient to
support a claim. (See this chapter’s Business Law Analysis feature for details of how courts
analyze these types of claims.) Acts that cause indignity or annoyance alone usually are
not enough.

4. Mills v. PPE Casino Resorts Maryland, LLC, 2017 WL 2930460 (D.Md. 2017).

Actionable Capable of serving as
the basis of a lawsuit. An actionable
claim can be pursued in a lawsuit or
other court action.

While living in her home country of Tanzania, Sophia Kiwanuka signed
an employment contract with Anne
Bakilana, a Tanzanian living in the United
States. Kiwanuka came to Washington,
D.C., to work as a babysitter and maid
in Bakilana’s house. When Kiwanuka
arrived, Bakilana confiscated her pass-
port, held her in isolation, and forced her to
work long hours under threat of having her
deported. Kiwanuka worked seven days a
week without breaks and was subjected to
regular verbal and psychological abuse by

Kiwanuka filed a complaint against
Bakilana for intentional infliction of emo-
tional distress. Bakilana asked the court

to dismiss the claim. Are Kiwanuka’s
allegations sufficient to show outrageous
intentional conduct that resulted in severe
emotional distress?

Analysis: In deciding whether the
alleged conduct was sufficiently outra-
geous, a court would look at the repeated
conduct of the purported tortfeasor. The
complaint stated that Bakilana, on a daily
basis, used her position of power and con-
trol over Kiwanuka to engage in an inten-
tional pattern of outrageous verbal abuse
against her. The complaint also alleged
that Bakilana intentionally interfered with
Kiwanuka’s attempts to form relation-
ships or acquaintances, which deepened

Kiwanuka’s suffering of isolation and

Result and Reasoning: These alle-
gations were sufficient to show extreme
and outrageous conduct, intentionally
committed, that resulted in severe emo-
tional distress to Kiwanuka. Therefore,
Kiwanuka was entitled to a trial on her
claim for intentional infliction of emo-
tional distress.

Analyzing Intentional Infliction
of Emotional Distress Claims

Business Law

127CHAPTER 5: Tort Law

30301_ch05_hr_123-150.indd 127 8/30/18 12:38 PM

Example 5.5 A father attacks a man who has had consensual sexual relations with the
father’s nineteen-year-old daughter. The father handcuffs the man to a steel pole and threat-
ens to kill him unless he leaves town immediately. The father’s conduct may be sufficiently
extreme and outrageous to be actionable as an intentional infliction of emotional distress. ■

Limited by the First Amendment When the outrageous conduct consists of speech about
a public figure, the First Amendment’s guarantee of freedom of speech limits emotional
distress claims. Spotlight Case Example 5.6 Hustler magazine once printed a fake advertise-
ment that showed a picture of the Reverend Jerry Falwell and described him as having lost
his virginity to his mother in an outhouse while he was drunk. Falwell sued the magazine
for intentional infliction of emotional distress and won, but the United States Supreme Court
overturned the decision. The Court held that creators of parodies of public figures are pro-
tected under the First Amendment from claims of intentional infliction of emotional distress.
(The Court applied the same standards that apply to public figures in defamation lawsuits,
discussed next.)5 ■

5–2e Defamation
The freedom of speech guaranteed by the First Amendment to the U.S. Constitution is not
absolute. In interpreting the First Amendment, the courts must balance free speech rights
against other strong social interests, including society’s interest in preventing and redressing
attacks on reputation.

The tort of defamation involves wrongfully hurting a person’s good reputation. The law
has imposed a general duty on all persons to refrain from making false, defamatory state-
ments of fact about others. Breaching this duty in writing or another permanent form (such
as a digital recording) constitutes the tort of libel. Breaching the duty orally is the tort of
slander. The tort of defamation also arises when a false statement of fact is made about a
person’s product, business, or legal ownership rights to property.

To establish defamation, a plaintiff normally must prove the following:

1. The defendant made a false statement of fact.

2. The statement was understood as being about the plaintiff and tended to harm the
plaintiff’s reputation.

3. The statement was published to at least one person other than the plaintiff.

4. In addition, if the plaintiff is a public figure, she or he must prove actual malice.

Statement of Fact Requirement Often at issue in defamation lawsuits (including online
defamation) is whether the defendant made a statement of fact or a statement of opinion.
Statements of opinion normally are not actionable because they are protected under the First
Amendment. In other words, making a negative statement about another person is not def-
amation unless the statement is false and represents something as a fact. Example 5.7 Vickie’s
statement “Lane cheats on his taxes,” if false, can lead to liability for defamation because
it  is a statement of fact. The statement “Lane is a jerk” cannot constitute defamation
because it is clearly an opinion. ■

The Publication Requirement The basis of the tort of defamation is the publication of
a statement or statements that hold an individual up to contempt, ridicule, or hatred.
Publication here means that the defamatory statements are communicated to persons other
than the defamed party.

The following case involved the application of free speech guarantees to reviews of
professional services posted online.

5. Hustler Magazine, Inc. v. Falwell, 485 U.S. 46, 108 S.Ct. 876, 99 L.Ed.2d 41 (1988). For another example of how the courts protect parody, see
Busch v. Viacom International, Inc., 477 F.Supp.2d 764 (N.D.Tex. 2007), involving a fake endorsement of televangelist Pat Robertson’s diet shake.

Learning Objective 2
What is defamation? Name
two types of defamation.

Defamation Anything published or
publicly spoken that causes injury to
another’s good name, reputation, or

Libel Defamation in writing or
another permanent form (such as a
digital recording).

Slander Defamation in oral form.








Is it legal to create a parody of
a public figure, such as the late
Reverend Jerry Falwell?

128 UNIT ONE: The Legal Environment of Business

30301_ch05_hr_123-150.indd 128 8/30/18 12:38 PM

The courts have generally held that even dictating a letter to a secretary constitutes pub-
lication, although the publication may be privileged (as discussed shortly). If a third party
overhears defamatory statements by chance, the courts usually hold that this also constitutes
publication. Defamatory statements made via the Internet are actionable as well. Note also
that anyone who republishes or repeats defamatory statements is liable even if that person
reveals the source of the statements.

Case Example 5.8 Eddy Ramirez, a meat cutter at Costco Wholesale Corporation, was
involved in a workplace incident with a co-worker, and Costco gave him a notice of suspen-
sion. After an investigation in which co-workers were interviewed, Costco fired Ramirez.
Ramirez sued, claiming that the suspension notice was defamatory. The court ruled in
Costco’s favor. Ramirez could not establish defamation, because he had not shown that the
suspension notice was published to any third parties. Costco did nothing beyond what was
necessary to investigate the events that led to Ramirez’s termination.6 ■

6. Ramirez v. Costco Wholesale Corp., 2014 WL 2696737 (Ct.Sup.Ct. 2014).

Background and Facts Copia Blake retained attorney
Ann-Marie Giustibelli to represent Blake in a divorce proceed-
ing against Peter Birzon. Blake agreed to pay Giustibelli $300 an
hour. After the marriage was dissolved and the related issues
were resolved, Giustibelli sought payment for her services. Blake
balked at the amount. She posted negative reviews of Giustibelli
online, including the following:


Giustibelli filed a suit in a Florida state court against Blake,
alleging libel. During the trial, Blake admitted that Giustibelli
had not charged four times more than what was quoted in the
agreement. The court entered a judgment in Giustibelli’s favor and
awarded punitive damages of $350,000. Blake appealed.

In the Words of the Court
CIKLIN, C.J. [Chief Judge]

* * * *
on appeal, Blake and Birzon argue that their Internet reviews

constituted statements of opinion and thus were protected by the
First Amendment and not actionable as defamation. We disagree.
An action for libel will lie for a false and unprivileged publication

by letter, or otherwise, which exposes a person to distrust, hatred,
contempt, ridicule or obloquy [censure or disgrace] or which
causes such person to be avoided, or which has a tendency to
injure such person in their office, occupation, business or employ-
ment. [Emphasis added.]

Here, all the reviews contained allegations that Giustibelli lied
to Blake regarding the attorney’s fee. Two of the reviews con-
tained the allegation that Giustibelli falsified a contract. These
are factual allegations, and the evidence showed they were false.

* * * *

Decision and Remedy The state intermediate appellate
court affirmed the lower court’s judgment and award. Blake’s
online reviews focused on her contract with Giustibelli and were
particularly critical of the amount of Giustibelli’s fee. The evidence,
however, showed that Blake had agreed to pay the amount stated
in the contract, which is the amount that Giustibelli sought after
the divorce proceedings were completed.

Critical Thinking

• Ethical If false statements of fact were not actionable at law,
would they be unethical? Explain.

• E-Commerce How does posting a false statement online
magnify its effect on a person’s reputation?

Blake v. Giustibelli
District Court of Appeal of Florida, Fourth District, 41 Fla.L.Weekly D122, 182 So.3d 881 (2016).

Case 5.1

129CHAPTER 5: Tort Law

30301_ch05_hr_123-150.indd 129 8/30/18 12:38 PM

Damages for Libel Once a defendant’s liability for libel is established, a plaintiff is
normally entitled to general damages. General damages are designed to compensate the
plaintiff for nonspecific harms such as disgrace or dishonor in the eyes of the commu-
nity, humiliation, injured reputation, and emotional distress—harms that are difficult to
measure. In other words, to recover general damages in a libel case, the plaintiff need not
prove that she or he was actually harmed in any specific way as a result of the libelous

Damages for Slander In contrast to cases involving libel, in a case alleging slander, the
plaintiff must prove special damages (defined earlier) to establish the defendant’s liability.
In other words, the plaintiff must show that the slanderous statement caused the plaintiff
to suffer actual economic or monetary losses.

Unless this initial hurdle of proving special damages is overcome, a plaintiff alleging slan-
der normally cannot go forward with the suit and recover any damages. This requirement is
imposed in cases involving slander because slanderous statements have a temporary quality.
In contrast, a libelous (written) statement has the quality of permanence, can be circulated
widely, especially through social media, and usually results from some degree of deliberation
on the part of the author.

Slander Per Se Exceptions to the burden of proving special damages in cases alleging slan-
der are made for certain types of slanderous statements. If a false statement constitutes
“slander per se,” no proof of special damages is required for it to be actionable. The follow-
ing four types of false utterances are considered to be slander per se:

1. A statement that another has a loathsome disease (such as a sexually transmitted diseases) or seri-
ous mental defect.

2. A statement that another has committed improprieties while engaging in a profession or trade.

3. A statement that another has committed or has been imprisoned for a serious crime.

4. A statement that a person is unchaste or has engaged in serious sexual misconduct. (This category
of slander per se usually applies only to unmarried persons and sometimes only to women.)

Defenses to Defamation Truth is normally an absolute defense against a defamation
charge. In other words, if the defendant in a defamation suit can prove that his or her
allegedly defamatory statements were true, normally no tort has been committed.

Other defenses to defamation may exist if the statement is privileged or concerns a public
figure. Note that the majority of defamation actions in the United States are filed in state
courts, and the states may differ both in how they define defamation and in the particular
defenses they allow, such as privilege (discussed shortly).

Privileged Communications. In some circumstances, a person will not be liable for defam-
atory statements because she or he enjoys a privilege, or immunity. Privileged communica-
tions are of two types: absolute and qualified.7 Only in judicial proceedings and certain
government proceedings is an absolute privilege granted. Thus, statements made in a court-
room by attorneys and judges during a trial are absolutely privileged, as are statements made
by government officials during legislative debate.

In other situations, a person will not be liable for defamatory statements because he
or she has a qualified, or conditional, privilege. An employer’s statements in written eval-
uations of employees are an example of a qualified privilege. Generally, if the statements
are made in good faith and the publication is limited to those who have a legitimate
interest in the communication, the statements fall within the area of qualified privilege.

Privilege A special right,
advantage, or immunity that enables
a person or a class of persons to
avoid liability for defamation.

  7. Note that the term privileged communication in this context is not the same as privileged communication between a professional, such as an
attorney, and his or her client.

“My initial response
was to sue her
for defamation of
character, but then
I realized that I had
no character.”

Charles Barkley,
(National Basketball Association
player, 1984–2000)

130 UNIT ONE: The Legal Environment of Business

30301_ch05_hr_123-150.indd 130 8/30/18 12:38 PM

Example 5.9 Jorge has worked at Google for five years and is being considered for a man-
agement position. His supervisor, Lydia, writes an e-mail about Jorge’s performance to
those evaluating him for the management position. The message contains certain negative
statements, which Lydia honestly believes are true. If Lydia limits the disclosure of the
contents of the message to company representatives, her statements will likely be pro-
tected by a qualified privilege. ■

Public Figures. Politicians, entertainers, professional athletes, and other persons who
are in the public eye are considered public figures. In general, public figures are considered
fair game, and false and defamatory statements about them that appear in the media will
not constitute defamation unless the statements are made with actual malice.9 To be made
with actual malice, a statement must be made with either knowledge of its falsity or a reck-
less disregard of the truth.

Statements about public figures, especially when made via a public medium, are usually
related to matters of general interest. They are made about people who substantially affect
all of us. Furthermore, public figures generally have some access to a public medium for
answering disparaging (belittling) falsehoods about themselves, whereas private individu-
als do not. For these reasons, public figures have a greater burden of proof in defamation
cases (they must prove actual malice) than do private individuals.

Case Example 5.10 In Touch Weekly magazine published a story about a former call girl
who claimed to have slept with legendary soccer player David Beckham more than once.
Beckham sued In Touch for libel, seeking $25 million in damages. He said that he had
never met the woman, had not cheated on his wife with her, and had not paid her for
sex. After months of litigation, a federal district court dismissed the case because
Beckham could not show that the magazine had acted with actual malice. Whether
or not the statements in the article were accurate, there was no evidence that the defen-
dants had made the statements with knowledge of their falsity or reckless disregard for
the truth.10 ■

Actual Malice The deliberate
intent to cause harm that exists
when a person makes a statement
with either knowledge of its falsity
or reckless disregard of the truth. It
is required to establish defamation
against public figures.

  9. The landmark case establishing the actual malice requirement is New York Times Co. v. Sullivan, 376 U.S. 254, 84 S.Ct. 710, 11 L.Ed.2d 686 (1964).
10. Beckham v. Bauer Pub. Co., L.P., 2011 WL 977570 (C.D.Cal. 2011).

A publication printed statements
by a woman who claimed that she
had slept with David Beckham on
several occasions. In order for
Beckham to prevail in a lawsuit
against the publication for
defamatory statements, what legal
barrier must he overcome?









When does an online criticism of a physician become
defamation? Just as there are online rating sites for college
professors, there are rating sites for practicing physicians. A posting at such a site formed the
basis for a defamation lawsuit brought by neurologist Dr. David McKee.

McKee went to examine a patient who had been transferred from the intensive care unit (ICU) to
a private room. In the room were family members of the patient, including his son. The patient’s son
later made the following post on a physician-rating website: “[Dr. McKee] seemed upset that my father
had been moved [into a private room]. Never having met my father or his family, Dr. McKee said ‘When
you weren’t in ICU, I had to spend time finding out if you transferred or died.’ When we gaped at him,
he said ‘Well, 44 percent of hemorrhagic strokes dies within 30 days. I guess this is the better option.’”8

McKee filed suit for defamation but lost. The court found that all the statements made by the
son were essentially true, and truth is a complete defense to a defamation action. In other words,
true statements, however disparaging, are not actionable. Even the presence of minor inaccuracies
of expression or detail does not render basically true statements false. As long as the “sting of the
libelous charge is justified,” defamation has not occurred.

  8. McKee v. Laurion, 825 N.W.2d 725 (Minn. 2013).

Ethical Issue

131CHAPTER 5: Tort Law

30301_ch05_hr_123-150.indd 131 8/30/18 12:38 PM

5–2f Invasion of the Right to Privacy and Appropriation
A person has a right to solitude and freedom from prying public eyes—in other words, to
privacy. The Supreme Court has held that a fundamental right to privacy is implied by var-
ious amendments to the U.S. Constitution. Some state constitutions also explicitly provide
for privacy rights. In addition, a number of federal and state statutes have been enacted to
protect individual rights in specific areas.

Tort law also safeguards these rights through the torts of invasion of privacy and appropria-
tion. Generally, to sue successfully for an invasion of privacy, a person must have a reasonable
expectation of privacy, and the invasion must be highly offensive. (See this chapter’s Adapting
the Law to the Online Environment feature for a discussion of how invasion of privacy claims
can arise when someone posts pictures or videos taken with digital devices.)

Nearly every digital device today takes photos and videos and has software
that allows the recording of conversa-
tions via Skype. Many couples immortalize
their “private moments” using such digital
devices. one partner may take a racy sel-
fie and send it as an attachment to a text
message to the other partner, for instance.

occasionally, after a relationship ends,
one partner seeks a type of digital
revenge. The result, called revenge porn,
involves the online distribution of sexually
explicit images of a nonconsenting individ-
ual with the intent to humiliate that person.

State Statutes
Thirty-five states have enacted statutes that
make revenge porn a crime. But each state’s
law is different. (In some states, it is a misde-
meanor with less serious consequences, and
in other states, it is a felony with more serious
penalties.) In addition, most of these criminal
statutes do not provide victims with a right to
obtain damages. Therefore, victims have sued
in civil courts on the basis of (1) invasion of pri-
vacy, (2) public disclosure of private facts, and
(3) intentional infliction of emotional distress.

A Case Example
Nadia Hussain had dated Akhil Patel on
and off for seven years since high school.
After they broke up, Patel hounded her

with offensive and threatening phone
calls, texts, and e-mails—often twenty
to thirty per day. He did this for several
years. He even came to her workplace a
few times. Hussain filed police reports
and changed her phone number multiple
times, but the harassment continued. Patel
also hacked or attempted to hack into her
accounts (she had received alerts).

Eventually, Patel posted secretly
recorded sexual videos of Hussain on the
Internet. (He had recorded, without her con-
sent, a Skype conversation they once had in
which Hussain had undressed and mastur-
bated.) Hussain sued Patel claiming inva-
sion of privacy, public disclosure of private
facts, and intentional infliction of emotional
distress. A jury found in her favor and
awarded $500,000 in damages for mental
anguish and damage to her reputation. An
appellate court affirmed but reduced the
damages to $345,000 (because the inten-
tional infliction of emotional distress claim
was not supported by the evidence).a

It Is More Than Just Pictures
and Videos
Perhaps the worst form of revenge porn
occurs when the perpetrator provides detailed
information about the victim. The information

posted online may include the
victim’s name, Facebook page, address, and
phone number, as well as the victim’s photos
and videos. Many of the hosting websites have
been shut down, but others are still active.

Perpetrators also use social media sites,
such as Facebook, Twitter, Instagram, and
Reddit, to disseminate revenge porn. Even
though Facebook and other companies have
explicit policies against pornography and
will take content down once it is reported,
users often hide it within restricted or closed
groups. For example, the Senate Armed Ser-
vices Committee held hearings in 2017 on
a private Facebook group called Marines
United. Marines United circulated nude
photos of women (including fellow marines,
ex-girlfriends, and strangers) without their
consent. The group was closed down after
one member reported it to the Marine Corps.
At least one member was court-martialed.

Critical Thinking
Why might the appellate court have
decided that the evidence did not support
Nadia Hussain’s intentional infliction of
emotional distress claim?

a. Patel v. Hussain, 485 S.W.3d 153 (Tex.App.—Houston 2016);
also see Doe v. Doe, 2017 WL 3025885 (S.D.N.y. 2017).

Revenge Porn and Invasion of Privacy Adapting the Law to
the Online Environment

132 UNIT ONE: The Legal Environment of Business

30301_ch05_hr_123-150.indd 132 8/30/18 12:38 PM

Invasion of Privacy Four acts qualify as an invasion of privacy:
1. Intrusion into an individual’s affairs or seclusion. Invading someone’s home or illegally searching

someone’s briefcase is an invasion of privacy. The tort has been held to extend to eavesdropping
by wiretap, the unauthorized scanning of a bank account, compulsory blood testing, and window
peeping. Example 5.11 A female sports reporter for ESPN is digitally videoed while naked through the
peephole in the door of her hotel room. If she sues, she will likely win a lawsuit against the man who
took the video and posted it on the Internet. ■

2. False light. Publication of information that places a person in a false light is also an invasion of
privacy. For instance, writing a story about a person that attributes ideas and opinions not held
by that person is an invasion of privacy. (Publishing such a story could involve the tort of defama-
tion as well.) Case Example 5.12 Police received a report from a customer of West Gate Bank that
his debit card had been stolen and used to withdraw funds from his account at the bank’s ATM.
The ATM video depicted a female walking up to an ATM and using a debit card to withdraw cash.
To identify the person, the police posted still images from the video on the Crime Stoppers web-
site and Facebook page. The caption said, “This young lady doesn’t look like your typical crook,
but she is! She used someone’s stolen credit card.… If you know who she is, leave us a tip here.”

Police received tips that the woman in the video was Shayla Funk. Funk, as it turned out, was
not a criminal and was simply withdrawing funds with her own card from her own bank account.
Nevertheless, as a result of the posting, she lost her job as an occupational therapist. Funk sued the
city and Crime Stoppers organization for defamation and for violating her privacy by false light, and
won. The court awarded Funk more than $259,000 in damages, which was affirmed on appeal by the
state’s highest court.11 ■

3. Public disclosure of private facts. This type of invasion of privacy occurs when a person publicly
discloses private facts about an individual that an ordinary person would find objectionable or
embarrassing. A newspaper account about a private citizen’s sex life or financial affairs could be an
actionable invasion of privacy, even if the information revealed is true, because it should not be a
matter of public concern.

4. Appropriation of identity. Under the common law, using a person’s name, picture, or other likeness
for commercial purposes without permission is a tortious invasion of privacy. An individual’s right
to privacy normally includes the right to the exclusive use of her or his identity. Example 5.13 An
advertising agency asks a singer with a distinctive voice and stage presence to do a marketing
campaign for a new automobile. The singer rejects the offer. If the agency then uses someone who
imitates the singer’s voice and dance moves in the ad, this would be actionable as an appropriation
of identity. ■

Appropriation Most states today have codified the common law tort of appropriation of
identity in statutes that establish the distinct tort of appropriation, or right of publicity. States
differ as to the degree of likeness that is required to impose liability for appropriation,

Some courts have held that even when an animated character in a video or a video game
is made to look like an actual person, there are not enough similarities to constitute appro-
priation. Spotlight Case Example 5.14 The Naked Cowboy, Robert Burck, was a street enter-
tainer in New York City who had achieved some fame performing for tourists. He performed
wearing only a white cowboy hat, white cowboy boots, and white underwear and carrying
a guitar strategically placed to give the illusion of nudity. Burck sued Mars, Inc., the maker
of M&Ms candy, over a video it showed on billboards in Times Square that depicted a blue
M&M dressed exactly like The Naked Cowboy. The court, however, held that the use of
Burck’s signature costume did not amount to appropriation.12 ■

11. Funk v. Lincoln-Lancaster County Crime Stoppers, Inc., 294 Neb. 715, 885 N.W.2d 1 (2016).

Appropriation In tort law, the use
by one person of another person’s
name, likeness, or other identifying
characteristic without permission and
for the benefit of the user.

12. Burck v. Mars, Inc., 571 F.Supp.2d 446 (S.D.N.y. 2008). Also see Beastie Boys v. Monster Energy Co., 66 F.Supp.3d 424 (S.D.N.y. 2014).

Under what circumstances, if any,
could the use of the image of The
Naked Cowboy in an ad constitute











133CHAPTER 5: Tort Law

30301_ch05_hr_123-150.indd 133 8/30/18 12:38 PM

5–2g Fraudulent Misrepresentation
A misrepresentation leads another to believe in a condition that is different from the condi-
tion that actually exists. This is often accomplished through a false or incorrect statement.
Although persons sometimes make misrepresentations accidentally because they are unaware
of the existing facts, the tort of fraudulent misrepresentation, or fraud, involves intentional deceit
for personal gain. The tort includes several elements:

1. The misrepresentation of facts or conditions with knowledge that they are false or with reckless dis-
regard for the truth.

2. An intent to induce another to rely on the misrepresentation.

3. Justifiable reliance by the deceived party.

4. Damage suffered as a result of the reliance.

5. A causal connection between the misrepresentation and the injury suffered.

For fraud to occur, more than mere puffery, or seller’s talk, must be involved. Fraud exists
only when a person represents as a fact something she or he knows is untrue. For instance,
it is fraud to claim that a roof does not leak when one knows it does. Facts are objectively
ascertainable, whereas seller’s talk (such as “I am the best accountant in town”) is not.

Case Example 5.15 Joseph Guido bought nine rental houses in Stillwater, New York. The
houses shared a waste disposal system that was not functioning. Guido hired someone to
design and install a new system. When town officials later discovered sewage on the prop-
erty, Guido had the system partially replaced. He then represented to prospective buyers of
the property, including Danny Revell, that the “Septic system [was] totally new—each field
totally replaced.” In response to a questionnaire from the buyers’ bank, Guido denied any
knowledge of environmental problems.

A month after the sale of the houses, the septic system failed and required substantial
repairs. The buyers sued Guido for fraud. A jury found in favor of the plaintiffs and awarded
damages. A state intermediate appellate court affirmed the judgment on appeal. Guido knew
that the septic system was not totally new and that sewage had been released on the property
(an environmental problem). He had misrepresented these facts to the buyers. The buyers’
reliance on Guido’s statements was justifiable because a visual inspection of the property did
not reveal any problems.13 ■

Statement of Fact versus Opinion Normally, the tort of misrepresentation or fraud
occurs only when there is reliance on a statement of fact. Sometimes, however, the tort
may involve reliance on a statement of opinion if the individual making the statement has a
superior knowledge of the subject matter. For instance, when a lawyer makes a statement
of opinion about the law in a state in which the lawyer is licensed to practice, a court would
treat it as a statement of fact.

Negligent Misrepresentation Sometimes, a tort action can arise from misrepresen-
tations that are made negligently rather than intentionally. The key difference between
intentional and negligent misrepresentation is whether the person making the misrepre-
sentation had actual knowledge of its falsity. Negligent misrepresentation requires only that
the person making the statement or omission did not have a reasonable basis for believing
its truthfulness.

Liability for negligent misrepresentation usually arises when the defendant who made
the misrepresentation owed a duty of care to the plaintiff to supply correct information.
Statements or omissions made by attorneys and accountants to their clients, for instance,
can lead to liability for negligent misrepresentation.

Misrepresentation Any
misrepresentation, either by
misstatement or by omission of a
material fact, knowingly made with
the intention of deceiving another and
on which a reasonable person would
and does rely to his or her detriment.

Puffery A salesperson’s
exaggerated claims concerning the
quality of property offered for sale.
Such claims involve opinions rather
than facts and are not legally binding
promises or warranties.

13. Revell v. Guido, 124 A.D.3d 1006, 2 N.y.S.3d 252 (3d Dept. 2015).







If a home seller claims that a
new septic system was installed
when it wasn’t, does that
constitute fraud?

134 UNIT ONE: The Legal Environment of Business

30301_ch05_hr_123-150.indd 134 8/30/18 12:38 PM

5–2h Wrongful Interference
The torts known as business torts generally involve wrongful interference with another’s busi-
ness rights. Business torts involving wrongful interference are generally divided into two
categories: wrongful interference with a contractual relationship and wrongful interference
with a business relationship.

Wrongful Interference with a Contractual Relationship Three elements are neces-
sary for wrongful interference with a contractual relationship to occur:

1. A valid, enforceable contract must exist between two parties.

2. A third party must know that this contract exists.

3. The third party must intentionally induce a party to breach the contract.

Classic Case Example 5.16 A classic case involved an opera singer, Johanna Wagner, who
was under contract to sing for a man named Lumley for a specified period of years. A man
named Gye, who knew of this contract, nonetheless “enticed” Wagner to refuse to carry out
the agreement, and Wagner began to sing for Gye. Gye’s action constituted a tort because it
wrongfully interfered with the contractual relationship between Wagner and Lumley.14 (Of
course, Wagner’s refusal to carry out the agreement also entitled Lumley to sue Wagner for
breach of contract.) ■

The body of tort law relating to intentional interference with a contractual relationship
has expanded greatly in recent years. In principle, any lawful contract can be the basis
for an action of this type. The contract could be between a firm and its employees or a
firm and its customers. Sometimes, for instance, a competitor draws away one of a firm’s
key employees. Only if the original employer can show that the competitor knew of the
contract’s existence, and intentionally induced the breach, can damages be recovered from
the competitor.

Wrongful Interference with a Business Relationship Businesspersons devise count-
less schemes to attract customers, but they are prohibited from unreasonably interfering
with another’s business in their attempts to gain a share of the market. There is a difference
between competitive methods and predatory behavior—actions undertaken with the inten-
tion of unlawfully driving competitors completely out of the market. Attempting to attract
customers in general is a legitimate business practice, whereas specifically targeting
the customers of a competitor is more likely to be predatory.

Example 5.17 A shopping mall contains two athletic shoe stores: Joe’s and Ultimate Sport.
Joe’s cannot station an employee at the entrance of Ultimate Sport to divert customers by
telling them that Joe’s will beat Ultimate Sport’s prices. This type of activity constitutes the
tort of wrongful interference with a business relationship, which is commonly considered
to be an unfair trade practice. If this activity were permitted, Joe’s would reap the benefits of
Ultimate Sport’s advertising. ■

Defenses to Wrongful Interference A person will not be liable for the tort of
wrongful interference with a contractual or business relationship if it can be shown that
the interference was justified or permissible. Bona fide competitive behavior is a permissible
interference even if it results in the breaking of a contract.

Example 5.18 If Antonio’s Meats advertises so effectively that it induces Sam’s Restaurant
to break its contract with Burke’s Meat Company, Burke’s will be unable to recover against
Antonio’s Meats on a wrongful interference theory. After all, the public policy that favors free
competition in advertising outweighs any possible instability that such competitive activity
might cause in contractual relations. ■

Business Tort Wrongful
interference with another’s business
rights and relationships.

14. Lumley v. Gye, 118 Eng.Rep. 749 (1853).















Opera singer Johanna Wagner is
shown here in one of her many
roles. She was under contract
to sing for one person, but was
enticed to break the contract and
sing for someone else. Was a tort
committed? If so, by whom?

135CHAPTER 5: Tort Law

30301_ch05_hr_123-150.indd 135 8/30/18 12:38 PM

5–3 Intentional Torts against Property
Intentional torts against property include trespass to land, trespass to personal property,
conversion, and disparagement of property. These torts are wrongful actions that interfere
with individuals’ legally recognized rights with regard to their land or personal property. The
law distinguishes real property from personal property. Real property is land and things “per-
manently” attached to the land. Personal property consists of all other items, which are
basically movable. Thus, a house and lot are real property, whereas the furniture inside the
house is personal property. Cash, stocks, and bonds are also personal property.

5–3a Trespass to Land
A trespass to land occurs anytime a person, without permission, does any of the following:

1. Enters onto, above, or below the surface of land that is owned by another.

2. Causes anything to enter onto land owned by another.

3. Remains on land owned by another or permits anything to remain on it.

Actual harm to the land is not an essential element of this tort, because the tort
is designed to protect the right of an owner to exclusive possession.

Common types of trespass to land include walking or driving on anoth-
er’s land, shooting a gun over the land, and throwing rocks at a building that
belongs to someone else. Another common form of trespass involves construct-
ing a building so that part of it is on an adjoining landowner’s property.

Establishing Trespass Before a person can be a trespasser, the real property
owner (or other person in actual and exclusive possession of the property)
must establish that person as a trespasser. For instance, “posted” trespass
signs expressly establish as a trespasser a person who ignores these signs and
enters onto the property. Any person who enters onto property to commit an
illegal act (such as a thief entering a lumberyard at night to steal lumber) is
established impliedly as a trespasser, without posted signs. In contrast, a guest in
your home is not a trespasser unless she or he has been asked to leave but refuses.

Liability for Harm At common law, a trespasser is liable for any damage caused to the
property and generally cannot hold the owner liable for injuries sustained on the premises.
This common law rule is being abandoned in many jurisdictions in favor of a reasonable
duty of care rule that varies depending on the status of the parties.

For instance, a landowner may have a duty to post a notice that guard dogs patrol the
property. Also, if young children are likely to be attracted to the property by some object,
such as a swimming pool or a sand pile, and are injured, the landowner may be held liable
under the attractive nuisance doctrine. An owner can normally use reasonable force to remove
a trespasser from the premises—or detain the trespasser for a reasonable time—without
liability for damages, however.

Defenses against Trespass to Land One defense to a claim of trespass to land is to
show that the trespass was warranted. This may occur, for instance, when the trespasser
entered the property to assist someone in danger.

Another defense is for the trespasser to show that he or she had a license to come onto
the land. A licensee is one who is invited (or allowed to enter) onto the property of another
for the licensee’s benefit. A person who enters another’s property to read an electric meter,
for example, is a licensee. Another example of a licensee is someone who is camping on
another person’s land with the owner’s permission but without paying for the privilege.

Note that licenses to enter are revocable by the property owner. If a property owner asks
a meter reader to leave and the meter reader refuses to do so, the meter reader at that point
becomes a trespasser.

Know This
What society and the
law consider permissible
often depends on the

Trespass to Land Entry onto,
above, or below the surface of
land owned by another without
the owner’s permission or legal

What are some common types of trespass
to land?









136 UNIT ONE: The Legal Environment of Business

30301_ch05_hr_123-150.indd 136 8/30/18 12:38 PM

5–3b Trespass to Personal Property
Whenever an individual wrongfully takes or harms the personal property of another or
otherwise interferes with the lawful owner’s possession of personal property, trespass to
personal property (also called trespass to chattels or trespass to personalty15) occurs. In this
context, harm means not only destruction of the property, but also anything that diminishes
its value, condition, or quality.

Trespass to personal property involves intentional meddling with a possessory interest (the
right to possess), including barring an owner’s access to personal property. Example 5.19 Kelly
takes Ryan’s business law book as a practical joke and hides it so that Ryan is unable to find
it for several days before the final examination. Here, Kelly has engaged in a trespass to per-
sonal property. (Kelly has also committed the tort of conversion—to be discussed next.) ■

If it can be shown that trespass to personal property was warranted, then a complete defense
exists. Most states, for instance, allow automobile repair shops to retain a customer’s car (under
what is called an artisan’s lien) when the customer refuses to pay for repairs already completed.

5–3c Conversion
Any act that deprives an owner of personal property or of the use of that property without
the owner’s permission and without just cause can constitute conversion. Even the taking of
electronic records and data can form the basis of a conversion claim. Often, when conversion
occurs, a trespass to personal property also occurs. The original taking of the personal prop-
erty from the owner was a trespass, and wrongfully retaining the property is conversion.

Failure to Return Goods Conversion is the civil side of crimes related to theft, but it is
not limited to theft. Even if the rightful owner consented to the initial taking of the property,
so there was no theft or trespass, a failure to return the personal property may still be con-
version. Example 5.20 Chen borrows Mark’s iPad Pro to use while traveling home from school
for the holidays. When Chen returns to school, Mark asks for his iPad Pro back. Chen tells
Mark that she gave it to her little brother for Christmas. In this situation, Mark can sue
Chen for conversion, and Chen will have to either return the iPad Pro or pay damages equal
to its replacement value. ■

Intention Conversion can occur even when a person mistakenly believes that she or he
was entitled to the goods. In other words, good intentions are not a defense against conver-
sion. Someone who buys stolen goods, for instance, can be sued for conversion even if
he or she did not know that the goods were stolen. If the true owner of the goods sues the
buyer and wins, the buyer must either return the property to the owner or pay the owner
the full value of the property.

Case Example 5.21 Nicholas Mora worked for Welco Electronics, Inc., but had
also established his own company, AQM Supplies. Mora used Welco’s credit card
without permission and deposited more than $375,000 into AQM’s account,
which he then transferred to his personal account. Welco sued. A California
court held that Mora was liable for conversion. The court reasoned that when
Mora misappropriated Welco’s credit card and used it, he took part of Welco’s
credit balance with the credit-card company.16 ■

5–3d Disparagement of Property
Disparagement of property occurs when economically injurious falsehoods are
made about another’s product or property, rather than about another’s repu-
tation (as in the tort of defamation). Disparagement of property is a general
term for torts specifically referred to as slander of quality or slander of title.

Trespass to Personal
Property Wrongfully taking or
harming the personal property of
another or otherwise interfering with
the lawful owner’s possession of
personal property.

15. Pronounced per-sun-ul-tee.

Conversion Wrongfully taking or
retaining possession of an individual’s
personal property and placing it in the
service of another.

Learning Objective 3
What conduct contitutes

Know This
It is the intent to do an
act that is important in
tort law, not the motive
behind the intent.

16. Welco Electronics, Inc. v. Mora, 223 Cal.App.4th 202, 166 Cal.Rptr.3d 877 (2014).

Disparagement of Property An
economically injurious falsehood
about another’s product or property.

How can a portable credit-card terminal be used
for conversion?








137CHAPTER 5: Tort Law

30301_ch05_hr_123-150.indd 137 8/30/18 12:38 PM

Publication of false information about another’s product, alleging that it is not what its
seller claims, constitutes the tort of slander of quality, or trade libel. To establish trade libel,
the plaintiff must prove that the improper publication caused a third party to refrain from
dealing with the plaintiff and that the plaintiff sustained economic damages (such as lost
profits) as a result. An improper publication may be both a slander of quality and defamation
of character. For example, a statement that disparages the quality of a product may also, by
implication, disparage the character of the person who would sell such a product.

When a publication denies or casts doubt on another’s legal ownership of property, and
the property’s owner suffers financial loss as a result, the tort of slander of title may exist.
Usually, this is an intentional tort that occurs when someone knowingly publishes an untrue
statement about property with the intent of discouraging a third party from dealing with the
property’s owner. For instance, a car dealer would have difficulty attracting customers if
competitors publish a notice that the dealer’s stock consists of stolen automobiles.

5–4 Negligence
The tort of negligence occurs when someone suffers injury because of another’s failure
to fulfill a required duty of care. In contrast to intentional torts, in torts involving negligence,
the tortfeasor neither wishes to bring about the consequences of the act nor believes that they
will occur. The person’s conduct merely creates a risk of such consequences. If no risk is created,
there is no negligence. Moreover, the risk must be foreseeable—that is, it must be such that a
reasonable person engaging in the same activity would anticipate the risk and guard against it.
In determining what is reasonable conduct, courts consider the nature of the possible harm.

Many of the actions giving rise to the intentional torts discussed earlier in the chapter con-
stitute negligence if the element of intent is missing (or cannot be proved). Example 5.22 Juan
walks up to Maya and intentionally shoves her. Maya falls and breaks an arm as a result.
In this situation, Juan has committed an intentional tort (assault and battery). If Juan
carelessly bumps into Maya, however, and she falls and breaks an arm as a result, Juan’s action
will constitute negligence. In either situation, Juan has committed a tort. ■

To succeed in a negligence action, the plaintiff must prove each of the following:

1. Duty. The defendant owed a duty of care to the plaintiff.

2. Breach. The defendant breached that duty.

3. Causation. The defendant’s breach caused the plaintiff’s injury.

4. Damages. The plaintiff suffered a legally recognizable injury.

We discuss each of these four elements of negligence next.

5–4a The Duty of Care and Its Breach
Central to the tort of negligence is the concept of a duty of care. The basic principle underlying
the duty of care is that people in society are free to act as they please so long as their actions
do not infringe on the interests of others. When someone fails to comply with the duty to
exercise reasonable care, a potentially tortious act may result.

Failure to live up to a standard of care may be an act (setting fire to a building) or an
omission (neglecting to put out a campfire). It may be a careless act or a carefully performed
but nevertheless dangerous act that results in injury. In determining whether the duty of care
has been breached, courts consider several factors:

1. The nature of the act (whether it is outrageous or commonplace).

2. The manner in which the act was performed (cautiously versus heedlessly).

3. The nature of the injury (whether it is serious or slight).

Slander of Quality (Trade
Libel) The publication of false
information about another’s product,
alleging that it is not what its seller

Slander of Title The publication
of a statement that denies or casts
doubt on another’s legal ownership
of property, causing financial loss to
that property’s owner.

Negligence The failure to
exercise the standard of care that a
reasonable person would exercise in
similar circumstances.

Learning Objective 4
Identify the four elements of

Duty of Care The duty of all
persons, as established by tort law,
to exercise a reasonable amount of
care in their dealings with others.
Failure to exercise due care,
which is normally determined by
the reasonable person standard,
constitutes the tort of negligence.

138 UNIT ONE: The Legal Environment of Business

30301_ch05_hr_123-150.indd 138 8/30/18 12:38 PM

Creating even a very slight risk of a dangerous explosion might be unreasonable, whereas
creating a distinct possibility of someone’s burning his or her fingers on a stove might be

The question in the following case was whether a fraternity’s local chapter and its officers
owed a duty of care to their pledges.

Background and Facts David Bogenberger attended a
pledge event at the Pi Kappa Alpha fraternity house at Northern
Illinois University (NIU). The NIU Chapter officers planned an eve-
ning of hazing, during which the pledges were required to consume
vodka provided by the fraternity’s members. By the end of the night,
Bogenberger’s blood-alcohol level was more than five times the
legal limit. He lost consciousness. The NIU Chapter officers failed
to seek medical attention, and Bogenberger died during the night.

Bogenberger’s father, Gary, filed a complaint in an Illinois state
court against the NIU Chapter of the fraternity and its officers, on
a theory of negligence. Gary alleged that the defendants required
the pledges—including his son, David—to participate in the pledge
event and to consume excessive and dangerous amounts of alcohol
in violation of the state’s hazing statute.a The court dismissed the
complaint. A state intermediate appellate court reversed the dis-
missal. The defendants appealed to the Illinois Supreme Court.

In the Words of the Court
Justice FREEMAN delivered the judgment of the court, with

* * * *
* * * Every person owes a duty of ordinary care to all others to

guard against injuries which naturally flow as a reasonably probable
and foreseeable consequence of an act * * *. Where an individual’s
course of action creates a foreseeable risk of injury, the individual
has a duty to protect others from such injury. [Emphasis added.]

* * * *
To determine whether the NIU Chapter and officers owed a

duty to the pledges, we look to the reasonable foreseeability of
the injury, the likelihood of the injury, the magnitude of the burden
of guarding against the injury, and the consequences of placing

that burden on the defendant. In deciding reasonable foreseeabil-
ity, an injury is not reasonably foreseeable where it results from
freakish, bizarre, or fantastic circumstances. Regarding the first
two factors, we cannot say that * * * an injury resulting from haz-
ing is freakish, bizarre, or occurs under fantastic circumstances.
The existence of hazing statutes across the country, including the
[national Pi Kappa Alpha organization’s] written policy against haz-
ing as well as Illinois’s hazing statute, indicates that injury due to
hazing is reasonably foreseeable. We also find that injuries result-
ing from hazing events, especially those involving the consumption
of large amounts of alcohol, are likely to occur. When pledges are
required to consume large quantities of alcohol in short periods of
time, their risk of injury is great—not only physical injury due to
their inebriated condition but injury or death resulting from alcohol
poisoning. [Emphasis added.]

Regarding the last two factors, we find that the magnitude
of the burden of guarding against injury is small and the conse-
quences of placing that burden on the NIU Chapter and officers
are reasonable. To require the NIU Chapter and officers to guard
against hazing injuries is infinitesimal. Hazing is not only against
the law in Illinois, it is against the university’s rules as well as the
Pi Kappa Alpha fraternity’s rules. There can be no real burden to
require the NIU Chapter and officers to comply with the law and
the university’s and fraternity’s rules. And it seems quite reason-
able to place that burden on the very people who are in charge of
planning and carrying out the pledge event. We find that the NIU
Chapter and the officers owed a duty to the pledges, including
David, and plaintiff has sufficiently alleged a claim for negligence
against them.

Decision and Remedy The Illinois Supreme Court affirmed
the intermediate appellate court’s reversal of the trial court’s
dismissal. Gary’s complaint against the NIU Chapter of Pi Kappa
Alpha (and its officers) could proceed.

a. As a result of the pledge event, the Pi Kappa Alpha national organization revoked the NIU
Chapter’s charter, and criminal charges were brought against those who participated in
the hazing.

Bogenberger v. Pi Kappa Alpha Corporation, Inc.
Supreme Court of Illinois, 2018 IL 120951, ___ N.E.3d ___ (2018).

Case 5.2

(Continues )

139CHAPTER 5: Tort Law

30301_ch05_hr_123-150.indd 139 8/30/18 12:38 PM

The Reasonable Person Standard Tort law measures duty by the reasonable person
standard. In determining whether a duty of care has been breached, the courts ask how a
reasonable person would have acted in the same circumstances. The reasonable person
standard is said to be (though in an absolute sense it cannot be) objective. It is not neces-
sarily how a particular person would act. It is society’s judgment on how people should act.
If the so-called reasonable person existed, he or she would be careful, conscientious, even
tempered, and honest.

The degree of care to be exercised varies, depending on the defendant’s occupation or
profession, her or his relationship with the plaintiff, and other factors. Generally, whether
an action constitutes a breach of the duty of care is determined on a case-by-case basis. The
outcome depends on how the judge (or jury, in a jury trial) decides a reasonable person in
the position of the defendant would act in the particular circumstances of the case.

Note that the courts frequently use the reasonable person standard in other areas of law
as well as in negligence cases. Indeed, the principle that individuals are required to exer-
cise a reasonable standard of care in their activities is a pervasive concept in many areas of
business law.

The Duty of Landowners Landowners are expected to exercise reasonable care to pro-
tect persons coming onto their property from harm. In some jurisdictions, landowners are
held to owe a duty to protect even trespassers against certain risks. Landowners who rent
or lease premises to tenants are expected to exercise reasonable care to ensure that the
tenants and their guests are not harmed in common areas, such as stairways, entryways,
and laundry rooms.

Duty to Warn Business Invitees of Risks. Retailers and other firms that explicitly or
implicitly invite persons to come onto their premises have a duty to exercise reasonable care
to protect these business invitees. The duty normally requires storeowners to warn business
invitees of foreseeable risks, such as construction zones and wet floors, about which the
owners knew or should have known.

Example 5.23 Liz enters a Crown Market, slips on a wet floor, and sustains injuries as a
result. If there was no sign warning that the floor was wet when Liz slipped, the owner of
Crown Market would be liable for damages. A court would hold that the business owner
was negligent because the owner failed to exercise a reasonable degree of care in protecting
the store’s customers against foreseeable risks about which the owner knew or should have
known. That a patron might slip on the wet floor and be injured was a foreseeable risk, and
the owner should have taken care to avoid this risk or to warn the customer of it (by posting
a sign or setting out orange cones, for instance). ■

The business owner also has a duty to discover and remove any hidden dangers that
might injure a customer or other invitee. Hidden dangers might include uneven surfaces
or defects in the pavement of a parking lot or walkway, or merchandise that has fallen off
a store shelf.

Reasonable Person
Standard The standard of
behavior expected of a hypothetical
“reasonable person.” It is the
standard against which negligence is
measured and that must be observed
to avoid liability for negligence.

Business Invitee A person, such as
a customer or a client, who is invited
onto business premises by the owner of
those premises for business purposes.

Critical Thinking

• Legal Environment The NIU Chapter invited nonmember
sorority women to participate in the hazing event by filling the
pledges’ cups with vodka and directing them to drink it. Did these
women owe a duty of care to the pledges? Discuss.

• What If the Facts Were Different? Suppose that the
pledges’ attendance at the hazing event had been optional, and
the NIU Chapter had furnished alcohol, but not required its con-
sumption. Would the result have been different? Explain.









Does a “Wet Floor” sign relieve a
restaurant owner from being held
negligent if a customer slips?

“A little neglect may
breed great mischief.”

Benjamin Franklin,
(American politician and inventor)

140 UNIT ONE: The Legal Environment of Business

30301_ch05_hr_123-150.indd 140 8/30/18 12:38 PM

Obvious Risks Are an Exception. Some risks, of course, are so obvious that the owner
need not warn of them. For instance, a business owner does not need to warn customers to
open a door before attempting to walk through it. Other risks, however, may seem obvious
to a business owner but may not be so to someone else, such as a child. In addition, even an
obvious risk does not necessarily excuse a business owner from the duty to protect customers
from foreseeable harm.

Case Example 5.24 During a trip to a Costco warehouse store in Nevada, Stephen Foster
tripped and fell over a wooden pallet and sustained injuries. A Costco employee who was
restocking the shelves had placed the pallet in the aisle without any barricades. When Foster
sued Costco for negligence, Costco argued that it had not breached its duty by failing to warn
customers because the pallet was open and obvious. A lower court agreed and granted a
summary judgment in Costco’s favor, but the Supreme Court of Nevada reversed. The court
held that the open and obvious nature of a dangerous condition does not automatically
relieve a business owner from the general duty of reasonable care. Every situation is different.
Therefore, Foster was entitled to proceed to trial and argue that Costco should have used
barricades or warnings to protect customers.17 ■

The Duty of Professionals Persons who possess superior knowledge, skill, or train-
ing are held to a higher standard of care than others. Professionals—such as physicians,
dentists, architects, engineers, accountants, and lawyers—are required to have a standard
minimum level of special knowledge and ability. In determining what constitutes reasonable
care, the law takes their training and expertise into account. Thus, an accountant’s conduct
is judged not by the reasonable person standard, but by the reasonable accountant standard.

If a professional violates her or his duty of care toward a client, the professional may be
sued for malpractice, which is essentially professional negligence. For instance, a patient
might sue a physician for medical malpractice. A client might sue an attorney for legal

5–4b Causation
Another element necessary in a negligence action is causation. If a person breaches a duty
of care and someone suffers an injury, the wrongful act must have caused the harm for it to
constitute the tort of negligence.

Courts Ask Two Questions In deciding whether there is causation, the court must address
two questions:

1. Is there causation in fact? Did the injury occur because of the defendant’s act, or would it have
occurred anyway? If an injury would not have occurred without the defendant’s act, then there is
causation in fact.

Causation in fact can usually be determined by the use of the but for test: “but for” the wrongful
act, the injury would not have occurred. Theoretically, causation in fact is limitless. One could claim,
for example, that “but for” the creation of the world, a particular injury would not have occurred.
Thus, as a practical matter, the law has to establish limits, and it does so through the concept of
proximate cause.

2. Was the act the proximate cause of the injury? Proximate cause, or legal cause, exists when the
connection between an act and an injury is strong enough to justify imposing liability. Courts use
proximate cause to limit the scope of the defendant’s liability to a subset of the total number of
potential plaintiffs that might have been harmed by the defendant’s actions.

Example 5.25 Ackerman carelessly leaves a campfire burning. The fire not only burns down the
forest but also sets off an explosion in a nearby chemical plant that spills chemicals into a river,

17. Foster v. Costco Wholesale Corp., 128 Nev.Adv.op. 71, 291 P.3d 150 (2012).

Malpractice Professional
misconduct or the lack of the
requisite degree of skill as a
professional. Negligence on the
part of a professional, such as a
physician, is commonly referred
to as malpractice.

Causation in Fact An act or
omission without which an event
would not have occurred.

Proximate Cause Legal cause. It
exists when the connection between
an act and an injury is strong enough
to justify imposing liability.

141CHAPTER 5: Tort Law

30301_ch05_hr_123-150.indd 141 8/30/18 12:38 PM

killing all the fish for a hundred miles downstream and ruining the economy of a tourist resort. Should
Ackerman be liable to the resort owners? To the tourists whose vacations were ruined? These are
questions of proximate cause that a court must decide. ■

Both questions concerning causation must be answered in the affirmative for tort liability
to arise. If a defendant’s action constitutes causation in fact but a court decides that the action
was not the proximate cause of the plaintiff’s injury, the causation requirement has not been
met—and the defendant normally will not be liable to the plaintiff.

Foreseeability Questions of proximate cause are linked to the concept of foreseeability.
It would be unfair to impose liability on a defendant unless the defendant’s actions created
a foreseeable risk of injury. Probably the most cited case on proximate cause is the Palsgraf
case, which is discussed in this chapter’s Landmark in the Law feature. In determining the
issue of proximate cause, the court addressed the following question: Does a defendant’s
duty of care extend only to those who may be injured as a result of a foreseeable risk,
or does it also extend to a person whose injury could not reasonably have been foreseen?

Know This
Proximate cause can be
thought of in terms of
social policy. Should the
defendant be made to
bear the loss instead of
the plaintiff?

In 1928, the New york Court of Appeals (that state’s highest court) issued its deci-
sion in Palsgraf v. Long Island Railroad
Co.,a a case that has become a landmark in
negligence law and proximate cause.

The Facts of the Case The plaintiff,
Helen Palsgraf, was waiting for a train
on a station platform. A man carrying a
small package wrapped in newspaper was
rushing to catch a train that had begun to
move away from the platform. As the man
attempted to jump aboard the moving train,
he seemed unsteady and about to fall. A
railroad guard on the train car reached for-
ward to grab him, and another guard on the
platform pushed him from behind to help
him board the train. In the process, the
man’s package fell on the railroad tracks and
exploded, because it contained fireworks.
The repercussions of the explosion caused
scales at the other end of the train platform
to fall on Palsgraf, who was injured as a
result. She sued the railroad company for
damages in a New york state court.

The Question of Proximate
Cause At the trial, the jury found that the
railroad guards were negligent in their con-
duct. on appeal, the question before the
New york Court of Appeals was whether
the conduct of the railroad guards was the
proximate cause of Palsgraf’s injuries. In
other words, did the guards’ duty of care
extend to Palsgraf, who was outside the
zone of danger and whose injury could not
reasonably have been foreseen?

The court stated that the question of
whether the guards were negligent with
respect to Palsgraf depended on whether
her injury was reasonably foreseeable by
the railroad guards. Although the guards
may have acted negligently with respect
to the man boarding the train, this had no
bearing on the question of their negligence
with respect to Palsgraf. This was not a
situation in which a person committed an
act so potentially harmful (for example,
firing a gun at a building) that he or she
would be held responsible for any harm
that resulted. The court stated that here
“there was nothing in the situation to
suggest to the most cautious mind that

the parcel wrapped in newspaper would
spread wreckage through the station.”
The court thus concluded that the railroad
guards were not negligent with respect to
Palsgraf, because her injury was not rea-
sonably foreseeable.

Application to Today’s World The
Palsgraf case established foreseeability
as the test for proximate cause. Today,
the courts continue to apply this test in
determining proximate cause—and thus
tort liability for injuries. Generally, if the
victim of a harm or the consequences of
a harm done are unforeseeable, there is
no proximate cause. Note, though, that in
the online environment, distinctions based
on physical proximity, such as the “zone of
danger” cited by the court in this case, are
largely inapplicable.a. 248 N.y. 339, 162 N.E. 99 (1928).

Palsgraf v. Long Island Railroad Co. (1928) Landmark
in the Law

142 UNIT ONE: The Legal Environment of Business

30301_ch05_hr_123-150.indd 142 8/30/18 12:38 PM

5–4c The Injury Requirement and Damages
For a tort to have been committed, the plaintiff must have suffered
a legally recognizable injury. To recover damages (receive compen-
sation), the plaintiff must have suffered some loss, harm, wrong, or
invasion of a protected interest. If no harm or injury results from
a given negligent action, there is nothing to compensate—and no
tort exists. Example 5.26 If you carelessly bump into a passerby,
who stumbles and falls as a result, you may be liable in tort if the
passerby is injured in the fall. If the person is unharmed, however,
there normally cannot be a suit for damages because no injury was
suffered. ■

Essentially, the purpose of tort law is to compensate for legally
recognized injuries resulting from wrongful acts. Thus, compensa-
tory damages are the norm in negligence cases. As noted earlier, a
court will award punitive damages only if the defendant’s conduct
was grossly negligent, reflecting an intentional failure to perform a
duty with reckless disregard of the consequences to others.

5–4d Good Samaritan Statutes
Most states now have what are called Good Samaritan statutes.18 Under these statutes, someone
who is aided voluntarily by another cannot turn around and sue the “Good Samaritan” for
negligence. These laws were passed largely to protect physicians and medical personnel who
volunteer their services in emergency situations to those in need, such as individuals hurt
in car accidents.

5–4e Dram Shop Acts
Many states have also passed dram shop acts,19 under which a bar owner or bartender may
be held liable for injuries caused by a person who became intoxicated while drinking at the
bar. The owner or bartender may also be held responsible for continuing to serve a person
who was already intoxicated.

Some states’ statutes also impose liability on social hosts (persons hosting parties) for
injuries caused by guests who became intoxicated at the hosts’ homes. Under these statutes,
it is unnecessary to prove that the bar owner, bartender, or social host was negligent.

Example 5.27 Monica hosts a Super Bowl party at which Brett, a minor, sneaks alcoholic
drinks. Monica is potentially liable for damages resulting from Brett’s drunk driving after the
party, even if she was not negligent in serving the alcoholic beverages. ■

5–4f Defenses to Negligence
Defendants often defend against negligence claims by asserting that the plaintiffs failed to
prove the existence of one or more of the required elements for negligence. Additionally,
there are three basic affirmative defenses in negligence cases (defenses that a defendant
can use to avoid liability even if the facts are as the plaintiff states): (1) assumption of risk,
(2) superseding cause, and (3) contributory and comparative negligence.

Good Samaritan Statute A state
statute stipulating that persons who
provide emergency services to, or
rescue, someone in peril cannot be
sued for negligence unless they act
recklessly and cause further harm.

18. These laws derive their name from the Good Samaritan story in the Bible. In the story, a traveler who had been robbed and beaten lay along
the roadside, ignored by those passing by. Eventually, a man from the region of Samaria (the “Good Samaritan”) stopped to render assistance
to the injured person.

Dram Shop Act A state statute
that imposes liability on bar owners,
as well as bartenders and social
hosts who serve alcohol, for injuries
resulting from accidents caused
by intoxicated persons when the
sellers or servers of alcoholic drinks
contributed to the intoxication.

19. Historically, a dram was a small unit of liquid, and spirits were sold in drams. Thus, a dram shop was a place where liquor was sold in drams.








Injuries from car accidents can cause handicaps that last
a lifetime. Do such injuries satisfy the injury requirement
for a finding of negligence?

143CHAPTER 5: Tort Law

30301_ch05_hr_123-150.indd 143 8/30/18 12:38 PM

Assumption of Risk A plaintiff who voluntarily enters into a risky situation, knowing
the risk involved, will not be allowed to recover. This is the defense of assumption of risk,
which requires two elements:

1. Knowledge of the risk.

2. Voluntary assumption of the risk.

This defense is frequently asserted when a plaintiff is injured during recreational activities
that involve known risk, such as skiing and skydiving. Courts do not apply the assumption
of risk doctrine in certain situations, such as those involving emergencies, however.

Assumption of risk can apply not only to participants in sporting events, but also to
spectators and bystanders who are injured while attending those events. In the following
Spotlight Case, the issue was whether a spectator at a baseball game voluntarily assumed the
risk of being hit by an errant ball thrown while the players were warming up before the game.

Assumption of Risk A defense to
negligence that bars a plaintiff from
recovering for injuries or damage
suffered as a result of risks he or she
knew of and voluntarily assumed.

Taylor v. Baseball Club of Seattle, L.P.
Court of Appeals of Washington, 132 Wash.App. 32, 130 P.3d 835 (2006).

Background and Facts Delinda Middleton
Taylor went to a Mariners baseball game at
Safeco Field with her boyfriend and two minor
sons. Their seats were four rows up from the
field along the right field foul line. They arrived
more than an hour before the game began so
that they could see the players warm up and get
their autographs. When she walked in, Taylor
saw that Mariners pitcher Freddy Garcia was
throwing a ball back and forth with José Mesa
right in front of their seats.

As Taylor stood in front of her seat, she looked away from
the field, and a ball thrown by Mesa got past Garcia and struck
her in the face, causing serious injuries. Taylor sued the Mariners
for the allegedly negligent warm-up throw. The Mariners filed a
motion for a summary judgment in which they argued that Taylor,
a Mariners fan, was familiar with baseball and the inherent risk
of balls entering the stands, and therefore assumed the risk of her
injury. The trial court granted the motion and dismissed Taylor’s
case. Taylor appealed.

In the Words of the Court
DWYER, J. [Judge]

* * * *
* * * For many decades, courts have required baseball stadi-

ums to screen some seats—generally those behind home plate—
to provide protection to spectators who choose it.

A sport spectator’s assumption of risk and
a defendant sports team’s duty of care are
accordingly discerned under the doctrine of
primary assumption of risk. * * * “Implied pri-
mary assumption of risk arises where a plain-
tiff has impliedly consented (often in advance
of any negligence by defendant) to relieve
defendant of a duty to plaintiff regarding spe-
cific known and appreciated risks.” [Emphasis
in original.]

* * * *
Under this implied primary assumption of risk, defendant must

show that plaintiff had full subjective understanding of the spe-
cific risk, both its nature and presence, and that he or she volun-
tarily chose to encounter the risk.

* * * It is undisputed that the warm-up is part of the sport, that
spectators such as Taylor purposely attend that portion of the event,
and that the Mariners permit ticket-holders to view the warm-up.

* * * We find the fact that Taylor was injured during warm-up
is not legally significant because that portion of the event is nec-
essarily incident to the game.

* * * *
Here, there is no evidence that the circumstances leading to

Taylor’s injury constituted an unusual danger. It is undisputed that
it is the normal, everyday practice at all levels of baseball for pitch-
ers to warm up in the manner that led to this incident. The risk of
injuries such as Taylor’s are within the normal comprehension of a

Spotlight on the Seattle Mariners: Case 5.3










Many fans arrive at baseball games
early so they can watch the players

warm up.

144 UNIT ONE: The Legal Environment of Business

30301_ch05_hr_123-150.indd 144 8/30/18 12:38 PM

spectator who is familiar with the game. Indeed, the possibility of
an errant ball entering the stands is part of the game’s attraction
for many spectators. [Emphasis added.]

* * * The record contains substantial evidence regarding
Taylor’s familiarity with the game. She attended many of her
sons’ baseball games, she witnessed balls entering the stands,
she had watched Mariners’ games both at the Kingdome and on
television, and she knew that there was no screen protecting her
seats, which were close to the field. In fact, as she walked to
her seat she saw the players warming up and was excited about
being in an unscreened area where her party might get autographs
from the players and catch balls.

Decision and Remedy The state intermediate appellate
court affirmed the lower court’s judgment. As a spectator who chose
to sit in an unprotected area of seats, Taylor voluntarily undertook
the risk associated with being hit by an errant baseball thrown
during warm-ups before the start of the game.

Critical Thinking

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

Superseding Cause An unforeseeable intervening event may break the connection
between a wrongful act and an injury to another. If so, the event acts as a superseding
cause—that is, it relieves a defendant of liability for injuries caused by the intervening event.

Example 5.28 While riding his bicycle, Derrick negligently hits Julie, who is walking on the
sidewalk. As a result of the impact, Julie falls and fractures her hip. While she is waiting for
help to arrive, a small plane crashes nearby and explodes, and some of the fiery debris hits
her, causing her to sustain severe burns. Derrick will be liable for Julie’s fractured hip because
the risk of hitting her with his bicycle was foreseeable. Normally, though, Derrick will not be
liable for the burns caused by the plane crash, because the risk of a plane’s crashing nearby
and injuring Julie was not foreseeable. ■

Contributory Negligence All individuals are expected to exercise a reasonable degree of
care in looking out for themselves. In the past, under the common law doctrine of contributory
negligence, a plaintiff who was also negligent (who failed to exercise a reasonable degree of care)
could not recover anything from the defendant. Under this rule, no matter how insignificant
the plaintiff’s negligence was relative to the defendant’s negligence, the plaintiff was precluded
from recovering any damages. Today, only a few jurisdictions still follow this doctrine.

Comparative Negligence In most states, the doctrine of contributory negligence has been
replaced by a comparative negligence standard. Under this standard, both the plaintiff’s and the
defendant’s negligence are computed, and the liability for damages is distributed accordingly.

Some jurisdictions have adopted a “pure” form of comparative negligence that allows a
plaintiff to recover, even if the extent of his or her fault is greater than that of the defendant.
For instance, if a plaintiff was 80 percent at fault and the defendant 20 percent at fault, the
plaintiff may recover 20 percent of his or her damages.

Many states’ comparative negligence statutes, however, contain a “50 percent” rule that
prevents a plaintiff from recovering any damages if she or he was more than 50 percent at
fault. Under this rule, a plaintiff who is 35 percent at fault could recover 65 percent of his or
her damages, but a plaintiff who is 65 percent at fault could recover nothing.

5–5 Strict Liability
Another category of torts is called strict liability, or liability without fault. Intentional torts and
torts of negligence involve acts that depart from a reasonable standard of care and cause injuries.
Under the doctrine of strict liability, liability for injury is imposed for reasons other than fault.

Contributory Negligence A rule
in tort law, used in only a few states,
that completely bars the plaintiff
from recovering any damages if the
harm suffered is partly the plaintiff’s
own fault.

Comparative Negligence A rule
in tort law, used in the majority of
states, that reduces the plaintiff’s
recovery in proportion to the plaintiff’s
degree of fault, rather than barring
recovery completely.

Strict Liability Liability regardless
of fault, which is imposed on
those engaged in abnormally
dangerous activities, on persons
who keep dangerous animals, and
on manufacturers or sellers that
introduce into commerce defective
and unreasonably dangerous goods.

145CHAPTER 5: Tort Law

30301_ch05_hr_123-150.indd 145 8/30/18 12:38 PM

5–5a Abnormally Dangerous Activities
Strict liability for damages proximately caused by an abnormally dangerous or exceptional
activity is one application of this doctrine. Courts apply the doctrine of strict liability in such
cases because of the extreme risk of the activity. For instance, even if blasting with dynamite
is performed with all reasonable care, there is still a risk of injury. Because of the potential
for harm, the person who is engaged in an abnormally dangerous activity—and benefits
from it—is responsible for paying for any injuries caused by that activity. Although there
is no fault, there is still responsibility because of the dangerous nature of the undertaking.

5–5b Other Applications of Strict Liability
The strict liability principle is also applied in other situations. Persons who keep wild
animals, for instance, are strictly liable for any harm inflicted by the animals. In addition,
an owner of domestic animals may be strictly liable for harm caused by those animals if the
owner knew, or should have known, that the animals were dangerous or had a propensity
to harm others.

A significant application of strict liability is in the area of product liability—liability of
manufacturers and sellers for harmful or defective products. Liability here is a matter
of social policy. Manufacturers and sellers can better bear the cost of injuries, and because
they profit from making and selling the products, they should be responsible for the inju-
ries the products cause.

Learning Objective 5
What is meant by
strict liability? In what
circumstances is strict
liability applied?

Practice and Review

Elaine Sweeney went to Ragged Mountain Ski Resort in New Hampshire with a friend. Elaine went
snow tubing down a run designed exclusively for snow tubers. No Ragged Mountain employees
were present in the snow-tube area to instruct Elaine on the proper use of a snow tube. on her
fourth run down the trail, Elaine crossed over the center line between snow-tube lanes, collided
with another snow tuber, and was injured. Elaine filed a negligence action against Ragged Mountain
seeking compensation for the injuries that she sustained. Two years earlier, the New Hampshire
state legislature had enacted a statute that prohibited a person who participates in the sport of
skiing from suing a ski-area operator for injuries caused by the risks inherent in skiing. Using the
information presented in the chapter, answer the following questions.

1. What defense will Ragged Mountain probably assert?

2. The central question in this case is whether the state statute establishing that skiers assume the
risks inherent in the sport applies to Elaine’s suit. What would your decision be on this issue? Why?

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

4. Now suppose that the jury concludes that Elaine was partly at fault for the accident. Under what
theory might her damages be reduced in proportion to how much her actions contributed to the
accident and her resulting injuries?

Debate This
Each time a state legislature enacts a law that applies the assumption of risk doctrine to a partic-
ular sport, participants in that sport suffer.

146 UNIT ONE: The Legal Environment of Business

30301_ch05_hr_123-150.indd 146 8/30/18 12:38 PM

147CHAPTER 5: Tort Law

Chapter Summary: Tort Law

Key Terms

Intentional Torts against

1. Assault and battery—An assault is an unexcused and intentional act that causes another person to
be apprehensive of immediate physical harm. A battery is an assault that results in actual physical

2. False imprisonment—The intentional confinement or restraint of another person’s movement with-
out justification.

3. Intentional infliction of emotional distress—An extreme and outrageous act, intentionally commit-
ted, that results in severe emotional distress to another.

4. Defamation (libel or slander)—A false statement of fact, not made under privilege, that is commu-
nicated to a third person and that causes damage to a person’s reputation. For public figures, the
plaintiff must also prove actual malice.

5. Invasion of the right to privacy—Includes four types: wrongful intrusion into a person’s private
activities; publication of information that places a person in a false light; public disclosure of pri-
vate facts that an ordinary person would find objectionable; and appropriation of identity, which
involves the use of a person’s name, likeness, or other identifying characteristic, without permis-
sion and for a commercial purpose. Most states have enacted statutes establishing appropriation
of identity as the tort of appropriation, or right of publicity. Courts differ on the degree of likeness

6. Fraudulent misrepresentation—A false representation made by one party, through misstatement of
facts or through conduct, with the intention of deceiving another and on which the other reasonably
relies to his or her detriment. Negligent misrepresentation occurs when a person supplies informa-
tion without having a reasonable basis for believing its truthfulness.

7. Wrongful interference—The knowing, intentional interference by a third party with an enforceable
contractual relationship or an established business relationship between other parties for the pur-
pose of advancing the economic interests of the third party.

Intentional Torts against

1. Trespass to land—The invasion of another’s real property without consent or privilege.
2. Trespass to personal property—Unlawfully damaging or interfering with the owner’s right to use,

possess, or enjoy her or his personal property.
3. Conversion—Wrongfully taking, retaining, or using the personal property of another without

4. Disparagement of property—Any economically injurious falsehood that is made about another’s

product or property. The term includes the torts of slander of quality and slander of title.


actionable 127
actual malice 131
appropriation 133
assault 126
assumption of risk 144
battery 126
business invitee 140
business tort 135
causation in fact 141
comparative negligence 145
compensatory damages 124
contributory negligence 145
conversion 137
damages 124

defamation 128
defense 125
disparagement of property 137
dram shop act 143
duty of care 138
fraudulent misrepresentation 134
general damages 124
Good Samaritan statute 143
intentional tort 125
libel 128
malpractice 141
negligence 138
privilege 130
proximate cause 141

puffery 134
punitive damages 124
reasonable person standard 140
slander 128
slander of quality (trade libel) 138
slander of title 138
special damages 124
strict liability 145
tort 123
tortfeasor 125
transferred intent 126
trespass to land 136
trespass to personal property 137

30301_ch05_hr_123-150.indd 147 9/3/18 9:22 AM

148 UNIT ONE: The Legal Environment of Business

Issue Spotters
1. Jana leaves her truck’s motor running while she enters a Kwik-Pik Store. The truck’s transmission engages, and the vehicle crashes

into a gas pump, starting a fire that spreads to a warehouse on the next block. The warehouse collapses, causing its billboard to fall
and injure Lou, a bystander. Can Lou recover from Jana? Why or why not? (See Negligence.)

2. A water pipe bursts, flooding a Metal Fabrication Company utility room and tripping the circuit breakers on a panel in the room. Metal
Fabrication contacts Nouri, a licensed electrician with five years’ experience, to check the damage and turn the breakers back on.
Without testing for short circuits, which Nouri knows that he should do, he tries to switch on a breaker. He is electrocuted, and his
wife sues Metal Fabrication for damages, alleging negligence. What might the firm successfully claim in defense? (See Negligence.)
—Check your answers to the Issue Spotters against the answers provided in Appendix D at the end of this text.

Business Scenarios and Case Problems
5–1. Defamation. Richard is an employee of the Dun Construc-

tion Corp. While delivering materials to a construction site, he
carelessly backs Dun’s truck into a passenger vehicle driven by
Green. This is Richard’s second accident in six months. When
the company owner, Dun, learns of this latest accident, a heated
discussion ensues, and Dun fires Richard. Dun is so angry that
he immediately writes a letter to the union of which Richard is
a member and to all other construction companies in the com-
munity. In it, Dun states that Richard is the “worst driver in the
city” and that “anyone who hires him is asking for legal liability.”
Richard files a suit against Dun, alleging libel on the basis of the
statements made in the letters. Discuss. (See Intentional Torts
Against Persons.)

5–2. Liability to Business Invitees. Kim went to Ling’s Market
to pick up a few items for dinner. It was a stormy day, and the
wind had blown water through the market’s door each time it
opened. As Kim entered through the door, she slipped and fell in
the rainwater that had accumulated on the floor. The manager

knew of the weather conditions but had not posted any sign to
warn customers of the water hazard. Kim injured her back as a
result of the fall and sued Ling’s for damages. Can Ling’s be held
liable for negligence? Discuss. (See Negligence.)

5–3. Spotlight on Intentional Torts—Defamation. Sharon
Yeagle was an assistant to the vice president of
student affairs at Virginia Polytechnic Institute and
State University (Virginia Tech). As part of her duties,

Yeagle helped students participate in the Governor’s Fellows
Program. The Collegiate Times, Virginia Tech’s student newspa-
per, published an article about the university’s success in plac-
ing students in the program. The article’s text surrounded a
block quotation attributed to Yeagle with the phrase “Director of
Butt Licking” under her name. Yeagle sued the Collegiate Times
for defamation. She argued that the phrase implied the commis-
sion of sodomy and was therefore actionable. What is Collegiate
Times’s defense to this claim? [Yeagle v. Collegiate Times, 497
S.E.2d 136 (Va. 1998)] (See Intentional Torts Against Persons.)

Negligence Negligence is the failure to exercise the standard of care that a reasonable person would apply in similar
circumstances. A plaintiff must prove that a legal duty of care existed, that the defendant breached that
duty, that the breach caused the plaintiff’s injury, and that the plaintiff suffered a legally recognizable injury.
1. Good Samaritan statutes—State laws that protect those who voluntarily aid another from being

sued for negligence.
2. Dram shop acts—State laws that impose liability on bar owners, bartenders, or persons hosting parties

for injuries caused by intoxicated persons when the sellers or servers contributed to the intoxication.
3. Defenses to negligence—The basic affirmative defenses in negligence cases are assumption of

risk, superseding cause, and contributory or comparative negligence.

Strict Liability Under the doctrine of strict liability, parties may be held liable, regardless of the degree of care exer-
cised, for damages or injuries caused by their products or activities. Strict liability includes liability for
harms caused by abnormally dangerous activities, by dangerous animals, and by defective products
(product liability).

30301_ch05_hr_123-150.indd 148 9/3/18 9:22 AM

149CHAPTER 5: Tort Law

5–4. Business Case Problem with Sample Answer—
Negligence. At the Weatherford Hotel in Flagstaff,
Arizona, in Room 59, a balcony extends across thirty
inches of the room’s only window, leaving a twelve-

inch gap with a three-story drop to the concrete below. A sign
prohibits smoking in the room but invites guests to “step out
onto the balcony” to smoke. Toni Lucario was a guest in Room
59 when she climbed out of the window and fell to her death.
Patrick McMurtry, her estate’s personal representative, filed a
suit against the Weatherford. Did the hotel breach a duty of care
to Lucario? What might the Weatherford assert in its defense?
Explain. [McMurtry v. Weatherford Hotel, Inc., 293 P.3d 520 (Ariz.
App. 2013)] (See Negligence.)

— For a sample answer to Problem 5–4, go to Appendix E at the
end of this text.

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

5–6. Negligence. Charles Robison, an employee of West Star
Transportation, Inc., was ordered to cover an unevenly loaded
flatbed trailer with a 150-pound tarpaulin. The load included
uncrated equipment and pallet crates of different heights, about
thirteen feet off the ground at its highest point. While standing
on the load, manipulating the tarpaulin without safety equipment
or assistance, Robison fell headfirst and sustained a traumatic
head injury. He filed a suit against West Star to recover for his
injury. Was West Star “negligent in failing to provide a reason-
ably safe place to work,” as Robison claimed? Explain. [West
Star Transportation, Inc. v. Robison, 457 S.W.3d 178 (Tex.App.—
Amarillo 2015)] (See Negligence.)

5–7. Negligence. DSC Industrial Supply and Road Rider Supply
are located in North Kitsap Business Park in Seattle, Wash-
ington. Both firms are owned by Paul and Suzanne Marshall.
The Marshalls had outstanding commercial loans from Frontier
Bank. The bank dispatched one of its employees, Suzette Gould,
to North Kitsap to “spread Christmas cheer” to the Marshalls as

an expression of appreciation for their business. Approaching
the entry to Road Rider, Gould tripped over a concrete “wheel
stop” and fell, suffering a broken arm and a dislocated elbow.
The stop was not clearly visible, it had not been painted a con-
trasting color, and it was not marked with a sign. Gould had
not been aware of the stop before she tripped over it. Is North
Kitsap liable to Gould for negligence? Explain. [Gould v. North
Kitsap Business Park Management, LLC, 192 Wash.App. 1021
(2016)] (See Negligence.)

5–8. Defamation. Jonathan Martin, an offensive lineman with the
Miami Dolphins, abruptly quit the team and checked himself into
a hospital seeking psychological treatment. Later, he explained
that he left because of persistent taunting from other Dolphins
players. The National Football League hired attorney Theodore
Wells to investigate Martin’s allegations of bullying. After receiv-
ing Wells’s report, the Dolphins fired their offensive line coach,
James Turner. Turner was a prominent person on the Dolphins
team, and during his career he chose to thrust himself further
into the public arena. He was the subject of articles discussing
his coaching philosophy, and the focus of one season of HBO’s
“Hard Knocks,” showcasing his coaching style. Turner filed a
suit in a federal district court against Wells, alleging defama-
tion. He charged that Wells failed to properly analyze certain
information. Is Turner likely to succeed on his claim? Explain.
[Turner v. Wells, 879 F.3d 1254 (11th Cir. 2018)] (See Intentional
Torts Against Persons.)

5–9. A Question of Ethics—The IDDR Approach and
Wrongful Interference. Julie Whitchurch was
an employee of Vizant Technologies, LLC. After she
was fired, she created a website falsely accusing

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

from other cases that involve wrongful interference? What
does this suggest about the ethics in this situation? Discuss.

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

30301_ch05_hr_123-150.indd 149 8/30/18 12:38 PM

150 UNIT ONE: The Legal Environment of Business

Critical Thinking and Writing Assignments

5–10. Time-Limited Group Assignment—Negligence.
Donald and Gloria Bowden hosted a cookout at their
home in South Carolina, inviting mostly business
acquaintances. Justin Parks, who was nineteen years

old, attended the party. Alcoholic beverages were available to
all of the guests, even those who, like Parks, were between the
ages of eighteen and twenty-one.

Parks consumed alcohol at the party and left with other guests.
One of these guests detained Parks at the guest’s home to give
Parks time to “sober up.” Parks then drove himself from this guest’s
home and was killed in a one-car accident. At the time of death,
he had a blood alcohol content of 0.291 percent, which exceeded
the state’s limit for driving a motor vehicle. Linda Marcum, Parks’s
mother, filed a suit in a South Carolina state court against the
Bowdens and others, alleging negligence. (See Negligence.)

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

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

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

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

30301_ch05_hr_123-150.indd 150 8/30/18 12:38 PM

6Product Liability
An area of tort law of particular importance to business­
persons is product liability. As Warren Buffett implies in the
chapter­opening quote, to be successful, a business cannot
make too many mistakes. This is especially true for businesses
that make or sell products. The manufacturers and sellers of
products may incur product liability when product defects
cause injury or property damage to consumers, users, or
bystanders (people in the vicinity of the product when it fails).

Suppose that Braden is injured when his Samsung Galaxy
Note 7 smartphone explodes into flames. Under product
liability laws, he could sue Samsung. Indeed, Samsung is
facing numerous product liability lawsuits as a result of

exploding lithium batteries in its Galaxy Note 7s. Some plaintiffs claim that Samsung knew
that its smartphones could explode. Eventually, the company recalled all Galaxy Note 7
phones and halted production of the model.

In this chapter, you will learn about various theories of product liability under which
plaintiffs can sue. Remember that although multimillion­dollar product liability lawsuits
often involve big automakers, pharmaceutical companies, and the tobacco industry, many
businesses face potential liability for the products they sell.

6–1 Product Liability Claims
Those who make, sell, or lease goods can be held liable for physical harm or property damage
caused by those goods to a consumer, user, or bystander. This is called product liability. Product
liability claims may be based on the tort theories of negligence, fraudulent misrepresentation,

Product Liability The legal liability
of manufacturers, sellers, and lessors
of goods for injuries or damage
caused by the goods to consumers,
users, or bystanders.

Warren Buffett
(American businessman and
the most successful investor
in the twentieth century)

“You only have to do a
very few things right
in your life so long
as you don’t do too
many things wrong.”

Learning Objectives
The four Learning Objectives below
are designed to help improve your
understanding. After reading this chapter,
you should be able to answer the following

1. Can a manufacturer be held
liable to any person who
suffers an injury proximately
caused by the manufacturer’s
negligently made product?

2. What are the elements of
a cause of action in strict
product liability?

3. What are three types of
product defects?

4. What defenses to liability can
be raised in a product liability











30301_ch06_hr_151-171.indd 151 8/30/18 12:41 PM

and strict liability. Sometimes, a business faces multiple
product liability lawsuits over the same product, as dis­
cussed in this chapter’s Business Web Log feature.

6–1a Negligence
Negligence is the failure to exercise the degree of care
that a reasonable, prudent person would have exercised
under the circumstances. If a manufacturer fails to exer­
cise “due care” to make a product safe, a person who
is injured by the product may sue the manufacturer
for negligence.

Due Care Must Be Exercised The manufacturer
must exercise due care in all of the following areas:

1. Designing the product.

2. Selecting the materials.

3. Using the appropriate production process.

4. Assembling and testing the product.

5. Placing adequate warnings on the label to inform the user of dangers of which an ordinary person
might not be aware.

6. Inspecting and testing any purchased components used in the final product.

In 1892, the director of scientific affairs of Johnson & Johnson (J&J) invented
scented talcum powder. Talcum, or talc,
is a soft mineral found in rock deposits.
This invention quickly became J&J’s Baby
Powder, known throughout the world. Over
time, the product expanded beyond being
used on babies after a diaper change.
In the early 1900s, women began apply­
ing the powder to their bodies and under­
garments for a fresh scent.

In the 1970s, several studies suggested
that using talc around the female genital
area increased a woman’s risk of ovarian
cancer. Despite these studies, J&J denied
the findings and did not include any warn­
ing labels on its talc­based products. By
2016, several female plaintiffs had been

awarded tens of millions of dollars—
mainly in punitive damages. Why punitive
damages? Juries were convinced J&J had
withheld critical information about a pos­
sible relationship between ovarian cancer
and talcum powder for more than four
decades. By 2017, J&J faced more than
2,500 lawsuits in state and federal courts.

In its defense, J&J contends that the
National Toxicology Program has not yet
fully reviewed talc. Moreover, the Interna­
tional Agency for Research on Cancer clas­
sifies genital use of talc as only “possibly”
carcinogenic—that is, having the potential
to cause cancer. After all, talc is found in a
wide variety of cosmetic products and has
other uses, such as in paints and plastics.

Key Point
Product liability lawsuits are common for
large corporations. Note that in the talcum
powder cases, 90 percent or more of the
jury awards were for “failure to warn.”
J&J could have warned consumers of a
potential link between genital use of tal-
cum powder and ovarian cancer, but it did
not. Of course, sales of talc-based products
would not have grown so rapidly had such
a warning been evident on each J&J Baby
Powder container.

Johnson & Johnson Faces Continuing
Lawsuits Over Its Talcum Powder

Business Web Log

The talc mineral used in Johnson’s Baby Powder has been linked
to certain cancers in women. Should the company be liable for not
warning consumers about this possibility? Why or why not?








152 UNIT ONE: The Legal Environment of Business

30301_ch06_hr_151-171.indd 152 8/30/18 12:41 PM

Privity of Contract Not Required A product liability action based on negligence does
not require privity of contract between the injured plaintiff and the defendant manufacturer.
Privity of contract refers to the relationship that exists between the promisor and the
promisee of a contract. Privity is the reason that normally only the parties to a contract can
enforce that contract.

In the context of product liability law, privity is not required. A person who is injured by
a defective product can bring a negligence suit even though he or she was not the one who
actually purchased the product—and thus is not in privity. A manufacturer is liable for its
failure to exercise due care to any person who sustains an injury proximately caused by a
negligently made (defective) product.

Relative to the long history of the common law, this exception to the privity requirement
is a fairly recent development, dating to the early part of the twentieth century. A leading
case in this respect is MacPherson v. Buick Motor Co., which is presented as this chapter’s
Landmark in the Law feature.

“Cause in Fact” and Proximate Cause In a product liability suit based on negligence,
as in any action alleging that the defendant was negligent, the plaintiff must show that the
defendant’s conduct was the “cause in fact” of an injury. Cause in fact requires showing that
but for the defendant’s action, the injury would not have occurred.

Privity of Contract The
relationship that exists between
the promisor and the promisee
of a contract.

Learning Objective 1
Can a manufacturer be held
liable to any person who
suffers an injury proximately
caused by the manufacturer’s
negligently made product?

In the landmark case of MacPherson v. Buick Motor Co.,a the New York Court of
Appeals—New York’s highest court—
considered the liability of a manufacturer
that had failed to exercise reasonable care
in manufacturing a finished product.

Case Background Donald MacPherson
suffered injuries while riding in a Buick
automobile that suddenly collapsed
because one of the wheels was made of
defective wood. The spokes crumbled into
fragments, throwing MacPherson out of
the vehicle and injuring him.

MacPherson had purchased the car
from a Buick dealer, but he brought a
lawsuit against the manufacturer, Buick
Motor Company. Buick itself had not made
the wheel but had bought it from another
manufacturer. There was evidence, though,
that the defects could have been discov­
ered by a reasonable inspection by Buick
and that no such inspection had taken

place. MacPherson charged Buick with
negligence for putting a human life in
imminent danger.

The Issue Before the Court and
the Court’s Ruling The primary issue
was whether Buick owed a duty of care to
anyone except the immediate purchaser of
the car—that is, the Buick dealer. In decid­
ing the issue, Justice Benjamin Cardozo
stated that “if the nature of a thing is such
that it is reasonably certain to place life
and limb in peril when negligently made,
it is then a thing of danger. . . . If to the
element of danger there is added knowl­
edge that the thing will be used by persons
other than the purchaser, and used without
new tests, then, irrespective of contract,
the manufacturer of this thing of danger is
under a duty to make it carefully.”

The court concluded that “beyond all
question, the nature of an automobile gives
warning of probable danger if its construc­
tion is defective. This automobile was
designed to go 50 miles an hour. Unless its

wheels were sound and strong, injury was
almost certain.” Although Buick itself had
not manufactured the wheel, the court held
that Buick had a duty to inspect the wheels
and that Buick “was responsible for the fin­
ished product.” Therefore, Buick was liable
to MacPherson for the injuries he sustained
when he was thrown from the car.

Application to Today’s World This
landmark decision was a significant step in
creating the legal environment of the mod-
ern world. As often happens, technological
developments necessitated changes in the
law. Today, automobile manufacturers are
commonly held liable when their negligence
causes automobile users to be injured.a. 217 N.Y. 382, 111 N.E. 1050 (1916).

MacPherson v. Buick Motor Co. (1916) Landmark
in the Law

153CHAPTER 6: Product Liability

30301_ch06_hr_151-171.indd 153 8/30/18 12:41 PM

It must also be determined that the defendant’s act was the proximate cause of the injury.
This determination focuses on the foreseeability of the consequences of the act and whether
the defendant should be held legally responsible.

For proximate cause to become a relevant issue, however, a plaintiff must establish cause
in fact. The issue in the following case was whether a “silent” alarm bell could be a product
defect that was the cause in fact and the proximate cause of the deaths of two sisters.

Background and Facts Karen Schwarck was operating an
Arctic Cat 660 snowmobile on Mackinac Island in Michigan with
her sister, Edith Bonno, as a passenger. The sisters were killed
when the Cat went backward through a fence and over a bluff.
Their spouses filed a suit in a Michigan state court against the
manufacturer, Arctic Cat, Inc., alleging negligent design.

The vehicle was equipped with a reverse alarm that did not sound
the entire time the vehicle was in reverse. The plaintiffs asserted
that in executing a turn, Schwarck stopped the Cat, shifted forward,
and, not hearing the alarm, accelerated. Still in reverse, however, the
Cat crashed through the fence. The court ruled that there was no dis­
pute the alarm was “operational” and issued a summary judgment in
the defendant’s favor. The plaintiffs appealed, arguing that the alarm,
though “operational,” was defective because it caused Schwarck
to be confused about whether she was in forward or reverse gear.

In the Words of the Court
PER CURIAM [By the Whole Court].

* * * *
[The plaintiffs’ expert, John Frackelton, an accident reconstruc­

tionist and snowmobile mechanic] observed that the shift lever trav­
eled from full reverse to full forward in a distance of four inches.
* * * Frackelton experimented with the lever, shifting it up toward
forward gear, an inch at a time. For the next two inches of shift
travel forward, the reverse alarm did not sound, but the snowmobile
was still in reverse. Frackelton observed that it was only in the last
or fourth inch of shift travel that the snowmobile was in full forward.

* * * *
* * * Defendant argues that the alarm served its intended

purpose, which is to notify bystanders and not operators that
the snowmobile is in reverse and that it was unreasonable for
decedent [Karen] Schwarck to rely on the alarm to determine the
gear of the snowmobile. The fact that the manufacturer’s intended
purpose for the alarm was to warn third-parties is not disposi-
tive of the issue [does not settle the issue] of whether decedent

Schwarck relied on the alarm to determine her gear or whether
that reliance was reasonable or a foreseeable misuse of the alarm
and snowmobile. [Emphasis added.]

Reasonable minds could differ as to whether a reverse alarm
that does not sound throughout the reverse trajectory or only oper­
ates in a partial manner is defective.

* * * *
* * * It is foreseeable that an operator of the Arctic Cat may

rely on the sound of the reverse alarm to indicate when the snow­
mobile is no longer in reverse and experience unexpected travel
backward because the alarm does not sound during the entire
reverse gear. It is further foreseeable that unanticipated reverse
travel may cause a risk of harm to the operator.

A jury could infer that traveling backward when one thought he or
she would go forward is an unexpected stimulus. It is also a reason­
able inference * * * that it was foreseeable that the operator would
be surprised by the rearward motion. Given the evidence, reasonable
minds may differ as to whether decedent Schwarck did not or could
not correct the snowmobile’s rearward direction in the time allotted.

Decision and Remedy A state intermediate appellate court
vacated the lower court’s judgment. The fact that the alarm was
“operational” did not determine whether its operation constituted
a product defect. The appellate court remanded the case to be
submitted to a jury to make this determination.

Critical Thinking

• Ethical Does a manufacturer have an ethical obligation to
warn the buyers of its products of defects? Explain.

• What If the Facts Were Different? Suppose that the
Arctic Cat 660 did not have an alarm, and that occasionally, when
the gearshift was pushed forward, the vehicle did not shift into
forward as expected. Is this a feature that the plaintiffs might have
asserted as a defect? Discuss.

Schwarck v. Arctic Cat, Inc.
Court of Appeals of Michigan, 2016 WL 191992 (2016).

Case 6.1

154 UNIT ONE: The Legal Environment of Business

30301_ch06_hr_151-171.indd 154 8/30/18 12:41 PM

6–1b Misrepresentation
When a user or consumer is injured as a result of a manufacturer’s or seller’s fraudulent
misrepresentation, the basis of liability may be the tort of fraud. In this situation, the mis­
representation must have been made knowingly or with reckless disregard for the facts. The
intentional mislabeling of packaged cosmetics, for instance, or the intentional concealment
of a product’s defects constitutes fraudulent misrepresentation.

The misrepresentation must be of a material fact, and the seller must have intended to
induce the buyer’s reliance on the misrepresentation. Misrepresentation on a label or adver­
tisement is enough to show the intent to induce reliance. Of course, to bring a lawsuit on
this ground, the buyer must have relied on the misrepresentation.

6–2 Strict Product Liability
Under the doctrine of strict liability, people may be liable for the results of their acts regardless
of their intentions or their exercise of reasonable care. In addition, liability does not depend on
privity of contract. The injured party does not have to be the buyer or a third party beneficiary
(one for whose benefit a contract is made). In the 1960s, courts applied the doctrine of strict
liability in several landmark cases involving manufactured goods, and this doctrine has since
become a common method of holding manufacturers liable.

6–2a Strict Product Liability and Public Policy
The law imposes strict product liability as a matter of public policy. The public policy con­
cerning strict product liability may be expressed in a statute or in the common law. This
public policy rests on a threefold assumption:

1. Consumers should be protected against unsafe products.

2. Manufacturers and distributors should not escape liability for faulty products simply because they
are not in privity of contract with the ultimate user of those products.

3. Manufacturers, sellers, and lessors of products are generally in a better position than consumers to
bear the costs associated with injuries caused by their products. They can ultimately pass on these
costs to all consumers in the form of higher prices.

California was the first state to impose strict product liability in tort on manufacturers.
Classic Case Example 6.1 William Greenman was injured when his Shopsmith combination

power tool threw off a piece of wood that struck him in the head. He sued the manufac­
turer, claiming that he had followed the product instructions and that the product must
be defective.

In a landmark decision, Greenman v. Yuba Power Products, Inc.,1 the California Supreme
Court set out the reason for applying tort law rather than contract law in cases involving
consumers who were injured by defective products. According to the Greenman court, the
“purpose of such liability is to [e]nsure that the costs of injuries resulting from defective
products are borne by the manufacturers . . . rather than by the injured persons who are
powerless to protect themselves.” ■ Today, the majority of states recognize strict product
liability, although some state courts limit its application to situations involving personal
injuries (rather than property damage).

6–2b Requirements for Strict Product Liability
After the Restatement (Second) of Torts was issued in 1964, Section 402A became a widely
accepted statement of how the doctrine of strict liability should be applied to sellers of goods.
These sellers include manufacturers, processors, assemblers, packagers, bottlers, wholesalers,
distributors, retailers, and lessors.

1. 59 Cal.2d 57, 377 P.2d 897, 27 Cal.Rptr. 697 (1962); see also, Okoye v. Bristol-Myers Squibb Co., ___ F.Supp.3d ___, 2017 WL 1435886 (N.D.Cal. 2017).

Learning Objective 2
What are the elements of
a cause of action in strict
product liability?









If a power tool is defective and
injures a user, does the user sue
under contract law or tort law?

155CHAPTER 6: Product Liability

30301_ch06_hr_151-171.indd 155 8/30/18 12:41 PM

The bases for an action in strict liability that are set forth in Section 402A can
be summarized as the following six requirements. Depending on the jurisdiction,
if these requirements are met, a manufacturer’s liability to an injured party can
be almost unlimited.

1. The product must have been in a defective condition when the defendant sold it.

2. The defendant must normally be engaged in the business of selling (or otherwise
distributing) that product.

3. The product must be unreasonably dangerous to the user or consumer because of its
defective condition.

4. The plaintiff must incur physical harm to self or property by use or consumption
of the product.

5. The defective condition must be the proximate cause of the injury or damage.

6. The goods must not have been substantially changed from the time the product was sold
to the time the injury was sustained.

Proving a Defective Condition Under these requirements, in any action aga­
inst a manufacturer, seller, or lessor, the plaintiff does not have to show why
or how the product became defective. The plaintiff does, however, have to
prove that the product was defective at the time it left the seller or lessor and
that this defective condition made it “unreasonably dangerous” to the user
or consumer.

Unless evidence can be presented that will support the conclusion that the
product was defective when it was sold or leased, the plaintiff normally will not
succeed. If the product was delivered in a safe condition and subsequent mishan­

dling made it harmful to the user, the seller or lessor usually is not strictly liable.

Unreasonably Dangerous Products The Restatement recognizes that many products
cannot possibly be made entirely safe for all uses. Thus, sellers or lessors of these prod­
ucts  are held liable only when the products are unreasonably dangerous. A court may
consider a product so defective as to be an unreasonably dangerous product in either of the
following situations.

1. The product is dangerous beyond the expectation of the ordinary consumer.

2. A less dangerous alternative was economically feasible for the manufacturer, but the manufacturer
failed to produce it.

A product may be unreasonably dangerous due to a flaw in its manufacturing, design, or

6–2c Product Defects
The Restatement (Third) of Torts: Products Liability defines the three types of product defects
that have traditionally been recognized in product liability law—manufacturing
defects, design defects, and inadequate warnings.

Manufacturing Defects According to Section 2(a) of the Restatement (Third) of Torts:
Products Liability, a product “contains a manufacturing defect when the product departs
from its intended design even though all possible care was exercised in the preparation
and marketing of the product.” Basically, a manufacturing defect is a departure from design
specifications that results in products that are physically flawed, damaged, or incorrectly
assembled. A glass bottle that is made too thin, causing it to explode in a consumer’s face,
is an example of a product with a manufacturing defect.

Unreasonably Dangerous
Product A product that is so
defective that it is dangerous beyond
the expectation of an ordinary
consumer, or a product for which
a less dangerous alternative was
feasible but the manufacturer failed
to produce it.








Does a person injured by a defective air bag
have to prove that it was defective when the
car was manufactured?

Learning Objective 3
What are three types of
product defects?

156 UNIT ONE: The Legal Environment of Business

30301_ch06_hr_151-171.indd 156 8/30/18 12:41 PM

Quality Control. Usually, manufacturing defects occur when a manufacturer fails to assem­
ble, test, or check the quality of a product adequately. In fact, the idea behind holding defen­
dants strictly liable for manufacturing defects is to encourage greater investment in product
safety and stringent quality control standards.

Note that liability is imposed on a manufacturer (and on the wholesaler and retailer)
regardless of whether the manufacturer’s quality control efforts were “reasonable.” For more
information on how effective quality control procedures can help businesses reduce their
potential legal liability for defective products, see the Linking Business Law to Corporate
Management feature.

Manufacturing and design defects can give rise to expensive law­
suits and substantial liability, which is a major concern for man­
agers in every organization. The legal issues surrounding product liability relate directly to quality
control. Companies that have cost­effective quality control systems produce products with fewer
manufacturing and design defects. As a result, these companies incur fewer potential and actual
product liability lawsuits.

Three Types of Quality Control
Most management systems involve three types of quality control—preventive, concurrent, and
feedback. They apply at different stages of the manufacturing process. Preventive quality control
occurs before the process begins, concurrent control takes place during the process, and feedback
control occurs after it is finished.

Preventive quality control, for instance, might involve inspecting raw materials before they are
used in the manufacturing process. During production, measuring and monitoring devices constantly
assess quality standards as part of a concurrent quality control system. When the standards are not
being met, employees can correct the problem.

Once the manufacturing is complete, the products can undergo a final quality inspection as part
of the feedback quality control system. Of course, there are economic limits to how extensive the
final inspection will be. Management faces a trade­off. The less a product is tested, the sooner
it gets to market and the faster the company receives its payment. With a shorter testing period,
however, comes a higher risk of a defect that could cost the manufacturer.

Total Quality Management (TQM)
Some managers attempt to reduce product liability costs by relying on a concurrent quality control
system known as total quality management (TQM). TQM attempts to infuse quality into every activity
in a company through continuous improvement.

Quality circles are a popular TQM technique. Groups of six to twelve employees volunteer to
meet regularly to discuss problems and possible solutions. A quality circle might consist of workers
from different phases in the production process, so that workers in various stages of production
have input on changes. Quality circles force changes in the production process that affect workers
who are actually on the production line.

Benchmarking is a TQM technique in which a company continuously measures its products
against those of its competitors or the industry leaders in order to identify areas for improvement. In
the automobile industry, benchmarking enabled several Japanese firms to overtake U.S. automakers
in terms of quality.

Business Law
to Corporate

Quality Control

157CHAPTER 6: Product Liability

30301_ch06_hr_151-171.indd 157 8/30/18 12:41 PM

The Role of Expert Testimony. Cases involving allegations of a manufacturing defect
are often decided based on the opinions and testimony of experts. Case Example 6.2 Kevin
Schmude purchased an eight­foot stepladder and used it to install radio­frequency shielding
in a hospital room. While Schmude was standing on the ladder, it collapsed, and he was
seriously injured. He filed a lawsuit against the ladder’s maker, Tricam Industries, Inc., based
on a manufacturing defect.

Experts testified that when the ladder was assembled during manufacturing, the preexisting
holes in the top cap did not properly line up with the holes in the rear right rail and backing
plate. As a result of the misalignment, the rear legs of the ladder were not securely fastened in
place, causing the ladder to fail. A jury concluded that this manufacturing defect made the
ladder unreasonably dangerous and awarded Schmude more than $677,000 in damages.2 ■

Design Defects Unlike a product with a manufacturing defect, a product with a design
defect is made in conformity with the manufacturer’s design specifications. Nevertheless, it
results in injury to the user because the design itself is flawed. The product’s design creates
an unreasonable risk to the user.

A product “is defective in design when the foreseeable risks of harm posed by the product
could have been reduced or avoided by the adoption of a reasonable alternative design by
the seller or other distributor, or a predecessor in the commercial chain of distribution, and the
omission of the alternative design renders the product not reasonably safe.”3 See this chapter’s
Business Law Analysis feature for an example of how courts analyze design defects.

Test for Design Defects. To successfully assert a design defect, a plaintiff has to show that:
1. A reasonable alternative design was available.

2. As a result of the defendant’s failure to adopt the alternative design, the product was not
reasonably safe.

In other words, a manufacturer or other defendant is liable only when the harm was rea­
sonably preventable.

Example 6.3 Gillespie accidentally cuts off several of his fingers while operating a table
saw. He later files a lawsuit against the maker of the saw, claiming that the blade guards on
the saw were defectively designed. At trial, however, an expert testifies that the alternative
design for blade guards used for table saws could not have been used for the particular cut
that Gillespie was performing at the time he was injured. In this situation, Gillespie’s claim
will likely fail because there is no proof that the “better” guard design would have prevented
his injury. ■

2. Schmude v. Tricam Industries, Inc., 550 F.Supp.2d 846 (E.D.Wis. 2008); see also Stuhlmacher v. Home Depot, U.S.A., Inc., 2013 WL 3201572
(N.D.Ind. 2013).

3. Restatement (Third) of Torts: Products Liability, Section 2(b).

Another TQM system is called Six Sigma, a quality control approach based on a five­step meth­
odology: define, measure, analyze, improve, and control. Six Sigma controls emphasize discipline
and a relentless attempt to achieve higher quality (and lower costs). A Six Sigma program requires a
major commitment from management, however, because it involves widespread changes throughout
the entire organization.

Critical Thinking
Quality control leads to fewer defective products and fewer lawsuits, which is important for a com-
pany’s long-term financial health. At the same time, the more quality control that managers impose
on their organization, the higher the average cost per unit of whatever is produced and sold. How
does a manager decide how much quality control to undertake?

Tom Peters
(American business writer)

“Almost all quality
improvement comes
via simplification of
design, manufacturing
. . . layout, processes,
and procedures.”

158 UNIT ONE: The Legal Environment of Business

30301_ch06_hr_151-171.indd 158 8/30/18 12:41 PM

According to the Official Comments accompanying the Restatement (Third) of Torts, a court
can consider a broad range of factors in deciding claims of design defects. These factors include
the magnitude and probability of the foreseeable risks, as well as the relative advantages and
disadvantages of the product as it was designed and as it alternatively could have been designed.

David Dobrovolny bought a new Ford F­350 pickup truck. A year later, the
truck spontaneously caught fire in Dobro­
volny’s driveway. The truck was destroyed,
but no other property was damaged, and no
one was injured. Dobrovolny filed a suit in
a Nebraska state court against Ford Motor
Company on a theory of strict product
lia bility to recover the cost of the truck.
Nebraska limits the application of strict
product liability to situations involving
personal injuries. Will Dobrovolny’s lawsuit
succeed? Why or why not?

Analysis: The majority of states recog­
nize strict product liability. The purpose of
strict product liability is to ensure that the
costs of injuries resulting from defective

products are borne by the manufacturers
rather than by the injured persons. The law
imposes this liability as a matter of public
policy. Some state courts limit the appli­
cation of the tort theory of strict product
liability to situations involving personal
injuries rather than property damage.

Nebraska recognizes strict product
liability, but the state’s courts limit its appli­
cation. The issue is whether these limits
apply when a product self­destructs without
causing damage to persons or other property.

Result and Reasoning: Because
Nebraska limits strict product liability
suits to situations involving personal injury,
a court will most likely dismiss Dobrovol­
ny’s design defect claim. When a product

injures only itself, the reasons for impos­
ing strict product liability lose their signifi­
cance. The consumer has not been injured,
and the loss concerns the con sumer’s
benefit of the bargain from the contract
with the seller of the product. Although
a consumer with only a damaged product
may not recover in tort, the consumer is
not without other remedies. Dobrovolny
may attempt to recover for the loss of his
truck under contract theories for breach of

How State Legislation Can Limit
Recovery for Design Defects

Business Law

Can a Taser be considered unreasonably dangerous as
designed? Taser International, Inc., located in Scottsdale, Arizona,
provides nonlethal devices that police personnel can use to “stun” aggressors. When officer Jeremy
Baird of the Moberly, Missouri, Police Department used a Taser device after a routine traffic stop,
the victim fell to the ground, lost consciousness, and died two hours later. The victim’s mother sued
the city of Moberly and several police officers. That case was settled for $2.4 million.

The victim’s mother then sued Taser International. The claim was that the company did not provide
adequate warnings that using the device directly on the chest could lead to cardiac arrest. The law­
suit also argued that the Taser was defectively designed. A federal trial court dismissed the case.

On appeal, the reviewing court pointed out that the plaintiff would have had to prove that addi­
tional warnings on the use of the Taser “would have altered the behavior of the officers involved in
the incident.” But, concluded the court, there was “no dispute on this record that Officer Baird would
not have read any additional warning Taser may have added about the cardiac danger” of its device.
As to the defective design claim, the court noted that “under strict liability, a manufacturer is not
intended to be an ensurer of any and all injuries caused by its products.”4 Just showing a link
between the use of the Taser and the victim’s injury was insufficient to establish strict liability.

4. Bachtel v. Taser International, Inc., 747 F.3d 967 (2014).

Ethical Issue

Is showing that a Taser caused the
death of a victim sufficient under
the doctrine of strict liability?







159CHAPTER 6: Product Liability

30301_ch06_hr_151-171.indd 159 8/30/18 12:41 PM

Risk-Utility Analysis. Most courts engage in a risk­utility analysis, determining whether
the risk of harm from the product as designed outweighs its utility to the user and to the pub­
lic. Case Example 6.4 Benjamin Riley, a county sheriff, was driving his Ford F­150 pickup truck
near Ehrhardt, South Carolina, when it collided with another vehicle. The impact caused
Riley’s truck to leave the road and roll over. The driver’s door of the truck opened in the
collision, and Riley was ejected and killed. Riley’s widow, Laura, as the representative of his
estate, filed a product liability suit against Ford Motor Company. She claimed that the design
of the door­latch system of the truck allowed the door to open in the collision. A state court

held in her favor and awarded the estate $900,000 in damages.
Ford appealed, but the court found that a reasonable alternative

design was available for the door­latch system. Evidence showed that
Ford was aware of the safety problems presented by the current sys­
tem (a rod­linkage system). After conducting a risk­utility analysis
of a different system (a cable­linkage system), Ford had concluded
that the alter native system was feasible and perhaps superior. The
state’s highest court affirmed the damages award.5 ■

Consumer-Expectation Test. Instead of the risk­utility test, some
courts apply the consumer­expectation test to determine whether a
product’s design was defective. Under this test, a product is unreason­
ably dangerous when it fails to perform in the manner that would rea­
sonably be expected by an ordinary consumer.

Case Example 6.5 A representative from Wilson Sporting Goods
Company gave Edwin Hickox an umpire’s mask that was designed to
be safer than other umpire’s masks. The mask had a newly designed

throat guard that angled forward instead of extending straight down. While Hickox was
working as an umpire during a game and wearing the mask, he was was struck by a foul
ball and injured. He suffered a concussion and damage to his inner ear, which caused per­
manent hearing loss. Hickox and his wife sued the manufacturer for product liability based
on a defective design and won. A jury awarded $750,000 to Hickox and $25,000 to his wife.
Wilson appealed.

The reviewing court affirmed the jury’s verdict. The design was defective because “an
ordinary consumer would have expected the mask to perform more safely than it did.” The
evidence presented to the jury had shown that Wilson’s mask was more dangerous than
comparable masks sold at the time. The new “masks could concentrate energy at the point
of impact, rather than distribute energy evenly throughout the padded area of the mask,” as
an ordinary consumer would have expected a baseball mask to do.6 ■

Inadequate Warnings A product may also be deemed defective because of inadequate
instructions or warnings. A product will be considered defective “when the foreseeable risks
of harm posed by the product could have been reduced or avoided by the provision of rea­
sonable instructions or warnings by the seller or other distributor, or a predecessor in the
commercial chain of distribution, and the omission of the instructions or warnings renders
the product not reasonably safe.”7 Generally, a seller must also warn consumers of the harm
that can result from the foreseeable misuse of its product.

Note that the plaintiff must show that the inadequate warning was the proximate cause
of the injuries that she or he sustained. In the following case, a drug manufacturer argued
that an injured plaintiff failed to prove an inadequate warning was the cause of his injuries.

5. Riley v. Ford Motor Co., 414 S.C. 185, 777 S.E.2d 824 (2015).
6. Wilson Sporting Goods Co. v. Hickox, 59 A.3d 1267 (D.C.App. 2013).
7. Restatement (Third) of Torts: Products Liability, Section 2(c).







How can a plaintiff prove that a truck’s door latch was
defectively designed?

160 UNIT ONE: The Legal Environment of Business

30301_ch06_hr_151-171.indd 160 8/30/18 12:41 PM

Background and Facts Timothy Stange was twelve years
old when he was prescribed Risperdal, an antipsychotic drug, for
Tourette’s syndrome. Stange subsequently developed female breasts,
a condition known as gynecomastia. Surgery successfully removed
Stange’s breasts but left him with permanent scars and pain. Janssen
Pharmaceuticals, Inc., manufactures Risperdal. Janssen knew that
gynecomastia was a frequent adverse event in children and adoles­
cents who took Risperdal. Its label, however, significantly downplayed
the risk, for instance, stating that the disorder’s occurrence was “rare.”

Stange filed a suit in a Pennsylvania state court against Jans­
sen, alleging that the maker negligently failed to adequately warn
of the risk of gynecomastia associated with Risperdal use. The court
entered a judgment in favor of the plaintiff for more than $500,000.
Janssen appealed to a state intermediate appellate court.

In the Words of the Court
Opinion by Ford ELLIOTT, P.J.E. [President Judge Emeritus]

* * * *
* * * Janssen argues that Stange failed to prove proximate

cause, [meaning] that an inadequate warning was the cause of
Stange’s injuries. * * * Janssen argues that it was entitled to
[a judgment notwithstanding the verdict (JNOV) because] Stange
failed to prove that additional risk information would have changed
Dr. Kovnar’s prescribing decision.

To support his claim of negligence, Stange must establish that
Janssen breached its duty to warn, and that the breach caused
his injuries.

A plaintiff who has established both a duty and a failure to
warn must also establish causation by showing that, if properly
warned, he or she would have altered behavior and avoided injury.
* * * Absent proof that a more complete or explicit warning would
have prevented Stange’s use of Risperdal, he cannot establish that
Janssen’s alleged failure to warn was the proximate cause of his
injuries. [Emphasis added.]

In cases involving the failure to warn of risks associated with
prescription drugs, * * * a manufacturer will be held liable only
where it fails to exercise reasonable care to inform a physician
of the facts which make the drug likely to be dangerous. The

manufacturer has the duty to disclose risks to the physician, as
opposed to the patient, because it is the duty of the prescribing
physician to be fully aware of (1) the characteristics of the drug
he is prescribing, (2) the amount of the drug which can be safely
administered, and (3) the different medications the patient is tak­
ing. It is also the duty of the prescribing physician to advise the
patient of any dangers or side effects associated with the use of
the drug as well as how and when to take the drug.

* * * There was substantial evidence that Janssen intention­
ally downplayed the risk of gynecomastia for adolescent boys using
Risperdal. * * * The * * * label * * * reported that gynecomastia
occurred in less than 1% of adult patients and less than 5% of pedi­
atric patients treated with Risperdal. Both of these warnings were
inaccurate based on the scientific evidence that the Defendants pos­
sessed [which] indicated that gynecomastia was a frequent adverse
event, not “rare.” * * * These warnings were not accurate, strong, or
clear. Instead, the warnings, to the extent they warned at all, were
inaccurate and misleading about the risks of gynecomastia.

Furthermore, Dr. Kovnar, Stange’s pediatric neurologist, testi­
fied that * * * he would not have prescribed Risperdal to Stange
had he been aware of the increased risk.

* * * The trial court did not err in refusing to grant JNOV.

Decision and Remedy The appellate court affirmed the
judgment in favor of Stange. The court stated, “Due to Janssen’s
inadequate labeling and failure to warn, Dr. Kovnar was unaware
of the specific heightened risks associated with the use of Risp­
erdal.” Had the doctor known about Risperdal’s risks for children,
he would have prescribed a different drug for Stange.

Critical Thinking

• Economic Why did Janssen downplay the risks of Risperdal
in the warnings to physicians? Discuss.

• What If the Facts Were Different? Suppose that
instead of suffering harm through a prescription drug’s legitimate
use, the plaintiff had been injured by a drug’s illegal abuse. Would
the result have been different? Explain.

Stange v. Janssen Pharmaceuticals, Inc.
Superior Court of Pennsylvania, 2018 PA Super 4, 179 A.3d 45 (2018).

Case 6.2

161CHAPTER 6: Product Liability

30301_ch06_hr_151-171.indd 161 8/30/18 12:41 PM

A company can develop and sell a per­fectly manufactured and designed prod­
uct, yet still face product liability lawsuits for
defective warnings. A product may be defec­
tive because of inadequate instructions or
warnings when the foreseeable risks of
harm posed by the product could have been
reduced by reasonable warnings offered by
the seller or other distributor. Manufacturers
and distributors have a duty to warn users of
any hidden dangers of their products. Addi­
tionally, they have a duty to instruct users in
how to use the product to avoid any dangers.
Warnings generally must be clear and spe­
cific. They must also be conspicuous.

When No Warning Is Required
Not all manufacturers have to provide
warnings. People are expected to know
that knives can cut fingers, for instance, so
a seller need not place a bright orange label
on each knife sold reminding consumers of
this danger. Most household products are
generally safe when used as intended.

In a New Jersey case, a ten­year­old
boy was injured when he fell and struck
his face on a Razor A kick scooter’s han­
dlebars. The padded end caps on the
handlebars had deteriorated, and the boy’s
mother had thrown them away, exposing
the handlebars’ metal ends.

The boy and his mother sued, claiming
that the manufacturer was required to pro­
vide a warning to prevent injuries of this type.
The appellate court noted, however, that the
plaintiffs were not able to claim that the

Razor A was defective. “Lacking evidence
that Razor A’s end­cap design was defective,
plaintiffs cannot show that Razor A had a
duty to warn of such a defect, and therefore
cannot make out their failure to warn claim.”a

In an Indiana case, an employee of a con­
crete contractor was injured at a construc­
tion site when his head was struck by a
sixteen­foot­long two­by­four board that
had dislodged from a concrete formwork
system. The employee sued the construction
manager and the manufacturer of the form­
work system for failure to warn. The court
decided that the danger that lumber used in
this formwork system could eject and strike
a person was open and obvious. Therefore,
neither the construction manager nor the
manufacturer of the system was liable for
failing to warn the employee.b

Warnings on Medication
In a case involving prescription medication,
a woman suffered neurological disorders
after taking a generic drug to treat her gas­
troesophageal reflux disease. Part of her
complaint asserted strict liability for failure
to warn. The plaintiff claimed that the
manufacturer had not updated its label to
indicate that usage should not exceed
twelve weeks. The reviewing court rea­
soned that “The adequacy of the instruc­
tions . . . made no difference to the
outcome . . . because [the plaintiff alleges

that her pre­
scribing physician]
did not read those materials.”c

In contrast, in a Pennsylvania case, a
family was awarded over $10 million in
a  lawsuit against Johnson & Johnson for
defective warnings on bottles of children’s
Motrin. A three­year­old girl suffered burns
over 84 percent of her skin, experienced
brain damage, and went blind after suffering
a reaction to the drug. The drug did have a
specific warning label that instructed con­
sumers to stop taking the medication and
contact a physician in the event of an allergic
reaction. Nonetheless, Johnson & Johnson
was found liable for failing to warn about the
known risk of severe side effects.d

Business Questions
1. To protect themselves, manufacturers
have been forced to include lengthy safety
warnings for their products. What might be
the downside of such warnings?

2. Does a manufacturer have to create
safety warnings for every product? Why or
why not?

a. Vann v. Toys R Us, 2014 WL3537937 (N.J.Sup.A.D. 2014).
b. Gleaves v. Messer Construction Co., 77 N.E.3d 1244 (Ind.

App. 2017).

c. Brinkley v. Pfizer, Inc., 772 F.3d 1133 (8th Cir. 2014). For
another situation in which the alleged warning defect did
not cause the plaintiff’s injury, see Bock v. Novartis Pharma-
ceuticals Corp., 661 Fed.Appx. 227 (3d Cir. 2016).

d. Maya v. Johnson and Johnson, 2014 Pa.Super. 152, 97 A.3d
1203 (2014).

When Is a Warning Legally Bulletproof? Managerial Strategy

Content of Warnings. Important factors for a court to consider include the risks of a
product, the “content and comprehensibility” and “intensity of expression” of warnings and
instructions, and the “characteristics of expected user groups.”8 Courts apply a “reasonable­
ness” test to determine if the warnings adequately alert consumers to the product’s risks. For
instance, children will likely respond more readily to bright, bold, simple warning labels,
while educated adults might need more detailed information. For more on tips on making
sure a product’s warnings are adequate, see this chapter’s Managerial Strategy feature.

8. Restatement (Third) of Torts: Products Liability, Section 2, Comment h.

162 UNIT ONE: The Legal Environment of Business

30301_ch06_hr_151-171.indd 162 8/30/18 12:41 PM

Case Example 6.6 Jeffrey Johnson was taken to the emergency room for an episode of atrial
fibrillation, a heart rhythm disorder. Dr. David Hahn used a defibrillator manufactured by
Medtronic, Inc., to deliver electric shocks to Johnson’s heart. The defibrillator had synchro­
nous and asynchronous modes, and it reverted to the asynchronous mode after each use.
Hahn intended to deliver synchronized shocks, which required him to select the synchro­
nous mode for each shock. Hahn did not read the device’s instructions, which Medtronic
had provided both in a manual and on the device itself. As a result, he delivered one syn­
chronized shock, followed by twelve asynchronous shocks that endangered Johnson’s life.

Johnson and his wife filed a product liability suit against Medtronic asserting that
Medtronic had provided inadequate warnings about the defibrillator and that the device had
a design defect. A Missouri appellate court held that the Johnsons could not pursue a claim
based on the inadequacy of Medtronic’s warnings, but they could pursue a claim alleging a
design defect. The court reasoned that in some cases, “a manufacturer may be held liable
where it chooses to warn of the danger . . . rather than preclude the danger by design.”9 ■

Obvious Risks. There is no duty to warn about risks that are obvious or commonly known.
Warnings about such risks do not add to the safety of a product and could even detract from
it by making other warnings seem less significant. The obviousness of a risk and a user’s
decision to proceed in the face of that risk may be a defense in a product liability suit based
on an inadequate warning.

Example 6.7 Sixteen­year­old Lana White attempts to do a back flip on a trampoline and
fails. She is paralyzed as a result. There are nine warning labels affixed to the trampoline,
an instruction manual with safety warnings, and a placard attached at the entrance advising
users not to do flips. If White sues the manufacturer for inadequate warnings, she is likely
to lose. The warning labels are probably sufficient to make the risks obvious and insulate
the manufacturer from liability for her injuries. ■

Risks that may seem obvious to some users will not be obvious to all users. This is a
particular problem when users are likely to be children. A young child may not be able to
read or understand warning labels or comprehend the risk of certain activities. To avoid
liability, the manufacturer would have to prove that the warnings it provided were adequate
to make the risk of injury obvious to a young child.

State Laws and Constitutionality. An action alleging that a product is defective due to an
inadequate label can be based on state law, but that law must not violate the U.S. Constitution.
Case Example 6.8 California once enacted a law imposing restrictions and a labeling requirement
on the sale or rental of “violent video games” to minors. Although the video game industry
had adopted a voluntary rating system for games, the legislators deemed those labels inade­
quate. The Video Software Dealers Association immediately filed a suit in federal court to
invalidate the law, and the law was struck down. The court found that the definition of a
violent video game in California’s law was unconstitutionally vague and violated the First
Amendment.10 ■

6–2d Market-Share Liability
Generally, in cases involving product liability, a plaintiff must prove that the defective
product that caused her or his injury was made by a specific defendant. In a few situations,
however, courts have dropped this requirement when a plaintiff cannot prove which of many
distributors of a harmful product supplied the particular product that caused the injury.
Under a theory of market-share liability, a court can hold each manufacturer responsible for
a percentage of the plaintiff’s damages that is equal to the percentage of its market share.

9. Johnson v. Medtronic, Inc., 365 S.W.3d 226 (Mo.App. 2012).
10. Video Software Dealers Association v. Schwarzenegger, 556 F.3d 950 (9th Cir. 2009); Brown v. Entertainment Merchants Association, 564 U.S.

786, 131 S.Ct. 2729, 180 L.Ed.2d 708 (2011).

Market-Share Liability A theory
under which liability is shared among
all firms that manufactured and
distributed a particular product during
a certain period of time. This form
of liability sharing is used only when
the specific source of the harmful
product is unidentifiable.









How can a manufacturer ade-
quately warn users against doing
back flips on a trampoline?

163CHAPTER 6: Product Liability

30301_ch06_hr_151-171.indd 163 8/30/18 12:41 PM

Case Example 6.9 Suffolk County Water Authority (SCWA) is a municipal water supplier
in Suffolk County, New York. SCWA discovered the presence of a toxic chemical, perchlo­
roethylene (PCE), used by dry cleaners and others in its local water. SCWA filed a product
liability lawsuit against Dow Chemical Corporation and other companies that manufactured
and distributed PCE. Dow filed a motion to dismiss the case for failure to state a claim,
since SCWA could not identify each defendant whose allegedly defective product caused the
water contamination.

A state trial court refused to dismiss the action, holding that SWCA’s allegations were
sufficient to invoke market­share liability. Under market­share liability, the burden of iden­
tification shifts to defendants if the plaintiff establishes a prima facie case on every element
of the claim except identification of the specific defendant. (A prima facie case is one in which
the plaintiff has presented sufficient evidence for the claim to go forward.)11 ■

Courts in many jurisdictions do not recognize market­share liability, believing that it
deviates too significantly from traditional legal principles. Jurisdictions that do recognize
this theory of liability apply it only when it is difficult or impossible to determine which
company made a particular product.

6–2e Other Applications of Strict Liability
Almost all courts extend the strict liability of manufacturers and other sellers to injured
bystanders. Example 6.10 A forklift that Trent is operating will not go into reverse, and as a
result, it runs into a bystander. In this situation, the bystander can sue the manufacturer of
the defective forklift under strict liability (and possibly bring a negligence action against the
forklift operator as well). ■

Strict liability also applies to suppliers of component parts. Example 6.11 Toyota buys brake
pads from a subcontractor and puts them in Corollas without changing their composition. If
those pads are defective, both the supplier of the brake pads and Toyota will be held strictly
liable for injuries caused by the defects. ■

6–3 Defenses to Product Liability
Defendants in product liability suits can raise a number of defenses. One defense, of course,
is to show that there is no basis for the plaintiff’s claim. For instance, in a product liability case
based on negligence, if a defendant can show that the plaintiff has not met the requirements
(such as causation) for an action in negligence, generally the defendant will not be liable. A
defendant may also assert that the statute of limitations for a product liability claim has lapsed.12

In a case involving strict product liability, a defendant can claim that the plaintiff failed to
meet one of the requirements. If the defendant establishes that goods were altered after they
were sold, for instance, the defendant normally will not be held liable.

6–3a Preemption
A defense that has been successfully raised by defendants in recent years is preemption—that
government regulations preempt claims for product liability. An injured party may not be
able to sue a manufacturer of defective products that are subject to comprehensive federal
regulatory schemes.

Medical devices, for instance, are subject to extensive government regulation and undergo
a rigorous premarket approval process. Case Example 6.12 The United States Supreme Court
decided in Riegel v. Medtronic, Inc., that a man who was injured by an approved medical
device (a balloon catheter) could not sue its maker for product liability. The Court reasoned
that Congress had created a comprehensive scheme of federal safety oversight for medical

11. Suffolk County Water Authority v. Dow Chemical Co., 44 Misc.3d 569, 987 N.Y.S.2d 819 (N.Y.Sup. 2014).
12. Similar state statutes, called statutes of repose, place outer time limits on product liability actions.

Learning Objective 4
What defenses to liability
can be raised in a product
liability lawsuit?

164 UNIT ONE: The Legal Environment of Business

30301_ch06_hr_151-171.indd 164 8/30/18 12:41 PM

devices. The U.S. Food and Drug Administration is required to review the design, labeling,
and manufacturing of medical devices before they are marketed to make sure that they are
safe and effective. Because premarket approval is a “rigorous process,” it preempts all com­
mon law claims challenging the safety or effectiveness of a medical device that has been
approved.13 ■

Since the Medtronic decision, some courts have extended the preemption defense to other
product liability actions.14 Other courts have been unwilling to deny an injured party relief
simply because the federal government was supposed to ensure the product’s safety.

In the following Spotlight Case, the United States Supreme Court had to decide if the
preemption defense barred a plaintiff’s claim for injuries caused by vaccination.

13. Riegel v. Medtronic, Inc., 552 U.S. 312, 128 S.Ct. 999, 169 L.Ed.2d 892 (2008).
14. See, for example, Fortner v. Bristol-Myers Squibb Co., __ F.Supp.3d __, 2017 WL 3193928 (S.D.N.Y. 2017).

Bruesewitz v. Wyeth, LLC
Supreme Court of the United States, 562 U.S. 223, 131 S.Ct. 1068, 179 L.Ed.2d 1 (2011).

Background and Facts When Hannah
Bruesewitz was six months old, her pediatri­
cian administered a dose of the diphtheria,
tetanus, and pertussis (DTP) vaccine according
to the Centers for Disease Control and Preven­
tion’s recommended childhood immunization
schedule. Within twenty­four hours, Hannah
began to experience seizures. She suffered
more than one hundred seizures during the
next month. Her doctors diagnosed her with
“residual seizure disorder” and “developmen­
tal delay.”

Hannah’s parents, Russell and Robalee
Bruesewitz, filed a claim for relief in the U.S. Court of Federal
Claims under the National Childhood Vaccine Injury Act (NCVIA).
The NCVIA set up a no­fault compensation program for persons
injured by vaccines. The claim was denied. The Bruesewitzes then
filed a suit in a Pennsylvania state court against Wyeth, LLC, the
maker of the vaccine, alleging strict product liability. The suit was
moved to a federal district court. The court held that the claim
was preempted by the NCVIA, which includes provisions pro­
tecting manufacturers from liability for “a vaccine’s unavoidable,
adverse side effects.” A federal appellate court affirmed the dis­
trict court’s judgment. The Bruesewitzes appealed to the United
States Supreme Court.

In the Words of the Court
Justice SCALIA delivered the opinion of the

* * * *
In the 1970’s and 1980’s vaccines became,

one might say, victims of their own success.
They had been so effective in preventing infec­
tious diseases that the public became much
less alarmed at the threat of those diseases,
and much more concerned with the risk of injury
from the vaccines themselves.

Much of the concern centered around vac­
cines against * * * DTP, which were blamed

for children’s disabilities * * * . This led to a massive increase
in vaccine­related tort litigation. * * * This destabilized the DTP
vaccine market, causing two of the three domestic manufacturers
to withdraw.

* * * *
To stabilize the vaccine market and facilitate compensation,

Congress enacted the NCVIA in 1986. The Act establishes a
no­fault compensation program designed to work faster
and with greater ease than the civil tort system. A  person
injured by a vaccine, or his legal guardian, may file a
petition for  compensation in the United States Court of Federal

Spotlight on Injuries from Vaccinations: Case 6.3

What happens when a vaccine causes
adverse side effects?








(Continues )

165CHAPTER 6: Product Liability

30301_ch06_hr_151-171.indd 165 8/30/18 12:41 PM

6–3b Assumption of Risk
Assumption of risk can sometimes be used as a defense in a product liability action. To estab­
lish such a defense, the defendant must show that (1) the plaintiff knew and appreciated
the risk created by the product defect and (2) the plaintiff voluntarily assumed the risk, even
though it was unreasonable to do so.

Although assumption of the risk is a defense in product liability actions, some courts do
not allow it to be used as a defense to strict product liability claims. Case Example 6.13 When
Savannah Boles became a customer of Executive Tans, she signed a contract. One clause
stated that signers used the company’s tanning booths at their own risk. It also released the
manufacturer and others from liability for any injuries. Later, Boles’s fingers were partially
amputated when they came into contact with a tanning booth’s fan. Boles sued the manu­
facturer, claiming strict product liability. The Colorado Supreme Court held that assumption
of risk was not applicable because strict product liability is driven by public­policy consid­
erations. The theory focuses on the nature of the product rather than the conduct of either
the manufacturer or the person injured.15 ■

6–3c Product Misuse
Similar to the defense of voluntary assumption of risk is that of product misuse, which
occurs when a product is used for a purpose for which it was not intended. The courts have
severely limited this defense. Today, product misuse is recognized as a defense only when the
particular use was not reasonably foreseeable. If the misuse is foreseeable, the seller must take
measures to guard against it.

Case Example 6.14 David Stults developed “popcorn lung” (bronchiolitis obliterans) from
consuming multiple bags of microwave popcorn daily for several years. When he filed suit
against the manufacturers of the popcorn and butter flavorings, the defendants asked the
court for a summary judgment in their favor. The court denied defendants’ motion and found
that a manufacturer has a duty to warn of dangers associated with reasonably foreseeable

15. Boles v. Sun Ergoline, Inc., 223 P.3d 724 (Co.Sup.Ct. 2010).

Under what circumstances can
a tanning salon customer sue for
injuries even though she or he
signed a release?







* * * *
Successful claimants receive compensation for medical, reha­

bilitation, counseling, special education, and vocational training
expenses; diminished earning capacity; pain and suffering; and
$250,000 for vaccine­related deaths. Attorneys’ fees are provided
* * * . These awards are paid out of a fund created by a * * * tax
on each vaccine dose.

The quid pro quo [something done in exchange] for this,
designed to stabilize the vaccine market, was the provision of sig­
nificant tort­liability protections for vaccine manufacturers. * * *
Manufacturers are generally immunized from liability * * * if they
have complied with all regulatory requirements * * * . And most
relevant to the present case, the Act expressly eliminates liability
for a vaccine’s unavoidable, adverse side effects. [ Emphasis added.]

* * * *
The Act’s structural quid pro quo leads to the * * * conclu­

sion: The vaccine manufacturers fund from their sales an informal,

efficient compensation program for vaccine injuries; in exchange
they avoid costly tort litigation.

Decision and Remedy The United States Supreme Court
affirmed the federal appellate court’s judgment. The NCVIA pre­
empted the Bruesewitzes’ claim against Wyeth for compensation for
the injury to their daughter caused by the DTP vaccine’s side effects.
In the Court’s opinion, the NCVIA’s compensation program strikes a
balance between paying victims harmed by vaccines and protecting
the vaccine industry from collapsing under the costs of tort liability.

Critical Thinking

• Political If the public wants to change the policy outlined in
this case, which branch of the government—and at what level—
should be lobbied to make the change? Explain.
• Economic What is the public policy expressed by the provi-
sions of the NCVIA?

166 UNIT ONE: The Legal Environment of Business

30301_ch06_hr_151-171.indd 166 8/30/18 12:41 PM

misuses of a product. If it is foreseeable that a person might consume several bags of the
popcorn a day, then the manufacturer might have to warn users about the potential health
risks associated with doing so.16 ■

6–3d Comparative Negligence (Fault)
Developments in the area of comparative negligence, or fault (discussed in the torts chapter),
have also affected the doctrine of strict liability. Today, courts in many jurisdictions consider
the negligent or intentional actions of both the plaintiff and the defendant when apportioning
liability and awarding damages. A defendant may be able to limit at least some liability for
injuries caused by a defective product if it can show that the plaintiff’s misuse of the product
contributed to the injuries.

When proved, comparative negligence differs from other defenses in that it does not
completely absolve the defendant of liability. It can, however, reduce the amount of damages
that will be awarded to the plaintiff. Note that some jurisdictions allow only intentional
conduct to affect a plaintiff’s recovery, whereas others allow ordinary negligence to be used
as a defense to product liability.

6–3e Commonly Known Dangers
As mentioned, the dangers associated with certain products (such as sharp knives and
guns) are so commonly known that manufacturers need not warn users of those dangers.
If a defendant succeeds in convincing the court that a plaintiff’s injury resulted from a com-
monly known danger, the defendant normally will not be liable.

Classic Case Example 6.15 In a case from 1957, Marguerite Jamieson was injured when
an elastic exercise rope slipped off her foot and struck her in the eye, causing a detachment
of the retina. Jamieson claimed that the manufacturer should be liable because it had failed
to warn users that the exerciser might slip off a foot in such a manner.

The court stated that to hold the manufacturer liable in these circumstances “would go
beyond the reasonable dictates of justice in fixing the liabilities of manufacturers.” After all,
stated the court, “almost every physical object can be inherently dangerous or potentially
dangerous in a sense. . . . A manufacturer cannot manufacture a knife that will not cut or a
hammer that will not mash a thumb or a stove that will not burn a finger. The law does not
require [manufacturers] to warn of such common dangers.”17 ■

6–3f Knowledgeable User
A related defense is the knowledgeable user defense. If a particular danger (such as electrical
shock) is or should be commonly known by particular users of the product (such as elec­
tricians), the manufacturer of electrical equipment need not warn these users of the danger.

Spotlight Case Example 6.16 The parents of a group of teenagers who had become over­
weight and developed health problems filed a product liability lawsuit against McDonald’s.
The plaintiffs claimed that the well­known fast­food chain should be held liable for failing to
warn customers of the adverse health effects of eating its food products. The court rejected
this claim, however, based on the knowledgeable user defense.

According to the court, it is well known that the food at McDonald’s contains high levels
of cholesterol, fat, salt, and sugar, and is therefore unhealthful. The court’s opinion, which
thwarted numerous future lawsuits against fast­food restaurants, stated, “If consumers know
(or reasonably should know) the potential ill health effects of eating at McDonald’s, they
cannot blame McDonald’s if they, nonetheless, choose to satiate [satisfy] their appetite with
a surfeit [excess] of supersized McDonald’s products.”18 ■

16. Stults v. International Flavors and Fragrances, Inc., 31 F.Supp.3d 1015 (N.D. Iowa 2014).
17. Jamieson v. Woodward & Lothrop, 247 F.2d 23, 101 D.C.App. 32 (1957).
18. Pelman v. McDonald’s Corp., 237 F.Supp.2d 512 (S.D.N.Y. 2003).

167CHAPTER 6: Product Liability

30301_ch06_hr_151-171.indd 167 8/30/18 12:41 PM

Practice and Review

Shalene Kolchek bought a Great Lakes Spa from Val Porter, a dealer who was selling spas at the
state fair. After Kolchek signed the contract, Porter handed her the manufacturer’s paperwork and
arranged for the spa to be delivered and installed for her. Three months later, Kolchek left her six­
year­old daughter, Litisha, alone in the spa. While exploring the spa’s hydromassage jets, Litisha
got her index finger stuck in one of the jet holes.

Litisha yanked hard, injuring her finger, and then panicked and screamed for help. Kolchek was
unable to remove Litisha’s finger, and the local police and rescue team were called to assist. After a
three­hour operation that included draining the spa, sawing out a section of the spa’s plastic mold­
ing, and slicing the jet casing, Litisha’s finger was freed. Following this procedure, the spa was no
longer functional. Litisha was taken to the local emergency room, where she was told that a bone
in her finger was broken in two places. Using the information presented in the chapter, answer the
following questions.

1. Under which theories of product liability can Kolchek sue Porter to recover for Litisha’s injuries?

2. Would privity of contract be required for Kolchek to succeed in a product liability action against
Great Lakes? Explain.

3. For an action in strict product liability against Great Lakes, what six requirements must Kolchek

4. What defenses to product liability might Porter or Great Lakes be able to assert?

Debate This
All liability suits against tobacco companies for causing lung cancer should be thrown out of court
now and forever.

market-share liability 163
privity of contract 153

product liability 151
statute of repose 168

toll 168
unreasonably dangerous product 156

Key Terms

6–3g Statutes of Limitations and Repose
As mentioned previously, statutes of limitations restrict the time within which an action may
be brought. The statute of limitations for product liability cases varies according to state law.
Usually, the injured party must bring a product liability claim within two to four years. Often,
the running of the prescribed period is tolled (that is, suspended) until the party suffering an
injury has discovered it or should have discovered it.

To ensure that sellers and manufacturers will not be left vulnerable to lawsuits indefinitely,
many states have passed statutes of repose, which place outer time limits on product liability
actions. For instance, a statute of repose may require that claims be brought within twelve
years from the date of sale or manufacture of the defective product. If the plaintiff does not
bring an action before the prescribed period expires, the seller cannot be held liable.

Toll To temporarily suspend the
running of a prescribed time period,
such as a statute of limitations.

Statute of Repose A statute that
places outer time limits on product
liability actions. Such statutes cut
off absolutely the right to bring an
action after a specified period of
time following some event (often the
product’s manufacture or purchase)
other than the occurrence of
an injury.

168 UNIT ONE: The Legal Environment of Business

30301_ch06_hr_151-171.indd 168 8/30/18 12:41 PM

169CHAPTER 6: Product Liability

Issue Spotters
1. Rim Corporation makes tire rims and sells them, to Superior Vehicles, Inc., which installs them on cars. One set of rims is defective, which

an inspection would reveal. Superior does not inspect the rims. The car with the defective rims is sold to Town Auto Sales, which sells
the car to Uri. Soon, the car is in an accident caused by the defective rims, and Uri is injured. Is Superior Vehicles liable? Explain your
answer. (See Product Liability Claims.)

2. Bensing Company manufactures generic drugs for the treatment of heart disease. A federal law requires generic drug makers to use
labels that are identical to the labels on brand-name versions of the drugs. Hunter Rothfus purchased Bensing’s generic drugs in Ohio
and wants to sue Bensing for defective labeling based on its failure to comply with Ohio state common law (rather than the federal
labeling requirements). What defense might Bensing assert to avoid liability under state law? (See Defenses to Product Liability.)
—Check your answers to the Issue Spotters against the answers provided in Appendix D at the end of this text.

Chapter Summary: Product Liability
Product Liability Claims 1. Negligence—The manufacturer must use due care in designing the product, selecting materials,

using the appropriate production process, assembling and testing the product, placing adequate
warnings on the label or product, and inspecting and testing its components. Privity of contract is
not required. A manufacturer is liable for failure to exercise due care to any person who sustains an
injury proximately caused by a negligently made (defective) product.

2. Misrepresentation—Fraudulent misrepresentation of a product may result in product liability based
on the tort of fraud. The misrepresentation must have been made knowingly or with reckless disre-
gard for the facts.

Strict Product Liability 1. Requirements—
a. The defendant must have sold the product in a defective condition.
b. The defendant must normally be engaged in the business of selling that product.
c. The product must be unreasonably dangerous to the user or consumer because of its defective

condition (in most states).
d. The plaintiff must incur physical harm to self or property by use or consumption of the product.
e. The defective condition must be the proximate cause of the injury or damage.
f. The goods must not have been substantially changed from the time the product was sold to the

time the injury was sustained.
2. Product defects—A product may be defective in three basic ways: in its manufacture, in its design,

or in the instructions or warnings that come with it.
3. Market-share liability—When plaintiffs cannot prove which of many distributors of a defective

product supplied the particular product that caused the plaintiffs’ injuries, some courts apply
market-share liability. All firms that manufactured and distributed the harmful product during the
period in question are then held liable for the plaintiffs’ injuries in proportion to the firms’ respective
share of the market, as directed by the court.

4. Other applications—Manufacturers and other sellers are liable for harms suffered by bystanders as
a result of defective products. Suppliers of component parts are strictly liable for defective parts
that, when incorporated into a product, cause injuries to users.

Defenses to Product

1. Preemption—An injured party may not be able to sue the manufacturer of a product that is subject
to comprehensive federal safety regulations, such as medical devices.

2. Assumption of risk—The user or consumer knew of the risk of harm and voluntarily assumed it.
3. Product misuse—The user or consumer misused the product in a way unforeseeable by the manufacturer.
4. Comparative negligence—Liability may be distributed between the plaintiff and the defendant under the

doctrine of comparative negligence if the plaintiff’s misuse of the product contributed to the risk of injury.
5. Commonly known dangers—If a defendant succeeds in convincing the court that a plaintiff’s injury

resulted from a commonly known danger, such as the danger associated with using a sharp knife,
the defendant will not be liable.

6. Knowledgeable user—If a particular danger is or should be commonly known by particular users of
the product, the manufacturer of the product need not warn these users of the danger.

30301_ch06_hr_151-171.indd 169 9/3/18 9:24 AM

170 UNIT ONE: The Legal Environment of Business

Business Scenarios and Case Problems
6–1. Product Liability. Carmen buys a television set manu-

factured by AKI Electronics. She is going on vacation, so she
takes the set to her mother’s house for her mother to use.
Because the set is defective, it explodes, causing considerable
damage to her mother’s house. Carmen’s mother sues AKI for
the damage to her house. Discuss the theories under which
Carmen’s mother can recover from AKI. (See Product Liability

6–2. Product Liability. Jason Clark, an experienced hunter,
bought a paintball gun. Clark practiced with the gun and knew
how to screw in the carbon dioxide cartridge, pump the gun,
and use its safety and trigger. Although Clark was aware that he
could purchase protective eyewear, he chose not to do so. Clark
had taken gun safety courses and understood that it was “com-
mon sense” not to shoot anyone in the face. Clark’s friend, Chris
Wright, also owned a paintball gun and was similarly familiar
with the gun’s use and its risks.

Clark, Wright, and their friends played a game that involved
shooting paintballs at cars whose occupants also had the guns.
One night, while Clark and Wright were cruising with their
guns, Wright shot at Clark’s car but hit Clark in the eye. Clark
filed a product liability lawsuit against the manufacturer
of Wright’s paintball gun to recover for the injury. Clark claimed
that the gun was defectively designed. During the trial, Wright
testified that his gun “never malfunctioned.” In whose favor
should the court rule? Why? (See Product Liability Claims.)

6–3. Product Misuse. Five-year-old Cheyenne Stark was riding
in the backseat of her parents’ Ford Taurus. Cheyenne was
not sitting in a booster seat. Instead, she was using a seatbelt
designed by Ford but was wearing the shoulder belt behind her
back. The car was involved in a collision. As a result, Cheyenne
suffered a spinal cord injury and was paralyzed from the waist
down. The family filed a suit against Ford Motor Co., alleging
that the seatbelt was defectively designed. Could Ford success-
fully claim that Cheyenne had misused the seatbelt? Why or why
not? [Stark v. Ford Motor Co., 365 N.C. 468, 723 S.E.2d 753 (2012)]
(See Defenses to Product Liability.)

6–4. Business Case Problem with Sample Answer—
Product Liability. While driving on Interstate 40
in North Carolina, Carroll Jett became distracted
by a texting system in the cab of his tractor-trailer

truck. He smashed into several vehicles that were slowed or
stopped in front of him, injuring Barbara and Michael Durkee
and others. The injured motorists filed a suit in a federal district
court against Geologic Solutions, Inc., the maker of the texting
system, alleging product liability. Was the accident caused by
Jett’s inattention or the texting device? Should a manufacturer
be required to design a product that is incapable of distracting

a driver? Discuss. [Durkee v. Geologic Solutions, Inc., 502 Fed.
Appx. 326 (4th Cir. 2013)] (See Product Liability Claims.)
— For a sample answer to Problem 6–4, go to Appendix E at the

end of this text.

6–5. Strict Product Liability. Medicis Pharmaceutical
Corp. makes Solodyn, a prescription oral antibiotic. Medicis
warns physicians that “autoimmune syndromes, including
drug-induced lupus-like syndrome,” may be associated with
use of the drug. Amanda Watts had chronic acne. Her physi-
cian prescribed Solodyn. Information included with the drug
did not mention the risk of autoimmune disorders, and Watts
was not otherwise advised of it. She was prescribed the drug
twice, each time for twenty weeks. Later, she experienced debil-
itating joint pain and, after being hospitalized, was diagnosed
with lupus. On what basis could Watts recover from Medicis in
an action grounded in product liability? Explain. [Watts v. Medi-
cis Pharmaceutical Corp., 236 Ariz. 19, 365 P.3d 944 (2016)] (See
Strict Product Liability.)

6–6. Strict Product Liability. Duval Ford, LLC, sold a new Ford
F-250 pickup truck to David Sweat. Before taking delivery, Sweat
ordered a lift kit to be installed on the truck by a Duval subcon-
tractor. Sweat also replaced the tires and modified the sus-
pension system to increase the towing capacity. Later, through
Burkins Chevrolet, Sweat sold the truck to Shaun Lesnick.
Sweat had had no problems with the truck’s steering or sus-
pension, but Lesnick did. He had the steering repaired and made
additional changes, including installing a steering stabilizer and
replacing the tires. Two months later, Lesnick was driving the
truck when the steering and suspension suddenly failed, and
the truck flipped over, causing Lesnick severe injuries. Could
Lesnick successfully claim that Duval and Burkins had failed to
warn him of the risk of a lifted truck? Explain. [Lesnick v. Duval
Ford, LLC, 41 Fla.L.Weekly D281, 185 So.3d 577 (1 Dist. 2016)] (See
Product Liability Claims.)

6–7. Spotlight on Pfizer, Inc.—Defenses to Product
Liability. Prescription drugs in the United States
must be approved by the Food and Drug Administration
(FDA) before they can be sold. A drug maker whose

product is approved through the FDA’s “abbreviated new drug
application” (ANDA) process cannot later change the label
without FDA approval. Pfizer Inc. makes and sells by prescrip-
tion Depo-T, a testosterone replacement drug classified as an
ANDA-approved drug. Rodney Guilbeau filed a claim in a federal
district court against Pfizer, alleging that he sustained a “car-
diovascular event” after taking Depo-T. He sought recovery on
a state-law product liability theory, arguing that Pfizer failed to
warn patients adequately about the risks. He claimed that after
the drug’s approval its maker had become aware of a higher
incidence of heart attacks, strokes, and other cardiovascular

30301_ch06_hr_151-171.indd 170 8/30/18 12:41 PM

171CHAPTER 6: Product Liability

events among those who took it but had not added a warning
to its label. What is Pfizer’s best defense to this claim? Explain.
[Guilbeau v. Pfizer, Inc., 80 F.3d 304 (7th Cir. 2018)] (See Defenses
to Product Liability.)

6–8. A Question of Ethics—The IDDR Approach and
Product Liability. While replacing screws in
a gutter, John Baugh fell off a ladder and landed
headfirst on his concrete driveway. He sustained a

severe brain injury, which permanently limited his ability to
perform routine physical and intellectual functions. He filed a
suit in a federal district court against Cuprum S.A. de C.V., the
company that designed and made the ladder, alleging a design
defect under product liability theories. Baugh weighed nearly
200 pounds, which was the stated weight limit on this ladder.
Kevin Smith, a mechanical engineer, testified on Baugh’s behalf
that the gusset (bracket) on the ladder’s right front side was too

short to support Baugh’s weight. This caused the ladder’s
leg to fail and Baugh to fall. In Smith’s opinion, a longer gus-
set would have prevented the accident. Cuprum argued that
the accident occurred because Baugh climbed too high on the
ladder and stood on its fourth step and pail shelf, neither of
which were intended for the purpose. No other person wit-
nessed Baugh using the ladder prior to his fall, however,
so there was no evidence to support Cuprum’s argument.
[ Baugh v. Cuprum S.A. de C.V., 845 F.3d 838 (7th Cir. 2017) ] (See
Strict Product Liability.)

1. What is a manufacturer’s legal and ethical duty when
designing and making products for consumers? Did Cuprum
meet this standard? Discuss.

2. Did the mechanical engineer’s testimony establish that a
reasonable alternative design was available for Cuprum’s
ladder? Explain.

Critical Thinking and Writing Assignments
6–9.Time-Limited Group Assignment. Bret D’Auguste

was an experienced skier when he rented equip-
ment to ski at Hunter Mountain Ski Bowl in New York.
When D’Auguste entered an extremely difficult trail,

he noticed immediately that the surface consisted of ice with
almost no snow. He tried to exit the steeply declining trail by
making a sharp right turn, but in the attempt, his left ski snapped
off. D’Auguste lost his balance, fell, and slid down the moun-
tain, striking his face and head against a fence along the trail.
According to a report by a rental shop employee, one of the
bindings on D’Auguste’s skis had a “cracked heel housing.”
D’Auguste filed a lawsuit against the bindings’ manufacturer
on a theory of strict product liability. The manufacturer filed a
motion for summary judgment. (See Product Liability Claims.)

1. The first group will take the position of the manufacturer
and develop an argument why the court should grant the
summary judgment motion and dismiss the strict product
liability claim.

2. The second group will take the position of D’Auguste and
formulate a basis for why the court should deny the motion
and allow the strict product liability claim.

3. The third group will evaluate whether D’Auguste assumed
the risk of this type of injury.

4. The fourth group will analyze whether the manufacturer
could claim that D’Auguste’s negligence (under the com-
parative negligence doctrine) contributed to his injury.

30301_ch06_hr_151-171.indd 171 8/30/18 12:41 PM

Intellectual Property Rights7
Intellectual property is any property resulting from intellectual,
creative processes—the products of an individual’s mind, as
suggested in the chapter-opening quotation. Although it is
an abstract term for an abstract concept, intellectual prop-
erty is nonetheless familiar to almost everyone. The apps for
your iPhone or Samsung Galaxy, the movies you see, and
the music you listen to are all forms of intellectual property.

More than two hundred years ago, the framers of the
U.S. Constitution recognized the importance of protecting
creative works in Article I, Section 8. Statutory protection of
these rights began in the 1940s and continues to evolve to
meet the needs of modern society. Suppose that JD  Beverage
Company makes and sells a line of flavored vodkas called
“Hot Lips Vodka.” The name Hot Lips Vodka, along with

an image of puckered lips, appears on the label of each bottle. The color of the lips
logo depends on the vodka’s flavor—red for chili pepper, green for apple, and so on.
JD  Beverage has regis tered trademarks for the name Hot Lips Vodka and the puckered
lips logo, and the company heavily markets the vodka using hot lips as a theme. Sales of
Hot Lips Vodka are at an all-time high.

Now another alcoholic beverage company begins to distribute a line of flavored vodkas
called “Kiss Vodka.” Like the Hot Lips label, the new vodka’s label features the prod-
uct’s name and a puckered lips logo, and the company uses the lips in its marketing.
JD  Beverage believes that Kiss Vodka’s use of the lips logo is diminishing the value of its
Hot Lips brand and cutting into its sales. What can JD Beverage do? The answer lies in
intellectual property law.

Intellectual Property Property
resulting from intellectual and
creative processes.

Learning Objectives
The five Learning Objectives below
are designed to help improve your
understanding. After reading this chapter,
you should be able to answer the follow-
ing questions:

1. Why is the protection of
trademarks important?

2. How does the law protect

3. What laws protect authors’
rights in the works they create?

4. What are trade secrets, and
what laws offer protection
for this form of intellectual

5. How does the TRIPS
agreement protect intellectual
property worldwide?

“My words and
my ideas are my
property, and I’ll
keep and protect
them as surely as
I do my stable of

Jarod Kintz
(American author)










30301_ch07_hr_172-199.indd 172 8/30/18 12:49 PM

7–1 Trademarks
A trademark is a distinctive word, symbol, sound, or design that identifies the manufacturer
as the source of particular goods and distinguishes its products from those made or sold
by others. At common law, the person who used a symbol or mark to identify a business
or product was protected in the use of that trademark. Clearly, if another company used
the trademark, it could lead consumers to believe that its goods were made by the trade-
mark owner. The law seeks to avoid this kind of confusion. (For information on how
companies use trademarks and service marks, see the Linking Business Law to Marketing

Trademark A distinctive word, symbol,
sound, or design that identifies the
manufacturer as the source of particular
goods and distinguishes its products
from those made or sold by others.

Learning Objective 1
Why is the protection of
trademarks important?

Trademarks and service marks consist of much more than well-
known brand names, such as Apple and Amazon. If you become a
marketing manager, you will be involved in creating trademarks or
service marks for your firm, protecting the firm’s existing marks, and ensuring that you do not infringe
on anyone else’s marks. You will need to be aware that parts of a brand name or other forms of
product identification may qualify for trademark protection.

• Catchy phrases—Certain brands have established phrases that are associated with the brands,
such as Nike’s “Just Do It!” Take care to avoid using another brand’s catchy phrase in your own
program. Note, too, that not all phrases can become part of a trademark or service mark. When
a phrase is extremely common, the courts normally will not grant it trademark or service mark

• Abbreviations—The public sometimes abbreviates a well-known trademark. For example, Bud-
weiser beer is known as Bud and Coca-Cola as Coke. Do not use any name for a product or service
that closely resembles a well-known abbreviation, such as Koke for a cola drink.

• Shapes—The shape of a brand name, a service mark, or a container can take on exclusivity if
the shape clearly aids in product or service identification. Just about everyone recognizes the
shape of a Coca-Cola bottle, for example. Avoid using a similar shape for competing products.

• Ornamental colors—Sometimes, color combinations can become part of a service mark or
trademark. For example, FedEx established its unique identity with the use of bright orange and
purple. The courts have protected this color combination. The same holds for the black-and-copper
color combination of Duracell batteries.

• Ornamental designs—Symbols and designs associated with a particular mark are normally
protected, so do not attempt to copy them. For example, Levi’s places a small tag on the left side
of the rear pocket of its jeans. Cross uses a cutoff black cone on the top of its pens.

• Sounds—Sounds can also be protected. For example, the familiar roar of the Metro- Goldwyn-
Mayer (MGM) lion is protected.

When to Protect Trademarks and Service Marks
Once your company has established trademarks or service marks, it must decide how aggressively
to protect those marks. If it fails to protect them, it faces the possibility that the marks will become
generic. As discussed later, aspirin, cellophane, thermos, dry ice, shredded wheat, and many other
familiar terms were once legally protected trademarks.

Business Law
to Marketing

Trademarks and
Service Marks

Should the roar of the MGM lion
be protected under trademark






, I


173CHAPTER 7: Intellectual Property Rights

30301_ch07_hr_172-199.indd 173 8/30/18 12:49 PM

Protecting exclusive rights to a mark can be expensive, however, and a company must determine
how much it is worth to protect its rights. Major expenditures to protect a small company’s trade-
marks and service marks might not be cost-effective.

Critical Thinking
The U.S. Patent and Trademark Office requires that a registered trademark or service mark be put
into commercial use within six months. Extensions can be granted but the mark must be put into
commercial use within three years after the application has been approved. Why do you think the
federal government established this requirement?

In the following Classic Case concerning Coca-Cola, the defendants argued that the Coca-
Cola trademark was not entitled to protection under the law because the term did not accu-
rately represent the product.

Background and Facts John Pemberton, an
Atlanta pharmacist, invented a caramel-colored,
carbonated soft drink in 1886. His bookkeeper, Frank
Robinson, named the beverage Coca-Cola after two
of the ingredients, coca leaves and kola nuts. Asa
Candler bought the Coca-Cola Company in 1891 and
made the soft drink available throughout the United
States and in parts of Canada and Mexico. Candler
continued to sell Coke aggressively and to open up
new markets in Europe and elsewhere, attracting
numerous competitors, some of whom tried to capi-
talize directly on the Coke name.

The Coca-Cola Company brought an action in a federal district
court to enjoin (prevent) other beverage companies (including Koke
Company of America) from using the names Koke and Dope for their
products. The defendants contended that the Coca-Cola trademark
was a fraudulent representation and that Coca-Cola was therefore
not entitled to any help from the courts. By using the Coca-Cola
name, the defendants alleged, the Coca-Cola Company represented
that the beverage contained cocaine (from coca leaves). The dis-
trict court granted the injunction, but the federal appellate court
reversed. The Coca-Cola Company appealed to the United States
Supreme Court.

In the Words of the Court
Mr. Justice HOLMES delivered the opinion of the Court.

* * * *

* * * Before 1900 the beginning of [Coca-Cola’s]
good will was more or less helped by the presence
of cocaine, a drug that, like alcohol or opium, may be
described as a deadly poison or as a valuable item
of the pharmacopoea [collection of pharmaceuticals]
according to the [purposes of the speaker]. * * * After
the Food and Drug Act of June 30, 1906, if not earlier,
long before this suit was brought, it was eliminated
from the plaintiff’s compound.

* * * Since 1900 the sales have increased at a very
great rate corresponding to a like increase in advertis-
ing. The name now characterizes a beverage to be had

at almost any soda fountain. It means a single thing coming from
a single source, and well known to the community. It hardly would
be too much to say that the drink characterizes the name as much
as the name the drink. In other words, Coca-Cola probably means to
most persons the plaintiff’s familiar product to be had everywhere
rather than a compound of particular substances. [Emphasis added.]

* * * Before this suit was brought the plaintiff had advertised
to the public that it must not expect and would not find cocaine,
and had eliminated everything tending to suggest cocaine effects
except the name and the picture of the leaves and nuts, which
probably conveyed little or nothing to most who saw it. It appears
to us that it would be going too far to deny the plaintiff relief
against a palpable fraud because possibly here and there an igno-
rant person might call for the drink with the hope for incipient
cocaine intoxication. The plaintiff’s position must be judged by the

Coca-Cola Co. v. Koke Co. of America
Supreme Court of the United States, 254 U.S. 143, 41 S.Ct. 113, 65 L.Ed. 189 (1920).

Classic Case 7.1

How is Coca-Cola









174 UNIT ONE: The Legal Environment of Business

30301_ch07_hr_172-199.indd 174 8/30/18 12:49 PM

7–1a Statutory Protection of Trademarks
Statutory protection of trademarks and related property is provided at the federal level by
the Lanham Act of 1946.1 The Lanham Act was enacted in part to protect manufacturers
from losing business to rival companies that used confusingly similar trademarks. The
Lanham Act incorporates the common law of trademarks and provides remedies for owners
of trademarks who wish to enforce their claims in federal court. Many states also have trade-
mark statutes.

Trademark Dilution The Federal Trademark Dilution Act2 amended the Lanham Act to
allow trademark owners to bring suits in federal court for trademark dilution. Later, Congress
further amended the law on trademark dilution by passing the Trademark Dilution Revision
Act (TDRA).3

Under the TDRA, to state a claim for trademark dilution, a plaintiff must prove the

1. The plaintiff owns a famous mark that is distinctive.

2. The defendant has begun using a mark in commerce that allegedly is diluting the famous mark.

3. The similarity between the defendant’s mark and the famous mark gives rise to an association
between the marks.

4. The association is likely to impair the distinctiveness of the famous mark or harm its

Trademark dilution laws protect “distinctive” or “famous” trademarks (such as Rolls-
Royce, McDonald’s, Starbucks, and Apple) from certain unauthorized uses. Such a mark
is protected even when the unauthorized use is on noncompeting goods or is unlikely to
confuse. More than half of the states have also enacted trademark dilution laws.

The Marks Need Not Be Identical A famous mark may be diluted not only by the
use of an identical mark but also by the use of a similar mark, provided that it reduces
the value of the famous mark. A similar mark is more likely to lessen the value of a famous
mark when the companies using the marks provide related goods or compete against each
other in the same market.

1. 15 U.S.C. Sections 1051–1128.

Trademark Dilution The
unauthorized use of a distinctive and
famous mark in a way that impairs the
mark’s distinctiveness or harms its

2. 15 U.S.C. Section 1125.
3. Pub. L. No. 103-312, 120 Stat. 1730 (2006).

Know This
Trademark dilution laws
protect the owners of
distinctive marks from
unauthorized uses even
when the defendants’ use
involves noncompeting
goods or is unlikely to
cause confusion.

facts as they were when the suit was begun, not by the facts of a
different condition and an earlier time.

Decision and Remedy The United States Supreme Court
upheld the district court’s injunction. The competing beverage com-
panies were prevented from calling their products Koke. The Court
did not prevent them from calling their products Dope, however.

Critical Thinking

• What If the Facts Were Different? Suppose that Coca-
Cola had been trying to make the public believe that its product

contained cocaine. Would the result in the case likely have been
different? Explain your answer.

• Impact of This Case on Today’s Law In this early
case, the United States Supreme Court made it clear that trade-
marks and trade names (and nicknames for those marks and
names, such as “Coke” for “Coca-Cola”) that are in common use
receive protection under the common law. This holding is sig-
nificant historically because it is the predecessor to the federal
statute later passed to protect trademark rights (the Lanham
Act, discussed next).

175CHAPTER 7: Intellectual Property Rights

30301_ch07_hr_172-199.indd 175 8/30/18 12:49 PM

Spotlight Case Example 7.1 When Samantha Lundberg opened Sambuck’s Coffeehouse in
Astoria, Oregon, she knew that Starbucks was one of the largest coffee chains in the nation.
Starbucks Corporation filed a dilution lawsuit, and a federal court ruled that use of the
Sambuck’s mark constituted trademark dilution because it created confusion for consumers.
Not only was there a “high degree” of similarity between the marks, but also both companies
provided coffee-related services through stand-alone retail stores. Therefore, the use of the
similar mark (Sambuck’s) reduced the value of the famous mark (Starbucks).4 ■

7–1b Trademark Registration
Trademarks may be registered with the state or with the federal government. To register for
protection under federal trademark law, a person must file an application with the U.S. Patent
and Trademark Office in Washington, D.C. A mark can be registered (1) if it is currently in
commerce or (2) if the applicant intends to put it into commerce within six months.

In special circumstances, the six-month period can be extended by thirty months. Thus,
the applicant would have a total of three years from the date of notice of trademark approval
to make use of the mark and to file the required use statement. Registration is postponed
until the mark is actually used.

During this waiting period, an applicant can legally protect his or her trademark against
a third party who has neither used the mark previously nor filed an application for it. Regis-
tration is renewable between the fifth and sixth years after the initial registration and every
ten years thereafter (every twenty years for trademarks registered before 1990).

4. Starbucks Corp. v. Lundberg, 2005 WL 3183858 (D.Or. 2005).

Should the law allow offensive trademark names? It is set-
tled law that the First Amendment generally protects people’s use

of offensive words. Until recently, though, free speech did not necessarily extend to trademarking
a word or name that some Americans find offensive. Under Section 2(a) of the Lanham Act (also
known as the disparagement clause), the federal government could prohibit applicants from trade-
marking offensive (or disparaging) terms. The disparagement clause bars any trademark that “may
disparage . . . or bring into contempt, or disrepute” any persons, institutions, beliefs, or national

symbols. The U.S. Patent and Trademark Office (USPTO) used this clause to cancel
the Washington Redskins football team’s trademarks, which were deemed offensive
to Native Americans.5 Then came another case involving a musical group called The
Slants, which consisted of only Asians.

The members of The Slants picked the name because it was offensive. They
claimed they wanted to turn the phrase upside down “to reappropriate it into some-
thing positive and empowering.” When the trademark registration was reviewed
by the USPTO, however, the USPTO cited Section 2(a) of the Lanham Act to deny
registration. The band contested the ruling, noting that it could not get a record label
deal unless it had a federally registered trademark. The case eventually was heard
by the United States Supreme Court. In arguing before the Court, the band’s attor-
ney pointed out the numerous inconsistencies in the USPTO’s decisions concerning
potentially offensive names. For instance, the USPTO had approved a hip-hop group’s
registration of N.W.A.—which stands for Niggaz Wit Attitudes.

5. See Pro-Football, Inc. v. Amanda Blackhorse, 62 F.Supp.3d 498 (E.D.Va. 2014) and 112 F.Supp.3d 439 (E.D.Va. 2015).

Ethical Issue

Some people find the term “Redskins” offensive,
while others do not. Who should prevail when it
comes to providing trademark protection to such
offensive terms or names, and why?









176 UNIT ONE: The Legal Environment of Business

30301_ch07_hr_172-199.indd 176 8/30/18 12:49 PM

In 2017, the United States Supreme Court decided that the disparagement clause of the Lanham
Act was an unconstitutional restraint on free speech. In a unanimous opinion, Justice Samuel Alito
wrote, “It offends a bedrock First Amendment principle: Speech may not be banned on the ground
that it expresses ideas that offend.” Under this ruling, the federal government can no longer cancel
or refuse to register trademarks—such as The Slants or the Redskins—that officials deem to be
offensive or disparaging.6

6. Matal v. Tam, ___ U.S. ___, 137 S.Ct. 1744, 198 L.Ed.2d 366 (2017).

7–1c Trademark Infringement
Registration of a trademark with the U.S. Patent and Trademark Office gives notice on a
nationwide basis that the trademark belongs exclusively to the registrant. The registrant is
also allowed to use the symbol ® to indicate that the mark has been registered. Whenever
that trademark is copied to a substantial degree or used in its entirety by another, inten-
tionally or unintentionally, the trademark has been infringed (used without authorization).

When a trademark has been infringed, the owner has a cause of action against the
infringer. To succeed in a lawsuit for trademark infringement, the owner must show that
the defendant’s use of the mark created a likelihood of confusion about the origin of the
defendant’s goods or services. (See this chapter’s Beyond Our Borders feature for a discussion
of how confusion can arise from product packaging.) The owner need not prove that the
infringer acted intentionally or that the trademark was registered (although registration does
provide proof of the date of inception of the trademark’s use).

How many U.S. residents have not heard of the pain relief drug Aleve? Not many,
because the product is so heavily adver-
tised. The same could be said about the
painkiller Flanax in Mexico. And in fact,
Aleve and Flanax are the same drug,
owned by the same company, Bayer AG.
Bayer has been selling Flanax in Mexico
and Latin America since the 1970s.

Trademark Rights versus the
Lanham Act
Traditionally, trademark rights have been
territorial. Consequently, Bayer did not reg-
ister the Flanax brand name in the United
States. After all, Bayer never sold or mar-
keted any products under the Flanax name

in this country. Here, it chose to use the
name Aleve. Taking advantage of this lack of
trademark registration in the United States,
a small pharmaceutical company named
Belmora applied for and obtained a U.S.
trademark registration for Flanax in 2005.

Since then, Belmora has used packaging
identical to that used for Bayer’s Flanax in
Mexico, including color schemes and type
style. Within the United States, it has tar-
geted the Mexican American community
with such advertising copy as “Flanax prod-
ucts have been used [for] many, many years
in Mexico [and are] now being produced in
the United States by Belmora.” Clearly, such
practices make it difficult, if not impossible,
for consumers to distinguish between

Bayer’s Mexican
product and the product
offered by Belmora. Bayer petitioned the
U.S. Patent and Trademark Office to cancel
Belmora’s Flanax trademark registration
under the provisions of the Lanham Act.a

A Long Road to Redemption
The Trademark Trial and Appeal Board can-
celled Belmora’s trademark registration,
citing obvious misuse of the Flanax mark.
A Virginia district court reversed the

a. Section 14(3).

Aleve versus FlAnAx—Same Pain Killer, But
in Different Countries

Beyond Our Borders

(Continues )

177CHAPTER 7: Intellectual Property Rights

30301_ch07_hr_172-199.indd 177 8/30/18 12:49 PM

The most commonly granted remedy for trademark infringement is an injunction to pre-
vent further infringement. Under the Lanham Act, a trademark owner that successfully
proves infringement can recover actual damages, plus the profits that the infringer wrong-
fully received from the unauthorized use of the mark. A court can also order the destruction
of any goods bearing the unauthorized trademark. In some situations, the trademark owner
may also be able to recover attorneys’ fees.

At the center of the following case was an injunction granted in an earlier dispute between
two brothers. The injunction prohibited one of the brothers from using trademarks owned
by the other, including a mark featuring their shared last name.

Know This
To prove trademark
infringement, the trade-
mark owner must show
that the other party’s use
of the mark has created
a likelihood of confusion
about the origin of that
party’s goods or services.

Background and Facts Brothers Jimmy and Larry Flynt
owned “The Hustler Club,” a bar and nightclub, in Cincinnati, Ohio.
Larry opened Hustler clubs in other Ohio cities and, within a few
years, began publishing Hustler, a sexually explicit magazine. Larry
formed LFP IP, Inc., and other corporations to conduct his enter-
prises. Many of these used “HUSTLER” or “LARRY FLYNT” as trade-
marks, which LFP owned. Jimmy opened his own store, “Hustler
Cincinnati,” and paid LFP licensing fees to use the “HUSTLER” mark.

When Hustler Cincinnati stopped paying the fees, LFP filed a
suit in a federal district court against the store’s corporate owner,
alleging trademark infringement. The court issued an injunc-
tion prohibiting Jimmy from using the “HUSTLER” mark. Later,
he opened a store called “FLYNT Sexy Gifts.” LFP claimed that
this name was likely to cause confusion with the “LARRY FLYNT”
mark. The court modified the injunction to limit Jimmy’s use of the
“Flynt” name without “Jimmy.” Jimmy appealed.

In the Words of the Court
SUTTON, Circuit Judge.

* * * *
Courts * * * may exercise their sound judicial discretion to

modify an injunction if the circumstances, whether of law or fact,
obtaining at the time of its issuance have changed, or new ones
have since arisen.

* * * The [district] court * * * applied the traditional test for
trademark infringement under federal law, asking whether (1) Larry
and his companies owned the LARRY FLYNT trademark, (2) Jimmy
used the mark in commerce, and (3) the use was likely to cause con-
fusion. The court found all three elements satisfied * * *. Because
the original injunction was tailored to prevent trademark infringe-
ment by [Jimmy] and because Jimmy had committed new viola-
tions, the district court acted appropriately when it modified its
initial grant of relief to cover Jimmy’s conduct at the [new] outlet.

LFP IP, LLC v. Hustler Cincinnati, Inc.
United States Court of Appeals, Sixth Circuit, 810 F.3d 424 (2016).

Case 7.2

trademark registration cancellation, and
Bayer appealed.

The U.S. Court of Appeals for Fourth
Circuit sided with Bayer.b It held that Bayer
had standing under Section 43(a) of the
Lanham Act, which did not require that
Bayer hold a U.S. trademark registration.
Rather, Bayer had clearly been damaged by
Belmora’s activities in the United States,
and that was sufficient under the plain

language of the statute. The court further
ruled that Bayer’s claims were sufficient
under a test established by the Supreme
Court several years earlier.c Bayer’s claim
came “within the zone of interest in a suit
for false advertising.”

The U.S. Supreme Court denied certio-
rari.d That means that, at least in the Fourth

Circuit, the owner of a non-U.S. trademark
can bring an action under the Lanham Act
for the unauthorized use of a brand that the
plaintiff never marketed in this country.

Critical Thinking
The federal district court in Virginia, in
upholding Belmora’s registered trademark,
held that “Bayer could not have an eco-
nomic loss for a market it did not use in
U.S. commerce.” Why did the appellate
court not accept this reasoning?

b. Belmora, LLC v. Bayer Consumer Care, A.G., 819 F.3d 697
(4th Cir. 2016).

c. Lexmark International, Inc. v. Static Control Components,
Inc., ___ U.S. ___, 134 S.Ct. 1377, 188 L.Ed.2d 392 (2014).

d. Cert. denied, Belmora, LLC v. Bayer Consumer Care, A.G.,
___ U.S. ___, 137 S.Ct. 1202, 197 L.Ed.2d 246 (2017).

178 UNIT ONE: The Legal Environment of Business

30301_ch07_hr_172-199.indd 178 8/30/18 12:49 PM

7–1d Distinctiveness of the Mark
A central objective of the Lanham Act is to reduce the likelihood that consumers will be con-
fused by similar marks. For that reason, only those trademarks that are deemed sufficiently
distinctive from all competing trademarks will be protected.

To determine a mark’s strength, courts classify it on a spectrum of five categories, ranging
from strongest to weakest. Fanciful and arbitrary marks employ words and phrases with no
commonly understood connection to the product. These are the two strongest categories
and trigger the highest degree of trademark protection. Suggestive marks, which suggest a
product’s features and require consumers to use some imagination to associate the sugges-
tive mark with the product, are in the middle of the spectrum. The two weakest categories
are descriptive and generic marks. Descriptive marks define a particular characteristic of the
product in a way that does not require any imagination. Generic marks describe the product
in its entirety and are not entitled to trademark protection.

Strong Marks As the most distinctive (strongest) trademarks, fanciful and arbitrary marks
receive automatic protection because they serve to identify a particular product’s source,
as opposed to describing the product itself. Fanciful trademarks often include invented
words. Examples include Xerox for one company’s copiers and Google for another company’s
search engine.

Arbitrary trademarks use words and phrases with no commonly understood connection
to the product, such as Dutch Boy as a name for paint. Even a single letter used in a particular
style can be an arbitrary trademark, such as the stylized X mark that Quiksilver, Inc., uses
on its clothing.

Suggestive trademarks, representing the middle of the spectrum, indicate something about
a product’s nature, quality, or characteristics without describing the product directly. For

The district court’s modified injunction was also suitably tai-
lored to the changed circumstances. Balancing the competing
interests of Larry and Jimmy, the court permitted Jimmy to use
his full name while protecting Larry’s interest in the LARRY FLYNT

* * * *
Jimmy * * * takes issue with some of the factual findings that

the district court used to justify the modified injunction.
But none of the district court’s factual findings is clearly erro-

neous. * * * Larry * * * presented evidence that he used the mark
in connection with a wide range of adult entertainment products,
including the kinds of products sold at Jimmy’s store. Because
product use * * * marks the salient [most noticeable] indicator of
ownership in trademark-infringement actions, the district court
reasonably found that Larry * * * owned the LARRY FLYNT trade-
mark with respect to retail goods. The court also reasonably found
that Larry began using the mark on adult entertainment products
before Jimmy did. * * * And * * * Larry’s company * * * continued
to use that mark in commerce. [Emphasis added.]

In claiming an absence of evidence of consumer confusion,
Jimmy missteps. Some of the evidence comes from Jimmy

himself. When asked about instances where a consumer has been
confused, in terms of whether or not Jimmy was the owner of
the store, Jimmy responded, “I have experienced the confusion in
the names, you know. Jimmy and Larry Flynt, in this market area,
is somewhat synonymous with Hustler or with Flynt. You’re not
going to get around that.”

Decision and Remedy The federal appellate court affirmed
the lower court’s modification of the injunction. The injunction
was initially tailored to prevent Jimmy’s infringement of his broth-
er’s marks. When Jimmy committed a new violation by opening
“FLYNT Sexy Gifts,” the district court acted appropriately in mod-
ifying the injunction to cover this conduct.

Critical Thinking

• E-Commerce Can Jimmy use his last name—the name that
he shares with his brother—as a domain name? Why or why not?

• What If the Facts Were Different? Suppose that Jimmy
had used the marks at the center of this case on an entirely dif-
ferent line of goods, not adult entertainment products. Would the
result have been the same? Explain.

179CHAPTER 7: Intellectual Property Rights

30301_ch07_hr_172-199.indd 179 8/30/18 12:49 PM

instance, “Dairy Queen” suggests an association between its products and milk, but it does
not directly describe ice cream. Suggestive marks can be transformed into strong marks by
achieving a high degree of marketplace recognition, such as through substantial advertising.

Secondary Meaning Descriptive terms, geographic terms, and personal names are not
inherently distinctive and do not receive protection under the law until they acquire a
secondary meaning. Whether a secondary meaning becomes attached to a term or name
usually depends on how extensively the product is advertised, the market for the product,
the number of sales, and other factors.

A secondary meaning may arise when customers begin to associate a specific term or
phrase (such as Calvin Klein) with specific trademarked items made by a particular company
(designer clothing and goods). Once a secondary meaning is attached to a term or name, a
trademark is considered distinctive and is protected. Even a color can qualify for trademark
protection, such as the color schemes used by college sports teams.

Case Example 7.2 Federal Express Corporation (FedEx) pro-
vides transportation and delivery services worldwide using the
logo FedEx in a specific color combination. FedEx sued a com-
petitor, JetEx Management Services, Inc., for using the same color
combination and a similar name and logo. JetEx also mimicked
FedEx’s trademarked slogan (“The World on Time” for FedEx,
and “Keeping the World on Time” for JetEx). FedEx alleged
trademark infringement and dilution, among other claims.

A federal district court in New York granted a permanent
injunction to block JetEx from using the infringing mark in
FedEx colors. When JetEx (now operating as JetEx Air Express)
continued to use the infringing mark on its vehicles, FedEx went
back to the court to enforce the injunction. The court entered a
default judgment against JetEx and awarded FedEx an additional
$25,000 in attorney’s fees and court costs.7 ■

Generic Terms Generic terms that refer to an entire class of
products, such as bicycle and computer, receive no protection,

even if they acquire secondary meanings. A particularly thorny problem for a business
arises when its trademark acquires generic use. For instance, aspirin and thermos were
originally trademarked products, but today the words are used generically. Other trade-
marks that have acquired generic use include escalator, trampoline, raisin bran, dry ice,
lanolin, linoleum, nylon, and cornflakes.

A trademark that is commonly used does not automatically become generic, though.
Case Example 7.3 David Elliot and Chris Gillespie sought to register numerous domain names
(Internet addresses), including “” and “” They were
unable to register the names because all of them used the word google, a trademark of
Google, Inc.

Elliot and Gillespie brought an action in federal court to have the Google trademark
canceled because it had become a generic term. They argued that because most people now
use google as a verb (“to google”) when referring to searching the Internet with any search
engine (not just Google), the term should no longer be protected. The court held that even
if people do use the word google as a verb, it is still a protected trademark if consumers
associate the noun with one company. The court concluded that “the primary significance
of the word google to a majority of the public who utilize Internet search engines is a desig-
nation of the Google search engine.”8 ■

7. Federal Express Corp. v. JetEx Air Express, Inc., ___ F.Supp.3d ___, 2017 WL 816479 (E.D.N.Y. 2017).
8. Elliot v. Google, Inc., 45 F.Supp.3d 1156 (D.Ariz. 2014).

Why should a company’s distinctive colors, such those for FedEx,
be protected under trademark law?








180 UNIT ONE: The Legal Environment of Business

30301_ch07_hr_172-199.indd 180 8/30/18 12:49 PM

7–1e Service, Certification, and Collective Marks
A service mark is essentially a trademark that is used to distinguish the services (rather than
the products) of one person or company from those of another. For instance, each airline
has a particular mark or symbol associated with its name. Titles and character names used
in radio and television are frequently registered as service marks.

Other marks protected by law include certification marks and collective marks. A
certification mark is used by one or more persons, other than the owner, to certify the region,
materials, mode of manufacture, quality, or other characteristic of specific goods or services.
Certification marks include such marks as “Good Housekeeping Seal of Approval” and “UL

When used by members of a cooperative, association, labor union, or other organization,
a certification mark is referred to as a collective mark. Example 7.4 Collective marks appear at
the end of a movie’s credits to indicate the various associations and organizations that par-
ticipated in making the movie. The mark “CPA” is a collective mark used by members of the
Society of Certified Public Accountants. ■

7–1f Trade Dress
The term trade dress refers to the image and overall appearance of a product. Trade dress
is a broad concept that can include all or part of the total image or overall impression
created by a product or its packaging. Example 7.5 The distinctive decor, menu, and style
of service of a particular restaurant may be regarded as the restaurant’s trade dress. Simi-
larly, trade dress can include the layout and appearance of a catalogue, the use of a light-
house as part of a golf hole, the fish shape of a cracker, or the G-shaped design of a Gucci
watch. ■

Basically, trade dress is subject to the same protection as trademarks. In cases involv-
ing trade dress infringement, as in trademark infringement cases, a major consideration is
whether consumers are likely to be confused by the allegedly infringing use. Example 7.6 Con-
verse makes All-Star shoes, which were the first shoes ever endorsed by a famous basketball
player, Chuck Taylor. Nike, Inc., which now owns Converse, sued thirty-one companies,
including Ralph Lauren, for manufacturing very similar versions of these shoes, claiming that
consumers are likely to be confused. The knockoffs use the same white rubber soles, rubber
cap on the toes, canvas tops, and conspicuous stitching as used on All-Stars. Ralph Lauren
ultimately agreed to settle its dispute with Nike by destroying all remaining fake All-Stars
and paying Nike an undisclosed sum. ■

7–1g Counterfeit Goods
Counterfeit goods copy or otherwise imitate trademarked goods but are not genuine. The
importation of goods bearing counterfeit trademarks poses a significant problem for U.S.
businesses, consumers, and law enforcement (see the Business Web Log feature for an exam-
ple). In addition to having negative financial effects on legitimate businesses, sales of certain
counterfeit goods, such as pharmaceuticals and nutritional supplements, can present serious
public health risks.

Stop Counterfeiting in Manufactured Goods Act The Stop Counterfeiting in Manu-
factured Goods Act9 (SCMGA) was enacted to combat counterfeit goods. The act made it a
crime to intentionally traffic in, or attempt to traffic in, counterfeit goods or services, or to
knowingly use a counterfeit mark on or in connection with goods or services.

Service Mark A trademark that
is used to distinguish the services
(rather than the products) of one
person or company from those of

Certification Mark A mark used by
one or more persons, other than the
owner, to certify the region, materials,
mode of manufacture, quality, or
other characteristic of specific goods
or services.

Collective Mark A mark used
by members of a cooperative,
association, union, or other
organization to certify the region,
materials, mode of manufacture,
quality, or other characteristic of
specific goods or services.

Trade Dress The image and overall
appearance of a product.

9. Pub. L. No. 109-181 (2006), which amended 18 U.S.C. Sections 2318–2320.

181CHAPTER 7: Intellectual Property Rights

30301_ch07_hr_172-199.indd 181 8/30/18 12:49 PM

Before this act, the law did not prohibit the creation or shipment of counterfeit labels that
were not attached to products. Therefore, counterfeiters would make labels and packaging
bearing a counterfeit trademark, ship the labels to another location, and then affix them to
inferior products to deceive buyers. The SCMGA closed this loophole by making it a crime
to traffic in counterfeit labels, stickers, packaging, and the like, whether or not they are
attached to goods.

Penalties for Counterfeiting Persons found guilty of violating the SCMGA may be fined
up to $2 million or imprisoned for up to ten years (or more if they are repeat offenders). If
a court finds that the statute was violated, it must order the defendant to forfeit the coun-
terfeit products (which are then destroyed), as well as any property used in the commission
of the crime. The defendant must also pay restitution to the trademark holder or victim in
an amount equal to the victim’s actual loss.

Case Example 7.7 Charles Anthony Jones pleaded guilty to trafficking in counterfeit pre-
scription drugs for erectile dysfunction. The court sentenced Jones to thirty-seven months
in prison and ordered him to pay more than $600,000 in restitution. Jones appealed, arguing
that the amount awarded was more than the pharmaceutical companies’ actual losses. The
court agreed. The pharmaceutical companies were entitled only to their lost net profits rather
than the retail price of the genuine drugs.10 ■

10. United States v. Jones, 616 Fed.Appx. 726 (5th Cir. 2015).

The world’s largest online retailer is fac-ing at least one lawsuit alleging trade-
mark infringement, copyright infringement,
and other torts. Electronic cable desig-
ner and manufacturer Fuse Chicken, LLC,
discovered that Amazon consumers were
frequently being sold fake Fuse Chicken
cables for their smartphones.

The reality today is that when any
branded product be comes well known,
cheap imitations become a problem.
Amazon apparently did not do enough to
prevent the sale of such inferior copies of
Fuse Chicken’s trademarked and copy-
righted products. For example, Amazon
sold Fuse Chicken’s Bobine Auto iPhone
Lightning Car Dock to a customer who gave
it a one-star review because it broke within
a week. The product was clearly a counter-
feit version.

Fuse Chicken attempted to resolve
the issue of counterfeit products with
Amazon. When Fuse Chicken received

little satisfaction, it filed suit.a In its law-
suit, Fuse Chicken pointed out that Amazon
does not control the products sold via its
“Sell Yours Here” listing site. Anybody can
sell a trademarked or copyrighted product
via this site. According to the lawsuit,
“Amazon makes no effort to determine
whether the products sold by such third-
party sellers are authentic.”

Another disgruntled trademark and
copyright holder is Randy Hetrick, the seller
of the TRX Training System. He claims that
fake TRX systems are costing him $100
million a year—twice his annual sales.
Currently, he and his employees scour the
Amazon website regularly to inform the
online retailer about third-party sellers of
fake items that should be eliminated from
Amazon’s system.

Key Point
Large-scale online retailing continues to
grow, and Amazon continues to dominate
this sector. The number of counterfeit prod-
ucts is growing, too. Amazon has decided to
fight back. It has built teams in the United
States and Europe that work with major
brands. Together, they are developing a reg-
istry to help prevent fakes. Amazon is ask-
ing brand owners to register with its online
store. Then Amazon requires any market-
place merchant who lists registered products
to prove that it has the brands’ permission to
sell them online. Other online resellers, such
as Alibaba and eBay, also face counterfeit
issues. It’s a multibillion-dollar problem that
won’t go away soon.

a. Fuse Chicken, LLC. v., Inc., Case: 5:17-c-b-
01538-SL Doc # 1 Filed July 21, 2017 in Northern District
Ohio Court.

Business Web logAmazon Faces Fake Products

182 UNIT ONE: The Legal Environment of Business

30301_ch07_hr_172-199.indd 182 8/30/18 12:49 PM

Combating Online Sales of Counterfeit Goods The United
States cannot prosecute foreign counterfeiters under U.S. laws,
because our national laws do not apply to them. One effective
tool that U.S. officials are using to combat online sales of coun-
terfeit goods is to obtain a court order to close down the domain
names of websites that sell such goods.

Example 7.8 U.S. agents have shut down hundreds of domain
names on the Monday after Thanksgiving (“Cyber Monday”).
Shutting down the websites, particularly on key shopping days,
prevents some counterfeit goods from entering the United
States. Europol, an international organization, has also used
this tactic. ■

7–1h Trade Names
Trademarks apply to products. The term trade name refers to part
or all of a business’s name, whether the business is a sole propri-
etorship, a partnership, or a corporation. Generally, a trade name
is directly related to a business and its goodwill.

A trade name may be protected as a trademark if the trade name is the same as the com-
pany’s trademarked product—for instance, Coca-Cola. Unless it is also used as a trademark
or service mark, a trade name cannot be registered with the federal government. Trade names
are protected under the common law, but only if they are unusual or fancifully used. The
word Safeway, for instance, was sufficiently fanciful to obtain protection as a trade name for
a grocery chain.

7–1i Licensing
One way to avoid litigation and still make use of another’s trademark or other form of intel-
lectual property is to obtain a license to do so. A license in this context is an agreement
permitting the use of a trademark, copyright, patent, or trade secret for certain limited pur-
poses. The party that owns the intellectual property rights and issues the license is the
licensor, and the party obtaining the license is the licensee.

A license grants only the rights expressly described in the license agreement. A licensor
might, for instance, allow the licensee to use a trademark as part of its company or domain
name, but not otherwise use the mark on any products or services. Disputes frequently arise
over licensing agreements, particularly when the license involves Internet use.11

7–2 Patents
A patent is a grant from the government that gives an inventor the exclusive right to make,
use, and sell an invention for a period of twenty years. Patents for designs, as opposed to
inventions, are given for a fourteen-year period. The applicant must demonstrate to the
satisfaction of the U.S. Patent and Trademark Office that the invention, discovery, process,
or design is novel, useful, and not obvious in light of current technology.

Until recently, patent law in the United States differed from the laws of many other
countries because the first person to invent a product or process obtained the patent rights,
rather than the first person to file for a patent. It was often difficult to prove who invented
an item first, however, which prompted Congress to change the system by passing the

Trade Name A name that a
business uses to identify itself and
its brand. A trade name is directly
related to a business’s reputation
and goodwill, and is protected under
trademark law.

License An agreement by the
owner of intellectual property to
permit another to use a trademark,
copyright, patent, or trade secret for
certain limited purposes.

11. See, for instance, Diebold Incorporated v. QSI, Inc., ___F.Supp. 3d ___, 2017 WL 3219866 (N.D. Ohio 2017).

Patent A property right granted by
the federal government that gives an
inventor an exclusive right to make,
use, and sell an invention for a
limited time.

What are the limits on restitution as a penalty for selling
counterfeit prescription pills, such as Viagra?







Learning Objective 2
How does the law protect

183CHAPTER 7: Intellectual Property Rights

30301_ch07_hr_172-199.indd 183 8/30/18 12:49 PM

America Invents Act.12 Now, the first person to file an application for a patent on a product
or process will receive patent protection. In addition, the law established a nine-month limit
for challenging a patent on any ground.

The period of patent protection begins on the date when the patent application is
filed, rather than when the patent is issued, which can sometimes be years later. After the
patent period ends (either fourteen or twenty years later), the product or process enters
the public domain, and anyone can make, sell, or use the invention without paying the
patent holder.

7–2a Searchable Patent Databases
A significant development relating to patents is the availability online of the world’s patent
databases. The website of the U.S. Patent and Trademark Office ( provides
searchable databases covering U.S. patents granted since 1976. The website the European
Patent Office ( provides online access to 50 million patent documents in more
than seventy nations through a searchable network of databases.

Businesses use these searchable databases in many ways. Companies may conduct patent
searches to list or inventory their patents, which are valuable assets. Patent searches also
enable companies to study trends and patterns in a specific technology or to gather infor-
mation about competitors in the industry.

7–2b What Is Patentable?
Under the Patent Act, “[w]hoever invents or discovers any new and useful process, machine,
manufacture, or composition of matter, or any new and useful improvement thereof, may
obtain a patent therefor, subject to the conditions and requirements of this title.”13 Thus, to
be patentable, an invention must be novel, useful, and not obvious in light of current

Almost anything is patentable, except the laws of nature, natural phenomena, and abstract
ideas (including algorithms14). Even artistic methods and works of art, certain business
processes, and the structures of storylines are patentable, provided that they are novel and
not obvious.15 Plants that are reproduced asexually (by means other than from seed), such
as hybrid or genetically engineered plants, are patentable in the United States, as are genet-
ically engineered (or cloned) microorganisms and animals.

As mentioned, abstract ideas (including theories and concepts) are not patentable. For
this reason, ideas that involve analyzing information and displaying results have often been
found ineligible for patents. Such an idea becomes patentable only if particular aspects or
combinations of elements transform it into a patent- eligible claim. Case Example 7.9 West
View Research, LLC (WVR), holds numerous patents in a range of technologies, including
speech recognition, wireless mobile devices, and medical devices. WVR filed a suit in federal
court against several automakers, including Audi, Hyundai, Nissan, Tesla, and Volkswagen,
alleging patent infringement.

WVR claimed that the carmakers had infringed two of its patents by selling vehicles with
touch-screen displays that offered navigation, traffic, and weather information. A federal
district court held in favor of the defendants, and a federal appellate court affirmed. The
appellate court reasoned that the two patents simply described abstract ideas (analyzing

12. The full title of this law is the Leahy-Smith America Invents Act, Pub. L. No. 112-29 (2011), which amended 35 U.S.C. Sections 1, 41, and 321.
13. 35 U.S.C. Section 101.
14. An algorithm is a step-by-step procedure, formula, or set of instructions for accomplishing a specific task. An example is the set of rules used

by a search engine to rank the listings contained within its index in response to a particular query.
15. For a United States Supreme Court case discussing the obviousness requirement, see KSR International Co. v. Teleflex, Inc., 550 U.S. 398, 127

S.Ct. 1727, 167 L.Ed.2d 705 (2007). For a discussion of business process patents, see In re Bilski, 545 F3d 943 (Fed. Cir. 2008).

Know This
A patent is granted to
inventions that are novel
(new) and not obvious in
light of prior discoveries.

184 UNIT ONE: The Legal Environment of Business

30301_ch07_hr_172-199.indd 184 8/30/18 12:49 PM

information and displaying results) and lacked an inventive ele-
ment that could transform them into patent-eligible inventions.
WVR’s two patents were thus invalid.16 ■

7–2c Patent Infringement
If a firm makes, uses, or sells another’s patented design, product,
or process without the patent owner’s permission, it commits
the tort of patent infringement. Patent infringement may occur
even though the patent owner has not put the patented product
in commerce. Patent infringement may also occur even though
not all features or parts of an invention are copied. (To infringe
the patent on a process, however, all steps or their equivalent
must be copied.)

Patent Infringement Suits and High-Tech Companies
Obviously, companies that specialize in developing new technol-
ogy stand to lose significant profits if someone “makes, uses, or
sells” devices that incorporate their patented inventions. Because these firms are the holders
of numerous patents, they are frequently involved in patent infringement lawsuits (as well
as other types of intellectual property disputes).

A complication in many such lawsuits is their global scope. Many companies that make
and sell electronics and computer software and hardware are based in foreign nations (for
instance, Sony is a Japanese firm). Foreign firms can apply for and obtain U.S. patent protec-
tion on items that they sell within the United States, just as U.S. firms can obtain protection
in foreign nations where they sell goods. In the United States, however, no patent infringe-
ment occurs when a patented product is made and sold in another country.

Apple, Inc. versus Samsung Electronics Company Apple sued Samsung in fed-
eral court alleging that Samsung’s Galaxy smartphones and tablets using Google’s HTC
Android operating system infringe on Apple’s patents. Apple has design patents that cover
its devices’ graphical user interface (the display of icons on the home screen), shell, and
screen and button design. Apple has also patented the way information is displayed on
iPhones and other devices, the way windows pop open, and the way information is scaled
and rotated.

In 2014, a jury found that Samsung had willfully infringed five of Apple’s patents and
awarded $399 million in damages. The parties appealed. A judge later reduced the amount
of damages awarded on the patent claims. Litigation between the two companies continued.
In 2015, a federal appellate court held that elements of the physical design of these two
manufacturers’ mobile devices and their on-screen icons were functional. Therefore, they
were not protected as trade dress under the Lanham Act.

In 2016, the United States Supreme Court reversed and remanded. The Court held that
the Patent Act provision governing damages for design patent infringement encompasses
both a product sold to a consumer and a component of that product. Therefore, components
of the infringing smartphones could be considered relevant to the damages, even though
consumers could not purchase those components separately from the smartphones. The
Court left it up to the lower courts to determine the appropriate amount of damages. In 2017,
a federal appellate court sent the case back to the trial court.17

16. West View Research, LLC v. Audi AG, Volkswagen AG, 685 Fed.Appx. 923 (Fed.Cir. 2017).
17. Apple, Inc. v. Samsung Electronics Co., 678 Fed.Appx. 1012 (Fed.Cir. 2017); Samsung Electronics Co. v. Apple, Inc., ___ U.S. ___, 137 S.Ct.

429, 196 L.Ed.2d 363 (2016).

Why are abstract ideas, such as the in-dash navigation system in
new cars, ineligible for patent protection?










“To invent, you need a
good imagination and
a pile of junk.”

Thomas Edison
(American inventor)

185CHAPTER 7: Intellectual Property Rights

30301_ch07_hr_172-199.indd 185 8/30/18 12:49 PM

7–2d Remedies for Patent Infringement
If a patent is infringed, the patent holder may sue for relief in
federal court. The patent holder can seek an injunction against
the infringer and can also request damages for royalties and lost
profits. (A royalty is a payment made to a patent or copyright
holder for the privilege of using the patent or the copyrighted
work.) In some cases, the court may grant the winning party
reimbursement for attorneys’ fees and costs. If the court deter-
mines that the infringement was willful, the court can triple the
amount of damages awarded (treble damages).

In the past, permanent injunctions were routinely granted
to prevent future infringement. Today, however, a patent holder
must prove that it has suffered irreparable injury and that the
public interest would not be disserved by a permanent injunc-
tion. Thus, courts have the discretion to decide what is equitable
in the circumstances and to consider the public interest rather
than just the interests of the parties.

Spotlight Case Example 7.10 Cordance Corporation developed
some of the technology and software that automates Internet
communications. Cordance sued, Inc., for pat-
ent infringement, claiming that Amazon’s one-click purchas-

ing interface infringed on one of Cordance’s patents. After a jury found Amazon guilty of
infringement, Cordance requested the court to issue a permanent injunction against Ama-
zon’s infringement or, alternatively, to order Amazon to pay Cordance an ongoing royalty.

The court refused to issue a permanent injunction, because Cordance had not proved that
it would otherwise suffer irreparable harm. Cordance and Amazon were not direct compet-
itors in the relevant market. Cordance had never sold or licensed the technology infringed
by Amazon’s one-click purchasing interface and had presented no market data or evidence
to show how the infringement negatively affected Cordance. The court also refused to impose
an ongoing royalty on Amazon.18 ■

7–3 Copyrights
A copyright is an intangible property right granted by federal statute to the author or origina-
tor of certain literary or artistic productions. The 1976 Copyright Act,19 as amended, governs
copyrights. Works created after January 1, 1978, are automatically given statutory copyright
protection for the life of the author plus 70 years. For copyrights owned by publishing com-
panies, the copyright expires 95 years from the date of publication or 120 years from the
date of creation, whichever is first. For works by more than one author, the copyright expires
70 years after the death of the last surviving author.

Case Example 7.11 The popular character Sherlock Holmes originated in stories written by
Arthur Conan Doyle and published from 1887 through 1927. Over the years, elements of
the characters and stories created by Doyle have appeared in books, movies, and television
series, including Elementary on CBS and Sherlock on BBC. Before 2013, those who wished
to use the copyrighted Sherlock material had to pay a licensing fee to Doyle’s estate. Then,
in 2013, the editors of a book of Holmes-related stories filed a lawsuit in federal court claim-
ing that the basic Sherlock Holmes story elements introduced before 1923 should no longer

18. Cordance Corp. v., Inc., 730 F.Supp.2d 333 (D.Del. 2010).

Copyright The exclusive right of an
author or originator of a literary or
artistic production to publish, print,
sell, or otherwise use that production
for a statutory period of time.

19. 17 U.S.C. Sections 101 et seq.

Learning Objective 3
What laws protect authors’
rights in the works they create?

How did the Supreme Court rule on Apple’s claim that Samsung
should pay damages for Samsung’s patent infringement on
Apple’s product components?







186 UNIT ONE: The Legal Environment of Business

30301_ch07_hr_172-199.indd 186 8/30/18 12:49 PM

be protected. The court agreed and ruled that these elements have entered the
public domain—that is, the copyright has expired, and they can be used without
permission.20 ■

7–3a Registration
Copyrights can be registered with the U.S. Copyright Office (
in Washington, D.C. Registration is not required, however. A copyright owner need
not place a © or Copr. or Copyright on the work to have the work protected against
infringement. Chances are that if somebody created it, somebody owns it.

Generally, copyright owners are protected against the following:

1. Reproduction of the work.

2. Development of derivative works.

3. Distribution of the work.

4. Public display of the work.

7–3b What Is Protected Expression?
Works that are copyrightable include books, records, films, artworks, architectural
plans, menus, music videos, product packaging, and computer software. To be pro-
tected, a work must be “fixed in a durable medium” from which it can be perceived,
reproduced, or communicated. As noted, protection is automatic, and registration
is not required.

To obtain protection under the Copyright Act, a work must be original and fall
into one of the following categories:

1. Literary works (including newspaper and magazine articles, computer and training manuals, cata-
logues, brochures, and print advertisements).

2. Musical works and accompanying words (including advertising jingles).

3. Dramatic works and accompanying music.

4. Pantomimes and choreographic works (including ballets and other forms of dance).

5. Pictorial, graphic, and sculptural works (including cartoons, maps, posters, statues, and even stuffed

6. Motion pictures and other audiovisual works (including multimedia works).

7. Sound recordings.

8. Architectural works.

Section 102 Exclusions Generally, anything that is not an original expression will not
qualify for copyright protection. Facts widely known to the public are not copyrightable.
Page numbers are not copyrightable because they follow a sequence known to everyone.
Mathematical calculations are not copyrightable.

In addition, it is not possible to copyright an idea. Section 102 of the Copyright Act spe-
cifically excludes copyright protection for any “idea, procedure, process, system, method of
operation, concept, principle, or discovery, regardless of the form in which it is described,
explained, illustrated, or embodied.” Thus, others can freely use the underlying ideas or
principles embodied in a work. What is copyrightable is the particular way in which an idea
is expressed. Whenever an idea and an expression are inseparable, the expression cannot
be copyrighted.

20. Klinger v. Conan Doyle Estate, Ltd., 988 F.Supp.2d 879 (N.D.III. 2013).

Know This
A creative work that is
not copyrightable may
be protected by other
intellectual property law.

Why have the story elements from the
famous Sherlock Holmes books entered the
public domain?













187CHAPTER 7: Intellectual Property Rights

30301_ch07_hr_172-199.indd 187 8/30/18 12:49 PM

An idea and its expression, then, must be separable to be copyrightable. Thus, for the
design of a useful item to be copyrightable, the sculptural features—that is, the way it
looks—must be separate from its utilitarian (functional) purpose. Case Example 7.12 A hookah
is a device for smoking tobacco by filtering the smoke through water held in a container at
the base of the hookah. Inhale, Inc., claimed to hold a registered copyright on a hookah that
covered the shape of the hookah’s water container.

Inhale filed a suit in a federal district court against Starbuzz Tobacco, Inc., for copyright
infringement, alleging that Starbuzz sold hookahs with water containers shaped exactly like
the Inhale containers. The district court held that the shape of the water container on
Inhale’s hookahs was not copyrightable, and issued a summary judgment in Starbuzz’s favor.
A federal appellate court affirmed. “The shape of a container is not independent of the
container’s utilitarian function—to hold the contents within its shape—because the shape
accomplishes the function.”21 ■

Compilations of Facts As mentioned, facts widely known to the public are not copy-
rightable. Compilations of facts, however, may be copyrightable. Under Section 103 of the
Copyright Act, a compilation is a work formed by the collection and assembling of pre-
existing materials or of data that are selected, coordinated, or arranged in such a way that
the resulting work as a whole constitutes an original work of authorship.

The key requirement for the copyrightability of a compilation is originality. For instance,
a template form used by emergency room physicians to record patient information is not
original and does not qualify for copyright protection.

7–3c Copyright Infringement
Whenever the form or expression of an idea is copied, an infringement of copyright occurs.
The reproduction does not have to be exactly the same as the original, nor does it have to
reproduce the original in its entirety. If a substantial part of the original is reproduced, copy-
right infringement has occurred.

Example 7.13 Ed Sheeran was accused of copyright infringement over his hit song “Photo-
graph.” Sheeran allegedly copied much of the song note for note from “Amazing,” a single
released a few years earlier by X Factor winner Matt Cardle. The songwriters of “Amazing”
sued Sheeran, who reportedly settled the case for $20 million in 2017. ■

Note that when a copyright owner grants to another a license to use the work, the owner
waives his or her right to sue that party (the licensee) for copyright infringement. See this
chapter’s Business Law Analysis feature for an example of how a license can be used as a
defense to copyright infringement claims.

Remedies for Copyright Infringement Those who infringe copyrights may be liable
for damages or criminal penalties. These range from actual damages or statutory damages,
imposed at the court’s discretion, to criminal proceedings for willful violations. Actual
damages are based on the harm caused to the copyright holder by the infringement, while
statutory damages, not to exceed $150,000, are provided for under the Copyright Act. In
addition, criminal proceedings may result in fines and/or imprisonment. In some instances,
a court may grant an injunction against the infringer.

Spotlight Case Example 7.14 Rusty Carroll operated an online term paper business, R2C2,
Inc., that offered up to 300,000 research papers for sale on nine different websites. Individ-
uals whose work was posted on these websites without their permission filed a lawsuit
against Carroll for copyright infringement. Because Carroll repeatedly failed to comply with
court orders regarding discovery, the court found that the copyright infringement was likely

21. Inhale, Inc. v. Starbuzz Tobacco, Inc., 755 F.3d 1038 (9th Cir. 2014).

“Don’t worry about
people stealing an idea.
If it’s original and it’s
any good, you’ll have
to ram it down their

Howard Aiken
(Engineer and pioneer in computing)

Is the shape of this hookah’s
water container copyrightable?









188 UNIT ONE: The Legal Environment of Business

30301_ch07_hr_172-199.indd 188 8/30/18 12:49 PM

Redwin Wilchcombe composed, per-formed, and recorded a song called “Tha
Weedman” at the request of Lil Jon. Lil Jon,
who was then a member of Lil Jon & the
East Side Boyz (LJESB), wanted to use “Tha
Weedman” for LJESB’s album Kings of Crunk.

Wilchcombe was not paid but was given
credit on the album as a producer. After the
album had sold 2 million copies, Wilchcombe
filed a suit against LJESB, alleging copyright
infringement. The defendants claimed that
they had a license to use the song. Which
party should win the lawsuit? Explain.

Analysis: A license is permission granted
by a property owner to another to make, sell,
or use the item. If the property is a copy-
righted work, the copyright owner waives
the right to sue the licensee for copyright
infringement while the license is in effect.

Result and Reasoning: In this situa-
tion, the parties’ conduct established that
Wilchcombe gave LJESB a license to use
his song. He created the song at Lil Jon’s
request. He knew that it would be used on
LJESB’s album and that it would be widely

distributed. Wilchcombe never indicated
to the defendants that their use of the
song would constitute copyright infringe-
ment. Thus, the license constitutes a valid
defense to Wilchcombe’s allegation of
copyright infringement, and the defendants
(LJESB) should win the lawsuit.

Business law

to continue unless an injunction was issued. The court therefore issued a permanent injunc-
tion prohibiting Carroll and R2C2 from selling any term paper without sworn documentary
evidence that the paper’s author had given permission.22 ■

The “Fair Use” Exception An exception to liability for copyright infringement is made
under the “fair use” doctrine. In certain circumstances, a person or organization can repro-
duce copyrighted material without paying royalties. Section 107 of the Copyright Act pro-
vides as follows:

[T]he fair use of a copyrighted work, including such use by reproduction in copies or
phonorecords or by any other means specified by [Section 106 of the Copyright Act],
for purposes such as criticism, comment, news reporting, teaching (including multiple
copies for classroom use), scholarship, or research, is not an infringement of copyright.
In determining whether the use made of a work in any particular case is a fair use the
factors to be considered shall include—

(1) the purpose and character of the use, including whether such use is of a commercial
nature or is for nonprofit educational purposes;

(2) the nature of the copyrighted work;
(3) the amount and substantiality of the portion used in relation to the copyrighted

work as a whole; and
(4) the effect of the use upon the potential market for or value of the copyrighted work.

What Is Fair Use? Because the fair use guidelines are very broad, the courts determine
whether a particular use is fair on a case-by-case basis. Thus, anyone reproducing copy-
righted material may be committing a violation. In determining whether a use is fair, courts
have often considered the fourth factor to be the most important. Case Example 7.15 A num-
ber of research universities, in partnership with Google, Inc., agreed to digitize books from
their libraries and create a repository for them. Eighty member institutions (including many
colleges and universities) contributed more than 10 million works to the HathiTrust Digital

22. Weidner v. Carroll, 2010 WL 310310 (S.D.Ill. 2010).

licensing Is a Defense to Copyright

189CHAPTER 7: Intellectual Property Rights

30301_ch07_hr_172-199.indd 189 8/30/18 12:49 PM

Library. Some authors complained that this book scanning violated their rights and sued the
HathiTrust and several associated entities for copyright infringement.

The court, however, sided with the defendants and held that making digital copies for the
purposes of online search was a fair use. The library’s searchable database enabled researchers
to find terms of interest in the digital volumes—but not to read the volumes online. There-
fore, the court concluded that the digitization did not provide a substitute that damaged the
market for the original works.23 ■

See this chapter’s Adapting the Law to the Online Environment feature for a discussion of
whether Beyoncé’s use of three phrases written by another artist constituted fair use.

The First Sale Doctrine Section 109(a) of the Copyright Act provides that the owner of
a particular item that is copyrighted can, without the authority of the copyright owner, sell
or otherwise dispose of it. This rule is known as the first sale doctrine.

Under this doctrine, once a copyright owner sells or gives away a particular copy of a
work, the copyright owner no longer has the right to control the distribution of that copy.

23. Authors Guild, Inc. v. HathiTrust, 755 F.3d 87 (2d Cir. 2014). See also Authors Guild v. Google, Inc., 804 F.3d 202 (2d Cir. 2015).

To date, Beyoncé’s single “Formation” has been legally downloaded mil-
lions times. The video and the song itself
were nominated for Grammy awards in
the following categories: Record of the
Year, Song of the Year, and Best Music

What Does Sampling Involve?
In the song “Formation,” Beyoncé sam-
pled several phrases attributed to street
performer and music artist Anthony
Barré, popularly known as Messy Mya.
(Sampling is taking a part of a sound
recording and reusing it in a different
recording.) Messy Mya became famous
on YouTube by filming himself in New
Orleans’ gay, lesbian, and transgender
communities in the aftermath of Hurricane
Katrina. The three phrases that Beyoncé
sampled are:

• “I like that.”
• “What happened at the New Orleans.”
• “Bitch, I’m back by popular demand.”

Was It Fair Use?
Copyright law requires payment to copy-
right owners except for fair use. But what
constitutes fair use? Typically, courts tend to
measure fair use by looking at whether the
use in question is of a commercial nature.
Additionally, courts look at the amount and
substantiality of the portion used in relation
to the copyrighted work as a whole and the
effect of the use on the potential market for
the copyrighted work. Beyoncé claimed that
her sampled use of Messy Mya’s words fell
under the fair use doctrine.

A Lawsuit Nonetheless
Messy Mya was shot and killed in 2010,
and his estate would not accept the fair
use doctrine defense offered by Beyoncé’s
attorneys. Rather, the estate sued for
$20 million in back royalties, as well as
proper credit for Messy Mya “as a writer,
composer, producer, and performer.” The
suit alleged that “the verbatim copying
of [Messy Mya’s] voice and words by

defendant is so blatant in both scale and
degree that it raises this matter to an
unusual level of striking similarity.”

Are the three phrases that Beyoncé
sampled worth $20 million? After losing
a motion to dismiss the case based on a
fair use defense in a federal district court,
Beyoncé agreed to settle the case for the
full $20 million.a

Critical Thinking
Beyoncé also used footage from a 2013
documentary called That B.E.A.T. Why
might international entertainment stars
choose to use sampled words and sam-
pled video footage without the permission
of the copyright holders?

Adapting the law to the
Online environment

Beyoncé, Sampling, and a $20 Million

a. Estate of Barré v. Carter, 272 F.Supp.3d 906 (E.D.La. 2017).

190 UNIT ONE: The Legal Environment of Business

30301_ch07_hr_172-199.indd 190 8/30/18 12:49 PM

Thus, for instance, a person who buys a copyrighted book can
sell it to someone else. The first sale doctrine also applies to
copyrighted CDs and DVDs.

The United States Supreme Court has ruled that the first sale
doctrine protects lawfully made copies no matter where in the
world those copies were made. Case Example 7.16 Supap Kirtsaeng,
a citizen of Thailand, was a graduate student at the University of
Southern California. He enlisted friends and family in Thailand
to buy copies of textbooks there and ship them to him in the
United States. Kirtsaeng resold the textbooks on eBay, where
he eventually made about $100,000.

John Wiley & Sons, Inc., had printed some of those textbooks
in Asia. Wiley sued Kirtsaeng in federal district court for copyright
infringement. Kirtsaeng argued that Section 109(a) of the
Copyright Act allows the first purchaser-owner of a book to sell it
without the copyright owner’s permission. The trial court held in
favor of Wiley, and that decision was affirmed on appeal. Kirtsaeng
then appealed to the United States Supreme Court, which ruled in
Kirtsaeng’s favor. The first sale doctrine applies even to goods
purchased abroad and resold in the United States.24 ■

7–3d Copyright Protection for Software
The Computer Software Copyright Act amended the Copyright Act to include computer
programs in the list of creative works protected by federal copyright law. Generally, copyright
protection extends to those parts of a computer program that can be read by humans, such
as the high-level language of a source code. Protection also extends to the binary-language
object code, which is readable only by the computer, and to such elements as the overall
structure, sequence, and organization of a program.

Not all aspects of software are protected, however. Courts typically have not extended
copyright protection to the “look and feel”—the general appearance, command structure,
video images, menus, windows, and other screen displays—of computer programs. (Note
that copying the “look and feel” of another’s product may be a violation of trade dress or
trademark laws, however.) Sometimes it can be difficult for courts to decide which particular
aspects of software are protected.

Case Example 7.17 Oracle America, Inc., is a software company that owns numerous appli-
cation programming interfaces, or API packages. Oracle grants licenses to others to use these
API packages to write applications in the Java programming language. Java is open and free
for anyone to use, but using it requires an interface.

When Google began using some of Oracle’s API packages to run Java on its Android
mobile devices, Oracle sued for copyright infringement. Google argued that the software
packages were command structure and, as such, not protected under copyright law. Ulti-
mately, a federal appellate court concluded that the API packages were source code and were
entitled to copyright protection.25 ■

The dispute in the following case was whether a third-party software support service
infringed the copyright of the owner of the software that the service supported.

24. Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519, 133 S.Ct. 1351, 185 L.Ed.2d 392 (2013). See also Geophysical Service, Inc. v. TGS-NOPEC
Geophysical Co., 850 F.3d 785 (5th Cir. 2017).

25. Oracle America, Inc. v. Google, Inc., 750 F.3d 1339 (Fed.Cir. 2014).

Beyoncé sampled several phrases from another musician in one of
her new songs. Why might a court conclude that this use was not
a fair use under copyright law?










191CHAPTER 7: Intellectual Property Rights

30301_ch07_hr_172-199.indd 191 8/30/18 12:49 PM

Background and Facts Oracle USA, Inc., licenses its pro-
prietary enterprise software for a one-time payment. Oracle also
sells its licensees maintenance contracts for the software. The
maintenance work includes software updates. Rimini Street, Inc.,
provided third-party support for Oracle’s enterprise software, in
competition with Oracle’s maintenance services. To compete
effectively, Rimini also needed to provide software updates to
its customers. Creating these updates required copying Oracle’s
copyrighted software.

Oracle filed a suit in a federal district court against Rimini,
alleging copyright infringement. Oracle alleged that Rimini copied
Oracle’s software under the license of one customer for work for
other customers, or for unknown or future customers, instead of
restricting the copying to work for the licensee. A jury found in
Oracle’s favor. The court entered a judgment for Oracle, awarding
damages of more than $50 million. Rimini appealed the judgment
to the U.S. Court of Appeals for the Ninth Circuit.

In the Words of the Court
FOGEL, * * * Judge:

* * * *
Work produced by humans is rarely if ever perfect, and com-

puter software is no exception. Even casual users of computers
are familiar with regular software patches and updates intended
to correct glitches and to modify software in light of changing

However, unlike the off-the-shelf consumer software used by
individuals in everyday life, enterprise software employed by large
organizations is customized around the organizations’ specific
needs. While producers of consumer software generally design
updates around standard use cases and make them available for
end users to download and install directly, updates to enterprise
software must be tested and modified to fit with bespoke [spe-
cially made] customizations before being put to actual use.

This testing process requires the creation of “development
environments.” A “development environment,” sometimes called
a “sandbox,” is * * * a software environment that contains a copy
of the software program which is then modified to develop and
test software updates.

In other words, the very work of maintaining customized soft-
ware requires copying the software, which without a license to do
so is a violation of the exclusive right of the copyright owner. Here,

it is undisputed that the licenses generally permit Oracle’s licens-
ees to maintain the software and make development environments
for themselves. However, some licensees of the software, lacking
either the capability or the interest, opt to outsource the work of
maintenance to others, such as Rimini or even Oracle itself.

* * * *
* * * Rimini argues * * * that: 1) each of Rimini’s customers

had its own license; 2) each license permits copies to be made for
archival and support purposes; 3) the licenses authorize the cus-
tomers to outsource the archival and support work to third parties;
and 4) such archival and support work includes the creation of
development environments. Rimini dismisses evidence showing
that it created development environments for future customers
using the license of an existing customer on the basis that future
customers presumably would have licenses that would permit
them to hire Rimini to create development environments.

Oracle properly responds that * * * the licenses at issue here
“pointedly limits copying and use to supporting the Licensee.”
The licenses do not authorize Rimini to “develop products Rimini
could sell for Rimini’s financial gain.” Any work that Rimini per-
forms under color of a license held by a customer for other existing
customers cannot be considered work in support of that particu-
lar customer. The same logic applies to work Rimini performs for
unknown, future customers. The licensees may hire a third party
such as Rimini to maintain their software for them, but nothing
in the licenses permits them to grant a non-party to the license
a general right to copy proprietary software. [Emphasis added.]

Decision and Remedy The U.S. Court of Appeals for the
Ninth Circuit affirmed the judgment of the lower court. The court
stated, “Absent an applicable license, Rimini’s accused acts vio-
lated the exclusive right Oracle enjoys as owner of the software
copyright to copy or to modify the software.”

Critical Thinking

• Economic Rimini argued that Oracle was misusing the copy-
right in its proprietary software to stifle competition. Do you
agree? Explain.

• What If the Facts Were Different? Suppose that Rimini
had bought one of Oracle’s licenses for itself. Would the result
have been different? Why or why not?

Oracle USA, Inc. v. Rimini Street, Inc.
United States Court of Appeals, Ninth Circuit, 879 F.3d 948 (2018).

Case 7.3

192 UNIT ONE: The Legal Environment of Business

30301_ch07_hr_172-199.indd 192 8/30/18 12:49 PM

7–4 Trade Secrets
The law of trade secrets protects some business processes and information that are not or
cannot be protected under patent, copyright, or trademark law. A trade secret is basically
information of commercial value. A company’s customer lists, plans, and research and devel-
opment are trade secrets. Trade secrets may also include pricing information, marketing
techniques, and production methods—anything that makes an individual company unique
and that would have value to a competitor.

Unlike copyright and trademark protection, protection of trade secrets extends both to
ideas and to their expression. (For this reason, and because there are no registration or filing
requirements for trade secrets, trade secret protection may be well suited for software.) Of
course, the secret formula, method, or other information must be disclosed to some persons,
particularly to key employees. Businesses generally attempt to protect their trade secrets
by having all employees who use the process or information agree in their contracts, or in
confidentiality agreements, never to divulge it.

7–4a State and Federal Law on Trade Secrets
Under Section 757 of the Restatement of Torts, those who disclose or use another’s trade
secret, without authorization, are liable to that other party if either of the following is true:
1. They discovered the secret by improper means.
2. Their disclosure or use constitutes a breach of a duty owed to the other party.
Stealing of confidential business data by industrial espionage, as when a business taps into
a competitor’s computer, is a theft of trade secrets without any contractual violation and is
actionable in itself.

Trade secrets have long been protected under the common law. Today, nearly every state
has enacted trade secret laws based on the Uniform Trade Secrets Act. Additionally, the Eco-
nomic Espionage Act made the theft of trade secrets a federal crime.

7–4b Trade Secrets in Cyberspace
Today’s computer technology undercuts a business firm’s ability to protect its confidential
information, including trade secrets. For instance, a dishonest employee could e-mail trade
secrets in a company’s server to a competitor or a future employer. If e-mail is not an option,
the employee might walk out with the information on a flash drive.

Misusing a company’s social media accounts is yet another way in which employees may
appropriate trade secrets. Case Example 7.18 Noah Kravitz worked for a company called Phone-
Dog for four years as a product reviewer and video blogger. PhoneDog provided him with
the Twitter account “@PhoneDog_Noah.” Kravitz’s popularity grew, and he had approxi-
mately 17,000 followers by the time he quit the company in 2010. PhoneDog requested that
Kravitz stop using the Twitter account. Although Kravitz changed his handle to “@noah-
kravitz,” he continued to use the account. PhoneDog subsequently sued Kravitz for misap-
propriation of trade secrets, among other things. Kravitz moved for a dismissal, but the court
found that the complaint adequately stated a cause of action for misappropriation of trade
secrets and allowed the suit to continue.26 ■

For a summary of trade secrets and other forms of intellectual property, see Exhibit 7–1.

7–5 International Protections
For many years, the United States has been a party to various international agreements relat-
ing to intellectual property rights. For instance, the Paris Convention of 1883, to which about
180 countries are signatory, allows parties in one country to file for patent and trademark

Trade Secret A formula, device,
idea, process, or other information
used in a business that gives the
owner a competitive advantage
in the marketplace.

26. PhoneDog v. Kravitz, 2011 WL 5415612 (N.D.Cal. 2011).

Learning Objective 4
What are trade secrets, and
what laws offer protection
for this form of intellectual

193CHAPTER 7: Intellectual Property Rights

30301_ch07_hr_172-199.indd 193 8/30/18 12:49 PM

protection in any of the other member countries. Other international agreements include
the Berne Convention, the Trade-Related Aspects of Intellectual Property Rights (known
as the TRIPS agreement), the Madrid Protocol, and the Anti-Counterfeiting Trade Agreement.

7–5a The Berne Convention
Under the Berne Convention of 1886, if a U.S. citizen writes a book, every country that has
signed the convention must recognize her or his copyright in the book. Also, if a citizen of a
country that has not signed the convention first publishes a book in one of the 169 countries


Trademark (service,
certification, and
collective marks,
and trade dress)

Any distinctive word,
symbol, sound, or design
that an entity uses to
distinguish its goods or
services from those of
others. The owner has the
exclusive right to use that
mark or trade dress.

1. At common law,
ownership created by
use of the mark.

2. Registration with the
appropriate federal
or state office gives
notice and is permitted
if the mark is currently
in commercial use or
will be within the next
six months.

Unlimited, as long as it
is in use. To continue
notice by registration,
the owner must renew
by filing between the
fifth and sixth years,
and thereafter, every
ten years.

1. Injunction prohibiting
the future use of the

2. Actual damages
plus profits received
by the party who
infringed (can be
increased under the
Lanham Act).

3. Destruction of articles
that infringed.

4. Plus attorneys’ fees.

Patent A grant from the
government that gives an
inventor exclusive rights
to make, use, and sell an

By filing a patent
application with the U.S.
Patent and Trademark
Office and receiving its

Twenty years from the
date of the application;
for design patents,
fourteen years.

1. Injunction against

2. Possible monetary
damages, including
royalties and
lost profits, plus
attorneys’ fees.

3. Damages may be
tripled for intentional

Copyright The right of an author or
originator of a literary
or artistic work, or other
production that falls within a
specified category, to have
the exclusive use of that
work for a given period of

Automatic (once the
work or creation is put in
tangible form). Only the
expression of an idea (and
not the idea itself) can be
protected by copyright.

For authors: the life of
the author plus 70 years.

For publishers: 95 years
after the date of
publication or 120 years
after creation.

Actual damages plus
profits received by the
party who infringed, or
statutory damages under
the Copyright Act. Courts
may impose fines and/or
imprisonment, as well as
an injunction.

Trade Secret Any information that a
business possesses and
that gives the business an
advantage over competitors
(including customer lists,
plans, pricing information,
and production methods).

Through the originality
and development of the
information and processes
that constitute the
business secret and are
unknown to others.

Unlimited, so long as
not revealed to others.
Once revealed to others,
it is no longer a trade

Monetary damages for
misappropriation (the
Uniform Trade Secrets
Act also permits punitive
damages if willful), plus
costs and attorneys’

exhibit 7–1 Forms of Intellectual Property

194 UNIT ONE: The Legal Environment of Business

30301_ch07_hr_172-199.indd 194 8/30/18 12:49 PM

that have signed, all other countries that have signed the convention must recognize that
author’s copyright. Copyright notice is not needed to gain protection under the Berne Con-
vention for works published after March 1, 1989.

The European Union altered its copyright rules under the Berne Convention by agree-
ing to extend the period of royalty protection for musicians from fifty years to sev-
enty years. This decision aids major record labels as well as performers and musicians.
The profits of musicians and record companies have been shrinking in recent years
because of the sharp decline in sales of compact discs and the rise in digital downloads
(both legal and illegal).

7–5b The TRIPS Agreement
The Berne Convention and other international agreements have given some protection to intel-
lectual property on a worldwide level. None of them, however, has been as significant and far
reaching in scope as the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement.
Representatives from more than one hundred nations signed the TRIPS agreement in 1994.

Established Standards and Procedures The TRIPS agreement established, for the first
time, standards for the international protection of intellectual property rights, including
patents, trademarks, and copyrights for movies, computer programs, books, and music.
The TRIPS agreement provides that each member country must include in its domestic
laws broad intellectual property rights and effective remedies (including civil and criminal
penalties) for violations of those rights.

Each member nation must ensure that legal procedures are available for parties who wish
to bring actions for infringement of intellectual property rights. Additionally, a related docu-
ment established a mechanism for settling disputes among member nations.

Prohibits Discrimination Generally, the TRIPS agreement forbids member nations from
discriminating against foreign owners of intellectual property rights in the administration,
regulation, or adjudication of such rights. In other words, a member nation cannot give
its own nationals (citizens) favorable treatment without offering the same treatment to
nationals of all member countries. Example 7.19 A U.S. software manufacturer brings a suit
for the infringement of intellectual property rights under Germany’s national laws. Because
Germany is a member of the TRIPS agreement, the U.S. manufacturer is entitled to receive
the same treatment as a German manufacturer. ■

7–5c The Madrid Protocol
In the past, one of the difficulties in protecting U.S. trademarks internationally was that
it was time consuming and expensive to apply for trademark registration in foreign coun-
tries. The filing fees and procedures for trademark registration vary significantly among
individual countries. The Madrid Protocol, which was signed into law in 2003, may help
to resolve these problems.

The Madrid Protocol is an international treaty that has been signed by about a hundred
countries. Under its provisions, a U.S. company wishing to register its trademark abroad can
submit a single application and designate other member countries in which it would like
to register the mark. The treaty was designed to reduce the costs of obtaining international
trademark protection by more than 60 percent.

Although the Madrid Protocol may simplify and reduce the cost of trademark registra-
tion in foreign nations, it remains to be seen whether it will provide significant benefits to
trademark owners. Even with an easier registration process, the question of whether member
countries will enforce the law and protect the mark still remains.

Learning Objective 5
How does the TRIPS
agreement protect
intellectual property

195CHAPTER 7: Intellectual Property Rights

30301_ch07_hr_172-199.indd 195 8/30/18 12:49 PM

7–5d The Anti-Counterfeiting Trade Agreement
In 2011, Australia, Canada, Japan, Korea, Morocco, New Zealand, Singapore, and the United
States signed the Anti-Counterfeiting Trade Agreement (ACTA), an international treaty to
combat global counterfeiting and piracy. Other nations have since signed the agreement.
Once a nation has adopted appropriate procedures, it can ratify the treaty.

Provisions and Goals The goals of the treaty are to increase international cooperation,
facilitate the best law enforcement practices, and provide a legal framework to combat
counterfeiting. The treaty has its own governing body.

The ACTA applies not only to counterfeit physical goods, such as medications, but also to
pirated copyrighted works being distributed via the Internet. The idea is to create a new stan-
dard of enforcement for intellectual property rights that goes beyond the TRIPS agreement and
encourages international cooperation and information sharing among signatory countries.

Border Searches Under ACTA, member nations are required to establish border mea-
sures that allow officials, on their own initiative, to search commercial shipments of imports
and exports for counterfeit goods. The treaty neither requires nor prohibits random border
searches of electronic devices, such as laptops and iPads, for infringing content.

If border authorities reasonably believe that any goods in transit are counterfeit, the treaty
allows them to keep the suspect goods unless the owner proves that the items are authentic
and noninfringing. The treaty allows member nations, in accordance with their own laws,
to order online service providers to furnish information about (including the identity of)
suspected trademark and copyright infringers.

Practice and Review

Two computer science majors, Trent and Xavier, have an idea for a new video game, which they
propose to call “Hallowed.” They form a business and begin developing their idea. Several months
later, Trent and Xavier run into a problem with their design and consult with a friend, Brad, who is
an expert in creating computer source codes. After the software is completed but before Hallowed
is marketed, a video game called Halo 2 is released for both the Xbox and the PlayStation 3 systems.
Halo 2 uses source codes similar to those of Hallowed and imitates Hallowed’s overall look and
feel, although not all the features are alike. Using the information presented in the chapter, answer
the following questions.

1. Would the name Hallowed receive protection as a trademark or as trade dress?

2. If Trent and Xavier had obtained a business process patent on Hallowed, would the release of Halo 2
infringe on their patent? Why or why not?

3. Based only on the facts presented above, could Trent and Xavier sue the makers of Halo 2 for
copyright infringement? Why or why not?

4. Suppose that Trent and Xavier discover that Brad took the idea of Hallowed and sold it to the com-
pany that produced Halo 2. Which type of intellectual property issue does this raise?

Debate This
Congress has amended the Copyright Act several times. Copyright holders now have protection
for many decades. Was Congress justified in extending the copyright time periods? Why or
why not?

196 UNIT ONE: The Legal Environment of Business

30301_ch07_hr_172-199.indd 196 8/30/18 12:49 PM

197CHAPTER 7: Intellectual Property Rights

Chapter Summary: Intellectual Property Rights

certification mark 181
collective mark 181
copyright 186
intellectual property 172

license 183
patent 183
service mark 181
trade dress 181

trade name 183
trade secret 193
trademark 173
trademark dilution 175

Key Terms

Trademarks 1. A trademark is a distinctive word, symbol, sound, or design that identifies the manufacturer as the
source of the goods and distinguishes its products from those made or sold by others.

2. The major federal statutes protecting trademarks and related property are the Lanham Act and the
Federal Trademark Dilution Act. Generally, to be protected, a trademark must be sufficiently distinctive
from all competing trademarks.

3. Trademark infringement occurs when one party uses a mark that is the same as, or confusingly similar
to, the protected trademark, service mark, certification mark, collective mark, or trade name of another
party without permission when marketing goods or services.

Patents 1. A patent is a grant from the government that gives an inventor the exclusive right to make, use, and sell
an invention for a period of twenty years (fourteen years for a design patent) from the date when the
application for a patent is filed. To be patentable, an invention (or a discovery, process, or design) must
be novel, useful, and not obvious in light of current technology. Computer software may be patented.

2. Almost anything is patentable, except the laws of nature, natural phenomena, and abstract ideas
(including algorithms). Even artistic methods and works of art, certain business processes, and the
structures of storylines may be patentable.

3. Patent infringement occurs when someone uses or sells another’s patented design, product, or process
without the patent owner’s permission. The patent holder can sue the infringer in federal court and
request an injunction, but must prove irreparable injury to obtain a permanent injunction against the
infringer. The patent holder can also request damages and attorneys’ fees. If the infringement was
willful, the court can grant treble damages.

Copyrights 1. A copyright is an intangible property right granted by federal statute to the author or originator of
certain literary or artistic productions. The Copyright Act, as amended, governs copyrights. Works
created after January 1, 1978, are automatically given statutory protection for the life of the author plus
seventy years.

2. Copyright infringement occurs whenever the form or expression of an idea is copied without the
permission of the copyright holder. An exception applies if the copying is deemed a “fair use.”

3. The Computer Software Copyright Act amended the Copyright Act to include computer programs in the
list of creative works protected by federal copyright law.

Trade Secrets 1. Trade secrets are basically information of commercial value and include customer lists, plans, research
and development, and pricing information.

2. Trade secrets are protected under the common law and by statute in nearly all of the states against
misappropriation by competitors. Unlike copyright and trademark protection, protection of trade secrets
extends both to ideas and to their expression. The Economic Espionage Act made the theft of trade
secrets a federal crime.

International Protections Various international agreements provide international protection for intellectual property. A landmark
agreement is the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, which provides
for enforcement procedures in all countries signatory to the agreement.

30301_ch07_hr_172-199.indd 197 9/3/18 9:26 AM

198 UNIT ONE: The Legal Environment of Business

Issue Spotters
1. Roslyn, a food buyer for Organic Cornucopia Food Company, decides to go into business for herself as Roslyn’s Kitchen. She contacts

Organic’s suppliers, offering to buy their entire harvest for the next year. She also contacts Organic’s customers, offering to sell her
products for less than Organic. Has Roslyn violated any of the intellectual property rights discussed in this chapter? Explain. (See
Trade Secrets.)

2. Global Products develops, patents, and markets software. World Copies, Inc., sells Global’s software without the maker’s permission.
Is this patent infringement? If so, how might Global save the cost of suing World for infringement and at the same time profit from
World’s sales? (See Patents.)
—Check your answers to the Issue Spotters against the answers provided in Appendix D at the end of this text.

Business Scenarios and Case Problems
7–1. Patent Infringement. John and Andrew Doney invented

a hard-bearing device for balancing rotors. Although they
obtained a patent for their invention from the U.S. Patent and
Trademark Office, it was never used as an automobile wheel
balancer. Some time later, Exetron Corp. produced an automo-
bile wheel balancer that used a hard-bearing device similar to
the Doneys’ device. Given that the Doneys had not used their
device for automobile wheel balancing, does Exetron’s use of
a similar device infringe on the Doneys’ patent? (See Patents.)

7–2. Fair Use. Professor Wise is teaching a summer seminar
in business torts at State University. Several times during the
course, he makes copies of relevant sections from business law
texts and distributes them to his students. Wise does not realize
that the daughter of one of the textbook authors is a member of
his seminar. She tells her father about Wise’s copying activities,
which have taken place without her father’s or his publisher’s
permission. Her father sues Wise for copyright infringement.
Wise claims protection under the fair use doctrine. Who will
prevail? Explain. (See Copyrights.)

7–3. Spotlight on Macy’s—Copyright Infringement. United
Fabrics International, Inc., bought a fabric design from
an Italian designer and registered a copyright to the
design with the U.S. Copyright Office. When Macy’s,

Inc., began selling garments with a similar design, United filed a
copyright infringement suit against Macy’s. Macy’s argued that
United did not own a valid copyright to the design and so could
not claim infringement. Does United have to prove that the copy-
right is valid to establish infringement? Explain. [United Fabrics
International, Inc. v. C & J Wear, Inc., 630 F.3d 1255 (9th Cir. 2011)]
(See Copyrights.)

7–4. Copyright Infringement. SilverEdge Systems Software
hired Catherine Conrad to perform a singing telegram. Silver-
Edge arranged for James Bendewald to record Conrad’s per-
formance of her copyrighted song to post on the company’s
website. Conrad agreed to wear a microphone to assist in the
recording, told Bendewald what to film, and asked for an addi-
tional fee only if SilverEdge used the video for a commercial

purpose. Later, the company chose to post a video of a different
performer’s singing telegram instead. Conrad filed a suit in a fed-
eral district court against SilverEdge and Bendewald for copy-
right infringement. Are the defendants liable? Explain. [Conrad
v. Bendewald, 500 Fed.Appx. 526 (7th Cir. 2013)] (See Copyrights.)

7–5. Business Case Problem with Sample Answer—
Patents. The U.S. Patent and Trademark Office
(PTO) denied Raymond Gianelli’s application for
a patent for a “Rowing Machine”—an exercise

machine on which a user pulls on handles to perform a rowing
motion against a selected resistance. The PTO considered the
device obvious in light of a previously patented “Chest Press
Apparatus for Exercising Regions of the Upper Body”—an exer-
cise machine on which a user pushes on handles to overcome
a selected resistance. On what ground might this result be
reversed on appeal? Discuss. [In re Gianelli, 739 F.3d 1375 (Fed.
Cir. 2014)] (See Patents.)
— For a sample answer to Problem 7–5, go to Appendix E at

the end of this text.

7–6. Patents. Rodney Klassen was employed by the U.S. Depart-
ment of Agriculture (USDA). Without the USDA’s authorization,
Klassen gave Jim Ludy, a grape grower, plant material for two
unreleased varieties of grapes. For almost two years, most of
Ludy’s plantings bore no usable fruit, none of the grapes were
sold, and no plant material was given to any other person. The
plantings were visible from publicly accessible roads, but none
of the vines were labeled, and the variety could not be identi-
fied by simply viewing the vines. Under patent law, an applicant
may not obtain a patent for an invention that is in public use
more than one year before the date of the application. Could
the USDA successfully apply for patents on the two varieties
given to Ludy? Explain. [Delano Farms Co. v. California Table
Grape Commission, 778 F.3d 1243 (Fed.Cir. 2015)] (See Patents.)

7–7. Copyright Infringement. Savant Homes, Inc., is a custom
home designer and builder. Using what it called the Anders Plan,
Savant built a model house in Windsor, Colorado. This was a
ranch house with two bedrooms on one side and a master suite

30301_ch07_hr_172-199.indd 198 8/30/18 12:49 PM

199CHAPTER 7: Intellectual Property Rights

on the other, separated by a combined family room, dining room,
and kitchen. Ron and Tammie Wagner toured the Savant house.
The same month, the Wagners hired builder Douglas Collins and
his firm, Douglas Consulting, to build a house for them. After it was
built, Savant filed a lawsuit in a federal district court against Col-
lins for copyright infringement, alleging that the builder had cop-
ied the Anders Plan in the design and construction of the Wagner
house. Collins showed that the Anders Plan consisted of standard
elements and standard arrangements of elements. In these cir-
cumstances, has infringement occurred? Explain. [Savant Homes,
Inc. v. Collins, 809 F.3d 1133 (10th Cir. 2016)] (See Copyrights.)

7–8. Patent Infringement. Finjan, Inc., owns a patent—U.S.
Patent No. 7,418,731, or “the ‘731 patent”—for a system and
method that provide computer security from malicious software
embedded in websites on the Internet. The system consists of
a gateway that compares security profiles associated with
requested files to the security policies of requesting users.
The method includes scanning an incoming file to create the
profile, which comprises a list of computer commands the file
is programmed to perform. The ’731 patent required “a list of
computer commands.” Blue Coat Systems, Inc., sold a compet-
ing product. Blue Coat’s product scanned an incoming file for
certain commands and created a new file called Cookie2 that
contained a field showing whether, and how often, those com-
mands appeared. Finjan filed a suit against Blue Coat, alleging

patent infringement. Blue Coat argued that its profiles did not
contain the ’731 patent’s required “list of computer commands.”
Did Blue Coat’s product infringe Finjan’s patent? Explain. [Finjan,
Inc. v. Blue Cost Systems, Inc., 879 F.3d 1299 (Fed. Cir. 2018)]
(See Patents.)

7–9. A Question of Ethics—The IDDR Approach and
Copyright Infringement. Usenet is an online
bulletin board network. A user gains access to
Usenet posts through a commercial service, such as

Giganews, Inc. Giganews deletes or blocks posts that contain
child pornography. Otherwise, the service does not monitor con-
tent. Perfect 10, Inc. owns the copyrights to tens of thousands
of images, many of which have been illegally posted on Usenet
through Giganews. When Perfect 10 notified Giganews of posts
that contained infringing images, the service took them down.
Despite these efforts, illegal posting continued. Perfect 10 filed
a suit in a federal district court against Giganews, alleging copy-
right infringement. [ Perfect 10, Inc. v. Giganews, Inc., 847 F.3d
657 (9th Cir. 2017)] (See Copyrights.)

1. Is Giganews liable for copyright infringement? Do Internet
service providers have an ethical duty to do more to prevent
infringement? Why or why not?

2. Using the IDDR approach, decide whether a copyright owner
has an ethical duty to protect against infringement.

Critical Thinking and Writing Assignments
7–10. Time-Limited Group Assignment—Patents. After

years of research, your company has developed a prod-
uct that might revolutionize the green (environmentally
conscious) building industry. The product is made from

relatively inexpensive and widely available materials combined in
a unique way that can substantially lower the heating and cooling
costs of residential and commercial buildings. The company has
registered the trademark it intends to use for the product and
has filed a patent application with the U.S. Patent and Trademark
Office. (See Patents.)

1. One group will provide three reasons why this product does
or does not qualify for patent protection.

2. A second group will develop a four-step plan for how the
company can best protect its intellectual property rights
(trademark, trade secret, and patent) and prevent domestic
and foreign competitors from producing counterfeit goods or
cheap knockoffs.

3. The third group will list and explain three ways in which the
company can utilize licensing.

30301_ch07_hr_172-199.indd 199 8/30/18 12:49 PM

Internet Law, Social Media,
and Privacy8

The Internet has changed our lives and our laws.
Technology has put the world at our fingertips and now
allows even the smallest business to reach customers
around the globe. Because the Internet allows the world
to “pass around notes” so quickly, as Jon Stewart joked
in the chapter-opening quotation, it presents a variety of
challenges for the law.

Courts are often in uncharted waters when deciding dis-
putes that involve the Internet, social media, and online
privacy. Judges may have no common law precedents to rely

on when resolving cases. Long-standing principles of justice may be inapplicable. New
rules are evolving, but often not as quickly as technology.

Alex Jones is a talk show host who promotes conspiracy theories online through his
website, Twitter feed, and YouTube channel. Suppose that Jones posts a video online
accusing Chobani, LLC, of bringing in “migrant rapists” to work at its new facility in
Twin Falls, Idaho. The statements in Jones’s video are false. Understandably, the state-
ments anger the owners and employees of Chobani, a company that was founded by a
Turkish immigrant in New York. Chobani spent $450 million expanding to the Twin Falls
location, where it employs more than a thousand workers, a few hundred of whom are
refugees (but not illegal immigrants or rapists).

Can Chobani succeed in a lawsuit against Jones for online defamation? Proving online
defamation can be difficult. In addition, several laws protect those who post online defam-
atory statements made by a third party. In this chapter, you will read about the rules per-
taining to online defamation, as well as other legal challenges presented by the Internet
and social media.

Learning Objectives
The five Learning Objectives below
are designed to help improve your
understanding. After reading this
chapter, you should be able to
answer the following questions:

1. What is cybersquatting, and
when is it illegal?

2. What law protects copyrights
in the digital age?

3. When does the law protect a
person’s electronic commu-
nications from being inter-
cepted or accessed?

4. What law governs whether
Internet service providers are
liable for online defamatory
statements made by users?

5. How do online retailers track
their users’ Web browsing

“The Internet is just
the world passing
around notes in a

Jon Stewart
(American comedian and former
host of The Daily Show)













30301_ch08_hr_200-223.indd 200 8/30/18 12:51 PM

8–1 Internet Law
A number of laws specifically address issues that arise only on the Internet. These issues
include unsolicited e-mail, domain names, cybersquatting, and meta tags, as we discuss
here. We also discuss how the law is dealing with problems of trademark dilution online,
as well as licensing.

8–1a Spam
Businesses and individuals alike are targets of spam.1 Spam is the unsolicited “junk e-mail”
that floods virtual mailboxes with advertisements, solicitations, and similar communications.
Considered relatively harmless in the early days of the Internet, spam has become a serious
problem. By 2019, it accounted for roughly 75 percent of all e-mails.

State Regulation of Spam In an attempt to combat spam, thirty-seven states have
enacted laws that prohibit or regulate its use. Many state laws that regulate spam require
the senders of e-mail ads to instruct the recipients on how they can “opt out” of further
e-mail ads from the same sources. For instance, in some states, an unsolicited e-mail must
include a toll-free phone number or return e-mail address that the recipient can use to ask
the sender not to send unsolicited e-mails.

The Federal CAN-SPAM Act In 2003, Congress enacted the Controlling the Assault of
Non-Solicited Pornography and Marketing (CAN-SPAM) Act.2 The legislation applies to
any “commercial electronic mail messages” that are sent to promote a commercial product
or service. Significantly, the statute preempts state antispam laws except those provisions
in state laws that prohibit false and deceptive e-mailing practices.

Generally, the act permits the sending of unsolicited commercial e-mail but prohibits
certain types of spamming activities. Prohibited activities include the use of a false return
address and the use of false, misleading, or deceptive information when sending e-mail. The
statute also prohibits the use of “dictionary attacks”—sending messages to randomly gener-
ated e-mail addresses—and the “harvesting” of e-mail addresses from websites through the
use of specialized software.

Example 8.1 Sanford Wallace, known as the “Spam King,” is
considered to be one of the world’s most prolific spammers. He has
operated several businesses over the years that used botnets (auto-
mated spamming networks) to send out hundreds of millions of
unwanted e-mails. Wallace also infected computers with spyware
and then sold consumers the software to fix it. He infiltrated Face-
book accounts to spam 27 million Facebook users.

As a result, Wallace was sued by Facebook and the Federal
Trade Commission, and ordered to pay millions of dollars in
fines. The Federal Bureau of Investigation ultimately filed crim-
inal charges against Wallace, and he pleaded guilty to fraud,
spam, and violating a court order not to access Facebook. ■
Arresting prolific spammers, however, has done little to curb
spam, which continues to flow at a rate of many billions of
messages per day.

Spam Bulk, unsolicited (junk) e-mail.

1. The term spam is said to come from the lyrics of a Monty Python song that repeats the word spam over and over.
2. 15 U.S.C. Sections 7701 et seq.








Have state and federal laws against spam reduced its use?

201CHAPTER 8: Internet Law, Social Media, and Privacy

30301_ch08_hr_200-223.indd 201 8/30/18 12:51 PM

The U.S. Safe Web Act After the CAN-SPAM Act, spamming from servers located in
other nations increased. These cross-border spammers generally were able to escape detec-
tion and legal sanctions because the Federal Trade Commission (FTC) lacked the authority
to investigate foreign spamming.

Congress sought to rectify the situation by enacting the U.S. Safe Web Act (also known
as the Undertaking Spam, Spyware, and Fraud Enforcement with Enforcers beyond Borders
Act).3 The act allows the FTC to cooperate and share information with foreign agencies in
investigating and prosecuting those involved in spamming, spyware, and various Internet
frauds and deceptions.

The Safe Web Act also provides a “safe harbor” for Internet service providers (ISPs)—
organizations that provide access to the Internet. The safe harbor gives ISPs immunity from
liability for supplying information to the FTC concerning possible unfair or deceptive con-
duct in foreign jurisdictions.

8–1b Domain Names
As e-commerce expanded worldwide, one issue that emerged involved the rights of a trade-
mark owner to use the mark as part of a domain name. A domain name is part of an Internet
address, such as “”

Structure of Domain Names Every domain name ends with a top-level domain (TLD),
which is the part of the name to the right of the period. This part of the name often indicates
the type of entity that operates the site. For instance, com is an abbreviation for commercial,
and edu is a shortened term for education.

The second-level domain (SLD)—the part of the name to the left of the period—is chosen
by the business entity or individual registering the domain name. Competition for SLDs
among firms with similar names and products has led to numerous disputes. By using an
identical or similar domain name, one company may attempt to profit from a competitor’s
goodwill (the intangible value of a business). For instance, a party might use a similar domain
name to sell pornography or otherwise infringe on another’s trademarks.

Domain Name Distribution System The Internet Corporation for Assigned Names and
Numbers (ICANN), a nonprofit corporation, oversees the distribution of domain names
and operates an online arbitration system. Due to numerous complaints, ICANN overhauled
the domain name distribution system in 2012.

ICANN now sells new generic top-level domain names (gTLDs) for an initial price of
$185,000 plus an annual fee of $25,000. Whereas TLDs previously had been limited to
only a few terms (including com, net, and org), gTLDs can take any form. By 2019, many
companies and corporations had acquired gTLDs based on their brands, such as aol, bmw,
target, and walmart. Some companies have numerous gTLDs. Google’s gTLDs, for instance,
include android, chrome, gmail, goog, and YouTube.

Because gTLDs have greatly increased the potential number of domain names, domain
name registrars have proliferated. Registrar companies charge a fee to businesses and indi-
viduals to register new names and to renew annual registrations (often through automated
software). Many of these companies also buy and sell expired domain names.

8–1c Cybersquatting
One of the goals of the new gTLD system was to alleviate the problem of cybersquatting.
Cybersquatting occurs when a party registers a domain name that is the same as, or confus-
ingly similar to, the trademark of another and then offers to sell the domain name back to
the trademark owner.

3. Pub. L. No. 109–455, 120 Stat. 3372 (2006), codified in various sections of 15 U.S.C. and 12 U.S.C. Section 3412.

Internet Service Provider (ISP)
A business or organization that offers
users access to the Internet and
related services.

Domain Name The series of letters
and symbols used to identify a site
operator on the Internet (an Internet

Goodwill In the business context,
the valuable reputation of a business
viewed as an intangible asset.

Cybersquatting The act of
registering a domain name that is the
same as, or confusingly similar to,
the trademark of another and then
offering to sell that domain name
back to the trademark owner.

“Almost overnight, the
Internet’s gone from a
technical wonder to a
business must.”

Bill Schrader
(Internet pioneer and co-founder of
the first commercial Internet service

202 UNIT ONE: The Legal Environment of Business

30301_ch08_hr_200-223.indd 202 8/30/18 12:51 PM

Example 8.2 Apple, Inc., has repeatedly sued cybersquatters that registered domain names
similar to the names of its products, such as and ■

Anticybersquatting Legislation Because cybersquatting has led to so much litiga-
tion, Congress enacted the Anticybersquatting Consumer Protection Act (ACPA).4 The
act amended the Lanham Act—the federal law protecting trademarks. The ACPA makes
cybersquatting illegal when both of the following are true:

1. The domain name is identical or confusingly similar to the trademark of another.

2. The one registering, trafficking in, or using the domain name has a “bad faith intent” to profit from
that trademark.

Despite the ACPA, cybersquatting continues to present a problem for businesses.
Case Example 8.3 CrossFit, Inc., is a Delaware corporation that provides personal fitness
services and products. CrossFit is well known in the fitness industry and licenses affiliates
to operate individual CrossFit-branded programs. CrossFit granted a license to Andres Del
Cueto Davalos to operate a location in Mexico and allowed him to use the domain name
“CrossFitAlfa.” Davalos later registered the domain name CrossFitBeta without CrossFit’s
permission and then used both of these domain names to redirect website visitors to a third
website, Davalos was attempting to
siphon off CrossFit customers to another business that he
co-owned, Woodbox Training Centers, which operated in
twenty-five locations across Mexico. CrossFit sued under the
ACPA. Because of Davalos’s bad faith intent, the court
awarded CrossFit the maximum amount of statutory dam-
ages available ($100,000 for each domain name), plus costs
and attorneys’ fees.5 ■

All domain name registrars are supposed to relay informa-
tion about registrations and renewals to ICANN and other
companies that keep a master list of domain names, but this
does not always occur. The speed at which domain names
change hands and the difficulty in tracking mass automated
registrations have created an environment in which cyber-
squatting can flourish.

Typosquatting Cybersquatters have also developed new
tactics, such as typosquatting, or registering a name that is a
misspelling of a popular brand name, such as or Because many Internet users are not perfect
typists, Web pages using these misspelled names may receive a lot of traffic. More traffic
generally means increased profits (advertisers often pay websites based on the number
of unique visits, or hits).

Case Example 8.4 Counter Balance Enterprises, Ltd., registered and used domain names
that misspelled Facebook, such as “” and “” Facebook, Inc.,
filed suit in a California federal court under the ACPA against Counter Balance (and ten
other defendants, including Banana Ads, LLC) for typosquatting. The defendants failed to
appear, and the court entered a default judgment in favor of Facebook. The court perma-
nently enjoined the defendants from using the infringing domain names and awarded Face-
book a total of $2.8 million in damages (ranging from $5,000 to $1.3 million per individual
defendant).6 ■

4. 15 U.S.C. Section 1129.
5. CrossFit, Inc. v. Davalos, ___ F.Supp.3d ___, 2017 WL 733213 (N.D.Cal. 2017).

Typosquatting A form of
cybersquatting that relies on
mistakes, such as typographical
errors, made by Internet users when
entering information into a Web

6. Facebook, Inc. v. Banana Ads, LLC, 2013 WL 1873289 (N.D.Cal. 2013).

Learning Objective 1
What is cybersquatting, and
when is it illegal?

How did the Anticybersquatting Consumer Protection Act affect
a dispute involving the physical fitness program, CrossFit, and its







t M





203CHAPTER 8: Internet Law, Social Media, and Privacy

30301_ch08_hr_200-223.indd 203 8/30/18 12:51 PM

Typosquatters may sometimes fall beyond the reach of the ACPA. If the misspelling that
they use is significant, the trademark owner may have difficulty proving that the name is
identical or confusingly similar to the trademark of another, as the ACPA requires.

Typosquatting adds costs for businesses seeking to protect their domain name rights.
Companies must attempt to register not only legitimate variations of their domain names
but also potential misspellings. Large corporations may have to register thousands of domain
names across the globe just to protect their basic brands and trademarks.

Applicability and Sanctions of the ACPA The ACPA applies to all domain name reg-
istrations of trademarks. Successful plaintiffs in suits brought under the act can collect
actual damages and profits, or they can elect to receive statutory damages ranging from
$1,000 to $100,000.

Although some companies have been successful suing under the ACPA, there are road-
blocks to pursuing such lawsuits. Some domain name registrars offer privacy services that
hide the true owners of websites, making it difficult for trademark owners to identify
cybersquatters. Thus, before bringing a suit, a trademark owner has to ask the court for
a subpoena to discover the identity of the owner of the infringing website. Because of the
high costs of court proceedings, discovery, and even arbitration, many disputes over cyber-
squatting are settled out of court.

To facilitate dispute resolution, ICANN offers two dispute resolution forums: the Uni-
form Domain-Name Dispute-Resolution Policy (UDRP) and the Uniform Rapid Suspension
(URS) system. More disputes are resolved through the UDRP, which allows common law
trademark claims and has fewer procedural requirements. The newer URS system can be
used by only registered trademark owners with clear-cut infringement claims. The URS has
other limitations as well, but it is faster. Example 8.5 IBM once filed a complaint with the
URS against an individual who registered the domain names and
A week later, the URS panel decided in IBM’s favor and suspended the two domain names. ■

8–1d Meta Tags
Meta tags are key words that give Internet browsers specific information about a Web page.
Meta tags can be used to increase the likelihood that a site will be included in search engine
results, even if the site has nothing to do with the key words. In effect, one website can
appropriate the key words of other sites with more frequent hits so that the appropriating
site will appear in the same search engine results as the more popular sites.

Using another’s trademark in a meta tag without the owner’s permission normally con-
stitutes trademark infringement. Some uses of another’s trademark as a meta tag may be
permissible, however, if the use is reasonably necessary and does not suggest that the owner
authorized or sponsored the use.

Case Example 8.6 Nespresso USA, Inc., is a well-known espresso and coffee machine pro-
ducer, and owner of the federally registered trademark “Nespresso.” Nespresso also makes
and sells espresso capsules for use with its machines. Africa America Coffee Trading Com-
pany, which does business as Libretto, makes espresso capsules that are compatible with
Nespresso machines. Libretto’s capsules are the same shape and size as Nespresso’s, but they
are made of plastic (not aluminum like Nespresso’s). Libretto used Nes presso’s trademark on
its boxes and also used the word “Nespresso” as a meta tag in the source code for its website.

Nespresso attempted to contact Libretto and request that it stop producing and selling
espresso capsules that infringed on its trademark, but Libretto did not respond. Nespresso
filed a suit in a federal court in New York. The court concluded that Libretto had been
infringing on Nespresso’s trademark and permanently enjoined (prohibited) Libretto from
using Nespresso’s mark—including its meta tags.7 ■

7. Nespresso USA, Inc. v. Africa America Coffee Trading Co., LLC, 2016 WL 3162118 (S.D.N.Y. 2016).

“National borders
aren’t even speed
bumps on the

Timothy C. May
(Engineer and technical
and political writer)

204 UNIT ONE: The Legal Environment of Business

30301_ch08_hr_200-223.indd 204 8/30/18 12:51 PM

8–1e Trademark Dilution in the Online World
As previously explained, trademark dilution occurs when a trademark is used, with-
out authorization, in a way that diminishes the distinctive quality of the mark. Unlike
trademark infringement, a claim of dilution does not require proof that consumers are
likely to be confused by a connection between the unauthorized use and the mark. For
this reason, the products involved need not be similar, as the following Spotlight Case

Hasbro, Inc. v. Internet Entertainment Group, Ltd.
United States District Court, Western District of Washington, 1996 WL 84853 (1996).

Background and Facts In 1949, Hasbro,
Inc.—then known as the Milton Bradley
Company—published its first version of Candy
Land, a children’s board game. Hasbro is the
owner of the trademark “CANDY LAND,”
which has been registered with the U.S. Pat-
ent and Trademark Office since 1951. Over the
years, Hasbro has produced several versions
of the game, including Candy Land puzzles,
a computer game, and a handheld electronic

In the mid-1990s, Brian Cartmell and his employer, the Inter-
net Entertainment Group, Ltd., used the term
as a domain name for a sexually explicit Internet site. Anyone
who performed an online search using the word candyland
was directed to this adult website. Hasbro filed a trademark
dilution claim in a federal court, seeking a permanent injunc-
tion to prevent the defendants from using the CANDY LAND

In the Words of the Court
DWYER, U.S. District Judge.

* * * *
2. Hasbro has demonstrated a probability of proving that

defendants Internet Entertainment Group, Ltd., Brian Cartmell
and Internet Entertainment Group, Inc. (collectively referred
to as “defendants”) have been diluting the value of Hasbro’s
CANDY LAND mark by using the name CANDYLAND to identify
a sexually explicit Internet site, and by using the name string
“” as an Internet domain name which, when typed

into an Internet-connected computer, provides
Internet users with access to that site.

* * * *
4. Hasbro has shown that defendants’ use of

the CANDY LAND name and the domain name in connection with their Internet
site is causing irreparable injury to Hasbro.

5. The probable harm to Hasbro from defendants’
conduct outweighs any inconvenience that defen-
dants will experience if they are required to stop
using the CANDYLAND name. [Emphasis added.]

* * * *
THEREFORE, IT IS HEREBY ORDERED that Hasbro’s motion for

preliminary injunction is granted.

Decision and Remedy The federal district court granted
Hasbro an injunction against the defendants, agreeing that the
domain name was “causing irreparable injury to
Hasbro.” The judge ordered the defendants to immediately remove
all content from the website and to stop using
Habro’s CANDY LAND trademark.

Critical Thinking

• What If the Facts Were Different? Suppose that the website had not been sexually explicit but had sold
candy. Would the result have been the same? Explain.

• Economic How can companies protect themselves from sit-
uations such as the one described in this case? What limits each
company’s ability to be fully protected?

Spotlight on Internet Porn: Case 8.1

Candy Land is a children’s board
game. Why did its parent company,

Hasbro, Inc., sue a website?










205CHAPTER 8: Internet Law, Social Media, and Privacy

30301_ch08_hr_200-223.indd 205 8/30/18 12:51 PM

8–1f Licensing
Recall that a company may permit another party to use a trademark (or other intellectual
property) under a license. A licensor might grant a license allowing its trademark to be used
as part of a domain name, for instance.

Another type of license involves the use of a product such as software. This sort of
licensing is ubiquitous in the online world. When you download an application on your
smartphone or other mobile device, for instance, you are typically entering into a license
agreement. You are obtaining only a license to use the software and not ownership rights in
it. Apps published on Google Play, for instance, may use its licensing service to prompt users
to agree to a license at the time of installation and use.

Licensing agreements frequently include restrictions that prohibit licensees from sharing
the file and using it to create similar software applications. The license may also limit the
use of the application to a specific device or give permission to the user for a certain time

8–2 Copyrights in Digital Information
Copyright law is probably the most important form of intellectual property protection
on the Internet. This is because much of the material on the Internet (including software
and database information) is copyrighted, and in order for that material to be transferred
online, it must be “copied.” Generally, whenever a party downloads software, movies, or
music into a computer’s random access memory, or RAM, without authorization, a copy-
right is infringed.

In 1998, Congress passed additional legislation to protect copyright
holders—the Digital Millennium Copyright Act (DMCA).8 Because of its sig-
nificance in protecting against the piracy of copyrighted materials in the
online environment, this act is presented as this chapter’s Landmark in the Law

8–2a Copyright Infringement
Technology has vastly increased the potential for copyright infringement.
Even using a small portion of another’s copyrighted sound recording (digital
sampling) can constitute copyright infringement. Fair use can be asserted as a
defense to copyright infringement. Spotlight Case Example 8.7 Stephanie Lenz
posted a short video on YouTube of her toddler son dancing with the Prince
song “Let’s Go Crazy” playing in the background. Universal Music Group
(UMG) sent YouTube a take-down notice that stated that the video violated
copyright law under the DMCA. YouTube removed the “dancing baby” video
and notified Lenz of the allegations of copyright infringement, warning her
that repeated incidents of infringement could lead it to delete her account.

Lenz filed a lawsuit against UMG claiming that accusing her of infringe-
ment constituted a material misrepresentation (fraud) because UMG knew
that Lenz’s video was a fair use of the song. The district court held that UMG
should have considered the fair use doctrine before sending the take-down
notice. UMG appealed, and the U.S. Court of Appeals for the Ninth Circuit
affirmed. Lenz was allowed to pursue nominal damages from UMG for send-
ing the notice without considering whether her use was fair.9 ■

8. 17 U.S.C. Sections 512, 1201–1205, 1301–1332; and 28 U.S.C. Section 4001.
9. Lenz v. Universal Music Group, 815 F.3d 1145 (9th Cir. 2015).

Learning Objective 2
What law protects
copyrights in the digital age?

Was the use of a Prince song in a YouTube video
considered a “fair use” under the DMCA?








206 UNIT ONE: The Legal Environment of Business

30301_ch08_hr_200-223.indd 206 8/30/18 12:51 PM

Initially, criminal penalties for copyright violations could be imposed only if unauthorized
copies were exchanged for financial gain. Then, Congress amended the law and extended
criminal liability for the piracy of copyrighted materials to persons who exchange unautho-
rized copies of copyrighted works without realizing a profit.

See this chapter’s Adapting the Law to the Online Environment feature for a discussion of
copyright law in the context of video games.

8–2b File-Sharing Technology
Soon after the Internet became popular, a few enterprising programmers created software
to compress large data files, particularly music files. The best-known compression and
decompression system is MP3, which enables music fans to download songs or entire
CDs onto their computers or onto portable listening devices, such as smartphones. The
MP3 system also made it possible for music fans to access other fans’ files by engaging in
file-sharing via the Internet.

The United States leads the world in the production of creative products, includ-
ing books, films, videos, recordings, and
software. Exports of U.S. creative products
surpass those of every other U.S. industry
in value.

Given the importance of intellectual
property to the U.S. economy, the United
States has actively supported international
efforts to protect ownership rights in intel-
lectual property, including copyrights. In
1996, to curb unauthorized copying of
copyrighted materials, the member nations
of the World Intellectual Property Organi-
zation (WIPO) adopted a treaty to upgrade
global standards of copyright protection,
particularly for the Internet.

Implementing the WIPO Treaty
Congress implemented the provisions of
the WIPO treaty by enacting a new statute
to update U.S. copyright law in 1998. The
law—the Digital Millennium Copyright Act
(DMCA)—is a landmark step in the protec-
tion of copyright owners. Because of the
leading position of the United States in

the creative industries, the law also serves
as a model for other nations.

Among other things, the DMCA estab-
lished civil and criminal penalties for any-
one who circumvents (bypasses) encryption
software or other technological antipiracy
protection. Also prohibited are the man-
ufacture, import, sale, and distribution of
devices or services for circumvention.

Allowing Fair Use The act provides
for exceptions to fit the needs of librar-
ies, scientists, universities, and others. In
general, the law does not restrict the “fair
use” of circumvention methods for educa-
tional and other noncommercial purposes.
For instance, circumvention is allowed to
test computer security, conduct encryption
research, protect personal privacy, and
enable parents to monitor their children’s
use of the Internet. The exceptions are to
be reconsidered every three years.

Limiting the Liability of Internet
Service Providers The DMCA also
includes a safe-harbor provision that lim-
its the liability of Internet service providers

(ISPs). Under the act, an ISP is not liable for
any copyright infringement by its customer
unless the ISP is aware of the subscriber’s
violation. An ISP may be held liable only
if it fails to take action to shut the sub-
scriber down after learning of the violation.
A copyright holder has to act promptly,
however, by pursuing a claim in court, or
the subscriber has the right to be restored
to online access.

Application to Today’s World
Without the DMCA, copyright owners
would have a more difficult time obtaining
legal redress against those who, without
authorization, decrypt or copy copyrighted
materials. Nevertheless, problems remain,
particularly because of the global nature
of the Internet.

In the Law

“We’re into a whole new
world with the Internet,
and whenever we sort of
cross another plateau in
our development, there
are those who seek to
take advantage of it. So
this is a replay of things
that have happened
throughout our history.”

Bill Clinton
(Forty-second president of the
United States)

The Digital Millennium Copyright Act

207CHAPTER 8: Internet Law, Social Media, and Privacy

30301_ch08_hr_200-223.indd 207 8/30/18 12:51 PM

The acronym LoL generally means “laugh out loud.” But when it comes to
the popular online video game League of
Legends owned by Riot Games, Inc., LoL
means something much different. More
than 100 million people use this free multi-
player video game online each month. Of
course, competitors have eyed that large
market for years.

Taking on a Chinese Competitor
To protect its LoL copyrights, U.S.-based
Riot Games has filed a lawsuit against a
Chinese company, Shanghai MoBai Com-
puter Technology (Moby). Riot Games
alleges that Moby has “blatantly and slav-
ishly copied LoL in [Moby’s online video
game called] Arena of Battle.”a In particu-
lar, Moby’s copycat game features nearly
sixty champions with similar names, sound
effects, icons, and abilities as those used
in LoL. Moby has marketed Arena of Battle
through the Apple App Store as well as
Google Play, and it has used alternative
titles and aliases in order to sell its game.

Note that under current case law, video
gameplay is not protected by copyright law.
Gameplay describes how players interact

with a video game, such as through its plot
and its rules. Specific expressions of that
gameplay, however—as measured by look,
settings, stories, characters, and sound—
are protected.

The Mobile Game Market
in China
While LoL has been China’s top computer
desktop game for years, millions of Chinese
online game players use only mobile plat-
forms, such as smartphones or tablets. As a
result, Tencent, the parent company of Riot
Games, created a mobile version of LoL called
King of Glory. It is almost an exact copy of
LoL. King of Glory is now China’s top-grossing
Apple mobile game. Of course, there are no
copyright issues with King of Glory because
Tencent can copy its own video game.

Taking on a Cheating Software
In addition to suing Moby, as mentioned
earlier, Riot Games accused the makers of
LeagueSharp of violating the Digital
Millennium Copyright Act.b The plaintiff
claimed that the defendants had violated

the Digital Millennium Copyright Actc by
circumventing LoL’s anti-cheating software.
Customers had paid a monthly fee to use
LeagueSharp. Among other things, the ser-
vice enabled them to see hidden informa-
tion, automate gameplay to perform with
enhanced accuracy, and accumulate cer-
tain rewards at a rate not possible for a
normal human player.

The obvious question is why anybody
would have wanted to pay for LeagueSharp
services—recall that LoL is a free online
game. The reason is the advantage the
cheating players gained over ordinary play-
ers. They could, for instance, more quickly
and easily win “swords,” which they could
use to buy new characters with which to
play. LeagueSharp’s makers ultimately
agreed to pay $10 million to Riot Games.d

Critical Thinking
If LoL is free to players, why would a
Chinese company want to copy it?

a. Riot Games, Inc., v. Shanghai MoBai Computer Technology
Co., Ltd. et al, Case No. 3:17-CV-00331 (N.D.Cal. 2017).

b. Riot Games, Inc. v. Argote, Case No. 2:16-CV-5871 (C.D.Cal.

c. Pub. L. No. 105–304, 112 Stat. 2860 (1998).
d. Chalk, Andy. “Riot awarded $10 million in Leaguesharp

lawsuit settlement.” 03 Mar. 2017. Web.

Adapting the Law to the
Online Environment

Methods of File-Sharing File-sharing can be accomplished through peer-to-peer (P2P)
networking. The concept is simple. Rather than going through a central network, P2P
networking uses numerous computers or other devices that are connected to one another,
often via the Internet.

A P2P network is a type of distributed network, which may include devices distributed all
over the country or the world. Persons located almost anywhere can work together on the
same project by using file-sharing programs on distributed networks.

Peer-to-Peer (P2P) Networking
The sharing of resources among
multiple DVDs without the requirement
of a central network server.

Distributed Network A network
that can be used by persons located
(distributed) around the country or
the globe to share computer files.

Riot Games, Inc., Protects Its Online
Video Game Copyrights

208 UNIT ONE: The Legal Environment of Business

30301_ch08_hr_200-223.indd 208 8/30/18 12:51 PM

A newer method of sharing files via the Internet is cloud computing, which is essentially a
subscription-based or pay-per-use service that extends a computer’s software or storage capa-
bilities. Cloud computing can deliver a single application through a browser to multiple
users. Alternatively, cloud computing might provide data storage and virtual servers that can
be accessed on demand. Amazon, Facebook, Google, IBM, and Sun Microsystems are using
and developing more cloud computing services.

Sharing Stored Music Files When file-sharing is used to download others’ stored music
files, copyright issues arise. Recording artists and their labels stand to lose large amounts
of royalties and revenues if relatively few digital downloads are purchased and then made
available on distributed networks. These concerns have prompted recording companies
to pursue not only companies involved in file-sharing but also individuals who have file-
shared copyrighted works.

Case Example 8.8 Maverick Recording Company and other recording companies sued
Whitney Harper in federal court for copyright infringement. Harper had used a file-sharing
program to download a number of copyrighted songs from the Internet and had then shared
the audio files with others via a P2P network. The plaintiffs sought $750 per infringed
work—the minimum amount of statutory damages available under the Copyright Act.

Harper claimed that she was an “innocent” infringer because she was unaware that her
actions constituted copyright infringement. Under the act, innocent infringement can result
in a reduced penalty. The court, however, noted that a copyright notice appeared on all the
songs that Harper had downloaded. She therefore could not assert the innocent infringer
defense, and the court ordered her to pay damages of $750 per infringed work.10 ■

In the following case, the owner of copyrights in musical compositions sought to recover
from an Internet service provider, some of whose subscribers used a P2P network to share
the owner’s copyrighted compositions without permission.

Cloud Computing The delivery to
users of on-demand services from
third-party servers over a network.

10. Maverick Recording Co. v. Harper, 598 F.3d 193 (5th Cir. 2010).

Background and Facts Cox Communications, Inc., is an
Internet service provider (ISP), with 4.5 million subscribers. Some
of Cox’s subscribers shared copyrighted files, including music files,
without the copyright owners’ permission, using BitTorrent. (Bit-
Torrent is a peer-to-peer file transfer protocol for sharing large
amounts of data online.) Cox’s stated policy is to suspend or
terminate subscribers who use the service to “infringe the .  .  .
copyrights .  .  . of any party.” Despite this policy, Cox declined to
terminate infringing subscribers so as not to lose revenue.

BMG Rights Management (US), LLC, owned copyrights in
some of the music shared by the subscribers. BMG sent millions
of notices to Cox to alert the ISP to the infringing activity. Cox
deleted the notices without acting on them. BMG filed a suit in
a federal district court against Cox, seeking to hold the ISP liable

under the Digital Millennium Copyright Act (DMCA) for its sub-
scribers’ infringement of BMG’s copyrights. Cox claimed a “safe
harbor” under the act. The court issued a judgment in BMG’s favor.
Cox appealed to the U.S. Court of Appeals for the Fourth Circuit.

In the Words of the Court
Diana Gribbon motz, Circuit Judge:

*  *  *  *
[The Digital Millennium Copyright Act (DMCA)] requires that, to

obtain the benefit of the *  *  * safe harbor, Cox must have reasona-
bly implemented “a policy that provides for the termination in appro-
priate circumstances” of its subscribers who repeatedly infringe
copyrights. *  *  * Cox formally adopted a repeat infringer “policy,”
but *  *  * made every effort to avoid reasonably implementing that

BMG Rights Management (US), LLC v. Cox Communications, Inc.
United States Court of Appeals, Fourth Circuit, 881 F.3d 293 (2018).

Case 8.2








As more individuals and
companies store their data on
“the cloud,” what security issues
might arise?

(Continues )

209CHAPTER 8: Internet Law, Social Media, and Privacy

30301_ch08_hr_200-223.indd 209 8/30/18 12:51 PM

Pirated Movies and Television File-sharing also creates problems for the motion pic-
ture industry, which loses significant amounts of revenue annually as a result of pirated
DVDs. Numerous websites offer software that facilitates the illegal copying of movies. Bit-
Torrent, for instance, enables users to download high-quality files from the Internet. Pop-
corn Time is a BitTorrent site that offers streaming services that allow users to watch pirated
movies and television shows without downloading them.

Case Example 8.9 Malibu Media, LLC, produces and distributes adult erotic films through its
website Customers pay a monthly or yearly subscription fee to access an online
library of copyrighted pornographic content. Malibu hires investigators to identify individ-
uals who use BitTorrent to illegally download, reproduce, and distribute content from its
website. After investigators named Jonathan Gonzales as a suspect, Malibu filed a copyright
infringement action against him. A federal district court in Texas ruled in favor of Malibu
Media. Gonzales had infringed on fifteen of Malibu’s copyrighted films. Thus, Malibu was
entitled to damages and to an injunction prohibiting Gonzales from future infringement.11 ■

8–3 Social Media
Social media provide a means by which people can create, share, and exchange ideas and
comments via the Internet. Social networking sites, such as Facebook, Google+, LinkedIn,
Pinterest, and Tumblr, have become ubiquitous. Other social media platforms, including

11. Malibu Media, LLC v. Gonzales, ___ F.Supp.3d ___, 2017 WL 2985641 (S.D.Tex.—Houston 2017).

Instagram, Snapchat, and Twitter, have also gained popularity. Studies show that Internet
users spend more time on social networks than at any other sites. The amount of time people
spend on social media is constantly increasing.

8–3a Legal Issues
The emergence of Facebook and other social networking sites has affected the legal pro-
cess in various ways. Here, we explain some uses of social media posts in the litigation
process, as well as in the investigations that precede prosecutions or other actions. We also
discuss what can happen when employees violate their employers’ social media policies.

Impact on Litigation Social media posts now are routinely included in discovery in lit-
igation. Such posts can provide damaging information that establishes a person’s intent or
what she or he knew at a particular time. Like e-mail, posts on social networks can be the
smoking gun that leads to liability.

In some situations, social media posts have been used to reduce damages awards.
Example 8.10 Jil Daniels sues for injuries she sustained in a car accident, claiming that her
injuries make it impossible for her to continue working as a hairstylist. The jury initially
determines that her damages were $237,000, but when the jurors see Daniels’s tweets and
photographs of her partying in New Orleans and vacationing on the beach, they reduce the
damages award to $142,000. ■

Impact on Settlement Agreements Social media posts have been used to invalidate
settlement agreements that contained confidentiality clauses. Case Example 8.11 Patrick
Snay was the headmaster of Gulliver Preparatory School in Florida. When Gulliver did not
renew Snay’s employment contract, Snay sued the school for age discrimination. During
mediation, Snay agreed to settle the case for $80,000 and signed a confidentiality clause
that required his wife and he not to disclose the “terms and existence” of the agreement.
Nevertheless, Snay and his wife told their daughter, Dana, that the dispute had been settled
and that they were happy with the results.

Dana, a college student, had recently graduated from Gulliver and, according to Snay, had
suffered retaliation at the school. Dana posted a Facebook comment that said, “Mama and
Papa Snay won the case against Gulliver. Gulliver is now officially paying for my vacation to
Europe this summer. SUCK IT.” The comment went out to 1,200 of Dana’s Facebook friends,
many of whom were Gulliver students, and school officials soon learned of it. The school
immediately notified Snay that he had breached the confidentiality clause and refused to pay
the settlement amount. Ultimately, a state intermediate appellate court agreed and held that
Snay could not enforce the settlement agreement.12 ■

Criminal Investigations Law enforcement uses social media to detect and prosecute crim-
inals. A surprising number of criminals boast about their illegal activities on social media.
Example 8.12 A nineteen-year-old posts a message on Facebook bragging about how drunk
he was on New Year’s Eve and apologizing to the owner of the parked car that he hit. The
next day, police officers arrest him for drunk driving and leaving the scene of an accident. ■

Police may also use social media to help them to locate a particular suspect or to determine
the identity of other suspects within a criminal network. In fact, police officers in New York
City and other locations have even assumed fake identities on Facebook in order to “friend”
suspects and obtain information. According to at least one court, it is legally acceptable for
law enforcement officers to set up a phony social media account to catch a suspect.13

Administrative Agencies Federal regulators also use social media posts in their investi-
gations into illegal activities. Example 8.13 Reed Hastings, the top executive of Netflix, stated
on Facebook that Netflix subscribers had watched a billion hours of video the previous

Social Media Forms of
communication through which users
create and share information, ideas,
messages, and other content via the

12. Gulliver Schools, Inc. v. Snay, 137 So.3d 1045 (Fla.App. 2014).
13. United States v. Gatson, 2014 WL 7182275 (D.N.J. 2014). See also United States v. Tutis, 216 F.Supp.3d 467 (D.N.J. 2016).

policy. Indeed, *  *  * Cox very clearly determined not to terminate
subscribers who in fact repeatedly violated the policy.

The words of Cox’s own employees confirm this conclusion. In
[an] email, Jason Zabek, the executive managing the Abuse Group,
a team tasked with addressing subscribers’ violations of Cox’s
policies, explained to his team that “if a customer is terminated for
DMCA, you are able to reactivate them.” *  *  * This would allow
Cox to “collect a few extra weeks of payments for their account.”
*  *  * As a result of this practice, *  *  * Cox never terminated a
subscriber for infringement without reactivating them.

Cox nonetheless contends that it lacked “actual knowledge” of
its subscribers’ infringement and therefore did not have to termi-
nate them. That argument misses the m