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Library of Congress Cataloging-in-Publication Data
The legal and ethical environment of business : an integrated approach / Gerald R. Ferrera, Mystica M. Alexander, William P. Wiggins, Cheryl Kirschner, and Jonathan J. Darrow.
pages cm
Includes bibliographical references and index.
eISBN 978-1-4548-4632-1
1. Industrial laws and legislation—United States. 2. Trade regulation—United States. 3. Commercial law—United States. 4. Business ethics—United States. 5. Trade regulation—Moral and ethical aspects.
I. Ferrera, Gerald R. author. II. Alexander, Mystica M., author. III. Wiggins, William P. author.
KF1600.L43 2014
346.73’065—dc23
2014000168
About Wolters Kluwer Law & Business
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To my dear wife, Judith, and to our beloved granddaughter, Sophia Asha, and her beloved dog, Logan.
—G.R.F.
To my grandparents, who were my first teachers; to my mom, who is a constant source of support; and to my son, Michael, who has brought such happiness into my life.
—M.M.A.
To my lovely wife, Joanne, and our four wonderful children, Erik, Jonathan, Hannah, and Mark, for their endless love, encouragement, and support.
—W.P.W.
With much love, to my wonderful sons, Michael, Philip, and Adam; to my dear, supportive husband, Roger; to my dependable mother; and to the memory of my beloved father. Like so many
things in life, this would not have been possible without all of you.
—C.K.
To my parents, Marion and Roselyn, and my brother, Stephen, for all their love and support.
—J.J.D.
Contents
Preface
Acknowledgments
About the Authors
Part I: Legal and Ethical Overview
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
The United States Legal System
Ethics in the Business Environment
Constitutional Issues in Business
Administrative Law
Legal Aspects of the Global Business Environment
Corporate Social Responsibility
Part II: The Business
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Business Organizations
Intellectual Property
Sale of Securities and Investor Protection
Business Crimes
Antitrust
Part III: The Employee
Chapter 12 Agency Law
Chapter 13 Employment Law
Chapter 14 Discrimination in the Workplace
Part IV: The Business Sale
Chapter 15
Chapter 16
Chapter 17
Chapter 18
Contracts: Contract Formation
Contracts: Performance, Public Policy, and Global Contracts
Sales Law, Consumer Protection, and E-Commerce
The Debtor-Creditor Relationship
Part V: Business Liability
Chapter 19 Business Torts
Chapter 20 Product Liability and Warranties
Chapter 21 Environmental Law and Sustainability
Glossary
Table of Cases
Index
Preface
Acknowledgments
About the Authors
PART I: LEGAL AND ETHICAL OVERVIEW
Chapter 1: The United States Legal System
What Is the Law?
The U.S. Legal System
Understanding the Federalist System
Sources of Law
The U.S. Constitution
Treaties
Statutory Law
Administrative Law
Case Law
Understanding the Branches of Government and the Balance of Power
The Balance of Power in Action
An Example of the Balance of Power
It All Begins with Congress
Next Stop: The President
The Role of the EPA
It Is All in the Interpretation
The Court Steps In
The Court System
The Federal Court System
District Court
Court of Appeals
The U.S. Supreme Court
The State Court System
Entry-Level Court
Intermediate Appellate Court
Highest Court
Right of Appeal to the U.S. Supreme Court
Understanding Jurisdiction
Subject Matter Jurisdiction
Jurisdiction over Persons
Jurisdiction over Property
Online Jurisdiction
Venue and Standing to Sue
The Litigation Process
The Pleadings
Motions
Discovery
Trial
Appeal
Alternative Dispute Resolution
Negotiation
Mediation
Arbitration
Practical Application of Arbitration in Business Transactions
Global Perspective: Comparative Law and Legal Systems
Summary
Questions for Review
Further Reading
Chapter 2: Ethics in the Business Environment
Practical Applications of Business Ethics
Business Ethics
An Ethical Insight: Ethics and the “Newspaper Test”
Ethical Corporate Culture
Ethical Corporate Culture and the Good Reputation of the Company
Ethical Corporate Culture and “Doing the Right Thing”
An Ethical Insight: “Do What Is Right”
Due Diligence and Risk Assessment
Due Diligence
Risk Assessment
Compliance and Ethics Programs, Codes of Ethics, and Training Sessions
Chief Ethics and Compliance Officer
Ethical Corporate Governance Starts from the Top
An Ethical Insight: Corporate Ethics Starts from the Top
Ethical Culture and the Practical Problems of Business
An Ethical Insight: Ethics and the Practical Problems of Business
Manager’s Compliance and Ethics Meeting: Federal Sentencing Guidelines
The U.S. Sentencing Commission
Training Programs and the 2004 Federal USSC Sentencing Guidelines
Ethical Principles
Unethical Corporate Behavior in Violation of the “Public Trust”
An Ethical Insight: Prof. Ronald Dworkin: The “Moral Dimension” to a Lawsuit
Ethical Theory: Deontology and Teleology
Deontology
Teleology
Virtue Ethics and Executive Responsibility
Virtue Ethics
Aristotle and the Virtue of Justice
Virtue Ethics and Ethical Corporate Culture
Natural Law and Ethics
Natural Law and Common Law
Natural Law Is Self-Evident
Natural Law and Reasonable Differences
Natural Law and Ethical Corporate Culture
Categorical Imperatives and Ethics
Kant’s “Categorical Imperatives”
Kant’s “Categorical Imperatives” and Ethical Corporate Culture
Utilitarianism and Ethics
Utilitarianism as a Pragmatic Philosophy
Utilitarianism and the Greater Good to the Company’s Stakeholders
Utilitarianism and Ethical Corporate Culture
“Prima Facie” Duties and Ethics
Ross and the Value of “Promise Keeping”
“Prima Facie” Duties and Moral Obligations
“Prima Facie” Duties and Ethical Corporate Culture
“Theory of Justice” and Ethics
The First Principle: Equal Liberty Principle
The Second Principle: “Difference Principle”
Rawls’s Principles of Justice and Ethical Corporate Culture
Global Perspectives and Business Ethics
Summary
Questions for Review
Further Reading
Chapter 3: Constitutional Issues in Business
The Making of the U.S. Constitution
Federal Powers, State Powers, the Supremacy Clause, and Preemption
The Commerce Clause
Federal Regulation of Business and an “Interdependent National Economy”
State Activities That “Might Have a Substantial and Harmful Effect upon Interstate Commerce”
Dormant Commerce Clause
State Sales Tax
The Constitutional Protection of Liberty
First Amendment Protection of Speech
Different Types of Speech
Regulating Speech
Understanding the Limits of Commercial Speech
Obscene Speech
Limits on Distasteful Ideas?
Constitutional Safeguards for the Criminally Accused
The Fourth Amendment
The Fifth Amendment
The Sixth Amendment
Equal Protection of the Laws
Summary
Questions for Review
Further Reading
Chapter 4: Administrative Law
Overview of Administrative Law
The “Fourth Branch” of Government
What Is an Administrative Agency?
Naming Administrative Agencies
The Number and Growth over Time of Administrative Agencies
The Creation of Administrative Agencies
Why Create Agencies?
Agency Specialization
Legislative Gap-Filling
Other Explanations for the Rise of Administrative Agencies
State and Local Agencies
State Agencies
Local Agencies
Independent Versus Executive Agencies
Administrative Agencies: Legislative, Executive, and Judicial Powers
Legislative Powers
Agency Regulations
Where Can a Business Find Regulations?
Executive Powers
Agency Information Gathering
In-Depth Ethical Case Analysis: Pliva, Inc. v. Mensing, 131 S.Ct. 2567 (2011)
Manager’s Compliance and Ethics Meeting: Executives’ Ethical Responsibility
Licensing
Consent Decrees
Alternative Dispute Resolution
An Ethical Insight: Stephen J. Heyman
Product Recalls
Fines and Warning Letters
Judicial Powers
Appeal Within the Agency
Cease-and-Desist Orders
Attorney Fee Shifting
Agency Hearings Versus Court Trials
Limits to Agency Power
Constitutional Limits
An Ethical Insight: W.D. Ross and Indecent Speech
Legislative Limits
Agency-Specific Legislation: Enabling Acts and Amendments
General Legislation: The Administrative Procedure Act of 1946 (APA)
Types of Rulemaking
Notice-and-Comment Rulemaking
Negotiated Rulemaking
Transparency
The Federal Register
The Freedom of Information Act (FOIA)
An Ethical Insight: John Rawls and the Government in the Sunshine Act
Government in the Sunshine Act
General Legislation: Additional Checks
Executive Limits
Judicial Limits
Ripeness, Mootness, and Standing
Exhaustion of Administrative Remedies
Agency Discretion
Deference to Agency Action
Global Perspective
Administrative Law in China
Administrative Law in Turkey
Summary
Questions for Review
Further Reading
Chapter 5: Legal Aspects of the Global Business Environment
Sovereignty, Sovereign Immunity, and Comity
Sovereignty
Sovereign Immunity
Comity
Sources of International Law and Public and Private International Law
Why Abide by International Law?
Legal Validity of International Law
Public and Private International Law
Sources of International Law
Treaties and Conventions
Customary International Law
Relationship Between Domestic and International Law
Preventing and Resolving International Disputes
Communication and Cultural Misunderstandings
Transportation and Delivery Problems
Financial Risks
Resolving International Business Disputes
Negotiation
Mediation
Arbitration
International Litigation
International Trade Law and the World Trade Organization (WTO)
Tariff and Nontariff Barriers to Trade
World Trade Organization Origins
World Trade Organization Principles
Dumping
Subsidies
An Ethical Insight: Rawls and a Just World Order
The United Nations
UN Formation and Purpose
Structure and Power Allocation Within the United Nations
General Assembly
Security Council
Secretariat
International Court of Justice
Economic and Social Council
UN Agencies
United Nations Commission on International Trade Law (UNCITRAL)
World Intellectual Property Organization (WIPO)
Summary
Questions for Review
Further Reading
Chapter 6: Corporate Social Responsibility
Understanding the Nature of a Corporation
What Is a Corporation?
History of Corporations
Maximization of Shareholder Profit
Corporate Stakeholder Theory
The Social Enterprise Movement
Conscious Capitalism: Capitalism Needs a Conscience
Corporations: Being a Good Corporate Citizen
An Ethical Insight: Lucien J. Dhooge
Manager’s Compliance and Ethics Meeting: Reducing Carbon Footprints and Adequate Disclosure
Doing Well by Doing Good
The SuperCorps
The Firms of Endearment
The Evolution of the Hybrid Entity
State Constituency Statutes
B-Lab
Benefit Corporations
Purpose of a Benefit Corporation
Model Benefit Corporation Legislation
Global Perspective: International Guidelines
Global Perspective: The European Union
Summary
Questions for Review
Further Reading
PART II: THE BUSINESS
Chapter 7: Business Organizations
Sole Proprietorship
General Partnership
Limited Partnership
Limited Liability Partnership (LLP)
Limited Liability Company (LLC)
Characteristics of an LLC
Formation of an LLC
Management of an LLC
Operating Agreement
Taxation of an LLC
Termination of an LLC
Corporations
Characteristics
An Ethical Insight: Jeremy Bentham and “Private Ethics”
Starting a Corporation
Where to Incorporate
Shareholders
Directors
Officers
Stock
Dividends
Taxation
Dissolution
External Influences on Corporate Management Practices
Manager’s Compliance and Ethics Meeting: Executive Compensation—How Much Is Enough? Shareholders “Say-On-Pay”
Business Judgment Rule, Minority Shareholder Rights, and Shareholder Derivative Actions
Business Judgment Rule
Minority Shareholder Rights
In-Depth Ethical Case Analysis: Donahue v. Rodd Electrotype Company of New England, Inc., 328 N.E. 2d 505 (1954)
Shareholder Derivative Action
Piercing the Corporate Veil
What Is the Corporate Veil?
Piercing the Corporate Veil
Global Perspective: Global Business Organizations
Summary
Questions for Review
Further Reading
Chapter 8: Intellectual Property
Overview of Intellectual Property
Types of Intellectual Property
Intellectual Property Rights Are “Negative Rights”
What Is Property?
Intellectual Property: A Strange Sort of “Property”
An Ethical Insight: John Locke and the Justification for Intellectual Property
Trademarks
The Purpose of Trademarks
Trademark Registration and Renewal
Unusual Trademarks
The “Likelihood of Confusion” Standard
Trademark Dilution
The Distinctiveness Continuum
Genericide
Domain Names
An Explosion of New Generic Top-Level Domains?
Copyright
Copyright Duration
Employers and Copyright Duration
Obtaining a Copyright
Copyright Damages
Fair Use
The Public Domain
An Ethical Insight: Ross, Bentham, and Copyright Statutory Damages
Patents
Patent Duration and Exceptions
Who Can Obtain a Patent?
Costs of Obtaining and Maintaining a Patent
Exceptions to the Patent Right
In-Depth Ethical Case Analysis: Association for Molecular Pathology v. Myriad Genetics, 133 S. Ct. 2107 (2013)
Design Patents and Plant Patents
Patent Trolls and Injunctions
Trade Secrets
State Law: The Uniform Trade Secrets Act
Federal Law: The Economic Espionage Act of 1996
Manager’s Compliance and Ethics Meeting: Trade Secrets: Executives’ Ethical Responsibility
Manager’s Compliance and Ethics Meeting: Trade Secrets: Corporate Board Member Responsibilities
An Ethical Insight: Trade Secrets, John Stuart Mill—Utilitarianism
The Rise and Rise of Intellectual Property
Expanding U.S. Patent and Copyright Duration
IP Duration: Natural Rights or Utilitarian Rationale?
Expanding Scope of Intellectual Property Protection
Implications of Expanded Intellectual Property for Business
Global Perspective: The Globalization of Intellectual Property
Global Perspective: Intellectual Property Law in the European Union
Global Perspective: Intellectual Property Law in India
An Ethical Insight: John Rawls and Compulsory Licenses of Patented Products
Global Perspective: Intellectual Property Law in Russia
Summary
Questions for Review
Further Reading
Chapter 9: Sale of Securities and Investor Protection
State Securities Laws
The Securities and Exchange Commission
The Securities Act of 1933
Registration with the Securities and Exchange Commission
Exemptions from the Registration Process
Benefits and Burdens of “Going Public”
Jumpstart Our Business Startups Act
Securities Exchange Act of 1934
Reporting Requirements
Registration under the Securities Exchange Act of 1934
In-Depth Ethical Case Analysis: AUSA Life Insurance Co. v. Ernst & Young, 206 F.3d 202 (2000)
Insider Trading
What Is Inside Information?
What Are the Penalties for Insider Trading?
An Ethical Insight: Insider Trading and Ross’s Prima Facie Duty of Fidelity
Legislative Initiatives of the Twenty-First Century
Sarbanes-Oxley Act of 2002
Section 302: Corporate Responsibility for Financial Reports
Manager’s Compliance and Ethics Meeting: Whistleblower
Section 401: Disclosures in Periodic Reports
Section 404: Management Assessment of Internal Controls
Section 409: Real-Time Issuer Disclosures
Section 802: Criminal Penalties for Altering Documents
Dodd-Frank Wall Street Reform and Consumer Protection Act
Global Perspective: International Securities Law
Summary
Questions for Review
Further Reading
Chapter 10: Business Crimes
Basic Concepts of Criminal Law
Ethical Corporate Culture and Business Crimes
Origin of Criminal Law in the United States
What Is a Crime?
Civil Law and Criminal Law
Burden of Proof
Preponderance of the Evidence Standard
Beyond a Reasonable Doubt
Appeal
Felonies and Misdemeanors
Criminal Intent and Criminal Act
Strict Liability Crimes
Model Penal Code
Business Crimes
An Ethical Insight: Aristotle and Virtue of Justice
Investor Fraud
Economic Crimes
Corporate Crimes
Embezzlement
Manager’s Compliance and Ethics Meeting: Developing an Effective Ethics Training Program: U.S. Sentencing Commission Guidelines
Money Laundering
Bribery
Foreign Corrupt Practices Act (FCPA)
The FCPA Prohibits Payments by Whom?
The FCPA Prohibits Payments to Whom?
The FCPA Prohibits Payments for What Purpose?
Bribery Prevention
Common Defenses to Business Crimes
Duress
Insanity
Mistake of Fact
Mistake of Law
Statute of Limitations
Entrapment
The Criminal Process and Constitutional Protections
Law Enforcement Investigation
Probable Cause Hearing
Arrest
Booking
First Appearance
An Information and a Grand Jury Indictment
Arraignment
Plea
Trial and Appeal
Fifth Amendment Right Against Self-Incrimination
An Ethical Insight: Immanuel Kant and Thinking to Harm Another
In-Depth Ethical Case Analysis: Berghuis v. Thompkins, 130 S. Ct. 2250 (2010)
Global Perspective: International Business Crimes
Summary
Questions for Review
Further Reading
Chapter 11: Antitrust
Overview of Antitrust Law
The Goals of Antitrust Law
A Note on the Term Antitrust
A Brief History of Federal Antitrust Law
State Antitrust Laws
An Ethical Insight: Aristotle—Virtue of Justice and Antitrust Laws
The Sherman Act of 1890
Sherman Act §1: Contracts in Restraint of Trade
Vertical Versus Horizontal Restraints
“Per Se” Versus “Rule of Reason”
A Sliding Scale
Horizontal Price Fixing
In-Depth Ethical Case Analysis: United States v. Brown University, 5 F.3d 658 (3d Cir. 1993)
Vertical Price Fixing
Manager’s Compliance and Ethics Meeting: Ethics of Collusive Bidding and Antitrust Law
Horizontal Market Allocation
Vertical Market Allocation
Group Boycott
Selling Versus Buying
Sherman Act §2: Monopolies
What Is Monopolization?
An Ethical Insight: Jeremy Bentham—Utilitarianism and Antitrust Laws
The Clayton Act of 1914
Clayton Act §2: Price Discrimination
An Ethical Insight: Immanuel Kant and Antitrust Behavior
Primary Line Injury
Secondary Line Injury
Tertiary Line Injury
Defenses
Recommendation to Repeal the Robinson-Patman Act
Clayton Act §3: Tying Arrangements
Tying and Price Discrimination
Clayton Act §7: Mergers
Types of Mergers
Premerger Notification
FTC and DOJ Merger Guidelines
Celler-Kefauver Act of 1950
Clayton Act §8: Interlocking Directorates and Officers
Federal Trade Commission Act of 1914
Antitrust Enforcement
Public Enforcement: FTC, DOJ, and Other Federal Agencies
Public Enforcement: State Attorneys General
Private Enforcement
An Ethical Insight: W.D. Ross—Antitrust and the Duty of Reparation
Penalties and Remedies for Antitrust Violations
Criminal Penalties
Civil Damages and Equitable Remedies
DOJ Leniency Program
Exemptions and Limitations
Global Perspective
Global Perspective: Competition Law in South Korea
Global Perspective: Competition Law in the European Union
Summary
Questions for Review
Further Reading
PART III: THE EMPLOYEE
Chapter 12: Agency Law
What Is an Agency?
Forming the Agency Relationship
Agency Formation in General
Special Situation—Agency by Estoppel
Independent Contractors Versus Employees
Why Is the Distinction Between Employees and Independent Contractors Important?
Manager’s Compliance and Ethics Meeting: Cash Paid to a Foreign Official by an Employee/Agent to Make a Sale Can Go a Long Way—to Jail!
Factors in Determining the Difference Between Independent Contractors and Employees
Types of Authority
Actual Authority
Implied Authority
Apparent Authority
In-Depth Ethical Case Analysis: Motorsport Marketing, Inc. v. Wiedmaier, Inc., 195 S.W.3d 492 (Mo. App. 2006)
Rights and Duties of Principals and Agents
Principal’s Duties to Agent
An Ethical Insight: John Rawls and an Agent’s Expectation to Receive What’s Ethically Due from the Principal under the Agency Agreement
The Fiduciary Duty
Agent’s Duty to Principal
Loyalty
Performance
Notification
Accounting
Obedience
Liability of Principals and Agents
Contractual Liability of Principal and Agent
Tort Liability of Principal and Agent
Principal’s Liability for an Independent Contractor’s Negligence
Principal’s Vicarious Liability for an Employee’s Negligence
An Ethical Insight: W.D. Ross and the Ethical Obligations of an Agent at a Trade Show Not to Misrepresent the Quality of a Product
Tort Liability of Principal and Agent—Intentional Torts and Crimes
Terminating the Agency Relationship
Summary
Questions for Review
Further Reading
Chapter 13: Employment Law
Employment-at-Will
Public Policy Exception
Whistleblower Protection
Refusal to Perform an Illegal Act
Exercising a Right or Privilege
In-Depth Ethical Case Analysis: Sullivan v. Harnisch 2012 WL1580602 New York Court of Appeals
Implied Contract Exception
Covenant of Good Faith and Fair Dealing Exception
Employers’ Obligations to the Employee
Minimum Wage and Hour Laws and Child Labor Restrictions
An Ethical Insight: John Rawls and the Fair Labor Standards Act
Family and Medical Leave Act
Maintaining Workplace Safety
Workers’ Compensation
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)
Employees’ Right to Unionize
Employee Obligations to the Employer
Nondisclosure Agreements
Covenant Not to Compete
Privacy in the Workplace
Drug Testing
Polygraphs
Monitoring an Employee’s Actions
Manager’s Compliance and Ethics Meeting: Changing Your Clothes in a Private Office—Is Someone Watching?
Monitoring Electronic Activities
Protecting Privacy Rights in Electronic Communications
Privacy in E-Mail Communications
Cell Phone Privacy
Privacy in Social Media
Global Perspective: International Aspects of Employment Law
Summary
Questions for Review
Further Reading
Chapter 14: Discrimination in the Workplace
Title VII of the Civil Rights Act of 1964
An Ethical Insight: St. Thomas Aquinas: Unjust Laws and the Civil Rights Movement
Procedure to File a Claim
An Ethical Insight: John Finnis: Moral Absolutes and Workplace Discrimination
Intentional Discrimination
Unintentional Discrimination
In-Depth Ethical Case Analysis: Ricci v. DeStefano, 129 S.Ct. 2658 (2009)
Protected Classes
Race/Color Discrimination
National Origin Discrimination
Religious Discrimination
Gender Discrimination
Pregnancy Discrimination
Pay Differentials Based on Gender
An Ethical Insight: John Rawls and Ttile VII of the Civil Rights Act
Sexual Harassment
Employer Liability for Harassment
Harassment by Supervisors
Harassment by Coworkers and Nonemployees
Discrimination Based on Age
Making the Case
Discrimination Based on Disability
Understanding the Term Disability
Manager’s Compliance and Ethics Meeting: Company Layoffs and Age Discrimination
Genetic Testing
Making the Case
Reasonable Accommodation
Undue Hardship
Defenses to Employment Discrimination
Bona Fide Occupational Qualification
Seniority or Merit Systems
After-Acquired Evidence
Retaliation
Remedies
Affirmative Action
Global Perspective
Global Perspective: The European Union
Global Perspective: China
Global Perspective: India
Summary
Questions for Review
Further Reading
PART IV: THE BUSINESS SALE
Chapter 15: Contracts: Contract Formation
What Is a Contract?
Contract Definition
Contract Terms
Freedom of Contract
Role of Contracts in Business
Requirements for a Valid Contract
Sources of Contract Law
Uniform Commercial Code (UCC)
Restatement (Second) of Contracts
Agreement in General
Point of Commitment
Valid Offers
Definition and Requirements for a Valid Offer
An Ethical Insight: W.D. Ross’s Prima Facie Duty of Fidelity and “Promise Keeping”
Language of Present Commitment
Definite Terms
Communication to the Offeree
Special Situations—Advertisements, Online Auctions, and Bids
Termination of Offers
Termination of Offers by Lapse of Time
Manager’s Compliance and Ethics Meeting: Contract Criminal Liability
Termination of Offers by Operation of Law
Termination of Offers by Revocation
Option Contracts
UCC Firm Offers
Offer for a Unilateral Contract
Promissory Estoppel
Termination of Offers by Rejection and Counteroffers
Valid Acceptances
Requirements for a Valid Acceptance
In-Depth Ethical Case Analysis: Trademark Properties Inc. v. A&E Television Networks, 422 Fed.Appx. 199, 2011 WL 1350758 (C.A. 4 S.C.)
Silence as Acceptance
Other Expressions of Agreement
Term Sheets, Letters of Intent, and Memorandum of Understanding
An Ethical Insight: Kant’s Ethics on a Letter of Intent
Agreements to Agree
The Consideration Requirement
What Is Consideration?
What Is Not Consideration?
Past Consideration
An Ethical Insight: Aquinas, an Excessive Selling Price, and Contract Consideration
Preexisting Duty Rule
Gifts and Donations
Capacity to Contract
Minors
Mental Capacity
Summary
Questions for Review
Further Reading
Chapter 16: Contracts: Performance, Public Policy, and Global Contracts
Legality and Public Policy Considerations
Statutory Violations
Public Policy Versus Enforcement of Agreements
Unconscionable Agreements
Adhesion Contracts
Usury Law
Noncompetition Clauses
When Do Contracts Have to Be in Writing?
Origins of the Statute of Frauds
Agreements Subject to the Statute of Frauds
Writing Sufficient to Satisfy the Statute of Frauds and Electronic Signatures
Exceptions to the Statute of Frauds
Results of Noncompliance
Writing, Interpreting, and Proving the Terms of a Contract
Rules of Contract Interpretation
Parol Evidence Rule
Types of Contracts
Bilateral Contracts
Unilateral Contracts
Valid, Voidable, and Void Agreements
Enforceable and Unenforceable Contracts
Executed and Executory Contracts
Assent and Contract Defenses
Misrepresentation and Fraud
Manager’s Compliance and Ethics Meeting: Ethics of Selling Potentially Unsafe Play Tents
Duress
Undue Influence
Assignment and Delegation
Assignment
Delegation
Discharge
Completion of the Contract or Discharge by Agreement
Excuses from Performance: Impossibility
An Ethical Insight: W.D. Ross and the “Impossibility of Performance”
Excuses from Performance: Commercial Frustration
In-Depth Ethical Case Analysis: Parker v. Arthur Murray, 295 N.E.2d 487 (Ill. App. 1973)
Excuses from Performance: Terrorism and Other Force Majeure Conditions
Excuses from Performance: Waiver
Statute of Limitations
Third Parties and Contracts
Intended Beneficiaries
Incidental Beneficiaries
Conditions and Breaches of Contract
Conditions
Breaches in General
Material Breach
Minor Breach
Duty of Good Faith
Anticipatory Repudiation
Remedies
An Ethical Insight: W.D. Ross and the Ethical Duty to Mitigate Damages
Damages for Expectation Interest
Damages for Reliance Interest
Damages for Restitution Interest
An Ethical Insight: Immanuel Kant and W.D. Ross on the Ethical Duty to Keep a Promise
Compensatory and Consequential Damages
Punitive Damages
Liquidated Damages and Limitation of Liability
Equitable Remedies—Rescission
Equitable Remedies—Specific Performance and Injunction
Unjust Enrichment
Global Perspective: Contracts
Summary
Questions for Review
Further Reading
Chapter 17: Sales Law, Consumer Protection, and E-Commerce
Sales Law
Article 2 of the Uniform Commercial Code
What Is a Contract for the Sale of Goods?
Merchants and Consumers
Who Is a Merchant?
Why Is a Merchant Treated Differently Than a Consumer?
An Ethical Insight: Karl Llewellyn and Reasonable Commercial Transactions
UCC Article 2A—Lease of Goods
Firm Offer by a Merchant
Acceptance of an Offer to Buy, Sell, or Lease Goods
Acceptance by Shipping
Acceptance by Responding
Special Situation: Shrink-wrap Acceptance
Determining the Contract Terms
Open Terms
Different Terms in a Valid Acceptance
Additional Terms in a Valid Acceptance
Implied Duty of Good Faith
The Difference Between Good Faith and an Ethical Standard of Care
The Statute of Frauds—UCC 2-201(1) and UCC 2A-201(1)
Special Rules for Merchants—UCC 2-201(2)
Specially Manufactured Goods
Admitting to a Contract
PART Performance
Obligations of the Seller
Conforming Goods
Place of Delivery—UCC 2-308
Tender of Delivery—UCC 2-503(1)
Perfect Tender Rule and Its Exceptions
Perfect Tender Rule—UCC 2-601
Exceptions: Cure—UCC 2-508
Exceptions: Substitution of Carriers—UCC 2-614(1)
Exceptions: Commercial Impracticability—UCC 2-615(a)
Exceptions: Destruction of Identified Goods—UCC 2-613
Exceptions: Noncooperation—UCC 2-311(3)(b)
Obligations of the Buyer
Payment at the Time and Place the Buyer Receives the Goods—UCC 2-310(a)
Acceptance by the Buyer After a Reasonable Opportunity to Inspect the Goods—UCC 2-606(1)(a)
Anticipatory Repudiation
Remedies
Remedies of the Seller
Manager’s Compliance and Ethics Meeting: The Ethics of Anticipatory Repudiation of a Sales Contract
Remedies of the Buyer
Title to Goods and Risk of Loss
Passage of Title
In-Depth Ethical Case Analysis: Bakalar v. Vavra, 819 F. Supp. 293 (S.D.N.Y. 2011)
Risk of Loss
Insurable Interests
E-Signatures
Uniform Electronic Transactions Act (UETA)
Electronic Signatures in Global and National Commerce Act of 2000 (E-SIGN)
Consumer Protection Law
History of Consumer Protection Law
What Does Consumer Protection Law Cover?
Consumer Protection Federal Statutes
The Federal Trade Commission Unfair and Deceptive Acts and Practices
Deceptive Advertising
Federal Food, Drug, and Cosmetic Act and the Food and Drug Administration
Consumer Product Safety Act and the Consumer Product Safety Commission
Global Perspective
Summary
Questions for Review
Further Reading
Chapter 18: The Debtor-Creditor Relationship
The Debtor-Creditor Relationship
Types of Creditors
Secured Creditors
Unsecured Creditors
Preferred Creditors
Secured Creditors—UCC Article 9
Perfecting a Security Interest
Mortgages and Real Estate
Sureties and Guarantors
Garnishment
Liens
Artisan’s Liens—Personal Property
Mechanic’s Lien—Real Property
Judgment Lien
Exempt Property
Lien Discharge
Manager’s Compliance and Ethics Meeting: Is It Ethical to Violate the Terms of a Debtor/Creditor Agreement If No One Is Financially Harmed?
Federal Bankruptcy Laws
Purpose of Bankruptcy Laws
Bankruptcy Court
Bankruptcy Discharge
Types of Bankruptcy
Chapter 7 Liquidation
Eligibility
An Exception
Property, Income, and Creditors
Payment and Discharge
Chapter 11 Reorganization
Restructuring Business Operations
Disclosure Statement
The Trustee
Creditors’ Committee
An Ethical Insight: Utilitarianism and Chapter 11 Bankruptcy Reorganization
Fraudulent Transfers
In-Depth Ethical Case Analysis: ACLI Government Securities, Inc. v. Daniel Rhoades and Nora Rhoades, 653 F. Supp. 1388 (1987)
Global Perspective
Summary
Questions for Review
Further Reading
PART V: BUSINESS LIABILITY
Chapter 19: Business Torts
Torts and Business Torts
Unintentional Torts (Negligence)
Defenses
Intentional Torts
Business Torts
Fraudulent Misrepresentation
Negligent Misrepresentation
Intentional Interference with Contractual Relations
In-Depth Ethical Case Analysis: Mathis v. Liu, 276 F.3d 1027 (2002)
Intentional Interference with Prospective Economic Advantage
Conversion
Commercial Disparagement
An Ethical Insight: John Rawls: The Equal Liberty Principle and the Ethics of Commercial Disparagement
Manager’s Compliance and Ethics Meeting: The Business Tort of Commercial Disparagement
Damages
Nominal Damages
Compensatory Damages
Actual Damages
General Damages
Punitive Damages
Damages: Reform Legislation
Global Perspective
Summary
Questions for Review
Further Reading
Chapter 20: Product Liability and Warranties
What Is Product Liability Law?
Product Liability: Origin in Contract Law
Product Liability Suits Based on a Negligence Theory
Product Liability Suits Based on a Strict Liability
An Ethical Insight: John Locke—Actions Follow Thoughts: Why Do Some Executives “Cross the Line?” and Place Profits Above Safety?
Restatement (Third) of Torts—Product Liability: Design Defects, Manufacturing Defects and Marketing Defects
Need to Establish a “Defect” in the Product
Design Defects
Manufacturing Defects
Manager’s Compliance and Ethics Meeting: The Fewer Yellow Teeth the Better
Marketing Defects
In-Depth Ethical Case Analysis: Liriano v. Hobart Corporation, 170 F.3d 264 (2d Cir. 1999)
Defenses to Product Liability Claims
Warranties
Express Warranties
Implied Warranties
Implied Warranty of Merchantability
Implied Warranty of Fitness for a Particular Purpose
Global Perspective: International Product Liability Law
Summary
Questions for Review
Further Reading
Chapter 21: Environmental Law and Sustainability
Protection for the Environment
Protecting the Air
An Ethical Insight: John Stuart Mill: Utilitarianism and Environmental Law
Clean Air Act
Emissions Standards
Greenhouse Gases
In-Depth Ethical Case Analysis: Massachusetts v. EPA, 127 S. Ct. 1438 (2007)
Global Perspectives: International Efforts to Combat Air Pollution
Protecting the Water
Clean Water Act
Safe Drinking Water Act
Marine Protection, Research, and Sanctuaries Act, aka Ocean Dumping Act
Manager’s Compliance and Ethics Meeting: Wetland, Civil Engineers, and the Ethics of Their Second Opinion
Global Perspective: International Efforts with Regard to Water Pollution
Preventing Harm from Toxic Substances
Toxic Control Substances Act
Global Perspective: International Efforts with Regard to Toxic Substances
Safely Disposing of Waste
Resource Conservation and Recovery Act
Comprehensive Environmental Response, Compensation, and Liability Act
Electronic Waste
Global Perspective: International Efforts to Combat Hazardous Waste
Alternative Energy
The Energy Independence and Security Act
Global Perspective: International Commitment to Alternative Energy
Summary
Questions for Review
Further Reading
Glossary
Table of Cases
Index
We are pleased to introduce this first edition of The Legal and Ethical Environment of Business: An Integrated Approach. The new approach taken in this
textbook was developed in response to the realities of learning to do business in the contemporary global context. The book covers, comprehensively and
crisply, all the topics traditionally found in the legal environment of business textbooks, presented in a readable, accessible writing style. But in addition, it
integrates that law with two themes of paramount importance in today’s business world: the pursuit of ethical business practice and the understanding of
the international dimensions of business and law.
To prepare students for the new realities of the workplace, regulatory and legal environment curricula must include meaningful ethics coverage.
Current industry norms, practices, and legislation call for the incorporation of ethics into decision making and for a new approach to business structures
that satisfies legal requirements and adopts and implements best practices. Most major corporations in the United States, for example, have adopted a
Compliance and Ethics Program that includes a corporate Code of Ethics and mandates training for executives and managers in understanding legal
compliance, corporate ethical codes, due diligence, risk assessment, and the resolution of ethical dilemmas. Many large companies now have chief ethics
and compliance officers, reporting directly to the board or to the chief executive officer, who are responsible for protecting and enhancing the company’s
reputation, oversight of legal compliance, complying with the company’s Code of Ethics, and maintaining ethical standards within the company.
Legislative initiatives over the past decade, responding to high-level and widely publicized ethical infractions and criminal wrongdoings, have resulted in
the passage of far-reaching initiatives such as the Sarbanes-Oxley Act of 2002 and the U.S. Sentencing Guidelines. Corporate boards increasingly include
ethics committees charged with reviewing and approving major corporate initiatives, such as whistleblower protection, and compliance with the company’s
internal code of ethics.
This high-level focus on ethics, both internally and externally, demands increased, thoughtful ethics coverage to prepare students for the business
world they will encounter. Traditionally, ethical coverage in many legal environments of business texts has been limited to a single chapter, perhaps
coupled with brief case questions on ethics scattered elsewhere in the book. The Legal and Ethical Environment of Business takes a new approach. Here, a
foundational chapter is devoted entirely to ethical theory and analysis, and ethics coverage is integrated throughout the book and featured in nearly every
chapter. Ethical theory is interwoven with practical applications using several novel pedagogical tools we developed to promote focused, thoughtful inquiry
and to highlight the interplay of ethics and law. We have found in our own teaching that these methods can help students learn to analyze judicial opinions
more effectively and to achieve a deeper understanding of the legal environment of business:
â–  An Ethical Insight. Boxes throughout the text spotlight the thinking of selected ethicists and business executives, illustrating the basis of legal and
business strategies in ethical theory, principle, or practice.
■ Manager’s Compliance and Ethics Meeting. Frequent simulations of managers’ meetings address ethical issues, along with applicable law, to help
readers explore fundamental ethical dilemmas, often through multiple perspectives.
â–  In-Depth Ethical Case Analysis. These extended case reviews identify the ethical issue in an appellate decision and review the case from an ethical
perspective, applying classical ethical principles and theory to the judicial decision and case holding.
Although a thorough and deep understanding of the ethical and legal environment of business in the United States is fundamental to this text and course,
this knowledge has today an ever-widening applicability. Economic interdependence, advances in technology and transportation, liberalization of
international trade law, and greater political freedom in many countries around the globe are just a few of the factors contributing to the enormous increase
in and reliance on international business transactions. This book pursues two distinct approaches to international business. First, it integrates international
coverage by including, in addition to a chapter devoted to international business transactions, relevant international law components at the ends of most
chapters. Second, and more importantly, the international coverage offered goes beyond the usual comparative law topics. Instead, most chapters include
substantial coverage of a central topic in international business law, such as bribery and the Foreign Corrupt Practices Act, key provisions of the
Convention of Contracts for the International Sales of Goods, and a comparison of the Uniform Commercial Code and the UN Convention on Contracts for
the International Sale of Goods. Selected for their relevancy, practicality, and importance, knowledge of these international topics will help prepare
students to embark on a career in the expanding world of business.
The accreditation requirements of business schools reinforce the need for thorough ethical coverage within the Legal Environment of Business
context. In April 2013, the Association to Advance Collegiate Schools of Business adopted new accreditation standards, and this textbook was written in
part to help academic institutions comply with those new standards. In particular, the book addresses Standard 9: “Curriculum content is appropriate to
general expectations for the degree program type and learning goals.” The standard further specifies:
â–  General Skill Area. Ethical understanding and reasoning (able to identify ethical issues and address the issues in a socially responsible manner)
â–  General Business and Management Knowledge Area. Economic, political, regulatory, legal, technological, and social contexts of organizations in a
global society and social responsibility, including sustainability, and ethical behavior and approaches to management [Emphasis added.]
This textbook is also an ideal choice for schools holding or aspiring to achieve EQUIS accreditation from the European Foundation for Management
Development. It provides the comprehensive coverage of international law expected of schools holding EQUIS accreditation.
Our objectives in writing this book were to provide comprehensive legal and ethical coverage of the business environment, to convey information
clearly and concisely, to integrate ethical and international perspectives throughout the book, to develop an appreciation of the engaging nature of law and
ethics, and to share with students the insights we have gained from our many cumulative years of study and experience in the field. We welcome instructors
and students to this text and to the fascinating and challenging journey it represents: pursuit of a deep understanding of and appreciation for the productive
integration of law, ethics, and global issues in the twenty-first-century legal and ethical environment of business.
Welcome to this textbook and congratulations on undertaking the study of the Legal and Ethical Environment of Business. We were motivated to write this
book to help you understand and appreciate how law and, in a special way, ethics should be understood and used by executives, managers, and
entrepreneurs in today’s global business environment.
As you proceed through this book, you will be challenged from a professional perspective to see how ethical dilemmas and legal problems permeate
the business environment. Chapter 2, “Ethics in the Business Environment” introduces classic ethical principles that will support you in your efforts to
learn to think about business and legal issues from an ethical perspective. Our objective is to help you understand what it means to “do the right thing” as a
manager prepared to contribute to the development and maintenance of an ethical corporate culture. Elements in our approach include case illustrations and
court decisions that demonstrate the legal resolution of business disputes; insights in most chapters into the global business environment through
explanations of relevant international business practices or agreements; and practical examples throughout illustrating the ethical dilemmas and legal
problems that frequently arise in business situations.
Specific features show these ideas in practice. The Ethical Insight features, for example, provide brief but practical insights on ethics from business
executives and philosophers. Building on these insights, the In-Depth Ethical Case Analysis feature shows court decisions from a legal and ethical
perspective. The Manager’s Compliance and Ethics Meeting feature offers practical illustrations of how managers discuss and resolve business and legal
problems through the application of ethical principles. These concerns and methods are knit together as well in Chapter 8, “Corporate Social
Responsibility,” a concept increasingly embraced by companies worldwide.
We are honored to assist you in developing your understanding of the international, ethical, and legal dimensions of today’s business environment.
I gratefully acknowledge the mentoring of Chancellor Gregory H. Adamian of Bentley University when Dr. Adamian chaired the law department and later
when he was president of Bentley. I also acknowledge the wisdom and support of the late Prof. Edwin W. Tucker and his many years of treasured
friendship. I gratefully acknowledge my development in business ethics through the teaching of Dr. Michael Hoffman, the founder of the Bentley Center of
Business Ethics, and especially the instruction in ethics by the late philosopher Prof. Frank Reeves, also associated with the Bentley Center of Business
Ethics. I acknowledge the assistance of Prof. Tony Buono, director of the Alliance of Ethics and Social Responsibility at Bentley University, for his
informative guidance on business ethics issues. Any misinterpretations of selected ethical theories applied to business problems are my own, especially
those that go beyond their traditional use. My colleagues on the team of authors for this book and the publishing staff have made this venture a memorable
joy.
A final loving acknowledgment to my wife, Judith, who for many years has patiently endured my constant response: “I’m almost finished.”
—Gerald R. Ferrera
I acknowledge the support and guidance of my friend and mentor, Gerald Ferrera, who has made my work on this project possible. I also thank my pastor
of 20 years, Father John Connelly, for his encouragement and support throughout this process. A special thanks to Fred Costantino who provided countless
hours of technical help. Thanks to Grace Alexander, Michael Alexander-Yang, and John Hayward for their useful advice, and thanks also to Marianne
DelPo Kulow and Cynthia Pasciuto for sharing their expertise. Last, I thank my coauthors who have made working on this project a joy.
—Mystica M. Alexander
I gratefully acknowledge the support and friendship of Dr. Michael Page, Provost and Vice President for Academic Affairs at Bentley University. Special
thanks to my longtime friend and colleague, Jerry Ferrera, whose vision and leadership made this book possible, and to my other coauthors for their insight,
dedication, and humor, all of which contributed immensely to the joy and pleasure of this intellectual journey.
—William P. Wiggins
I am deeply grateful to Dean Carolyn Hotchkiss and Professor Ross Petty, both of Babson College, for their sage advice and guidance over the past many
years. My professional successes are due in some part to their guidance; my failures are due to my shortcomings. I am also grateful for Beverly Balconi’s
administrative support and cheerfulness and for Kathy Esper’s encouragement, wisdom, and friendship. Last, my coauthors have been a dream to work
with—my thanks for the opportunity to work on this project and, more importantly, to work with you.
—Cheryl Kirschner
I gratefully acknowledge Stephen M. Darrow and Katherine E. King for their substantial efforts in reviewing and making suggestions to the antitrust,
intellectual property, and administrative law chapters, and thank Michael Adelman for his able research assistance. Thanks also to Deniz Tuncel and
Ceylan Kara for providing research leads regarding certain international materials.
—Jonathan J. Darrow
The authors all also gratefully acknowledge David Herzig, associate publisher, for seeing the value of the new model of integrating ethics, global issues,
and law and for sharing our vision.
The authors also gratefully acknowledge the professional work of Susan Boulanger, developmental editor, and her collaborative efforts in moving the
project along. She has provided us with invaluable assistance and insight on this endeavor.
The authors thank art editor Naomi Kornhauser for guidance and assistance in the selection of photographs and for her professional attention to detail
and her patience in selecting appropriate illustrations and securing copyright permissions.
The authors gratefully acknowledge permissions editor Trish O’Hara and her valuable, professional assistance in obtaining copyright permissions.
The authors gratefully acknowledge Steven Silverstein, senior account manager, Legal Education, for seeing the value of this textbook at the start of
the project.
Last, the authors are deeply appreciative of the invaluable assistance and the many hours Fred Costantino devoted to the development of this text. We
are in awe of his computer skills. His patience, attention to detail, and energy truly helped make this book possible.
Cover photo by Jon Feingersh/Blend.
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GERALD R. FERRERA is the Gregory H. Adamian Professor of Law Emeritus at Bentley University and was the first member of the law faculty to hold
that endowed chair. In 2002 Professor Ferrera received the Academy of Legal Studies in Business Senior Faculty Award of Excellence. He chaired the Law
Department at Bentley for 17 years. Over his teaching career of 45 years at Bentley University, he has been active in the legal environment of business
curriculum development with an ethical component and has coauthored textbooks on business law, the legal environment of business, and cyberlaw. His
scholarly articles on ethics and jurisprudence, authored or coauthored, were published in The American Journal of Jurisprudence and the Richmond
Journal of Law and the Public Interest. He has also authored or coauthored published material in the New York University School of Law Journal of
Legislation and Public Policy, the Northwestern Journal of Technology and Intellectual Property, Texas Intellectual Property Law Journal, the American
Business Law Journal, Marquette Law Review, Pepperdine Law Review, Journal of Legal Studies Education, Business Law Review, and Cleveland State
Law Review. He is currently a research fellow at the Center for Business Ethics, Bentley University, and a past president and current member of the
executive committee of the North Atlantic Regional Business Law Association. He received the Ralph C. Hober publication award given by the Academy
of Legal Studies in Business and the Bentley University Scholar of the Year Award. His teaching awards include the Bentley University Gregory H.
Adamian Excellence in Teaching Award, numerous Bentley University Innovation in Teaching Awards, and the Master Teacher Award from the Academy
of Legal Studies in Business. He holds a B.S. in Finance from Boston College, a J.D. from the New England School of Law/Boston, and an M.S.in
Taxation from Bentley. He is a member of the State Bar of Massachusetts and federal bars.
MYSTICA M. ALEXANDER is Assistant Professor in the Law, Taxation, and Financial Planning Department at Bentley University. A graduate of
Harvard Law School, Mystica practiced corporate and tax law for several years before moving into academia. She currently teaches business law and ethics
as well as courses in the Masters of Science in Taxation Program. In addition to her role in the classroom, Mystica has been involved with curriculum
development at the undergraduate and graduate level. She is a past Holmes Cardozo finalist for best conference paper at the Academy of Legal Studies in
Business and the recipient of an Innovation in Teaching Award from Bentley University.
WILLIAM P. WIGGINS is Professor in the Law, Taxation, and Financial Planning Department at Bentley University. In addition to his faculty
responsibilities, Professor Wiggins serves as chair of the Bentley University Institutional Review Board and coordinator of the Bentley Research Council.
Over the years, Professor Wiggins has held a variety of administrative positions at the university and has chaired many of the university’s major task
forces. Most recently, he served as Associate Dean of Business for Academic Affairs, which included responsibilities for directing the university’s AACSB
and EQUIS accreditation processes.
Professor Wiggins is recipient of Bentley’s highest teaching award: The Gregory H. Adamian Excellence in Teaching Award. He has developed and
taught a wide variety of courses at the undergraduate and graduate levels, including a tax controversy practicum for graduate tax students for which he
received a Bentley University Innovation in Teaching Award. Professor Wiggins has coauthored a leading textbook and a leading treatise on tax practice
and procedure and has published articles in academic and professional journals and presented his work at international, national, and regional conferences.
Professor Wiggins holds a bachelor’s degree and a master’s degree from Bentley University and a JD from Suffolk University Law School. He is a member
of Beta Gamma Sigma, the honor society for business students and faculty.
CHERYL KIRSCHNER is Senior Lecturer in Law at Babson College. She received a BA from the University of Rochester in English and political
science and a JD from Boston University School of Law. At Babson, she teaches undergraduate and graduate courses in business law and international
business law. She was awarded the Babson College Dean’s Award for Excellence in Undergraduate Teaching and is deeply involved in curriculum
development and revision. She also serves as editor-in-chief for the Babson Case Publishing Center. The Academy of Legal Studies in Business awarded
her the Best International Case in 2008 for her best-selling case, Zidane’s Last Red Card. She coteaches Babson’s offshore course in South Africa, where,
in partnership with the University of Stellenbosch, students from both colleges teach entrepreneurship to underserved populations in the Cape Town area.
JONATHAN J. DARROW holds a BS in biological sciences from Cornell, a JD from Duke, and an MBA from Boston College, and completed the LLM
and SJD programs (the PhD of the law discipline) at Harvard Law School. After admission to the bar, Dr. Darrow practiced law in the Silicon Valley
offices of Cooley Godward and later worked on patent litigation matters at Wiley Rein & Fielding in Washington, DC. He has taught law at Boston College
and Plymouth State University, provided research assistance to the World Trade Organization and the World Health Organization, spoken widely on legal
topics throughout the United States and in Europe, given testimony before the Massachusetts Joint Committee on the Judiciary, and has published more
than 20 articles and other works in numerous publications, including the Stanford Technology Law Review, the NYU Journal of Legislation and Public
Policy, and the Harvard Journal of Law and Technology. Dr. Darrow is a coauthor of the leading textbook Cyberlaw: Text and Cases. He currently teaches
at Bentley University and researches issues of pharmaceutical law and policy at Brigham and Women’s Hospital/Harvard Medical School.
Chapter Objectives
1. To understand the structure of the U.S. legal system and the significance of the balance of power
2. To know the various sources of law and to understand the relative authority of such sources
3. To understand the basics of the process by which a case moves through the court system, with emphasis on the concepts of jurisdiction, venue, and
standing to sue
4. To understand the special jurisdictional challenges posed by online transactions
5. To recognize that the majority of cases are resolved, not through litigation, but through an alternative form of dispute resolution
Practical Example: Early Beginnings of the Legal System
They were steaming hot and humid days in the State House of Philadelphia in 1787. The small room, without air conditioning, was stuffy and
uncomfortable, the curtains were closed, and the press was not allowed to hear the deliberations. In this room, 55 white males, 25 without any formal
education, gathered together; the youngest was 26, and the oldest, a fellow named Ben Franklin, was 81. Most of the men were living out of suitcases in
hotels far from their homes. A tall, dignified, quiet war hero presided over the assembly. George Washington was by then the most respected person in the
nation. At the end of five months of deliberations that resulted in the U.S. Constitution, something was still lacking for a necessary ratification by the states.
Between 1787 and 1788 the New York newspapers published essays under the name “Publius,” written by James Madison, John Jay, and Alexander
Hamilton. Those political essays are now known as The Federalist Papers. Our Bill of Rights, the first ten amendments of the U.S. Constitution, is a
reflection of the values found in those essays. They essentially guarantee individual liberties and limit the role of the federal government.
Throughout this chapter you will see how the U.S. legal system tries to preserve the delicate balance between individual rights and the need for a
federal government that attempts to provide for the common welfare of the nation. Keep in mind as you read and study the legal environment of business,
including applicable federal and state laws and regulations, that many of the underlying principles of business laws and traditional ethical values are found
in the U.S. Constitution and the Bill of Rights. Our contemporary hi-tech business environment could not possibly have been foreseen in any remote
fashion by the 1787 assembly in Philadelphia that created the U.S. Constitution. It is the role of our legal system to guarantee and further develop those
values as technology, a diverse group of employees, and marketing distribution systems continue to grow and adapt to the global marketplace.
Can you think of any current business laws that have their supporting values in the Bill of Rights? The U.S. court system has its foundation in the U.S.
Constitution. Do you think our business laws and regulations are moving in the right direction or might they be too burdensome for American companies to
compete in a global economy? In this chapter and throughout the book, we will discuss many similar questions to assist you in better understanding our
contemporary legal environment of business.
Take a moment and think about what first comes to mind when you hear the phrase “the law?” Do you immediately associate the phrase with law
enforcement and think of the local police officers and sheriffs who enforce the law? Do you think of the classic courtroom scenes portrayed in one too
many television dramas? Perhaps you think of Judge Judy or Judge Joe Brown handing down their pronouncements from the “bench” in their television
studios. Does the phrase immediately bring to mind the lawmakers in Congress charged with shaping the law for the United States? If your initial reaction
is a more global one, perhaps you are wondering whether there is a set of enforceable international laws that transcend national boundaries.
What Is the Law?
So, what exactly is the law? There is no one-size-fits-all answer to that question because the law is a chameleon-like concept, with a precise definition
varying to fit a particular situation. Consider, for example, the Yanomami tribal people, one of the largest groups of Amerindian people living in South
America. Do these indigenous people who continue the hunting and farming practices put into place by their ancestors hundreds of years ago live by a
system of law? Indeed, they do. In the context of the Yanomami, we can define the law as the practices or customs of a community considered by the
members of that community to be binding. How the binding practices will be enforced is often left to the tribal elders.
Perhaps you are a member of a fraternity or sorority—Kappa Sigma, Tau Kappa Epsilon, Kappa Alpha Psi, or Chi Omega. What is the law within the
context of that Greek organization? Most likely a “national” organization dictates the requirements for the individual chapters through a constitution and
bylaws that form the laws for that fraternity or sorority. Such laws clearly set out penalties and consequences for violations.
Bringing our focus into the business context, consider a contract that you may have entered into with a cell phone provider such as AT&T or T-Mobile
to secure cell phone service, or the membership agreement you may have signed with Planet Fitness, Gold’s Gym, or Curves. That contract or agreement
brings with it certain rights and responsibilities, not only those terms dictated in the contract itself, but also the broader dictates of rules that have been
formally recognized by society as governing contracts.
At this point you are likely getting a clearer sense of what law is. It can be defined as “the regime that orders human activities and relations through
systematic application of the force of a politically organized society…”1 But this definition leaves us with even greater and more questions. Who prescribes
these laws by which members of society are supposed to act? Who enforces these laws? If laws are not carefully drafted and leave room for interpretation,
how will they be interpreted? If a law no longer serves the good of the community, should it be changed? If so, how can that change come about, and who
has the authority to change it? What process is in place to ensure all people receive equal treatment under the prescribed set of rules?
The answers to these questions lie in an understanding of the sources of law and the legal system. This chapter will provide you with an overview of
the U.S. sources of law and the legal system. Although this book is primarily focused on U.S. law and the U.S. legal system, it is important to recognize
that we live in a global society. When we think of global transactions, our tendency is to first think of the dealings of widely recognized, multinational
corporations such as Johnson & Johnson and Coca-Cola. Thanks to modern communications and technology, the global community has become
increasingly interconnected, and even the average individual is likely to engage in a global transaction, whether it is a student studying abroad for a
semester or an eBay shopper in the United States who buys an item from a seller located in Hong Kong. Cross-border exchanges are becoming more
commonplace, and for this reason, incorporated throughout this text is a look at the international law arena and its impact on a variety of business
transactions. In addition, Chapter 5, “Legal Aspects of the Global Business Environment,” provides an in-depth look at the global perspective.
The U.S. Legal System
Any attempt to understand how the legal system works must begin with an understanding of the federalist form of government.
Understanding the Federalist System
The United States is a federalist system of government meaning that a strong federal government operates alongside a parallel, sometimes complementary,
sometimes competing state system of government. For example, you are no doubt aware that the U.S. Constitution, discussed in Chapter 3, “Constitutional
Issues in Business,” is at the center of the legal system. It is the foundation upon which all other laws are enacted and interpreted. Are you also aware that
each state also has its own state constitution which serves as the guiding principle for that state? Elected U.S. senators and representatives enact federal
laws, and corresponding state elected officials enact state laws.
The key to understanding the reasons behind this dual federal/state system lies in the very history of the United States. Recall that before the United
States of America came into being, the founders were citizens under English rule living in colonies in America. These colonies united and fought against
what they considered to be their common enemy—the English monarchy. When they were victorious in breaking free from English rule, they had to create
a workable system of government balancing the concerns of those who were wary of a strong central, authority figure (after living under English rule) with
the recognition that the individual colonies could only continue to survive and grow through concerted action. The federalist system—a compromise—
brought together the two systems of government operating side by side, ideally with each side operating with a clear understanding of its rights and
responsibilities.
Unfortunately, the boundary line between federal and state authority was not clear at the country’s founding and to a certain extent remains unclear
today, resulting in an endless tug-of-war between federal control and state authority. Even though there are some areas that are clearly within the purview
of the state, such as the laws of marriage, adoption, and divorce, authority over some of the more controversial issues surrounding drugs, guns, and
healthcare is less certain. At times, states have lobbied the federal government directly, seeking to have a greater voice in federal legislation affecting the
states. At other times some states have found it necessary to file lawsuits against the federal government seeking to nullify federal laws believed to be an
overreach by the federal government. On occasion, states have taken even more extreme actions such as adopting measures in direct opposition to federal
statutes. Exhibit 1.1 provides a brief snapshot of some recent areas of controversy between the federal and state governments. These examples illustrate that
the federal and state governments exist together in a delicate balance of power.
Sources of Law
Constitutional law, treaties, statutory law, administrative law, and case law are the primary sources of U.S. law.
The U.S. Constitution
Our starting point in understanding the U.S. legal system is the U.S. Constitution: “the supreme law of the land.” Adopted in 1787 by delegates from 12 of
the original 13 states, the U.S. Constitution remains one of the oldest federal constitutions in existence. The framers of the Constitution were faced with
quite a challenge—they had to create a strong and effective national government but at the same time ensure that this national government did not infringe
on the rights of the states or the rights of the individual. In setting up the parameters of the national government, the framers created three equal branches of
government, each to serve as a check on the other and to prevent any one branch from becoming too powerful. There were some who pushed for a
statement of individual rights in the text of the Constitution, but instead of including these rights in the Constitution itself, they were incorporated in the
first ten amendments to the Constitution in the Bill of Rights. The rights granted under the Constitution will be explored more fully in Chapter 3.
Treaties
Treaties are agreements entered into between two or more nations. Those between two nations are referred to as bilateral, and those between three or more
nations are multilateral. Treaties may address a variety of issues including trade relations, taxation, immigration, and human rights. In the United States,
treaties are negotiated through the Department of State and must be ratified or endorsed by the U.S. Senate in order to have the force of law. Chapter 5 will
provide additional information on the role of treaties.
Statutory Law
Statutory laws are those laws adopted through the legislative process. U.S. statutory law is adopted and approved by Congress. To become statutory law,
proposed legislation must be approved by a majority of the members of both houses of Congress: the Senate and the House of Representatives. There are
100 senators, two from each state. There are 435 representatives. The number of representatives for each state varies by the population of the state, with
some states, such as Alaska and Montana, having only one representative and others, such as California, having as many as 53. Laws that are passed by
Congress and signed by the president become part of the U.S. Code. The U.S. Code is divided into 51 Titles, or subject matter categories, governing a
broad array of issues including food and drug safety (Title 21), taxation (Title 26), protection of intellectual property such as patents and copyright (Titles
17 and 35), labor (Title 29), and agriculture (Title 7). The official version of the U.S. Code is published by the Office of the Law Revision Counsel of the
U.S. House of Representatives.
Administrative Law
Standing alone, statutory law often does not contain an adequate level of detail needed to implement a statutory mandate. The task of describing how the
law is to be implemented and enforced is left to federal administrative agencies that carry out this function through issuance of administrative regulations
that are published in the Code of Federal Regulations. For example, Congress has enacted revenue laws that require payments of personal income tax on
incomes over a certain threshold amount. The Treasury Department is responsible for adopting tax regulations that explain the details of this income tax,
and the Internal Revenue Service is responsible for the implementation and enforcement of these revenue laws. Administrative law and the unique role of
administrative agencies in our legal system will be explored in detail in Chapter 4, “Administrative Law.”
Case Law
The United States is a Common Law system that has its roots in the English Common Law system. This means that in addition to the Constitution and
statutory law, the legal system also rests upon judicial decisions that interpret the law. Relying on the doctrine of stare decisis (“to stand on decided
cases”), judges place great weight on following the precedent of previous court decisions. This means that cases decided today will be decided in
accordance with past cases that involve the same legal issues. Given the pivotal role the judiciary plays in the U.S. legal system, we will revisit this topic in
more detail later in the chapter.
Understanding the Branches of Government and the Balance of Power
The U.S. system of government operates through a balance of separate powers designed to prevent any one branch from being too powerful, as each one
serves as a check on the other’s authority. It is the role of the legislative branch to enact statutory laws. The executive branch, the office of the president, is
responsible for enforcing the laws, which is done through federal administrative agencies. The president also has the limited authority to enact law through
the use of executive orders. It is the role of the judicial branch, or the court system, to apply and interpret the laws in resolving disputes. The balance of
power is illustrated in Exhibit 1.2 on page 10.
As already discussed, the U.S. federalist system consists not only of the central, federal government but also of the independent governments of the
states. State governments also rely on this balance of power. State legislatures make the laws; the state executive branch, the governor, enforces the laws;
and the state court system applies and interprets the laws in resolving disputes.
The Balance of Power in Action
Consider the following question: What is the connection between the construction of a shopping center in Michigan in 1988 and a glass of water in 1972?
To answer this question, we must first journey through a legal labyrinth that will illustrate how the balance of power works.
An Example of the Balance of Power
Mr. Rapanos is a land developer who, in 1988, owned approximately 715 acres of land in Michigan. In 1988 he decided to build a shopping center on a
portion of this land. The construction site included wetlands, and because of this Rapanos was cautioned by the Michigan Department of Natural Resources
that these wetlands might be federally regulated property. Mr. Rapanos disagreed and proceeded to fill the wetlands with sand even though the Michigan
Department of Natural Resources and the Environmental Protection Agency issued orders that he stop this action. Ultimately, the federal government
stepped in and brought both civil and criminal charges against Mr. Rapanos for defying the orders and filling in the wetlands on his property. What would
allow the federal government to dictate what a property owner can do with land that he owns? In the instant case, the answer to that question begins with a
look at a contaminated glass of water.
It All Begins with Congress
In 1971 it came to the attention of the public that the average glass of drinking water contained an unsafe level of contaminants (see Exhibit 1.3). Sharing
the public sentiment that the government should take action to protect the nation’s waters, Senator Edmund Muskie proposed the Clean Water Act on
October 28, 1971. The legislation would bring all “navigable waters of the United States” under the jurisdiction of the federal government. In order for
Senator Muskie’s proposed legislation to become law, it first had to be approved by the House of Representatives and the Senate. The legislation gained
Senate approval on November 2, 1971. On March 29, 1972, the House also voted in favor of the legislation. The versions of the legislation passed by the
House and Senate varied slightly, and so a Congressional Joint Conference Committee stepped in to shape the legislation into a version that could be
approved by both the House and Senate. This process was completed on October 4, 1972, and that same day both the House and the Senate approved the
legislation.
Next Stop: The President
As part of the next step in the legislative process, the legislation was sent to President Nixon for his signature of approval. Instead, on October 17, 1972,
President Nixon vetoed the proposal. A presidential veto can only be overcome by a two-thirds vote of both the Senate and the House of Representatives.
The House and Senate did indeed override the presidential veto, and on October 18, 1972, the Clean Water Act was enacted and became Title 33 of the
U.S. Code.
The Role of the EPA
The Environmental Protection Agency (EPA) is the executive agency responsible for enforcing the Clean Water Act. Among other things, the law requires
that before filling or dredging or otherwise polluting any “navigable waters of the United States” a permit must be obtained from the Army Corps of
Engineers, a federal agency. The Army Corps of Engineers was given the task of providing a working definition of the term “navigable waters.”
It Is All in the Interpretation
The Clean Water Act is intended to govern and protect the “navigable waters” of the United States. At the center of the government’s dispute with Mr.
Rapanos’s desire to build a shopping mall was whether the wetlands on the shopping mall location were brought within the control of the federal
government by the Clean Water Act. The Army Corp of Engineers provided regulations that interpreted the phrase “navigable waters” very broadly to
include not only traditionally navigable waters but also any “tributaries of such waters” and wetlands “adjacent to such waters or tributaries.” Since the
wetlands on Mr. Rapanos’s property were near ditches or man-made drains that emptied into traditional navigable waters, the government believed his
property was within their authority. Mr. Rapanos disagreed. The correct interpretation of the Clean Water Act was not clear, so it was left to the court
system to decide the proper interpretation of the law.
The Court Steps In
In 1994 the U.S. Justice Department brought both civil and criminal proceedings against Mr. Rapanos in the federal District Court in Michigan for
violations of the Clean Water Act. The civil litigation proceeded as follows. In February 2003, the District Court ruled that Mr. Rapanos had in fact
discharged pollutants into federally protected wetlands in violation of the Clean Water Act. In April 2003, Mr. Rapanos appealed this decision to the next
highest court, the 6th Circuit Court of Appeals. In July 2004, the Court of Appeals affirmed the decision of the District Court, meaning they agreed that Mr.
Rapanos had violated the Clean Water Act. At this point Mr. Rapanos’s only recourse in the matter was the Supreme Court, the nation’s highest court, and
so, in January 2005, he filed a petition to ask the Supreme Court to hear his case. The Court agreed. Oral arguments before the court occurred in February
2006, and the Supreme Court issued a decision shortly thereafter. Four of the nine justices on the court agreed with Mr. Rapanos that the Army Corp of
Engineers’ interpretation of the extent of the waters covered by the Clean Water Act was too expansive and should cover only those waters that have a
natural, continuous flow to navigable waters. One justice wrote his own opinion that a natural flow should not be required but instead the Army Corp of
Engineers should consider the nexus of the wetlands to the “navigable water” on a case-by-case basis, and the remaining four justices sided with the
government. Because there was no solution agreed to by a majority of five justices, it was ultimately left to the lower courts to rule on the proper
interpretation of the statute on a case-by-case basis. The Supreme Court sent the decision back down to the 6th Circuit for additional fact finding to
determine whether the Army Corp of Engineers applied the statute too broadly. The 6th Circuit sent the case back down to the District Court for the fact
finding. In 2007 the parties to the case decided to enter into settlement negotiations, and in December 2008 a settlement agreement was finally reached
which resulted in the payment of fines and certain remedial actions required by Mr. Rapanos. His shopping center was never built.
The Court System
Notice the pivotal role of the court in resolving Mr. Rapanos’s dispute. When parties to a legal dispute cannot resolve the situation between themselves, the
parties often look to the courts for recourse. In fact, each year more than three hundred thousand disputes are filed in the federal court system, and more
than 18 million civil cases are filed in the state courts. Approximately 90 percent of all decided cases are state court cases. Therefore, it is important to have
an understanding of both the federal court and the state court systems.
The Federal Court System
“The judicial power of the United States shall be vested in one Supreme Court, and in such inferior courts as the Congress may from time to time
ordain and establish. The judges, both of the supreme and inferior Courts, shall hold their Offices during good Behaviour, and shall, at stated
Times, receive for their Services, a Compensation, which shall not be diminished during their Continuance in Office.” U.S. Constitution—Article
III
To ensure the independence of the judicial branch, the majority2 of federal judges are appointed by the president (subject to the approval of the Senate) for
life terms and can only be removed by Congress for substantial cause such as bribery, treason, and other “high crimes and misdemeanors.” In addition, the
compensation of federal judges can never be reduced.
District Court
The U.S. District Court is the trial court of the federal system. It is often the court in which cases are initially heard. Judges determine how the law applies
to a particular set of facts, but to ascertain the exact facts and circumstances of the dispute, judges may rely on a jury, witnesses, expert witness testimony,
and other admissible evidence submitted by the parties. There are 94 district courts. Within each district there is also a U.S. bankruptcy court that hears
bankruptcy cases.
Court of Appeals
The district courts are divided into regional circuits. There is one court of appeals for each of these regional circuits. In addition, there is a U.S. Court of
Appeals for the Federal Circuit.3 Exhibit 1.4 provides a snapshot of the federal circuit courts. The appeals court hears cases on appeal from the District
Court and the other specialized courts. The first, sixth, eighth, ninth, and tenth circuits each have a bankruptcy appellate judge panel. These three judge
panels hear appeals of bankruptcy court cases.
The U.S. Supreme Court
The U.S. Supreme Court is the highest court in the federal system. The Supreme Court is composed of one Chief Justice and eight Associate Justices.4
Article III, section 1 of the Constitution confers broad powers on the court to hear all cases, in law and equity, arising under the Constitution, the laws of
the United States, and treaties.5 The Supreme Court exercises discretion in choosing which cases to accept. To request the Supreme Court to hear a case, a
petitioner must file a petition for the writ of certiorari. This is a formal request asking the court to agree to hear the case. At least four of the nine judges
must agree to hear the case before a writ will be granted. (This is referred to as the rule of four.) Getting the attention of the Supreme Court is no easy task,
since about 7,000 petitions are filed with the court each year, and the court can only hear and rule on about 150 of those cases.
Before moving on to a discussion of the state court system, a further explanation of the notion of stare decisis is relevant here. Recall that stare decisis
means relying on past case precedent. But what past court decisions must be followed by a particular court? Look at Exhibit 1.5 below. Items 4, 5, and 6
represent entry-level courts. Decisions from these courts can be appealed to the appellate courts shown as items 2 and 3. The Supreme Court, item 1, is the
highest authority, and all lower courts must follow Supreme Court precedent.
Consider the following example of how stare decisis works. Let us say that an appeal is being heard in the 8th Circuit Court of Appeals on a matter in
which there is no Supreme Court precedent. To reach a decision, the appeals judge will look to existing precedent within the 8th circuit for guidance. If no
such cases exist in the 8th circuit, the appeals judge might opt to look to what the other circuit court judges have ruled on similar issues, but she is not
required to do so. Consider another example. Assume that a case is being heard by a judge in the district court in Louisiana. District court judges are bound
by the precedent within their circuit and by Supreme Court decisions, but are not bound by the decisions from other jurisdictions. Louisiana is in the 5th
circuit. A district court judge in Louisiana will consider Supreme Court decisions and decisions of the 5th Circuit Court of Appeals binding authority, while
decisions issued by other district courts and circuit courts may be of interest and merely persuasive, but not determinative.
The State Court System
While each state has its own structure of court system, the most common state court structure includes two entry-level courts, an intermediate appellate
court, and the highest state court. Unlike the federal judges, state court judges are either appointed by the governor or state legislature, or elected by the
people. Generally, their term lasts for a set period of years.
Entry-Level Court
Most states have a trial court of general jurisdiction as well as a court of limited jurisdiction. The trial court of general jurisdiction is the main trial court of
the state and hears both civil and criminal cases not heard by the courts of limited jurisdiction. As in the federal trial court, cases in this court are heard by
one judge, usually in the presence of a jury. These courts go by various names but are often called superior courts, circuit courts, or district courts,
depending on the state. The courts of limited jurisdiction only hear specific types of cases, and these cases are generally heard by one judge, without the
assistance of a jury. Courts of limited jurisdiction include family court (dealing with family matters such as adoption, divorce, etc.), traffic court (dealing
with violations of traffic laws), probate courts (handling matters relating to the distribution of assets upon death), and small claims court (dealing with cases
involving a low dollar amount, generally under $5,000).
Intermediate Appellate Court
Most states also have intermediate appellate courts to which an appeal may be made from the trial court. Generally speaking, these appeals are considered a
matter of right. These courts may be called by a variety of names, but the most common are courts of appeals and circuit courts of appeals. The appellate
courts consist of a panel of either two or three judges. These judges generally will not review questions of fact, but rather hear appeals as to whether a
procedural error was made or whether the law was applied incorrectly by the trial court.
Highest Court
All states have a highest court, which in most states is called the supreme court. In some states the highest court is referred to as the court of appeals, the
supreme judicial court, or the supreme court of appeals. These courts use a panel of judges that vary in number. Some states have as few as three judges on
the panel, and others have as many as nine. In states that have an intermediate appellate court, the highest court may exercise discretion on whether to hear
a case. In states without an intermediate appellate court, appeal to the highest court is considered a matter of right.
Right of Appeal to the U.S. Supreme Court
Certain state cases are eligible for review by the U.S. Supreme Court. For example, if the highest state court has decided a federal question in a manner that
conflicts with a decision of the high court of another state, a decision of a federal court of appeals, or a prior decision of the U.S. Supreme Court, the U.S.
Supreme Court may agree to step in to resolve the issue.
Understanding Jurisdiction
Another key to understanding the workings of the court system is the concept of jurisdiction. Jurisdiction refers to the power or authority of the court to
hear a case. The court must have jurisdiction over the subject matter of a particular case and must have jurisdiction over the parties to the dispute or the
property at issue in the case. We examine jurisdiction because we must feel confident that everyone is in the right court. If the case is not in the right court,
then any judgment that the court renders would be considered void and, therefore, unenforceable.
Subject Matter Jurisdiction
There are several types of cases over which the federal and state courts both have jurisdiction (concurrent jurisdiction), but the majority of cases must be
addressed exclusively in federal or state court. For example, state courts have jurisdiction over family law matters such as divorce, adoption, and child
custody; real estate cases; cases involving contracts; most criminal actions; and personal injury cases. Federal courts, on the other hand, have jurisdiction
over cases that involve a federal question. Cases that involve a federal question are those that arise under the U.S. Constitution, the laws of the United
States, and treaties. These cases include, for example, suits between states, cases involving ambassadors and high-ranking officials of foreign countries,
bankruptcy, antitrust, securities and banking regulations, intellectual property, and federal crimes (such as treason, piracy, and counterfeiting). The other
types of cases that can be heard by the federal courts are those cases in which there is diversity jurisdiction. Diversity jurisdiction exists when the parties to
the case are residents of different states and the amount in controversy exceeds the amount specified by federal law that currently is $75,000.
Jurisdiction over Persons
In order for a court to hear a particular case, that court must have jurisdiction over the parties to the dispute. This jurisdiction over persons is called in
personam jurisdiction. This is generally based on the presence of the person or a business in the geographic region of the court. Assume that Jordan and
Jonathan, both residents of Massachusetts, have entered into a contract that Jonathan breaches. The state court of Massachusetts has jurisdiction over both
individuals, as they are residents of the state. Let’s change the facts a bit so that Jordan is a resident of Massachusetts but Jonathan is a resident of South
Dakota. If Jordan wants to bring a suit against Jonathan in Massachusetts, she can do so only if the court in Massachusetts has jurisdiction over Jonathan.
Because Jonathan is not a resident of Massachusetts, the court will have to consider what type of contact Jonathan has had with the state. In order to bring a
nonresident defendant under the jurisdiction of the court, the court will always ascertain whether the person (or business) has sufficient minimum contacts
within that state so that exercising jurisdiction over the person will “not offend traditional notions of fair play and substantial justice.”6 In Burnham v.
Superior Court on page 20, the Supreme Court considered whether a brief visit to a state was sufficient to establish in personam jurisdiction.
Jurisdiction over Property
Jurisdiction over real or personal property is called in rem jurisdiction. It is the location of the property that determines which court has jurisdiction. Court
judgment is enforced upon the property itself rather than on the person. Going back to our example involving Jordan and Jonathan, let us assume that their
dispute is over a piece of real estate in Wyoming. Even though Jordan is a resident of Massachusetts and Jonathan is a resident of South Dakota, a case
could be brought in Wyoming because the court in Wyoming has in rem jurisdiction.
The jurisdiction principles U.S. courts apply to foreign residents are similar to those applied to U.S. residents. The Supreme Court case Republic of
Argentina v. Welton on page 21 provides guidance on this issue.
Burnham v. Superior Court, 495 U.S. 604 (1990)
Facts: Prior to their separation, Mr. and Mrs. Burnham lived in New Jersey. Mrs. Burnham moved to California with the couple’s children and filed for
divorce. Mr. Burnham remained a New Jersey resident but on occasion visited California both for business and to visit his children. On one such visit to
California, Mr. Burnham was served with divorce papers.
Mr. Burnham filed a motion in the Superior Court of California to quash this service on the basis that his limited contacts with the state of
California were insufficient to give the courts of the state of California personal jurisdiction over him. Both the superior court and the appeals court
denied Mr. Burnham’s petition, ruling that his physical presence in the state was sufficient grounds for personal jurisdiction.
Issue: Did the court of the state of California have in personam jurisdiction over Mr. Burnham?
Holding: Yes. The Supreme Court upheld the right of the California court to exercise jurisdiction over Mr. Burnham. The Due Process Clause does not
deny jurisdiction over a nonresident who is temporarily in a state in furtherance of activities unrelated to the suit.
From the Court’s Opinion: To determine whether the assertion of personal jurisdiction is consistent with due process, we have long relied on the
principles traditionally followed by American courts in marking out the territorial limits of each State’s authority. That criterion was first announced in
Pennoyer v. Neff…in which we stated that due process “mean[s] a course of legal proceedings according to those rules and principles which have been
established in our systems of jurisprudence for the protection and enforcement of private rights,”…including the “well-established principles of public
law respecting the jurisdiction of an independent State over persons and property.”…In what has become the classic expression of the criterion, we said
in International Shoe Co. v. Washington, 326 U.S. 310 (1945), that a state court’s assertion of personal jurisdiction satisfies the Due Process Clause if it
does not violate “tradition…
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