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Jeffrey F. Beatty Boston University

Susan S. Samuelson Boston University

Patricia Sánchez Abril University of Miami

Business Law

6 th

E D

IT IO

N ESSENTIALS OF

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

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Library of Congress Control Number: 2017948378

Student Edition: ISBN: 978-1-337-40419-8

Loose-leaf Edition: ISBN: 978-1-337-40432-7

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Essentials of Business Law, 6th Edition Jeffrey F. Beatty, Susan S. Samuelson, and Patricia Sánchez Abril

Senior Vice President/General Manager Social Sciences, Business, & Humanities: Erin Joyner

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Intellectual Property

Analyst: Jennifer Bowes

Project Manager: Reba Frederics

Printed in the United States of America Print Number: 01 Print Year: 2017

Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

Preface xix

U N I T 1 The Legal Environment 1 1 Introduction to Law 2 2 Ethics and Corporate Social Responsibility 23 3 International Law 58 4 Common Law, Statutory Law,

and Administrative Law 83 5 Constitutional Law 108 6 Dispute Resolution 133 7 Crime 164

U N I T 2 Torts 195 8 Intentional Torts and Business Torts 196 9 Negligence, Strict Liability,

and Product Liability 217 10 Privacy and Internet Law 240

U N I T 3 Contracts 265 11 Introduction to Contracts 266 12 The Agreement: Offers and Acceptances 285 13 Consideration 307 14 Legality 327 15 Voidable Contracts: Capacity and Consent 347 16 Written Contracts 368 17 Third Parties 388 18 Contract Termination 407 19 Remedies 427 20 Practical Contracts 449

U N I T 4 Sales 475 21 Introduction to Sales 476 22 Ownership, Risk, and Warranties 501 23 Performance and Remedies 529

U N I T 5 Additional CPA Topics 553 24 Secured Transactions 554 25 Creating a Negotiable Instrument 588 26 Liability for Negotiable Instruments 612 27 Accountants’ Liability 637

U N I T 6 Agency and Employment Law 661 28 Agency Law 662 29 Employment and Labor Law 690 30 Employment Discrimination 719

U N I T 7 Business Organizations 753 31 Starting a Business: LLCs

and Other Options 754 32 Partnerships 776 33 Life and Death of a Corporation 802 34 Management Duties 827 35 Shareholder Rights 848 36 Bankruptcy 875

C O N T E N T S : Ov E rv I E w

iii

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iv CONTENTS: OvErvIEw

U N I T 8 Government Regulation 901 37 Securities Regulation 902 38 Antitrust 931 39 Consumer Protection 954 40 Environmental Law 981

U N I T 9 Property 1007 41 Intellectual Property 1008 42 Real Property and Landlord–Tenant Law 1033 43 Personal Property and Bailment 1060 44 Planning for the Future: Wills,

Trusts, and Insurance 1080

Appendix A The Constitution of the United States A1

Appendix B Uniform Commercial Code (Selected Provisions) B1

Appendix C Answers to Selected End-of-Chapter Questions C1

Glossary G1 Table of Cases T1 Index I1

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C O N T E N T S

Preface xix

U N I T 1 The Legal Environment 1

Chapter 1 Introduction to Law 2 1-1 Exploring the Law 3

1-1a The Role of Law in Society 3 1-1b Origins of Our Law 4

1-2 Sources of Contemporary Law 6 1-2a The United States Constitution 6 1-2b Statutes 9 1-2c Common Law 9 1-2d Court Orders 9 1-2e Administrative Law 10 1-2f Treaties 10

1-3 Classifications 10 1-3a Criminal and Civil Law 10 1-3b Law and Morality 11

1-4 Jurisprudence 12 1-4a Legal Positivism 12 1-4b Natural Law 12 1-4c Legal Realism 13

1-5 Working with the Book’s Features 13 1-5a Analyzing a Case 14 1-5b Exam Strategy 16 1-5c You Be the Judge 17

Chapter Conclusion 18 Exam Review 18 Multiple-Choice Questions 19 Case Questions 20 Discussion Questions 21

Chapter 2 Ethics and Corporate Social Responsibility 23

2-1 Why Study Ethics? 25 2-1a Ethics in Business 26 2-1b Why Be Ethical? 27

2-2 Theories of Ethics 29 2-2a Utilitarian Ethics 29 2-2b Deontological Ethics 30 2-2c Rawlsian Justice 30 2-2d Front Page Test 31

2-2e Moral Universalism and Relativism 31 2-2f Ethics Case: Up in Smoke 32

2-3 Ethics Traps 33 2-3a Money 33 2-3b Competition 33 2-3c Rationalization 34 2-3d We Cannot Be Objective about Ourselves 35 2-3e Moral Licensing 35 2-3f Conflicts of Interest 36 2-3g Conformity 36 2-3h Ethics Case: Diamonds in the Rough 36 2-3i Following Orders 37 2-3j Euphemisms and Reframing 37 2-3k Lost in a Crowd 38 2-3l Ethics Case: Man Down 38 2-3m Short-Term Perspective 39 2-3n Ethics Case: Wobbly Platform 39 2-3o Blind Spots 40 2-3p Avoiding Ethics Traps 40 2-3q Lying: A Special Case 41 2-3r Ethics Case: Truth (?) in Borrowing 41

2-4 Reacting to Unethical Behavior 42 2-4a Loyalty 42 2-4b Exit 42 2-4c Voice 43 2-4d Ethics Case: Truth or Consequences 43

2-5 Applying the Principles 45 2-5a Personal Ethics in the Workplace 45 2-5b Ethics Case: Weird Wierdsma 45 2-5c The Organization’s Responsibility

to Society 46 2-5d Ethics Case: Breathing the Fumes 46 2-5e The Organization’s Responsibility

to Its Employees 46 2-5f Ethics Case: The Storm after the Storm 47 2-5g The Organization’s Responsibility

to Its Customers 47 2-5h Ethics Case: Mickey Weighs In 48 2-5i The Organization’s Responsibility

to Overseas Workers 48 2-5j Ethics Case: A Worm in the Apple 49 2-5k Corporate Social Responsibility (CSR) 50 2-5l Ethics Case: The Beauty of a

Well-Fed Child 50

Chapter Conclusion 51 Exam Review 51

v

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vi CONTENTS

Multiple-Choice Questions 53 Case Questions 54 Discussion Questions 55

Chapter 3 International Law 58 3-1 International Law:

Public and Private 59 3-2 Actors in International Law 59

3-2a The United Nations 59 3-2b The International Court of Justice 60 3-2c International Chamber of Commerce 62 3-2d Sovereign Nations 62

3-3 The World’s Legal Systems 63 3-3a Common Law 63 3-3b Civil Law 64 3-3c Islamic Law 65

3-4 Sources and Applicability of International Law 67 3-4a Sources of International Law 67 3-4b Interaction of Foreign

and Domestic Laws 73 3-4c Choosing the Applicable Law

and Jurisdiction 77

Chapter Conclusion 77 Exam Review 78 Multiple-Choice Questions 80 Case Questions 81 Discussion Questions 82

Chapter 4 Common Law, Statutory Law, and Administrative Law 83

4-1 Common Law 84 4-1a Stare Decisis 84 4-1b Bystander Cases 84

4-2 Statutory Law 86 4-2a Bills 87 4-2b Discrimination: Congress and the Courts 88 4-2c Debate 88 4-2d Conference Committee 90 4-2e Statutory Interpretation 91 4-2f Changing Times 93 4-2g Voters’ Role 93 4-2h Congressional Override 93

4-3 Administrative Law 94 4-3a Creation of Agencies 95 4-3b Power of Agencies 96 4-3c Limits on Agency Power 99

Chapter Conclusion 103 Exam Review 103 Multiple-Choice Questions 105 Case Questions 106 Discussion Questions 107

Chapter 5 Constitutional Law 108 5-1 Who Will Have Power? 109

5-1a Overview 109 5-1b Creating the Constitution:

Important Principles 109 5-1c Powers Granted 110

5-2 Protected Rights 116 5-2a Incorporation 117 5-2b First Amendment: Free Speech 117 5-2c Fifth Amendment: Due Process

and the Takings Clause 120 5-2d Fourteenth Amendment:

Equal Protection Clause 125

Chapter Conclusion 127 Exam Review 127 Multiple-Choice Questions 130 Case Questions 131 Discussion Questions 131

Chapter 6 Dispute Resolution 133 6-1 Court Systems 134

6-1a State Courts 134 6-1b Federal Courts 138

6-2 Before Trial 141 6-2a Pleadings 141 6-2b Discovery 145 6-2c Summary Judgment 149 6-2d Final Preparation 151

6-3 The Anatomy of a Trial and Appeal 151 6-3a The Trial 151 6-3b Appeals 156

6-4 Alternative Dispute Resolution 157 6-4a Negotiation 157 6-4b Mediation 157 6-4c Arbitration 158

Chapter Conclusion 159 Exam Review 159 Multiple-Choice Questions 161 Case Questions 162 Discussion Questions 163

Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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viiCONTENTS

Chapter 7 Crime 164 7-1 Criminal Procedure 165

7-1a A Civil versus a Criminal Case 165 7-1b Conduct Outlawed 166 7-1c State of Mind 168 7-1d Gathering Evidence:

The Fourth Amendment 169 7-1e After Arrest 174

7-2 Crimes That Harm Businesses (and Their Customers) 177 7-2a Larceny 177 7-2b Embezzlement 178 7-2c Fraud 178 7-2d Arson 181 7-2e Hacking 181

7-3 Crimes Committed by Business 182 7-3a Making False Statements 183 7-3b Workplace Crimes 183 7-3c RICO 184 7-3d Money Laundering 185 7-3e Hiring Illegal Workers 185 7-3f Foreign Corrupt Practices Act 185 7-3g Other Crimes 187 7-3h Punishing a Corporation 187

Chapter Conclusion 188 Exam Review 188 Multiple-Choice Questions 191 Case Questions 192 Discussion Questions 193

U N I T 2 Torts 195

Chapter 8 Intentional Torts and Business Torts 196

8-1 Intentional Torts 198 8-1a Defamation 198 8-1b False Imprisonment 200 8-1c Intentional Infliction

of Emotional Distress 200 8-1d Battery and Assault 201 8-1e Trespass, Conversion, and Fraud 202

8-2 Damages 203 8-2a Compensatory Damages 203 8-2b Punitive Damages 204 8-2c Tort Reform and the Exxon Valdez 206

8-3 Business Torts 208 8-3a Tortious Interference with

Business Relations 208 8-3b Tortious Interference with a Contract 208 8-3c Tortious Interference with a Prospective

Advantage 209 8-3d The Lanham Act 210

Chapter Conclusion 211 Exam Review 211 Multiple-Choice Questions 213 Case Questions 214 Discussion Questions 215

Chapter 9 Negligence, Strict Liability, and Product Liability 217

9-1 Negligence 218 9-1a Duty of Due Care 219 9-1b Breach of Duty 221 9-1c Causation 221 9-1d Damages 225 9-1e Defenses 225

9-2 Strict Liability and Product Liability 228 9-2a Strict Liability 228 9-2b Product Liability 230 9-2c Contemporary Trends 232

Chapter Conclusion 234 Exam Review 234 Multiple-Choice Questions 236 Case Questions 238 Discussion Questions 239

Chapter 10 Privacy and Internet Law 240 10-1 Privacy in a Digital World 241

10-1a How We Lose Our Privacy in the Digital World 241

10-2 The Law of Privacy 243 10-2a Constitutional Law: The Fourth

Amendment 243 10-2b Common Law: Privacy Torts 245 10-2c Privacy Statutes 247 10-2d European Privacy Law 251

10-3 Regulation in the Digital World 252 10-3a Net Neutrality 252 10-3b Regulation of User-Generated Content 252 10-3c Online Speech 253

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viii CONTENTS

10-3d Liability of Internet Service Providers 255

10-3e Consumer Protection 256

Chapter Conclusion 258 Exam Review 258 Multiple-Choice Questions 261 Case Questions 262 Discussion Questions 263

U N I T 3 Contracts 265

Chapter 11 Introduction to Contracts 266 11-1 Contracts 267

11-1a All Shapes and Sizes 268 11-1b Contracts Defined 268 11-1c Development of Contract Law 268 11-1d Types of Contracts 270

11-2 Sources of Contract Law 273 11-2a Common Law 273 11-2b Uniform Commercial Code 273

11-3 Enforcing Non-Contracts 275 11-3a Promissory Estoppel 275 11-3b Quasi-Contract 276

Chapter Conclusion 279 Exam Review 279 Multiple-Choice Questions 281 Case Questions 282 Discussion Questions 284

Chapter 12 The Agreement: Offers and Acceptances 285

12-1 Offer 286 12-1a Meeting of the Minds 286 12-1b Statements That Usually

Do Not Amount to Offers 288 12-1c Problems with Definiteness 291 12-1d The UCC and Open Terms 293 12-1e Termination of Offers 294

12-2 Acceptance 295 12-2a Mirror Image Rule 296 12-2b UCC and the Battle of Forms 296 12-2c Clickwrap and Browsewrap

Agreements 298 12-2d Communication of Acceptance 300

Chapter Conclusion 301 Exam Review 302 Multiple-Choice Questions 304 Case Questions 305 Discussion Questions 306

Chapter 13 Consideration 307 13-1 What Is Consideration? 308

13-1a What Is Value? 309 13-1b What Is a Bargained-For Exchange? 311 13-1c What Consideration Is Not 312

13-2 Special Consideration Cases 317 13-2a Settlement of Debts 317 13-2b Agreements Not to Compete 319 13-2c Moral Consideration 320

Chapter Conclusion 321 Exam Review 321 Multiple-Choice Questions 323 Case Questions 324 Discussion Questions 325

Chapter 14 Legality 327 14-1 Contracts That Violate a Statute 328

14-1a Wagers 328 14-1b Insurance 329 14-1c Licensing Statutes 329 14-1d Usury 330

14-2 Contracts That Violate Public Policy 332 14-2a Restraint of Trade: Non-compete

Agreements 332 14-2b Exculpatory Clauses 336 14-2c Unconscionable Contracts 338

Chapter Conclusion 341 Exam Review 341 Multiple-Choice Questions 343 Case Questions 344 Discussion Questions 345

Chapter 15 Voidable Contracts: Capacity and Consent 347

15-1 Capacity 348 15-1a Minors 348 15-1b Mentally Impaired Persons 350

15-2 Reality of Consent 352 15-2a Fraud 352

Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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ixCONTENTS

15-2b Mistake 357 15-2c Duress 360 15-2d Undue Influence 361

Chapter Conclusion 362 Exam Review 362 Multiple-Choice Questions 364 Case Questions 366 Discussion Questions 367

Chapter 16 Written Contracts 368 16-1 The Common Law Statute of Frauds:

Contracts That Must Be in Writing 369 16-1a Agreements for an Interest in Land 370 16-1b Agreements That Cannot

Be Performed within One Year 372 16-1c Promise to Pay the Debt of Another 374 16-1d Promise Made by an Executor

of an Estate 375 16-1e Promise Made in Consideration

of Marriage 375 16-2 The Common Law Statute of Frauds:

What Is a “Writing”? 375 16-2a Signature 375 16-2b Reasonable Certainty 376 16-2c Vagueness 376 16-2d Incompleteness 376

16-3 The UCC’s Statute of Frauds 378 16-3a UCC §2-201(1)—The Basic Rule 378

16-4 Parol Evidence 381 16-4a Exception: An Incomplete or

Ambiguous Contract 382 16-4b Fraud, Misrepresentation,

or Duress 382

Chapter Conclusion 383 Exam Review 383 Multiple-Choice Questions 385 Case Questions 386 Discussion Questions 387

Chapter 17 Third Parties 388 17-1 Third Party Beneficiary 389

17-1a Intended Beneficiaries 389 17-1b Incidental Beneficiaries 391

17-2 Assignment and Delegation 392 17-2a Assignment 392 17-2b Delegation of Duties 398

Chapter Conclusion 401 Exam Review 401 Multiple-Choice Questions 403 Case Questions 404 Discussion Questions 405

Chapter 18 Contract Termination 407 18-1 Performance 408

18-1a Discharge 408 18-1b Conditions 408 18-1c Completion 412

18-2 Non-Performance 417 18-2a Breach 417 18-2b Impossibility 418

Chapter Conclusion 421 Exam Review 421 Multiple-Choice Questions 423 Case Questions 424 Discussion Questions 426

Chapter 19 Remedies 427 19-1 Identifying the “Interest” to Be Protected 428 19-2 Expectation Interest 429

19-2a Direct Damages 430 19-2b Consequential Damages 431 19-2c Incidental Damages 433 19-2d The UCC and Damages 433

19-3 Reliance Interest 435 19-3a Promissory Estoppel 435

19-4 Restitution Interest 437 19-4a Restitution in Cases of Contract

Breach or Discharge 437 19-4b Restitution in Cases of a

Voidable Contract 438 19-4c Restitution in Cases of a

Quasi-Contract 438 19-5 Equitable Interest and Remedies 439

19-5a Specific Performance 439 19-5b Injunction 440 19-5c Reformation 441

19-6 Special Issues 441 19-6a Mitigation of Damages 441 19-6b Nominal Damages 442 19-6c Liquidated Damages 442

Chapter Conclusion 443 Exam Review 443

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x CONTENTS

Multiple-Choice Questions 445 Case Questions 446 Discussion Questions 447

Chapter 20 Practical Contracts 449 20-1 Creating a Contract 450

20-1a The Lawyer 450 20-1b Who Drafts the Contract? 452 20-1c How to Read a Contract 452 20-1d Mistakes 452

20-2 The Structure of a Contract 458 20-2a Terms That Vary by Contract 458 20-2b Boilerplate 463

Chapter Conclusion 468 Exam Review 468 Multiple-Choice Questions 471 Case Questions 472 Discussion Questions 472

U N I T 4 Sales 475

Chapter 21 Introduction to Sales 476 21-1 Development and Scope of the UCC 477

21-1a Noah and Nina, Revisited 479 21-1b This Unit and This Chapter 479

21-2 UCC Basics 480 21-2a Code’s Purpose 480 21-2b Scope of Article 2 480 21-2c Mixed Contracts 480 21-2d Merchants 481 21-2e Good Faith and Unconscionability 482

21-3 UCC Contract Formation 482 21-3a Formation Basics: Section 2-204 482 21-3b Statute of Frauds 484 21-3c Added Terms: Section 2-207 486 21-3d Open Terms: Sections 2-305 and 2-306 490 21-3e Output and Requirements Contracts 490 21-3f Modification 492

Chapter Conclusion 495 Exam Review 495 Multiple-Choice Questions 497

Case Questions 498 Discussion Questions 499

Chapter 22 Ownership, Risk, and Warranties 501

22-1 Legal Interest and Title 502 22-1a Existence and Identification 502 22-1b Passing of Title 504 22-1c Insurable Interest 504 22-1d Imperfect Title 506

22-2 Risk of Loss 508 22-2a Shipping Terms 509 22-2b When the Parties Fail to Allocate

the Risk 509 22-3 Warranties 513

22-3a Express Warranties 513 22-3b Implied Warranties 515 22-3c Warranty Disclaimers 517 22-3d Remedy Limitations 519 22-3e Privity 520 22-3f Buyer’s Misuse 522 22-3g Statute of Limitations

and Notice of Breach 522

Chapter Conclusion 522 Exam Review 522 Multiple-Choice Questions 525 Case Questions 526 Discussion Questions 528

Chapter 23 Performance and Remedies 529 23-1 Rights and Obligations

of Contracting Parties 530 23-1a Obligation on All Parties: Good Faith 530 23-1b Seller’s Rights and Obligations 531 23-1c Buyer’s Rights and Obligations 536

23-2 Remedies of Contracting Parties 538 23-2a Seller’s Remedies 538 23-2b Buyer’s Remedies 541

Chapter Conclusion 546 Exam Review 546 Multiple-Choice Questions 549 Case Questions 550 Discussion Questions 551

Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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xiCONTENTS

U N I T 5 Additional CPA Topics 553

Chapter 24 Secured Transactions 554 24-1 Article 9: Terms and Scope 555

24-1a Article 9 Vocabulary 555 24-1b Scope of Article 9 556

24-2 Attachment of a Security Interest 559 24-2a Agreement 559 24-2b Control and Possession 560 24-2c Value 561 24-2d Debtor Rights in the Collateral 561 24-2e Attachment to Future Property 561

24-3 Perfection 562 24-3a Perfection by Filing 562 24-3b Perfection by Possession

or Control 566 24-3c Perfection of Consumer Goods 567 24-3d Perfection of Movable Collateral

and Fixtures 569 24-4 Protection of Buyers 570

24-4a Buyers in Ordinary Course of Business 570

24-4b Buyers of Consumer Goods 572 24-4c Buyers of Chattel Paper, Instruments,

and Documents 573 24-4d Liens 573

24-5 Priorities Among Creditors 575 24-5a Filing versus Control or Possession 576 24-5b Priority Involving a Purchase Money

Security Interest 576 24-6 Default and Termination 578

24-6a Default 578 24-6b Termination 581

Chapter Conclusion 582 Exam Review 582 Multiple-Choice Questions 585 Case Questions 586 Discussion Questions 587

Chapter 25 Creating a Negotiable Instrument 588

25-1 Negotiable Instruments 589 25-1a …