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Business Law Today

R o g e r L e R oy M i l l e r Institute for University Studies

Arlington, Texas

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

11th Edition

S ta n da R d E d i t i o n Te x T & Summ arized C a SeS

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Student Edition ISBN: 978-1-305-64452-6

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Printed in the United States of America Print Number: 01 Print Year: 2015

Business Law Today Standard Edition TEXT & SUMMARIZED CASES 11th Edition

Roger LeRoy Miller

Vice President for Social Science and Qualitative Business: Erin Joyner

Product Director: Michael Worls

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Cover Images: Gavel and scales: pixhook/iStock .com; Financial graphs: isak55/ShutterStock.com; Financial Systems: isak55/Shutterstock.com; Internet collage: Creativa Images/Shutterstock .com; light on modern buildings: gui jun peng/ Shutterstock.com; technology background plus world: watcharakun/Shutterstock.com; abstract digital blue with arrows: winui/Shutterstock.com.

Design Elements: Skyline logo: happydancing, Shutterstock.com; Landmark feature: Yuriy Kulik/Shutterstock.com; Classic Case US Flag: STILLFX/Shutterstock.com; Beyond Our Borders: sebastian-julian/iStock.com; Adapting to Online: everything possible/Shutterstock.com; Spotlight Case: Kamil Krawczyk/iStock.com; Standard Case: Rawpixel/Shutterstock.com; Managerial Strategy 1: Gemenacom/Shutterstock.com and 2: PathDoc/Shutterstock.com; Linking Business Law: bikeriderlondon/Shutterstock.com; Business Application: Konstantin Sutyagin/Shutterstock .com; Featured Case: Bacho/Shutterstock .com; Preventing Legal Disputes: JoemanjiArts/ Shutterstock.com; Ethical Issues: Gary Lanfer/ Shutterstock.com

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WCN: 02-200-202

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Unit 1 The Legal Environment of Business 1 1 The Legal Environment 2 2 Constitutional Law 31 3 Courts and Alternative Dispute Resolution 55 4 Tort Law 89 5 Product Liability 118 6 Intellectual Property Rights 138 7 Internet Law, Social Media, and Privacy 162 8 Criminal Law and Cyber Crime 184 9 Business Ethics 216

Unit 2 Contracts and E-Contracts 243 10 Nature and Classification 244 11 Agreement 261 12 Consideration, Capacity, and Legality 285 13 Defenses to Contract Enforceability 309 14 Third Party Rights and Discharge 331 15 Breach and Remedies 356 16 International Law in a Global Economy 374

Unit 3 Commercial Transactions 397 17 The Formation of Sales and Lease Contracts 398 18 Performance and Breach of Sales and Lease Contracts 433 19 Negotiable Instruments 460 20 Banking in the Digital Age 491 21 Security Interests and Creditors’ Rights 514 22 Bankruptcy 541

Unit 4 Agency and Employment Law 573 23 Agency Relationships in Business 574 24 Employment, Immigration, and Labor Law 601 25 Employment Discrimination 629

Unit 5 Business Organizations 657 26 Sole Proprietorships and Franchises 658 27 All Forms of Partnership 675 28 Limited Liability Companies and Special Business Forms 697 29 Corporations 715 30 Investor Protection, Insider Trading,

and Corporate Governance 747

Unit 6 Government Regulation 777 31 Antitrust Law and Promoting Competition 778 32 Consumer and Environmental Law 802 33 Liability of Accountants and Other Professionals 830

Unit 7 Property and Its Protection 855 34 Personal Property and Bailments 856 35 Real Property and Landlord-Tenant Law 877 36 Insurance, Wills, and Trusts 899

APPENDICES A How to Brief Cases and Analyze Case Problems A-1 B The Constitution of the United States A-3 C The Uniform Commercial Code (Excerpts) A-11 D Answers to Issue Spotters A-130 E Answers to Even-Numbered Learning

Objectives Check Questions A-136

F Sample Answers for Business Case Problems with Sample Answer A-144

G Case Excerpts for Case Analysis Questions A-152 Glossary G-1

Table of Cases TC-1

Index I-1

Contents in Brief

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Contents

Unit 1 the LegaL environment of BUsiness 1 Chapter 1 The Legal Environment 2 Business Activities and the Legal Environment 3

Sources of American Law 5

Common Law Tradition 9 ◾◾ Adapting the Law to the Online Environment: Can New Laws Prevent People from Wearing Google Glass? 12 ◾◾ Landmark in the Law: Equitable Principles and Maxims 14

Classifications of Law 15 ◾◾ Beyond Our Borders: National Law Systems 16 ◾◾ Linking Business Law to Corporate Management: Dealing with Administrative Law 18

Appendix to Chapter 1 22

Chapter 2 Constitutional Law 31 The Constitutional Powers of Government 32

◾◾ Landmark in the Law: Gibbons v. Ogden (1824) 33

ClassiC Case 2.1: Heart of Atlanta Motel v. United States 34

Business and the Bill of Rights 37 ◾◾ Beyond Our Borders: The Impact of Foreign Law on the United States Supreme Court 39

spotlight on Beer laBels: Case 2.2: Bad Frog Brewery, Inc. v. New York State Liquor Authority 41

◾◾ Adapting the Law to the Online Environment: Should Threats Made on Facebook Be Considered Free Speech? 43

Case 2.3: Holt v. Hobbs 45

Due Process and Equal Protection 45

Privacy Rights 48 ◾◾ Managerial Strategy: Marriage Equality and the Constitution 49 ◾◾ Business Application: Is “Pretexting” Illegal? 51

Chapter 3 Courts and Alternative Dispute Resolution 55 The Judiciary’s Role in American Government 56

Basic Judicial Requirements 56 ◾◾ Landmark in the Law: Marbury v. Madison (1803) 57

spotlight on guCCi: Case 3.1: Gucci America, Inc. v. Wang Huoqing 62

The State and Federal Court Systems 64 ◾◾ Managerial Strategy: Budget Cuts for State Courts Can Affect Businesses 65 ◾◾ Beyond Our Borders: Islamic Law Courts Abroad and at Home 66

Following a State Court Case 69

Case 3.2: Brothers v. Winstead 72 ◾◾ Adapting the Law to the Online Environment: Jurors’ Use of Wireless Devices and the Internet 76

Courts Online 78

Alternative Dispute Resolution 78

Case 3.3: Cruise v. Kroger Co. 82

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Chapter 4 Tort Law 89 The Basis of Tort Law 89

Intentional Torts against Persons 92 ◾◾ Beyond Our Borders: “Libel Tourism” 95 ◾◾ Adapting the Law to the Online Environment: Revenge Porn and Invasion of Privacy 98

Case 4.1: Revell v. Guido 100

Intentional Torts against Property 102

Case 4.2: Welco Electronics, Inc. v. Mora 104

Unintentional Torts (Negligence) 105 ◾◾ Landmark in the Law: Palsgraf v. Long Island

Railroad Co. (1928) 108

spotlight on the seattle Mariners: Case 4.3: Taylor v. Baseball Club of Seattle, L.P. 109

Strict Liability 112 ◾◾ Business Application: How Important Is Tort Liability to Business? 113

Chapter 5 Product Liability 118 Product Liability 118

◾◾ Landmark in the Law: MacPherson v. Buick Motor Co. (1916) 120

Strict Product Liability 120

spotlight on injuries froM VaCCinations: Case 5.1: Bruesewitz v. Wyeth, LLC 121

◾◾ Beyond Our Borders: Imposing Product Liability as Far Away as China 122

Case 5.2: Riley v. Ford Motor Co. 125 ◾◾ Managerial Strategy: When Is a Warning Legally Bulletproof? 127

Defenses to Product Liability 129

Case 5.3: Verost v. Mitsubishi Caterpillar Forklift America, Inc. 129 ◾◾ Linking Business Law to Corporate Management: Quality Control 133

Chapter 6 Intellectual Property Rights 138 Trademarks 139

ClassiC Case 6.1: Coca-Cola Co. v. Koke Co. of America 139

Patents 145

Case 6.2: In re Imes 146 ◾◾ Adapting the Law to the Online Environment: The Problem of Patent Trolls 148

Copyrights 149

Case 6.3: Inhale, Inc. v. Starbuzz Tobacco, Inc. 150 ◾◾ Beyond Our Borders: The Resale of Textbooks Purchased Abroad 153

Trade Secrets 154

International Protections 156 ◾◾ Linking Business Law to Marketing: Trademarks and Service Marks 158

Chapter 7 Internet Law, Social Media, and Privacy 162 Internet Law 162

spotlight on internet porn: Case 7.1: Hasbro, Inc. v. Internet Entertainment Group, Ltd. 166

Copyrights in Digital Information 167 ◾◾ Landmark in the Law: The Digital Millennium Copyright Act 168 ◾◾ Adapting the Law to the Online Environment: E-Mail Hacking at Sony Pictures—Can You Put the Cat Back into the Bag? 169

Social Media 171

Online Defamation 175

Case 7.2: Yelp, Inc. v. Hadeed Carpet Cleaning, Inc. 175

Privacy 177 ◾◾ Beyond Our Borders: “The Right to Be Forgotten” in the European Union 177

Case 7.3: Nucci v. Target Corp. 178

Chapter 8 Criminal Law and Cyber Crime 184 Civil Law and Criminal Law 184

Criminal Liability 187 ◾◾ Managerial Strategy: The Criminalization of American Business 189

Types of Crimes 190

Case 8.1: State of Minnesota v. Smith 191

spotlight on White-Collar CriMe: Case 8.2: People v. Sisuphan 194

Defenses to Criminal Liability 197

Constitutional Safeguards and Criminal Procedures 199

Case 8.3: State of Oklahoma v. Marcum 200 ◾◾ Landmark in the Law: Miranda v. Arizona (1966) 203

Cyber Crime 206 ◾◾ Beyond Our Borders: Hackers Hide in Plain Sight in Russia 208 ◾◾ Adapting the Law to the Online Environment: Malware Is Changing the Criminal Landscape 209 ◾◾ Business Application: Protecting Your Company against Hacking of Its Bank Accounts 211

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◾◾ Adapting the Law to the Online Environment: Should Employees Have a “Right of Disconnecting”? 228

Case 9.3: Al-Dabagh v. Case Western Reserve University 229

Global Business Ethics 230 ◾◾ Beyond Our Borders: Bribery and the Foreign Corrupt Practices Act 232 ◾◾ Linking Business Law to Accounting and Finance: Managing a Company’s Reputation 233

Appendix to Chapter 9 238

unit one—Business Case study With dissenting opinion: Central Radio Co. v. City of Norfolk, Virginia 239

Unit 2 ContraCts and e-ContraCts 243 Chapter 10 Nature and Classification 244 An Overview of Contract Law 244

Case 10.1: Pan Handle Realty, LLC v. Olins 246

Elements of a Contract 246

Types of Contracts 247

Case 10.2: Vukanovich v. Kine 250

Quasi Contracts 252

Interpretation of Contracts 253

spotlight on ColuMBia piCtures: Case 10.3: Wagner v. Columbia Pictures Industries, Inc. 255

Chapter 11 Agreement 261 Agreement 261

ClassiC Case 11.1: Lucy v. Zehmer 262

spotlight on aMazon.CoM: Case 11.2: Basis Technology Corp. v. Amazon.com, Inc. 265

◾◾ Adapting the Law to the Online Environment: Can Your E-Mails or Instant Messages Create a Valid Contract? 268

Case 11.3: Brown v. Lagrange Development Corp. 269

E-Contracts 271 ◾◾ Managerial Strategy: E-Mailed Credit Card Receipts 276

The Uniform Electronic Transactions Act 276 ◾◾ Linking Business Law to Marketing: Customer Relationship Management 280

Chapter 12 Consideration, Capacity, and Legality 285 Consideration 285

◾◾ Landmark in the Law: Hamer v. Sidway (1891) 287

spotlight on nike: Case 12.1: Already, LLC v. Nike, Inc. 290

Promissory Estoppel 291

Contractual Capacity 292

Case 12.2: PAK Foods Houston, LLC v. Garcia 293

Legality 295

Case 12.3: Holmes v. Multimedia KSDK, Inc. 301 ◾◾ Managerial Strategy: Creating Liability Waivers That Are Not Unconscionable 302

The Effect of Illegality 302

Chapter 9 Business Ethics 216 Business Ethics 216

Case 9.1: Scott v. Carpanzano 219

Case 9.2: May v. Chrysler Group, LLC 220

Business Ethics and Social Media 221

Approaches to Ethical Reasoning 222

Making Ethical Business Decisions 227

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Chapter 13 Defenses to Contract Enforceability 309 Voluntary Consent 309

Case 13.1: Cronkelton v. Guaranteed Construction Services, LLC 314

Case 13.2: Fazio v. Cypress/GR Houston I, LP 315 ◾◾ Adapting the Law to the Online Environment: “Catfishing”: Is That Online “Friend” for Real? 317

The Writing Requirement 318 ◾◾ Beyond Our Borders: The Statute of Frauds and International Sales Contracts 321

Sufficiency of the Writing or Electronic Record 323

The Parol Evidence Rule 324

Case 13.3: Frewil, LLC v. Price 326

Chapter 14 Third Party Rights and Discharge 331 Assignments 331

Case 14.1: Bass-Fineberg Leasing, Inc. v. Modern Auto Sales, Inc. 334

Delegations 336

Third Party Beneficiaries 338

Contract Discharge 341

Case 14.2: Kohel v. Bergen Auto Enterprises, LLC 344 ◾◾ Adapting the Law to the Online Environment: When Do Changes in Social Media Terms of Service Constitute a Breach of Contract? 345

Case 14.3: Kolodin v. Valenti 349 ◾◾ Beyond Our Borders: Impossibility or Impracticability of Performance in Germany 351 ◾◾ Business Application: Dealing with Third Party Rights 352

Unit 3 CommerCiaL transaCtions 397 Chapter 17 The Formation of Sales and Lease Contracts 398

◾◾ Landmark in the Law: The Uniform Commercial Code 399

The Scope of Articles 2 and 2A 399

Chapter 15 Breach and Remedies 356 Damages 356

Case 15.1: Hallmark Cards, Inc. v. Murley 357 ◾◾ Landmark in the Law: Hadley v. Baxendale (1854) 361

spotlight on liquidated daMages: Case 15.2: Kent State University v. Ford 362

Equitable Remedies 363

Case 15.3: Clara Wonjung Lee, DDS, Ltd. v. Robles 364

Recovery Based on Quasi Contract 366

Contract Provisions Limiting Remedies 367 ◾◾ Business Application: What Do You Do When You Cannot Perform? 369

Chapter 16 International Law in a Global Economy 374

◾◾ Beyond Our Borders: Border Searches of Your Electronic Devices 375

International Law 375

Case 16.1: Linde v. Arab Bank, PLC 377

Doing Business Internationally 379

Regulation of Specific Business Activities 381

International Contracts 383

Case 16.2: Carlyle Investment Management LLC v. Moonmouth Company SA 384

Payment Methods 386

U.S. Laws in a Global Context 388

spotlight on international torts: Case 16.3: Daimler AG v. Bauman 389

unit tWo—Business Case study With dissenting opinion: Braddock v. Braddock 394

Case 17.1: Nautilus Insurance Co. v. Cheran Investments LLC 400 ◾◾ Adapting the Law to the Online Environment: Taxing Web Purchases 402

The Formation of Sales and Lease Contracts 404

Case 17.2: C. Mahendra (N.Y.), LLC v. National Gold & Diamond Center, Inc. 408

ClassiC Case 17.3: Jones v. Star Credit Corp. 414

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The Bank’s Duty to Honor Checks 495

Case 20.2: Michigan Basic Property Insurance Association v. Washington 500

The Bank’s Duty to Accept Deposits 501

Case 20.3: Shahin v. Delaware Federal Credit Union 502 ◾◾ Landmark in the Law: Check Clearing in the 21st Century Act (Check 21) 503

Electronic Fund Transfers 506

Online Banking and E-Money 507 ◾◾ Adapting the Law to the Online Environment: Pay with Your Smartphone 508 ◾◾ Linking Business Law to Accounting and Finance: Banking Risks 509

Chapter 21 Security Interests and Creditors’ Rights 514 Terminology of Secured Transactions 514

Creating and Perfecting a Security Interest 515

Case 21.1: Royal Jewelers Inc. v. Light 516 ◾◾ Adapting the Law to the Online Environment: Secured Transactions Online 517

Scope of a Security Interest 522

Priorities, Rights, and Duties 524

Default 527

Case 21.2: Smith v. Firstbank Corp. 529

Other Laws Assisting Creditors 530

Case 21.3: HSBC Realty Credit Corp. (USA) v. O’Neill 534

Title and Risk of Loss 415 ◾◾ Managerial Strategy: Commercial Use of Drones 417

Contracts for the International Sale of Goods 422 ◾◾ Business Application: Who Bears the Risk of Loss— the Seller or the Buyer? 424

Appendix to Chapter 17 429

Chapter 18 Performance and Breach of Sales and Lease Contracts 433 Performance Obligations 434

Case 18.1: Garziano v. Louisiana Log Home Co. 435

Anticipatory Repudiation 441

Remedies for Breach 441 ◾◾ Beyond Our Borders: The CISG’s Approach to Revocation of Acceptance 447

spotlight on BaseBall Cards: Case 18.2: Fitl v. Strek 448

Warranties 449

ClassiC Case 18.3: Webster v. Blue Ship Tea Room, Inc. 452

Chapter 19 Negotiable Instruments 460 Types of Negotiable Instruments 460

Requirements for Negotiability 464

Case 19.1: Alpacas of America, LLC v. Groome 466

Case 19.2: Charles R. Tips Family Trust v. PB Commercial LLC 470

Transfer of Instruments 470

Case 19.3: In re Bass 472 ◾◾ Beyond Our Borders: Severe Restrictions on Check Indorsements in France 473

Holder in Due Course (HDC) 475

Signature and Warranty Liability 478

Defenses, Limitations, and Discharge 483 ◾◾ Landmark in the Law: Federal Trade Commission Rule 433 485

Chapter 20 Banking in the Digital Age 491 Checks 491

The Bank-Customer Relationship 494

Case 20.1: Royal Arcanum Hospital Association of Kings County, Inc. v. Herrnkind 494

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Chapter 22 Bankruptcy 541 Mortgages 541

spotlight on foreClosures: Case 22.1: McLean v. JPMorgan Chase Bank, N.A. 544

Laws Assisting Debtors 545

The Bankruptcy Code 546 ◾◾ Landmark in the Law: The Bankruptcy Abuse Prevention and Consumer Protection Act 547

Unit 4 agenCy and empLoyment Law 573 Chapter 23 Agency Relationships in Business 574 Agency Relationships 575

Case 23.1: Asphalt & Concrete Services, Inc. v. Perry 577

Formation of an Agency 579

Duties of Agents and Principals 581

Agent’s Authority 583 ◾◾ Adapting the Law to the Online Environment: What Happens When an Agent Breaches Company Policy on the Use of Electronic Data? 585

spotlight on apparent authority of Managers: Case 23.2: Lundberg v. Church Farm, Inc. 586

Liability in Agency Relationships 587

Case 23.3: Stonhard, Inc. v. Blue Ridge Farms, LLC 588 ◾◾ Landmark in the Law: The Doctrine of Respondeat Superior 591

Termination of an Agency 592 ◾◾ Beyond Our Borders: Islamic Law and Respondeat Superior 593 ◾◾ Business Application: How Can an Employer Use Independent Contractors? 596

Chapter 24 Employment, Immigration, and Labor Law 601 Employment at Will 601

Wages, Hours, Layoffs, and Leave 603

Case 24.1: Bailey v. TitleMax of Georgia, Inc. 605 ◾◾ Beyond Our Borders: Brazil Requires Employers to Pay Overtime for Use of Smartphones after Work Hours 606

Case 24.2: Ballard v. Chicago Park District 607

Health, Safety, and Income Security 608

Employee Privacy Rights 612 ◾◾ Adapting the Law to the Online Environment: Social Media in the Workplace Come of Age 613

Immigration Law 615

Labor Unions 617

Case 24.3: Services Employees International Union v. National Union of Healthcare Workers 619

◾◾ Managerial Strategy: Union Organizing Using Your Company’s E-Mail System 621 ◾◾ Business Application: How to Develop a Policy on Employee Use of the Internet and Social Media 624

Chapter 7—Liquidation 547

Case 22.2: In re Cummings 558

Chapter 11—Reorganization 559

Bankruptcy Relief under Chapter 12 and Chapter 13 561

Case 22.3: In re Welsh 563 ◾◾ Linking Business Law to Corporate Management: What Can You Do to Prepare for a Chapter 11 Reorganization? 566

unit three—Business Case study With dissenting opinion: First Bank v. Fischer & Frichtel, Inc. 570

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◾◾ Beyond Our Borders: Sexual Harassment in Other Nations 640

Discrimination Based on Age 641

Discrimination Based on Disability 642

Defenses to Employment Discrimination 646

Affirmative Action 647 ◾◾ Linking Business Law to Corporate Management: Human Resource Management 649

unit four—Business Case study With dissenting opinion: EEOC v. Greater Baltimore Medical Center, Inc. 653

Unit 5 BUsiness organizations 657 Chapter 26 Sole Proprietorships and Franchises 658 Sole Proprietorships 659

◾◾ Managerial Strategy: Cyber Thieves Empty Small-Business Owners’ Bank Accounts 659

Case 26.1: Quality Car & Truck Leasing, Inc. v. Sark 661 ◾◾ Adapting the Law to the Online Environment: A Sole Proprietorship, Facebook Poker, and Bankruptcy 662

Franchises 662 ◾◾ Beyond Our Borders: Franchising in Foreign Nations 663

The Franchise Contract 665

Franchise Termination 667

Case 26.2: Century 21 Real Estate LLC v. All Professional Realty, Inc. 668

spotlight on holiday inns: Case 26.3: Holiday Inn Franchising, Inc. v. Hotel Associates, Inc. 669

◾◾ Business Application: What Problems Can a Franchisee Anticipate? 671

Chapter 27 All Forms of Partnership 675 Basic Partnership Concepts 675

Formation and Operation 678 ◾◾ Beyond Our Borders: Doing Business with Foreign Partners 679

ClassiC Case 27.1: Meinhard v. Salmon 681

Dissociation and Termination 684

Case 27.2: Estate of Webster v. Thomas 686

Limited Liability Partnerships 688

Limited Partnerships 689

Case 27.3: DeWine v. Valley View Enterprises, Inc. 690

Chapter 28 Limited Liability Companies and Special Business Forms 697 Limited Liability Companies 697

◾◾ Landmark in the Law: Limited Liability Company (LLC) Statutes 698

Case 28.1: Hodge v. Strong Built International, LLC 700 ◾◾ Beyond Our Borders: Limited Liability Companies in Other Nations 701

Chapter 25 Employment Discrimination 629 Title VII of the Civil Rights Act 629

◾◾ Adapting the Law to the Online Environment: Hiring Discrimination Based on Social Media Posts 633

Case 25.1: Young v. United Parcel Service, Inc. 635

Case 25.2: Roberts v. Mike’s Trucking, Ltd. 637

Case 25.3: Morales-Cruz v. University of Puerto Rico 639

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LLC Operation and Management 702

Case 28.2: Mekonen v. Zewdu 702

Dissociation and Dissolution of an LLC 704 ◾◾ Managerial Strategy: Can a Person Who Is Not a Member of a Protected Class Sue for Discrimination? 705

Case 28.3: Venture Sales, LLC v. Perkins 706

Special Business Forms 707 ◾◾ Business Application: How Do You Choose between an LLC and an LLP? 711

Chapter 29 Corporations 715 Nature and Classification 715

Case 29.1: Drake Manufacturing Co. v. Polyflow, Inc. 717 ◾◾ Adapting the Law to the Online Environment: Imposing a 1930s Regulatory Law on Broadband Operators 719

Formation and Financing 721

Corporate Powers 726

Case 29.2: Dog House Investments, LLC v. Teal Properties, Inc. 728

Directors and Officers 729

ClassiC Case 29.3: Guth v. Loft, Inc. 733

Unit 6 government regULation 777 Chapter 31 Antitrust Law and Promoting Competition 778 The Sherman Antitrust Act 779

◾◾ Landmark in the Law: The Sherman Antitrust Act 779

Section 1 of the Sherman Act 781

◾◾ Adapting the Law to the Online Environment: The Justice Department Goes After E-Book Pricing 783

Section 2 of the Sherman Act 785

Case 31.1: McWane, Inc. v. Federal Trade Commission 787

spotlight on Weyerhaeuser: Case 31.2: Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co. 789

The Clayton Act 790

Case 31.3: Batson v. Live Nation Entertainment, Inc. 792

Enforcement and Exemptions 793

Shareholders 734 ◾◾ Beyond Our Borders: Derivative Actions in Other Nations 739

Major Business Forms Compared 740

Chapter 30 Investor Protection, Insider Trading, and Corporate Governance 747

◾◾ Landmark in the Law: The Securities and Exchange Commission 748

Securities Act of 1933 748

Case 30.1: Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund 755

Securities Exchange Act of 1934 756

ClassiC Case 30.2: Securities and Exchange Commission v. Texas Gulf Sulphur Co. 758

Case 30.3: United States v. Newton 762

State Securities Laws 763

Corporate Governance 764 ◾◾ Beyond Our Borders: Corporate Governance in Other Nations 765

unit fiVe—Business Case study With dissenting opinion: Notz v. Everett Smith Group, Ltd. 773

U.S. Antitrust Laws in the Global Context 794 ◾◾ Beyond Our Borders: The EU’s Lengthy Antitrust Proceedings 796 ◾◾ Business Application: How Can You Avoid Antitrust Problems? 797

Chapter 32 Consumer and Environmental Law 802 Advertising, Marketing, and Sales 802

Case 32.1: POM Wonderful, LLC v. Federal Trade Commission 804 ◾◾ Adapting the Law to the Online Environment: The FTC’s Guideline Regulating Astroturfing 806

Case 32.2: Lexmark International, Inc. v. Static Control Components, Inc. 807

Labeling and Packaging 808

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Toxic Chemicals and Hazardous Waste 822 ◾◾ Business Application: The Proper Approach to Using Credit Reporting Services 825

Chapter 33 Liability of Accountants and Other Professionals 830 Potential Liability to Clients 831

◾◾ Landmark in the Law: The SEC Adopts Global Accounting Rules 832

Case 33.1: In re B.L.H. 835

Potential Liability to Third Parties 836

Case 33.2: Perez v. Stern 839

The Sarbanes-Oxley Act 839

Potential Liability of Accountants under Securities Laws 841

spotlight on an aCCountant’s duty to CorreCt Mistakes: Case 33.3: Overton v. Todman & Co., CPAs 844

Potential Criminal Liability 845

Confidentiality and Privilege 846

unit six—Business Case study With dissenting opinion: Yates v. United States 852

Unit 7 property and its proteCtion 855 Chapter 34 Personal Property and Bailments 856 Personal Property versus Real Property 856

Case 34.1: Corbello v. DeVito 857

Acquiring Ownership of Personal Property 858 ◾◾ Adapting the Law to the Online Environment: The Exploding World of Digital Property 859

ClassiC Case 34.2: In re Estate of Piper 861

Mislaid, Lost, and Abandoned Property 863

Bailments 865

Case 34.3: Bridge Tower Dental, P.A. v. Meridian Computer Center, Inc. 869

◾◾ Business Application: What Should You Do with Lost Property? 873

Chapter 35 Real Property and Landlord-Tenant Law 877 The Nature of Real Property 877

Ownership Interests and Leases 879

Case 35.1: Main Omni Realty Corp. v. Matus 881

Case 35.2: Baker v. Walnut Bowls, Inc. 885

Transfer of Ownership 886

spotlight on sales of haunted houses: Case 35.3: Stambovsky v. Ackley 887

Landlord-Tenant Relationships 891

Protection of Health and Safety 810 ◾◾ Beyond Our Borders: Europe Bans Foods That Americans Eat 810

Credit Protection 812

Protecting the Environment 816

Air and Water Pollution 818

Case 32.3: United States v. O’Malley 820

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xii Contents

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Chapter 36 Insurance, Wills, and Trusts 899 Insurance 899

Case 36.1: Breeden v. Buchanan 902

Case 36.2: Valero v. Florida Insurance Guaranty Association, Inc. 905

Wills 907

Case 36.3: In re Estate of Melton 910 ◾◾ Adapting the Law to the Online Environment: Social Media Estate Planning 913

Trusts 915 ◾◾ Business Application: How Can You Manage Risk in Cyberspace? 920

unit seVen—Business Case study With dissenting opinion: Kovarik v. Kovarik 926

APPENDICES A How to Brief Cases and Analyze Case Problems A-1 B The Constitution of the United States A-3 C The Uniform Commercial Code (Excerpts) A-11 D Answers to Issue Spotters A-130 E Answers to Even-Numbered Learning

Objectives Check Questions A-136

F Sample Answers for Business Case Problems with Sample Answer A-144

G Case Excerpts for Case Analysis Questions A-152 Glossary G-1

Table of Cases TC-1

Index I-1

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xiiiContents

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The study of business and the legal environment has universal applicability. A student entering any field of business must have at least a passing understanding of business law in order to function in the real world. Business Law Today, Eleventh Edition, provides the information in an interesting and contemporary way. The Eleventh Edition continues its established tradition of being the most up-to-date text on the market.

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

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

New Chapter on Internet Law, Social Media, and Privacy For the Eleventh Edition, I have included an entirely new chapter (Chapter 7) entitled Internet Law, Social Media, and Privacy. Social media have entered the mainstream and become a part of everyday life for many businesspersons. Throughout the text, I recognize this trend by incorporating the Internet and social media as they relate to the topics under discussion.

New Features The Eleventh Edition of Business Law Today is filled with exciting new features including the following:

• Twenty-three Adapting the Law to the Online Environment features examine cutting- edge cyberlaw issues. Seventeen of these are new and cover topics such as Facebook poker, hacking, patent trolls, paying with smartphones, revenge porn, and social media.

• I have included twenty new Ethical Issues that focus on the ethical aspects of a topic being discussed in order to emphasize that ethics is an integral part of a business law course.

• I have also added six new Beyond Our Borders features (for a total of twenty-four) that focus on the global legal environment and illustrate how other nations deal with specific legal concepts being discussed.

• For this edition, I have created a new feature entitled Managerial Strategy that focuses on the management aspects of business law. There are ten of these new features throughout the text, covering such topics as the commercial use of drones, marriage equality, and the use of company e-mail systems to organize a union.

• Fourteen Business Application features and eight Linking Business Law to [one of the six functional fields of business] features are included at the end of selected chapters.

preface

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The Business Applications focus on practical considerations and offer checklists related to the chapter’s contents, whereas the Linking Business Law features underscore how the law relates to other fields of business.

• Eighteen Landmark in the Law features discuss a landmark case, statute, or other legal development that has had a significant effect on business law.

New Cases and Case Problems The Eleventh Edition of Business Law Today has new cases and case problems from 2015 and 2014 in every chapter. The new cases have been carefully selected to illustrate important points of law and be of high interest to students and instructors. I have made it a point to find recent cases that enhance learning and are simple enough for business law students to understand.

Certain cases and case problems have been carefully chosen as good teaching cases and are designated as Spotlight Cases and Spotlight Case Problems. Some examples include Spotlight on Apple, Spotlight on Beer Labels, Spotlight on Nike, and Spotlight on the Seattle Mariners. Instructors will find these Spotlight decisions useful to illustrate the legal concepts under discussion, and students will enjoy studying these cases because they involve interesting and memorable facts. Other cases have been chosen as Classic Cases because they establish a legal precedent in the particular area of law.

Each case concludes with a question, which may be called Critical Thinking, What If the Facts Were Different? or Why Is This Case Important? Classic Cases conclude with an Impact of This Case on Today’s Law section that clarifies how the case has affected the legal environment. Suggested answers to all case-ending questions can be found in the Solutions Manual for this text.

Many New Highlighted and Numbered Case Examples Many instructors use cases and examples to illustrate how the law applies to business. For this edition of Business Law Today, I have added more than one hundred new highlighted and numbered Examples, and more than one hundred new highlighted and consecutively numbered Case Examples. Examples illustrate how the law applies in a specific situation. Case Examples present the facts and issues of an actual case and then describe the court’s decision and rationale. The numbered Examples and Case Examples features are integrated throughout the text to help students better understand how courts apply the principles in the real world.

Critical Thinking and Legal Reasoning Elements Critical thinking questions conclude most of the features and cases in this text. There is also a Debate This question at the end of each chapter that requires students to think critically about the rationale underlying the law on a particular topic.

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

The chapter-ending materials also include a separate section of questions that focus on critical thinking and writing. This section always includes a Business Law Critical Thinking Group Assignment and may also include the following:

• Critical Legal Thinking questions require students to think critically about some aspect of the law discussed in the chapter.

• Business Law Writing questions require students to compose a written response to a business-oriented critical-thinking question.

• Case Analysis Questions require students to read through a case excerpt in Appendix G, brief the case, and then answer a series of questions relating to the case.

xvi Preface

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

the text provide a framework for the student). • Preventing Legal Disputes (integrated text sections offer practical guidance on how

businesspersons can avoid legal disputes and litigation in a particular area). • Chapter Outline (an outline of the chapter’s first-level headings). • Margin definitions. • Highlighted and numbered Examples and Case Examples (illustrate legal principles). • Quotations and Know This (margin features). • Exhibits. • Photographs (with critical thinking questions) and cartoons.

Chapter-Ending Pedagogy • Reviewing . . . features (in every chapter). • Debate This (a statement or question at the end of the Reviewing feature). • Key Terms (with appropriate page references). • Chapter Summary (in table format). • Issue Spotters (in every chapter with answers in Appendix D). • Learning Objectives Check (The Learning Objectives questions are presented again to

aid students in reviewing the chapter. For this edition, answers to the even-numbered questions for each chapter are provided in Appendix E.)

• Business Scenarios and Case Problems (Every chapter includes a Business Case Problem with Sample Answer answered in Appendix F, A Question of Ethics, and a Business Law Critical Thinking Group Assignment. Selected chapters include a Spotlight Case Problem.)

Unit-Ending Pedagogy Each of the seven units in the Eleventh Edition of Business Law Today concludes with the following features (which are answered in the Solutions Manual):

• Business Case Study with Dissenting Opinion—This feature presents a court case that relates to a topic covered in the unit. It opens with an introductory section, discusses the case background and significance, and then provides excerpts from the court’s majority opinion and from a dissenting opinion as well. The case study portion ends with Questions for Analysis—a series of questions that prompt the student to think critically about the legal, ethical, economic, international, or general business implications of the case.

• Business Scenario—This feature presents a hypothetical business situation and then asks a series of questions about how the law applies to various actions taken by the firm. To answer the questions, the student must apply the laws discussed throughout the unit.

• Group Project—The final portion of the unit-ending pedagogy is a Group Project that requires students to work together to formulate answers based on materials they learned in the previous chapters.

Supplements Business Law Today, Eleventh Edition, provides a comprehensive supplements package designed to make the tasks of teaching and learning more enjoyable and efficient. The following supple- ments are available for instructors.

xviiPreface

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MindTap Business Law for Business Law Today, Eleventh Edition MindTap™ is a fully online, highly personalized learning experience built upon authoritative Cengage Learning content. By combining readings, multimedia, activities, and assessments into a singular Learning Path, MindTap guides students through their course with ease and engagement. Instructors personalize the Learning Path by customizing Cengage Learning resources and adding their own content via apps that integrate into the MindTap framework seamlessly with Learning Management Systems.

The MindTap Business Law product provides a four-step Learning Path, Case Repository, Adaptive Test Prep, and an Interactive eBook designed to meet instructors’ needs while also allowing instructors to measure skills and outcomes with ease. Each and every item is assign- able and gradable. This gives instructors the knowledge of class standings and concepts that may be difficult. Additionally, students gain knowledge about where they stand—both indi- vidually and compared to the highest performers in class.

Cengage Learning Testing Powered by Cognero Cengage Learning Testing Powered by Cognero is a flexible, online system that allows instructors to do the following:

• Author, edit, and manage Test Bank content from multiple Cengage Learning solutions. • Create multiple test versions in an instant. • Deliver tests from their Learning Management System (LMS), classroom, or wherever

they want.

Start Right Away! Cengage Learning Testing Powered by Cognero works on any operating system or browser.

• Use your standard browser; no special installs or downloads are needed. • Create tests from school, home, the coffee shop—anywhere with Internet access.

What Instructors Will Find • Simplicity at every step. A desktop-inspired interface features drop-down menus and

familiar, intuitive tools that take instructors through content creation and management with ease.

• Full-featured test generator. Create ideal assessments with a choice of fifteen question types—including true/false, multiple choice, opinion scale/Likert, and essay. Multi- language support, an equation editor, and unlimited metadata help ensure instructor tests are complete and compliant.

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

Instructor’s Companion Web Site The Instructor’s Companion Web Site contains the following supplements:

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

• Solutions Manual. Provides answers to all questions presented in the text, including the Learning Objectives, the questions in each case and feature, the Issue Spotters, the Business Scenarios and Case Problems, Critical Thinking and Writing Assignments, and the unit-ending features. New for this edition, we also provide a set of Alternative Case Problems for every chapter.

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

• Case-Problem Cases. • Case Printouts. • PowerPoint Slides.

xviii Preface

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Through personalized paths of dynamic assignments and applications, MindTap is a digital learning solution that turns cookie cutter into cutting edge, apathy into engagement, and memorizers into higher-level thinkers.

With MindTap’s carefully curated material, you get the right content and groundbreaking tools you need. You can personalize every element of your course—from rearranging the Table of Contents to inserting videos, cases, and activities. You’ll save time and improve workflow by having everything in one place. And, with MindTap’s Progress App, you can monitor student progress in real time.

Specifically for this Edition, you’ll find: A pre-built learning path in MindTap that guides students through consistent learning activities to prepare, engage, apply, and analyze business law content.

Turn the page to learn more about our exciting NEW Case Repository, Adaptive Test Prep, and the Interactive eBook.

Turn the Light ON with mindTap!

Worksheets - interactive online “worksheets” PREPARE students for class, ensuring reading and comprehension.

Brief Hypotheticals - these applications help students spot the issue and APPLY the law in the context of a short, factual scenario.

Video Activities - real-world video exercises make business law RELEVANT AND ENGAGING.

Case Problem Blueprints - promote deeper CRITICAL THINKING and legal reasoning by guiding students step by step through a case problem.

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Now, within MindTap, you can search a library of cases from previous editions of your favorite textbooks by relevant criteria and then incorporate those cases in the learning path for your students.

This exciting repository allows you to personalize your course and truly engage students, helping them to reach higher levels of critical thinking.

Access Over 900 Cases with our new Case repository

Easily search by topic, and then refine your search by subtopic, to find case examples of a specific legal concept.

Search by court or state to bring a local flavor or interest to your classroom.

Enjoy over 900 cases at your fingertips. All new edition omitted cases will be added every year, allowing the archive to continually grow.

Allows you to mix and match cases from different textbooks.

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MindTap’s Adaptive Test Prep helps students study for exams with unlimited practice tests, quizzes, and feedback aimed specifically at helping them understand the course concepts.

Students can create an unlimited number of practice tests using similar types of questions seen on exams and test themselves on multiple chapters, by chapter, and by sub-topic levels. All practice test questions are book-specific and students receive immediate feedback with a remediation path, called My Study Plan, based on questions they miss.

The feedback provided is available in up to three formats:

eBook link back to the reading

written remediation

video walk-throughs

These resources consist of robust explanations created by some of the best business law educators in the country. My Study Plan also provides chapter level resources such as flashcards and chapter summary reviews.

Reduce Exam Anxiety with adaptive Test Prep

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Turn the Light on Engagement with interactive eBook activities

An eBook environment leads to more interaction with the material and a deeper learning of Business Law concepts. MindTap offers interactive cases, interactive exhibits, and video whiteboard explanations for the business law classroom.

Interactive Cases Bring cases to life with an interactive environment that pulls students into the material. Instead of reading a boxed case feature, these interactive cases ask questions throughout, provide detailed answers, help guide students to a deeper understanding of the case, and enhance their legal reasoning skills. After reading the case, students are asked application questions to assess their understanding at a broader level.

Interactive Exhibits Select static exhibits from within the narrative are now interactive. Students can enjoy manipulating figures and exhibits to better solidify their understanding of key concepts in the text. These activities are sure to engage students in the learning process and encourage greater focus and participation.

Video Whiteboard Explanations Bring key legal concepts to life, literally, with short, entertaining animations. Video whiteboard explanations help students remember and learn key concepts with fun, real-world examples. Each being 3 minutes or less, these videos are an exciting way to help students see how they’d encounter these concepts in their own lives or in the near future when entering the business world.

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Acknowledgments for Previous Editions Since I began this project many years ago, numerous business law professors and users of Business Law Today have been kind enough to help me revise the book, including the following:

John J. Balek Morton College, Illinois

John Jay Ballantine University of Colorado, Boulder

Lorraine K. Bannai Western Washington University

Marlene E. Barken Ithaca College, New York

Laura Barnard Lakeland Community College, Ohio

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

Daryl Barton Eastern Michigan University

Merlin Bauer Mid State Technical College, Wisconsin

Donna E. Becker Frederick Community College, Maryland

Richard J. Bennet Three Rivers Community College, Connecticut

Dr. Anne Berre Schreiner University, Texas

Robert C. Bird University of Connecticut

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

Brad Botz Garden City Community College, Kansas

Teresa Brady Holy Family College, Pennsylvania

Dean Bredeson University of Texas at Austin

Lee B. Burgunder California Polytechnic University, San Luis Obispo

Thomas D. Cavenagh North Central College, Illinois

Bradley D. Childs Belmont University, Tennessee

Corey Ciocchetti University of Denver, Colorado

Peter Clapp St. Mary’s College, California

Dale Clark Corning Community College, New York

Tammy W. Cowart University of Texas, Tyler

Stanley J. Dabrowski Hudson County Community College, New Jersey

Sandra J. Defebaugh Eastern Michigan University

Patricia L. DeFrain Glendale College, California

Julia G. Derrick Brevard Community College, Florida

Joe D. Dillsaver Northeastern State University, Oklahoma

Claude W. Dotson Northwest College, Wyoming

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

Jacolin Eichelberger Hillsborough Community College, Florida

George E. Eigsti Kansas City, Kansas, Community College

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

Tony Enerva Lakeland Community College, Ohio

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

Joseph L. Flack Washtenaw Community College, Michigan

Jerry Furniss University of Montana

Joan Gabel Florida State University

Elizabeth J. Guerriero Northeast Louisiana University

Phil Harmeson University of South Dakota

Nancy L. Hart Midland College, Texas

Mo Hassan Cabrillo College, California

Andy E. Hendrick Coastal Carolina University, South Carolina

Janine S. Hiller Virginia Polytechnic Institute & State University

Karen A. Holmes Hudson Valley Community College, New York

Fred Ittner College of Alameda, California

Susan S. Jarvis University of Texas, Pan American

Jack E. Karns East Carolina University, North Carolina

Sarah Weiner Keidan Oakland Community College, Michigan

Richard N. Kleeberg Solano Community College, California

Bradley T. Lutz Hillsborough Community College, Florida

Diane MacDonald Pacific Lutheran University, Washington

Darlene Mallick Anne Arundel Community College, Maryland

John D. Mallonee Manatee Community College, Florida

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

Woodrow J. Maxwell Hudson Valley Community College, New York

Diane May Winona State University, Minnesota

Beverly McCormick Morehead State University, Kentucky

William J. McDevitt Saint Joseph’s University, Pennsylvania

John W. McGee Aims Community College, Colorado

James K. Miersma Milwaukee Area Technical Institute, Wisconsin

Susan J. Mitchell Des Moines Area Community College, Iowa

Jim Lee Morgan West Los Angeles College, California

Jack K. Morton University of Montana

Annie Laurie I. Myers Northampton Community College, Pennsylvania

Solange North Fox Valley Technical Institute, Wisconsin

Jamie L. O’Brien South Dakota State University

Ruth R. O’Keefe Jacksonville University, Florida

Robert H. Orr Florida Community College at Jacksonville

George Otto Truman College, Illinois

Thomas L. Palmer Northern Arizona University

David W. Pan University of Tulsa, Oklahoma

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

Donald L. Petote Genesee Community College, New York

Francis D. Polk Ocean County College, New Jersey

Gregory Rabb Jamestown Community College, New York

Brad Reid Abilene Christian University, Texas

Anne Montgomery Ricketts University of Findlay, Ohio

Donald A. Roark University of West Florida

Hugh Rode Utah Valley State College

xxiiiPreface

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Gerald M. Rogers Front Range Community College, Colorado

Dr. William J. Russell Northwest Nazarene University, Idaho

William M. Rutledge Macomb Community College, Michigan

Martha Wright Sartoris North Hennepin Community College, Minnesota

Anne W. Schacherl Madison Area Technical College, Wisconsin

Edward F. Shafer Rochester Community College, Minnesota

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

Lou Ann Simpson Drake University, Iowa

Denise Smith Missouri Western State College

Hugh M. Spall Central Washington University

Catherine A. Stevens College of Southern Maryland

Maurice Tonissi Quinsigamond Community College, Massachusetts

James D. Van Tassel Mission College, California

Russell A. Waldon College of the Canyons, California

Frederick J. Walsh Franklin Pierce College, New Hampshire

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

Randy Waterman Richland College, Texas

Jerry Wegman University of Idaho

Edward L. Welsh, Jr. Phoenix College, Arizona

Clark W. Wheeler Santa Fe Community College, Florida

Lori Whisenant University of Houston, Texas

Kay O. Wilburn The University of Alabama at Birmingham

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

James L. Wittenbach University of Notre Dame, Indiana

Eric D. Yordy Northern Arizona University

Joseph Zavaglia, Jr. Brookdale Community College, New Jersey

In addition, I give my thanks to the staff at Cengage Learning, especially Vicky True-Baker, product manager; Michael Worls, product director; Rebecca von Gillern, managing content developer; Leah Wuchnick, content developer; and Ann Borman, content project manager. I also thank Katie Jergens in marketing; Michelle Kunkler, art director; and Anne Sheroff, photo researcher. I would also like to thank the staff at Lachina, the compositor, for accurately generating pages for this text and making it possible for me to meet my ambitious printing schedule.

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

Roger LeRoy Miller

xxiv Preface

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Dedication

To John Allen,

The power of rational analysis never weakens.

R.L.M.

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

Unit 1 The Legal Environment

of Business

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

Clarence Darrow 1857–1938 (American lawyer)

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

Although the law has various definitions, all of them are based on the general observation that law consists of enforceable rules governing relationships among individuals and between individuals and their society. In some societies, these enforceable rules consist of unwritten principles of behav- ior. In other societies, they are set forth in ancient or contemporary law codes. In the United States, our rules consist of written laws and court decisions created by modern legislative and judicial bodies. Regardless of how such rules are created, they all have one feature in common: they establish rights, duties, and privileges that are consistent with the val- ues and beliefs of a society or its ruling group.

In this introductory chapter, we look first at an important question for any student reading this text: How do business law and the legal environment affect business decision making? Next, we describe the basic sources of American law, the common law tradition, and some schools of legal thought. We conclude the chapter with a discussion of some general classifications of law.

The Legal EnvironmentLEARNING OBJECTIVESThe five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions:

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

2. What is the common law tradition?

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

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

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

CHAPTER OUTLINE ▪▪ Business Activities and

the Legal Environment

▪▪ Sources of American Law ▪▪ Common Law Tradition ▪▪ Classifications of Law

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

2

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

Realize also that in today’s business world, simply being aware of what conduct can lead to legal liability is not enough. Businesspersons must develop critical thinking and legal rea- soning skills so that they can evaluate how various laws might apply to a given situation and determine the best course of action. Businesspersons are also pressured to make ethical deci- sions. Thus, the study of business law necessarily involves an ethical dimension.

1–1a Many Different Laws May Affect a Single Business Transaction As you will note, each chapter in this text covers a specific area of the law and shows how the legal rules in that area affect business activities. Although compartmentalizing the law in this fashion facilitates learning, it does not indicate the extent to which many different laws may apply to just one transaction. Exhibit 1–1 illustrates the various areas of the law that may influence business decision making.

EXAMPLE 1.1 When Mark Zuckerberg started Facebook as a Har- vard student, he probably did not imagine all the legal challenges his company would face as a result of his business decisions.

• Shortly after Facebook was launched, others claimed that Zuckerberg had stolen their ideas for a social networking site. Their claims involved alleged theft of intellectual property (see Chapter 6), fraudulent misrepresentation (see Chapter 13), partnership law (see Chapter 27), and securities law (see Chapter 30). Facebook ultimately paid a significant amount ($65 million) to settle those claims out of court.

• By 2015, Facebook had been sued repeatedly for violating users’ privacy (such as by disseminating private information to third parties for commercial purposes—see Chapters 4 and 7). In 2012 and 2014, lawsuits were filed against Facebook for violating users’ privacy (and federal laws) by tracking their Web site usage and by scanning private messages for purposes of data mining and user profiling. Also in 2014, a suit was filed in Europe against Facebook alleging violations of EU laws governing privacy and data use.

• Facebook’s business decisions have come under scrutiny by federal regulators, such as the Federal Trade Commission (FTC) and the Securities and Exchange Commission (SEC). The company settled a complaint filed by the FTC alleging that Facebook failed to keep “friends” lists and other user information private. n

A key to avoiding business disputes is to think ahead when starting or running a business or entering a contract. Learn what you can about the laws pertaining to that spe- cific enterprise or transaction. Have some idea of the legal ramifications of your business deci- sions, and seek the advice of a licensed attorney. When you need to choose an attorney, obtain recommendations from friends, relatives, or business associates who have had long-standing relationships with their attorneys.

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

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

3CHAPTER 1: The Legal Environment

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

1. Corporate management. 2. Production and transportation. 3. Marketing. 4. Research and development. 5. Accounting and finance. 6. Human resource management.

One of our goals in this text is to show how legal concepts can be useful for managers and businesspersons, whether their activities focus on man- agement, marketing, accounting, or some other field. To that end, numer- ous chapters, including this chapter, conclude with a special feature called “Linking Business Law to [one of the six functional fields of business].” The link between business law and accounting is so significant that we discuss it in detail in Chapter 33.

1–1c The Role of the Law in a Small Business Some of you may end up working in a small business or even owning and running one. The small business owner/operator is the most general of managers. When you seek additional

Sales

Negotiable Instruments

Creditors’ Rights

Intellectual Property

E-Commerce

Product Liability

Torts

Agency

Business Organizations

Professional Liability

Courts and Court Procedures

Contracts

Business Decision Making

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

Why is basic knowledge of business law and the legal environment so important today?

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financing, you become a finance manager. When you “go over the books” with your book- keeper, you become an accountant. When you decide on a new advertising campaign, you are suddenly the marketing manager. When you hire employees and determine their salaries and benefits, you become a human resources manager.

Just as the functional fields of business are linked to the law, so too are all of the different managerial roles that a small-business owner/operator must perform. Exhibit 1–2 shows some of the legal issues that may arise as part of the management of a small business. Large busi- nesses face most of these issues, too.

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

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

Business Organization What is the most appropriate business organizational form,

and what type of personal liability does it entail?

Taxation How will the small business be taxed, and are there ways to reduce those taxes?

Intellectual Property Does the small business have any patents or other intellectual

property that needs to be protected, and if so, what steps should the firm take?

Administrative Law What types of government regulations apply to the

business, and what must the firm do to comply with them?

Employment Does the business need an employment manual,

and does management have to explicitly inform employees of their rights?

Contracts, Sales, and Leases Will the firm be regularly entering into contracts with others, and if so, should it hire an attorney to review those contracts?

Accounting Do the financial statements created by an accountant need to be verified for accuracy?

Finance What are appropriate and legal ways to raise

additional capital so that the business can grow?

Exhibit 1–2 Linking Business Law to the Management of a Small Business

5CHAPTER 1: The Legal Environment

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• The U.S. Constitution and the constitutions of the various states. • Statutory law—including laws passed by Congress, state legislatures, and local

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

Administration. • Case law (court decisions).

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

Secondary sources of law are books and articles that summarize and clarify the primary sources of law. Legal encyclopedias, compilations (such as Restatements of the Law, which sum- marize court decisions on a particular topic), official comments to statutes, treatises, articles in law reviews published by law schools, and articles in other legal journals are examples of secondary sources of law. Courts often refer to secondary sources of law for guidance in inter- preting and applying the primary sources of law discussed here.

1–2a Constitutional Law The federal government and the states have written constitutions that set forth the general organization, powers, and limits of their respective governments. Constitutional law, which deals with the fundamental principles by which the government exercises its authority, is the law as expressed in these constitutions.

The U.S. Constitution is the basis of all law in the United States. It provides a framework for statutes and regulations, and thus is the supreme law of the land. A law in violation of the U.S. Constitution, if challenged, will be declared unconstitutional and will not be enforced, no matter what its source. Because of its paramount importance in the American legal sys- tem, we discuss the U.S. Constitution at length in Chapter 2 and present its complete text in Appendix B.

The Tenth Amendment to the U.S. Constitution reserves to the states all powers not granted to the federal government. Each state in the union has its own constitution. Unless it conflicts with the U.S. Constitution or a federal law, a state constitution is supreme within that state’s borders.

1–2b Statutory Law Laws enacted by legislative bodies at any level of government, such as the statutes passed by Congress or by state legislatures, make up the body of law generally referred to as statutory law. When a legislature passes a statute, that statute ultimately is included in the federal code of laws or the relevant state code of laws.

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

Statutory law also includes local ordinances—regulations passed by municipal or county governing units to deal with matters not covered by federal or state law. Ordinances com- monly have to do with city or county land use (zoning ordinances), building and safety codes, and other matters affecting only the local governing unit.

A federal statute, of course, applies to all states. A state statute, in contrast, applies only within the state’s borders. State laws thus may vary from state to state. No federal statute may violate the U.S. Constitution, and no state statute or local ordinance may violate the U.S. Con- stitution or the relevant state constitution.

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

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

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

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

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

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

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Uniform Laws During the 1800s, the differences among state laws frequently created dif- ficulties for businesspersons conducting trade and commerce among the states. To counter these problems, a group of legal scholars and lawyers formed the National Conference of Commissioners on Uniform State Laws (NCCUSL, online at www.uniformlaws.org) in 1892 to draft uniform laws (“model statutes”) for the states to consider adopting. The NCCUSL still exists today and continues to issue uniform laws.

Each state has the option of adopting or rejecting a uniform law. Only if a state legislature adopts a uniform law does that law become part of the statutory law of that state. Furthermore, a state legislature may choose to adopt only part of a uniform law or to rewrite the sections that are adopted. Hence, even though many states may have adopted a uniform law, those laws may not be entirely “uniform.”

The Uniform Commercial Code (UCC) One of the most important uniform acts is the Uni- form Commercial Code (UCC), which was created through the joint efforts of the NCCUSL and the American Law Institute.1 The UCC was first issued in 1952 and has been adopted in all fifty states,2 the District of Columbia, and the Virgin Islands.

The UCC facilitates commerce among the states by providing a uniform, yet flexible, set of rules governing commercial transactions. Because of its importance in the area of commercial law, we cite the UCC frequently in this text. We also present excerpts of the UCC in Appendix C. From time to time, the NCCUSL revises the articles contained in the UCC and submits the revised versions to the states for adoption.

1–2c Administrative Law Another important source of American law is administrative law, which consists of the rules, orders, and decisions of administrative agencies. An administrative agency is a federal, state, or local government agency established to perform a specific function.

Rules issued by various administrative agencies affect almost every aspect of a business’s operations. Regulations govern a business’s capital structure and financing, its hiring and firing procedures, its relations with employees and unions, and the way it manufactures and markets its products. (See the Linking Business Law to Management feature at the end of this chapter.)

Federal Agencies At the national level, numerous executive agencies exist within the cabinet departments of the executive branch. The Food and Drug Administration, for example, is an agency within the U.S. Department of Health and Human Services. Executive agencies are sub- ject to the authority of the president, who has the power to appoint and remove their officers.

There are also major independent regulatory agencies at the federal level, including the Fed- eral Trade Commission, the Securities and Exchange Commission, and the Federal Commu- nications Commission. The president’s power is less pronounced in regard to independent agencies, whose officers serve for fixed terms and cannot be removed without just cause.

State and Local Agencies There are administrative agencies at the state and local levels as well. Commonly, a state agency (such as a state pollution-control agency) is created as a par- allel to a federal agency (such as the Environmental Protection Agency).

Just as federal statutes take precedence over conflicting state statutes, so do federal agency regulations take precedence over conflicting state regulations. Because the rules of state and local agencies vary widely, we focus here exclusively on federal administrative law.

Agency Creation Because Congress cannot possibly oversee the actual implementation of all the laws it enacts, it delegates such tasks to agencies. Congress creates an administrative

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

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

Administrative Law The body of law created by administrative agencies in order to carry out their duties and responsibilities.

Administrative Agency A federal or state government agency created by the legislature to perform a specific function, such as to make and enforce rules pertaining to the environment.

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

Henry Ward Beecher 1813–1887 (American clergyman and abolitionist)

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agency by enacting enabling legislation, which specifies the name, composition, purpose, and powers of the agency being created.

EXAMPLE 1.2 The Federal Trade Commission (FTC) was created in 1914 by the Federal Trade Commission Act.3 This act prohibits unfair and deceptive trade prac- tices. It also describes the procedures the agency must follow to charge persons or organizations with violations of the act, and it provides for judicial review (review by the courts) of agency orders.

Other portions of the act grant the agency powers to “make rules and regula- tions for the purpose of carrying out the Act,” and to conduct investigations of business practices. In addition, the FTC can obtain reports from interstate corpora- tions concerning their business practices, investigate possible violations of the act, publish findings of its investigations, and recommend new legislation. The act also empowers the FTC to hold trial-like hearings and to adjudicate (resolve judicially) certain kinds of disputes involving its regulations. n

Note that the powers granted to the FTC incorporate functions associated with the legislative branch of government (rulemaking), the executive branch (investi- gation and enforcement), and the judicial branch (adjudication). Taken together, these functions constitute the administrative process, which is the administration

of law by administrative agencies. The administrative process involves rulemaking, enforce- ment, and adjudication.

Rulemaking A major function of an administrative agency is rulemaking—formulating new regulations. When Congress enacts an agency’s enabling legislation, it confers the power to make legislative rules, or substantive rules, which are legally binding on all businesses.

The Administrative Procedure Act (APA)4 imposes strict procedural requirements that agen- cies must follow in legislative rulemaking and other functions. EXAMPLE 1.3 The Occupational Safety and Health Act authorized the Occupational Safety and Health Administration (OSHA) to develop and issue rules governing safety in the workplace. When OSHA wants to formulate rules regarding safety in the steel industry, it has to follow specific procedures outlined by the APA. n

Legislative Rules. Legislative rulemaking under the APA typically involves the following three steps (referred to as notice-and-comment rulemaking).

1. Notice of the proposed rulemaking. The notice must be published in the Federal Register, a daily publication of the U.S. government.

2. A comment period. The agency must allow ample time for interested parties to comment in writing on the proposed rule. The agency takes these comments into consideration when drafting the final version of the regulation.

3. The final rule. Once the agency has drafted the final rule, it is published in the Federal Register. (See the appendix at the end of this chapter for an explanation of how to find agency regulations.)

Interpretive Rules. Administrative agencies also issue interpretive rules that are not legally binding but simply indicate how an agency plans to interpret and enforce its statutory author- ity. The APA does not apply to interpretive rulemaking. EXAMPLE 1.4 The Equal Employment Opportunity Commission periodically issues interpretive rules indicating how it plans to interpret the provisions of certain statutes, such as the Americans with Disabilities Act. These informal rules provide enforcement guidelines for agency officials. n

Enforcement and Investigation Agencies often enforce their own rules and have both inves- tigatory and prosecutorial powers. Agencies investigate a wide range of activities, including coal mining, automobile manufacturing, and the industrial discharge of pollutants into the environment.

3. 15 U.S.C. Sections 45–58. 4. 5 U.S.C. Sections 551–706.

Interpretive Rule A nonbinding rule or policy statement issued by an administrative agency that explains how it interprets and intends to apply the statutes it enforces.

Which federal agency oversees worker safety?

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Enabling Legislation A statute enacted by Congress that authorizes the creation of an administrative agency and specifies the name, composition, purpose, and powers of the agency being created.

Adjudicate To render a judicial decision. Adjudication is the trial-like proceeding in which an administrative law judge hears and resolves disputes involving an administrative agency’s regulations.

Administrative Process The procedure used by administrative agencies in administering the law.

Rulemaking The process by which an administrative agency formally adopts a new regulation or amends an old one.

Legislative Rule An administrative agency rule that carries the same weight as a congressionally enacted statute.

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In an investigation, an agency can request that individuals or organizations hand over specified books, papers, electronic records, or other documents. In addition, agencies may conduct on-site inspections, although a search warrant is normally required for such inspec- tions.5 Sometimes, a search of a home, an office, or a factory is the only means of obtaining evidence needed to prove a regulatory violation.

After investigating a suspected rule violation, an agency may decide to take action against an individual or a business. Most administrative actions are resolved through negotiated set- tlement at their initial stages without the need for formal adjudication. If a settlement cannot be reached, though, the agency may issue a formal complaint and proceed to adjudication.

Adjudication Agency adjudication involves a trial-like hearing before an administrative law judge (ALJ). Hearing procedures vary widely from agency to agency. After the hearing, the ALJ renders a decision in the case. The ALJ can fine the charged party or prohibit the party from carrying on some specified activity.

Either the agency or the charged party may appeal the ALJ’s decision to the commission or board that governs the agency. If the party fails to get relief there, appeal can be made to a federal court. Courts give significant weight (deference) to an agency’s judgment and interpre- tation of its rules, though, and typically uphold the ALJ’s decision unless it is unreasonable. If neither side appeals the case, the ALJ’s decision becomes final.

Do administrative agencies exercise too much authority? Administrative agencies, such as the Federal Trade Commission, combine in a single governmental entity functions normally divided among the three branches of government. They create rules, conduct investigations, and prosecute and pass judgment on violators. Yet administrative agencies’ powers often go unchecked by the other branches. Some businesspersons have suggested that it is unethical for agencies—which are not even mentioned in the U.S. Constitution—to wield so many powers.

Although agency rulemaking must comply with the requirements of the Administrative Procedure Act (APA), the act applies only to legislative, not interpretive, rulemaking. In addition, the APA is largely procedural and aimed at preventing arbitrariness. It does little to ensure that the rules passed by agencies are fair or correct—or even cost effective. On those rare occasions when an agency’s ruling is challenged and later reviewed by a court, the court cannot reverse the agency’s decision unless the agency exceeded its authority or acted arbitrarily. Courts typi- cally are reluctant to second-guess an agency’s rules, interpretations, and decisions. Moreover, once an agency has final regulations in place, it is difficult to revoke or alter them.

1–2d Case Law and Common Law Doctrines The rules of law announced in court decisions constitute another basic source of American law. These rules of law include interpretations of constitutional provisions, of statutes enacted by legislatures, and of regulations created by administrative agencies. Today, this body of judge-made law is referred to as case law. Case law—the doctrines and principles announced in cases—governs all areas not covered by statutory law or administrative law and is part of our common law tradition. We look at the origins and characteristics of the common law tra- dition in some detail in the pages that follow.

1–3 Common Law Tradition Because of our colonial heritage, much American law is based on the English legal system. Knowledge of this tradition is crucial to understanding our legal system today because judges in the United States still apply common law principles when deciding cases.

5. In some heavily regulated industries, such as the sale of firearms or liquor, agencies can conduct searches without obtaining a warrant.

Administrative Law Judge (ALJ) One who presides over an administrative agency hearing and has the power to administer oaths, take testimony, rule on questions of evidence, and make determinations of fact.

Case Law The rules of law announced in court decisions. Case law interprets statutes, regulations, constitutional provisions, and other case law.

LEARNING OBJECTIVE 2 What is the common law tradition?

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1–3a Early English Courts After the Normans conquered England in 1066, William the Conqueror and his successors began the process of unifying the country under their rule. One of the means they used to do this was the establishment of the king’s courts, or curiae regis. Before the Norman Conquest, disputes had been settled according to the local legal customs and traditions in various regions of the country. The king’s courts sought to establish a uniform set of rules for the country as a whole. What evolved in these courts was the beginning of the common law—a body of general rules that applied throughout the entire English realm. Eventually, the common law tradition became part of the heritage of all nations that were once British colonies, including the United States.

Courts developed the common law rules from the principles underlying judges’ decisions in actual legal controversies. Judges attempted to be consistent, and whenever possible, they based their decisions on the principles suggested by earlier cases. They sought to decide sim- ilar cases in a similar way and considered new cases with care because they knew that their decisions would make new law. Each interpretation became part of the law on the subject and served as a legal precedent—that is, a court decision that furnished an example or authority for deciding subsequent cases involving identical or similar legal principles or facts.

In the early years of the common law, there was no single place or publication where court opinions, or written decisions, could be found. Beginning in the late thirteenth and early fourteenth centuries, however, portions of significant decisions from each year were gathered together and recorded in Year Books. The Year Books were useful references for lawyers and judges. In the sixteenth century, the Year Books were discontinued, and other reports of cases became available. (See the appendix to this chapter for a discussion of how cases are reported, or published, in the United States today.)

1–3b Stare Decisis The practice of deciding new cases with reference to former decisions, or precedents, even- tually became a cornerstone of the English and U.S. judicial systems. The practice forms a doctrine called stare decisis6 (“to stand on decided cases”).

The Importance of Precedents in Judicial Decision Making Under the doctrine of stare decisis, judges are obligated to follow the precedents established within their jurisdictions. (The term jurisdiction refers to a geographic area in which a court or courts have the power to apply the law—see Chapter 3.) Once a court has set forth a principle of law as being applica- ble to a certain set of facts, that court must apply the principle in future cases involving similar facts. Courts of lower rank (within the same jurisdiction) must do likewise. Thus, stare decisis has two aspects:

1. A court should not overturn its own precedents unless there is a strong reason to do so. 2. Decisions made by a higher court are binding on lower courts.

Controlling precedents in a jurisdiction are referred to as binding authorities. A binding authority is any source of law that a court must follow when deciding a case. Binding author- ities include constitutions, statutes, and regulations that govern the issue being decided, as well as court decisions that are controlling precedents within the jurisdiction. United States Supreme Court case decisions, no matter how old, remain controlling until they are overruled by a subsequent decision of the Supreme Court, by a constitutional amendment, or by con- gressional legislation.

Stare Decisis and Legal Stability The doctrine of stare decisis helps the courts to be more efficient because if other courts have carefully reasoned through a similar case, their legal

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

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

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

LEARNING OBJECTIVE 3 What is a precedent? When might a court depart from precedent?

KNOW THIS Courts normally must follow the rules set forth by higher courts in deciding cases with similar fact patterns.

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

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

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reasoning and opinions can serve as guides. Stare decisis also makes the law more stable and predictable. If the law on a given subject is well settled, someone bringing a case to court can usually rely on the court to make a decision based on what the law has been.

Departures from Precedent Although courts are obligated to follow prec- edents, sometimes a court will depart from the rule of precedent. If a court decides that a precedent is simply incorrect or that technological or social changes have rendered the precedent inapplicable, the court may rule con- trary to the precedent. Cases that overturn precedent often receive a great deal of publicity.

CASE EXAMPLE 1.5 In Brown v. Board of Education of Topeka,7 the United States Supreme Court expressly overturned precedent when it concluded that separate educational facilities for whites and blacks, which had been upheld as constitutional in numerous previous cases,8 were inherently unequal. The Supreme Court’s departure from precedent in the Brown decision received a tremendous amount of publicity as people began to realize the ramifications of this change in the law. n

When There Is No Precedent At times, a case may raise issues that have not been raised before in that jurisdiction, so the court has no precedents on which to base its decision. Tech- nological advances such as the one discussed in this chapter’s Adapting the Law to the Online Environment feature often raise new legal issues, for example.

When deciding such cases, called “cases of first impression,” courts often look at prec- edents established in other jurisdictions for guidance. Precedents from other jurisdictions, because they are not binding on the court, are referred to as persuasive authorities. A court may also consider other factors, including legal principles and policies underlying previous court decisions or existing statutes, fairness, social values and customs, public policy, and data and concepts drawn from the social sciences.

1–3c Equitable Remedies and Courts of Equity A remedy is the means given to a party to enforce a right or to compensate for the violation of a right. EXAMPLE 1.6 Elena is injured because of Rowan’s wrongdoing. If Elena files a lawsuit and is successful, a court can order Rowan to compensate Elena for the harm by paying her a certain amount. The compensation is Elena’s remedy. n

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

Remedies in Equity Equity is a branch of law—founded on notions of justice and fair dealing— that seeks to supply a remedy when no adequate remedy at law is available. When individuals could not obtain an adequate remedy in a court of law, they petitioned the king for relief. Most of these petitions were referred to the chancellor, an adviser to the king who had the power to grant new and unique remedies. Eventually, formal chancery courts, or courts of equity, were established. The remedies granted by the chancery courts were called remedies in equity.

Plaintiffs (those bringing lawsuits) had to specify whether they were bringing an “action at law” or an “action in equity,” and they chose their courts accordingly. EXAMPLE 1.7 A plaintiff

7. 347 U.S. 483, 74 S.Ct. 686, 98 L.Ed. 873 (1954). 8. See Plessy v. Ferguson, 163 U.S. 537, 16 S.Ct. 1138, 41 L.Ed. 256 (1896).

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

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

Plaintiff One who initiates a lawsuit.

LEARNING OBJECTIVE 4 What is the difference between remedies at law and remedies in equity?

Why would this scene not have been likely before 1954?

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might ask a court of equity to order the defendant (the person against whom a lawsuit is brought) to perform within the terms of a contract. A court of law could not issue such an order because its remedies were limited to the payment of money or property as compensation for damages.

A court of equity, however, could issue a decree for specific performance—an order to per- form what was promised. A court of equity could also issue an injunction, directing a party to do or refrain from doing a particular act. In certain cases, a court of equity could allow for the

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

ADAPTING THE LAW TO THE ONLINE ENVIRONMENT Can New Laws Prevent People from Wearing Google Glass?

Google Glass is a wearable computer. Basically, it’s a Bluetooth-enabled, hands-free device that allows wearers to take photos and videos, surf the Internet, and do other things through voice commands. For the most part, Google Glass devices have been sold to consumers. One result has been legal problems, including problems involv- ing privacy issues, safety while driving, and movie pirating.

Invasion of Privacy? Privacy advocates point out that it is much easier to film or photograph others secretly with wearable video technology than with cameras or even cell phones. The more people use wearable video technology, the greater the problem will become. The so-called sacred precincts of private life will increasingly be violated. This issue came up over a hundred years ago with the creation of low-cost cameras. Initially, there were wide- spread bans on cameras at beaches.a Today, numerous bars and restaurants are banning Google Glass. Corporations are concerned that employees wearing Google Glass can more easily photograph documents that reveal trade secrets.

What about facial recognition software in Google Glass? Such an application could allow anyone to get personal information about another person just by looking at the person through a Google Glass headset. Even Congress has made inquiries about this possibility. In response, Google announced

that it would not allow facial recognition applications on Glass.

In any event, the doctrine of a reasonable expectation of privacy is going to be chal- lenged because of Google Glass. If Glass is ubiquitous, can any of us have a reasonable expectation of privacy when we are in public places?

Driving While Watching When a San Diego policeman pulled over a motorist for speeding, she was also cited for “driving with a monitor visible to driver.” Cal- ifornia law prohibits in-vehicle video displays that are visible to the vehicles’ drivers.b The charge was thrown out because of a lack of evidence that the device was in operation at the time of the purported offense.

A number of states have introduced leg- islation that would restrict the use of Google Glass while driving. All such legislation spec- ifies the prohibited activity as “using” wear- able devices, such as Google Glass. William & Mary law professor Adam Gershowitz argues

that such driving bans are unenforceable. A police officer has no way of knowing whether a passing driver was using, as opposed to simply wearing, Google Glass.

The Pirated Movie Problem Pirated movies offered free on the Internet have greatly affected revenues for movie production companies and movie theaters. Not surprisingly, movie theater owners are on the lookout for camouflaged, hand-held cameras during screenings of movies. When an AMC theater in Columbus, Ohio, noticed a customer wearing a Google Glass device, it contacted the Motion Picture Association of America (MPAA), which then contacted the federal Department of Homeland Security. An hour into the movie, the Glass wearer was removed from the theater by Immigration and Customs Enforcement (ICE) officers. He was released when an officer connected his Glass to a computer, which showed that no video of the movie had been taken.

Both the MPAA and the AMC theater chain stated that wearing “devices with recording capabilities is not appropriate at movie theaters.” Note, though, that any restrictions on Google Glass and similar wearable devices will be more difficult to enforce as more individuals use prescription lenses in such devices.

CrITICAL THInkIng

▪▪ What benefits could wearers of Google Glass obtain from using facial recognition technology?

a. Samuel D. Warren and Louis D. Brandeis, “The Right to Privacy,” Harvard Law Review 4 (December 15, 1890): 193–220.

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Under what circumstances could a user of Google Glass be violating the right

to privacy of others?

b. California Vehicle Code Section 27602.

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rescission (cancellation) of the contract, thereby returning the parties to the positions that they held prior to the contract’s formation. n Equitable remedies will be discussed in greater detail in the chapters covering contracts.

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

The distinction between legal and equitable remedies remains significant, however, because a court normally will grant an equitable remedy only when the remedy at law (monetary dam- ages) is inadequate. To request the proper remedy, a businessperson (or her or his attorney) must know what remedies are available for the specific kinds of harms suffered. Exhibit 1–3 summarizes the procedural differences (applicable in most states) between an action at law and an action in equity.

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

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

The Natural Law School Those who adhere to the natural law theory believe that a higher, or universal, law exists that applies to all human beings and that written laws should imitate these inherent principles. If a written law is unjust, then it is not a true (natural) law and need not be obeyed.

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

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

The question of the universality of basic human rights also comes into play in the context of international business operations. For instance, U.S. companies that have operations abroad

KNOW THIS Even though courts of law and equity have merged, the principles of equity still apply, and courts will not grant an equitable remedy unless the remedy at law is inadequate.

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

Jurisprudence The science or philosophy of law.

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

Exhibit 1–3 Procedural Differences between an Action at Law and an Action in Equity

PROCEDURE ACTION AT LAW ACTION IN EQUITY

Initiation of lawsuit By filing a complaint By filing a petition

Decision By jury or judge By judge (no jury)

Result Judgment Decree

Remedy Monetary damages Injunction, specific performance, or rescission

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In medieval England, courts of equity were expected to use discretion in supplement- ing the common law. Even today, when the same court can award both legal and equi- table remedies, it must exercise discretion. Students of business law should know that courts often invoke equitable principles and maxims when making their decisions. Here are some of the most significant equitable principles and maxims:

1. Whoever seeks equity must do equity. (Any- one who wishes to be treated fairly must treat others fairly.)

2. Where there is equal equity, the law must prevail. (The law will determine the outcome of a controversy in which the merits of both sides are equal.)

3. One seeking the aid of an equity court must come to the court with clean hands. (Plaintiffs must have acted fairly and honestly.)

4. Equity will not suffer a wrong to be without a remedy. (Equitable relief will be awarded when there is a right to relief and there is no adequate remedy at law.)

5. Equity regards substance rather than form. (Equity is more concerned with fairness and justice than with legal technicalities.)

6. Equity aids the vigilant, not those who rest on their rights. (Equity will not help those who neglect their rights for an unreason- able period of time.)

The last maxim has come to be known as the equitable doctrine of laches. The doctrine arose to encourage people to bring lawsuits while the evidence was fresh. If they failed to do so, they would not be allowed to bring a lawsuit. What constitutes a reasonable time, of course, varies according to the circum- stances of the case.

Time periods for different types of cases are now usually fixed by statutes of limitations—that is, statutes that set the maximum time period during which a cer- tain action can be brought. After the time

allowed under a statute of limitations has expired, no action can be brought, no matter how strong the case was originally.

ApplIcAtIon to todAy’s World The equitable maxims listed here underlie many of the legal rules and principles that are com- monly applied by the courts today—and that you will read about in this book. For instance, in the contracts materials you will read about the doctrine of promissory estoppel. Under this doctrine, a person who has reasonably and sub- stantially relied on the promise of another may be able to obtain some measure of recovery, even though no enforceable contract exists. The court will estop (bar) the one making the prom- ise from asserting the lack of a valid contract as a defense. The rationale underlying the doc- trine of promissory estoppel is similar to that expressed in the fourth and fifth maxims listed.

Equitable principles and MaximsLandmark in the Law

often hire foreign workers as employees. Should the same laws that protect U.S. employees apply to these foreign employees? This question is rooted implicitly in a concept of universal rights that has its origins in the natural law tradition.

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

According to the positivist school, there is no such thing as “natural rights.” Rather, human rights exist solely because of laws. If the laws are not enforced, anarchy will result. Thus, whether a law is morally “bad” or “good” is irrelevant. The law is the law and must be obeyed until it is changed—in an orderly manner through a legitimate lawmaking process.

A judge with positivist leanings probably would be more inclined to defer to an existing law than would a judge who adheres to the natural law tradition.

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

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

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

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

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

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

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

EXAMPLE 1.8 A state law that provides employees with the right to workers’ compensa- tion benefits for any on-the-job injuries they sustain is a substantive law because it creates legal rights (workers’ compensation laws will be discussed in Chapter 24). Procedural laws, in contrast, establish the method by which an employee must notify the employer about an on-the-job injury, prove the injury, and periodically submit additional proof to continue receiving workers’ compensation benefits. Note that a law concerning workers’ compensation may contain both substantive and procedural provisions. n

Another classification system divides law into federal law and state law. Still another system distinguishes between private law (dealing with relationships between persons) and public law (addressing the relationship between persons and their governments). Frequently, people use the term cyberlaw to refer to the emerging body of law that governs transactions con- ducted via the Internet, but cyberlaw is not really a classification of law. Rather, it is an infor- mal term used to describe traditional legal principles that have been modified and adapted to fit situations that are unique to the online world. Throughout this book, you will read about how the law is evolving to govern specific legal issues that arise in the online context.

1–4a Civil Law and Criminal Law Civil law spells out the rights and duties that exist between persons and between persons and their governments. It also specifies the relief available when a person’s rights are violated. Typically, in a civil case, a private party sues another private party to make sure that the other party complies with a duty or pays for the damage caused by the failure to comply with a duty. EXAMPLE 1.9 If a seller fails to perform a contract with a buyer, the buyer may bring a lawsuit against the seller. The purpose of the lawsuit will be either to compel the seller to perform as promised or, more commonly, to obtain monetary damages for the seller’s failure to perform. n The government can also bring civil lawsuits against private parties in many situations.

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

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

Whereas in a civil case the object is to obtain a remedy (such as monetary damages) to compensate the injured party, in a criminal case the object is to punish the wrongdoer in an

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

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

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

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

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

LEARNING OBJECTIVE 5 What are some important differences between civil law and criminal law?

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

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

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attempt to deter others from similar actions. Penalties for violations of criminal statutes consist of fines and/or imprisonment—and, in some cases, death.

1–4b National and International Law Although the focus of this book is U.S. business law, increasingly businesspersons in this country engage in transactions that extend beyond our national borders. In these situations,

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

Civil Law Systems Although national law systems share many commonalities, they also have distinct dif- ferences. In a civil law system, the primary source of law is a statutory code, and case precedents are not judicially binding, as they normally are in a common law system. Although judges in a civil law system com- monly refer to previous decisions as sources

of legal guidance, those decisions are not binding precedents (stare decisis does not apply).

Common Law and Civil Law Systems Today Exhibit 1–4 lists some countries that follow either the common law system or the civil law system. Generally, countries that were once colonies of Great Britain have retained their English common law heritage. The civil law system, which is used in most conti- nental European nations, has been retained in the countries that were once colonies of those nations. In the United States, the state of Louisiana, because of its historical ties to France, has in part a civil law system, as do Haiti, Québec, and Scotland.

Islamic Legal Systems A third, less prevalent legal system is com- mon in Islamic countries, where the law is often influenced by sharia, the religious law

of Islam. Islam is both a religion and a way of life. Sharia is a comprehensive code of princi- ples that governs the public and private lives of Islamic persons and directs many aspects of their day-to-day lives, including politics, economics, banking, business law, contract law, and social issues.

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

CrITICAL THInkIng

▪▪ Does the civil law system offer any advantages over the common law system, or vice versa? Explain.

National Law systems BeYOnd OUr BOrderS

Exhibit 1–4 The Legal Systems of Selected Nations

CIVIL LAW COMMON LAW

Argentina Indonesia Australia Nigeria

Austria Iran Bangladesh Singapore

Brazil Italy Canada United Kingdom

Chile Japan Ghana United States

China Mexico India Zambia

Egypt Poland Israel

Finland South Korea Jamaica

France Sweden Kenya

Germany Tunisia Malaysia

Greece Venezuela New Zealand

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the laws of other nations or the laws governing relationships among nations may come into play. For this reason, those who pursue a career in business today should have an understand- ing of the global legal environment (discussed further in Chapter 16).

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

International Law In contrast to national law, international law applies to more than one nation. International law can be defined as a body of written and unwritten laws observed by independent nations and governing the acts of individuals as well as governments. It is a mix- ture of rules and constraints derived from a variety of sources, including the laws of individual nations, customs developed among nations, and international treaties and organizations. Each nation is motivated not only by the need to be the final authority over its own affairs, but also by the desire to benefit economically from trade and harmonious relations with other nations. In essence, international law is the result of centuries-old attempts to strike a balance between these competing needs.

The key difference between national law and international law is that government author- ities can enforce national law. If a nation violates an international law, however, enforcement is up to other countries or international organizations, which may or may not choose to act. If persuasive tactics fail, the only option is to take coercive actions against the violating nation. Coercive actions range from the severance of diplomatic relations and boycotts to, as a last resort, war. We will examine the laws governing international business transactions in later chapters (including the chapter on international law and the chapters covering contracts for the sale and lease of goods).

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

International Law The law that governs relations among nations.

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

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

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

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

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

DebATe THIS

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

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Key Terms adjudicate 8 administrative agency 7 administrative law 7 administrative law judge (ALJ) 9 administrative process 8 binding authority 10 case law 9 citation 6 civil law 15 civil law system 15 common law 10 concurring opinion 28

constitutional law 6 criminal law 15 cyberlaw 15 defendant 12 dissenting opinion 28 enabling legislation 8 equitable principles and maxims 13 historical school 14 international law 17 interpretive rule 8 jurisprudence 13 law 2

legal positivism 14 legal realism 15 legislative rule 8 liability 3 majority opinion 28 national law 17 natural law 13 ordinance 6 per curiam opinion 28 persuasive authority 11 plaintiff 11 plurality opinion 28

Whether you work for a large corpo-ration or own a small business, you will be dealing with multiple aspects of administrative law. All federal, state, and local government administrative agencies create rules that have the force of law. As a manager, you probably will need to pay more attention to administrative rules and regula- tions than to laws passed by local, state, and federal legislatures.

Federal versus State and Local Agency Regulations The three levels of government create three levels of rules and regulations though their respective administrative agencies. At the federal level, these include the Food and Drug Administration, the Equal Employment Opportunity Commission, and the Occu- pational Safety and Health Administration. Similar agencies govern business activities at the state level.

As a manager, you will have to learn about agency regulations that pertain to your business activities. It will be up to you,

as a manager or small-business owner, to discern which of those regulations are most important and could create the most liability if you violate them.

When Should You Participate in the Rulemaking Process? All federal agencies and many state agencies invite public comments on proposed rules. Suppose that you manage a large construc- tion company and your state occupational safety agency proposes a new rule requiring every employee on a construction site to wear hearing protection. You believe that the rule will lead to a less safe environment because your employees will not be able to communicate easily with one another.

Should you spend time offering com- ments to the agency? As an efficient man- ager, you make a trade-off calculation. First, you determine the value of the time that you would spend attempting to prevent or at least alter the proposed rule. Then you com- pare this implicit cost with your estimate of the potential benefits your company would receive if the rule is not put into place.

Be Prepared for Investigations All administrative agencies have investiga- tory powers. Agencies’ investigators usually

have the power to search business premises, although normally they first have to obtain a search warrant. As a manager, you often have the choice of cooperating with agency investigators or providing just the minimum amount of assistance. If your business is routinely investigated, you will often opt for cooperation. In contrast, if your business is rarely investigated, you may decide that the on-site proposed inspection is overreach- ing. Then you must contact your company’s attorney for advice on how to proceed.

If an administrative agency cites you for a regulatory violation, you will probably nego- tiate a settlement with the agency rather than take your case before an administrative law judge. Again, as a manager, you have to weigh the cost of the negotiated settle- ment with the potential cost of fighting the enforcement action.

CrITICAL THInkIng

▪▪ Why are owner/operators of small businesses at a disadvantage relative to large corporations when they attempt to decipher complex regulations that apply to their businesses?

LINkING BUSINESS LAw TO CORPORATE MANAGEMENT Dealing with Administrative Law

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Chapter Summary: The Legal Environment

precedent 10 primary source of law 5 procedural law 15 remedy 11

rulemaking 8 secondary source of law 6 stare decisis 10 statutory law 6

substantive law 15 uniform law 7

Sources of American Law

1. Constitutional law—The law as expressed in the U.S. Constitution and the various state constitutions. The U.S. Constitu- tion is the supreme law of the land. State constitutions are supreme within state borders to the extent that they do not violate the U.S. Constitution or a federal law.

2. Statutory law—Laws or ordinances created by federal, state, and local legislatures and governing bodies. None of these laws can violate the U.S. Constitution or the relevant state constitutions. Uniform laws, when adopted by a state legis- lature, become statutory law in that state.

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

4. Case law and common law doctrines—Judge-made law, including interpretations of constitutional provisions, of statutes enacted by legislatures, and of regulations created by administrative agencies. The common law—the doctrines and principles embodied in case law—governs all areas not covered by statutory law or administrative law.

Common Law Tradition

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

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

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

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

law hold that there is a universal law applicable to all human beings and that this law is of a higher order than posi- tive, or conventional, law.

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

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

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

Classifications of Law

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

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

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

2. Apples & Oranges Corporation learns that a federal administrative agency is considering a rule that will have a negative impact on the firm’s ability to do business. Does the firm have any opportunity to express its opinion about the pending rule? Explain. (See Sources of American Law.)

—Check your answers to the Issue Spotters against the answers provided in Appendix D at the end of this text.

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

2. What is the common law tradition?

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

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

5. What are some important differences between civil law and criminal law? —Answers to the even-numbered Learning Objectives Check questions can be found in Appendix E at the end of this text.

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

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

1–2. Remedies. Arthur Rabe is suing Xavier Sanchez for breach- ing a contract in which Sanchez promised to sell Rabe a Van Gogh painting for $150,000. (See Common Law Tradition.)

1. In this lawsuit, who is the plaintiff, and who is the defendant?

2. If Rabe wants Sanchez to perform the contract as promised, what remedy should Rabe seek?

3. Suppose that Rabe wants to cancel the contract because Sanchez fraudulently misrepresented the painting as an original Van Gogh when in fact it is a copy. In this situation, what remedy should Rabe seek?

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

5. Suppose that the court finds in Rabe’s favor and grants one of these remedies. Sanchez then appeals the decision to a higher court. Read through the subsection entitled “Par- ties to Lawsuits” in the appendix following this chapter. On appeal, which party in the Rabe-Sanchez case will be the appellant (or petitioner), and which party will be the appel- lee (or respondent)?

1–3. Philosophy of Law. After World War II ended in 1945, an international tribunal of judges convened at Nuremberg, Germany. The judges convicted several Nazi war criminals of “crimes against humanity.” Assuming that the Nazis who were convicted had not disobeyed any law of their country and had merely been following their government’s (Hitler’s) orders, what law had they violated? Explain. (See Common Law Tradition.)

1–4. Spotlight on AOL—Common Law. AOL, LLC, mistakenly made public the personal information of 650,000 of its members. The members filed a suit, alleging violations of

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

1–5. Business Case Problem with Sample Answer—Law around the World. Karen Goldberg’s husband was killed in a terrorist bombing in Israel. She filed a suit in a U.S. federal court against UBS AG, a Switzerland-based

global financial services company. She claimed that UBS aided in her husband’s killing because it provided services to the ter- rorists. UBS argued that the case should be transferred to another country. Like many nations, the United States has a common law system. Other nations have civil law systems. What are the key differences between these systems? [Gold- berg v. UBS AG, 690 F.Supp.2d 92 (E.D.N.Y. 2010)] (See Classifi- cations of Law.) —For a sample answer to Problem 1–5, go to Appendix F at

the end of this text.

1–6. Reading Citations. Assume that you want to read the court’s entire opinion in the case of Baker v. Premo, 268 Or.App. 406, 342 P.3d 142 (2015). Read the section entitled “Finding Case Law” in the appendix that follows this chapter, and then explain specifically where you would find the court’s opinion. (See Finding Case Law.)

1–7. A Question of Ethics—Stare Decisis. On July 5, 1884, Dudley, Stephens, and Brooks—“all able-bodied English seamen”—and a teenage English boy were cast adrift in a lifeboat following a storm at sea. They had no water with

them in the boat, and all they had for sustenance were two one- pound tins of turnips. On July 24, Dudley proposed that one of the four in the lifeboat be sacrificed to save the others. Ste- phens agreed with Dudley, but Brooks refused to consent—and

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the boy was never asked for his opinion. On July 25, Dudley killed the boy, and the three men then fed on the boy’s body and blood. Four days later, the men were rescued by a passing vessel. They were taken to England and tried for the murder of the boy. If the men had not fed on the boy’s body, they would probably have died of starvation within the four-day period. The boy, who was in a much weaker condition, would likely have died before the rest. [Regina v. Dudley and Stephens, 14

Q.B.D. (Queen’s Bench Division, England) 273 (1884)] (See Common Law Tradition.)

1. The basic question in this case is whether the survivors should be subject to penalties under English criminal law, given the men’s unusual circumstances. You be the judge and decide the issue. Give the reasons for your decision.

2. Should judges ever have the power to look beyond the writ- ten “letter of the law” in making their decisions? Why or why not?

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

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

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

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

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

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

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

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Appendix to Chapter 1

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

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

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

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

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

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

In some codes, subjects are designated by number. In others, they are designated by name. For example, “13 Pennsylvania Consolidated Statutes Section 1101” means that the statute can be found in Title 13, Section 1101, of the Pennsylvania code. “California Commercial Code Section 1101” means the statute can be found in Section 1101 under the subject heading 22

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“Commercial Code” of the California code. Abbreviations may be used. For example, “13 Pennsylvania Consolidated Statutes Section 1101” may be abbreviated “13 Pa. C.S. § 1101,” and “California Commercial Code Section 1101” may be abbreviated “Cal. Com. Code § 1101.”

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

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

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

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

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

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

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

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

Case Citations After appellate decisions have been published, they are normally referred to (cited) by the name of the case and the volume, name, and page number of the reporter(s) in which the opinion can be found. The citation first lists information from the state’s official

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Exhibit 1A–1 West’s National Reporter System—Regional/Federal

Coverage Connecticut, Delaware, District of Columbia, Maine, Maryland, New Hampshire, New Jersey, Pennsylvania, Rhode Island, and Vermont. Illinois, Indiana, Massachusetts, New York, and Ohio. Iowa, Michigan, Minnesota, Nebraska, North Dakota, South Dakota, and Wisconsin. Alaska, Arizona, California, Colorado, Hawaii, Idaho, Kansas, Montana, Nevada, New Mexico, Oklahoma, Oregon, Utah, Washington, and Wyoming. Georgia, North Carolina, South Carolina, Virginia, and West Virginia. Arkansas, Kentucky, Missouri, Tennessee, and Texas.

Alabama, Florida, Louisiana, and Mississippi.

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

1885

1885 1879

1883

1887 1886

1887

1880

1932

1939

1882 1980

1978

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

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

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

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

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

Federal Supplement (F.Supp., F.Supp.2d, or F.Supp.3d)

Federal Rules Decisions (F.R.D.)

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

Military Justice Reporter (M.J.)

Regional Reporters Coverage Beginning

TENN.

VT.

ALASKA

HAWAII

WASH.

OREGON

CALIF.

NEVADA

IDAHO

MONTANA

WYOMING

UTAH

ARIZONA N. MEXICO

COLORADO

NEBR.

S. DAK.

N. DAK.

KANSAS

OKLA.

TEXAS

ARK.

MO.

IOWA

MINN.

WIS.

ILL. IND.

MICH.

OHIO

KY.

MISS. ALA.

LA.

GA.

FLA.

S. CAR.

N. CAR.

VA. W.VA.

PA.

N.Y.

ME.

DEL.

MD.

N.J. CONN.

R.I.

MASS. N.H.

Pacific North Western South Western North Eastern Atlantic South Eastern Southern

NATIONAL REPORTER SYSTEM MAP

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reporter (if different from West’s National Reporter System), then the National Reporter, and then any other selected reporter. (Citing a reporter by volume number, name, and page num- ber, in that order, is common to all citations.) When more than one reporter is cited for the same case, each reference is called a parallel citation.

Note that some states have adopted a “public domain citation system” that uses a somewhat different format for the citation. For example, in Ohio, an Ohio court decision might be desig- nated “2015-Ohio-620,” meaning that the decision was the 620th decision issued by the Ohio Supreme Court in 2015. Parallel citations to the Ohio Appellate Court Reporter and the North Eastern Reporter are included after the public domain citation.

Consider the following citation: Brody v. Brody, 315 Conn. 300, 105 A.3d 887 (2015). We see that the opinion in this case can be found in Volume 315 of the official Connecticut Reports, on page 300. The parallel citation is to Volume 105 of the Atlantic Reporter, Third Series, page 877.

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

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

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

Unpublished Opinions Many court opinions that are not yet published or that are not intended for publication can be accessed through Westlaw® (abbreviated in citations as “WL”), an online legal database. When no citation to a published reporter is available for cases cited in this text, we give the WL citation (such as 2015 WL 687700, which means it was case number 687700 decided in the year 2015).

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

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

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

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Exhibit 1A–2 How to Read Citations

STATE COURTS

290 Neb. 167, __ N.W.2d __ (2015) a

233 Cal.App.4th 1285, 183 Cal.Rptr.3d 427 (2015)

124 A.D.3d 536, 998 N.Y.S.2d 628 (2015)

___ Ga.App. ___, 767 S.E.2d 517 (2015)

___ U.S. ___, 135 S.Ct. 785, 190 L.Ed.2d 656 (2015)

FEDERAL COURTS

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

N.W. is the abbreviation for the publication of state court decisions rendered in the North Western Reporter of West’s National Reporter System. 2d indicates that this case was included in the Second Series of that reporter. The blank lines in this citation (or any other citation) indicate that the appropriate volume of the case reporter has not yet been published and no page number is available.

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

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

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

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

S.Ct. is the abbreviation for West’s unofficial reports—titled Supreme Court Reporter—of decisions of the United States Supreme Court.

U.S. is the abbreviation for United States Reports, the official edition of the decisions of the United States Supreme Court.

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

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

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Exhibit 1A–2 How to Read Citations

FEDERAL COURTS (Continued)

STATUTORY AND OTHER CITATIONS

775 F.3d 1172 (9th Cir. 2015)

___ F.Supp.3d ___ 2015 WL 273140 (N.D.Cal. 2015)

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

UCC 2–206(1)(b)

Restatement (Third) of Torts, Section 6

17 C.F.R. Section 230.505

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

N.D.Cal. is an abbreviation indicating that the U.S. District Court for the Northern District of California decided this case.

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

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

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

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

WESTLAW® CITATIONSb

2015 WL 358246

WL is an abbreviation for Westlaw. The number 2015 is the year of the document that can be found with this citation in the Westlaw database. The number 358246 is a number assigned to a specific document. A higher number indicates that a document was added to the Westlaw database later in the year.

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

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

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

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

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

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

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

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

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

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

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

• A dissenting opinion presents the views of one or more judges who disagree with the majority view. (See the Business Case Study with Dissenting Opinion that concludes each unit in this text for an example of a dissenting opinion.)

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

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

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

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

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

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

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

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A Sample Court Case Knowing how to read and analyze a court opinion is an essential step in undertaking accurate legal research. A further step is “briefing,” or summarizing, the case. Legal researchers rou- tinely brief cases by reducing the texts of the opinions to their essential elements. Instructions on how to brief a case are given in Appendix A.

The cases within this text have already been analyzed and briefed by the authors, and the essen- tial aspects of each case are presented in a convenient format consisting of four sections: Facts, Issue, Decision, and Reason. This format is illustrated in the sample court case in Exhibit 1A–3, which has been annotated to explain the kind of information that is contained in each section.

In the remaining chapters of this book, the basic format is often expanded to include special introductory sections. Each case is also followed by a question or section that is designed to enhance your analysis. Critical Thinking sections present a question about some issue raised by the case. Why Is This Case Important? sections explain the significance of the case. What If the Facts Were Different? questions alter the facts slightly and ask you to consider how this would change the outcome. A section entitled Impact of This Case on Today’s Law concludes each of the Classic Cases that appear throughout the text to indicate the significance of the case for today’s legal landscape.

The case we present in Exhibit 1A–3 is an actual case that the United States Court of Appeals for the Ninth Circuit decided in 2015. Michael Davis, a former professional football player, and other football players, sued Electronic Arts, Inc., the maker of a video game that replicated the players’ physical characteristics. The players alleged a violation of their “right of publicity” (a tort discussed in Chapter 4). One of the issues before the court was whether Electronic Arts’ use of the players’ likenesses in the video game was protected under the First Amendment to the U.S. Constitution (see Chapter 2).

FACTS Electronic Arts, Inc. (EA) makes and sells the video game Madden NFL, which allows users to play virtual games between National Football League (NFL) teams, both current and “historic.” EA’s artists create avatars of the players, each of whom is identi- fiable by position, years in the NFL, height, weight, skin tone, and skill.

EA pays a fee to use the likenesses of current players, but not to use the likenesses of former players on the historic teams. Those players filed a suit in a federal district court against EA, alleging a violation of their “right of publicity”—the right to control the use of one’s likeness and prevent another from using it for commercial purposes without consent.

EA filed a motion to strike the complaint. The court denied the motion. EA appealed to the U.S. Court of Appeals for the Ninth Cir- cuit, arguing that its use of the likenesses is protected under the First Amendment to the U.S. Constitution as an incidental use.

ISSUE Are the players likely to prevail against EA’s defense of inci- dental use?

DECISION Yes. The U.S. Court of Appeals for the Ninth Circuit affirmed the lower court’s denial of EA’s motion. The appellate

court held that EA’s use of the players’ likenesses is not incidental “because it is central to EA’s main commercial purpose.”

REASON Video games are protected under the First Amendment, because like books and movies, “video games communicate ideas— and even social messages.” A number of factors establish an inciden- tal use. These include the uniqueness and significance of the use’s contribution to the work’s commercial purpose. Here, “the former players’ likenesses have unique value and contribute to the commer- cial value of Madden NFL” as indicated by the lengths to which EA goes to achieve realism in representing the players.

Other factors are the relationship of the use to the purpose of the work, and the prominence of, in this case, the likenesses. “The former players’ likenesses are featured prominently in a manner that is substantially related to the main purpose and subject of Madden NFL—to create an accurate virtual simulation of an NFL game.”

CRITICAL THINKING—Political Consideration Why is the inci- dental use of a person’s likeness without his or her consent permitted?

Exhibit 1A–3 A Sample Court Case

Davis v. Electronic Arts, Inc. United States Court of Appeals, Ninth Circuit, 775 F.3d 1172 (2015).

6

7

5 8

4

1

2 3

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Review of Sample Court Case 1 The name of the case is Davis v. Electronic Arts, Inc. The lead plaintiff is Michael Davis, a

former professional football player whose physical characteristics were replicated in a video game produced by Electronic Arts, Inc., the defendant.

2 The court deciding this case is the United States Court of Appeals for the Ninth Circuit. 3 The case citation includes a citation to the official Federal Reporter, Third Series. The case can

be found in Volume 775 of the Federal Reporter, Third Series, beginning on page 1172. 4 The Facts section identifies the plaintiffs and the defendant, describes the events leading up

to this suit, and what the plaintiffs sought to obtain by bringing this action. Because this is a case before an appellate court, the ruling of the lower court is also included here.

5 The Issue section presents the central issue (or issues) to be decided by the court. In this case, the court is to determine the likelihood of the success of the plaintiffs’ case in light of the defendant’s asserted defense. Most cases concern more than one issue, but the author of this textbook has edited each case to focus on just one issue.

6 The Decision section, as the term indicates, contains the court’s decision on the issue or issues before the court. The decision reflects the opinion of the judge, or the majority of the judges or justices, hearing the case. In this particular case, the court reversed the lower court’s judgment. Decisions by appellate courts are frequently phrased in reference to the lower court’s decision. That is, the appellate court may “affirm” the lower court’s ruling or “reverse” it. In either situation, the appellate court may “remand,” or send back, the case for further proceedings.

7 The Reason section indicates what relevant laws and judicial principles were applied in forming the particular conclusion arrived at in the case at bar (“before the court”). In this case, the principle concerned a defense under the First Amendment to the U.S. Consti- tution to a charge that the defendant violated the plaintiffs’ right of publicity. The court determined that the defense was not established in the circumstances of this case.

8 The Critical Thinking—Political Consideration section raises a question to be considered in relation to the case just presented. Here the question involves a “political” consideration. In other cases presented in this text, the “consideration” may involve a cultural, environmen- tal, ethical, international, legal, social, or technological consideration.

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The U.S. Constitution is brief. (See Appendix B for the full text of the U.S. Constitution.) It contains only about seven thousand words—less than one-third as many as the average state constitution. Its brevity explains, in part, why the Constitution has proved to be so “marvel- ously elastic,” as Franklin Roosevelt described it in the chapter-opening quotation. Perhaps it also explains why the U.S. Constitution has survived for more than two hundred years—longer than any other written constitu- tion in the world.

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

the Constitution. Constitutional disputes frequently come before the courts—including dis- putes involving the Affordable Care Act1 (Obamacare), gun control, immigration, marijuana, and voter identification.

In this chapter, we first look at some basic constitutional concepts and clauses and their significance for business. Then we examine how certain fundamental freedoms guaranteed by the Constitution affect businesspersons and the workplace. We also examine the constitu- tional protection of privacy rights.

1. National Federation of Independent Business v. Sebelius, ___ U.S. ___, 132 S.Ct. 2566, 183 L.Ed.2d 450 (2012).

Constitutional Law LEARNING OBJECTIVESThe five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions:

1. What is the basic structure of the U.S. government?

2. What constitutional clause gives the federal govern- ment the power to regulate commercial activities among the various states?

3. What constitutional clause allows laws enacted by the federal government to take priority over conflicting state laws?

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

5. Where in the Constitution can the due process clause be found?

CHAPTER OUTLINE ▪▪ The Constitutional

Powers of Government

▪▪ Business and the Bill of Rights

▪▪ Due Process and Equal Protection

▪▪ Privacy Rights

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

Franklin D. Roosevelt 1882–1945 (Thirty-second president of the United States, 1933–1945)

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

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

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

The broad language of the Constitution, though, has left much room for debate over the specific nature and scope of these powers. Generally, it has been the task of the courts to determine where the boundary line between state and national powers should lie—and that line changes over time.

2–1b The Separation of Powers To make it difficult for the national government to use its power arbitrarily, the Constitution divided the national government’s powers among the three branches of government. The leg- islative branch makes the laws, the executive branch enforces the laws, and the judicial branch interprets the laws. Each branch performs a separate function, and no branch may exercise the authority of another branch.

Additionally, a system of checks and balances allows each branch to limit the actions of the other two branches, thus preventing any one branch from exercising too much power. The following are examples of these checks and balances:

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

LEARNING OBJECTIVE 1 What is the basic structure of the U.S. government?

Checks and Balances The principle under which the powers of the national government are divided among three separate branches—the executive, legislative, and judicial branches— each of which exercises a check on the actions of the others.

The U.S. Constitution provides for a system of checks and balances. How does the president check the power of Congress? In what ways can Congress check the power of the president?

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1. The legislative branch (Congress) can enact a law, but the executive branch (the president) has the constitutional authority to veto that law.

2. The executive branch is responsible for foreign affairs, but treaties with foreign governments require the advice and consent of the Senate.

3. Congress determines the jurisdiction of the federal courts, and the president appoints federal judges, with the advice and consent of the Senate, but the judicial branch has the power to hold actions of the other two branches unconstitutional.2

2. See the Landmark in the Law feature in Chapter 3 on the case of Marbury v. Madison (1803), in which the doctrine of judicial review was clearly enunciated by Chief Justice John Marshall.

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The commerce clause of the U.S. Consti-tution gives Congress the power “[t] o regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.” Before the commerce clause came into existence, states tended to restrict commerce within and beyond their borders, which made trade more costly and ineffi- cient. The goal of the clause was to unify the states’ commerce policies and improve the efficiency of exchanges.

The problem was that although the com- merce clause gave Congress some author- ity to regulate trade among the states, the extent of that power was unclear. What exactly does “to regulate commerce” mean? What does “commerce” entail? These questions came before the United States Supreme Court in 1824 in the case of Gib- bons v. Ogden.a

Background In 1803, Robert Fulton, the inventor of the steamboat, and Robert Liv- ingston, who was the ambassador to France, secured a monopoly from the New York leg- islature on steam navigation on the waters in the state of New York. Their monopoly

extended to interstate waters—waterways between New York and another state. Fulton and Livingston licensed Aaron Ogden, a for- mer governor of New Jersey and a U.S. sen- ator, to operate steam-powered ferryboats between New York and New Jersey.

Thomas Gibbons already operated a ferry service between New Jersey and New York, which had been licensed by Congress under a 1793 act regulating trade along the coast. Although the federal government had licensed Gibbons to operate boats in interstate waters, he did not have the state of New York’s permission to compete with Ogden in that area. Ogden sued Gibbons. The New York state courts granted Ogden’s request for an injunction—an order prohib- iting Gibbons from operating in New York waters. Gibbons appealed the decision to the United States Supreme Court.

Marshall’s decision The issue before the Court was whether the law regulated commerce that was “among the several states.” The chief justice on the Supreme Court was John Marshall, an advocate of a strong national government. Marshall defined the word commerce as used in the commerce clause to mean all commercial intercourse—that is, all business dealings that affect more than one state. This broader definition included navigation.

In addition to expanding the definition of commerce, Marshall also validated and increased the power of the national legislature to regulate commerce. Said Marshall, “What is this power? It is the power . . . to prescribe the rule by which commerce is to be governed.”

Marshall held that the power to regulate interstate commerce is an exclusive power of the national government. This power includes the power to regulate any intra- state commerce that substantially affects interstate commerce. Accordingly, the Court decided in favor of Gibbons.

applicaTion To Today’s World Mar- shall’s broad definition of the commerce power established the foundation for the expansion of national powers in the years to come. Today, the national government continues to rely on the commerce clause for its constitutional authority to regulate business activities.

Marshall’s conclusion that the power to regulate interstate commerce was an exclusive power of the national government has also had significant consequences. By implication, this means that a state cannot regulate activities that extend beyond its borders, such as out-of- state online gambling operations that affect the welfare of in-state citizens. It also means that state regulations over in-state activities normally will be invalidated if the regulations substantially burden interstate commerce.

Gibbons v. Ogden (1824)Landmark in the Law

2–1c The Commerce Clause To prevent states from establishing laws and regulations that would interfere with trade and commerce among the states, the Constitution explicitly gave the national government the power to regulate interstate commerce. Article I, Section 8, of the U.S. Constitution expressly permits Congress “[t]o regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.” This clause, referred to as the commerce clause, has had a greater impact on business than any other provision in the Constitution.

Initially, the commerce power was interpreted as being limited to interstate commerce (commerce among the states) and not applicable to intrastate commerce (commerce within a state). In 1824, however, the United States Supreme Court decided the case of Gibbons v. Ogden (see this chapter’s Landmark in the Law feature). The Court ruled that commerce within a state could also be regulated by the national government as long as the commerce substan- tially affected commerce involving more than one state.

Commerce Clause The provision in Article I, Section 8, of the U.S. Constitution that gives Congress the power to regulate interstate commerce.

LEARNING OBJECTIVE 2 What constitutional clause gives the federal government the power to regulate commercial activities among the various states?

a. 22 U.S. (9 Wheat.) 1, 6 L.Ed. 23 (1824).

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The Commerce Clause and the Expansion of National Powers In Gibbons v. Ogden, the commerce clause was expanded to regulate activities that “substantially affect interstate com- merce.” As the nation grew and faced new kinds of problems, the commerce clause became a vehicle for the additional expansion of the national government’s regulatory powers. Even activities that seemed purely local came under the regulatory reach of the national government if those activities were deemed to substantially affect interstate commerce.

CASE EXAMPLE 2.1 In 1942, in Wickard v. Filburn,3 the Supreme Court held that wheat pro- duction by an individual farmer intended wholly for consumption on his own farm was subject to federal regulation. The Court reasoned that the home consumption of wheat reduced the market demand for wheat and thus could have a substantial effect on interstate commerce. n

The following Classic Case involved a challenge to the scope of the national government’s constitutional authority to regulate local activities.

3. 317 U.S. 111, 63 S.Ct. 82, 87 L.Ed. 122 (1942).

••• Classic Case 2.1 •••

Heart of Atlanta Motel v. United States Supreme Court of the United States, 379 U.S. 241, 85 S.Ct. 348, 13 L.Ed.2d 258 (1964).

hisTorical and social seTTing In the first half of the twentieth century, state governments sanc- tioned segregation on the basis of race. In 1954, the United States Supreme Court held that racially segre- gated school systems violated the Constitution. In the following decade, the Court ordered an end to racial segregation imposed by the states in other public facili- ties, such as beaches, golf courses, buses, parks, audito- riums, and courtroom seating. Privately owned facilities that excluded or segregated African Americans and others on the basis of race were not subject to the same constitutional restrictions, however. Congress passed the Civil Rights Act of 1964 to prohibit racial discrimination in “establishments affecting interstate commerce.” These facilities included “places of public accommodation.”

FacTs The owner of the Heart of Atlanta Motel, in violation of the Civil Rights Act of 1964, refused to rent rooms to African Americans. The motel owner brought an action in a federal district court to have the Civil Rights Act declared unconstitutional on the ground that Congress had exceeded its constitutional authority to regulate commerce by enacting the statute. The owner argued that his motel was not engaged in interstate commerce but was “of a purely local character.” The motel, however, was accessible to state and interstate highways. The owner advertised nationally, maintained billboards throughout the state, and accepted convention trade from outside the state (75 percent of the guests were residents of other states). The district court ruled that the act did not violate the Constitution and enjoined (prohibited) the owner from discriminating on the basis of race. The owner appealed. The case ultimately went to the United States Supreme Court.

issue Did Congress exceed its constitutional power to regulate interstate commerce by enacting the Civil Rights Act of 1964?

decision No. The United States Supreme Court upheld the constitutionality of the act.

reason The Court noted that the act was passed to correct “the deprivation of personal dignity” accompanying the denial of equal access to “public establishments.” Testimony before Con- gress leading to the passage of the act indicated

that African Americans in particular experienced substantial dis- crimination in attempting to secure lodging while traveling. This dis- crimination impeded interstate travel and thus impeded interstate commerce.

As for the owner’s argument that his motel was “of a purely local character,” the Court said that even if this was true, the motel affected interstate commerce. According to the Court, “if it is inter- state commerce that feels the pinch, it does not matter how local the operation that applies the squeeze.” Therefore, under the commerce clause, “the power of Congress to promote interstate commerce also includes the power to regulate the local incidents thereof, including local activities.”

iMpacT oF This case on Today’s laW If the United States Supreme Court had invalidated the Civil Rights Act of 1964, the legal landscape of the United States would be much different today. The act prohibits discrimination based on race, color, national origin, religion, or gender in all “public accommodations,” including hotels and restaurants. The act also prohibits discrimination in employment based on these cri- teria. Although state laws now prohibit many of these forms of discrim- ination as well, the protections available vary from state to state—and it is not certain whether such laws would have been passed had the out- come in this case been different.

President Lyndon Johnson signs the 1964 Civil Rights Act.

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The Commerce Clause Today Today, at least theoretically, the power over commerce autho- rizes the national government to regulate almost every commercial enterprise in the United States. The breadth of the commerce clause permits the national government to legislate in areas in which Congress has not explicitly been granted power. Only occasionally has the Supreme Court curbed the national government’s regulatory authority under the commerce clause.

Indeed, in one case involving medical marijuana use, the Supreme Court allowed the fed- eral government to regulate noncommercial activities taking place wholly within a state’s bor- ders. CASE EXAMPLE 2.2 A growing number of states, including California, have adopted laws that legalize marijuana for medical purposes (and four states now permit the recreational use of marijuana). Marijuana possession, however, is illegal under the federal Controlled Sub- stances Act (CSA).4

After the federal government seized the marijuana that two seriously ill California women were using on the advice of their physicians, the women filed a lawsuit. They argued that it was unconstitutional for the federal statute to prohibit them from using marijuana for medical purposes that were legal within the state. The Supreme Court, though, held that Congress has the authority to prohibit the intrastate possession and noncommercial cultivation of marijuana as part of a larger regulatory scheme (the CSA).5 In other words, the federal government may prosecute individuals for possession of marijuana regardless of whether they reside in a state that allows the use of marijuana. n

The Regulatory Powers of the States As part of their inherent sovereignty, state govern- ments have the authority to regulate affairs within their borders. This authority stems in part from the Tenth Amendment to the Constitution, which reserves to the states all powers not delegated to the national government.

State regulatory powers are often referred to as police powers. The term encompasses not only the enforcement of criminal law but also the right of state governments to regu- late private activities in order to protect or promote the pub- lic order, health, safety, morals, and general welfare. Fire and building codes, antidiscrimination laws, parking regulations, zoning restrictions, licensing requirements, and thousands of other state statutes have been enacted pursuant to a state’s police powers. Local governments, including cities, also exer- cise police powers.6

Although a state may not directly regulate interstate com- merce, it may indirectly affect interstate commerce through the reasonable exercise of its police powers. Generally, state laws enacted pursuant to a state’s police powers carry a strong presumption of validity.

The “Dormant” Commerce Clause The United States Supreme Court has interpreted the commerce clause to mean that the national government has the exclusive authority to regulate commerce that substantially affects trade and com- merce among the states. This express grant of authority to the national government, which is often referred to as the “positive” aspect of the commerce clause, implies a negative

4. 21 U.S.C. Sections 801 et seq. 5. Gonzales v. Raich, 545 U.S. 1, 125 S.Ct. 2195, 162 L.Ed.2d 1 (2005). 6. Local governments derive their authority to regulate their communities from the state because they are creatures of the state.

In other words, they cannot come into existence unless authorized by the state to do so.

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

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

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aspect—that the states do not have the authority to regulate interstate commerce. This nega- tive aspect of the commerce clause is often referred to as the “dormant” (implied) commerce clause.

The dormant commerce clause comes into play when state regulations affect interstate commerce. In this situation, the courts normally weigh the state’s interest in regulating a certain matter against the burden that the state’s regulation places on interstate commerce. Because courts balance the interests involved, predicting the outcome in a particular case can be extremely difficult.

CASE EXAMPLE 2.3 Tri-M Group, LLC, a Pennsylvania electrical contractor, was hired to work on a veterans’ home in Delaware that was partially state funded. Delaware’s regulations allowed contractors on state-funded projects to pay a lower wage rate to apprentices if the contractors had registered their apprenticeship programs in the state. Out-of-state contrac- tors, however, were not eligible to pay the lower rate unless they maintained a permanent office in Delaware.

Tri-M filed a suit in federal court claiming that Delaware’s regulations discriminated against out-of-state contractors in violation of the dormant commerce clause. The state argued that the regulations were justified because it had a legitimate interest in safeguarding the welfare of all apprentices by requiring a permanent place of business in Delaware. But the court held that the state had not overcome the presumption of invalidity that applies to discriminatory regu- lations and that nondiscriminatory alternatives existed for ensuring the welfare of apprentices. Therefore, the regulations violated the dormant commerce clause.7 n

2–1d The Supremacy Clause Article VI of the Constitution provides that the Constitution, laws, and treaties of the United States are “the supreme Law of the Land.” This article, commonly referred to as the supremacy clause, is important in the ordering of state and federal relationships.

Preemption Under the supremacy clause, when there is a direct conflict between a federal law and a state law, the state law is rendered invalid. Because some powers are concurrent (shared by the federal government and the states), however, it is necessary to determine which law governs in a particular circumstance.

Preemption occurs when Congress chooses to act exclusively in a concurrent area. In this circumstance, a valid federal statute or regulation will take precedence over a conflicting state or local law or regulation on the same general subject.

Congressional Intent Often, it is not clear whether Congress, in passing a law, intended to preempt an entire subject area against state regulation. In these situations, the courts deter- mine whether Congress intended to exercise exclusive power.

Generally, congressional intent to preempt will be found if a federal law regulating an activity is so pervasive, comprehensive, or detailed that the states have little or no room to regulate in that area. Also, when a federal statute creates an agency—such as the National Labor Relations Board—to enforce the law, the agency’s decisions in matters that come within its jurisdiction will likely preempt state laws.

CASE EXAMPLE 2.4 The United States Supreme Court ruled on a case involving a man who alleged that he had been injured by a faulty medical device (a balloon catheter that had been inserted into his artery following a heart attack). The Court noted that the Medical Device Amendments, a federal law, had included a preemption provision. The medical device had passed the U.S. Food and Drug Administration’s rigorous premarket approval process.

7. Tri-M Group, LLC v. Sharp, 638 F.3d 406 (3d Cir. 2011). Sharp was the name of the secretary of the Delaware Department of Labor.

LEARNING OBJECTIVE 3 What constitutional clause allows laws enacted by the federal government to take priority over conflicting state laws?

Supremacy Clause The provision in Article VI of the U.S. Constitution that the Constitution, laws, and treaties of the United States are “the supreme Law of the Land.”

Preemption A doctrine under which certain federal laws preempt, or take precedence over, conflicting state or local laws.

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Therefore, the Court ruled that the federal regulation of medical devices preempted the man’s state law claims for negligence, strict liability, and implied warranty.8 n

2–2 Business and the Bill of Rights The importance of having a written declaration of the rights of individuals eventually caused the first Congress of the United States to enact twelve amendments to the Constitution and submit them to the states for approval. The first ten of these amendments, commonly known as the Bill of Rights, were adopted in 1791.

The Bill of Rights embodies a series of protections for the individual against various types of conduct by the federal government.9 Some constitutional protections apply to business entities as well. For example, corporations exist as separate legal entities, or legal persons, and enjoy many of the same rights and privileges as natural persons do.

Summarized here are the protections guaranteed by the first ten amendments (see the Con- stitution in Appendix B for the complete text of each amendment):

1. The First Amendment guarantees the freedoms of religion, speech, and the press and the rights to assemble peaceably and to petition the government.

2. The Second Amendment guarantees the right to keep and bear arms.

3. The Third Amendment prohibits, in peacetime, the lodging of soldiers in any house without the owner’s consent.

4. The Fourth Amendment prohibits unreasonable searches and seizures of persons or property.

5. The Fifth Amendment guarantees the rights to indictment (formal accusation) by a grand jury, to due process of law, and to fair payment when private property is taken for public use. The Fifth Amendment also prohibits compulsory self-incrimination and double jeopardy (trial for the same crime twice).

6. The Sixth Amendment guarantees the accused in a criminal case the right to a speedy and public trial by an impartial jury and with counsel. The accused has the right to cross-examine witnesses against him or her and to solicit testimony from witnesses in his or her favor.

7. The Seventh Amendment guarantees the right to a trial by jury in a civil (noncriminal) case involving at least twenty dollars.10

8. The Eighth Amendment prohibits excessive bail and fines, as well as cruel and unusual punishment.

9. The Ninth Amendment establishes that the people have rights in addition to those specified in the Constitution.

10. The Tenth Amendment establishes that those powers neither delegated to the federal government nor denied to the states are reserved for the states.

8. Riegel v. Medtronic, Inc., 552 U.S. 312, 128 S.Ct. 999, 169 L.Ed.2d 892 (2008). 9. One of the proposed amendments was ratified more than two hundred years later (in 1992) and became the Twenty-seventh

Amendment to the Constitution. See Appendix B. 10. Twenty dollars was forty days’ pay for the average person when the Bill of Rights was written.

Bill of Rights The first ten amendments to the U.S. Constitution.

Learning Objective 4 What is the Bill of Rights? What freedoms does the First Amendment guarantee?

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We will look closely at several of these amendments in Chapter 8, in the context of crim- inal law and procedures. In this chapter, we examine two important guarantees of the First Amendment—freedom of speech and freedom of religion. First, though, we look at how the Bill of Rights puts certain limits on government.

2–2a Limits on Federal and State Governmental Actions As originally intended, the Bill of Rights limited only the powers of the national government. Over time, however, the United States Supreme Court “incorporated” most of these rights into the protections against state actions afforded by the Fourteenth Amendment to the Constitu- tion. That amendment, passed in 1868 after the Civil War, provides, in part, that “[n]o State shall . . . deprive any person of life, liberty, or property, without due process of law.”

Starting in 1925, the Supreme Court began to define various rights and liberties guaranteed in the national Constitution as constituting “due process of law,” which was required of state governments under the Fourteenth Amendment. Today, most of the rights and liberties set

forth in the Bill of Rights apply to state governments as well as to the national government.

The rights secured by the Bill of Rights are not absolute. Many of the rights guaranteed by the first ten amendments are described in very general terms. For instance, the Second Amendment states that people have a right to keep and bear arms, but it does not explain the extent of this right. As the Supreme Court has noted, the right does not extend so far that people can “keep and carry any weapon whatsoever in any manner whatsoever and for whatever purpose.”11 Legisla- tures can prohibit the carrying of concealed weapons or cer- tain types of weapons, such as machine guns. Ultimately, the Supreme Court, as the final interpreter of the Constitution, gives meaning to constitutional rights and determines their boundaries. (For a discussion of how the Supreme Court may consider other nations’ laws when determining the appropriate balance of individual rights, see this chapter’s Beyond Our Bor- ders feature.)

2–2b The First Amendment—Freedom of Speech A democratic form of government cannot survive unless people can freely voice their political opinions and criticize government actions or policies. Freedom of speech, particularly politi- cal speech, is thus a prized right, and traditionally the courts have protected this right to the fullest extent possible.

Symbolic speech—gestures, movements, articles of clothing, and other forms of expressive conduct—is also given substantial protection by the courts. The Supreme Court held that the burning of the American flag to protest government policies is a constitutionally protected form of expression.12 Similarly, wearing a T-shirt with a photo of a presidential candidate would be a constitutionally protected form of expression.

The test is whether a reasonable person would interpret the conduct as conveying some sort of message. EXAMPLE 2.5 As a form of expression, Eric has gang signs tattooed on his torso, arms, neck, and legs. If a reasonable person would interpret this conduct as conveying a message, then it might be a protected form of symbolic speech. n

11. District of Columbia v. Heller, 554 U.S. 570, 128 S.Ct. 2783, 171 L.Ed.2d 637 (2008). 12. See Texas v. Johnson, 491 U.S. 397, 109 S.Ct. 2533, 105 L.Ed.2d 342 (1989).

KNOW THIS Although most of the rights in the Bill of Rights apply to actions of the states, some of them apply only to actions of the federal government.

Symbolic Speech Nonverbal expressions of beliefs. Symbolic speech, which includes gestures, movements, and articles of clothing, is given substantial protection by the courts.

Which amendment states that people have the right to keep and bear arms? Does this mean that anyone has the right to buy an assault-type weapon?

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Reasonable Restrictions Expression—oral, written, or symbolized by conduct—is subject to reasonable restrictions. A balance must be struck between a government’s obligation to protect its citizens and those citizens’ exercise of their rights. Reasonableness is analyzed on a case-by-case basis.

Content-Neutral Laws. Laws that regulate the time, manner, and place, but not the content, of speech receive less scrutiny by the courts than do laws that restrict the content of expression. If a restriction imposed by the government is content neutral, then a court may allow it. To be content neutral, the restriction must be aimed at combating some secondary societal problem, such as crime, and not be aimed at suppressing the expressive conduct or its message.

Courts have often protected nude dancing as a form of symbolic expression. Nevertheless, the courts typically allow content-neutral laws that ban all public nudity. CASE EXAMPLE 2.6  Rita Ora was charged with dancing nude at an annual “anti-Christmas” protest in Harvard Square in Cambridge, Massachusetts. Ora argued that the statute was overly broad and unconstitu- tional, and a trial court agreed. On appeal, a state appellate court reversed. The court found that the statute was constitutional because it banned public displays of open and gross lewd- ness in situations in which there was an unsuspecting or unwilling audience.13 n

Laws That Restrict the Content of Speech. If a law regulates the content of the expression, it must serve a compelling state interest and must be narrowly written to achieve that interest. Under the compelling government interest test, the government’s interest is balanced against the individual’s constitutional right to be free of government interference. For the statute to be valid, there must be a compelling governmental interest that can be furthered only by the law in question.

The United States Supreme Court has held that schools may restrict students’ speech at school events. CASE EXAMPLE 2.7 Some high school students held up a banner saying “Bong

13. Commonwealth v. Ora, 451 Mass. 125, 883 N.E.2d 1217 (2008).

Compelling Government Interest A test of constitutionality that requires the government to have convincing reasons for passing any law that restricts fundamental rights, such as free speech, or distinguishes between people based on a suspect trait.

The United States Supreme Court inter-prets the rights provided in the U.S. Constitution. Changing public views on con- troversial topics, such as privacy in an era of terrorist threats or the rights of gay men and lesbians, may affect the way the Supreme Court decides a case. But should the Court also consider other nations’ laws and world opinion when balancing individual rights in the United States?

Justices on the Supreme Court have increasingly considered foreign law when deciding issues of national importance. This trend started in 2003 when, for the first time ever, foreign law was cited in a majority

opinion of the Supreme Court. The case was a controversial one in which the Court struck down laws that prohibited oral and anal sex between consenting adults of the same gen- der. In the majority opinion, Justice Anthony Kennedy mentioned that the European Court of Human Rights and other foreign courts have consistently acknowledged that homo- sexuals have a right “to engage in intimate, consensual conduct.” a

The practice of looking at foreign law has many critics, including Justice Antonin Sca- lia and other conservative members of the Supreme Court, who believe that foreign

views are irrelevant to rulings on U.S. law. Other Supreme Court justices, however, including Justice Stephen Breyer and Justice Ruth Bader Ginsburg, have publicly stated that in our increasingly global community we should not ignore the opinions of courts in the rest of the world.

CRITICAL THINKING

▪▪ Should U.S. courts, and particularly the United States Supreme Court, look to other nations’ laws for guidance when deciding important issues—including those involving rights granted by the Constitution? If so, what impact might this have on their decisions? Explain.

The Impact of Foreign Law on the United States Supreme Court

BEYOND OUR BORDERS

a. Lawrence v. Texas, 539 U.S. 558, 123 S.Ct. 2472, 156 L.Ed.2d 508 (2003).

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Hits 4 Jesus” at an off-campus but school-sanctioned event. The majority of the Court ruled that school officials did not violate the students’ free speech rights when they confiscated the banner and suspended the students for ten days. Because the banner could reasonably be interpreted as promoting drugs, the Court concluded that the school’s actions were justified. Several justices disagreed, however, noting that the majority’s holding creates a special excep- tion that will allow schools to censor any student speech that mentions drugs.14 n

Can a high school suspend teenagers from extracurricular activities because they posted suggestive photos of themselves online at social networking sites? T.V. and M.K. were students at a public high school. During summer sleepovers, the girls took photos of each other pretending to suck penis-shaped, rainbow-colored lollipops and holding them in various suggestive positions. They later posted the photos on Facebook, MySpace, and Photo Bucket to be seen by persons granted “friend” status or given a password. When a parent com- plained to the school about the provocative online display, school officials suspended both girls from the high school volleyball team. M.K. was also suspended from the cheerleading squad and the show choir. Through their parents, the girls filed a lawsuit claiming that the school had violated their First Amendment rights.

A federal judge in Indiana ruled that a high school did not have the right to punish students for posting suggestive photos of themselves on the Internet. Expressive conduct is entitled to First Amendment protection if it is intended to convey a particular message and is likely to be understood by those viewing it as expressing a message. Here, both girls testified that they were just trying to be funny when they took the photos and posted them online for their friends to see. The court reasoned that the conduct depicted in the photos was intended to be humorous and would be understood as such by their teenage audience. Therefore, the photos were entitled to First Amendment protection as symbolic speech.15

Corporate Political Speech Political speech by corporations also falls within the protection of the First Amendment. Many years ago, the United States Supreme Court reviewed a Mas- sachusetts statute that prohibited corporations from making political contributions or expen- ditures that individuals were permitted to make. The Court ruled that the Massachusetts law

was unconstitutional because it violated the right of corpora- tions to freedom of speech.16 The Court has also held that a law prohibiting a corporation from using bill inserts to express its views on controversial issues violated the First Amendment.17

Corporate political speech continues to be given significant protection under the First Amendment. CASE EXAMPLE 2.8 In Citizens United v. Federal Election Commission,18 the Supreme Court overturned a twenty-year-old precedent on campaign financing. The case involved Citizens United, a nonprofit corporation that has a political action committee (an organiza- tion that registers with the government and campaigns for or against political candidates).

Citizens United had produced a film called Hillary: The Movie that was critical of Hillary Clinton, who was seeking the Democratic nomination for presidential candidate. Campaign- finance law restricted Citizens United from broadcasting the movie, however. The Court ruled that the restrictions were

14. Morse v. Frederick, 551 U.S. 393, 127 S.Ct. 2618, 168 L.Ed.2d 290 (2007). 15. T.V. ex rel. B.V. v. Smith-Green Community School Corp., 807 F.Supp.2d 767 (N.D.Ind. 2011). 16. First National Bank of Boston v. Bellotti, 435 U.S. 765, 98 S.Ct. 1407, 55 L.Ed.2d 707 (1978). 17. Consolidated Edison Co. v. Public Service Commission, 447 U.S. 530, 100 S.Ct. 2326, 65 L.Ed.2d 319 (1980). 18. Citizens United v. Federal Election Commission, 558 U.S. 310, 130 S.Ct. 876, 175 L.Ed.2d 753 (2010).

The U.S. Supreme Court decision Citizens United allows corporations to spend to elect or defeat candidates for president and Congress. Why did this decision upset some people?

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unconstitutional and that the First Amendment prevents limits from being placed on indepen- dent political expenditures by corporations. n

Commercial Speech The courts also give substantial protection to commercial speech, which consists of communications—primarily advertising and marketing—made by business firms that involve only their commercial interests. The protection given to commercial speech under the First Amendment is not as extensive as that afforded to noncommercial speech, however. A state may restrict certain kinds of advertising, for instance, in the interest of protecting con- sumers from being misled.

States also have a legitimate interest in the beautification of roadsides, and this interest allows states to place restraints on billboard advertising. CASE EXAMPLE 2.9 Café Erotica, a nude dancing establishment, sued the state after being denied a permit to erect a billboard along an interstate highway in Florida. The state appellate court decided that because the law directly advanced a substantial government interest in highway beautification and safety, it was not an unconstitutional restraint on commercial speech.19 n

Generally, a restriction on commercial speech will be considered valid as long as it (1) seeks to implement a substantial government interest, (2) directly advances that interest, and (3) goes no further than necessary to accomplish its objective. A substantial government interest is a significant or important connection or concern of the government with respect to a particular matter (such as highway beautification and safety, mentioned in Case Example 2.9). This substantial-interest requirement limits the power of the government to regulate commercial speech.

At issue in the following Spotlight Case was whether a government agency had unconsti- tutionally restricted commercial speech when it prohibited the use of a certain illustration on beer labels.

19. Café Erotica v. Florida Department of Transportation, 830 So.2d 181 (Fla.App. 1 Dist. 2002); review denied, Café Erotica/We Dare to Bare v. Florida Department of Transportation, 845 So.2d 888 (Fla. 2003).

“If the freedom of speech is taken away, then dumb and silent we may be led like sheep to the slaughter.”

George Washington 1732–1799 (First president of the United States, 1789–1797)

Spotlight on Beer Labels: Case 2.2

Bad Frog Brewery, Inc. v. New York State Liquor Authority United States court of appeals, Second circuit, 134 F.3d 87 (1998).

FACTS Bad Frog Brewery, Inc., makes and sells alcoholic beverages. Some of the beverages feature labels with a drawing of a frog making the gesture generally known as “giving the finger.” Renaissance Beer Company was Bad Frog’s authorized New York distributor. Renaissance applied to the New York State Liquor Authority (NYSLA) for brand label approval, as required by state law before the beer could be sold in New York. The NYSLA denied the application, in part, because “the label could appear in grocery and convenience stores, with obvious exposure on the shelf to children of tender age.” Bad Frog filed a suit in a federal district court against the NYSLA, asking for, among other things, an injunction against the denial of the application. The court granted summary judgment in favor of the NYSLA. Bad Frog appealed to the U.S. Court of Appeals for the Second Circuit.

ISSUE Was the NYSLA’s ban of Bad Frog’s beer labels a reasonable restriction on commercial speech?

DECISION No. The U.S. Court of Appeals for the Second Circuit reversed the judgment of the district court and remanded the case for judgment to be entered in favor of Bad Frog.

REASON The appellate court held that the NYS- LA’s denial of Bad Frog’s application violated the First Amendment. The ban on the use of the labels lacked a “reasonable fit” with the state’s interest in shielding minors from vulgarity. In addition, the

NYSLA did not adequately consider alternatives to the ban. The court acknowledged that the NYSLA’s interest “in protecting children from vulgar and profane advertising” was “substantial.” The question was whether banning Bad Frog’s labels “directly advanced” that interest. “In view of the wide currency of vulgar displays throughout contem- porary society, including comic books targeted directly at children, barring such displays from labels for alcoholic beverages cannot real- istically be expected to reduce children’s exposure to such displays to any significant degree.”

Can a label be too offensive?

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Unprotected Speech The United States Supreme Court has made it clear that certain types of speech will not be given any protection under the First Amendment. Speech that harms the good reputation of another, or defamatory speech (defamation is discussed in the torts chapter), will not be protected.

Speech that violates criminal laws (such as threatening speech) is not constitutionally protected. (See this chapter’s Adapting the Law to the Online Environment for a discussion of when threats made on social media become unprotected speech.) Other unprotected speech includes “fighting words,” or words that are likely to incite others to respond violently.

Obscenity. The First Amendment, as interpreted by the Supreme Court, also does not pro- tect obscene speech. Numerous state and federal statutes make it a crime to disseminate and possess obscene materials, including child pornography. Objectively defining obscene speech has proved difficult, however. And, obviously, it is difficult to prohibit the dissemination of obscenity and pornography online.

Most of Congress’s attempts to pass legislation protecting minors from pornographic mate- rials on the Internet have been struck down on First Amendment grounds when challenged in court. One exception was a law that requires schools public schools and libraries to install filtering software on computers to keep children from accessing adult content.20 Such soft- ware is designed to prevent persons from viewing certain Web sites based on a site’s Internet address or its meta tags, or key words. The Supreme Court held that the act does not uncon- stitutionally burden free speech because it is flexible and libraries can disable the filters for any patrons who ask. 21

Virtual Child Pornography. Another exception is a law that makes it a crime to intention- ally distribute virtual child pornography—which uses computer-generated images, not actual people— without indicating that it is computer-generated.22 In a case challenging the law’s constitutionality, the Supreme Court held that the statute was valid because it does not pro- hibit a substantial amount of protected speech.23 Nevertheless, because of the difficulties of policing the Internet, as well as the constitutional complexities of prohibiting online obscenity through legislation, it remains a problem worldwide.

2–2c The First Amendment—Freedom of Religion The First Amendment states that the government may neither establish any religion nor pro- hibit the free exercise of religious practices. The first part of this constitutional provision is referred to as the establishment clause, and the second part is known as the free exercise

20. Children’s Internet Protection Act (CIPA), 17 U.S.C. Sections 1701–1741. 21. United States v. American Library Association, 539 U.S. 194, 123 S.Ct. 2297, 156 L.Ed.2d 221 (2003). 22. The Prosecutorial Remedies and Other Tools to End the Exploitation of Children Today Act (Protect Act), 18 U.S.C. Section

2252A(a)(5)(B). 23. United States v. Williams, 553 U.S. 285, 128 S.Ct. 1830, 170 L.Ed.2d 650 (2008).

Filtering Software A computer program that is designed to block access to certain Web sites, based on their content. The software blocks the retrieval of a site whose URL or key words are on a list within the program.

Meta Tag A key word in a document that can serve as an index reference to the document. On the Web, search engines return results based, in part, on the tags in Web documents.

The court concluded that a commercial speech limitation must be “part of a substantial effort to advance a valid state interest, not merely the removal of a few grains of offensive sand from a beach of vulgarity.” Finally, as to whether the ban on the labels was more extensive than necessary to serve this interest, the court pointed out that there were “numerous less intrusive alternatives.” For example,

the NYSLA could have placed restrictions on the permissible loca- tions where the appellant’s products could be displayed in stores.

WhaT iF The FacTs Were diFFerenT? If Bad Frog had sought to use the label to market toys instead of beer, would the court’s ruling likely have been the same? Explain your answer.

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clause. Government action, both federal and state, must be consistent with this constitutional mandate.

The Establishment Clause The establishment clause prohibits the government from estab- lishing a state-sponsored religion, as well as from passing laws that promote (aid or endorse) religion or show a preference for one religion over another. Although the establishment clause involves the separation of church and state, it does not require a complete separation.

Applicable Standard. Establishment clause cases often involve such issues as the legality of allowing or requiring school prayers, using state-issued vouchers to pay tuition at religious schools, and teaching creation theories versus evolution in public schools. Federal or state

Establishment Clause The provision in the First Amendment that prohibits the government from establishing any state-sponsored religion or enacting any law that promotes religion or favors one religion over another.

AdApting LAw to the Online environment Should Threats Made on Facebook Be Considered Free Speech?

Many people say things on social media that they do not mean. Often, their statements are full of rage toward another person, a company, or a workplace—especially after a relationship ends or a firing occurs. Are such postings illegal, or are they protected as free speech? That depends on whether the statements constitute a true threat.

Under a federal statute, anyone who “transmits in interstate or foreign commerce any communication containing any threat to kidnap any person or any threat to injure the person of another” has committed a crime.a A conviction under this law can result in fines and/or imprisonment for up to five years. Because the Internet is obviously interstate, a person who communicates threats to kid- nap or injure another via the Internet can potentially be convicted.

What Is a True Threat? A true threat is a statement in which the speaker means to communicate a serious intent to commit an unlawful, violent act against a particular person or group. The First Amendment does not protect speech that contains true threats, and thus the gov- ernment can prohibit them.

Courts have differed on whether the standard for determining whether a state- ment is a true threat should be objective or subjective. The majority of courts apply

an objective standard. Under this standard, the speaker must “knowingly and willfully” transmit a communication that a reason- able (or objective) person would find threat- ening. A subjective standard requires that the speaker must personally (subjectively) intend not only to transmit the communi- cation but also to threaten the victim. Since subjective intent can be difficult to deter- mine, this standard makes it more difficult to prosecute a person for posting threats on the Internet.

Anthony Elonis’s Story Anthony Elonis’s wife, Tara, left him in 2010 and took their two young children. Elonis was upset and experienced problems at work. A coworker, Amber Morrissey, filed five sexual harassment reports against him. When Elonis posted a photograph of himself in a Halloween costume holding a knife to Morrissey’s neck, he was fired from his job.

Elonis then began posting violent state- ments on his Facebook page, mostly focus- ing on his former wife. “There’s one way to love you,” he wrote, “but a thousand ways to kill you. I’m not going to rest until your body is a mess, soaked in blood and dying from all the little cuts. Hurry up and die, bitch. . . .” Based on statements like these, the court issued a protective order to Tara. But Elonis continued to post statements about killing his wife and eventually was arrested and prosecuted for his online posts.

Were the Facebook Posts Free Speech? At trial, Elonis claimed the Facebook posts were rap lyrics, inspired by Eminem, which were a “therapeutic” way to deal with his problems. Elonis argued that he did not mean to seriously threaten Tara. (Tara testi- fied, however, that Elonis had not listened to rap music during their marriage.)

Elonis was convicted of violating the stat- ute after a jury trial and ordered to serve four years in prison. He appealed, and a federal appellate court affirmed his conviction.b He appealed to the United States Supreme Court, which reversed and remanded the case for further proceedings. The Court ruled that it is not enough that a reasonable person might view the defendant’s Facebook posts as threats (which is the negligence standard applied by the lower court). Elonis must have intended to issue threats or known that his statements would be viewed as threats to be convicted of a crime.c

CRITICAL THINKING

▪▪ When should a statement made on social media be considered a true threat?

b. United States v. Elonis, 730 F.3d 321 (3d Cir. 2013); cert. granted, 134 S.Ct. 2819 (2014).

c. Elonis v. United States, ___ U.S. ___, 135 S.Ct. 2001, ___ L.Ed.2d ___ (2015).a. 18 U.S.C. Section 875(c).

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laws that do not promote or place a significant burden on religion are constitutional even if they have some impact on religion. For a government law or policy to be constitutional, it must not have the primary effect of promoting or inhibiting religion.

Religious Displays. Religious displays on public property have often been challenged as vio- lating the establishment clause, and the United States Supreme Court has ruled on a number of such cases. Generally, the Court has focused on the proximity of the religious display to nonreligious symbols, such as reindeer and candy canes, or to symbols from different reli- gions, such as a menorah (a nine-branched candelabrum used in celebrating Hanukkah). The Supreme Court eventually took a slightly different approach when it held that public displays having historical, as well as religious, significance do not necessarily violate the establishment clause.24

CASE EXAMPLE 2.10 Mount Soledad is a prominent hill near San Diego. There has been a forty-foot cross on top of Mount Soledad since 1913. In the 1990s, a war memorial was con- structed next to the cross that included six walls listing the names of veterans. The site was privately owned until 2006, when Congress authorized the property’s transfer to the federal government “to preserve a historically significant war memorial.”

Steve Trunk and the Jewish War Veterans filed lawsuits claiming that the cross display vio- lated the establishment clause because it endorsed the Christian religion. A federal appellate court agreed, finding that the primary effect of the memorial as a whole sent a strong message of endorsement and exclusion (of non-Christian veterans). The court noted that although not all cross displays at war memorials violate the establishment clause, the cross in this case physically dominated the site. Additionally, the cross was originally dedicated to religious purposes, had a long history of religious use, and was the only portion visible to drivers on the freeway below.25 n

The Free Exercise Clause The free exercise clause guarantees that people can hold any religious beliefs they want or can have no religious beliefs. The constitutional guarantee of personal religious freedom restricts only the actions of the government, however, and not those of individuals or private businesses.

Restrictions Must Be Necessary. The government must have a compelling state interest for restricting the free exercise of religion, and the restriction must be the only way to further that interest. CASE EXAMPLE 2.11 Members of a particular Mennonite church must use horses and buggies for transportation, but they can use tractors to take their agricultural products to market. Their religion requires the tractors to have steel cleats on the tires, and they drove tractors with cleats on county roads for many years. Then the county passed an ordinance that prohibited the use of steel cleats because the cleats tend to damage newly surfaced roads.

When a member of the church received a citation for driving a tractor with cleats, he claimed that the ordinance violated the church’s right to freely exercise its religion. Ultimately, the court ruled in his favor. The county had not met its burden of showing that the ordinance served a compelling state interest and was the least restrictive means of attaining that interest. There was no evidence of how much the cleats harmed the roads, other events also harmed the roads, and the county had allowed the cleats to be used for many years. Therefore, the ordinance was not carefully tailored to achieve the stated objective of road preservation.26 n

In the following case, the United States Supreme Court had to decide whether a prison’s grooming policy violated an inmate’s exercise of his religion.

24. See Van Orden v. Perry, 545 U.S. 677, 125 S.Ct. 2854, 162 L.Ed.2d 607 (2005). The Court held that a six-foot-tall monument of the Ten Commandments on the Texas state capitol grounds did not violate the establishment clause because the Ten Com- mandments had historical significance.

25. Trunk v. City of San Diego, 629 F.3d 1099 (9th Cir. 2011). 26. Mitchell County v. Zimmerman, 810 N.W.2d 1 (Iowa Sup.Ct. 2012).

KNOW THIS The free exercise clause applies only to the actions of the state and federal governments, not to private employers. Private employers may nonetheless be required to accommodate their employees’ religious beliefs.

Free Exercise Clause The provision in the First Amendment that prohibits the government from interfering with people’s religious practices or forms of worship.

This large cross on Mount Soledad can be viewed by freeway drivers in San Diego. Because the land on which it sits became public property, should it be removed as a violation of the establishment clause?

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Public Welfare Exception. When religious practices work against public policy and the public welfare, the government can act. For instance, the government can require that a child receive certain types of vaccinations or receive medical treatment when the child’s life is in danger— regardless of the child’s or parent’s religious beliefs.

In other words, when public safety is an issue, an individual’s religious beliefs often must give way to the government’s interests in protecting the public. EXAMPLE 2.12 According to the Muslim faith, a woman should not appear in public without a scarf, known as a hijab, over her head. Due to public safety concerns, many courts today do not allow the wearing of any headgear (hats or scarves) in courtrooms. n

2–3 Due Process and Equal Protection Two other constitutional guarantees of great significance to Americans are mandated by the due process clauses of the Fifth and Fourteenth Amendments and the equal protection clause of the Fourteenth Amendment.

LEARNING OBJECTIVE 5 Where in the Constitution can the due process clause be found?

FacTs Gregory Holt, an inmate in an Arkansas state prison, is a devout Muslim who wished to grow a beard in accord with his religious beliefs. The Arkansas Department of Correction prohib- ited inmates from growing beards (except for medical reasons). Holt asked for an exemption on religious grounds. Prison officials denied his request.

Holt filed a suit in a federal district court against Ray Hobbs, the director of the department, and others. Holt’s lawsuit claimed that the restriction was a violation of the Religious Land Use and Institutionalized Persons Act of 2000 (RLUIPA), which governs the exercise of religion by prison inmates. The defendants argued that beards compromise prison safety because they can hide contraband and because an inmate can quickly shave his beard to disguise his identity. The court dismissed the suit. On appeal, the U.S. Court of Appeals for the Eighth Circuit affirmed the dismissal. Hobbs appealed to the United States Supreme Court.

issue Does the department’s grooming policy with respect to Holt’s beard violate the RLUIPA and his right to freely exercise his religion?

decision Yes. The United States Supreme Court reversed the rul- ing of the lower court and remanded the case for further proceed- ings. The Supreme Court held that “the Department’s grooming

policy violates RLUIPA insofar as it prevents [Holt] from growing a 1/2-inch beard in accordance with his religious beliefs.”

reason The RLUIPA prohibits a state from taking any action that substantially burdens the religious exercise of an institutionalized person unless the action is the least restrictive means of furthering a compelling governmental interest. In this case, the department’s policy substantially burdened

Holt’s exercise of his religion. The Court doubted that the prohibition against the beard furthered the department’s compelling interest in stopping the flow of contraband. “An item of contraband would have to be very small indeed to be concealed by a 1/2-inch beard.” And the department did not show that its policy was the least restrictive means of furthering its compelling interest. The department could “satisfy its security concerns by simply searching [Holt’s] beard. The Department already searches prisoners’ hair and clothing.” Finally, the department could solve the identity problem by photographing all inmates periodically to record changes in their appearance.

criTical Thinking—legal consideration Most states and the federal government permit inmates to grow 1/2-inch beards. Would the policies followed at these institutions be relevant in determining the need for a beard restriction in this case? Discuss.

Can prison policy prevent a devout Muslim from keeping a short beard?

Case 2.3

Holt v. Hobbs United States Supreme Court, __ U.S. __, 135 S.Ct. 853, __ L.Ed.2d __ (2015).

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2–3a Due Process Both the Fifth and the Fourteenth Amendments provide that no person shall be deprived “of life, liberty, or property, without due process of law.” The due process clause of each of these constitutional amendments has two aspects—procedural and substantive. Note that the due process clause applies to “legal persons,” such as corporations, as well as to individuals.

Procedural Due Process Procedural due process requires that any government decision to take life, liberty, or property must be made fairly. This means that the government must give a person proper notice and an opportunity to be heard. The government must also use fair procedures in determining whether a person will be subjected to punishment or have some burden imposed on him or her.

Fair procedure has been interpreted as requiring that the person have at least an opportu- nity to object to a proposed action before a fair, neutral decision maker (who need not be a judge). EXAMPLE 2.13 Doyle Burns, a nursing student in Kansas, poses for a photograph stand- ing next to a placenta used as a lab specimen. Although she quickly deletes the photo from her library, it ends up on Facebook. When the director of nursing sees the photo, Burns is expelled. She sues for reinstatement and wins. The school violated Burns’s due process rights by expelling her from the nursing program for taking a photo without giving her an opportu- nity to present her side to school authorities. n

Many of the constitutional protections discussed in this chapter have become part of our culture in the united states. Due process, especially procedural due process, has become synonymous with what Americans consider “fair.” For this reason, if you wish to avoid legal disputes, consider giving due process to anyone who might object to your business deci- sions or actions, whether that person is an employee, a partner, an affiliate, or a customer. For instance, provide ample notice of new policies to all affected persons, and give them at least an opportunity to express their opinions on the matter. Providing an opportunity to be heard is often the ideal way to make people feel that they are being treated fairly. People are less likely to sue a businessperson or firm that they believe is fair and listens to both sides of an issue.

Substantive Due Process Substantive due process focuses on the content of the legislation rather than the fairness of the procedures. Substantive due process limits what the govern- ment may do in its legislative and executive capacities. Legislation must be fair and reasonable in content and must further a legitimate governmental objective. Only when official conduct is arbitrary or shocks the conscience, however, will it rise to the level of violating substantive due process.

If a law or other governmental action limits a fundamental right, the courts will hold that it violates substantive due process unless it promotes a compelling or overriding state interest. Fundamental rights include interstate travel, privacy, voting, marriage and family, and all First Amendment rights. Thus, for example, a state must have a substantial reason for taking any action that infringes on a person’s free speech rights.

In situations not involving fundamental rights, a law or action does not violate substantive due process if it rationally relates to any legitimate governmental end. It is almost impossible for a law or action to fail the “rationality” test. Under this test, almost any government regula- tion of business will be upheld as reasonable.

2–3b Equal Protection Under the Fourteenth Amendment, a state may not “deny to any person within its jurisdiction the equal protection of the laws.” The United States Supreme Court has used the due process

Due Process Clause The provisions in the Fifth and Fourteenth Amendments that guarantee that no person shall be deprived of life, liberty, or property without due process of law. State constitutions often include similar clauses.

“Our Constitution protects aliens [extraterrestrials], drunks, and U.S. senators.”

Will Rogers 1879–1935 (American humorist)

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clause of the Fifth Amendment to make the equal protection clause applicable to the federal government as well. Equal protection means that the government must treat similarly situated individuals in a similar manner.

Equal protection, like substantive due process, relates to the substance of the law or other governmental action. When a law or action limits the liberty of all persons to do something, it may violate substantive due process. When a law or action limits the liberty of some persons but not others, it may violate the equal protection clause. EXAMPLE 2.14 If a law prohibits all advertising on the sides of trucks, it raises a substantive due process question. If the law makes an exception to allow truck owners to advertise their own businesses, it raises an equal protection issue. n

In an equal protection inquiry, when a law or action distinguishes between or among indi- viduals, the basis for the distinction—that is, the classification—is examined. Depending on the classification, the courts apply different levels of scrutiny, or “tests,” to determine whether the law or action violates the equal protection clause. The courts use one of three standards: strict scrutiny, intermediate scrutiny, or the “rational basis” test.

Strict Scrutiny If a law or action prohibits or inhibits some persons from exercising a fundamental right, the law or action will be subject to “strict scrutiny” by the courts. A classifica- tion based on a suspect trait—such as race, national origin, or citizenship status—will also be subject to strict scrutiny. Under this standard, the classification must be necessary to promote a compelling government interest.

Compelling state interests include remedying past unconsti- tutional or illegal discrimination, but do not include correcting the general effects of “society’s discrimination.”  EXAMPLE 2.15  For a city to give preference to minority applicants in awarding construction contracts, it normally must identify past uncon- stitutional or illegal discrimination against minority construc- tion firms. Because the policy is based on suspect traits (race and national origin), it will violate the equal protection clause unless it is necessary to promote a compelling state interest. n Generally, few laws or actions survive strict-scrutiny analysis by the courts.

Intermediate Scrutiny Another standard, that of “intermediate scrutiny,” is applied in cases involving discrimination based on gender or legitimacy. Laws using these classifications must be substantially related to important government objectives. EXAMPLE 2.16 An important govern- ment objective is preventing illegitimate teenage pregnancies. Because males and females are not similarly situated in this regard—only females can become pregnant—a law that punishes men but not women for statutory rape will be upheld even though it treats men and women unequally. n

The state also has an important objective in establishing time limits (called statutes of lim- itation) for how long after an event a particular type of action can be brought. Nevertheless, the limitation period must be substantially related to the important objective of preventing fraudulent or outdated claims. EXAMPLE 2.17 A state law requires illegitimate children to bring paternity suits within six years of their births in order to seek support from their fathers. A court will strike down this law if legitimate children are allowed to seek support from their parents at any time. This is because distinguishing between support claims on the basis of legitimacy is not related to the important government objective of preventing fraudulent or outdated claims. n

Equal Protection Clause The provision in the Fourteenth Amendment that requires state governments to treat similarly situated individuals in a similar manner.

Does the equal protection clause protect the homeless? If so, how?

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The “Rational Basis” Test In matters of economic and social welfare, a classification will be considered valid if there is any conceivable “rational basis” on which the classification might relate to a legitimate government interest. It is almost impossible for a law or action to fail the rational basis test.

CASE EXAMPLE 2.18 A Kentucky statute prohibits businesses that sell substantial amounts of staple groceries or gasoline from applying for a license to sell wine and liquor. Maxwell’s Pic-Pac (a grocer) filed suit against the state, alleging that the statute and the regulation were unconstitutional under the equal protection clause. The court applied the rational basis test and ruled that the statute and regulation were rationally related to a legitimate government interest in reducing access to products with high alcohol content. The court cited the prob- lems caused by alcohol, including drunk driving, and noted that the state’s interest in limiting access to such products extends to the general public. Grocery stores and gas stations pose a greater risk of exposing members of the public to alcohol. For these and other reasons, the state can restrict these places from selling wine and liquor.27 n

2–4 Privacy Rights The U.S. Constitution does not explicitly mention a general right to privacy. In a 1928 Supreme Court case, Olmstead v. United States,28 Justice Louis Brandeis stated in his dissent that the right to privacy is “the most comprehensive of rights and the right most valued by civilized men.” The majority of the justices at that time, however, did not agree with Brandeis.

It was not until the 1960s that a majority on the Supreme Court endorsed the view that the Constitution protects individual privacy rights. In a landmark 1965 case, Griswold v. Con- necticut,29 the Supreme Court invalidated a Connecticut law that effectively prohibited the use of contraceptives on the ground that it violated the right to privacy. The Supreme Court held that a constitutional right to privacy was implied by the First, Third, Fourth, Fifth, and Ninth Amendments.

Today, privacy rights receive protection under various federal statutes as well as the U.S. Constitution. State constitutions and statutes also secure individuals’ privacy rights, often to a significant degree. In addition, privacy rights are protected to an extent under tort law, consumer law, and employment law. In this section, we touch on some of the most important federal statutes protecting the privacy of individuals, as well as some current topics related to privacy rights. One such topic, the debate over marriage equality laws, is discussed in this chapter’s Managerial Strategy feature.

2–4a Federal Privacy Legislation In the last several decades, Congress has enacted a number of statutes that protect the privacy of individuals in various areas of concern. Most of these statutes deal with personal informa- tion collected by governments or private businesses.

In the 1960s, Americans were sufficiently alarmed by the accumulation of personal infor- mation in government files that they pressured Congress to pass laws permitting individuals to access their files. Congress responded by passing the Freedom of Information Act, which allows any person to request copies of any information on her or him contained in federal government files. Congress later enacted the Privacy Act, which also gives persons the right to access such information.

27. Maxwell’s Pic-Pac, Inc. v. Dehner, 739 F.3d 936 (6th Cir. 2014). 28. 277 U.S. 438, 48 S.Ct. 564, 72 L.Ed. 944 (1928). 29. 381 U.S. 479, 85 S.Ct. 1678, 14 L.Ed.2d 510 (1965).

“There was, of course, no way of knowing whether you were being watched at any given moment.”

George Orwell 1903–1950 (English author, from his famous novel 1984)

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In the 1990s, responding to the growing need to protect the privacy of individuals’ health records—particularly computerized records—Congress passed the Health Insurance Portability and Accountability Act (HIPAA).30 This act defines and limits the circumstances in which an individual’s “protected health information” may be used or disclosed by health- care providers, health-care plans, and others.

These and other major federal laws protecting privacy rights are listed and briefly described in Exhibit 2–1. (See the Business Application at the end of this chapter for a dis- cussion of some laws pertaining to the collection of personal information by businesses.)

2–4b The USA Patriot Act The USA Patriot Act was passed by Congress in the wake of the terrorist attacks of Septem- ber 11, 2001, and then reauthorized twice.31 Unlike laws protecting privacy rights, the act

30. HIPAA was enacted as Pub. L. No. 104-191 (1996) and is codified in 29 U.S.C.A. Sections 1181 et seq. 31. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of

2001, also known as the USA Patriot Act, was enacted as Pub. L. No. 107-56 (2001). While the bulk of the Patriot Act is perma- nent law, the most controversial surveillance provisions must be reauthorized every four years and were reauthorized by Pub. L. No. 109-173 (2006) and Pub. L. No. 112-114 (2011).

Management Faces a Legal Issue The debate over same-sex marriage has been raging across the country for years. The legal issues raised by marriage equality involve privacy rights and equal protection. Although marriage equality may not appear at first glance to be business related, it is an important legal issue for managers. Com- panies like Barilla Pasta, Chick-fil-A, Exxon Mobil, and Target Corporation have lost significant business for supporting anti-gay organizations and legislation.

What the Courts Say Before 1996, federal law did not define marriage, and the U.S. government recog- nized any marriage that was recognized by a state. Then Congress passed the Defense of Marriage Act (DOMA), which explicitly defined marriage as a union of one man and one woman. DOMA was later challenged, and a number of federal courts found it to be unconstitutional in the context of bankruptcy, public employee benefits, and estate taxes. In 2013, the United States

Supreme Court struck down part of DOMA as unconstitutional.a

Today, once again, no federal law defines marriage, and marriage law is determined at the state level. Thirteen states prohibit same-sex marriages either in their constitu- tions or through state statutes that define marriage as a union between a man and a woman. Marriage laws that do not permit or recognize same-sex marriage have led to numerous court challenges.

Federal courts have become increasingly likely to invalidate state bans on same-sex marriage. In 2013, a federal district court held that Utah’s same-sex marriage ban was unconstitutional.b In 2014, federal district courts in Arkansas, Mississippi, and Okla- homa struck down state same-sex marriage bans as unconstitutional.c Moreover, public sentiment on the issue has shifted, and more

states are recognizing the rights of same-sex couples. As of 2015, thirty-seven states, as well as the District of Columbia, had legal- ized same-sex marriage.

In 2015, the United States Supreme Court heard a consolidated appeal and determined that the remaining state-level prohibitions on same-sex marriage were unconstitutional. In a landmark decision, the Court ruled that the Fourteenth Amendment requires individ- ual states to (1) issue marriage licenses to same-sex couples and (2) recognize same- sex marriages performed in other states.d

MANAGeRIAL IMpLICATIoNs

In this era of social networking, a company’s poli- cies can become public almost instantly—the boy- cotts of Target and Barilla were organized largely via Facebook. Consequently, businesspersons must carefully consider their policies toward employees and others who have different sexual orientations. At a minimum, company policies should clearly specify how same-sex partners will be treated in terms of family and medical leave, health insur- ance coverage, pensions, and other benefits.

Marriage Equality and the ConstitutionMANAGERIAL STRATEGY

a. Windsor v. United States, ___ U.S. ___, 133 S.Ct. 2675, 186 L.Ed.2d 808 (2013).

b. Kitchen v. Herbert, 961 F.Supp.2d 1181 (D.Utah 2013). c. Campaign for Southern Equality v. Bryant, ___

F.Supp.2d ___, 2014 WL 6680570 (S.D. Miss. 2014); Jernigan v. Crane, ___ F.Supp.2d ___, 2014 WL 6685391; and Bishop v. U.S. ex rel. Holder, 962 F.Supp.2d 1252 (N.D. Okla. 2014).

d. Obergefell v. Hodges, ___ U.S. ___, ___ S.Ct. ___, ___ L.Ed.2d ___, 2015 WL 2473451 (2015).

Most medical records are being put online. What law protects patients’ right to privacy with respect to their online medical files?

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expanded the government’s ability to gather information about individuals. The Patriot Act has given government officials increased authority to monitor Internet activities (such as e-mail and Web site visits) and to gain access to personal financial information and student informa- tion. Law enforcement officials may now track the telephone and e-mail communications of one party to find out the identity of the other party or parties.

To gain access to these communications, the government must certify that the information likely to be obtained is relevant to an ongoing criminal investigation, but it does not need to provide proof of any wrongdoing. EXAMPLE 2.19 In 2012, General David Petraeus, who ran the wars in Iraq and Afghanistan, resigned as director of the Central Intelligence Agency after his extramarital affair with Paula Broadwell, his biographer, became public. Apparently, after Petraeus broke off the affair with Broadwell, she sent harassing e-mails to another woman, who reported the harassment. The FBI investigated, accessed Petraeus’s e-mail accounts, and discovered that he had communicated with Broadwell via messages left in a draft folder on his e-mail account. Although there was no evidence that Petraeus had done anything illegal, he was urged to resign and did so. n

Exhibit 2–1 Federal Legislation Relating to Privacy

TITLE OF ACT PROVISIONS CONCERNING PRIVACY

Freedom of Information Act (1966) Provides that individuals have a right to obtain access to information about them collected in govern- ment files.

Family and Educational Rights and Privacy Act (1974)

Limits access to computer-stored records of education-related evaluations and grades in private and public colleges and universities.

Privacy Act (1974) Protects the privacy of individuals about whom the federal government has information. Regu- lates agencies’ use and disclosure of data, and gives individuals access to and a means to correct inaccuracies.

Electronic Communications Privacy Act (1986)

Prohibits the interception of information communicated by electronic means.

Driver’s Privacy Protection Act (1994) Prevents states from disclosing or selling a driver’s personal information without the driver’s consent.

Health Insurance Portability and Accountability Act (1996)

Requires health-care providers and health-care plans to inform patients of their privacy rights and of how their personal medical information may be used. States that medical records may not be used for purposes unrelated to health care or disclosed without permission.

Financial Services Modernization Act (Gramm-Leach-Bliley Act) (1999)

Prohibits the disclosure of nonpublic personal information about a consumer to an unaffiliated third party unless strict disclosure and opt-out requirements are met.

Reviewing . . . Constitutional Law A state legislature enacted a statute that required any motorcycle operator or passenger on the state’s highways to wear a protective helmet. Jim Alderman, a licensed motorcycle operator, sued the state to block enforcement of the law. Alderman asserted that the statute violated the equal protection clause because it placed requirements on motorcyclists that were not imposed on other motorists. Using the information presented in the chapter, answer the following questions.

1. Why does this statute raise equal protection issues instead of substantive due process concerns?

2. What are the three levels of scrutiny that the courts use in determining whether a law violates the equal protection clause?

3. Which level of scrutiny or test would apply to this situation? Why?

4. Applying this standard or test, is the helmet statute constitutional? Why or why not?

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DeBAte thIS

▪▪ Legislation aimed at protecting people from themselves concerns the individual as well as the public in general. Protective helmet laws are just one example of such legislation. Should individuals be allowed to engage in unsafe activities if they choose to do so?

Most businesses and other organiza-tions gather information from and about their customers, constituents, or members. Businesses that want informa- tion about potential customers would like to obtain names from the mailing lists main- tained by these organizations. Unless the owner of a list has a privacy policy that pro- hibits the sharing of such information with- out consent, a business may purchase the list and proceed to offer its product or service to all the people on it.

Locating potential customers in this man- ner may be completely legal, depending on how the information was obtained in the first place. Pretexting is a method of col- lecting personal information that skirts the boundary between legal and illegal.

What Is “Pretexting”? A pretext is a false motive put forth to hide the real motive, and pretexting is the process of obtaining information by false means. The term pretexting was first used in the 1990s

when scammers obtained Social Security numbers by claiming that they were from the Social Security Administration and that their computer had broken down. Pretexters may try to obtain personal data by claiming that they are taking a survey for a research firm, a political party, or even a charity. Then they ask for information such as the person’s insurance or telephone company, where he or she banks, and perhaps the name of his or her broker. Once they obtain the informa- tion, the pretexters sell it to a data broker. The broker in turn sells it to someone else, who may be a legitimate businessperson, a private investigator, or an individual intent on identity theft.

Pretexting Legislation In 1999, Congress passed the Gramm-Leach- Bliley Act, which made pretexting to obtain financial information illegal. Initially, it was not clear whether that law prohibited lying to obtain nonfinancial information for pur- poses other than identity theft.

To clarify the law on pretexting to gain access to phone records, Congress enacted the Telephone Records and Privacy Protec- tion Act. This act makes it a federal crime to pretend to be someone else or to make false

representations for the purpose of obtaining another person’s confidential phone records. The act also prohibits the buying, selling, transferring, or receiving of such phone records without the phone owner’s permis- sion. The Federal Trade Commission investi- gates and prosecutes violators, who can be fined and sentenced to up to ten years in prison.

CheCkLISt for Providing or Securing Customer Information:

1. Make sure that your company has a privacy policy. If it does not, one should be created.

2. Never provide a third party with informa- tion unless your company’s privacy policy specifically allows you to do so.

3. If you wish to acquire personal informa- tion on potential customers from a third party, make sure the data broker is legit- imate, and find out how the information was acquired.

4. Treat all pretexting as illegal.

* This Business Application is not meant to substitute for the services of an attorney who is licensed to practice law in your state.

BUSINESS APPLICATION Is “Pretexting” Illegal?*

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Chapter Summary: Constitutional Law

Bill of Rights 37 checks and balances 32 commerce clause 33 compelling government interest 39 due process clause 46 equal protection clause 47

establishment clause 43 federal form of government 32 filtering software 42 free exercise clause 44 meta tags 42 police powers 35

preemption 36 supremacy clause 36 symbolic speech 38

Key Terms

The Constitutional Powers of Government

The U.S. Constitution established a federal form of government, in which government powers are shared by the national government and the state governments. At the national level, government powers are divided among the legislative, executive, and judicial branches.

The Commerce Clause

1. The expansion of national powers—The commerce clause expressly permits Congress to regulate commerce. Over time, courts expansively interpreted this clause, thereby enabling the national government to wield extensive powers over the economic life of the nation.

2. The commerce power today—Today, the commerce power authorizes the national government, at least theoretically, to regulate almost every commercial enterprise in the United States.

3. The regulatory powers of the states—The Tenth Amendment reserves to the states all powers not expressly delegated to the national government. Under their police powers, state governments may regulate private activities in order to protect or promote the public order, health, safety, morals, and general welfare.

4. The “dormant” commerce clause—If state regulations substantially interfere with interstate commerce, they will be held to violate the “dormant” commerce clause of the U.S. Constitution. The positive aspect of the commerce clause, which gives the national government the exclusive authority to regulate interstate commerce, implies a “dormant” aspect— that the states do not have this power.

The Supremacy Clause

The U.S. Constitution provides that the Constitution, laws, and treaties of the United States are “the supreme Law of the Land.” Whenever a state law directly conflicts with a federal law, the state law is rendered invalid.

Business and the Bill of Rights

The Bill of Rights, which consists of the first ten amendments to the U.S. Constitution, embodies a series of protections for individuals—and, in some instances, business entities—against various types of interference by the federal govern- ment. Today, most of the protections apply against state governments as well. Freedoms guaranteed by the First Amend- ment that affect businesses include the following: 1. Freedom of speech—Speech, including symbolic speech, is given the fullest possible protection by the courts. Corporate

political speech and commercial speech also receive substantial protection under the First Amendment. Certain types of speech, such as defamatory speech and obscene speech, are not protected under the First Amendment. Govern- ment attempts to regulate unprotected forms of speech in the online environment have, to date, met with numerous challenges.

2. Freedom of religion—Under the First Amendment, the government may neither establish any religion (the establish- ment clause) nor prohibit the free exercise of religion (the free exercise clause).

Due Process and Equal Protection

1. Due process—Both the Fifth and the Fourteenth Amendments provide that no person shall be deprived of “life, liberty, or property, without due process of law.” Procedural due process requires that any government decision to take life, liberty, or property must be made fairly, using fair procedures. Substantive due process focuses on the content of legislation. Generally, a law that limits a fundamental right violates substantive due process unless the law promotes a compelling state interest, such as public safety.

2. Equal protection—Under the Fourteenth Amendment, a law or action that limits the liberty of some persons but not others may violate the equal protection clause. Such a law may be upheld, however, if there is a rational basis for the discriminatory treatment of a given group or if the law substantially relates to an important government objective.

Privacy Rights The Constitution does not contain a specific guarantee of a right to privacy, but such a right has been derived from guar- antees found in several constitutional amendments. A number of federal statutes protect privacy rights. Privacy rights are also protected by many state constitutions and statutes, as well as under tort law.

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Issue Spotters 1. Can a state, in the interest of energy conservation, ban all advertising by power utilities if conservation could be accomplished by

less restrictive means? Why or why not? (See Business and the Bill of Rights.)

2. Suppose that a state imposes a higher tax on out-of-state companies doing business in the state than it imposes on in-state compa- nies. Is this a violation of equal protection if the only reason for the tax is to protect the local firms from out-of-state competition? Explain. (See Due Process and Equal Protection.)

—Check your answers to the Issue Spotters against the answers provided in Appendix D at the end of this text.

Learning Objectives Check 1. What is the basic structure of the U.S. government?

2. What constitutional clause gives the federal government the power to regulate commercial activities among the various states?

3. What constitutional clause allows laws enacted by the federal government to take priority over conflicting state laws?

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

5. Where in the Constitution can the due process clause be found? —Answers to the even-numbered Learning Objectives Check questions can be found in Appendix E at the end of this text.

Business Scenarios and Case Problems 2–1. The Free exercise clause. Thomas worked in the nonmili-

tary operations of a large firm that produced both military and nonmilitary goods. When the company discontinued the pro- duction of nonmilitary goods, Thomas was transferred to the plant producing military equipment. Thomas left his job, claim- ing that it violated his religious principles to participate in the manufacture of goods to be used in destroying life. In effect, he argued, the transfer to the military equipment plant forced him to quit his job. He was denied unemployment compensation by the state because he had not been effectively “discharged” by the employer but had voluntarily terminated his employment. Did the state’s denial of unemployment benefits to Thomas vio- late the free exercise clause of the First Amendment? Explain. (See Business and the Bill of Rights.)

2–2. spotlight on plagiarism—due process. The Russ College of Engineering and Technology of Ohio University announced in a press conference that it had found “ram- pant and flagrant plagiarism” in the theses of mechanical

engineering graduate students. Faculty singled out for “ignor- ing their ethical responsibilities” included Jay Gunasekera, chair of the department. Gunasekera was prohibited from advising students. He filed a suit against Dennis Irwin, the dean of Russ College, for violating his due process rights. What does due process require in these circumstances? Why? [Gunasekera v. Irwin, 551 F.3d 461 (6th Cir. 2009)] (See Due Process and Equal Protection.)

2–3. Business case problem with sample answer—estab- lishment clause. Judge James DeWeese hung a poster in his courtroom showing the Ten Commandments. The

American Civil Liberties Union (ACLU) filed a suit, alleging that the poster violated the establishment clause. DeWeese responded that his purpose was not to promote religion but to express his view about “warring” legal philosophies—moral rel- ativism and moral absolutism. “Our legal system is based on moral absolutes from divine law handed down by God through the Ten Commandments.” Does this poster violate the estab- lishment clause? Why or why not? [American Civil Liberties Union of Ohio Foundation, Inc. v. DeWeese, 633 F.3d 424 (6th Cir. 2011)] (See Business and the Bill of Rights.) —For a sample answer to Problem 2–3, go to Appendix F at

the end of this text.

2–4. The dormant commerce clause. In 2001, Puerto Rico enacted a law that requires specific labels on cement sold in Puerto Rico and imposes fines for any violations of these requirements. The law prohibits the sale or distribution of cement manufactured outside Puerto Rico that does not carry a required label warning that the cement may not be used in government-financed construction projects. Antilles Cement Corp., a Puerto Rican firm that imports foreign cement, filed a complaint in federal court, claiming that this law violated the dormant commerce clause. (The dormant commerce clause doctrine applies not only to commerce among the states and U.S. territories, but also to international commerce.) Did the 2001 Puerto Rican law violate the dormant commerce clause? Why or why not? [Antilles Cement Corp. v. Fortuno, 670 F.3d 310 (1st Cir. 2012)] (See The Constitutional Powers of Government.)

2–5. Freedom of speech. Mark Wooden sent e-mail to an alder- woman for the city of St. Louis. Attached was a nineteen-minute

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audio that compared her to the biblical character, Jezebel—she was a “bitch in the Sixth Ward,” spending too much time with the rich and powerful and too little time with the poor. In a menacing, maniacal tone, Wooden said that he was “dusting off a sawed-off shotgun,” called himself a “domestic terrorist,” and referred to the assassination of President John F. Kennedy, the murder of a federal judge, and the shooting of Congresswoman Gabrielle Giffords. Feeling threatened, the alderwoman called the police. Wooden was convicted of harassment under a state criminal statute. Was this conviction unconstitutional under the First Amendment? Discuss. [State v. Wooden, 388 S.W.3d 522 (Mo. 2013)] (See Business and the Bill of Rights.)

2–6. equal protection. Abbott Laboratories licensed SmithKline Beecham Corp. to market an Abbott human immunodeficiency virus (HIV) drug in conjunction with one of SmithKline’s drugs. Abbott then increased the price of its drug fourfold, forcing SmithKline to increase its prices and thereby driving business to Abbott’s own combination drug. SmithKline filed a suit in a federal district court against Abbott. During jury selection, Abbott struck the only self-identified gay person among the potential jurors. (The pricing of HIV drugs is of considerable concern in the gay community.) Could the equal protection clause be applied to prohibit discrimination based on sexual orientation in jury selection? Discuss. [SmithKline Beecham Corp. v. Abbott Laboratories, 740 F.3d 471 (9th Cir. 2014)] (See Due Process and Equal Protection.)

2–7. procedural due process. Robert Brown applied for admis- sion to the University of Kansas School of Law. Brown answered

“no” to questions on the application asking if he had a crimi- nal history and acknowledged that a false answer constituted “cause for . . . dismissal.” In fact, Brown had criminal convic- tions for domestic battery and driving under the influence. He was accepted for admission to the school. When school officials discovered his history, however, he was notified of their intent to dismiss him and given an opportunity to respond in writing. He demanded a hearing. The officials refused to grant Brown a hearing and then expelled him. Did the school’s actions deny Brown due process? Discuss. [Brown v. University of Kansas, __ F.3d __, 2015 WL 150271 (10th Cir. 2015)] (See Due Process and Equal Protection.)

2–8. a Question of ethics—Free speech. Aric Toll owns and manages the Balboa Island Village Inn, a restaurant and bar in Newport Beach, California. Anne Lemen lives across from the Inn. Lemen complained to the authorities about

the Inn’s customers, whom she called “drunks” and “whores.” Lemen told the Inn’s bartender Ewa Cook that Cook “worked for Satan.” She repeated her statements to potential custom- ers, and the Inn’s sales dropped more than 20 percent. The Inn filed a suit against Lemen. [Balboa Island Village Inn, Inc. v. Lemen, 40 Cal.4th 1141, 156 P.3d 339 (2007)] (See Business and the Bill of Rights.)

1. Are Lemen’s statements about the Inn’s owners and cus- tomers protected by the U.S. Constitution? In whose favor should the court rule? Why?

2. Did Lemen behave unethically in the circumstances of this case? Explain.

Critical Thinking and Writing Assignments 2–9. Business law Writing. The United States Supreme Court

has made it clear that the commerce clause applies not only to interstate commerce, but also to commerce that is purely intrastate. Today, the federal government has the

power to regulate almost every commercial enterprise in the United States. Write a page discussing what expanded federal government power over commerce means for commercial businesses that operate only within the borders of one state. Does it promote or discourage intrastate commerce? (See The Constitutional Powers of Government.)

2–10. Business law critical Thinking group assignment. For many years, New York City has had to deal with the vandalism and defacement of public property caused by unauthorized graffiti. In an effort to stop the damage, the

city banned the sale of aerosol spray-paint cans and broad- tipped indelible markers to persons under twenty-one years of age. The new rules also prohibited people from possessing these items on property other than their own. Within a year, five people under age twenty-one were cited for violations of

these regulations, and more than eight hundred individuals were arrested for actually making graffiti. Lindsey Vincenty and other artists wished to create graffiti on legal surfaces, such as canvas, wood, and clothing. Unable to buy supplies in the city or to carry them in the city if they were bought elsewhere, Vincenty and others filed a law- suit on behalf of themselves and other young artists against Michael Bloomberg, the city’s mayor, and others. The plaintiffs claimed that, among other things, the new rules violated their right to freedom of speech. (See The Constitutional Powers of Government.)

1. One group will argue in favor of the plaintiffs and provide several reasons why the court should hold that the city’s new rules violate the plaintiffs’ freedom of speech.

2. Another group will develop a counterargument that out- lines the reasons why the new rules do not violate free speech rights.

3. A third group will argue that the city’s ban violates the equal protection clause because it applies only to persons under age twenty-one.

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Every society needs to have an established method for resolv- ing disputes. Without one, as Mahatma Gandhi implied in the chapter-opening quotation, the biblical “eye for an eye” would lead to anarchy. This is particularly true in the busi- ness world—almost every businessperson will face a lawsuit at some time in his or her career. For this reason, anyone involved in business needs to have an understanding of court systems in the United States, as well as the various methods of dispute resolution that can be pursued outside the courts.

In this chapter, after examining the judiciary’s overall role in the American governmental system, we discuss some basic requirements that must be met before a party may bring a lawsuit before a particular court. We then look at the court systems of the United States in some detail and, to clarify judicial procedures, follow a hypothetical case through a state court system. We also touch upon a current controversy involving the introduction of some Islamic law into certain U.S. courts.

Throughout this chapter, we indicate how court doctrines and procedures are being adapted to the needs of a cyber age. The chapter concludes with an overview of some alterna- tive methods of settling disputes, including online dispute resolution.

Courts and Alternative Dispute Resolution LEARNING OBJECTIVESThe five Learning Objectives below

are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions:

1. What is judicial review? How and when was the power of judicial review established?

2. How are the courts applying traditional jurisdictional concepts to cases involving internet transactions?

3. What is the difference between the focus of a trial court and an appellate court?

4. What is discovery, and how does electronic discovery differ from traditional discovery?

5. What are three alterna- tive methods of resolving disputes?

CHAPTER OUTLINE ▪▪ The Judiciary’s Role ▪▪ Basic Judicial

Requirements

▪▪ The State and Federal Court Systems

▪▪ Following a State Court Case

▪▪ Courts Online ▪▪ Alternative Dispute

Resolution

3

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“An eye for an eye will make the whole world blind.”

Mahatma Gandhi 1869–1948 (Indian political and spiritual leader)

55

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James Madison (1751–1836) was Thomas Jefferson’s secretary of state at the time of the case that established the power of judicial review. What is judicial review?

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3–1 The Judiciary’s Role in American Government The body of American law includes the federal and state constitutions, statutes passed by legislative bodies, administrative law, and the case decisions and legal principles that form the common law. These laws would be meaningless, however, without the courts to interpret and apply them. This is the essential role of the judiciary—the courts—in the American govern- mental system: to interpret and apply the law.

3–1a Judicial Review As the branch of government entrusted with interpreting the laws, the judiciary can decide, among other things, whether the laws or actions of the other two branches are constitutional. The process for making such a determination is known as judicial review.

The power of judicial review enables the judicial branch to act as a check on the other two branches of government, in line with the checks-and-balances system established by the U.S. Constitution. (Today, nearly all nations with constitutional democracies, including Canada, France, and Germany, have some form of judicial review.)

3–1b The Origins of Judicial Review in the United States The U.S. Constitution does not mention judicial review (although many constitutional schol- ars believe that the founders intended the judiciary to have this power). How was the doctrine of judicial review established? See this chapter’s Landmark in the Law feature for the answer.

3–2 Basic Judicial Requirements Before a court can hear a lawsuit, certain requirements must first be met. These requirements relate to jurisdiction, venue, and standing to sue. We examine each of these important con- cepts here.

3–2a Jurisdiction In Latin, juris means “law,” and diction means “to speak.” Thus, “the power to speak the law” is the literal meaning of the term jurisdiction. Before any court can hear a case, it must have jurisdiction over the person or company against whom the suit is brought (the defendant) or over the property involved in the suit. The court must also have jurisdiction over the subject matter of the dispute.

Jurisdiction over Persons or Property Generally, a court with jurisdiction over a particular geographic area can exercise personal jurisdiction (in personam jurisdiction) over any person or business that resides in that area. A state trial court, for instance, normally has jurisdic- tional authority over residents (including businesses) in a particular area of the state, such as a county or district. A state’s highest court (often called the state supreme court)1 has jurisdic- tion over all residents of that state.

A court can also exercise jurisdiction over property that is located within its boundar- ies. This kind of jurisdiction is known as in rem jurisdiction, or “jurisdiction over the thing.”  EXAMPLE 3.1 A dispute arises over the ownership of a boat in dry dock in Fort Lau- derdale, Florida. The boat is owned by an Ohio resident, over whom a Florida court normally cannot exercise personal jurisdiction. The other party to the dispute is a resident of Nebraska.

1. As will be discussed shortly, a state’s highest court is frequently referred to as the state supreme court, but there are excep- tions. For example, in New York, the supreme court is a trial court.

LEARNING OBJECTIVE 1 What is judicial review? How and when was the power of judicial review established?

Judicial Review The process by which a court decides on the constitutionality of legislative enactments and actions of the executive branch.

Jurisdiction The authority of a court to hear and decide a specific case.

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In this situation, a lawsuit concerning the boat could be brought in a Florida state court on the basis of the court’s in rem jurisdiction. n

Long Arm Statutes. Under the authority of a state long arm statute, a court can exercise personal jurisdiction over certain out-of-state defendants based on activities that took place within the state. Before exercising long arm jurisdiction over a nonresident, however, the court must be convinced that the defendant had sufficient contacts, or minimum contacts, with the state to justify the jurisdiction.2 Generally, this means that the defendant must have enough of a connection to the state for the judge to conclude that it is fair for the state to exercise power over the defendant.

If an out-of-state defendant caused an automobile accident or sold defective goods within the state, for instance, a court will usually find that minimum contacts exist to exercise juris- diction over that defendant. CASE EXAMPLE 3.2 After an Xbox game system caught fire in Bonnie Broquet’s home in Texas and caused substantial personal injuries, Broquet filed a law- suit in a Texas court against Ji-Haw Industrial Company, a nonresident company that made

2. The minimum-contacts standard was established in International Shoe Co. v. State of Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945).

Long Arm Statute A state statute that permits a state to exercise jurisdiction over nonresident defendants.

The power of judicial review was estab-lished in the Supreme Court’s decision in the case of Marbury v. Madison.a Although the decision is widely viewed as a corner- stone of constitutional law, the case had its origins in early U.S. politics. When Thomas Jefferson defeated the incumbent president, John Adams, in the presidential elections of 1800, Adams feared the Jeffersonians’ antip- athy toward business and toward a strong national government. Adams thus rushed to “pack” the judiciary with loyal Federal- ists (those who believed in a strong national government) by appointing what came to be called “midnight judges” just before he left office. But Adams’s secretary of state (John Marshall) was able to deliver only forty-two of the fifty-nine judicial appointment letters by the time Jefferson took over as president. Jefferson refused to order his secretary of state, James Madison, to deliver the remain- ing commissions.

Marshall’s DileMMa William Marbury and three others to whom the commissions had not been delivered sought a writ of man- damus (an order directing a government offi- cial to fulfill a duty) from the United States Supreme Court, as authorized by the Judi- ciary Act in 1789. As fate would have it, John Marshall had just been appointed as chief justice of the Supreme Court. Marshall faced a dilemma: If he ordered the commissions delivered, the new secretary of state (Madi- son) could simply refuse to deliver them—and the Court had no way to compel him to act. At the same time, if Marshall simply allowed the new administration to do as it wished, the Court’s power would be severely eroded.

Marshall’s Decision Marshall master- fully fashioned his decision to enlarge the power of the Supreme Court by affirming the Court’s power of judicial review. He stated, “It is emphatically the province and duty of the Judicial Department to say what the law is. . . . If two laws conflict with each other, the Courts must decide on the operation of each. . . . [I]f both [a] law and the Constitu- tion apply to a particular case, . . . the Court must determine which of these conflicting rules governs the case.”

Marshall’s decision did not require any- one to do anything. He concluded that the highest court did not have the power to issue a writ of mandamus in this particular case. Although the Judiciary Act specified that the Supreme Court could issue writs of manda- mus as part of its original jurisdiction, Article III of the Constitution, which spelled out the Court’s original jurisdiction, did not mention such writs. Because Congress did not have the right to expand the Supreme Court’s jurisdiction, this section of the Judiciary Act was unconstitutional—and thus void. The Marbury decision stands to this day as a judi- cial and political masterpiece.

applicaTion To ToDay’s WorlD Since the Marbury v. Madison decision, the power of judicial review has remained unchallenged and today is exercised by both federal and state courts. If the courts did not have the power of judicial review, the constitutionality of Con- gress’s acts could not be challenged in court—a congressional statute would remain law unless changed by Congress. The courts of other coun- tries that have adopted a constitutional democ- racy often cite this decision as a justification for judicial review.

Marbury v. Madison (1803)LANDMARK IN THE LAW

a. 5 U.S. (1 Cranch) 137, 2 L.Ed. 60 (1803).

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the Xbox components. Broquet alleged that Ji-Haw’s components were defective and had caused the fire. Ji-Haw argued that the Texas court lacked jurisdiction over it, but a state appellate court held that the Texas long arm statute authorized the exercise of jurisdiction over the out-of- state defendant.3 n

Similarly, a state may exercise personal jurisdiction over a nonresi- dent defendant who is sued for breaching a contract that was formed within the state. This is true even when that contract was negotiated over the phone or through correspondence.

Corporate Contacts. Because corporations are considered legal persons, courts use the same principles to determine whether it is fair to exer- cise jurisdiction over a corporation. A corporation normally is subject to personal jurisdiction in the state in which it is incorporated, has its principal office, and is doing business. Courts apply the minimum- contacts test to determine if they can exercise jurisdiction over out-of- state corporations.

The minimum-contacts requirement is usually met if the corporation advertises or sells its products within the state, or places its goods into the “stream of commerce” with the intent that the goods be sold in the

state. EXAMPLE 3.3 A business is incorporated under the laws of Maine but has a branch office and manufacturing plant in Georgia. The corporation also advertises and sells its products in Georgia. These activities would likely constitute sufficient contacts with the state of Georgia to allow a Georgia court to exercise jurisdiction over the corporation. n

Some corporations do not sell or advertise products or place any goods in the stream of commerce. Determining what constitutes minimum contacts in these situations can be more difficult. CASE EXAMPLE 3.4 Independence Plating Corporation is a New Jersey corporation that provides metal-coating services. Its only office and all of its personnel are located in New Jersey, and it does not advertise out of state. Independence had a long-standing business relationship with Southern Prestige Industries, Inc., a North Carolina company. Eventually, Southern Prestige filed suit in North Carolina against Independence for defective workman- ship. Independence argued that North Carolina did not have jurisdiction over it, but the court held that Independence had sufficient minimum contacts with the state to justify jurisdiction. The two parties had exchanged thirty-two separate purchase orders in a period of less than twelve months.4 n

Jurisdiction over Subject Matter Jurisdiction over subject matter is a limitation on the types of cases a court can hear. In both the federal and state court systems, there are courts of gen- eral (unlimited) jurisdiction and courts of limited jurisdiction. An example of a court of general jurisdiction is a state trial court or a federal district court.

An example of a state court of limited jurisdiction is a probate court. Probate courts are state courts that handle only matters relating to the transfer of a person’s assets and obliga- tions after that person’s death, including matters relating to the custody and guardianship of children. An example of a federal court of limited subject-matter jurisdiction is a bankruptcy court. Bankruptcy courts handle only bankruptcy proceedings, which are governed by federal bankruptcy law.

A court’s jurisdiction over subject matter is usually defined in the statute or constitution creating the court. In both the federal and state court systems, a court’s subject-matter juris- diction can be limited by any of the following:

3. Ji-Haw Industrial Co. v. Broquet, 2008 WL 441822 (Tex.App.—San Antonio 2008). 4. Southern Prestige Industries, Inc. v. Independence Plating Corp., 690 S.E.2d 768 (N.C.App. 2010).

Probate Court A state court of limited jurisdiction that conducts proceedings relating to the settlement of a deceased person’s estate.

Bankruptcy Court A federal court of limited jurisdiction that handles only bankruptcy proceedings, which are governed by federal bankruptcy law.

Suppose that a young gamer is injured because Microsoft’s Xbox, shown above, released an electrical shock. Whom can the parents sue?

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1. The subject of the lawsuit. 2. The sum in controversy. 3. Whether the case involves a felony (a more serious type of crime) or a misdemeanor (a

less serious type of crime).

4. Whether the proceeding is a trial or an appeal.

Original and Appellate Jurisdiction The distinction between courts of original jurisdiction and courts of appellate jurisdiction normally lies in whether the case is being heard for the first time. Courts having original jurisdiction are courts of the first instance, or trial courts—that is, courts in which lawsuits begin, trials take place, and evidence is presented. In the federal court system, the district courts are trial courts. In the various state court systems, the trial courts are known by various names, as will be discussed shortly.

The key point here is that any court having original jurisdiction is normally known as a trial court. Courts having appellate jurisdiction act as reviewing courts, or appellate courts. In general, cases can be brought before appellate courts only on appeal from an order or a judgment of a trial court or other lower court.

Jurisdiction of the Federal Courts Because the federal government is a government of lim- ited powers, the jurisdiction of the federal courts is limited. Federal courts have subject- matter jurisdiction in two situations.

Federal Questions. Article III of the U.S. Constitution establishes the boundaries of federal judicial power. Section 2 of Article III states that “[t]he judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority.” This clause means that whenever a plaintiff’s cause of action is based, at least in part, on the U.S. Constitution, a treaty, or a federal law, then a federal question arises, and the federal courts have jurisdiction.

Any lawsuit involving a federal question, such as a person’s rights under the U.S. Constitu- tion, can originate in a federal court. Note that in a case based on a federal question, a federal court will apply federal law.

Diversity of Citizenship. Federal district courts can also exercise original jurisdiction over cases involving diversity of citizenship. The most common type of diversity jurisdiction requires both of the following: 5

1. The plaintiff and defendant must be residents of different states. 2. The dollar amount in controversy must exceed $75,000.

For purposes of diversity jurisdiction, a corporation is a citizen of both the state in which it is incorporated and the state in which its principal place of business is located. A case involv- ing diversity of citizenship can be filed in the appropriate federal district court. If the case starts in a state court, it can sometimes be transferred, or “removed,” to a federal court. A large percentage of the cases filed in federal courts each year are based on diversity of citizenship.

As noted, a federal court will apply federal law in cases involving federal questions. In a case based on diversity of citizenship, in contrast, a federal court will apply the relevant state law (which is often the law of the state in which the court sits).

CASE EXAMPLE 3.5 Kelley Mala, a U.S. citizen of the Virgin Islands, was driving his power- boat near St. Thomas, Virgin Islands. He stopped at Crown Bay Marina to buy gas, and asked a Crown Bay attendant to watch his boat while the pump was running and he paid the cashier. Although the attendant turned off the pump, it malfunctioned. Gas overflowed and spilled

5. Diversity jurisdiction also exists in cases between (1) a foreign country and citizens of a state or of different states and (2) citi- zens of a state and citizens or subjects of a foreign country. These bases for diversity jurisdiction are less commonly used.

Federal Question A question that pertains to the U.S. Constitution, an act of Congress, or a treaty and provides a basis for federal jurisdiction in a case.

Diversity of Citizenship A basis for federal court jurisdiction over a lawsuit between citizens of different states or a lawsuit involving a U.S. citizen and a citizen of a different country.

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into Mala’s boat and the water. Mala cleaned the gas off his boat with soap and water that the attendant provided. When he left the dock, his engine caught fire and exploded, severely burn- ing him and destroying the boat.

Mala sued the marina for negligence in a federal district court in the Virgin Islands. He alleged that the court had diver- sity jurisdiction and requested a jury trial. (A plaintiff in a maritime case does not have a right to a jury trial unless the court has diversity jurisdiction.) The court found that Crown Bay—like the plaintiff—was a citizen of the Virgin Islands, and therefore, the court did not have diversity jurisdiction. A fed- eral appellate court affirmed this decision. Mala had to sue the marina under admiralty law (law governing transportation on the seas and ocean waters) and did not have a right to a jury trial.6 n

Exclusive versus Concurrent Jurisdiction When both federal and state courts have the power to hear a case, as is true in lawsuits involving diversity of citizenship, concurrent

jurisdiction exists. When cases can be tried only in federal courts or only in state courts, exclusive jurisdiction exists.

Federal courts have exclusive jurisdiction in cases involving federal crimes, bankruptcy, most patent and copyright claims, suits against the United States, and some areas of admiralty law. State courts also have exclusive jurisdiction over certain subject matter—for instance, divorce and adoption.

When concurrent jurisdiction exists, a party may bring a suit in either a federal court or a state court. A number of factors can affect the decision of whether to litigate in a federal or a state court, such as the availability of different remedies, the distance to the respective court- houses, or the experience or reputation of a particular judge.

A resident of a state other than the one with jurisdiction might also choose a federal court over a state court if he or she is concerned that a state court might be biased against an out-of-state plaintiff. In contrast, a plaintiff might choose to litigate in a state court if it has a reputation for awarding substantial amounts of damages or if the judge is perceived as being pro-plaintiff. The concepts of exclusive and concurrent jurisdiction are illustrated in Exhibit 3–1.

3–2b Jurisdiction in Cyberspace The Internet’s capacity to bypass political and geographic boundaries undercuts the traditional basis on which courts assert personal jurisdiction. As already discussed, for a court to compel a defendant to come before it, there must be at least minimum contacts—the presence of a salesperson within the state, for example. Today, however, courts frequently have to decide what constitutes sufficient minimum contacts when a defendant’s only connection to a juris- diction is through an ad on a Web site.

The “Sliding-Scale” Standard The courts have developed a standard—called a “sliding- scale” standard—for determining when the exercise of jurisdiction over an out-of-state defen- dant is proper. The sliding-scale standard identifies three types of Internet business contacts and outlines the following rules for jurisdiction:

6. Mala v. Crown Bay Marina, Inc., 704 F.3d 239 (2013).

Concurrent Jurisdiction Jurisdiction that exists when two different courts have the power to hear a case.

Exclusive Jurisdiction Jurisdiction that exists when a case can be heard only in a particular court or type of court.

LEARNING OBJECTIVE 2 How are the courts applying traditional jurisdictional concepts to cases involving Internet transactions?

If a marina employee commits a negligent act while servicing a boat owned by someone whose legal residence is nearby, can the injured boat owner have the case removed to a federal court?

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1. When the defendant conducts substantial business over the Internet (such as contracts and sales), jurisdiction is proper. This is true whether the business is conducted with traditional computers, smartphones, or other means of Internet access.

2. When there is some interactivity through a Web site, jurisdiction may be proper, depending on the circumstances. Even a single contact can be sufficient to satisfy the minimum-contacts requirement in certain situations.

3. When a defendant merely engages in passive advertising on the Web, jurisdiction is never proper.7

CASE EXAMPLE 3.6 A Louisiana resident, Daniel Crummey, purchased a used recreational vehicle (RV) from sellers in Texas after viewing photos of it on eBay. The sellers’ statements on eBay claimed that “everything works great on this RV and will provide comfort and depend- ability for years to come. This RV will go to Alaska and back without problems!”

Crummey picked up the RV in Texas, but on the drive home, the RV quit working. He filed a suit in Louisiana against the sellers alleging that the vehicle was defective, but the sellers claimed that the Louisiana court lacked jurisdiction. Because the sellers regularly used eBay to market and sell vehicles to remote parties and had sold this RV to a Louisiana buyer, the court found that jurisdiction was proper. 8 n

Those of you with an entrepreneurial spirit may be eager to establish Web sites to promote products and solicit orders. Be aware, however, that you can be sued in states in which you have never been physically present if you have had sufficient contacts with residents of those states over the Internet. Before you create a Web site that is the least bit interactive, you need to consult an attorney to find out whether you will be subjecting yourself to jurisdiction in every state. Becoming informed about the extent of your potential exposure to lawsuits in various locations is an important part of preventing litigation.

7. For a leading case on this issue, see Zippo Manufacturing Co. v. Zippo Dot Com, Inc., 952 F.Supp. 1119 (W.D.Pa. 1997). 8. Crummey v. Morgan, 965 So.2d 497 (La.App.1 Cir. 2007). But note that a single sale on eBay does not necessarily confer juris-

diction. Jurisdiction depends on whether the seller regularly uses eBay as a means for doing business with remote buyers. See Boschetto v. Hansing, 539 F.3d 1011 (9th Cir. 2008).

Exclusive Federal Jurisdiction

Concurrent Jurisdiction Exclusive State Jurisdiction

(cases involving federal crimes, federal antitrust law, bankruptcy, patents, copyrights, trademarks, suits against the United States, some areas of admiralty law, and certain other matters specified in federal statutes) (most cases involving

federal questions, diversity-of-citizenship cases)

(cases involving all matters not subject to federal jurisdiction—for example, divorce and adoption cases)

Exhibit 3–1 Exclusive and Concurrent Jurisdiction

If you purchase a used RV outside your home state through an announcement on eBay, can you bring suit in your own state against the seller who lives in another state? Why or why not?

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International Jurisdictional Issues Because the Internet is global in scope, it raises interna- tional jurisdictional issues. The world’s courts seem to be developing a standard that echoes the minimum-contacts requirement applied by U.S. courts.

Most courts are indicating that minimum contacts—doing business within the jurisdiction, for instance—are enough to compel a defendant to appear. The effect of this standard is that a business firm has to comply with the laws in any jurisdiction in which it targets customers for its products. This situation is complicated by the fact that many countries’ laws on particular issues—such as free speech—are very different from U.S. laws.

The following case illustrates how federal courts apply a sliding-scale standard to deter- mine if they can exercise jurisdiction over a foreign defendant whose only contact with the United States is through a Web site.

Spotlight on Gucci: Case 3.1

Gucci America, Inc. v. Wang Huoqing United States District Court, Northern District of California, 2011 WL 30972 (2011).

coMpany proFile Gucci America, Inc., a New York corporation headquartered in New York City, is part of Gucci Group, a global fashion firm with offices in China, France, Great Britain, Italy, and Japan. Gucci makes and sells high-quality luxury goods, including footwear, belts, sunglasses, hand- bags, wallets, jewelry, fragrances, and children’s clothing. In connection with its products, Gucci uses twenty-one federally registered trademarks. Gucci also operates a number of boutiques, some of which are located in California.

FacTs Wang Huoqing, a resident of the People’s Republic of China, operates numerous Web sites. When Gucci discovered that Huo- qing’s Web sites were selling counterfeit goods—products that car- ried Gucci’s trademarks but were not genuine Gucci articles—it hired a private investigator in San Jose, California, to buy goods from the Web sites. The investigator purchased a wallet that was labeled Gucci but was counterfeit.

Gucci filed a trademark infringement lawsuit against Huoqing in a federal district court in California seeking damages and an injunc- tion to prevent further infringement. Huoqing was notified of the lawsuit via e-mail, but did not appear in court. Gucci asked the court to enter a default judgment—that is, a judgment entered when the defendant fails to appear. The court first had to determine whether it had personal jurisdiction over Huoqing based on the Internet sales.

issUe Could a U.S. federal court exercise personal jurisdiction over a resident of China whose only contact with the United States was through an interactive Web site that advertised and sold counterfeit goods?

Decision Yes. The U.S. District Court for the Northern District of California held that it had per- sonal jurisdiction over the foreign defendant, Huo- qing. The court entered a default judgment against Huoqing and granted Gucci an injunction.

reason The court reasoned that the due process clause allows a federal court to exercise jurisdiction over a defendant who has had sufficient minimum contacts with the court’s forum—the place where the court exercises jurisdiction. Specifically, juris- diction exists when (1) the nonresident defendant

engages in some act or transaction with the forum “by which he pur- posefully avails himself of the privilege of conducting activities in the forum, thereby invoking the benefits and protections of its laws; (2) the claim must be one which arises out of or results from the defen- dant’s forum-related activities; and (3) exercise of jurisdiction must be reasonable.”

To determine whether Huoqing had purposefully conducted busi- ness activities in California, the court used a sliding-scale analysis. Under this analysis, passive Web sites do not create sufficient con- tacts for such a finding, but interactive sites may do so. Huoqing’s Web sites were fully interactive. In addition, Gucci presented evi- dence that Huoqing had advertised and sold the counterfeited goods within the court’s district, and that he had made one actual sale within the district—the sale to Gucci’s private investigator.

WhaT iF The FacTs Were DiFFerenT? Suppose that Gucci had not presented evidence that Huoqing made one actual sale through his Web site to a resident (the private investigator) of the court’s district. Would the court still have found that it had personal jurisdiction over Huoqing? Why or why not?

Gucci luxury leather products are often counterfeited. Can Gucci sue an Asian company in the United

States, nonetheless?

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3–2c Venue Jurisdiction has to do with whether a court has authority to hear a case involving specific persons, property, or subject matter. Venue9 is concerned with the most appropriate physical location for a trial. Two state courts (or two federal courts) may have the authority to exercise jurisdiction over a case, but it may be more appropriate or convenient to hear the case in one court than in the other.

Basically, the concept of venue reflects the policy that a court trying a suit should be in the geographic neighborhood (usually the county) where the incident leading to the lawsuit occurred or where the parties involved in the lawsuit reside. Venue in a civil case typically is where the defendant resides, whereas venue in a criminal case normally is where the crime occurred. Pretrial publicity or other factors, though, may require a change of venue to another community, especially in criminal cases when the defendant’s right to a fair and impartial jury has been impaired.

EXAMPLE 3.7 Police raid a compound of religious polygamists in Texas and remove many children from the ranch. Authorities suspect that some of the children were being sexually and physically abused. The raid receives a great deal of media attention, and the people living in nearby towns are likely influenced by this publicity. In this situation, if the government files criminal charges against a member of the religious sect, that individual may request—and will probably receive—a change of venue to another location. n

Note that venue has lost some significance in today’s world because of the Internet and 24/7 news reporting. Courts now rarely grant requests for a change of venue. Because everyone has instant access to the same information about a purported crime, courts reason that no com- munity is more or less informed about the matter or prejudiced for or against the defendant.

3–2d Standing to Sue Before a person can bring a lawsuit before a court, the party must have standing to sue, or a sufficient “stake” in the matter to justify seeking relief through the court system. In other words, to have standing, a party must have a legally protected and tangible interest at stake in the litigation.

The party bringing the lawsuit must have suffered a harm, or have been threatened by a harm, as a result of the action about which she or he has complained. At times, a person can have standing to sue on behalf of another person, such as a minor (child) or a men- tally incompetent person. Standing to sue also requires that the controversy at issue be a justiciable10 controversy—a controversy that is real and substantial, as opposed to hypothet- ical or academic.

CASE EXAMPLE 3.8 Harold Wagner obtained a loan through M.S.T. Mortgage Group to buy a house in Texas. After the sale, M.S.T. transferred its interest in the loan to another lender, which assigned it to another lender, as is common in the mortgage industry. Eventually, when Wagner failed to make the loan payments, CitiMortgage, Inc., notified him that it was going to foreclose on the property and sell the house. Wagner filed a lawsuit claiming that the lenders had improperly assigned the mortgage loan. In 2014, a federal district court ruled that Wagner lacked standing to contest the assignment. Under Texas law, only the parties directly involved in an assignment can challenge its validity. In this case, the assignment was between two lend- ers and did not directly involve Wagner.11 n

9. Pronounced ven-yoo. 10. Pronounced jus-tish-uh-bul.  11. Wagner v. CitiMortgage, Inc., 995 F.Supp.2d 621 (N.D.Tex. 2014).

Venue The geographic district in which a legal action is tried and from which the jury is selected.

Standing to Sue The legal requirement that an individual must have a sufficient stake in a controversy before he or she can bring a lawsuit.

Justiciable Controversy A controversy that is not hypothetical or academic but real and substantial; a requirement that must be satisfied before a court will hear a case.

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3–3 The State and Federal Court Systems As mentioned earlier in this chapter, each state has its own court system. Additionally, there is a system of federal courts. Even though there are fifty-two court systems—one for each of the fifty states, one for the District of Columbia, and a federal system—similarities abound. Exhibit 3–2 illustrates the basic organizational structure characteristic of the court systems in many states. The exhibit also shows how the federal court system is structured.

Keep in mind that the federal courts are not superior to the state courts. They are simply an independent system of courts, which derives its authority from Article III, Sections 1 and 2, of the U.S. Constitution. We turn now to an examination of these court systems, beginning with the state courts.

3–3a The State Court Systems Typically, a state court system will include several levels, or tiers, of courts. As indicated in Exhibit 3–2, state courts may include (1) trial courts of limited jurisdiction, (2) trial courts of general jurisdiction, (3) appellate courts, and (4) the state’s highest court (often called the state supreme court).

Generally, any person who is a party to a lawsuit has the opportunity to plead the case before a trial court and then, if he or she loses, before at least one level of appellate court. If the case involves a federal statute or a federal constitutional issue, the decision of a state supreme court on that issue may be further appealed to the United States Supreme Court. (See this chapter’s Managerial Strategy feature for a discussion of how state budget cuts are making it more difficult to bring cases in some state courts.)

Trial Courts Trial courts are courts in which trials are held and testimony taken. State trial courts have either general or limited jurisdiction. Trial courts that have general jurisdiction as to subject matter may be called county, district, superior, or circuit courts.12 The jurisdiction

12. The name in Ohio is court of common pleas, and the name in New York is supreme court.

Supreme Court of the United States

U.S. Courts of Appeals

Federal Administrative

Agencies

U.S. District Courts

Specialized U.S. Courts

• Bankruptcy Courts • Court of Federal Claims

• Court of International Trade

• Tax Court

Highest State Courts

State Courts of Appeals

State Trial Courts of General Jurisdiction

Local Trial Courts of Limited Jurisdiction

State Administrative Agencies

Exhibit 3–2 The State and Federal Court Systems

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of these courts is often determined by the size of the county in which the court sits. State trial courts of general jurisdiction have jurisdiction over a wide variety of subjects, including both civil disputes and criminal prosecutions. (In some states, trial courts of general jurisdiction may hear appeals from courts of limited jurisdiction.)

Some courts of limited jurisdiction are called special inferior trial courts or minor judi- ciary courts. Small claims courts are inferior trial courts that hear only civil cases involving claims of less than a certain amount, such as $5,000 (the amount varies from state to state). Suits brought in small claims courts are generally conducted informally, and lawyers are not required (in a few states, lawyers are not even allowed). Another example of an inferior trial court is a local municipal court that hears mainly traffic cases. Decisions of small claims courts and municipal courts may sometimes be appealed to a state trial court of general jurisdiction.

Other courts of limited jurisdiction as to subject matter include domestic relations or fam- ily courts, which handle primarily divorce actions and child-custody disputes, and probate courts, as mentioned earlier. A few states have even established Islamic law courts, which are

Small Claims Court A special court in which parties can litigate small claims without an attorney.

Management Faces a Legal Issue In the United States, businesses use the courts far more than anyone else. Most civil court cases involve a business suing another business for breach of contract or fraud, for instance. Additionally, when one company fails to pay another company for products or services, the unpaid company often turns to the court system. If that firm does not have ready access to the courts, its financial sta- bility can be put at risk.

According to the National Center for State Courts, since 2009 forty-one state legislatures have reduced their state court services to the public as a result of budget restrictions. Many state courts have laid off staff members, delayed filling vacancies, and reduced hours of operation. California’s courts have experienced the steepest cuts— nearly $1 billion since 2009. Texas has also experienced large cuts in court funding.

What the Courts Say Today, the value of a company’s intellectual property, such as its copyrights and pat- ents, often exceeds the value of its physical property. Not surprisingly, disputes over intellectual property have grown in number

and importance. As a result of the court bud- get cuts, these disputes also take longer to resolve. In California, for example, a typical patent lawsuit used to last twelve months. That same lawsuit now might take three to five years.

If an intellectual property case goes on to an appellate court, three or four more years typically pass before the dispute is resolved. In fact, the United States Supreme Court heard a case in 2014 involving a trademark dispute that had been in the courts for more than sixteen years.a

Other types of lawsuits are also taking longer to conclude. Now attorneys must tell businesses to consider not only the cost of bringing a lawsuit, but also the length of time involved. The longer the litigation lasts, the larger the legal bills and the greater the drain on company employees’ time. During the years that a lawsuit can take, some busi- nesses find that they cannot expand or hire new employees, and they are reluctant to spend funds on additional marketing and advertising. In fact, it is not unusual for a company to win its case but end up going

out of business. As a result of putting its business on hold for years, the company becomes insolvent.

Managerial iMplications

Many investors are reluctant to invest in a com- pany that is the object of a patent or copyright lawsuit because they fear that if the company loses, it may lose the rights to its most valuable asset. Consequently, when litigation drags on for years, investors may abandon a company even though it is otherwise healthy. As a result, the company suffers.

Facing long delays in litigation with poten- tial negative effects on their companies, busi- ness managers have become more reluctant to bring lawsuits, even when their cases clearly have merit. In Alabama, for instance, the num- ber of civil cases filed has dropped by more than a third in the last few years. Before bringing a lawsuit, a manager must now take into account the possibility of long delays in resolving the case—delays that must figure into the cost- benefit analysis for undertaking litigation. Man- agers can no longer stand on principle because they know that they are right and that they will win a lawsuit. They have to look at the bigger picture, which includes substantial court delays.

Budget Cuts for State Courts Can Affect Businesses

MANAGERIAL STRATEGY

a. B&B Hardware Inc. v. Hargis Industries, Inc., ___ U.S. ___, 135 S.Ct. 696, 190 L.Ed.2d 386 (2014).

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courts of limited jurisdiction that serve the American Muslim community. (See this chapter’s Beyond Our Borders feature for a discussion of the rise of Islamic law courts.)

Appellate, or Reviewing, Courts Every state has at least one court of appeals (appellate court, or reviewing court), which may be an intermedi- ate appellate court or the state’s highest court. About three-fourths of the states have intermediate appellate courts. Generally, courts of appeals do not conduct new trials, in which evidence is submitted and witnesses are examined. Rather, an appellate court panel of three or more judges reviews the record of the case on appeal, which includes a transcript of the trial proceedings, and determines whether the trial court committed an error.

Focus on Questions of Law. Appellate courts generally focus on questions of law, not questions of fact. A question of fact deals with what really happened in regard to the dispute being tried—such as whether a party

Question of Fact In a lawsuit, an issue that involves only disputed facts, and not what the law is on a given point.

islamic law is one of the world’s three most common legal systems, along with civil law and common law systems. In most Islamic countries, the law is based on sharia, a sys- tem of law derived from the Qur’an and the sayings and doings of Muhammad and his companions. Today, many non-Islamic coun- tries are establishing Islamic courts for their Muslim citizens.

Islamic Law in Britain, Canada, and Belgium For several years, Great Britain has had coun- cils that arbitrate disputes between British Muslims involving child custody, property, employment, and housing. These councils do not deal with criminal law or with any civil issues that would put sharia in direct conflict with British statutory law. Most Islamic law cases involve marriage or divorce. Starting in 2008, Britain officially sanctioned the authority of sharia judges to rule on divorce and financial disputes of Muslim couples. Britain now has eighty-five officially recog- nized sharia courts that have the full power

of equivalent courts within the traditional British judicial system.

In Ontario, Canada, a group of Canadian Muslims established a judicial tribunal using sharia. To date, this tribunal has resolved only marital disagreements and some other civil disputes. Under Ontario law, the regular judi- cial system must uphold such agreements as long as they are voluntary and negotiated through an arbitrator. Any agreements that violate Canada’s Charter of Rights and Free- doms will not be upheld.

In 2011, Belgium established its first sha- ria court. This court handles primarily fam- ily law disputes for Muslim immigrants in Belgium.

Islamic Law Courts in the United States The use of Islamic courts in the United States has been somewhat controversial. The legal- ity of arbitration clauses that require dis- putes to be settled in Islamic courts has been upheld by regular state courts in some states, including Minnesota and Texas. In some other states, however, there has been a pub- lic backlash against the use of Islamic courts.

For instance, in Detroit, Michigan, which has a large American Muslim population, a controversy erupted over the community’s attempt to establish Islamic courts. Legis- lators in Michigan and many other states started introducing bills to limit consideration of foreign or religious laws in state court deci- sions. Voters in Oklahoma enacted a referen- dum banning courts from considering sharia law, but the ban was later held to be uncon- stitutional.a Legislation enacted in Arizona, Kansas, Louisiana, North Carolina, Oklahoma, South Dakota, and Tennessee bans judicial consideration of foreign law. (These laws do not explicitly mention Islamic, or sharia, law, because that might be ruled unconstitutional.)

crItIcAl tHInkInG

▪▪ One of the arguments against allowing sharia courts in the United States is that we would no longer have a common legal framework within our society. Do you agree or disagree? Why?

islamic law courts abroad and at home

BEYOND OUR BORDERS

a. Awad v. Zirax, 670 F.3d 1111 (10th Cir. 2012). A lower court later issued a permanent injunction to prevent the ban from being enforced. Awad v. Zirax, 966 F.Supp.2d 1198 (2013).

Can a U.S. court ever use the Qur’an as a basis for reaching a decision?

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actually burned a flag. A question of law concerns the application or interpretation of the law—such as whether flag-burning is a form of speech protected by the First Amendment to the U.S. Constitution. Only a judge, not a jury, can rule on questions of law.

Defer to the Trial Court’s Findings of Fact. Appellate courts normally defer (yield or give weight) to a trial court’s findings on questions of fact, because the trial court judge and jury were in a better position to evaluate testimony. The trial court could directly observe wit- nesses’ gestures, demeanor, and nonverbal behavior during the trial. At the appellate level, the judges review the written transcript of the trial, which does not include these nonverbal elements.

An appellate court will challenge a trial court’s finding of fact only when the finding is clearly erroneous (that is, when it is contrary to the evidence presented at trial or when no evidence was presented to support the finding). EXAMPLE 3.9  A jury concludes that a manu- facturer’s product harmed the plaintiff, but no evidence was submitted to the court to support that conclusion. In this situation, the appellate court will hold that the trial court’s decision was erroneous. n The options exercised by appellate courts will be discussed further later in this chapter.

Highest State Courts The highest appellate court in a state is usually called the supreme court but may be called by some other name. For example, in both New York and Maryland, the highest state court is called the court of appeals. The deci- sions of each state’s highest court are final on all questions of state law. Only when issues of federal law are involved can a decision made by a state’s highest court be overruled by the United States Supreme Court.

3–3b The Federal Court System The federal court system is basically a three-tiered model con- sisting of (1) U.S. district courts (trial courts of general juris- diction) and various courts of limited jurisdiction, (2) U.S. courts of appeals (intermediate courts of appeals), and (3) the United States Supreme Court.

Unlike state court judges, who are usually elected, federal court judges—including the justices of the Supreme Court— are appointed by the president of the United States and con- firmed by the U.S. Senate. Under Article III, federal judges “hold their offices during Good Behavior.” In essence, this means that federal judges receive lifetime appointments.

U.S. District Courts At the federal level, the equivalent of a state trial court of general juris- diction is the district court. There is at least one federal district court in every state. The number of judicial districts can vary over time, primarily owing to population changes and corresponding caseloads. Today, there are ninety-four federal judicial districts.

U.S. district courts have original jurisdiction in federal matters. Federal cases typically originate in district courts. Federal courts with original, but special (or limited), jurisdiction include the bankruptcy courts and others that were shown in Exhibit 3–2.

U.S. Courts of Appeals In the federal court system, there are thirteen U.S. courts of appeals— also referred to as U.S. circuit courts of appeals. The federal courts of appeals for twelve of the circuits, including the U.S. Court of Appeals for the District of Columbia Circuit, hear appeals from the federal district courts located within their respective judicial circuits.

Question of Law In a lawsuit, an issue involving the application or interpretation of a law.

LEARNING OBJECTIVE 3 What is the difference between the focus of a trial court and an appellate court?

KNOW THIS The decisions of a state’s highest court are final on questions of state law.

Trial decisions are normally determined by juries. Under what types of circumstances might an appellate court reverse a jury’s decision?

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The Court of Appeals for the Thirteenth Circuit is called the Federal Circuit. It has national appellate jurisdiction over certain types of cases, such as cases involving patent law and cases in which the U.S. government is a defendant.

The decisions of the circuit courts of appeals are final in most cases, but appeal to the United States Supreme Court is possible. Exhibit 3–3 shows the geographic boundaries of the U.S. circuit courts of appeals and the boundaries of the U.S. district courts within each circuit.

The United States Supreme Court The highest level of the three-tiered model of the federal court system is the United States Supreme Court. According to Article III of the U.S. Consti- tution, there is only one national Supreme Court. All other courts in the federal system are considered “inferior.” Congress is empowered to create inferior courts as it deems necessary. The inferior courts that Congress has created include the second tier in our model—the U.S. courts of appeals—as well as the district courts and any other courts of limited, or specialized, jurisdiction.

The United States Supreme Court consists of nine justices. Although the Supreme Court has original, or trial, jurisdiction in rare instances (set forth in Article III, Section 2), most of its work is as an appeals court. The Supreme Court can review any case decided by any of the federal courts of appeals, and it also has appellate authority over some cases decided in the state courts.

Appeals to the Supreme Court. To bring a case before the Supreme Court, a party requests that the Court issue a writ of certiorari. A writ of certiorari13 is an order issued by the Supreme

13. Pronounced sur-shee-uh-rah-ree.

Writ of Certiorari A writ from a higher court asking a lower court for the record of a case.

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Atlanta

Maine

Vermont

Puerto Rico

Virgin Islands

D.C. Circuit

Federal Circuit

Hawaii

Michigan

Washington, D.C.

Washington, D.C.

Legend Circuit boundaries

State boundaries

District boundaries

Location of U.S. Court of Appeals

Florida

Maryland Delaware

New Jersey

Pennsylvania

Connecticut Rhode Island Massachusetts

New Hampshire

New York

Guam

Northern Mariana Islands

Boston

New York

Philadelphia

District of Columbia Washington, D.C. Richmond

New Orleans

Cincinnati

Chicago

St. Louis

Denver San

Francisco

Source: Administrative Office of the United States Courts.

Texas

Mississippi

Alaska

California

Nevada

Oregon

Washington

Idaho

Montana

Wyoming

Utah

Arizona

New Mexico

Colorado

Kansas

Oklahoma

Nebraska

So. Dakota

No. Dakota Minnesota

Iowa

Missouri

Arkansas

Georgia Alabama

So. Carolina

No. Carolina

Virginia W. Va.

Ohio

Kentucky

Tennessee

Michigan

Indiana Illinois

Wisconsin

Louisiana

12

13

Exhibit 3–3 Boundaries of the U.S. Courts of Appeals and U.S. District Courts

Source: Administrative Office of the United States Courts.

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Court to a lower court requiring that court to send the record of the case for review. Under the rule of four, the Court will not issue a writ unless at least four of the nine justices approve.

Whether the Court will issue a writ of certiorari is entirely within its discretion. The Court is not required to issue one, and most petitions for writs are denied. (Although thousands of cases are filed with the Supreme Court each year, it hears, on average, fewer than one hun- dred of these cases.)14 A denial is not a decision on the merits of a case, nor does it indicate agreement with the lower court’s opinion. Furthermore, a denial of the writ has no value as a precedent.

Petitions Granted by the Court. Typically, the Court grants petitions when cases raise important constitutional questions or when the lower courts are issuing conflicting decisions on a signif- icant issue. The justices, however, never explain their reasons for hearing certain cases and not others, so it is difficult to predict which type of case the Court might select.

How much weight should Supreme Court justices give to arguments made in amicus briefs? Parties not directly involved in a case before the United States Supreme Court are al- lowed to file friend-of-the-court (amicus curiae) briefs. Important, headline-making cases some- times elicit eighty or more amicus briefs. Supreme Court justices often rely on these briefs to buttress their opinions. Law professor Allison Orr Larsen found that over a recent five-term period, the Court’s opinions cited factual assertions from amicus briefs 124 times.15

Critics of the justices’ use of amicus briefs for factual information, including Larsen, argue that such “information” can be highly unreliable and even outright incorrect. After all, in the age of the Internet, almost anyone can become an “expert.” Some recent Supreme Court opin- ions have cited facts from amicus briefs that were backed up only by blog posts or e-mails. Furthermore, some studies presented in amicus briefs were paid for by the groups providing the briefs and published only on the Internet. In spite of these problems, Supreme Court justices are increasingly citing amicus briefs for statements of fact, rather than citing underlying factual sources and their authority, prompting Justice Antonin Scalia to argue that “Supreme Court briefs are an inappropriate place to develop the key facts in a case.”

3–4 Following a State Court Case To illustrate the procedures that would be followed in a civil lawsuit brought in a state court, we present a hypothetical case and follow it through the state court system. The case involves an automobile accident in which Kevin Anderson, driving a Lexus, struck Lisa Marconi, driv- ing a Hyundai Genesis. The accident occurred at the intersection of Wilshire Boulevard and Rodeo Drive in Beverly Hills, California. Marconi suffered personal injuries and incurred med- ical and hospital expenses as a result, as well as lost wages for four months. Anderson and Marconi are unable to agree on a settlement, and Marconi sues Anderson. Marconi is the plaintiff, and Anderson is the defendant. Both are represented by lawyers.

During each phase of the litigation (the process of working a lawsuit through the court system), Marconi and Anderson will have to observe strict procedural requirements. A large body of law—procedural law—establishes the rules and standards for determining disputes in courts.

Procedural rules are very complex, and they vary from court to court and from state to state. In addition to the various sets of rules for state courts, the federal courts have their own rules of procedure. Additionally, the applicable procedures will depend on whether the case is

14. From the mid-1950s through the early 1990s, the United States Supreme Court reviewed more cases per year than it has in the last few years. In the Court’s 1982–1983 term, for example, the Court issued opinions in 151 cases. In contrast, in its 2014–2015 term, the Court issued opinions in only 76 cases.

15. Allison Orr Larsen, “The Trouble with Amicus Facts,” Virginia Law Review 100 (December 2014).

Rule of Four A rule of the United States Supreme Court under which the Court will not issue a writ of certiorari unless at least four justices approve of the decision to issue the writ.

“Lawsuit: A machine which you go into as a pig and come out of as a sausage.”

Ambrose Bierce 1842–1914 (American journalist)

Litigation The process of resolving a dispute through the court system.

This amicus brief was filed on behalf of many well-known recording artists. Are there any rules concerning the quality of the research or facts presented in such briefs?

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a civil or criminal proceeding. Generally, the Marconi-Anderson civil lawsuit will involve the procedures discussed in the following subsections. Keep in mind that attempts to settle the case may be ongoing throughout the trial.

3–4a The Pleadings The complaint and answer (and the counterclaim and reply)—all of which are discussed here—taken together are called the pleadings. The pleadings inform each party of the other’s claims and specify the issues (disputed questions) involved in the case. The style and form of the pleadings may be quite different in different states.

The Plaintiff’s Complaint Marconi’s suit against Anderson commences when her lawyer files a complaint with the appropriate court. The complaint contains statements alleging:

1. The facts necessary for the court to take jurisdiction. 2. A brief summary of the facts necessary to show that the plaintiff is entitled to relief (a

remedy).16

3. A statement of the remedy the plaintiff is seeking.

Complaints may be lengthy or brief, depending on the complexity of the case and the rules of the jurisdiction.

Service of Process Before the court can exercise personal jurisdiction over the defen- dant (Anderson)—in effect, before the lawsuit can begin—the court must have proof that the defendant was notified of the lawsuit. Formally notifying the defendant of a lawsuit is called service of process. The plaintiff must deliver, or serve, a copy of the complaint and a summons (a notice requiring the defendant to appear in court and answer the complaint) to the defendant.

The summons notifies Anderson that he must file an answer to the complaint within a specified time period (twenty days in the federal courts) or suffer a default judgment against him. A default judgment in Marconi’s favor would mean that she would be awarded the damages alleged in her complaint because Anderson failed to respond to the allegations. In our legal system, no case can proceed to trial unless the plaintiff can prove that he or she has properly served the defendant.

How service of process occurs depends on the rules of the court or jurisdiction in which the lawsuit is brought. Usually, the server hands the summons and complaint to the defendant personally or leaves it at the defendant’s residence or place of business. In some states, process can be served by mail if the defendant consents (accepts service). When the defendant cannot be reached, special rules provide for alternative means of service, such as publishing a notice in the local newspaper or serving process via e-mail.

The Defendant’s Answer The defendant’s answer either admits the statements or allegations set forth in the complaint or denies them and outlines any defenses that the defendant may have. If Anderson admits to all of Marconi’s allegations in his answer, the court will enter a judgment for Marconi. If Anderson denies any of Marconi’s allegations, the litigation will go forward.

Anderson can deny Marconi’s allegations and set forth his own claim that Marconi was neg- ligent and therefore owes him compensation for the damage to his Lexus. This is appropriately called a counterclaim. If Anderson files a counterclaim, Marconi will have to answer it with a pleading, normally called a reply, which has the same characteristics as an answer.

16. The factual allegations in a complaint must be enough to raise a right to relief above the speculative level. They must plausi- bly suggest that the plaintiff is entitled to a remedy. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).

Pleadings Statements by the plaintiff and the defendant that detail the facts, charges, and defenses of a case.

Complaint The pleading made by a plaintiff alleging wrongdoing on the part of the defendant. When filed with a court, the complaint initiates a lawsuit.

Service of Process The delivery of the complaint and summons to a defendant.

Summons A document informing a defendant that a legal action has been commenced against her or him and that the defendant must appear in court on a certain date to answer the plaintiff’s complaint.

Default Judgment A judgment entered by a court against a defendant who has failed to appear in court to answer or defend against the plaintiff’s claim.

Answer Procedurally, a defendant’s response to the plaintiff’s complaint.

Counterclaim A claim made by a defendant in a civil lawsuit against the plaintiff. In effect, the defendant is suing the plaintiff.

Reply Procedurally, a plaintiff’s response to a defendant’s answer.

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Anderson can also admit the truth of Marconi’s complaint but raise new facts that may result in dismissal of the action. This is called raising an affirmative defense. For example, Anderson could assert that Marconi was driving negligently at the time of the accident and thus was partially responsible for her own injuries. In some states, a plaintiff’s contributory negligence operates as a complete defense, whereas in others it simply reduces the amount of damages that Marconi can recover (see Chapter 4).

Motion to Dismiss A motion is a procedural request submitted to the court by an attorney on behalf of her or his client. A motion to dismiss requests the court to dismiss the case for stated reasons. Grounds for dismissal of a case include improper delivery of the complaint and summons, improper venue, and the plaintiff’s failure to state a claim for which a court could grant relief. For instance, suppose that Marconi had suffered no injuries or losses as a result of Anderson’s negligence. In that situation, Anderson could move to have the case dismissed because Marconi would not have stated a claim for which relief could be granted.

If the judge grants the motion to dismiss, the plaintiff generally is given time to file an amended complaint. If the judge denies the motion, the suit will go forward, and the defen- dant must then file an answer. Note that if Marconi wishes to discontinue the suit because, for example, an out-of-court settlement has been reached, she can likewise move for dismissal. The court can also dismiss the case on its own motion.

CASE EXAMPLE 3.10 Espresso Disposition Corporation 1 entered into a contract with San- tana Sales & Marketing Group, Inc. The agreement included a mandatory forum-selection clause—which was a provision designating that any disputes arising under the contract would be decided by a court in Illinois. When Santana Sales filed a lawsuit against Espresso in a Flor- ida state court, Espresso filed a motion to dismiss based on the agreement’s forum selection clause. Santana claimed that the forum-selection clause had been a mistake. The court denied Espresso’s motion to dismiss. Espresso appealed. A state intermediate appellate court reversed the trial court’s denial of Espresso’s motion to dismiss and remanded the case to the lower court for the entry of an order of dismissal.17 n

3–4b Pretrial Motions Either party may attempt to get the case dismissed before trial through the use of various pretrial motions. We have already mentioned the motion to dismiss. Two other important pretrial motions are the motion for judgment on the pleadings and the motion for summary judgment.

At the close of the pleadings, either party may make a motion for judgment on the pleadings, or on the merits of the case. The judge will grant the motion only when there is no dispute over the facts of the case and the sole issue to be resolved is a question of law. In deciding on the motion, the judge may consider only the evidence contained in the pleadings.

In contrast, in a motion for summary judgment, the court may consider evidence outside the pleadings, such as sworn statements (affidavits) by parties or witnesses, or other docu- ments relating to the case. Either party can make a motion for summary judgment. Like the motion for judgment on the pleadings, a motion for summary judgment will be granted only if there are no genuine questions of fact and the sole question is a question of law.

3–4c Discovery Before a trial begins, each party can use a number of procedural devices to obtain information and gather evidence about the case from the other party or from third parties. The process of obtaining such information is known as discovery. Discovery includes gaining access to witnesses, documents, records, and other types of evidence.

17. Espresso Disposition Corp. 1 v. Santana Sales & Marketing Group, Inc., 105 So.3d 592 (Fla.App. 3 Dist. 2013).

Motion to Dismiss A pleading in which a defendant admits the facts as alleged by the plaintiff but asserts that the plaintiff’s claim to state a cause of action has no basis in law.

Motion for Judgment on the Pleadings A motion by either party to a lawsuit at the close of the pleadings requesting the court to decide the issue solely on the pleadings without proceeding to trial. The motion will be granted only if no facts are in dispute.

Motion for Summary Judgment A motion requesting the court to enter a judgment without proceeding to trial. The motion can be based on evidence outside the pleadings and will be granted only if no facts are in dispute.

LEARNING OBJECTIVE 4 What is discovery, and how does electronic discovery differ from traditional discovery?

Discovery A method by which the opposing parties obtain information from each other to prepare for trial.

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The Federal Rules of Civil Procedure and similar rules in the states set forth the guidelines for discovery. Generally, discovery is allowed regarding any matter that is not privileged and is relevant to the claim or defense of any party. Discovery rules also attempt to protect witnesses and parties from undue harassment and to safeguard privileged or confidential material from being disclosed.

If a discovery request involves privileged or confidential business information, a court can deny the request and can limit the scope of discovery in a number of ways. For instance, a court can require the party to submit the materials to the judge in a sealed envelope so that the judge can decide if they should be disclosed to the opposing party.

Discovery prevents surprises at trial by giving parties access to evidence that might oth- erwise be hidden. This allows both parties to learn what to expect during a trial before they reach the courtroom. Discovery also serves to narrow the issues so that trial time is spent on the main questions in the case. The following case shows how vital discovery can be to the outcome of litigation.

FACTS Phillips Brothers, LP (limited partnership), Harry Simmons, and Ray Winstead were the own- ers of Kilby Brake Fisheries, LLC (limited liability company), a catfish farm in Mississippi. For nearly eight years, Winstead operated a hatchery for the firm. During this time, the hatchery had only two profitable years. Consequently, Winstead was fired. He filed a suit in a Mississippi state court against Kilby Brake and its other owners, alleging a “freeze-out.” (A freeze-out occurs when a majority of the owners of a firm exclude other owners from certain benefits of participating in the firm.)

The defendants filed a counterclaim of theft. To support this claim, the defendants asked the court to allow them to obtain documents from Winstead regarding his finances, particularly income from his Winstead Cattle Company. The court refused this request. A jury awarded Winstead more than $1.7 million, and the defendants appealed.

ISSUE Were the defendants entitled to discovery of information con- cerning Winstead’s finances to seek evidence to support their claims?

DECISION Yes. The Mississippi Supreme Court reversed the lower court’s decision to deny discovery of information on Winstead’s out- side finances and remanded the case for a new trial.

REASON The state supreme court noted sev- eral factors in explaining its reasoning. Winstead testified that Winstead Cattle Company did no business—it was “simply his hunting camp.” But during discovery, Winstead provided tax returns that showed substantial income from the company.

Other documents showed income from sales of “cattle” to a fish farmer named Scott Kiker, which did not appear on Winstead’s tax returns. Kilby Brake contended that this income represented sales of Kilby Brake fish, not cattle. Kiker testified

that he received a load of fish from Kilby Brake, sold the fish, and gave Winstead a commission without paying Kilby Brake.

Winstead countered that he often acted as a “middleman” between a farmer in need of fish and another with fish for sale, taking a commission on the deal. Further discovery of informa- tion on Winstead’s financial dealings could reveal whether he was selling fish from Kilby Brake and disguising these sales on his tax returns.

CRITICAL THINKING—Ethical Consideration Does Winstead have an ethical duty to comply with the defendants’ discovery request? Discuss.

Why was Winstead fired from his catfish hatchery position?

Case 3.2

Brothers v. Winstead Supreme Court of Mississippi, 129 So.3d 906 (2014).

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Depositions and Interrogatories Discovery can involve the use of depositions, interrog- atories, or both. A deposition is sworn testimony by a party to the lawsuit or any witness. The person being deposed (the deponent) answers questions asked by the attorneys, and the questions and answers are recorded by an authorized court official and sworn to and signed by the deponent. (Occasionally, written depositions are taken when witnesses are unable to

Deposition The testimony of a party to a lawsuit or a witness taken under oath before a trial.

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appear in person.) The answers given to depositions will, of course, help the attorneys prepare for the trial. They can also be used in court to impeach (challenge the credibility of) a party or a witness who changes her or his testimony at the trial. In addition, a witness’s deposition can be used as testimony if he or she is not available for the trial.

Interrogatories are written questions for which written answers are prepared and then signed under oath. The main difference between interrogatories and written depositions is that interrogatories are directed to a party to the lawsuit (the plaintiff or the defendant), not to a witness, and the party can prepare answers with the aid of an attorney. In addition, the scope of interrogatories is broader because parties are obligated to answer the questions, even if that means disclosing information from their records and files.

Note that, as with discovery requests, a court can impose sanctions on a party who fails to answer interrogatories. CASE EXAMPLE 3.11 Computer Task Group, Inc. (CTG), sued a for- mer employee, William Brotby, for violating the terms of his employment agreement. During discovery, Brotby refused to respond fully to CTG’s interrogatories. He gave contradictory answers, made frivolous objections, filed baseless motions, and never disclosed all the infor- mation that CTG sought. The court ordered Brotby to comply with discovery requests five times. Nevertheless, Brotby continued to make excuses and changed his story repeatedly, making it impossible for CTG to establish basic facts with any certainty. Eventually, CTG requested and the court granted a default judgment against Brotby based on his failure to cooperate.18 n

Requests for Other Information A party can serve a written request on the other party for an admission of the truth on matters relating to the trial. Any matter admitted under such a request is conclusively established for the trial. For instance, Marconi can ask Anderson to admit that he was driving at a speed of forty-five miles an hour. A request for admission saves time at trial because the parties will not have to spend time proving facts on which they already agree.

A party can also gain access to documents and other items not in her or his possession in order to inspect and examine them. Likewise, a party can gain “entry upon land” to inspect the premises. Anderson’s attorney, for instance, normally can gain permission to inspect and photocopy Marconi’s car repair bills.

When the physical or mental condition of one party is in question, the opposing party can ask the court to order a physical or mental examination, but the court will do so only if the need for the information outweighs the right to privacy of the person to be examined. If the court issues the order, the opposing party can obtain the results of the examination.

Electronic Discovery Any relevant material, including information stored electronically, can be the object of a discovery request. The federal rules and most state rules now specifically allow all parties to obtain electronic “data compilations.” Electronic evidence, or e-evidence, includes all types of computer-generated or electronically recorded information. This might include e-mail, voice mail, tweets, blogs, social media posts, and spreadsheets, as well as doc- uments and other data stored on computers.

E-evidence can reveal significant facts that are not discoverable by other means. Comput- ers, smartphones, cameras, and other devices automatically record certain information about files—such as who created a file and when, and who accessed, modified, or transmitted it— on their hard drives. This information is called metadata, which can be thought of as “data about data.” Metadata can be obtained only from the file in its electronic format—not from printed-out versions.

EXAMPLE 3.12 In 2012, John McAfee, the programmer responsible for creating McAfee anti- virus software, was wanted for questioning in the murder of his neighbor in Belize. McAfee

18. Computer Task Group, Inc. v. Brotby, 364 F.3d 1112 (9th Cir. 2004).

Interrogatories A series of written questions for which written answers are prepared by a party to a lawsuit, usually with the assistance of the party’s attorney, and then signed under oath.

E-Evidence A type of evidence that consists of computer- generated or electronically recorded information.

Metadata Data that are automatically recorded by electronic devices and provide information about who created a file and when, and who accessed, modified, or transmitted the file on their hard drives. Can be described as data about data.

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left Belize and was on the run from police, but he allowed a journalist to come with him and photograph him. When the journalist posted photos of McAfee online, some metadata were attached to a photo. The police used the metadata to pinpoint the latitude and longitude of the image and subsequently arrested McAfee in Guatemala. n

E-Discovery Procedures. The Federal Rules of Civil Procedure deal specifically with the pres- ervation, retrieval, and production of electronic data. Although parties may still use traditional means, such as interrogatories and depositions, to find out about the e-evidence, they must usually hire an expert to retrieve evidence in its electronic format. The expert uses software to reconstruct e-mail exchanges and establish who knew what and when they knew it. The expert can even recover files that the user thought had been deleted from a computer.

Advantages and Disadvantages. E-discovery has significant advantages over paper discovery. Back-up copies of documents and e-mail can provide useful—and often quite damaging— information about how a particular matter progressed over several weeks or months. E-discovery can uncover the proverbial smoking gun that will win the lawsuit, but it is also time consuming and expensive, especially when lawsuits involve large firms with multiple offices. Many companies have found it challenging to fulfill their duty to preserve electronic evidence from a vast number of sources. Failure to do so, however, can lead to sanctions and even force companies to agree to settlements that are not in their best interests.19

3–4d Pretrial Conference Either party or the court can request a pretrial conference, or hearing. Usually, the hearing consists of an informal discussion between the judge and the opposing attorneys after discov- ery has taken place. The purpose of the hearing is to explore the possibility of a settlement without trial and, if this is not possible, to identify the matters that are in dispute and to plan the course of the trial.

3–4e Jury Selection A trial can be held with or without a jury. The Seventh Amendment to the U.S. Constitution guarantees the right to a jury trial for cases in federal courts when the amount in controversy exceeds $20, but this guarantee does not apply to state courts. Most states have similar guar- antees in their own constitutions (although the threshold dollar amount is higher than $20). The right to a trial by jury does not have to be exercised, and many cases are tried without a jury. In most states and in federal courts, one of the parties must request a jury in a civil case, or the judge presumes that the parties waive the right.

Before a jury trial commences, a jury must be selected. The jury selection process is known as voir dire.20 During voir dire in most jurisdictions, attorneys for the plaintiff and the defen- dant ask prospective jurors oral questions to determine whether a potential jury member is biased or has any connection with a party to the action or with a prospective witness. In some jurisdictions, the judge may do all or part of the questioning based on written questions sub- mitted by counsel for the parties.

During voir dire, a party may challenge a prospective juror peremptorily—that is, ask that an individual not be sworn in as a juror without providing any reason. Alternatively, a party may challenge a prospective juror for cause—that is, provide a reason why an individual should not be sworn in as a juror. If the judge grants the challenge, the individual is asked to step down. A prospective juror may not be excluded from the jury by the use of discriminatory challenges, however, such as those based on racial criteria or gender.

19. See, for example, E. I. Du Pont de Nemours & Co. v. Kolon Industries, Inc., 803 F.Supp.2d 469 (E.D.Va. 2011); and In re Intel Corp. Microprocessor Antitrust Litigation, 2008 WL 2310288 (D.Del. 2008).

20. Pronounced vwahr deehr.

“The judicial system is the most expensive machine ever invented for finding out what happened and what to do about it.”

Irving R. Kaufman 1910–1992 (American jurist)

KNOW THIS Picking the “right” jury is often an important aspect of litigation strategy, and a number of firms now specialize in jury-selection consulting services.

Voir Dire An important part of the jury selection process in which the attorneys question prospective jurors about their backgrounds, attitudes, and biases to ascertain whether they can be impartial jurors.

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3–4f At the Trial Once the trial begins, it follows the specific procedures discussed next.

Opening Arguments and Examination of Witnesses At the beginning of the trial, the attor- neys present their opening arguments, setting forth the facts that they expect to prove during the trial. Then the plaintiff’s case is presented. In our hypothetical case, Marconi’s lawyer would introduce evidence (relevant documents, exhibits, and the testimony of witnesses) to support Marconi’s position. The defendant has the opportunity to challenge any evidence introduced and to cross-examine any of the plaintiff’s witnesses.

At the end of the plaintiff’s case, the defendant’s attorney has the opportunity to ask the judge to direct a verdict for the defendant on the ground that the plaintiff has presented no evidence that would justify the granting of the plaintiff’s remedy. This is called a motion for a directed verdict (known in federal courts as a motion for judgment as a matter of law).

If the motion is not granted (it seldom is granted), the defendant’s attorney then presents the evidence and witnesses for the defendant’s case. At the conclusion of the defendant’s case, the defendant’s attorney has another opportunity to make a motion for a directed verdict. The plaintiff’s attorney can challenge any evidence introduced and cross-examine the defendant’s witnesses.

Closing Arguments and Awards After the defense concludes its presentation, the attorneys present their closing arguments, each urging a verdict in favor of her or his client. The judge instructs the jury in the law that applies to the case (these instructions are often called charges), and the jury retires to the jury room to deliberate a verdict. Typically, jurors are instructed that they must decide the case based only on the information that they learned during the trial. But today, jurors may be tempted to conduct their own investigation of the case using wireless devices—as discussed in this chapter’s Adapting the Law to the Online Environment feature.

In the Marconi-Anderson case, the jury will not only decide for the plaintiff or for the defendant but, if it finds for the plaintiff, will also decide on the amount of the award (the compensation to be paid to her).

3–4g Posttrial Motions After the jury has rendered its verdict, either party may make a posttrial motion. If Marconi wins and Anderson’s attorney has previously moved for a directed verdict, Anderson’s attorney may make a motion for judgment n.o.v. (from the Latin non obstante veredicto, which means “notwithstanding the verdict”—called a motion for judgment as a matter of law in the federal courts). Such a motion will be granted only if the jury’s verdict was unreasonable and errone- ous. If the judge grants the motion, the jury’s verdict will be set aside, and a judgment will be entered in favor of the opposite party (Anderson).

Alternatively, Anderson could make a motion for a new trial, asking the judge to set aside the adverse verdict and to hold a new trial. The motion will be granted if, after looking at all the evidence, the judge is convinced that the jury was in error but does not feel that it is appropriate to grant judgment for the other side. A judge can also grant a new trial on the basis of newly discovered evidence, misconduct by the participants or the jury during the trial, or error by the judge.

3–4h The Appeal Assume here that any posttrial motion is denied and that Anderson appeals the case. (If Mar- coni wins but receives a smaller monetary award than she sought, she can appeal also.) Keep in mind, though, that a party cannot appeal a trial court’s decision simply because he or she is dissatisfied with the outcome of the trial.

Motion for a Directed Verdict A motion for the judge to take the decision out of the hands of the jury and to direct a verdict for the party making the motion on the ground that the other party has not produced sufficient evidence to support her or his claim.

Award The monetary compensation given to a party at the end of a trial or other proceeding.

Motion for Judgment n.o.v. A motion requesting the court to grant judgment in favor of the party making the motion on the ground that the jury’s verdict against him or her was unreasonable and erroneous.

Motion for a New Trial A motion asserting that the trial was so fundamentally flawed (because of error, newly discovered evidence, prejudice, or another reason) that a new trial is necessary to prevent a miscarriage of justice.

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A party must have legitimate grounds to file an appeal. In other words, he or she must be able to claim that the lower court committed an error. If Anderson has grounds to appeal the case, a notice of appeal must be filed with the clerk of the trial court within a prescribed time. Anderson now becomes the appellant, or petitioner, and Marconi becomes the appellee, or respondent.

Filing the Appeal Anderson’s attorney files the record on appeal with the appellate court. The record includes the pleadings, the trial transcript, the judge’s rulings on motions made by the parties, and other trial-related documents. Anderson’s attorney will also provide the

ADAPTING THE LAW TO THE ONLINE ENVIRONMENT Jurors’ Use of Wireless Devices and the internet

one former juror, fresh from trial, com-plained that the members of the court- room work group had not provided the jury with enough information to render a fair verdict. “We felt deeply frustrated at our inability to fill those gaps in our knowledge,” he added. Until recently, frustrated jury members lacked the means to carry out their own investigations in court. Today, however, jurors with smartphones and tablets can eas- ily access news stories and online research tools. With these wireless devices, they can look up legal terms, blog and tweet about their experiences, and sometimes even try to contact other participants in the trial through “friend” requests on social media Web sites such as Facebook.

What Jurors Are Not Supposed to Learn Outside the Courtroom Jurors are generally not supposed to obtain background information about the parties to a case or about case events. And certainly, they are prohibited from obtaining outside information about the attorneys, judges, and witnesses they encounter in the courtroom.

In one case, the judge explicitly instructed the jurors that they were not to “use any elec- tronic device or media, such as a telephone, cellphone, smartphone, iPhone, BlackBerry, computer; the Internet, any Internet service, or any text or instant messaging service; or Internet chat room, blog, or Web site, such as Facebook, MySpace, YouTube, or Twitter

to communicate to anyone any information in this case or to conduct any research about this case” until after the verdict. When a juror did do Internet research, and that fact came to light during an appeal of the verdict, the appellate court required a new trial.a

In another case, a juror used the Internet to access information about the defendant’s past criminal history. Again, the verdict was appealed, and the appellate court stated, “Because there is a reasonable possibility that the extrinsic information acquired by the juror influenced the verdict, we reverse and remand for a new trial.”b

Legislators Are Reacting In response to widespread mistrials stem- ming from jurors’ use of wireless devices and the Internet, some states have passed legislation to address the problem. Califor- nia amended its Code of Civil Procedure to require that all trial courts admonish jurors “that the prohibition on research, dissem- ination of information, and conversation applies to all forms of electronic and wire- less communication.” Any juror may be found guilty of a misdemeanor for “willful disobedience . . . of a court admonishment related to the prohibition on any form of communication or research about the case, including all forms of electronic or wireless communication or research.” c

crItIcAl tHInkInG

▪▪ The Sixth Amendment guarantees the accused a right of trial by an “impartial jury.” How does the use of wireless devices in the courtroom or research on the Internet threaten this right?

c. California Statutes 2011, Chapter 181, as cited in Steiner v. Superior Court, 220 Cal.App.4th 1479, 164 Cal.Rptr. 3d 155, Cal.App. 2 Dist. (2013). This law amended the California Code of Civil Procedure, Section 166, to make it contempt of court for a juror to disobey the judge and use wireless devices to perform research about a case.

a. Baird v. Owczarek, 93 A.3d 1222, Del.Supr. (2014). b. State v. Johnson, 177 Wash.App. 1035, 2013 WL 6092149

(2013).

How easy is it for judges to prevent Web information searches by

jurors during a trial?

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reviewing court with a condensation of the record, known as an abstract, and a brief. The brief is a formal legal document outlining the facts and issues of the case, the judge’s rulings or jury’s findings that should be reversed or modified, the applicable law, and arguments on Anderson’s behalf (citing applicable statutes and relevant cases as precedents).

Marconi’s attorney will file an answering brief. Anderson’s attorney can file a reply to Mar- coni’s brief, although it is not required. The reviewing court then considers the case.

Appellate Review As explained earlier, a court of appeals does not hear evidence. Instead, the court reviews the record for errors of law. Its decision concerning a case is based on the record on appeal, the abstracts, and the attorneys’ briefs. The attorneys can present oral argu- ments, after which the case is taken under advisement.

After reviewing a case, an appellate court has the following options:

1. The court can affirm the trial court’s decision. 2. The court can reverse the trial court’s judgment if it

concludes that the trial court erred or that the jury did not receive proper instructions.

3. The appellate court can remand (send back) the case to the trial court for further proceedings consistent with its opinion on the matter.

4. The court might also affirm or reverse a decision in part. For instance, the court might affirm the jury’s finding that Anderson was negligent but remand the case for further proceedings on another issue (such as the extent of Marconi’s damages).

5. An appellate court can also modify a lower court’s decision. If the appellate court decides that the jury awarded an excessive amount in damages, for instance, the court might reduce the award to a more appropriate, or fairer, amount.

Appeal to a Higher Appellate Court If the reviewing court is an intermediate appellate court, the losing party may decide to appeal to the state supreme court (the highest state court). Such a petition corresponds to a petition for a writ of certiorari from the United States Supreme Court. Although the losing party has a right to ask (petition) a higher court to review the case, the party does not have a right to have the case heard by the higher appellate court.

Appellate courts normally have discretionary power and can accept or reject an appeal. Like the United States Supreme Court, state supreme courts generally deny most appeals. If the appeal is granted, new briefs must be filed before the state supreme court, and the attorneys may be allowed or requested to present oral arguments. Like the intermediate appellate court, the supreme court may reverse or affirm the appellate court’s decision or remand the case. At this point, the case typically has reached its end (unless a federal question is at issue and one of the parties has legitimate grounds to seek review by a federal appellate court).

3–4i Enforcing the Judgment The uncertainties of the litigation process are compounded by the lack of guarantees that any judgment will be enforceable. Even if a plaintiff wins an award of damages in court, the defendant may not have sufficient assets or insurance to cover that amount. Usually, one of the factors considered before a lawsuit is initiated is whether the defendant will be able to pay the damages sought, should the plaintiff win the case.

Brief A written summary or statement prepared by one side in a lawsuit to explain its case to the judge.

Do parties to a trial decision always have a right to appeal that decision?

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3–5 Courts Online Most courts today have sites on the Web. Of course, each court decides what to make available at its site. Some courts display only the names of court personnel and office phone num- bers. Others add court rules and forms. Many appellate court sites include judicial decisions, although the decisions may remain online for only a limited time. In addition, in some states, including California and Florida, court clerks offer information about the court’s docket (its schedule of cases to be heard) and other searchable databases online.

Appellate court decisions are often posted online immediately after they are rendered. Recent decisions of the U.S. courts of appeals, for instance, are available online at their Web sites. The United States Supreme Court also has an official Web site and publishes its opinions there immediately after they are announced to the public. In fact, even decisions that are desig- nated as “unpublished” opinions by the appellate courts are usually published (posted) online.

3–5a Electronic Filing A number of state and federal courts now allow parties to file litigation-related documents with the courts via the Internet or other electronic means. In fact, the federal court system has implemented its electronic filing system, Case Management/Electronic Case Files (CM/ECF), in nearly all federal courts. The system is available in federal district, appellate, and bank- ruptcy courts, as well as the U.S. Court of International Trade and the U.S. Court of Federal Claims. More than 33 million cases are on the CM/ECF system. Access to the electronic doc- uments filed on CM/ECF is available through a system called PACER (Public Access to Court Electronic Records), which is a service of the U.S. courts.

A majority of the states have some form of electronic filing, although often it is not yet avail- able in state appellate courts. Some states, including Arizona, California, Colorado, Delaware, Mississippi, New Jersey, New York, and Nevada, offer statewide e-filing systems. Generally, when electronic filing is made available, it is optional. Nonetheless, some state courts have now made e-filing mandatory in certain types of disputes, such as complex civil litigation.

3–5b Cyber Courts and Proceedings Eventually, litigants may be able to use cyber courts, in which judicial proceedings take place only on the Internet. The parties to a case could meet online to make their arguments and present their evidence. Cyber proceedings might use e-mail submissions, video cameras, des- ignated chat rooms, closed sites, or other Internet and social media facilities. The promise of these virtual proceedings is greater efficiency and lower costs.

Electronic courtroom projects have already been developed in some federal and state courts. The state of Michigan has cyber courts that hear cases involving technology issues and high-tech businesses. Other states that have introduced cyber courts include California, Delaware, Louisiana, and North Carolina. Wisconsin has a rule authorizing the use of video- conferencing in both civil and criminal trials, at the discretion of the trial court.21 The Federal Rules of Civil Procedure also authorizes video conferencing, and some federal bankruptcy courts offer online chatting at their Web sites.

3–6 Alternative Dispute Resolution Litigation is expensive. It is also time consuming. Because of the backlog of cases pending in many courts, several years may pass before a case is actually tried. For these and other

21. Wisconsin Statute Section 751.12.

Docket The list of cases entered on a court’s calendar and thus scheduled to be heard by the court.

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reasons, more and more businesspersons are turning to alternative dispute resolution (ADR) as a means of settling their disputes.

The great advantage of ADR is its flexibility. Methods of ADR range from the parties sitting down together and attempting to work out their differences to multinational corporations agreeing to resolve a dispute through a formal hearing before a panel of experts. Normally, the parties themselves can control how they will attempt to settle their dispute, what procedures will be used, whether a neutral third party will be present or make a decision, and whether that decision will be legally binding or nonbinding.

Today, more than 90 percent of cases are settled before trial through some form of ADR. Indeed, most states either require or encourage parties to undertake ADR prior to trial. Many federal courts have instituted ADR programs as well. In the following pages, we examine the basic forms of ADR. Keep in mind, though, that new methods of ADR—and new combina- tions of existing methods—are constantly being devised and employed.

3–6a Negotiation The simplest form of ADR is negotiation, in which the parties attempt to settle their dispute informally, with or without attorneys to represent them. Attorneys frequently advise their clients to negotiate a settlement voluntarily before they proceed to trial. Parties may even try to negotiate a settlement during a trial or after the trial but before an appeal. Negotiation tra- ditionally involves just the parties themselves and (typically) their attorneys. The attorneys, though, are advocates—they are obligated to put their clients’ interests first.

3–6b Mediation In mediation, a neutral third party acts as a mediator and works with both sides in the dis- pute to facilitate a resolution. The mediator talks with the parties separately as well as jointly and emphasizes their points of agreement in an attempt to help them evaluate their options. Although the mediator may propose a solution (called a mediator’s proposal), he or she does not make a decision resolving the matter. States that require parties to undergo ADR before trial often offer mediation as one of the ADR options or (as in Florida) the only option.

One of the biggest advantages of mediation is that it is not as adversarial as litigation. In a trial, the parties “do battle” with each other in the courtroom, trying to prove each other wrong, while the judge is usually a passive observer. In mediation, the mediator takes an active role and attempts to bring the parties together so that they can come to a mutually satisfactory resolution. The mediation process tends to reduce the hostility between the dis- putants, allowing them to resume their former relationship without bad feelings. For this reason, mediation is often the preferred form of ADR for disputes involving business partners, employers and employees, or other parties involved in long-term relationships.

EXAMPLE 3.13 Two business partners, Mark Shalen and Charles Rowe, have a dispute over how the profits of their firm should be distributed. If the dispute is litigated, Shalen and Rowe will be adversaries, and their respective attorneys will emphasize how the parties’ positions differ, not what they have in common. In contrast, if the dispute is mediated, the mediator will emphasize the common ground shared by Shalen and Rowe and help them work toward agreement. The two men can work out the distribution of profits without damaging their continuing relationship as partners. n

3–6c Arbitration In arbitration, a more formal method of ADR, an arbitrator (a neutral third party or a panel of experts) hears a dispute and imposes a resolution on the parties. Arbitration differs from other forms of ADR in that the third party hearing the dispute makes a decision for the parties. Exhibit 3–4 outlines the basic differences among the three traditional forms of ADR.

Alternative Dispute Resolution (ADR) The resolution of disputes in ways other than those involved in the traditional judicial process, such as negotiation, mediation, and arbitration.

LEARNING OBJECTIVE 5 What are three alternative methods of resolving disputes?

Negotiation A process in which parties attempt to settle their dispute informally, with or without attorneys to represent them.

Mediation A method of settling disputes outside the courts by using the services of a neutral third party, who acts as a communicating agent between the parties and assists them in negotiating a settlement.

Arbitration The settling of a dispute by submitting it to a disinterested third party (other than a court), who renders a decision.

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Usually, the parties in arbitration agree that the third party’s decision will be legally binding, although the parties can also agree to nonbinding arbitration. (Arbitration that is mandated by the courts often is nonbinding.) In nonbinding arbitration, the parties can go forward with a lawsuit if they do not agree with the arbitrator’s decision.

In some respects, formal arbitration resembles a trial, although usually the procedural rules are much less restrictive than those governing litigation. In the typical arbitration, the parties present opening arguments and ask for specific remedies. Both sides present evidence and may call and examine witnesses. The arbitrator then renders a decision.

The Arbitrator’s Decision The arbitrator’s decision is called an award. It is usually the final word on the matter. Although the parties may appeal an arbitrator’s decision, a court’s review of the decision will be much more restricted in scope than an appellate court’s review of a trial court’s decision. The general view is that because the parties were free to frame the issues and set the powers of the arbitrator at the outset, they cannot complain about the results. A court will set aside an award only in the event of one of the following:

1. The arbitrator’s conduct or “bad faith” substantially prejudiced the rights of one of the parties.

2. The award violates an established public policy. 3. The arbitrator exceeded her or his powers—that is, arbitrated issues that the parties did

not agree to submit to arbitration.

Arbitration Clauses Just about any commercial matter can be submitted to arbitration. Parties can agree to arbitrate a dispute after it arises. Frequently, though, parties include an arbitration clause in a contract. The clause provides that any dispute that arises under the contract will be resolved through arbitration rather than through the court system.

Arbitration Statutes Most states have statutes (often based in part on the Uniform Arbitration Act) under which arbitration clauses will be enforced. Some state statutes compel arbitration of certain types of disputes, such as those involving public employees. At the federal level, the Fed- eral Arbitration Act (FAA) enforces arbitration clauses in contracts involving maritime activity and interstate commerce (though its applicability to employment contracts has been controversial, as discussed later). Because of the breadth of the commerce clause, arbitration agreements involving transactions only slightly connected to the flow of interstate commerce may fall under the FAA.

Arbitration Clause A clause in a contract that provides that, in the event of a dispute, the parties will submit the dispute to arbitration rather than litigate the dispute in court.

Exhibit 3–4 Basic Differences in the Traditional Forms of Alternative Dispute Resolution

TYPE OF ADR DESCRIPTION

NEUTRAL THIRD PARTY PRESENT?

WHO DECIDES THE RESOLUTION?

Negotiation The parties meet informally with or without their attorneys and attempt to agree on a resolution.

No The parties themselves reach a resolution.

Mediation A neutral third party meets with the parties and emphasizes points of agreement to help them resolve their dispute.

Yes The parties decide the resolution, but the mediator may suggest or propose a resolution.

Arbitration The parties present their argu- ments and evidence before an arbitrator at a hearing, and the arbitrator renders a decision resolving the parties’ dispute.

Yes The arbitrator imposes a resolution on the parties that may be either binding or nonbinding.

What are the steps in a typical arbitration proceeding?

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CASE EXAMPLE 3.14 Buckeye Check Cashing, Inc., cashes personal checks for consumers in Florida. Buckeye would agree to delay submitting a consumer’s check for payment if the con- sumer paid a “finance charge.” For each transaction, the consumer signed an agreement that included an arbitration clause. A group of consumers filed a lawsuit claiming that Buckeye was charging an illegally high rate of interest in violation of state law. Buckeye filed a motion to compel arbitration, which the trial court denied, and the case was appealed.

The plaintiffs argued that the entire contract—including the arbitration clause—was illegal and therefore arbitration was not required. The United States Supreme Court found that the arbitration provision was severable, or capable of being separated, from the rest of the contract. The Court held that when the challenge is to the validity of a contract as a whole, and not specifically to an arbitration clause within the contract, an arbitrator must resolve the dispute. Even if the contract itself later proves to be unenforceable, arbitration will still be required because the FAA established a national policy favoring arbitration and that policy extends to both federal and state courts.22▪n

The Issue of Arbitrability The terms of an arbitration agreement can limit the types of dis- putes that the parties agree to arbitrate. Disputes can arise, however, when the parties do not specify limits or when the parties disagree on whether a particular matter is covered by their arbitration agreement.

When one party files a lawsuit to compel arbitration, it is up to the court to resolve the issue of arbitrability. That is, the court must decide whether the matter is one that must be resolved through arbitration. If the court finds that the subject matter in controversy is cov- ered by the agreement to arbitrate, then it may compel arbitration. Usually, a court will allow the claim to be arbitrated if the court finds that the relevant statute (the state arbitration statute or the FAA) does not exclude such claims.

No party, however, will be ordered to submit a particular dispute to arbitration unless the court is convinced that the party has consented to do so. Additionally, the courts will not compel arbitration if it is clear that the arbitration rules and procedures are inherently unfair to one of the parties.

Mandatory Arbitration in the Employment Context A significant question for businessper- sons has concerned mandatory arbitration clauses in employment contracts. Many employees claim they are at a disadvantage when they are forced, as a condition of being hired, to agree to arbitrate all disputes and thus waive their rights under statutes designed to protect employees. The United States Supreme Court, however, has held that mandatory arbitration clauses in employment contracts are generally enforceable.

CASE EXAMPLE 3.15 In a landmark decision, Gilmer v. Interstate/Johnson Lane Corp.,23 the Supreme Court held that a claim brought under a federal statute prohibiting age discrimina- tion could be subject to arbitration. The Court concluded that the employee had waived his right to sue when he agreed, as part of a required registration application to be a securities representative with the New York Stock Exchange, to arbitrate “any dispute, claim, or contro- versy” relating to his employment. n

Since the Gilmer decision, some courts have refused to enforce one-sided arbitration clauses. Employment-related agreements often require the parties to split the costs of arbi- tration, but some courts have overturned those provisions when an individual worker lacked the ability to pay.24

In the following case, the court considered the effect of an arbitration clause included in an employment application.

22. Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006). 23. 500 U.S. 20, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991). 24. See, for example, Macias v. Excel Building Services, LLC, 767 F.Supp.2d 1002 (N.D.Cal. 2011), citing Davis v. O’Melveny & Myers,

LLC, 485 F.3d 1066 (9th Cir. 2007), and Nagrampa v. MailCoups, Inc., 469 F.3d 1257 (9th Cir. 2006).

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FacTs Stephanie Cruise applied for a job with Kroger Co.’s Compton Creamery & Deli Kitchen. The application contained a clause requiring arbitration of “employment-related disputes” and referred to the company’s arbitration pol- icy. Cruise was hired. Four years later, she was fired. Cruise filed a suit in a California state court against Kroger, alleging employment discrimina- tion—retaliation, sexual harassment, sexual and racial discrimination, and failure to investigate and prevent harassment and retaliation—as well as wrongful termination in violation of public pol- icy, intentional infliction of emotional distress, and defamation. Kro- ger filed a motion to compel arbitration and provided the court with an undated four-page arbitration policy. Because the company could not prove that the policy was in effect when Cruise signed the employ- ment application, the court held that there was no proof of a written agreement to arbitrate and denied the motion. Kroger appealed.

issUe Is an arbitration clause in an employment agreement suffi- cient to establish an agreement to arbitrate?

Decision Yes. The state intermediate appellate court reversed the lower court’s denial of Kroger’s motion to compel arbitration with directions to grant the motion.

reason The appellate court concluded that the arbitration clause in the employment application established that the parties had agreed to arbi- trate their “employment-related disputes.” The employment application was signed by Cruise. The arbitration clause, which was initialed by Cruise separately, stated that “any Employee who wishes to initiate or participate in formal proceedings to resolve any Covered Disputes must submit the claims or disputes to final and binding arbitration in accordance with the Policy.” The court reasoned that this “language eliminates any argument the

parties did not agree to arbitrate their employment-related dis- putes.” Kroger’s inability to prove the precise terms of the arbitration policy did not disprove the existence of the arbitration agreement. The court also concluded that all of Cruise’s claims were employ- ment-related disputes that fell within the meaning of the arbitration agreement.

criTical ThinKinG—legal consideration In the circumstances of this case, what procedures should govern the arbitration? Discuss.

When does an employee have to submit to arbitration for

employment-related disputes?

Case 3.3

cruise v. kroger co. Court of Appeal of California, Second District, Division 3, 233 Cal.App.4th 390, 183 Cal.Rptr.3d 17 (2015).

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3–6d Other Types of ADR The three forms of ADR just discussed are the oldest and traditionally the most commonly used. In addition, a variety of newer types of ADR have emerged, including those described here.

1. In early neutral case evaluation, the parties select a neutral third party (generally an expert in the subject matter of the dispute) and then explain their respective positions to that person. The case evaluator assesses the strengths and weaknesses of each party’s claims.

2. In a mini-trial, each party’s attorney briefly argues the party’s case before the other party and a panel of representatives from each side who have the authority to settle the dispute. Typically, a neutral third party (usually an expert in the area being disputed) acts as an adviser. If the parties fail to reach an agreement, the adviser renders an opinion as to how a court would likely decide the issue.

3. Numerous federal courts now hold summary jury trials, in which the parties present their arguments and evidence and the jury renders a verdict. The jury’s verdict is not binding, but it does act as a guide to both sides in reaching an agreement during the mandatory negotiations that immediately follow the trial.

Summary Jury Trial (SJT) A method of settling disputes by holding a trial in which the jury’s verdict is not binding but instead guides the parties toward reaching an agreement during the mandatory negotiations that immediately follow.

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3–6e Providers of ADR Services ADR services are provided by both government agencies and private organizations. A major provider of ADR services is the American Arbitration Association (AAA), which handles more than 200,000 claims a year in its numerous offices worldwide. Most of the largest U.S. law firms are members of this nonprofit association. Cases brought before the AAA are heard by an expert or a panel of experts in the area relating to the dispute and are usually settled quickly. The AAA has a special team devoted to resolving large, complex disputes across a wide range of industries.

Hundreds of for-profit firms around the country also provide various dispute-resolution services. Typically, these firms hire retired judges to conduct arbitration hearings or otherwise assist parties in settling their disputes. The judges follow procedures similar to those of the federal courts and use similar rules. Usually, each party to the dispute pays a filing fee and a designated fee for a hearing session or conference.

3–6f Online Dispute Resolution An increasing number of companies and organizations offer dispute-resolution ser- vices using the Internet. The settlement of disputes in these online forums is known as online dispute resolution (ODR). The disputes have most commonly involved disagreements over the rights to domain names or over the quality of goods sold via the Internet, including goods sold through Internet auction sites.

Rules being developed in online forums may ultimately become a code of conduct for everyone who does business in cyberspace. Most online forums do not automatically apply the law of any specific jurisdiction. Instead, results are often based on general, universal legal principles. As with most offline methods of dispute resolution, any party may appeal to a court at any time.

ODR may be best suited for resolving small- to medium-sized business liability claims, which may not be worth the expense of litigation or traditional ADR. In addition, some local governments are using ODR to resolve claims. EXAMPLE 3.16 New York City has used Cybersettle.com to resolve auto accident, sidewalk, and other personal-injury claims made against the city. Parties with complaints submit their demands, and the city submits its offers confidentially online. If an offer exceeds a demand, the claimant keeps half the difference as a bonus. n

Online Dispute Resolution (ODR) The resolution of disputes with the assistance of organizations that offer dispute-resolution services via the Internet.

Reviewing . . . Courts and Alternative Dispute Resolution Stan Garner resides in Illinois and promotes boxing matches for SuperSports, Inc., an Illinois corporation. Garner created the promotional concept of the “Ages” fights—a series of three boxing matches pitting an older fighter (George Foreman) against a younger fighter, such as John Ruiz or Riddick Bowe. The concept included titles for each of the three fights (“Challenge of the Ages,” “Battle of the Ages,” and “Fight of the Ages”), as well as promotional epithets to characterize the two fighters (“the Foreman Factor”).

Garner contacted George Foreman and his manager, who both reside in Texas, to sell the idea, and they arranged a meeting at Caesar’s Palace in Las Vegas, Nevada. At some point in the negotiations, Fore- man’s manager signed a nondisclosure agreement prohibiting him from disclosing Garner’s promotional concepts unless they signed a contract. Nevertheless, after negotiations between Garner and Foreman fell through, Foreman used Garner’s “Battle of the Ages” concept to promote a subsequent fight. Garner filed a lawsuit against Foreman and his manager in a federal district court in Illinois, alleging breach of contract. Using the information presented in the chapter, answer the following questions.

Continues

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1. On what basis might the federal district court in Illinois exercise jurisdiction in this case?

2. Does the federal district court have original or appellate jurisdiction?

3. Suppose that Garner had filed his action in an Illinois state court. Could an Illinois state court have exercised personal jurisdiction over Foreman or his manager? Why or why not?

4. What if Garner had filed his action in a Nevada state court? Would that court have had personal jurisdiction over Foreman or his manager? Explain.

DeBAte tHIs

▪▪ In this age of the Internet, when people communicate via e-mail, tweets, social media, and Skype, is the concept of jurisdiction losing its meaning?

alternative dispute resolution (ADR) 79 answer 70 arbitration 79 arbitration clause 80 award 75 bankruptcy court 58 brief 77 complaint 70 concurrent jurisdiction 60 counterclaim 70 default judgment 70 deposition 72 discovery 71 diversity of citizenship 59 docket 78 e-evidence 73 exclusive jurisdiction 60

federal question 59 interrogatories 73 judicial review 56 jurisdiction 56 justiciable controversy 63 litigation 69 long arm statute 57 mediation 79 metadata 73 motion for a directed verdict 75 motion for a new trial 75 motion for judgment n.o.v. 75 motion for judgment on the

pleadings 71 motion for summary judgment 71 motion to dismiss 71 negotiation 79

online dispute resolution (ODR) 83 pleadings 70 probate court 58 question of fact 66 question of law 67 reply 70 rule of four 69 service of process 70 small claims court 65 standing to sue 63 summary jury trial (SJT) 82 summons 70 venue 63 voir dire 74 writ of certiorari 68

Key Terms

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Chapter Summary: Courts and Alternative Dispute Resolution The Judiciary’s Role in American Government

The role of the judiciary—the courts—in the American governmental system is to interpret and apply the law. Through the process of judicial review—determining the constitutionality of laws—the judicial branch acts as a check on the executive and legislative branches of government.

Basic Judicial Requirements

1. Jurisdiction—Before a court can hear a case, it must have jurisdiction over the person against whom the suit is brought or the property involved in the suit, as well as jurisdiction over the subject matter. a. Limited versus general jurisdiction—Limited jurisdiction exists when a court is limited to a specific subject matter,

such as probate or divorce. General jurisdiction exists when a court can hear any kind of case. b. Original versus appellate jurisdiction—Original jurisdiction exists when courts have authority to hear a case for the

first time (trial courts). Appellate jurisdiction is exercised by courts of appeals, or reviewing courts, which generally do not have original jurisdiction.

c. Federal jurisdiction—Arises (1) when a federal question is involved (when the plaintiff’s cause of action is based, at least in part, on the U.S. Constitution, a treaty, or a federal law) or (2) when a case involves diversity of citizenship (citizens of different states, for example) and the amount in controversy exceeds $75,000.

d. Concurrent versus exclusive jurisdiction—Concurrent jurisdiction exists when two different courts have authority to hear the same case. Exclusive jurisdiction exists when only state courts or only federal courts have authority to hear a case.

2. Jurisdiction in cyberspace—Because the Internet does not have physical boundaries, traditional jurisdictional concepts have been difficult to apply in cases involving activities conducted via the Web. Gradually, the courts are developing standards to use in determining when jurisdiction over a Web site owner or operator located in another state is proper.

3. Venue—Venue has to do with the most appropriate location for a trial, which is usually the geographic area where the event leading to the dispute took place or where the parties reside.

4. Standing to sue—A requirement that a party must have a legally protected and tangible interest at stake sufficient to justify seeking relief through the court system. The controversy at issue must also be a justiciable controversy—one that is real and substantial, as opposed to hypothetical or academic.

The State and Federal Court Systems

1. Trial courts—Courts of original jurisdiction, in which legal actions are initiated. a. State—Courts of general jurisdiction can hear any case. Courts of limited jurisdiction include domestic relations

courts, probate courts, traffic courts, and small claims courts. b. Federal—The federal district court is the equivalent of the state trial court. Federal courts of limited jurisdiction

include the U.S. Tax Court, the U.S. Bankruptcy Court, and the U.S. Court of Federal Claims. 2. Intermediate appellate courts—Courts of appeals, or reviewing courts, which generally do not have original jurisdiction.

Many states have intermediate appellate courts. In the federal court system, the U.S. circuit courts of appeals are the intermediate appellate courts.

3. Supreme (highest) courts—Each state has a supreme court, although it may be called by some other name. Appeal from the state supreme court to the United States Supreme Court is possible only if the case involves a federal question. The United States Supreme Court is the highest court in the federal court system and the final arbiter of the U.S. Con- stitution and federal law.

Following a State Court Case

Rules of procedure prescribe the way in which disputes are handled in the courts. Rules differ from court to court, and separate sets of rules exist for federal and state courts, as well as for criminal and civil cases. A civil court case in a state court would involve the following procedures: 1. The pleadings—

a. Complaint—Filed by the plaintiff with the court to initiate the lawsuit. The complaint is served with a summons on the defendant.

b. Answer—A response to the complaint in which the defendant admits or denies the allegations made by the plaintiff. The answer may assert a counterclaim or an affirmative defense.

c. Motion to dismiss—A request to the court to dismiss the case for stated reasons, such as the plaintiff’s failure to state a claim for which relief can be granted.

2. Pretrial motions (in addition to the motion to dismiss)— a. Motion for judgment on the pleadings—May be made by either party. It will be granted if the parties agree on the

facts and the only question is how the law applies to the facts. The judge bases the decision solely on the pleadings. b. Motion for summary judgment—May be made by either party. It will be granted if the parties agree on the facts and

the sole question is a question of law. The judge can consider evidence outside the pleadings when evaluating the motion.

Continues

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Following a State Court Case (Continued)

3. Discovery—The process of gathering evidence concerning the case. Discovery involves depositions (sworn testimony by a party to the lawsuit or any witness), interrogatories (written questions and answers to these questions made by parties to the action with the aid of their attorneys), and various requests (for admissions, documents, and medical examinations, for example). Discovery may also involve electronically recorded information, such as e-mail, voice mail, word-processing documents, and other data compilations. Although electronic discovery has significant advantages over paper discovery, it is also more time consuming and expensive and often requires the parties to hire experts.

4. Pretrial conference—Either party or the court can request a pretrial conference to identify the matters in dispute after discovery has taken place and to plan the course of the trial.

5. Trial—Following jury selection (voir dire), the trial begins with opening statements from both parties’ attorneys. The following events then occur: a. The plaintiff’s introduction of evidence (including the testimony of witnesses) supporting the plaintiff’s position.

The defendant’s attorney can challenge evidence and cross-examine witnesses. b. The defendant’s introduction of evidence (including the testimony of witnesses) supporting the defendant’s posi-

tion. The plaintiff’s attorney can challenge evidence and cross-examine witnesses. c. Closing arguments by the attorneys in favor of their respective clients, the judge’s instructions to the jury, and the

jury’s verdict. 6. Posttrial motions—

a. Motion for judgment n.o.v. (“notwithstanding the verdict”)—Will be granted if the judge is convinced that the jury was in error.

b. Motion for a new trial—Will be granted if the judge is convinced that the jury was in error. The motion can also be granted on the grounds of newly discovered evidence, misconduct by the participants during the trial, or error by the judge.

7. Appeal—Either party can appeal the trial court’s judgment to an appropriate court of appeals. After reviewing the record on appeal, the abstracts, and the attorneys’ briefs, the appellate court holds a hearing and renders its opinion.

Courts Online A number of state and federal courts now allow parties to file litigation-related documents with the courts via the Internet or other electronic means. Nearly all of the federal appellate courts and bankruptcy courts and a majority of the federal district courts have implemented electronic filing systems. Almost every court now has a Web page offering information about the court and its procedures, and increasingly courts are publishing their opinions online. In the future, we may see cyber courts, in which all trial proceedings are conducted online.

Alternative Dispute Resolution

1. Negotiation—The parties come together, with or without attorneys to represent them, and try to reach a settlement without the involvement of a third party.

2. Mediation—The parties themselves reach an agreement with the help of a neutral third party, called a mediator. The mediator may propose a solution but does not make a decision resolving the matter.

3. Arbitration—The parties submit their dispute to a neutral third party, the arbitrator, who renders a decision. The deci- sion may or may not be legally binding, depending on the circumstances.

4. Other types of ADR—These include assisted negotiation, early neutral case evaluation, mini-trials, and summary jury trials (SJTs).

5. Providers of ADR services—The leading nonprofit provider of ADR services is the American Arbitration Association. Hundreds of for-profit firms also provide ADR services.

6. Online dispute resolution—A number of organizations and firms are now offering negotiation, mediation, and arbitration services through online forums. These forums have been a practical alternative for the resolution of domain name disputes and e-commerce disputes in which the amount in controversy is relatively small.

Issue Spotters 1. At the trial, after Sue calls her witnesses, offers her evidence, and otherwise presents her side of the case, Tom has at least two

choices between courses of action. Tom can call his first witness. What else might he do? (See Following a State Court Case.)

2. Sue contracts with Tom to deliver a quantity of computers to Sue’s Computer Store. They disagree over the amount, the delivery date, the price, and the quality. Sue files a suit against Tom in a state court. Their state requires that their dispute be submitted to mediation or nonbinding arbitration. If the dispute is not resolved, or if either party disagrees with the decision of the mediator or arbitrator, will a court hear the case? Explain. (See Alternative Dispute Resolution.)

—Check your answers to the Issue Spotters against the answers provided in Appendix D at the end of this text.

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Learning Objectives Check 1. What is judicial review? How and when was the power of judicial review established?

2. How are the courts applying traditional jurisdictional concepts to cases involving Internet transactions?

3. What is the difference between the focus of a trial court and an appellate court?

4. What is discovery, and how does electronic discovery differ from traditional discovery?

5. What are three alternative methods of resolving disputes? —Answers to the even-numbered Learning Objectives Check questions can be found in Appendix E at the end of this text.

Business Scenarios and Case Problems 3–1. Standing to Sue. Jack and Maggie Turton bought a house in

Jefferson County, Idaho, located directly across the street from a gravel pit. A few years later, the county converted the pit to a landfill. The landfill accepted many kinds of trash that cause harm to the environment, including major appliances, animal carcasses, containers with hazardous content warnings, leak- ing car batteries, and waste oil. The Turtons complained to the county, but the county did nothing. The Turtons then filed a lawsuit against the county alleging violations of federal envi- ronmental laws pertaining to groundwater contamination and other pollution. Do the Turtons have standing to sue? Why or why not? (See Basic Judicial Requirements.)

3–2. Discovery. Advance Technology Consultants, Inc. (ATC), contracted with RoadTrac, LLC, to provide software and client software systems for products using global positioning satel- lite (GPS) technology being developed by RoadTrac. RoadTrac agreed to provide ATC with hardware with which ATC’s soft- ware would interface. Problems soon arose, however, and RoadTrac filed a lawsuit against ATC alleging breach of con- tract. During discovery, RoadTrac requested ATC’s customer lists and marketing procedures. ATC objected to providing this information because RoadTrac and ATC had become compet- itors in the GPS industry. Should a party to a lawsuit have to hand over its confidential business secrets as part of a discov- ery request? Why or why not? What limitations might a court consider imposing before requiring ATC to produce this mate- rial? (See Following a State Court Case.)

3–3. Spotlight on the National Football League—Arbitration. Bruce Matthews played football for the Tennessee Titans. As part of his contract, he agreed to submit any dispute to arbitration. He also agreed that Tennessee law would

determine all matters related to workers’ compensation. After Matthews retired, he filed a workers’ compensation claim in California. The arbitrator ruled that Matthews could pursue his claim in California but only under Tennessee law. Should the arbitrator’s award be set aside? Explain. [National Football League Players Association v. National Football League

Management Council, 2011 WL 1137334 (S.D.Cal. 2011)] (See Alternative Dispute Resolution.)

3–4. Minimum Contacts. Seal Polymer Industries sold two freight containers of latex gloves to Med-Express, Inc., a com- pany based in North Carolina. When Med-Express failed to pay the $104,000 owed for the gloves, Seal Polymer sued in an Illinois court and obtained a judgment against Med-Express. Med-Express argued that it did not have minimum contacts with Illinois and therefore the Illinois judgment based on per- sonal jurisdiction was invalid. Med-Express stated that it was incorporated under North Carolina law, had its principal place of business in North Carolina, and therefore had no minimum contacts with Illinois. Was this statement alone sufficient to prevent the Illinois judgment from being collected against Med-Express in North Carolina? Why or why not? [Seal Polymer Industries v. Med-Express, Inc., 725 S.E.2d 5 (N.C.App. 2012)] (See Basic Judicial Requirements.)

3–5. Arbitration. Horton Automatics and the Industrial Division of the Communications Workers of America—the union that represented Horton’s workers—negotiated a collective bargain- ing agreement. If an employee’s discharge for a workplace-rule violation was submitted to arbitration, the agreement limited the arbitrator to determining whether the rule was reasonable and whether the employee had violated it. When Horton dis- charged its employee Ruben de la Garza, the union appealed to arbitration. The arbitrator found that de la Garza had vio- lated a reasonable safety rule, but “was not totally convinced” that Horton should have treated the violation more seriously than other rule violations. The arbitrator ordered de la Garza reinstated to his job. Can a court set aside this order from the arbitrator? Explain. [Horton Automatics v. The Industrial Divi- sion of the Communications Workers of America, AFL-CIO, __ F.3d __, 2013 WL 59204 (5th Cir. 2013)] (See Alternative Dispute Resolution.)

3–6. Business Case Problem with Sample Answer— Discovery. Jessica Lester died from injuries suffered in

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an auto accident caused by the driver of a truck owned by Allied Concrete Co. Jessica’s widower, Isaiah, filed a suit against Allied for damages. The defendant requested copies of all of Isaiah’s Facebook photos and other postings. Before respond- ing, Isaiah “cleaned up” his Facebook page. Allied suspected that some of the items had been deleted, including a photo of Isaiah holding a beer can while wearing a T-shirt that declared “I [heart] hotmoms.” Can this material be recovered? If so, how? What effect might Isaiah’s “misconduct” have on the result in this case? Discuss. [Allied Concrete Co. v. Lester, 736 S.E.2d 699 (Va. 2013)] (See Following a State Court Case.) —For a sample answer to Problem 3–6, go to Appendix F at

the end of this text.

3–7. electronic Filing. Betsy Faden worked for the U.S. Depart- ment of Veterans Affairs. Faden was removed from her position in April 2012 and was given until May 29 to appeal the removal decision. She submitted an appeal through the Merit Systems Protection Board’s e-filing system seven days after the dead- line. Ordered to show good cause for the delay, Faden testified that she had attempted to e-file the appeal while the board’s system was down. The board acknowledged that its system had not been functioning on May 27, 28, and 29. Was Faden suf- ficiently diligent in ensuring a timely filing? Discuss. [Faden v. Merit Systems Protection Board, __ F.3d __, 2014 WL 163394 (Fed. Cir. 2014)] (See Courts Online.)

3–8. corporate contacts. LG Electronics, Inc., and nineteen other foreign companies participated in the global market for cathode ray tube (CRT) products, which were integrated as components in consumer goods, including television sets.

These goods were sold for many years in high volume in the United States, including the state of Washington. Later, the state filed a suit in a Washington state court against LG and the others, alleging a conspiracy to raise prices and set pro- duction levels in the market for CRTs in violation of a state consumer protection statute. The defendants filed a motion to dismiss the suit for lack of personal jurisdiction. Should this motion be granted? Explain. [State of Washington v. LG Electron- ics, Inc., 341 P.3d 346 (Wash. App., Div. 1 2015)] (See Basic Judicial Requirements.)

3–9. a Question of ethics—agreement to arbitrate. Nellie Lumpkin, who suffered from dementia, was admitted to the Picayune Convalescent Center, a nursing home. Because of her mental condition, her daughter, Beverly

McDaniel, signed the admissions agreement. It included a clause requiring the parties to submit any dispute to arbitra- tion. After Lumpkin left the center two years later, she filed a suit against Picayune to recover damages for mistreatment and malpractice. [Covenant Health & Rehabilitation of Picayune, LP v. Lumpkin, 23 So.3d 1092 (Miss. App. 2009)] (See Alternative Dis- pute Resolution.)

1. Is it ethical for this dispute—involving negligent medical care, not a breach of a commercial contract—to be forced into arbitration? Why or why not? Discuss whether medical facilities should be able to impose arbitration when there is generally no bargaining over such terms.

2. Should a person with limited mental capacity be held to the arbitration clause agreed to by her next of kin, who signed on her behalf? Why or why not?

Critical Thinking and Writing Assignments 3–10. Business law critical Thinking Group assignment.

Bento Cuisine is a lunch-cart business. It occupies a street corner in Texarkana, a city that straddles the border of Arkansas and Texas. Across the street—and across the

state line, which runs down the middle of the street—is Rico’s Tacos. The two businesses compete for customers. Recently, Bento has begun to suspect that Rico’s is engaging in competi- tive behavior that is illegal. Bento’s manager overheard several of Rico’s employees discussing these competitive tactics while on a break at a nearby Starbucks. Bento files a lawsuit against

Rico’s in a federal court based on diversity jurisdiction. (See Basic Judicial Requirements and Following a State Court Case.) 1. One group will determine whether Rico’s could file a motion

claiming that the federal court lacks jurisdiction over this dispute.

2. Another group will assume that the case goes to trial. Bento believes that it has both the law and the facts on its side. Nevertheless, at the end of the trial, the jury decides against Bento, and the judge issues a ruling in favor of Rico’s. If Bento is unwilling to accept this result, what are its options?

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Most of us agree with the chapter-opening quotation—two wrongs do not make a right. In this chapter, we consider a particular type of wrongful actions called torts (the word tort is French for “wrong”). As you will see, torts form the basis for many lawsuits.

As noted in earlier chapters, part of doing business today is the risk of being involved in a lawsuit. The list of circumstances in which businesspersons can be sued is long and varied. A customer who is injured by a security guard at a business establishment, for instance, may sue the business owner. A person who slips and falls at a retail store may sue the company for negligence. Any time one party’s allegedly wrongful conduct causes injury to another, an action may arise under the law of torts. Through tort law, society compensates those who have suffered injuries as a result of the wrongful conduct of others.

Many of the lawsuits brought by or against business firms are based on the tort theories discussed in this chapter and the next chapter, which covers product liability. In addition, Chapter 7 discusses how tort law applies to wrongful actions in the online environment.

4–1 The Basis of Tort Law Two notions serve as the basis of all torts: wrongs and compensation. Tort law is designed to compensate those who have suffered a loss or injury due to another person’s wrongful act. In a tort action, one person or group brings a personal suit against another person or group to obtain compensation (monetary damages) or other relief for the harm suffered.

Tort A wrongful act (other than a breach of contract) that results in harm or injury to another and leads to civil liability.

Tort Law LEARNING OBJECTIVES The five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions:

1. What is the purpose of tort law? What types of damages are available in tort lawsuits?

2. What are two basic catego- ries of torts?

3. What is defamation? Name two types of defamation.

4. Identify the four elements of negligence.

5. What is meant by strict lia- bility? In what circumstances is strict liability applied?

CHAPTER OUTLINE ▪▪ The Basis of Tort Law ▪▪ Intentional Torts against

Persons

▪▪ Intentional Torts against Property

▪▪ Unintentional Torts (Negligence)

▪▪ Strict Liability

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English Proverb

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4–1a The Purpose of Tort Law Generally, the purpose of tort law is to provide remedies for the invasion of various protected interests. Society recognizes an interest in personal physical safety, and tort law provides reme- dies for acts that cause physical injury or interfere with physical security and freedom. Society also recognizes an interest in protecting property, and tort law provides remedies for acts that cause destruction of or damage to property.

Note that in legal usage, the singular damage is used to refer to harm or injury to persons or property. The plural damages is used to refer to monetary compensation for such harm or injury.

4–1b Damages Available in Tort Actions Because the purpose of tort law is to compensate the injured party for the damage suffered, it is important to have a basic understanding of the types of damages that plaintiffs seek in tort actions.

Compensatory Damages Plaintiffs are awarded compensatory damages to compensate or reimburse them for actual losses. Thus, the goal is to make the plaintiffs whole and put them in the same position that they would have been in had the tort not occurred. Compensatory damages awards are often broken down into special damages and general damages.

Special damages compensate plaintiffs for quantifiable monetary losses, such as medical expenses, lost wages and benefits (now and in the future), extra costs, the loss of irreplaceable items, and the costs of repairing or replacing damaged property. CASE EXAMPLE 4.1 Seaway Marine Transport operates the Enterprise, a large cargo ship with twenty-two hatches for stor- ing coal. When the Enterprise moved into position to receive a load of coal on the shores of Lake Erie in Ohio, it struck a land-based coal-loading machine operated by Bessemer & Lake Erie Railroad Company. A federal court found Seaway liable for negligence and awarded $522,000 in special damages to compensate Bessemer for the cost of repairing the damage to the loading machine.1 n

General damages compensate individuals (not companies) for the nonmone- tary aspects of the harm suffered, such as pain and suffering. A court might award general damages for physical or emotional pain and suffering, loss of companion- ship, loss of consortium (losing the emotional and physical benefits of a spousal relationship), disfigurement, loss of reputation, or loss or impairment of mental or physical capacity.

Punitive Damages Occasionally, the courts also award punitive damages in tort cases to punish the wrongdoers and deter others from similar wrongdoing. Puni- tive damages are appropriate only when the defendant’s conduct was particularly egregious (flagrant) or reprehensible (blameworthy).

Thus, punitive damages are normally available mainly in intentional tort actions and only rarely in negligence lawsuits (intentional torts and negligence will be explained later in the chapter). They may be awarded, however, in suits involv- ing gross negligence, which can be defined as an intentional failure to perform a manifest duty in reckless disregard of the effect on the life or property of another. (See this chapter’s Business Application feature for steps businesses can take to avoid tort liability and the large damages awards that may go with it.)

Courts exercise great restraint in granting punitive damages to plaintiffs in tort actions because punitive damages are subject to the limitations imposed by the due process clause of the U.S. Constitution. The United States Supreme Court

1. Bessemer & Lake Erie Railroad Co. v. Seaway Marine Transport, 596 F.3d 357 (6th Cir. 2010).

LEARNING OBJECTIVE 1 What is the purpose of tort law? What types of damages are available in tort lawsuits?

Damages A monetary award sought as a remedy for a breach of contract or a tortious action.

Compensatory Damages A monetary award equivalent to the actual value of injuries or damage sustained by the aggrieved party.

Special Damages In a tort case, an amount awarded to compensate the plaintiff for quantifiable monetary losses, such as medical expenses, property damage, and lost wages and benefits (now and in the future).

General Damages In a tort case, an amount awarded to compensate individuals for the nonmonetary aspects of the harm suffered, such as pain and suffering. Not available to companies.

Punitive Damages Monetary damages that may be awarded to a plaintiff to punish the defendant and deter similar conduct in the future.

Do tort lawsuits end up in civil or criminal courts?

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has held that, when an award of punitive damages is grossly excessive, it furthers no legitimate purpose and violates due process requirements.2 Consequently, an appellate court will sometimes reduce the amount of punitive damages awarded to a plaintiff because the amount was excessive and thereby violates the due process clause.

4–1c Tort Reform Tort law performs a valuable function by enabling injured parties to obtain compensation. Nevertheless, critics con- tend that certain aspects of today’s tort law encourage too many trivial and unfounded lawsuits, which clog the courts and add unnecessary costs. They say that damages awards are often excessive and bear little relationship to the actual damage suffered, which inspires more plaintiffs to file law- suits. The result, in the critics’ view, is a system that dispro- portionately rewards a few plaintiffs while imposing a “tort tax” on business and society as a whole. Among other consequences, physicians and hospitals order more tests than necessary in an effort to avoid medical malpractice suits, thereby adding to the nation’s health-care costs.

Types of Reform The federal government and a number of states have begun to take some steps toward tort reform. Measures to reduce the number of tort cases include the following:

1. Limiting the amount of both punitive damages and general damages that can be awarded. 2. Capping the amount that attorneys can collect in contingency fees (attorneys’ fees that are

based on a percentage of the damages awarded to the client).

3. Requiring the losing party to pay both the plaintiff’s and the defendant’s expenses.

Federal Reform At the federal level, the Class Action Fairness Act (CAFA)3 shifted jurisdic- tion over large interstate tort and product liability class-action lawsuits from the state courts to the federal courts. (A class action is a lawsuit in which a large number of plaintiffs bring suit as a group. Product liability suits involve the manufacture, sale, and distribution of allegedly dangerous or defective goods.)

The CAFA prevents plaintiffs’ attorneys from forum shopping—looking for a court based on whether the court is likely to provide a favorable judgment. Previously, multiple courts often had jurisdiction over class-action claims. Plaintiffs’ attorneys naturally chose to bring suit in state courts that were known to be sympathetic to their clients’ cause and predisposed to award large damages. Now, under the CAFA, state courts no longer have jurisdiction over class actions.

State Reform At the state level, more than half of the states have placed caps ranging from $250,000 to $750,000 on noneconomic general damages (for example, pain and suffering), especially in medical malpractice suits. More than thirty states have limited punitive damages, with some imposing outright bans.

Note, though, that the highest courts in about half a dozen states have declared their states’ damages caps to be unconstitutional. CASE EXAMPLE 4.2 Naython Watts was born with disabling brain injuries caused by the negligence of physicians at Cox Medical Centers in Missouri. At the age of six, Naython could not walk, talk, or feed himself. He had the

2. State Farm Mutual Automobile Insurance Co. v. Campbell, 538 U.S. 408, 123 S.Ct. 1513, 155 L.Ed.2d 585 (2003). 3. 28 U.S.C. Sections 1453, 1711–1715.

KNOW THIS Damage refers to harm or injury to persons or property. Damages is a legal term that refers to the monetary compensation awarded to a plaintiff who has suffered such harm or injury.

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mental capacity of a two-year-old, suffered from seizures, and needed around-the-clock care. His mother, Deborah Watts, sued the medical center on his behalf. A jury awarded Watts $1.45 million in noneconomic damages, plus $3.37 million in future medical damages.

The trial court reduced the noneconomic damages award to $350,000—the statutory cap under Missouri’s law. Watts appealed. Missouri’s highest court struck down the state’s damages cap, holding that it violated the state constitution’s right to trial by jury. The court reasoned that the amount of damages is a fact for the jury to determine, and the legislature cannot place caps on jury awards independent of the facts of a case.4 n

4–1d Classifications of Torts There are two broad classifications of torts: intentional torts and unintentional torts (torts involv- ing negligence). Intentional torts result from the intentional violation of person or property (fault with intent). Negligence results from the breach of a duty to act reasonably (fault with- out intent). The classification of a particular tort depends largely on how the tort occurs (intentionally or negligently) and the surrounding circumstances.

4–1e Defenses Even if a plaintiff proves all the elements of a tort, the defendant can raise a number of legally recognized defenses—reasons why the plaintiff should not obtain damages. The defenses available may vary depending on the specific tort involved.

A common defense to intentional torts against persons, for instance, is consent. When a per- son consents to the act that damages her or him, there is generally no liability. The most widely used defense in negligence actions is comparative negligence (discussed later in this chapter). A successful defense releases the defendant from partial or full liability for the tortious act.

Most states also have a statute of limitations that establishes the time limit (often two years from the date of discovering the harm) within which a particular type of lawsuit can be filed. After that time period has run, the plaintiff can no longer file a claim.

4–2 Intentional Torts against Persons An intentional tort, as just mentioned, requires intent. The tortfeasor (the one committing the tort) must intend to commit an act, the consequences of which interfere with the personal or business interests of another in a way not permitted by law. An evil or harmful motive is not required—in fact, the person committing the action may even have a beneficial motive for committing what turns out to be a tortious act.

In tort law, intent means only that the person intended the consequences of his or her act or knew with substantial certainty that certain consequences would result from the act. The law generally assumes that individuals intend the normal consequences of their actions. Thus, forcefully pushing another—even if done in jest and without any evil motive—is an inten- tional tort if injury results, because the object of a strong push can ordinarily be expected to fall down.

Intent can be transferred when a defendant intends to harm one individual, but uninten- tionally harms a different person. This is called transferred intent. EXAMPLE 4.3 Alex swings a bat intending to hit Blake but misses and hits Carson instead. Carson can sue Alex for the tort of battery (discussed shortly) because Alex’s intent to harm Blake can be transferred to Carson. n

4. Watts v. Lester E. Cox Medical Centers, 376 S.W.3d 633 (Mo. 2012).

LEARNING OBJECTIVE 2 What are two basic categories of torts?

Defense A reason offered by a defendant in an action or lawsuit as to why the plaintiff should not recover or establish what she or he seeks.

Intentional Tort A wrongful act knowingly committed.

Tortfeasor One who commits a tort.

KNOW THIS In intentional tort actions, the defendant must intend to commit the act, but need not have intended to cause harm to the plaintiff.

Transferred Intent A legal principle under which a person who intends to harm one individual, but unintentionally harms a different individual, can be liable to the second victim for an intentional tort.

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In this section, we discuss intentional torts against persons. These torts include assault and battery, false imprisonment, infliction of emotional distress, defamation, invasion of the right to privacy, appropriation, misrepresentation, abusive or frivolous litigation, and wrong- ful interference.

4–2a Assault and Battery An assault is any intentional and unexcused threat of immediate harmful or offensive contact—words or acts that create in another person a reasonable apprehension of harmful contact. An assault can be completed even if there is no actual contact with the plaintiff, provided the defendant’s conduct causes the plaintiff to have a reasonable apprehension of imminent harm. Tort law aims to protect individuals from having to expect harmful or offen- sive contact.

If the act that created the apprehension is completed and results in harm to the plaintiff, it is a battery, which is defined as an unexcused and harmful or offensive physical contact intentionally performed. EXAMPLE 4.4 Ivan threatens Jean with a gun and then shoots her. The pointing of the gun at Jean is an assault. The firing of the gun (if the bullet hits Jean) is a battery. n

The contact can be harmful, or it can be merely offensive (such as an unwelcome kiss). Physical injury need not occur. The contact can be made by the defendant or by some force set in motion by the defendant, such as a rock thrown by the defendant. Whether the contact is offensive or not is determined by the reasonable person standard.5

If the plaintiff shows that there was contact, and the jury (or judge, if there is no jury) agrees that the contact was offensive, the plaintiff has a right to compensation. A plaintiff may be compensated for the emotional harm resulting from a battery, as well as for physical harm. The defendant may raise a number of legally recognized defenses to justify his or her conduct, including self-defense and defense of others.

4–2b False Imprisonment False imprisonment is the intentional confinement or restraint of another person’s activities with- out justification. False imprisonment interferes with the freedom to move without restraint. The confinement can be accomplished through the use of physical barriers, physical restraint, or threats of physical force. Moral pressure or threats of future harm do not constitute false imprisonment. It is essential that the person under restraint does not wish to be restrained.

Businesspersons may face suits for false imprisonment after they have attempted to confine a suspected shoplifter for questioning. Under the “privilege to detain” granted to merchants in most states, a merchant can use reasonable force to detain or delay a person suspected of shoplifting the merchant’s property. Although the details of the privilege vary from state to state, generally laws require that any detention be conducted in a reasonable manner and for only a reasonable length of time. Undue force or unreasonable detention can lead to liability for the business.

Cities and counties may also face lawsuits for false imprisonment if they detain individuals without reason. CASE EXAMPLE 4.5 Police arrested Adetokunbo Shoyoye for an unpaid sub- way ticket and for a theft that had been committed by someone who had stolen his identity. A court ordered that he be released, but a county employee mistakenly confused Shoyoye’s paperwork with that of another person, who was scheduled to be sent to state prison. As a result, instead of being released, Shoyoye was held in county jail for more than two weeks. Shoyoye later sued the county for false imprisonment and won.6 n

5. The reasonable person standard is an objective test of how a reasonable person would have acted under the same circum- stances. See “The Duty of Care and Its Breach” later in this chapter.

6. Shoyoye v. County of Los Angeles, 203 Cal.App.4th 947, 137 Cal.Rptr.3d 839 (2012).

Assault Any word or action intended to make another person fearful of immediate physical harm—a reasonably believable threat.

Battery Physical contact with another that is unexcused, harmful or offensive, and intentionally performed.

Can cities and counties be sued for false imprisonment?

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4–2c Intentional Infliction of Emotional Distress The tort of intentional infliction of emotional distress can be defined as extreme and outrageous conduct resulting in severe emotional distress to another. To be actionable (capable of serving as the ground for a lawsuit), the conduct must be so extreme and outrageous that it exceeds the bounds of decency accepted by society.

Outrageous Conduct Courts in most jurisdictions are wary of emotional distress claims and confine them to truly outrageous behavior. Generally, repeated annoyances (such as those experienced by a person who is being stalked), coupled with threats, are sufficient to support a claim. Acts that cause indignity or annoyance alone usually are not enough.

EXAMPLE 4.6 A father attacks a man who has had consensual sexual relations with the father’s nineteen-year-old daughter. The father handcuffs the man to a steel pole and threat- ens to kill him unless he leaves town immediately. The father’s conduct may be sufficiently extreme and outrageous to be actionable as an intentional infliction of emotional distress. n

Limited by the First Amendment When the outrageous conduct consists of speech about a public figure, the First Amendment’s guarantee of freedom of speech limits emotional distress claims. CASE EXAMPLE 4.7 Hustler magazine once printed a fake advertisement that showed a picture of the Reverend Jerry Falwell and described him as having lost his virginity to his mother in an outhouse while he was drunk. Falwell sued the magazine for intentional inflic- tion of emotional distress and won, but the United States Supreme Court overturned the deci- sion. The Court held that creators of parodies of public figures are protected under the First Amendment from claims of intentional infliction of emotional distress. (The Court applied the same standards that apply to public figures in defamation lawsuits, discussed next.)7 n

4–2d Defamation As discussed in Chapter 2, the freedom of speech guaranteed by the First Amendment to the U.S. Constitution is not absolute. In interpreting the First Amendment, the courts must balance free speech rights against other strong social interests, including society’s interest in preventing and redressing attacks on reputation. (Nations with fewer free speech protections have seen an increase in defamation lawsuits targeting U.S. citizens and journalists as defen- dants. See this chapter’s Beyond Our Borders feature for a discussion of this trend.)

The tort of defamation involves wrongfully hurting a person’s good reputation. The law has imposed a general duty on all persons to refrain from making false, defamatory statements of fact about others. Breaching this duty in writing or another permanent form (such as a digital recording) constitutes the tort of libel. Breaching the duty orally is the tort of slander. The tort of defamation also arises when a false statement of fact is made about a person’s product, business, or legal ownership rights to property.

To establish defamation, a plaintiff normally must prove the following:

1. The defendant made a false statement of fact. 2. The statement was understood as being about the plaintiff and tended to harm the

plaintiff’s reputation.

3. The statement was published to at least one person other than the plaintiff. 4. In addition, if the plaintiff is a public figure, she or he must prove actual malice.

7. Hustler Magazine, Inc. v. Falwell, 485 U.S. 46, 108 S.Ct. 876, 99 L.Ed.2d 41 (1988). For another example of how the courts protect parody, see Busch v. Viacom International, Inc., 477 F.Supp.2d 764 (N.D.Tex. 2007), involving a fake endorsement of televangelist Pat Robertson’s diet shake.

Actionable Capable of serving as the basis of a lawsuit. An actionable claim can be pursued in a lawsuit or other court action.

Learning Objective 3 What is defamation? Name two types of defamation.

Defamation Anything published or publicly spoken that causes injury to another’s good name, reputation, or character.

Libel Defamation in writing or another permanent form (such as a digital recording).

Slander Defamation in oral form.

Is it legal to create a parody of a public figure, such as the Reverend Jerry Falwell?

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Statement of Fact Requirement Often at issue in defamation lawsuits (including online def- amation, discussed in Chapter 7) is whether the defendant made a statement of fact or a state- ment of opinion.8 Statements of opinion normally are not actionable because they are protected under the First Amendment. In other words, making a negative statement about another per- son is not defamation unless the statement is false and represents something as a fact (for exam- ple, “Lane cheats on his taxes”) rather than a personal opinion (for example, “Lane is a jerk”).

The Publication Requirement The basis of the tort of defamation is the publication of a statement or statements that hold an individual up to contempt, ridicule, or hatred. Publica- tion here means that the defamatory statements are communicated to persons other than the defamed party.

EXAMPLE 4.8 If Thompson writes Andrews a private letter or text falsely accusing him of embezzling funds, the action does not constitute libel. If Peters falsely states that Gordon is dishonest and incompetent when no one else is around, the action does not constitute slander. In neither instance was the message communicated to a third party. n

The courts have generally held that even dictating a letter to a secretary constitutes pub- lication, although the publication may be privileged (as discussed shortly). If a third party overhears defamatory statements by chance, the courts usually hold that this also constitutes publication. Defamatory statements made via the Internet (in e-mail or posted on social media)

8. See, for example, Lott v. Levitt, 469 F.Supp.2d 575 (N.D.Ill. 2007).

As mentioned earlier, U.S. plaintiffs have sometimes engaged in forum shopping by trying to have their complaints heard by a particular state court that is likely to be sym- pathetic to their claims. Libel tourism is essen- tially forum shopping on an international scale. Rather than filing a defamation lawsuit in the United States, where the freedoms of speech and press are strongly protected, a plaintiff files it in a foreign jurisdiction where there is a greater chance of winning.

The Threat of Libel Tourism Libel tourism can have a chilling effect on the speech of U.S. journalists and authors because the fear of liability in other nations may pre- vent them from freely discussing topics of profound public importance. Libel tourism might even increase the threat to our nation’s security if it discourages authors from writing about persons who support or finance terror- ism or other dangerous activities.

The threat of libel tourism captured media attention when Khalid bin Mahfouz, a Saudi Arabian businessman, sued U.S. resident Dr. Rachel Ehrenfeld in London, England. Ehren- feld had written a book on terrorist financ- ing that claimed Mahfouz financed Islamic terrorist groups. Mahfouz filed the case in England because English law assumes that the offending speech is false (libelous), and the author must prove that the speech is true in order to prevail. The English court took jurisdiction because twenty-three copies of the book had been sold online to residents of the United Kingdom.

Ehrenfeld did not go to England to defend herself, and the court entered a judgment of $225,000 against her. She then counter- sued Mahfouz in a U.S. court in an attempt to show that she was protected under the First Amendment and had not committed libel, but that case was dismissed for lack of jurisdiction.a

The U.S. Response In response to the Ehrenfeld case, the New York state legislature enacted the Libel Terrorism Reform Act in 2008.b That act enables New York courts to assert jurisdiction over anyone who obtains a foreign libel judgment against a writer or publisher living in New York State. It also prevents courts from enforcing foreign libel judgments unless the foreign country provides free speech protection equal to or greater than that available in New York. In 2010, the federal government passed similar legislation that makes foreign libel judgments unenforceable in U.S. courts unless they are consistent with the First Amendment.c

CRITICAL THINKING

▪▪ Why do we need special legislation designed to control foreign libel claims against U.S. citizens? Explain.

“Libel Tourism”BEYOND OUR BORDERS

a. Ehrenfeld v. Mahfouz, 518 F.3d 102 (2d Cir. 2008).

b. McKinney’s Consolidated Laws of New York, Sections 302 and 5304.

c. Securing the Protection of our Enduring and Established Constitutional Heritage Act, 28 U.S.C. Sections 4101–4105.

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are also actionable, as you will read in Chapter 7. Note further that anyone who republishes or repeats defamatory statements is liable even if that person reveals the source of the statements.

Damages for Libel Once a defendant’s liability for libel is established, general damages (defined earlier) are presumed as a matter of law. General damages are designed to compensate the plaintiff for nonspecific harms such as disgrace or dishonor in the eyes of the community, humiliation, injured reputation, and emotional distress—harms that are difficult to measure. In other words, to recover general damages in a libel case, the plaintiff need not prove that she or he was actually harmed in any specific way as a result of the libelous statement.

Damages for Slander In contrast to cases alleging libel, in a case alleging slander, the plain- tiff must prove special damages (defined earlier) to establish the defendant’s liability. In other words, the plaintiff must show that the slanderous statement caused the plaintiff to suffer actual economic or monetary losses. Unless this initial hurdle of proving special damages is overcome, a plaintiff alleging slander normally cannot go forward with the suit and recover any damages. This requirement is imposed in cases involving slander because slanderous statements have a temporary quality. In contrast, a libelous (written) statement has the quality of permanence, can be circulated widely, especially through social media, and usually results from some degree of deliberation on the part of the author.

Exceptions to the burden of proving special damages in cases alleging slander are made for certain types of slanderous statements. If a false statement constitutes “slander per se,” no proof of special damages is required for it to be actionable. The following four types of false utterances are considered to be slander per se:

1. A statement that another has a loathsome disease (historically, leprosy and sexually transmitted diseases, but now also including allegations of mental illness).

2. A statement that another has committed improprieties while engaging in a business, profession, or trade.

3. A statement that another has committed or has been imprisoned for a serious crime. 4. A statement that a person (usually only unmarried persons and sometimes only women)

is unchaste or has engaged in serious sexual misconduct.

Defenses to Defamation Truth is normally an absolute defense against a defamation charge. In other words, if the defendant in a defamation suit can prove that his or her allegedly defam- atory statements were true, normally no tort has been committed.

Other defenses to defamation may exist if the statement is privileged or concerns a pub- lic figure. Note that the majority of defamation actions in the United States are filed in state courts, and the states may differ both in how they define defamation and in the particular defenses they allow, such as privilege (discussed shortly).

When does an online criticism of a physician become defamation? Just as there are online rating sites for col- lege professors, there are rating sites for practicing physi- cians. A posting at such a site formed the basis for a def- amation lawsuit brought by neurologist Dr. David McKee.

McKee went to examine a patient who had been trans- ferred from the intensive care unit (ICU) to a private room. In the room were family members of the patient, includ- ing his son. The patient’s son later made the following post on a physician-rating Web site: “[Dr. McKee] seemed upset that my father had been moved [into a private room]. Never having met my father or his family, Dr. McKee said ‘When

“My initial response was to sue her for defamation of character, but then I realized that I had no character.”

Charles Barkley 1963–present (National Basketball Association player, 1984–2000)

Can a person post online a criticism about a physician’s “bedside manner” without being successfully sued for defamation?

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you weren’t in ICU, I had to spend time finding out if you transferred or died.’ When we gaped at him, he said ‘Well, 44 percent of hemorrhagic strokes dies within 30 days. I guess this is the better option.’” 9

McKee filed suit for defamation but lost. The court found that all the statements made by the son were essentially true, and truth is a complete defense to a defamation action. In other words, true statements, however disparaging, are not actionable. Even the presence of minor inaccuracies of expression or detail does not render basically true statements false. As long as the “sting of the libelous charge is justified,” defamation has not occurred.

Privileged Communications. In some circumstances, a person will not be liable for defamatory statements because she or he enjoys a privilege, or immunity. Privileged communications are of two types: absolute and qualified.10 Only in judicial proceedings and certain government proceedings is an absolute privilege granted. Thus, statements made in a courtroom by attor- neys and judges during a trial are absolutely privileged, as are statements made by government officials during legislative debate.

In other situations, a person will not be liable for defamatory statements because he or she has a qualified, or conditional, privilege. An employer’s statements in written evaluations of employees are an example of a qualified privilege. Generally, if the statements are made in good faith and the publication is limited to those who have a legitimate interest in the commu- nication, the statements fall within the area of qualified privilege. EXAMPLE 4.9 Jorge worked at Facebook for five years and was being considered for a management position. His supervisor, Lydia, wrote a memo about Jorge’s performance to those evaluating him for the management position. The memo contained certain negative statements. As long as Lydia honestly believed that what she wrote was true and limited her disclosure to company representatives, her state- ments would likely be protected by a qualified privilege. n

Public Figures. Politicians, entertainers, professional athletes, and other persons who are in the public eye are considered public figures. In general, public figures are considered fair game, and false and defamatory statements about them that appear in the media will not constitute defamation unless the statements are made with actual malice.11 To be made with actual malice, a statement must be made with either knowledge of its falsity or a reckless disregard of the truth.

Statements about public figures, especially when made via a public medium, are usually related to matters of general interest. They are made about people who substantially affect all of us. Furthermore, public figures generally have some access to a public medium for answer- ing disparaging (belittling) falsehoods about themselves, whereas private individuals do not. For these reasons, public figures have a greater burden of proof in defamation cases (they must prove actual malice) than do private individuals.

CASE EXAMPLE 4.10 In Touch magazine published a story about a former call girl who claimed to have slept with legendary soccer player David Beckham more than once. Beckham sued In Touch magazine for libel, seeking $25 million in damages. He said that he had never met the woman, had not cheated on his wife with her, and had not paid her for sex. After months of litigation, a federal district court dismissed the case because Beckham could not show that the magazine had acted with actual malice. Whether or not the statements in the article were accurate, there was no evidence that the defendants had made the statements with knowledge of their falsity or reckless disregard for the truth.12 n

9. McKee v. Laurion, Supreme Court of Minnesota, 825 N.W.2d 725 (2013). 10. Note that the term privileged communication in this context is not the same as privileged communication between a profes-

sional, such as an attorney, and his or her client. 11. New York Times Co. v. Sullivan, 376 U.S. 254, 84 S.Ct. 710, 11 L.Ed.2d 686 (1964). 12. Beckham v. Bauer Pub. Co., L.P., 2011 WL 977570 (2011).

Privilege A special right, advantage, or immunity that enables a person or a class of persons to avoid liability for defamation.

Actual Malice The deliberate intent to cause harm that exists when a person makes a statement with either knowledge of its falsity or reckless disregard of the truth. Actual malice is required to establish defamation against public figures.

A publication printed statements by a woman who claimed that she had slept with David Beckham on several occasions. In order for Beckham to prevail in a lawsuit against the publication for defamatory statements, what legal barrier must he overcome?

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4–2e Invasion of the Right to Privacy and Appropriation A person has a right to solitude and freedom from prying public eyes—in other words, to privacy. As discussed in Chapter 2, the Supreme Court has held that a fundamental right to privacy is implied by various amendments to the U.S. Constitution. Some state constitutions also explicitly provide for privacy rights. In addition, a number of federal and state statutes have been enacted to protect individual rights in specific areas.

Tort law also safeguards these rights through the torts of invasion of privacy and appropria- tion. Generally, to sue successfully for an invasion of privacy, a person must have a reasonable expectation of privacy, and the invasion must be highly offensive. (See this chapter’s Adapting the Law to the Online Environment feature for a discussion of how invasion of privacy claims can arise when someone posts pictures or videos taken with digital devices.)

ADAPTING THE LAW TO THE ONLINE ENVIRONMENT Revenge Porn and Invasion of Privacy

Every digital device today takes photos and videos at virtually no cost. Software allows the recording of conversations via Skype. Many couples immortalize their “pri- vate moments” using such digital devices. One partner may take a racy “selfie” and send it as an attachment to a text message to the other partner, for example.

Occasionally, after a couple breaks off their relationship, one of them seeks a type of digital revenge. The result, called revenge porn, has been defined in the Cyber Civil Rights Initiative as “The online distribution of sexually explicit images of a non-consenting individual with the intent to humiliate that person.” Until relatively recently, few states had criminal statutes that covered revenge porn. Therefore, victims have sued on the basis of (1) invasion of privacy, (2) public dis- closure of private facts, and (3) intentional infliction of emotional distress.

It Is More Than Just Pictures and Videos The most egregious form of revenge porn occurs when the perpetuator provides detailed information about the victim. Such information may include the victim’s name,

Facebook page, address, and phone number, as well as the victim’s workplace and chil- dren’s names. This information, along with the sexually explicit photos and videos, are posted on hosting Web sites. Many such Web sites have been shut down, as was the case with IsAnybodyDown? and Texxxan.com. But others are still active, usually with offshore servers and foreign domain-name owners.

The Injurious Results of Revenge Porn To be sure, victims of revenge porn suffer extreme embarrassment. They may also have their reputations ruined. Some have lost their jobs. A number of victims have been stalked in the physical world and harassed online and offline. When attempts at hav- ing offending photos removed from Web sites have failed, victims have changed their phone numbers and sometimes their names.

A Class Action Lawsuit Hollie Toups, along with twenty-two other female plaintiffs, sued the domain name reg- istrar and Web hosting company GoDaddy in a Texas court. Although GoDaddy did not create the defamatory and offensive mate- rial at issue, GoDaddy knew of the content and did not remove it. The plaintiffs asserted

causes of action “for intentional infliction of emotional distress,” among other claims. Additionally, the plaintiffs argued that “by its knowing participation in these unlaw- ful activities, GoDaddy has also committed the intentional Texas tort of invasion of privacy . . . as well as intrusion on Plaintiffs’ right to seclusion, the public disclosure of their private facts, [and] the wrongful appro- priation of their names and likenesses. . . .” GoDaddy sought to dismiss the case, and an appeals court eventually granted GoDaddy’s motion to dismiss.a

Another Texas woman had better luck. In a jury trial in early 2014, she won a $500,000 award. The woman’s ex-boyfriend had uploaded videos to YouTube and other sites. At the time she made the complaint, revenge porn was not a crime in Texas.

CRITICAL THINKING

▪▪ Should domain name hosting companies be liable for revenge porn?

a. GoDaddy.com, LLC. v. Toups, 429 S.W.3d 752, Tex. App—Beaumont (2014).

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Invasion of Privacy Four acts qualify as an invasion of privacy: 1. Intrusion into an individual’s affairs or seclusion. Invading someone’s home or illegally

searching someone’s briefcase is an invasion of privacy. The tort has been held to extend to eavesdropping by wiretap, the unauthorized scanning of a bank account, compulsory blood testing, and window peeping. EXAMPLE 4.11 A female sports reporter for ESPN is digitally videoed while naked through the peephole in the door of her hotel room. If she sues, she will likely win a lawsuit against the man who took the video and posted it on the Internet. n

2. False light. Publication of information that places a person in a false light is also an invasion of privacy. For instance, writing a story about a person that attributes ideas and opinions not held by that person is an invasion of privacy. (Publishing such a story could involve the tort of defamation as well.) EXAMPLE 4.12 An Arkansas newspaper prints an article with the headline “Special Delivery: World’s oldest newspaper carrier, 101, quits because she’s pregnant!” Next to the article is a picture of a ninety-six-year-old woman who is not the subject of the article (and not pregnant). If she sues the paper for invasion of privacy, she will probably win. n

3. Public disclosure of private facts. This type of invasion of privacy occurs when a person publicly discloses private facts about an individual that an ordinary person would find objectionable or embarrassing. A newspaper account about a private citizen’s sex life or financial affairs could be an actionable invasion of privacy, even if the information revealed is true, because it should not be a matter of public concern.

4. Appropriation of identity. Under the common law, using a person’s name, picture, or other likeness for commercial purposes without permission is a tortious invasion of privacy. An individual’s right to privacy normally includes the right to the exclusive use of her or his identity. EXAMPLE 4.13 An advertising agency asks a singer with a distinctive voice and stage presence to do a marketing campaign for a new automobile. The singer rejects the offer. If the agency then uses someone who imitates the singer’s voice and dance moves in the ad, this would be actionable as an appropriation of identity. n

Appropriation Most states today have codified the common law tort of appropriation of iden- tity in statutes that establish the distinct tort of appropriation, or right of publicity. States differ as to the degree of likeness that is required to impose liability for appropriation, however.

Some courts have held that even when an animated character in a video or a video game is made to look like an actual person, there are not enough similarities to constitute appropria- tion. CASE EXAMPLE 4.14 The Naked Cowboy, Robert Burck, was a street entertainer in New York City who had achieved some fame performing for tourists. He performed wearing only a white cowboy hat, white cowboy boots, and white underwear and carrying a guitar strategi- cally placed to give the illusion of nudity. Burck sued Mars, Inc., the maker of M&Ms candy, over a video it showed on billboards in Times Square that depicted a blue M&M dressed exactly like The Naked Cowboy. The court, however, held that the use of Burck’s signature costume did not amount to appropriation.13 n

4–2f Fraudulent Misrepresentation A misrepresentation leads another to believe in a condition that is different from the condi- tion that actually exists. This is often accomplished through a false or incorrect statement. Although persons sometimes make misrepresentations accidentally because they are unaware of the existing facts, the tort of fraudulent misrepresentation, or fraud, involves intentional deceit for personal gain. The tort includes several elements:

13. Burck v. Mars, Inc., 571 F.Supp.2d 446 (S.D.N.Y. 2008). Also see Kirby v. Sega of America, Inc., 144 Cal.App.4th 47, 50 Cal.Rptr.3d 607 (2006).

Appropriation In tort law, the use by one person of another person’s name, likeness, or other identifying characteristic without permission and for the benefit of the user.

Fraudulent Misrepresentation Any misrepresentation, either by misstatement or by omission of a material fact, knowingly made with the intention of deceiving another and on which a reasonable person would and does rely to his or her detriment.

Under what circumstances, if any, could the use of the image of the Naked Cowboy in an ad constitute appropriation?

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1. The misrepresentation of facts or conditions with knowledge that they are false or with reckless disregard for the truth.

2. An intent to induce another to rely on the misrepresentation. 3. Justifiable reliance by the deceived party. 4. Damage suffered as a result of the reliance. 5. A causal connection between the misrepresentation and the injury suffered.

For fraud to occur, more than mere puffery, or seller’s talk, must be involved. Fraud exists only when a person represents as a fact something she or he knows is untrue. For example, it is fraud to claim that a roof does not leak when one knows it does. Facts are objectively ascer- tainable, whereas seller’s talk is not. “I am the best accountant in town” is seller’s talk because best is subjective. In the following case, the court considered each of the elements of fraud.

Puffery A salesperson’s exaggerated claims concerning the quality of property offered for sale. Such claims involve opinions rather than facts and are not legally binding promises or warranties.

FACTS Joseph Guido bought a parcel of land in Still- water, New York, that contained nine rental houses. The houses shared a waste disposal system that was defective. Guido had a new septic system installed. When town officials discovered sewage on the prop- erty, Guido had the system partially replaced. Pro- spective buyers, including Danny Revell, were given a property information sheet that stated, “Septic system totally new—each field totally replaced.” In response to a questionnaire from the buyers’ bank, Guido denied any knowledge of environmental prob- lems. A month after the buyers bought the houses, the septic system failed and required substantial remediation. The lender foreclosed on the property. The buyers filed a suit in a New York state court against Guido and his firm, Real Property Solutions, LLC, alleging fraud. A jury found fraud and awarded damages. The court issued a judgment in the plaintiffs’ favor. The defendants appealed.

ISSUE Did the facts of the case and the plaintiffs’ proof meet all of the requirements for establishing fraud?

DECISION Yes. The state intermediate appellate court affirmed the lower court’s judgment in the plaintiffs’ favor.

REASON The court explained that to prove fraud, the plaintiffs had to establish that the defendants, with the intent to deceive, misrepresented a material fact that they knew to be false and on which the plaintiffs justifiably relied, incurring damages. The property’s information sheet and Guido’s responses to the envi- ronmental questionnaire misrepresented the facts. The septic system was not “totally new,” and Guido knew that partially treated sewage had been discov- ered on the property. Guido’s intent to deceive was shown by the “cavalier manner” in which he answered the questionnaire and his knowledge of the problems with the septic system. Because a visual inspection of the property did not reveal those problems, “one would assume that the system was working properly.” The plaintiffs’ reliance on the representation in the

property information sheet was thus justified. The evidence of dam- ages included “an abundance of receipts, invoices, billing statements and canceled checks” used by an accountant to calculate the amount.

CRITICAL THINKING—Legal Consideration Financing for the purchase of the property was conditioned on the bank’s review of Gui- do’s answers to the environmental questionnaire. How could the court conclude that the plaintiffs justifiably relied on misrepresentations made to the bank? Explain.

If a home seller claims that a new septic system was installed when it wasn’t,

does that constitute fraud?

Case 4.1

Revell v. Guido New York Supreme Court, Appellate Division, Third Department, 124 A.D.3d 1006, __ N.Y.S.2d __ (2015).

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Statement of Fact versus Opinion Normally, the tort of misrepresentation or fraud occurs only when there is reliance on a statement of fact. Sometimes, however, the tort may involve reliance on a statement of opinion if the individual making the statement has a superior knowl- edge of the subject matter. For instance, when a lawyer makes a statement of opinion about the law in a state in which the lawyer is licensed to practice, a court would treat it as a state- ment of fact.

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Negligent Misrepresentation Sometimes, a tort action can arise from misrepresentations that are made negligently rather than intentionally. The key difference between intentional and negligent misrepresentation is whether the person making the misrepresentation had actual knowledge of its falsity. Negligent misrepresentation requires only that the person making the statement or omission did not have a reasonable basis for believing its truthfulness.

Liability for negligent misrepresentation usually arises when the defendant who made the misrepresentation owed a duty of care to the plaintiff to supply correct information. State- ments or omissions made by attorneys and accountants to their clients, for instance, can lead to liability for negligent misrepresentation.

4–2g Abusive or Frivolous Litigation Tort law recognizes that people have a right not to be sued without a legally just and proper reason, and therefore it protects individuals from the misuse of litigation. Torts related to abu- sive litigation include malicious prosecution and abuse of process.

If a party initiates a lawsuit out of malice and without a legitimate legal reason, and ends up losing the suit, that party can be sued for malicious prosecution. Abuse of process can apply to any person using a legal process against another in an improper manner or to accomplish a purpose for which it was not designed.

The key difference between the torts of abuse of process and malicious prosecution is the level of proof required to succeed. Unlike malicious prosecution, abuse of process is not lim- ited to prior litigation and does not require the plaintiff to prove malice. It can be based on the wrongful use of subpoenas, court orders to attach or seize real property, or other types of formal legal process.

4–2h Wrongful Interference The torts known as business torts generally involve wrongful interference with another’s business rights. Business torts involving wrongful interference are generally divided into two categories: wrongful interference with a contractual relationship and wrongful interference with a business relationship.

Wrongful Interference with a Contractual Relationship Three elements are necessary for wrongful interference with a contractual relationship to occur:

1. A valid, enforceable contract must exist between two parties. 2. A third party must know that this contract exists. 3. The third party must intentionally induce a party to breach the contract.

CASE EXAMPLE 4.15 A landmark case involved an opera singer, Johanna Wagner, who was under contract to sing for a man named Lumley for a specified period of years. A man named Gye, who knew of this contract, nonetheless “enticed” Wagner to refuse to carry out the agreement, and Wagner began to sing for Gye. Gye’s action constituted a tort because it wrongfully interfered with the contractual relationship between Wagner and Lumley.14 (Of course, Wagner’s refusal to carry out the agreement also entitled Lumley to sue Wagner for breach of contract.) n

The body of tort law relating to intentional interference with a contractual relationship has expanded greatly in recent years. In principle, any lawful contract can be the basis for an action of this type. The contract could be between a firm and its employees or a firm and its customers. Sometimes, for instance, a competitor draws away one of a firm’s key employees. Only if the original employer can show that the competitor knew of the contract’s existence, and intentionally induced the breach, can damages be recovered from the competitor.

14. Lumley v. Gye, 118 Eng.Rep. 749 (1853).

Business Tort Wrongful interference with another’s business rights and relationships.

Opera singer Johanna Jachmann-Wagner is shown here in one of her many roles. She was under contract to sing for one person, but was enticed to break the contract and sing for someone else. Was a tort committed? If so, by whom?

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Wrongful Interference with a Business Relationship Businesspersons devise countless schemes to attract customers, but they are prohibited from unreasonably interfering with another’s business in their attempts to gain a share of the market. There is a difference between competitive methods and predatory behavior—actions undertaken with the intention of unlaw- fully driving competitors completely out of the market. Attempting to attract customers in general is a legitimate business practice, whereas specifically targeting the customers of a competitor is more likely to be predatory.

EXAMPLE 4.16 A shopping mall contains two athletic shoe stores: Joe’s and Ultimate Sport. Joe’s cannot station an employee at the entrance of Ultimate Sport to divert customers by tell- ing them that Joe’s will beat Ultimate Sport’s prices. This type of activity constitutes the tort of wrongful interference with a business relationship, which is commonly considered to be an unfair trade practice. If this activity were permitted, Joe’s would reap the benefits of Ultimate Sport’s advertising. n

Defenses to Wrongful Interference A person will not be liable for the tort of wrongful inter- ference with a contractual or business relationship if it can be shown that the interference was justified or permissible. Bona fide competitive behavior is a permissible interference even if it results in the breaking of a contract.

EXAMPLE 4.17 If Antonio’s Meats advertises so effectively that it induces Sam’s Restaurant to break its contract with Burke’s Meat Company, Burke’s will be unable to recover against Antonio’s Meats on a wrongful interference theory. After all, the public policy that favors free competition in advertising outweighs any possible instability that such competitive activity might cause in contractual relations. n

4–3 Intentional Torts against Property Intentional torts against property include trespass to land, trespass to personal property, con- version, and disparagement of property. These torts are wrongful actions that interfere with individuals’ legally recognized rights with regard to their land or personal property. The law distinguishes real property from personal property. Real property is land and things “perma- nently” attached to the land. Personal property consists of all other items, which are basically movable. Thus, a house and lot are real property, whereas the furniture inside the house is personal property. Cash and stocks and bonds are also personal property.

4–3a Trespass to Land A trespass to land occurs anytime a person, without permission, does any of the following:

1. Enters onto, above, or below the surface of land that is owned by another. 2. Causes anything to enter onto land owned by another. 3. Remains on land owned by another or permits anything to remain on it.

Actual harm to the land is not an essential element of this tort, because the tort is designed to protect the right of an owner to exclusive possession.

Common types of trespass to land include walking or driving on another’s land, shooting a gun over the land, and throwing rocks at a building that belongs to someone else. Another common form of trespass involves constructing a building so that part of it is on an adjoining landowner’s property.

Establishing Trespass Before a person can be a trespasser, the real property owner (or other person in actual and exclusive possession of the property) must establish that person as a trespasser. For instance, “posted” trespass signs expressly establish as a trespasser a person

KNOW THIS What society and the law consider permissible often depends on the circumstances.

Trespass to Land Entry onto, above, or below the surface of land owned by another without the owner’s permission or legal authorization.

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who ignores these signs and enters onto the property. Any person who enters onto property to commit an illegal act (such as a thief entering a lumberyard at night to steal lumber) is estab- lished impliedly as a trespasser, without posted signs. In contrast, a guest in your home is not a trespasser unless she or he has been asked to leave but refuses.

Damages At common law, a trespasser is liable for any damage caused to the property and generally cannot hold the owner liable for injuries sustained on the premises. This common law rule is being abandoned in many jurisdictions in favor of a reasonable duty of care rule that varies depending on the status of the parties.

For instance, a landowner may have a duty to post a notice that guard dogs patrol the property. Also, if young children are likely to be attracted to the property by some object, such as a swim- ming pool or a sand pile, and are injured, the landowner may be held liable under the attractive nuisance doctrine. An owner can normally use reasonable force to remove a trespasser from the premises—or detain the trespasser for a reasonable time—without liability for damages, however.

Defenses against Trespass to Land One defense to a claim of trespass to land is to show that the trespass was warranted. This may occur, for instance, when the trespasser entered the property to assist someone in danger.

Another defense is for the trespasser to show that he or she had a license to come onto the land. A licensee is one who is invited (or allowed to enter) onto the property of another for the licensee’s benefit. A person who enters another’s property to read an electric meter, for example, is a licensee. When you purchase a ticket to attend a movie or sporting event, you are licensed to go onto the property of another to view that movie or event.

Note that licenses to enter are revocable by the property owner. If a property owner asks a meter reader to leave and the meter reader refuses to do so, the meter reader at that point becomes a trespasser.

4–3b Trespass to Personal Property Whenever an individual wrongfully takes or harms the personal property of another or other- wise interferes with the lawful owner’s possession of personal property, trespass to personal property (also called trespass to chattels or trespass to personalty15) occurs. In this context, harm means not only destruction of the property, but also anything that diminishes its value, con- dition, or quality.

Trespass to personal property involves intentional meddling with a possessory interest (the right to possess), including barring an owner’s access to personal property. EXAMPLE 4.18 Kelly takes Ryan’s business law book as a practical joke and hides it so that Ryan is unable to find it for several days before the final examination. Here, Kelly has engaged in a trespass to personal property. (Kelly has also committed the tort of conversion—to be discussed next.) n

If it can be shown that trespass to personal property was warranted, then a complete defense exists. Most states, for example, allow automobile repair shops to retain a customer’s car (under what is called an artisan’s lien) when the customer refuses to pay for repairs already completed.

4–3c Conversion Any act that deprives an owner of personal property or of the use of that property without the owner’s permission and without just cause can constitute conversion. Even the taking of electronic records and data can form the basis of a conversion claim. Often, when conversion occurs, a trespass to personal property also occurs. The original taking of the personal prop- erty from the owner was a trespass, and wrongfully retaining the property is conversion.

15. Pronounced per-sun-ul-tee.

Trespass to Personal Property Wrongfully taking or harming the personal property of another or otherwise interfering with the lawful owner’s possession of personal property.

Conversion Wrongfully taking or retaining possession of an individual’s personal property and placing it in the service of another.

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Conversion is the civil side of crimes related to theft, but it is not limited to theft. Even if the rightful owner consented to the initial taking of the property, so there was no theft or trespass, a failure to return the personal property may still be conversion. EXAMPLE 4.19 Chen borrows Mark’s iPad to use while traveling home from school for the holidays. When Chen returns to school, Mark asks for his iPad back. Chen tells Mark that she gave it to her little brother for Christmas. In this situation, Mark can sue Chen for conversion, and Chen will have to either return the iPad or pay damages equal to its replacement value. n

Conversion can occur even when a person mistakenly believes that she or he was entitled to the goods. In other words, good intentions are not a defense against conversion. Someone who buys stolen goods, for instance, can be sued for conversion even if he or she did not know that the goods were stolen. If the true owner brings a tort action against the buyer, the buyer must either return the property to the owner or pay the owner the full value of the property (despite having already paid the purchase price to the thief).

In the following case, the court was asked to decide whether the tort of conversion was an appropriate cause of action for the misappropriation and use of a credit card.

KNOW THIS It is the intent to do an act that is important in tort law, not the motive behind the intent.

FACTS Darrel Derouis, the president of Welco Electronics, Inc., hired a certified bookkeeper to help him “find where his money went.” During the investigation, discrepancies in Welco’s credit-card statements were discovered. Statements from the credit-card company contained charges to AQM Supplies—a company established by Nicholas Mora, who worked for Welco as a quality assur- ance manager. The credit-card charges to AQM, which totaled more than $375,000, did not appear on Welco’s copies of the statements. At the time of the transactions, AQM had leased a portable credit-card terminal, and funds paid through the terminal were electronically deposited into Mora’s bank account.

Welco filed a suit in a California state court against Mora, alleging conversion. Welco sought the value of the funds allegedly converted, as well as interest, expenses, punitive damages, and other costs. The court ruled in Welco’s favor, and Mora appealed.

ISSUE Can the use of a company’s credit card by an employee to obtain funds from the company constitute conversion?

DECISION Yes. A state intermediate appellate court affirmed the lower court’s judgment.

REASON In the words of the court, “The tort of conversion has been adapted to new property rights and modern means of commercial transac- tions.” The court acknowledged that “historically, the tort of conversion was limited to tangible property and did not apply to intangible property,” but added that “modern courts . . . have permitted conversion claims against intangible interests.” The owner of a checking account, for instance, has an intangible property interest in his or her checks. Other examples of instruments represent-

ing intangible property rights include a savings account, an insurance policy, a company’s customer list, and a stock certificate.

Credit card, debit card, and PayPal information may also be subject to conversion. The card or account information is similar to the intangible property interest in a check. The court reasoned that when Mora misappropriated Welco’s credit card and used it, he took part of Welco’s credit balance with the credit-card company. The result was an unauthorized transfer to Mora of Welco’s property rights.

CRITICAL THINKING—E-Commerce Consideration Can the appropriation of an Internet domain name constitute conversion? Explain.

How can a portable credit card terminal be used for conversion?

Case 4.2

Welco Electronics, Inc. v. Mora Court of Appeal of California, Second District, 223 Cal.App.4th 202, 166 Cal.Rptr.3d 877 (2014).

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4–3d Disparagement of Property Disparagement of property occurs when economically injurious falsehoods are made about another’s product or property, rather than about another’s reputation (as in the tort of defama- tion). Disparagement of property is a general term for torts specifically referred to as slander of quality or slander of title.

Disparagement of Property An economically injurious falsehood about another’s product or property.

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Publication of false information about another’s product, alleging that it is not what its seller claims, constitutes the tort of slander of quality, or trade libel. To establish trade libel, the plaintiff must prove that the improper publication caused a third party to refrain from dealing with the plaintiff and that the plaintiff sustained economic damages (such as lost profits) as a result. An improper publication may be both a slander of quality and defamation of character. For example, a statement that disparages the quality of a product may also, by implication, disparage the character of the person who would sell such a product.

When a publication denies or casts doubt on another’s legal ownership of property, and the property’s owner suffers financial loss as a result, the tort of slander of title may exist. Usually, this is an intentional tort that occurs when someone knowingly publishes an untrue statement about property with the intent of discouraging a third party from dealing with the property’s owner. For instance, a car dealer would have difficulty attracting customers after competitors published a notice that the dealer’s stock consisted of stolen automobiles.

4–4 Unintentional Torts (Negligence) The tort of negligence occurs when someone suffers injury because of another’s failure to live up to a required duty of care. In contrast to intentional torts, in torts involving negligence, the tortfeasor neither wishes to bring about the consequences of the act nor believes that they will occur. The actor’s conduct merely creates a risk of such consequences. If no risk is created, there is no negligence. Moreover, the risk must be foreseeable—that is, it must be such that a reasonable person engaging in the same activity would anticipate the risk and guard against it. In determining what is reasonable conduct, courts consider the nature of the possible harm.

Many of the actions giving rise to the intentional torts discussed earlier in the chapter con- stitute negligence if the element of intent is missing (or cannot be proved). EXAMPLE 4.20 Juan walks up to Maya and intentionally shoves her. Maya falls and breaks an arm as a result. In this situation, Juan has committed an intentional tort (assault and battery). If Juan carelessly bumps into Maya, however, and she falls and breaks an arm as a result, Juan’s action will con- stitute negligence. In either situation, Juan has committed a tort. n

To succeed in a negligence action, the plaintiff must prove each of the following:

1. Duty. That the defendant owed a duty of care to the plaintiff. 2. Breach. That the defendant breached that duty. 3. Causation. That the defendant’s breach caused the plaintiff’s injury. 4. Damages. That the plaintiff suffered a legally recognizable injury.

We discuss each of these four elements of negligence next.

4–4a The Duty of Care and Its Breach Central to the tort of negligence is the concept of a duty of care. The basic principle under- lying the duty of care is that people in society are free to act as they please so long as their actions do not infringe on the interests of others. When someone fails to comply with the duty to exercise reasonable care, a potentially tortious act may result.

Failure to live up to a standard of care may be an act (setting fire to a building) or an omis- sion (neglecting to put out a campfire). It may be a careless act or a carefully performed but nevertheless dangerous act that results in injury. In determining whether the duty of care has been breached, courts consider several factors:

1. The nature of the act (whether it is outrageous or commonplace). 2. The manner in which the act was performed (cautiously versus heedlessly). 3. The nature of the injury (whether it is serious or slight).

Slander of Quality (Trade Libel) The publication of false information about another’s product, alleging that it is not what its seller claims.

Slander of Title The publication of a statement that denies or casts doubt on another’s legal ownership of property, causing financial loss to that property’s owner.

Negligence The failure to exercise the standard of care that a reasonable person would exercise in similar circumstances.

LEARNING OBJECTIVE 4 Identify the four elements of negligence.

Duty of Care The duty of all persons, as established by tort law, to exercise a reasonable amount of care in their dealings with others. Failure to exercise due care, which is normally determined by the reasonable person standard, constitutes the tort of negligence.

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Creating even a very slight risk of a dangerous explosion might be unreasonable, whereas creating a distinct possibility of someone’s burning his or her fingers on a stove might be reasonable.

The Reasonable Person Standard Tort law measures duty by the reasonable person standard. In determining whether a duty of care has been breached, the courts ask how a rea- sonable person would have acted in the same circumstances. The reasonable person standard is said to be (though in an absolute sense it cannot be) objective. It is not necessarily how a particular person would act. It is society’s judgment on how people should act. If the so-called reasonable person existed, he or she would be careful, conscientious, even tempered, and honest.

The degree of care to be exercised varies, depending on the defendant’s occupation or profession, her or his relationship with the plaintiff, and other factors. Generally, whether an action constitutes a breach of the duty of care is determined on a case-by-case basis. The outcome depends on how the judge (or jury, in a jury trial) decides a reasonable person in the position of the defendant would act in the particular circumstances of the case.

Note that the courts frequently use the reasonable person standard in other areas of law as well as in negligence cases. That individuals are required to exercise a reasonable standard of care in their activities is a pervasive concept in business law, and many of the issues discussed in subsequent chapters of this text have to do with this duty.

The Duty of Landowners Landowners are expected to exercise reasonable care to protect persons coming onto their property from harm. In some jurisdictions, landowners are held to owe a duty to protect even trespassers against certain risks. Landowners who rent or lease premises to tenants are expected to exercise reasonable care to ensure that the tenants and their guests are not harmed in common areas, such as stairways, entryways, and laundry rooms.

Duty to Warn Business Invitees of Risks. Retailers and other firms that explicitly or implicitly invite persons to come onto their premises have a duty to exercise reasonable care to protect these business invitees. The duty normally requires storeowners to warn business invitees of foreseeable risks about which the owners knew or should have known.

EXAMPLE 4.21 Liz enters a supermarket, slips on a wet floor, and sustains injuries as a result. If there was no sign warning that the floor was wet when Liz slipped, the owner of the supermarket would be liable for damages. A court would hold that the business owner was negligent because the owner failed to exercise a reasonable degree of care in protecting the store’s customers against foreseeable risks about which the owner knew or should have known. That a patron might slip on the wet floor and be injured was a foreseeable risk, and the owner should have taken care to avoid this risk or to warn the customer of it (by posting a sign or setting out orange cones, for example). n

The landowner also has a duty to discover and remove any hidden dangers that might injure a customer or other invitee. Store owners have a duty to protect customers from poten- tially slipping and injuring themselves on merchandise that has fallen off the shelves, for instance.

Obvious Risks Are an Exception. Some risks, of course, are so obvious that the owner need not warn of them. For instance, a business owner does not need to warn customers to open a door before attempting to walk through it. Other risks, however, may seem obvious to a business owner but may not be so to someone else, such as a child. In addition, even if a risk is obvious, that does not necessarily excuse a business owner from the duty to protect customers from foreseeable harm.

CASE EXAMPLE 4.22 Giorgio’s Grill in Hollywood, Florida, is a restaurant that becomes a nightclub after hours. At those times, traditionally—as the manager of Giorgio’s knew—the

Reasonable Person Standard The standard of behavior expected of a hypothetical “reasonable person.” It is the standard against which negligence is measured and that must be observed to avoid liability for negligence.

“A little neglect may breed great mischief.”

Benjamin Franklin 1706–1790 (American politician and inventor)

Business Invitee A person, such as a customer or a client, who is invited onto business premises by the owner of those premises for business purposes.

Does a “Wet Floor” sign relieve a restaurant owner from being held negligent if a customer slips?

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staff and customers throw paper napkins into the air as the music plays. The napkins land on the floor, but no one picks them up. One night, Jane Izquierdo went to Giorgio’s. Although she had been to the club on other occasions and knew about the napkin-throwing tradition, she slipped on a napkin and fell, breaking her leg. She sued Giorgio’s for negligence but lost at trial because the jury found that the risk of slipping on the napkins was obvious. A state appellate court reversed, however, holding that the obviousness of a risk does not discharge a business owner’s duty to its invitees to maintain the premises in a safe condition.16 n

It can be difficult to determine whether a risk is obvious. Because you can be held lia- ble if you fail to discover hidden dangers on business premises that could cause injuries to customers, you should post warnings of any conceivable risks on the property. Be vigilant and frequently reassess potential hazards. Train your employees to be on the lookout for possibly dangerous conditions at all times and to notify a supervisor immediately if they notice some- thing. Remember that a finding of liability in a single lawsuit can leave a small enterprise close to bankruptcy. To prevent potential negligence liability, make sure that your business premises are as safe as possible for all persons who might be there, including children, senior citizens, and individuals with disabilities.

The Duty of Professionals Persons who possess superior knowledge, skill, or training are held to a higher standard of care than others. Professionals—such as physicians, dentists, architects, engineers, accountants, and lawyers—are required to have a standard minimum level of special knowledge and ability. In determining what constitutes reasonable care, the law takes their training and expertise into account. Thus, an accountant’s conduct is judged not by the reasonable person standard, but by the reasonable accountant standard.

If a professional violates her or his duty of care toward a client, the professional may be sued for malpractice, which is essentially professional negligence. For instance, a patient might sue a physician for medical malpractice. A client might sue an attorney for legal malpractice.

4–4b Causation Another element necessary in a negligence action is causation. If a person breaches a duty of care and someone suffers an injury, the wrongful act must have caused the harm for it to con- stitute the tort of negligence.

Courts Ask Two Questions In deciding whether there is causation, the court must address two questions:

1. Is there causation in fact? Did the injury occur because of the defendant’s act, or would it have occurred anyway? If an injury would not have occurred without the defendant’s act, then there is causation in fact. Causation in fact can usually be determined by the use of the but for test: “but for” the wrongful act, the injury would not have occurred. Theoretically, causation in fact is limitless. One could claim, for example, that “but for” the creation of the world, a particular injury would not have occurred. Thus, as a practical matter, the law has to establish limits, and it does so through the concept of proximate cause.

2. Was the act the proximate cause of the injury? Proximate cause, or legal cause, exists when the connection between an act and an injury is strong enough to justify imposing liability. Courts use proximate cause to limit the scope of the defendant’s liability to a subset of the

16. Izquierdo v. Gyroscope, Inc., 946 So.2d 115 (Fla.App. 2007).

Malpractice Professional misconduct or the lack of the requisite degree of skill as a professional. Negligence on the part of a professional, such as a physician, is commonly referred to as malpractice.

Causation in Fact An act or omission without which an event would not have occurred.

Proximate Cause Legal cause. It exists when the connection between an act and an injury is strong enough to justify imposing liability.

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total number of potential plaintiffs that might have been harmed by the defendant’s actions. EXAMPLE 4.23 Ackerman carelessly leaves a campfire burning. The fire not only burns down the forest but also sets off an explosion in a nearby chemical plant that spills chemicals into a river, killing all the fish for a hundred miles downstream and ruining the economy of a tourist resort. Should Ackerman be liable to the resort owners? To the tourists whose vacations were ruined? These are questions of proximate cause that a court must decide. n

Both questions concerning causation must be answered in the affirmative for tort liability to arise. If a defendant’s action constitutes causation in fact but a court decides that the action was not the prox- imate cause of the plaintiff’s injury, the causation requirement has not been met—and the defendant normally will not be liable to the plaintiff.

Foreseeability Questions of proximate cause are linked to the concept of foreseeability. It would be unfair to impose liability on a defendant unless the defendant’s actions created a foreseeable risk of injury. Probably the most cited case on proximate cause is the Palsgraf case, which is discussed in this chapter’s Landmark in the Law feature. In determining the issue of proximate cause, the court addressed the following question: Does a defendant’s duty of care extend only to those who may be injured as a result of a foreseeable risk, or does it also extend to a person whose injury could not reasonably have been foreseen?

KNOW THIS Proximate cause can be thought of in terms of social policy. Should the defendant be made to bear the loss instead of the plaintiff?

Injuries from car accidents can cause handicaps that last a lifetime. Do such injuries satisfy the injury requirement for a finding of negligence?

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In 1928, the New York Court of Appeals (that state’s highest court) issued its deci- sion in Palsgraf v. Long Island Railroad Co.,a a case that has become a landmark in negli- gence law and proximate cause.

THE FACTS OF THE CASE The plaintiff, Helen Palsgraf, was waiting for a train on a station platform. A man carrying a small package wrapped in newspaper was rushing to catch a train that had begun to move away from the platform. As the man attempted to jump aboard the moving train, he seemed unsteady and about to fall. A railroad guard on the train car reached forward to grab him, and another guard on the platform pushed him from behind to help him board the train. In the process, the man’s package fell on the railroad tracks and exploded, because it con- tained fireworks. The repercussions of the

explosion caused scales at the other end of the train platform to fall on Palsgraf, who was injured as a result. She sued the railroad com- pany for damages in a New York state court.

THE QUESTION OF PROXIMATE CAUSE At the trial, the jury found that the railroad guards were negligent in their conduct. On appeal, the question before the New York Court of Appeals was whether the conduct of the railroad guards was the proximate cause of Palsgraf’s injuries. In other words, did the guards’ duty of care extend to Pals- graf, who was outside the zone of danger and whose injury could not reasonably have been foreseen?

The court stated that the question of whether the guards were negligent with respect to Palsgraf depended on whether her injury was reasonably foreseeable by the rail- road guards. Although the guards may have acted negligently with respect to the man boarding the train, this had no bearing on the question of their negligence with respect to Palsgraf. This was not a situation in which

a person committed an act so potentially harmful (for example, firing a gun at a build- ing) that he or she would be held responsi- ble for any harm that resulted. The court stated that here “there was nothing in the situation to suggest to the most cautious mind that the parcel wrapped in newspaper would spread wreckage through the station.” The court thus concluded that the railroad guards were not negligent with respect to Palsgraf, because her injury was not reason- ably foreseeable.

APPLICATION TO TODAY’S WORLD The Palsgraf case established foreseeability as the test for proximate cause. Today, the courts continue to apply this test in determining prox- imate cause—and thus tort liability for injuries. Generally, if the victim of a harm or the con- sequences of a harm done are unforeseeable, there is no proximate cause. Note, though, that in the online environment, distinctions based on physical proximity, such as the “zone of dan- ger” cited by the court in this case, are largely inapplicable.

Palsgraf v. Long Island Railroad Co. (1928)LANDMARK IN THE LAW

a. 248 N.Y. 339, 162 N.E. 99 (1928).

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4–4c The Injury Requirement and Damages For a tort to have been committed, the plaintiff must have suffered a legally recognizable injury. To recover damages (receive compensation), the plaintiff must have suffered some loss, harm, wrong, or invasion of a protected interest. If no harm or injury results from a given negligent action, there is nothing to compensate—and no tort exists. EXAMPLE 4.24 If you carelessly bump into a passerby, who stumbles and falls as a result, you may be liable in tort if the pass- erby is injured in the fall. If the person is unharmed, however, there normally cannot be a suit for damages because no injury was suffered. n

Essentially, the purpose of tort law is to compensate for legally recognized injuries result- ing from wrongful acts. Thus, compensatory damages are the norm in negligence cases. As noted earlier, a court will award punitive damages only if the defendant’s conduct was grossly negligent, reflecting an intentional failure to perform a duty with reckless disregard of the consequences to others.

4–4d Defenses to Negligence Defendants often defend against negligence claims by asserting that the plaintiffs failed to prove the existence of one or more of the required elements for negligence. Additionally, there are three basic affirmative defenses in negligence cases (defenses that a defendant can use to avoid liability even if the facts are as the plaintiff states): (1) assumption of risk, (2) supersed- ing cause, and (3) contributory and comparative negligence.

Assumption of Risk A plaintiff who voluntarily enters into a risky situation, knowing the risk involved, will not be allowed to recover. This is the defense of assumption of risk, which requires two elements:

1. Knowledge of the risk. 2. Voluntary assumption of the risk.

This defense is frequently asserted when a plaintiff is injured during recreational activities that involve known risk, such as skiing and skydiving. Courts do not apply the assumption of risk doctrine in certain situations, such as those involving emergencies, however.

Assumption of risk can apply not only to participants in sporting events, but to spectators and bystanders who are injured while attending those events. In the following Spotlight Case, the issue was whether a spectator at a baseball game voluntarily assumed the risk of being hit by an errant ball thrown while the players were warming up before the game.

Assumption of Risk A defense to negligence that bars a plaintiff from recovering for injuries or damage suffered as a result of risks he or she knew of and voluntarily assumed.

Spotlight on the Seattle Mariners: Case 4.3

Taylor v. Baseball Club of Seattle, L.P. Court of Appeals of Washington, 132 Wash.App. 32, 130 P.3d 835 (2006).

FACTS Delinda Middleton Taylor went to a Mariners baseball game at Safeco Field with her boyfriend and two minor sons. Their seats were four rows up from the field along the right field foul line. They arrived more than an hour before the game began so that they could see the players warm up and get their autographs. When she walked in, Taylor saw that Mariners pitcher Freddy Garcia was throwing a ball back

and forth with José Mesa right in front of their seats. As Taylor stood in front of her seat, she looked away from the field, and a ball thrown by Mesa got past Garcia and struck her in the face, causing serious injuries. Taylor sued the Mariners for the allegedly negligent warm-up throw. The Mariners filed a motion for a sum- mary judgment in which they argued that Tay- lor, a Mariners fan, was familiar with baseball

Many fans arrive at baseball games early so they can watch the players warm up.

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Superseding Cause An unforeseeable intervening event may break the connection between a wrongful act and an injury to another. If so, the event acts as a superseding cause—that is, it relieves a defendant of liability for injuries caused by the intervening event.

EXAMPLE 4.25 While riding his bicycle, Derrick negligently hits Julie, who is walking on the sidewalk. As a result of the impact, Julie falls and fractures her hip. While she is waiting for help to arrive, a small plane crashes nearby and explodes, and some of the fiery debris hits her, causing her to sustain severe burns. Derrick will be liable for Julie’s fractured hip because the risk of hitting her with his bicycle was foreseeable. Normally, though, Derrick will not be liable for the burns caused by the plane crash, because the risk of a plane’s crashing nearby and injuring Julie was not foreseeable. n

Contributory Negligence All individuals are expected to exercise a reasonable degree of care in looking out for themselves. In the past, under the common law doctrine of contributory negligence, a plaintiff who was also negligent (who failed to exercise a rea- sonable degree of care) could not recover anything from the defendant. Under this rule, no matter how insignificant the plaintiff’s negligence was relative to the defendant’s negligence, the plaintiff was precluded from recovering any damages. Today, only a few jurisdictions still follow this doctrine.

Comparative Negligence In most states, the doctrine of contributory negligence has been replaced by a comparative negligence standard. Under this standard, both the plaintiff’s and the defendant’s negligence are computed, and the liability for damages is distributed accordingly.

Some jurisdictions have adopted a “pure” form of comparative negligence that allows a plaintiff to recover, even if the extent of his or her fault is greater than that of the defendant. For instance, if a plaintiff was 80 percent at fault and the defendant 20 percent at fault, the plaintiff may recover 20 percent of his or her damages.

Many states’ comparative negligence statutes, however, contain a “50 percent” rule that prevents a plaintiff from recovering any damages if she or he was more than 50 percent at fault. Under this rule, a plaintiff who is 35 percent at fault could recover 65 percent of his or her damages, but a plaintiff who is 65 percent at fault could recover nothing.

Contributory Negligence A rule in tort law, used in only a few states, that completely bars the plaintiff from recovering any damages if the damage suffered is partly the plaintiff’s own fault.

Comparative Negligence A rule in tort law, used in the majority of states, that reduces the plaintiff’s recovery in proportion to the plaintiff’s degree of fault, rather than barring recovery completely.

and the inherent risk of balls entering the stands, and therefore assumed the risk of her injury. The trial court granted the motion and dismissed Taylor’s case. Taylor appealed.

ISSUE Was the risk of injury from an errant baseball thrown during pregame warm-up foreseeable to a reasonable person with Taylor’s familiarity with baseball?

DECISION Yes. The state intermediate appellate court affirmed the lower court’s judgment. Taylor, as a spectator in an unprotected area of seats, voluntarily undertook the risk associated with being hit by an errant baseball thrown during warm-ups before the start of the game.

REASON The court observed that there was substantial evidence that Taylor was familiar with the game. She was a seasoned Mariners fan, and both of her sons had played baseball for at least six years. “She attended many of her sons’ baseball games, she witnessed balls entering the stands, she had watched Mariners’ games both at the

Kingdome [the Mariners’ former stadium] and on television, and she knew that there was no screen protecting her seats, which were close to the field. In fact, as she walked to her seat she saw the play- ers warming up and was excited about being in an unscreened area where her party might get autographs from the players and catch balls.”

It was not legally relevant that the injury occurred during the pre- game warm-up because “it is the normal, every-day practice at all levels of baseball for pitchers to warm up in the manner that led to this incident.” The Mariners had satisfied their duty to protect spec- tators from balls entering the stands by providing a protective screen behind home plate. Taylor chose not to sit in the protected area and thus knowingly put herself at risk.

CRITICAL THINKING—Ethical Consideration Would the result in this case have been different if Taylor’s minor son, rather than Taylor herself, had been struck by the ball? Should courts apply the doctrine of assumption of risk to children? Discuss.

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4–4e Special Negligence Doctrines and Statutes There are a number of special doctrines and statutes relating to negligence. We examine a few of them here.

Res Ipsa Loquitur Generally, in lawsuits involving negligence, the plaintiff has the burden of proving that the defendant was negligent. In certain situations, however, the courts may infer that negligence has occurred under the doctrine of res ipsa loquitur17 (meaning “the facts speak for themselves”). Then the burden of proof rests on the defendant to prove that she or he was not negligent. This doctrine is applied only when the event creating the damage or injury is one that ordinarily would occur only as a result of negligence.

CASE EXAMPLE 4.26 A kidney donor, Darnell Backus, sustained injuries to his cervical spine and to the muscles on the left side of his body as a result of the surgery to harvest his kidney. He sued the hospital and physicians involved in the transplant operation for damages. Backus asserted res ipsa loquitor because the injury was of the kind that ordinarily does not occur in the absence of someone’s negligence. The burden of proof shifted to the defendants, and because they failed to show that they had not been negligent, Backus won.18 n

Negligence Per Se Certain conduct, whether it consists of an action or a failure to act, may be treated as negligence per se (per se means “in or of itself”). Negligence per se may occur if an individual violates a statute or ordinance and thereby causes the kind of harm that the statute was intended to prevent. The statute must clearly set out what standard of conduct is expected, when and where it is expected, and of whom it is expected. The standard of conduct required by the statute is the duty that the defendant owes to the plaintiff, and a violation of the statute is the breach of that duty.

CASE EXAMPLE 4.27 A Delaware statute states that anyone “who operates a motor vehicle and who fails to give full time and attention to the operation of the vehicle” is guilty of inat- tentive driving. Michael Moore was cited for inattentive driving after he collided with Debra Wright’s car when he backed a truck out of a parking space. Moore paid the ticket, which meant that he pleaded guilty to violating the statute. The day after the accident, Wright began having back pain, which eventually required surgery. She sued Moore for damages, alleging negligence per se. The Delaware Supreme Court ruled that the inattentive driving statute set forth a sufficiently specific standard of conduct to warrant application of negligence per se.19 n

“Danger Invites Rescue” Doctrine Sometimes, a person who is trying to avoid harm—such as an individual who swerves to avoid a head-on collision with a drunk driver—ends up caus- ing harm to another (such as a cyclist riding in the bike lane) as a result. In those situations, the original wrongdoer (the drunk driver in this scenario) is liable to anyone who is injured, even if the injury actually resulted from another person’s attempt to escape harm.

The “danger invites rescue” doctrine extends the same protection to a person who is trying to rescue another from harm—the original wrongdoer is liable for injuries to an individual attempting a rescue. The idea is that rescuers should not be held liable for any damages, because they did not cause the danger and because danger invites rescue. Whether rescuers injure themselves, the person rescued, or a passer-by, the original wrongdoer will still be liable.

EXAMPLE 4.28 Ludley drives down a street but fails to see a stop sign because he is trying to quiet his squabbling children in the car’s back seat. Salter, who is standing on the curb, realizes that Ludley is about to hit a pedestrian and runs into the street to push the pedestrian out of the way. If Ludley’s vehicle hits Salter instead, Ludley will be liable for Salter’s injury, as well as for any injuries the other pedestrian sustained. n

17. Pronounced rehz ihp-suh low-kwuh-tuhr. 18. Backus v. Kaleida Health, 91 A.D.3d 1284, 937 N.Y.S.2d 773 (N.Y.A.D. 4 Dept. 2012). 19. Wright v. Moore, 931 A.2d 405 (Del.Supr. 2007).

Res Ipsa Loquitur A doctrine under which negligence may be inferred simply because an event occurred, if it is the type of event that would not occur in the absence of negligence. Literally, the term means “the facts speak for themselves.”

Negligence Per Se An action or failure to act in violation of a statutory requirement.

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Good Samaritan Statutes Most states have enacted what are called Good Samaritan statutes.20 Under these statutes, someone who is aided voluntarily by another cannot turn around and sue the “Good Samaritan” for negligence. These laws were passed largely to protect physicians and medical personnel who voluntarily render medical services in emergency situations to those in need, such as individuals hurt in car accidents.

Dram Shop Acts Many states have also passed dram shop acts,21 under which a tavern owner or bartender may be held liable for injuries caused by a person who became intoxicated while drinking at the bar or who was already intoxicated when served by the bartender. Some states’ statutes also impose liability on social hosts (persons hosting parties) for injuries caused by guests who became intoxicated at the hosts’ homes. Under these statutes, it is unnecessary to prove that the tavern owner, bartender, or social host was negligent. EXAMPLE 4.29 Selena hosts a Super Bowl party at which Raul, a minor, sneaks alcoholic drinks. Selena is potentially liable for damages resulting from Raul’s drunk driving after the party. n

4–5 Strict Liability Another category of torts is called strict liability, or liability without fault. Intentional torts and torts of negligence involve acts that depart from a reasonable standard of care and cause inju- ries. Under the doctrine of strict liability, liability for injury is imposed for reasons other than fault.

4–5a Abnormally Dangerous Activities Strict liability for damages proximately caused by an abnormally dangerous or exceptional activity is one application of this doctrine. Courts apply the doctrine of strict liability in such cases because of the extreme risk of the activity. For instance, even if blasting with dynamite is performed with all reasonable care, there is still a risk of injury. Because of the potential for harm, the person who is engaged in an abnormally dangerous activity—and benefits from it—is responsible for paying for any injuries caused by that activity. Although there is no fault, there is still responsibility because of the dangerous nature of the undertaking.

4–5b Other Applications of Strict Liability The strict liability principle is also applied in other situations. Persons who keep wild animals, for example, are strictly liable for any harm inflicted by the animals. In addition, an owner of domestic animals may be strictly liable for harm caused by those animals if the owner knew, or should have known, that the animals were dangerous or had a propensity to harm others.

A significant application of strict liability is in the area of product liability—liability of manu- facturers and sellers for harmful or defective products—discussed in the next chapter. Liability here is a matter of social policy. Manufacturers and sellers can better bear the cost of injuries, and because they profit from making and selling the products, they should be responsible for the injuries the products cause.

20. These laws derive their name from the Good Samaritan story in the Bible. In the story, a traveler who had been robbed and beaten lay along the roadside, ignored by those passing by. Eventually, a man from the country of Samaria (the “Good Samari- tan”) stopped to render assistance to the injured person.

21. Historically, a dram was a small unit of liquid, and spirits were sold in drams. Thus, a dram shop was a place where liquor was sold in drams.

Good Samaritan Statute A state statute stipulating that persons who provide emergency services to, or rescue, someone in peril cannot be sued for negligence unless they act recklessly and cause further harm.

Dram Shop Act A state statute that imposes liability on the owners of bars and taverns, as well as those who serve alcoholic drinks to the public, for injuries resulting from accidents caused by intoxicated persons when the sellers or servers of alcoholic drinks contributed to the intoxication.

Strict Liability Liability regardless of fault, which is imposed on those engaged in abnormally dangerous activities, on persons who keep dangerous animals, and on manufacturers or sellers that introduce into commerce defective and unreasonably dangerous goods.

LEARNING OBJECTIVE 5 What is meant by strict liability? In what circumstances is strict liability applied?

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Reviewing . . . Tort Law Elaine Sweeney went to Ragged Mountain Ski Resort in New Hampshire with a friend. Elaine went snow tubing down a run designed exclusively for snow tubers. No Ragged Mountain employees were present in the snow-tube area to instruct Elaine on the proper use of a snow tube. On her fourth run down the trail, Elaine crossed over the center line between snow-tube lanes, collided with another snow tuber, and was injured. Elaine filed a negligence action against Ragged Mountain seeking compensation for the injuries that she sustained. Two years earlier, the New Hampshire state legislature had enacted a statute that prohibited a person who participates in the sport of skiing from suing a ski-area operator for injuries caused by the risks inherent in skiing. Using the information presented in the chapter, answer the following questions.

1. What defense will Ragged Mountain probably assert?

2. The central question in this case is whether the state statute establishing that skiers assume the risks inherent in the sport applies to Elaine’s suit. What would your decision be on this issue? Why?

3. Suppose that the court concludes that the statute applies only to skiing and not to snow tubing. Will Elaine’s lawsuit be successful? Explain.

4. Now suppose that the jury concludes that Elaine was partly at fault for the accident. Under what theory might her damages be reduced in proportion to how much her actions contributed to the accident and her resulting injuries?

DEBATE THIS

▪▪ Each time a state legislature enacts a law that applies the assumption of risk doctrine to a particular sport, participants in that sport suffer.

Although there are more claims for breach of contract than for any other category of lawsuits, tort claims are also commonplace for businesses. Furthermore, the dollar amount of damages awarded in tort actions is typically much higher than the awards in contract claims.

Because of the potential for large dam- ages awards for intentional and uninten- tional acts, businesspersons should take preventive measures to help them avoid tort liability. Remember that, for most torts, injured persons can bring actions against businesses as well as against individuals. In fact, if given a choice, a plaintiff often sues a business rather than an individual because the business is more likely to have “deep pockets” (the ability to pay large damages awards). Moreover, sometimes businesses

can be held liable for torts that do not apply to individuals.

The Extent of Business Negligence Liability A business can be exposed to negligence liability in a wide variety of instances. Liabil- ity to business invitees is a clear example. A business that fails to warn invitees that its

BUSINESS APPLICATION How Important Is Tort Liability to Business?*

Continues

* This Business Application is not meant to substitute for the services of an attorney who is licensed to practice law in your state.

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floor is slippery after a rainstorm, or that its parking lot is icy after a snow, may be liable to an injured customer. Indeed, business own- ers can be liable for nearly any fall or other injury that occurs on business premises.

Even the hiring of employees can lead to negligence liability. For example, a busi- ness can be liable if it fails to do a criminal background check before hiring a person to supervise a child-care center when an investigation would have revealed that the person had previously been convicted of sex- ual assault. Failure to properly supervise or instruct employees can also lead to liability for a business.

Liability for Torts of Employees and Agents A business can also be held liable for the neg- ligence or intentional torts of its employees

and agents. As you will learn in later chap- ters, a business is liable for the torts com- mitted by an employee who is acting within the scope of his or her employment or an agent who is acting with the authority of the business. Therefore, if a sales agent commits fraud while acting within the scope of her or his employment, the business will be held liable.

CHECKLIST for Minimizing Business Tort Liability:

1. Constantly inspect the premises and look for areas where customers or employees might trip, slide, or fall. Take corrective action whenever you find a problem.

2. Train employees on the importance of periodic safety inspections and the pro- cedures for reporting unsafe conditions.

3. Routinely maintain all business equip- ment (including vehicles).

4. Check with your liability insurance com- pany for suggestions on improving the safety of your premises and operations.

5. Make sure that your general liability policy will adequately cover the potential exposure of the business, and reassess your coverage annually.

6. Review the background and qualifications of individuals you are considering hiring as employees or agents.

7. Investigate and review all negligence claims promptly. Most claims can be settled at a lower cost before a lawsuit is filed.

actionable 94 actual malice 97 appropriation 99 assault 93 assumption of risk 109 battery 93 business invitee 106 business tort 101 causation in fact 107 comparative negligence 110 compensatory damages 90 contributory negligence 110 conversion 103 damages 90 defamation 94

defense 92 disparagement of property 104 dram shop act 112 duty of care 105 fraudulent misrepresentation 99 general damages 90 Good Samaritan statute 112 intentional tort 92 libel 94 malpractice 107 negligence 105 negligence per se 111 privilege 97 proximate cause 107 puffery 100

punitive damages 90 reasonable person standard 106 res ipsa loquitur 111 slander 94 slander of quality (trade libel) 105 slander of title 105 special damages 90 strict liability 112 tort 89 tortfeasor 92 transferred intent 92 trespass to land 102 trespass to personal property 103

Key Terms

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Chapter Summary: Tort Law Intentional Torts against Persons

1. Assault and battery—An assault is an unexcused and intentional act that causes another person to be apprehensive of immediate harm. A battery is an assault that results in physical contact.

2. False imprisonment—The intentional confinement or restraint of another person’s movement without justification. 3. Intentional infliction of emotional distress—An extreme and outrageous act, intentionally committed, that results in

severe emotional distress to another. 4. Defamation (libel or slander)—A false statement of fact, not made under privilege, that is communicated to a third

person and that causes damage to a person’s reputation. For public figures, the plaintiff must also prove actual malice. 5. Invasion of the right to privacy—Includes four types: wrongful intrusion into a person’s private activities; publication

of information that places a person in a false light; disclosure of private facts that an ordinary person would find objectionable; and appropriation of identity, which involves the use of a person’s name, likeness, or other identifying characteristic, without permission and for a commercial purpose. Most states have enacted statutes establishing appro- priation of identity as the tort of appropriation, or right of publicity. Courts differ on the degree of likeness required.

6. Misrepresentation (fraud)—A false representation made by one party, through misstatement of facts or through conduct, with the intention of deceiving another and on which the other reasonably relies to his or her detriment. Negligent mis- representation occurs when a person supplies information without having a reasonable basis for believing its truthfulness.

7. Abusive or frivolous litigation—A person who initiates a lawsuit out of malice and without probable cause, and loses the suit, can be sued for the tort of malicious prosecution. A person who uses a legal process against another improperly or to accomplish a purpose for which it was not designed can be sued for abuse of process.

8. Wrongful interference—The knowing, intentional interference by a third party with an enforceable contractual relation- ship or an established business relationship between other parties for the purpose of advancing the economic interests of the third party.

Intentional Torts against Property

1. Trespass to land—The invasion of another’s real property without consent or privilege. 2. Trespass to personal property—Unlawfully damaging or interfering with the owner’s right to use, possess, or enjoy her or

his personal property. 3. Conversion—Wrongfully taking or using the personal property of another without permission. 4. Disparagement of property—Any economically injurious falsehood that is made about another’s product or property.

The term includes the torts of slander of quality and slander of title.

Unintentional Torts (Negligence)

1. Negligence—The careless performance of a legally required duty or the failure to perform a legally required act. A plaintiff must prove that a legal duty of care existed, that the defendant breached that duty, that the breach caused the plaintiff’s injury, and that the plaintiff suffered a legally recognizable injury.

2. Defenses to negligence—The basic affirmative defenses in negligence cases are assumption of risk, superseding cause, and contributory or comparative negligence.

3. Special negligence doctrines and statutes— a. Res ipsa loquitur—A doctrine under which a plaintiff need not prove negligence on the part of the defendant because

“the facts speak for themselves.” b. Negligence per se—A type of negligence that may occur if a person violates a statute or an ordinance and the viola-

tion causes another to suffer the kind of injury that the statute or ordinance was intended to prevent. c. Special negligence statutes—State statutes that prescribe duties and responsibilities in certain circumstances. Viola-

tion of these statutes will impose civil liability. Dram shop acts and Good Samaritan statutes are examples.

Strict Liability Under the doctrine of strict liability, parties may be held liable, regardless of the degree of care exercised, for damages or injuries caused by their products or activities. Strict liability includes liability for harms caused by abnormally dangerous activities, by dangerous animals, and by defective products (product liability).

Issue Spotters 1. Jana leaves her truck’s motor running while she enters a Kwik-Pik Store. The truck’s transmission engages, and the vehicle crashes

into a gas pump, starting a fire that spreads to a warehouse on the next block. The warehouse collapses, causing its billboard to fall and injure Lou, a bystander. Can Lou recover from Jana? Why or why not? (See Negligence.)

2. A water pipe bursts, flooding a Metal Fabrication Company utility room and tripping the circuit breakers on a panel in the room. Metal Fabrication contacts Nouri, a licensed electrician with five years’ experience, to check the damage and turn the breakers back on. Without testing for short circuits, which Nouri knows that he should do, he tries to switch on a breaker. He is electrocuted, and his wife sues Metal Fabrication for damages, alleging negligence. What might the firm successfully claim in defense? (See Negligence.)

—Check your answers to the Issue Spotters against the answers provided in Appendix D at the end of this text.

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Business Scenarios and Case Problems 4–1. Liability to Business Invitees. Kim went to Ling’s Market

to pick up a few items for dinner. It was a stormy day, and the wind had blown water through the market’s door each time it opened. As Kim entered through the door, she slipped and fell in the rainwater that had accumulated on the floor. The man- ager knew of the weather conditions but had not posted any sign to warn customers of the water hazard. Kim injured her back as a result of the fall and sued Ling’s for damages. Can Ling’s be held liable for negligence? Discuss. (See Negligence.)

4–2. Spotlight on Intentional Torts—Defamation. Sharon Yeagle was an assistant to the vice president of student affairs at Virginia Polytechnic Institute and State Univer- sity (Virginia Tech). As part of her duties, Yeagle helped

students participate in the Governor’s Fellows Program. The Collegiate Times, Virginia Tech’s student newspaper, published an article about the university’s success in placing students in the program. The article’s text surrounded a block quotation attributed to Yeagle with the phrase “Director of Butt Licking” under her name. Yeagle sued the Collegiate Times for defama- tion. She argued that the phrase implied the commission of sodomy and was therefore actionable. What is Collegiate Times’s defense to this claim? [Yeagle v. Collegiate Times, 497 S.E.2d 136 (Va. 1998)] (See Intentional Torts against Persons.)

4–3. Business Torts. Medtronic, Inc., is a medical technology company that competes for customers with St. Jude Medical S.C., Inc. James Hughes worked for Medtronic as a sales man- ager. His contract prohibited him from working for a competitor for one year after leaving Medtronic. Hughes sought a position as a sales director for St. Jude. St. Jude told Hughes that his contract with Medtronic was unenforceable and offered him a job. Hughes accepted. Medtronic filed a suit, alleging wrongful interference. Which type of interference was most likely the basis for this suit? Did it occur here? Explain. [Medtronic, Inc. v. Hughes, 2011 WL 134973 (Minn.App. 2011)] (See Intentional Torts against Persons.)

4–4. Intentional Infliction of Emotional Distress. While liv- ing in her home country of Tanzania, Sophia Kiwanuka signed

an employment contract with Anne Margareth Bakilana, a Tanzanian living in Washington, D.C. Kiwanuka traveled to the United States to work as a babysitter and maid in Bakilana’s house. When Kiwanuka arrived, Bakilana confiscated her pass- port, held her in isolation, and forced her to work long hours under threat of having her deported. Kiwanuka worked seven days a week without breaks and was subjected to regular ver- bal and psychological abuse by Bakilana. Kiwanuka filed a com- plaint against Bakilana for intentional infliction of emotional distress, among other claims. Bakilana argued that Kiwanuka’s complaint should be dismissed because the allegations were insufficient to show outrageous intentional conduct that resulted in severe emotional distress. If you were the judge, in whose favor would you rule? Why? [Kiwanuka v. Bakilana, 844 F.Supp.2d 107 (D.D.C. 2012)] (See Intentional Torts against Persons.)

4–5. Business Case Problem with Sample Answer— Negligence. At the Weatherford Hotel in Flagstaff, Ari- zona, in Room 59, a balcony extends across thirty inches of the room’s only window, leaving a twelve-inch gap with

a three-story drop to the concrete below. A sign prohibits smoking in the room but invites guests to “step out onto the balcony” to smoke. Toni Lucario was a guest in Room 59 when she climbed out of the window and fell to her death. Patrick McMurtry, her estate’s personal representative, filed a suit against the Weatherford. Did the hotel breach a duty of care to Lucario? What might the Weatherford assert in its defense? Explain. [McMurtry v. Weatherford Hotel, Inc., 293 P.3d 520 (Ariz. App. 2013)] (See Negligence.) —For a sample answer to Problem 4–5, go to Appendix F at

the end of this text.

4–6. Negligence. Ronald Rawls and Zabian Bailey were in an auto accident in Bridgeport, Connecticut. Bailey rear-ended Rawls at a stoplight. Evidence showed it was more likely than not that Bailey failed to apply his brakes in time to avoid the collision, failed to turn his vehicle to avoid the collision, failed to keep his vehicle under control, and was inattentive to his surround- ings. Rawls filed a suit in a Connecticut state court against his

Learning Objectives Check 1. What is the purpose of tort law? What types of damages are available in tort lawsuits?

2. What are two basic categories of torts?

3. What is defamation? Name two types of defamation.

4. Identify the four elements of negligence.

5. What is meant by strict liability? In what circumstances is strict liability applied? —Answers to the even-numbered Learning Objectives Check questions can be found in Appendix E at the end of this text.

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insurance company, Progressive Northern Insurance Co., to obtain benefits under an underinsured motorist clause, alleg- ing that Bailey had been negligent. Could Rawls collect? Dis- cuss. [Rawls v. Progressive Northern Insurance Co., 310 Conn. 768, 83 A.3d 576 (2014)] (See Negligence.)

4–7. Negligence. Charles Robison, an employee of West Star Transportation, Inc., was ordered to cover an unevenly loaded flatbed trailer with a 150-pound tarpaulin. The load included uncrated equipment and pallet crates of different heights, about thirteen feet off the ground at its highest point. While standing on the load, manipulating the tarpaulin without safety equipment or assistance, Robison fell headfirst and sustained a traumatic head injury. He filed a suit against West Star to recover for his injury. Was West Star “negligent in failing to provide a reasonably safe place to work,” as Robison claimed? Explain. [West Star Transportation, Inc. v. Robison, __ S.W.3d __, 2015 WL 348594 (Tex.App.—Amarillo 2015)] (See Unintentional Torts (Negligence).)

4–8. A Question of Ethics—Wrongful Interference. White Plains Coat & Apron Co. and Cintas Corp. are competitors. White Plains had five-year exclusive contracts with some of its customers. As a result of Cintas’s soliciting of busi-

ness, dozens of White Plains’ customers breached their con- tracts and entered into rental agreements with Cintas. White Plains filed a suit against Cintas, alleging wrongful interfer- ence. [White Plains Coat & Apron Co. v. Cintas Corp., 8 N.Y.3d 422, 867 N.E.2d 381 (2007)] (See Intentional Torts against Persons.)

1. What are the two policies at odds in wrongful interference cases? When there is an existing contract, which of these interests should be accorded priority? Why?

2. Is a general interest in soliciting business for profit a suf- ficient defense to a claim of wrongful interference with a contractual relationship? What do you think? Why?

Critical Thinking and Writing Assignments 4–9. Business Law Critical Thinking Group Assignment.

Donald and Gloria Bowden hosted a cookout at their home in South Carolina, inviting mostly business acquain- tances. Justin Parks, who was nineteen years old, attended

the party. Alcoholic beverages were available to all of the guests, even those who, like Parks, were between the ages of eighteen and twenty-one. Parks consumed alcohol at the party and left with other guests. One of these guests detained Parks at the guest’s home to give Parks time to “sober up.” Parks then drove himself from this guest’s home and was killed in a one-car accident. At the time of death, he had a blood alcohol content of 0.291 percent, which exceeded the state’s limit for driving a motor vehicle.

Linda Marcum, Parks’s mother, filed a suit in a South Carolina state court against the Bowdens and others, alleging negli- gence. (See Negligence.) 1. The first group will present arguments in favor of holding the

social hosts liable in this situation. 2. The second group will formulate arguments against

holding the social hosts liable based on principles in this chapter.

3. The states vary widely in assessing liability and imposing sanctions in the circumstances described in this problem. The third group will determine the reasons why courts do not treat social hosts the same as parents who serve alco- holic beverages to their underage children.

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LEARNING OBJECTIVES The five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions:

1. Can a manufacturer be held liable to any person who suffers an injury proximately caused by the manufac- turer’s negligently made product?

2. What public policy assump- tions underlie strict product liability?

3. What are the elements of a cause of action in strict product liability?

4. What are three types of product defects?

5. What defenses to liability can be raised in a product liability lawsuit?

An area of tort law of particular importance to business- persons is product liability. As Warren Buffett implies in the chapter-opening quote, to be successful, a business cannot make too many mistakes. This is especially true for businesses that make or sell products. The manufac- turers and sellers of products may incur product liability when product defects cause injury or property damage to consumers, users, or bystanders (people in the vicinity of the product when it fails).

Although multimillion-dollar product liability claims often involve big automakers, pharmaceutical companies, or tobacco companies, many businesses face potential lia- bility. For instance, in the last few years, numerous reports have suggested that energy drinks, such as Monster, Red Bull, Rockstar, and 5-hour Energy, have serious adverse effects—especially on young people. Several individuals have been hospitalized, and some have even died, after consuming large amounts of energy drinks. The federal government has issued a report concerning the adverse effects of these products and is investigating their safety. Meanwhile, the producers of energy drinks are facing a number of product liability actions. For example, the parents of a teenage girl who died after consuming two Monster energy drinks have filed a lawsuit against Monster Beverage Corporation in California.

5–1 Product Liability Those who make, sell, or lease goods can be held liable for physical harm or property dam- age caused by those goods to a consumer, user, or bystander. This is called product liability.

Product Liability The legal liability of manufacturers, sellers, and lessors of goods for injuries or damage caused by the goods to consumers, users, or bystanders.

Product Liability

5 CHAPTER OUTLINE

▪▪ Product Liability ▪▪ Strict Product Liability ▪▪ Defenses to Product

Liability

“You only have to do a very few things right in your life so long as you don’t do too many things wrong.”

Warren Buffett 1930–present (American businessman and the most successful investor in the twentieth century)

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Product liability claims may be based on the tort theories of negligence, fraudulent misrepresentation, and strict liability. We look here at product liability based on negligence and misrepresentation.

5–1a Negligence Chapter 4 defined negligence as the failure to exercise the degree of care that a reasonable, prudent person would have exercised under the circumstances. If a manufacturer fails to exercise “due care” to make a product safe, a person who is injured by the product may sue the manufacturer for negligence.

Due Care Must Be Exercised The manufacturer must exer- cise due care in all of the following areas:

1. Designing the product. 2. Selecting the materials. 3. Using the appropriate production process. 4. Assembling and testing the product. 5. Placing adequate warnings on the label to inform the user of dangers of which an

ordinary person might not be aware.

6. Inspecting and testing any purchased components used in the final product.

Privity of Contract Not Required A product liability action based on negligence does not require privity of contract between the injured plaintiff and the defendant manufacturer. Privity of contract refers to the relationship that exists between the promisor and the promi- see of a contract. Privity is the reason that normally only the parties to a contract can enforce that contract.

In the context of product liability law, privity is not required. A person who is injured by a defective product can bring a negligence suit even though he or she was not the one who actu- ally purchased the product—and thus is not in privity. A manufacturer is liable for its failure to exercise due care to any person who sustains an injury proximately caused by a negligently made (defective) product.

Relative to the long history of the common law, this exception to the privity requirement is a fairly recent development, dating to the early part of the twentieth century. A leading case in this respect is MacPherson v. Buick Motor Co., which is presented as this chapter’s Landmark in the Law feature.

5–1b Misrepresentation When a user or consumer is injured as a result of a manufacturer’s or seller’s fraudulent mis- representation, the basis of liability may be the tort of fraud. In this situation, the misrepresen- tation must have been made knowingly or with reckless disregard for the facts. The intentional mislabeling of packaged cosmetics, for instance, or the intentional concealment of a product’s defects constitutes fraudulent misrepresentation.

The misrepresentation must be of a material fact, and the seller must have intended to induce the buyer’s reliance on the misrepresentation. Misrepresentation on a label or adver- tisement is enough to show the intent to induce reliance. Of course, to bring a lawsuit on this ground, the buyer must have relied on the misrepresentation.

Privity of Contract The relationship that exists between the promisor and the promisee of a contract.

To what extent are energy drink manufacturers responsible for injuries to those who consume large amounts of their products?

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LEARNING OBJECTIVE 1 Can a manufacturer be held liable to any person who suffers an injury proximately caused by the manufacturer’s negligently made product?

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5–2 Strict Product Liability Under the doctrine of strict liability, people may be liable for the results of their acts regardless of their intentions or their exercise of reasonable care. In addition, liability does not depend on privity of contract. The injured party does not have to be the buyer or a third party benefi- ciary (one for whose benefit a contract is made). In the 1960s, courts applied the doctrine of strict liability in several landmark cases involving manufactured goods, and this doctrine has since become a common method of holding manufacturers liable.

5–2a Strict Product Liability and Public Policy The law imposes strict product liability as a matter of public policy. This public policy rests on a threefold assumption:

1. Consumers should be protected against unsafe products. 2. Manufacturers and distributors should not escape liability for faulty products simply

because they are not in privity of contract with the ultimate user of those products.

3. Manufacturers, sellers, and lessors of products are generally in a better position than consumers to bear the costs associated with injuries caused by their products—costs that they can ultimately pass on to all consumers in the form of higher prices.

Learning Objective 2 What public policy assumptions underlie strict product liability?

In the landmark case of MacPherson v. Buick Motor Co.,a the New York Court of Appeals—New York’s highest court— considered the liability of a manufacturer that had failed to exercise reasonable care in manufacturing a finished product.

CASE BACKGROUND Donald MacPherson suffered injuries while riding in a Buick auto- mobile that suddenly collapsed because one of the wheels was made of defective wood. The spokes crumbled into fragments, throw- ing MacPherson out of the vehicle and injur- ing him.

MacPherson had purchased the car from a Buick dealer, but he brought a lawsuit against the manufacturer, Buick Motor Com- pany. Buick itself had not made the wheel but

had bought it from another manufacturer. There was evidence, though, that the defects could have been discovered by a reasonable inspection by Buick and that no such inspec- tion had taken place. MacPherson charged Buick with negligence for putting a human life in imminent danger.

THE ISSUE BEFORE THE COURT AND THE COURT’S RULING The primary issue was whether Buick owed a duty of care to anyone except the immediate purchaser of the car—that is, the Buick dealer. In deciding the issue, Justice Benjamin Cardozo stated that “if the nature of a thing is such that it is reasonably certain to place life and limb in peril when negligently made, it is then a thing of danger. . . . If to the element of dan- ger there is added knowledge that the thing will be used by persons other than the pur- chaser, and used without new tests, then, irrespective of contract, the manufacturer of this thing of danger is under a duty to make it carefully.”

The court concluded that “beyond all question, the nature of an automobile gives warning of probable danger if its con- struction is defective. This automobile was designed to go 50 miles an hour. Unless its wheels were sound and strong, injury was almost certain.” Although Buick itself had not manufactured the wheel, the court held that Buick had a duty to inspect the wheels and that Buick “was responsible for the fin- ished product.” Therefore, Buick was liable to MacPherson for the injuries he sustained when he was thrown from the car.

APPLICATION TO TODAY’S WORLD This landmark decision was a significant step in creating the legal environment of the modern world. As often happens, technological develop- ments necessitated changes in the law. Today, automobile manufacturers are commonly held liable when their negligence causes automobile users to be injured.

MacPherson v. Buick Motor Co. (1916)

a. 217 N.Y. 382, 111 N.E. 1050 (1916).

LANDMARK IN THE LAW

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Development of the Doctrine California was the first state to impose strict product liabil- ity in tort on manufacturers. CASE EXAMPLE 5.1 William Greenman was injured when his Shopsmith combination power tool threw off a piece of wood that struck him in the head. He sued the manufacturer, claiming that he had followed the product instructions and that the product must be defective.

In a landmark decision, Greenman v. Yuba Power Products, Inc.,1 the California Supreme Court set out the reason for applying tort law rather than contract law in cases involving con- sumers who were injured by defective products. According to the Greenman court, the “pur- pose of such liability is to [e]nsure that the costs of injuries resulting from defective products are borne by the manufacturers . . . rather than by the injured persons who are powerless to protect themselves.” n Today, the majority of states recognize strict product liability, although some state courts limit its application to situations involving personal injuries (rather than property damage).

Statement of Public Policy The public policy concerning strict product liability may be expressed in a statute or in the common law. Sometimes, public policy may be revealed in a court’s interpretation of a statute, as in the following Spotlight Case.

1. 59 Cal.2d 57, 377 P.2d 897, 27 Cal.Rptr. 697 (1962).

If a power tool is defective and injures a user, does the user sue under contract law or tort law?

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Spotlight on Injuries from Vaccinations: Case 5.1

Bruesewitz v. Wyeth, LLC Supreme Court of the United States, 562 U.S. 223, 131 S.Ct. 1068, 179 L.Ed.2d 1 (2011).

FACTS When Hannah Bruesewitz was six months old, her pediatrician administered a dose of the diphtheria, tetanus, and pertussis (DTP) vaccine according to the Centers for Disease Control and Prevention’s recommended childhood immuniza- tion schedule. Within twenty-four hours, Hannah began to experience seizures. She suffered more than one hundred seizures during the next month. Her doctors diagnosed her with “residual seizure disorder” and “developmental delay.”

Hannah’s parents, Russell and Robalee Brue- sewitz, filed a claim for relief in the U.S. Court of Federal Claims under the National Childhood Vac- cine Injury Act (NCVIA). The NCVIA set up a no-fault compensation program for persons injured by vaccines. The claim was denied. The Bruesewitzes then filed a suit in a Pennsylvania state court against Wyeth, LLC, the maker of the vaccine, alleging strict product liability. The suit was moved to a federal district court. The court held that the claim was preempted by the NCVIA, which includes provisions protecting manufacturers from liability for “a vaccine’s unavoidable, adverse side effects.” A federal appellate court affirmed the district court’s judgment. The Bruesewitzes appealed to the United States Supreme Court.

ISSUE Was the Bruesewitzes’ strict product liability claim against Wyeth for the injuries that their child suffered from vaccination pre- empted by the National Childhood Vaccine Injury Act?

DECISION Yes. The United States Supreme Court affirmed the lower court’s judgment. The NCVIA preempted the Bruesewitzes’ claim against Wyeth for injury to their daughter caused by the DTP vac- cine’s side effects.

REASON The Court reasoned that Congress enacted the NCVIA as a matter of public policy to stabilize the vaccine market and facilitate com- pensation. In the no-fault compensation program set up by the NCVIA, a person with a vaccine- related claim files a petition with the U.S. Court of Federal Claims. The court may award compensa-

tion for legal, medical, rehabilitation, counseling, special education, and vocational training expenses, as well as for diminished earning capacity, pain and suffering, and death. The awards are funded by a tax on the vaccine. In exchange for the “informal, efficient” com- pensation program, vaccine manufacturers that comply with the regulatory requirements are “immunized” from liability. The statute thus strikes a balance between paying victims harmed by vaccines and protecting the vaccine industry from collapsing under the costs of tort liability.

CRITICAL THINKING—Political Consideration If the public wants to change the policy outlined in this case, which branch of the government—and at what level—should be lobbied to make the change? Explain.

What happens when a vaccine causes adverse side effects?

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5–2b Requirements for Strict Product Liability After the Restatement (Second) of Torts was issued in 1964, Section 402A became a widely accepted statement of how the doctrine of strict liability should be applied to sellers of goods. These sellers include manufacturers, processors, assemblers, packagers, bottlers, wholesalers, distributors, retailers, and lessors.

The bases for an action in strict liability that are set forth in Section 402A can be summa- rized as the following six requirements. Depending on the jurisdiction, if these requirements are met, a manufacturer’s liability to an injured party can be almost unlimited.

1. The product must have been in a defective condition when the defendant sold it. 2. The defendant must normally be engaged in the business of selling (or otherwise

distributing) that product.

3. The product must be unreasonably dangerous to the user or consumer because of its defective condition (in most states).

4. The plaintiff must incur physical harm to self or property by use or consumption of the product.

5. The defective condition must be the proximate cause of the injury or damage. 6. The goods must not have been substantially changed from the time the product was

sold to the time the injury was sustained.

Proving a Defective Condition Under these requirements, in any action against a manufacturer, seller, or lessor, the plaintiff does not have to show why or how the product became defective. The plaintiff does, however, have to prove that the prod- uct was defective at the time it left the seller or lessor and that this defective condi- tion made it “unreasonably dangerous” to the user or consumer. (See this chapter’s Beyond Our Borders feature for a discussion of how foreign suppliers were held liable for defective goods sold in the United States.)

Unless evidence can be presented that will support the conclusion that the prod- uct was defective when it was sold or leased, the plaintiff normally will not succeed. If the product was delivered in a safe condition and subsequent mishandling made it harmful to the user, the seller or lessor usually is not strictly liable.

LEARNING OBJECTIVE 3 What are the elements of a cause of action in strict product liability?

U.S. builders began using Chinese dry-wall in the construction of houses in 2003. By 2007, thousands of homes had been constructed with this product in Alabama, Florida, Louisiana, Mississippi, and a few other states. There was a prob- lem, though—use of the Chinese drywall caused blackening and pitting of electrical wires. Homeowners began to notice an

odor similar to rotten eggs in their houses. Air-conditioning units started failing, as did ceiling fans, alarm systems, refrigerators, and other appliances.

Numerous lawsuits were filed against the Chinese drywall manufacturers. The compa- nies initially fought the claims but decided to settle when the number of lawsuits ran into the thousands. The estimated value of the settlement is between $800 million and $1  billion. It includes an uncapped fund to

pay for repairs to about 4,500 homes and a separate fund capped at $30 million that will be used to pay for health problems stem- ming from the defective drywall.

CRITICAL THINKING

▪▪ Could U.S. companies that sold Chinese drywall to consumers also be held liable for damages? Why or why not?

Imposing Product Liability as Far Away as China

BEYOND OUR BORDERS

Does a person injured by a defective air bag have to prove that it was defective when the car was manufactured?

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Unreasonably Dangerous Products The Restatement recognizes that many products cannot possibly be made entirely safe for all uses. Thus, sellers or lessors of these products are held liable only when the products are unreasonably dangerous. A court may consider a product so defective as to be an unreasonably dangerous product in either of the following situations.

1. The product is dangerous beyond the expectation of the ordinary consumer.

2. A less dangerous alternative was economically feasible for the manufacturer, but the manufacturer failed to produce it.

As will be discussed next, a product may be unreasonably danger- ous due to a design or manufacturing flaw or due to an inadequate warning.

5–2c Product Defects—Restatement (Third) of Torts The Restatement (Third) of Torts: Products Liability defines the three types of product defects that have traditionally been recognized in product liability law—manufacturing defects, design defects, and inadequate warnings.

Manufacturing Defects According to Section 2(a) of the Restatement (Third) of Torts: Prod- ucts Liability, a product “contains a manufacturing defect when the product departs from its intended design even though all possible care was exercised in the preparation and marketing of the product.” Basically, a manufacturing defect is a departure from design specifications that results in products that are physically flawed, damaged, or incorrectly assembled. A glass bot- tle that is made too thin, causing it to explode in a consumer’s face, is an example of a product with a manufacturing defect.

Encouraging Higher Standards. Usually, manufacturing defects occur when a manufacturer fails to assemble, test, or check the quality of a product adequately. In fact, the idea behind holding defendants strictly liable for manufacturing defects is to encourage greater investment in product safety and stringent quality control standards.

Note that liability is imposed on a manufacturer (and on the wholesaler and retailer) regardless of whether the manufacturer’s quality control efforts were “reasonable.” For more information on how effective quality control procedures can help businesses reduce their potential legal liability for defective products, see the Linking Business Law to Corporate Man- agement feature at the end of this chapter.

The Role of Expert Testimony. Cases involving allegations of a manufacturing defect are often decided based on the opinions and testimony of experts. CASE EXAMPLE 5.2 Kevin Schmude purchased an eight-foot stepladder and used it to install radio-frequency shielding in a hos- pital room. While Schmude was standing on the ladder, it collapsed, and he was seriously injured. He filed a lawsuit against the ladder’s maker, Tricam Industries, Inc., based on a manufacturing defect.

Experts testified that when the ladder was assembled during manufacturing, the preexist- ing holes in the top cap did not properly line up with the holes in the rear right rail and back- ing plate. As a result of the misalignment, the rear legs of the ladder were not securely fastened in place, causing the ladder to fail. A jury concluded that this manufacturing defect made the ladder unreasonably dangerous and awarded Schmude more than $677,000 in damages.2 n

2. Schmude v. Tricam Industries, Inc., 550 F.Supp.2d 846 (E.D.Wis. 2008).

Unreasonably Dangerous Product A product that is so defective that it is dangerous beyond the expectation of an ordinary consumer or a product for which a less dangerous alternative was feasible but the manufacturer failed to produce it.

LEARNING OBJECTIVE 4 What are three types of product defects?

If this Chinese-made drywall adversely affects electrical wiring, who has legal liability?

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Design Defects Unlike a product with a manufacturing defect, a product with a design defect is made in conformity with the manufacturer’s design specifications. Nevertheless, it results in injury to the user because the design itself is flawed. The product’s design creates an unreasonable risk to the user. A product “is defective in design when the foreseeable risks of harm posed by the product could have been reduced or avoided by the adoption of a reason- able alternative design by the seller or other distributor, or a predecessor in the commercial chain of distribution, and the omission of the alternative design renders the product not rea- sonably safe.”3

Test for Design Defects. To successfully assert a design defect, a plaintiff has to show that: 1. A reasonable alternative design was available. 2. As a result of the defendant’s failure to adopt the alternative design, the product was not

reasonably safe.

In other words, a manufacturer or other defendant is liable only when the harm was reason- ably preventable.

CASE EXAMPLE 5.3 After Gillespie cut off several of his fingers while operating a table saw, he filed a lawsuit against the maker of the saw. Gillespie alleged that the blade guards on the saw were defectively designed. At trial, however, an expert testified that the alternative design for blade guards used for table saws could not have been used for the particular cut that Gillespie was performing at the time he was injured. The court found that Gillespie’s claim must fail because there was no proof that the “better” design of guard would have prevented his injury.4 n

Can a Taser be considered unreasonably dangerous as designed? Taser International, Inc., located in Scottsdale, Arizona, provides nonlethal devices that police personnel can use to “stun” aggressors. When officer Jeremy Baird of the Moberly, Missouri, Police Department used a Taser device after a routine traffic stop, the victim fell to the ground, lost consciousness, and died two hours later. The victim’s mother sued the city of Moberly and several police officers. That case was settled for $2.4 million.

The victim’s mother then sued Taser International. The claim was that the company did not provide adequate warnings that using the device directly on the chest could lead to cardiac arrest. The lawsuit also argued that the Taser was defectively designed. A federal trial court dismissed the case.

On appeal, the reviewing court pointed out that the plaintiff would have had to prove that additional warnings on the use of the Taser “would have altered the behavior of the officers involved in the incident.” But, concluded the court, there was “no dispute on this record that Officer Baird would not have read any additional warning Taser may have added about the cardiac danger” of its device. As to the defective design claim, the court noted that “under strict liability, a manufacturer is not intended to be an ensurer of any and all injuries caused by its products.”5 Just showing a link between the use of the Taser and the victim’s injury was insuf- ficient to establish strict liability.

Factors to Be Considered. According to the Official Comments accompanying the Restatement (Third) of Torts, a court can consider a broad range of factors in deciding claims of design defects. These factors include the magnitude and probability of the foreseeable risks, as well

3. Restatement (Third) of Torts: Products Liability, Section 2(b). 4. Gillespie v. Sears, Roebuck & Co., 386 F.3d 21 (1st Cir. 2004). 5. Bachtel v. Taser International, Inc., 747 F.3d 967 (2014). In contrast, see Fontenot v. Taser International, Inc., 736 F.3d 318 (4th Cir.

2013).

“Almost all quality improvement comes via simplification of design, manufacturing . . . layout, processes, and procedures.”

Tom Peters 1942–present (American business writer)

Is showing that a Taser caused the death of a victim sufficient under the doctrine of strict liability?

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as the relative advantages and disadvantages of the product as it was designed and as it alter- natively could have been designed.

CASE EXAMPLE 5.4 Jodie Bullock smoked cigarettes manufactured by Philip Morris for forty- five years. When she was diagnosed with lung cancer, Bullock brought a product lia- bility suit against Philip Morris. She presented evidence that by the late 1950s, scientists had proved that smoking caused lung cancer. Nonetheless, Philip Morris had publicly announced that there was no proof that smoking caused cancer and that “numerous scientists” questioned “the validity of the statistics.”

At trial, the judge instructed the jury to consider the gravity of the danger posed by the design, as well as the likelihood that the danger would cause injury. The jury found that there was a defect in the design of the cigarettes and that they had been negligently designed, and awarded Bullock damages. A reviewing court affirmed the jury’s verdict on appeal.6 n

Risk-Utility Analysis. Most courts engage in a risk-utility analysis, determining whether the risk of harm from the product as designed outweighs its utility to the user and to the public. The court in the following case reviewed whether the plaintiff had satisfied the risk-utility test.

6. Bullock v. Philip Morris USA, Inc., 159 Cal.App.4th 655, 71 Cal.Rptr.3d 775 (2008). The California Court of Appeal subsequently upheld a punitive damages award of $13.8 million. See Bullock v. Philip Morris USA, Inc., 198 Cal.App.4th 543, 131 Cal.Rptr.3d 382 (2011).

FACTS Jasper County Sheriff Benjamin Riley was driv- ing his Ford F-150 pickup truck near Ehrhardt, South Car- olina, when it collided with another vehicle. The impact caused Riley’s truck to leave the road and roll over. The driver’s door of the truck opened in the collision, and Riley was ejected and killed.

Riley’s widow, Laura, as the representative of his estate, filed a product liability suit in a South Carolina state court against Ford Motor Company. The plain- tiff alleged that the design of the door-latch system of the truck allowed the door to open in the collision. The court awarded the estate $900,000 in damages “because of the stature of Riley and what he’s done in life, what he’s contributed to his family.” Ford appealed, argu- ing that the plaintiff had not proved the existence of a reasonable alternative design.

ISSUE Did the plaintiff prove the existence of a reasonable alterna- tive design?

DECISION Yes. A state intermediate appellate court affirmed the lower court’s ruling. Evidence showed that Ford knew of a reasonable alternative design for the truck’s door-latch system. Ford was aware

of the safety problems presented by the current system (a rod-linkage system). After conducting a risk-utility analysis of a different system (a cable-linkage system), Ford had concluded that the alternative system was a “feasible, if not superior, alternative.”

REASON To meet the risk-utility test, a plaintiff must show a reasonable alternative design for the product at issue. This involves showing that the manufacturer, after weighing costs and benefits, decided to use one design instead of another. In this case, the plaintiff pre- sented evidence of Ford’s own design for a cable-linkage door-latch system, which the manufacturer had used in

earlier F-150 trucks. According to studies conducted by Ford, cable systems have several advantages over rod systems—“cable systems are easier for assembly plants to handle,” “reduce cost and reduce operator dependence,” “reduce complexity in service,” and “are more robust to crash.” The only disadvantage is that cable systems cost more than rod systems.

CRITICAL THINKING—Legal Environment Consideration By what means did the plaintiff most likely discover the defendant’s studies of an alternative design for the door-latch system?

How can a plaintiff prove that a truck’s

door latch was defectively designed?

Case 5.2

Riley v. Ford Motor Co. Court of Appeals of South Carolina, 408 S.C. 1, 757 S.E.2d 422 (2014).

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Consumer-Expectation Test. Instead of the risk-utility test, some courts apply the consumer- expectation test to determine whether a product’s design was defective. Under this test, a product is unreasonably dangerous when it fails to perform in the manner that would reason- ably be expected by an ordinary consumer.

CASE EXAMPLE 5.5 A representative from Wilson Sporting Goods Company gave Edwin Hickox an umpire’s mask that was designed to be safer than other umpire’s masks. The mask had a newly designed throat guard that angled forward instead of extending straight down. While Hickox was working as an umpire during a game and wearing the mask, he was was struck by a foul ball and injured. He suffered a concussion and damage to his inner ear, which caused permanent hearing loss. Hickox and his wife sued the manufacturer for product liabil- ity based on a defective design and won. A jury awarded $750,000 to Hickox and $25,000 to his wife. Wilson appealed.

The reviewing court affirmed the jury’s verdict. The design was defective because “an ordinary consumer would have expected the mask to perform more safely than it did.” The evidence presented to the jury had shown that Wilson’s mask was more dangerous than com- parable masks sold at the time. The new “masks could concentrate energy at the point of impact, rather than distribute energy evenly throughout the padded area of the mask,” as an ordinary consumer would have expected a baseball mask to do.7 n

Inadequate Warnings A product may also be deemed defective because of inadequate instructions or warnings. A product will be considered defective “when the foreseeable risks of harm posed by the product could have been reduced or avoided by the provision of rea- sonable instructions or warnings by the seller or other distributor, or a predecessor in the commercial chain of distribution, and the omission of the instructions or warnings renders the product not reasonably safe.”8 Generally, a seller must also warn consumers of the harm that can result from the foreseeable misuse of its product.

Content of Warnings. Important factors for a court to consider include the risks of a product, the “content and comprehensibility” and “intensity of expression” of warnings and instruc- tions, and the “characteristics of expected user groups.”9 Courts apply a “reasonableness” test to determine if the warnings adequately alert consumers to the product’s risks. For instance, children will likely respond more readily to bright, bold, simple warning labels, while educated adults might need more detailed information. For more on tips on making sure a product’s warnings are adequate, see this chapter’s Managerial Strategy feature.

CASE EXAMPLE 5.6 Jeffrey Johnson was taken to the emergency room for an episode of atrial fibrillation, a heart rhythm disorder. Dr. David Hahn used a defibrillator manufactured by Medtronic, Inc., to deliver electric shocks to Johnson’s heart. The defibrillator had syn- chronous and asynchronous modes, and it reverted to the asynchronous mode after each use. Hahn intended to deliver synchronized shocks, which required him to select the synchronous mode for each shock. Hahn did not read the device’s instructions, which Medtronic had pro- vided both in a manual and on the device itself. As a result, he delivered one synchronized shock, followed by twelve asynchronous shocks that endangered Johnson’s life.

Johnson and his wife filed a product liability suit against Medtronic asserting that Medtronic had provided inadequate warnings about the defibrillator and that the device had a design defect. A Missouri appellate court held that the Johnsons could not pursue a claim based on the inadequacy of Medtronic’s warnings, but they could pursue a claim alleging a design defect. The court reasoned that in some cases, “a manufacturer may be held liable

7. Wilson Sporting Goods Co. v. Hickox, 59 A.3d 1267 (D.C.App. 2013). 8. Restatement (Third) of Torts: Products Liability, Section 2(c). 9. Restatement (Third) of Torts: Products Liability, Section 2, Comment h.

When is an umpire’s mask defectively designed under the consumer-expectation test?

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where it chooses to warn of the danger . . . rather than preclude the danger by design.”10 n

Obvious Risks. There is no duty to warn about risks that are obvious or com- monly known. Warnings about such risks do not add to the safety of a product and could even detract from it by making other warnings seem less significant. As will be discussed later in this chapter, the obviousness of a risk and a user’s decision to proceed in the face of that risk may be a defense in a product liabil- ity suit based on an inadequate warning.

10. Johnson v. Medtronic, Inc., 365 S.W.3d 226 (Mo.App. 2012). When a physician misuses a defibrillator manufactured by Medtronic without reading its warning label, is Medtronic liable for inadequate warnings?

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Management Faces a Legal Issue A company can develop and sell a perfectly manufactured and designed product, yet still face product liability lawsuits for defec- tive warnings. A product may be defec- tive because of inadequate instructions or warnings when the foreseeable risks of harm posed by the product could have been reduced by reasonable warnings offered by the seller or other distributor. Manufacturers and distributors have a duty to warn users of any hidden dangers of their products. Addi- tionally, they have a duty to instruct users in how to use the product to avoid any dangers. Warnings generally must be clear and spe- cific. They must also be conspicuous.

Not all manufacturers have to provide warnings, as pointed out in the text. People are expected to know that knives can cut fingers, for example, so a seller need not place a bright orange label on each knife sold reminding consumers of this danger. Most household products are generally safe when used as intended.

What the Courts Say In a 2014 New Jersey case, an appeals court reviewed a product liability case against the manufacturer of a Razor A–type kick scooter. A ten-year-old boy was injured when he fell and struck his face on the scooter’s

handlebars. The padded end caps on the handlebars had deteriorated, and the boy’s mother had thrown them away, exposing the handlebars’ metal ends.

The boy and his mother sued, claiming that the manufacturer was required to pro- vide a warning to prevent injuries of this type. The appellate court noted, however, that the plaintiffs were not able to claim that the Razor A was defective. “Lacking evidence that Razor A’s end-cap design was defective, plaintiffs cannot show that Razor A had a duty to warn of such a defect, and therefore cannot make out their failure to warn claim.”a

In another 2014 case, a woman suffered neurological disorders after taking a generic drug to treat her gastroesophageal reflux disease. Part of her complaint asserted strict liability for failure to warn. The plain- tiff claimed that the manufacturer had not updated its label to indicate that usage should not exceed twelve weeks. The review- ing court reasoned that “The adequacy of the instructions . . . made no difference to the outcome . . . because [the plaintiff alleges that her prescribing physician] did not read those materials.”b

In contrast, in a 2013 Massachusetts case, a family was awarded over $63 million

in a lawsuit against Johnson & Johnson for defective warnings on bottles of children’s Motrin. A seven-year-old girl lost 70 percent of her skin, experienced brain damage, and went blind after suffering a reaction to the drug. The drug did have a specific warning label that instructed consumers to stop tak- ing the medication and contact a physician in the event of an allergic reaction. None- theless, Johnson & Johnson was found liable for failing to warn about the known risk of severe side effects.

MANAGeRIAL IMPLICATIONS

Managers must be aware that whenever a product presents a danger, a warning is required. The seller, though, must know about the danger for the warning to be obligatory. In addition, the danger must not be obvious to a reasonable user. Here is where a manager’s task may become difficult, because it is not always clear what would be obvious to a “reasonable user.”

When product warnings are supplied, they must be obvious and easy to understand. Here, one issue to be considered is that of warning non-English-speaking users. Some manufac- turers publish warnings in foreign languages and also use symbols to indicate dangers. One downside of excessive safety warnings is that so many warnings may be attached to a product that few consumers will bother to read any of them.

When Is a Warning Legally Bulletproof?MANAGERIAL STRATEGY

a. Vann v. Toys R Us, N.J.Super.A.D., 2014 WL3537937 (N.J.Sup. A.D. 2014).

b. Brinkley v. Pfizer, Inc., 772 F.3d 1133 (8th Cir. 2014).

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CASE EXAMPLE 5.7 Sixteen-year-old Gary Crosswhite failed in an attempt to do a back flip on a trampoline and was paralyzed as a result. The manufacturer had provided nine warning labels affixed to the tram- poline, an instruction manual with safety warnings, and a placard to be attached to the entry ladder. Each advised users not to do flips on the trampoline. Crosswhite sued the manufacturer for inadequate warn- ings. The court found that the warnings were sufficient to make the risks obvious and insulate the manufacturer from liability for Crosswhite’s injuries.11 n

Risks that may seem obvious to some users will not be obvious to all users. This is a particular problem when users are likely to be children. A young child may not be able to read or understand warning labels or comprehend the risk of certain activities. To avoid liability, the manufac- turer would have to prove that the warnings it provided were adequate to make the risk of injury obvious to a young child.

State Laws and Constitutionality. An action alleging that a product is defective due to an inade- quate label can be based on state law, but that law must not violate the U.S. Constitution. CASE. .EXAMPLE 5.8 California once enacted a law imposing restrictions and a labeling requirement on the sale or rental of “violent video games” to minors. Although the video game industry had adopted a voluntary rating system for games, the legislators deemed those labels inadequate. The Video Software Dealers Association and the Entertainment Software Association immedi- ately filed a suit in federal court to invalidate the law, and the law was struck down. The court found that the definition of a violent video game in California’s law was unconstitutionally vague and violated the First Amendment’s guarantee of freedom of speech.12 n

5–2d Market-Share Liability Generally, in cases involving product liability, a plaintiff must prove that the defective product that caused her or his injury was made by a specific defendant. In a few situations, however, courts have dropped this requirement when a plaintiff cannot prove which of many distribu- tors of a harmful product supplied the particular product that caused the injury. Under a the- ory of market-share liability, a court can hold each manufacturer responsible for a percentage of the plaintiff’s damages that is equal to the percentage of its market share.

CASE EXAMPLE 5.9 Suffolk County Water Authority (SWCA) is a municipal water supplier in Suffolk County, New York. SWCA discovered the presence of a toxic chemical, perchloloreth- ylene (PCE), used by dry cleaners and others in its local water. SWCA filed a product liability lawsuit against Dow Chemical Corporation and other companies that manufactured and distrib- uted PCE. Dow filed a motion to dismiss the case for failure to state a claim, since SWCA could not identify each defendant whose allegedly defective product caused the water contamination.

A state trial court refused to dismiss the action, holding that SWCA’s allegations were suf- ficient to invoke market-share liability. Under market-share liability, the burden of identifica- tion shifts to defendants if the plaintiff establishes a prima facie case on every element of the claim except identification of the specific defendant. (A prima facie case is one in which the plaintiff has presented sufficient evidence for the claim to go forward.)13 n

Courts in many jurisdictions do not recognize market-share liability, believing that it devi- ates too significantly from traditional legal principles. Jurisdictions that do recognize this the- ory of liability apply it only when it is difficult or impossible to determine which company made a particular product.

11. Crosswhite v. Jumpking, Inc., 411 F.Supp.2d 1228 (D.Or. 2006). 12. Video Software Dealers Association v. Schwarzenegger, 556 F.3d 950 (9th Cir. 2009); Brown v. Entertainment Merchants Associa-

tion, ___ U.S. ___, 131 S.Ct. 2729, 180 L.Ed.2d 708 (2011). 13. Suffolk County Water Authority v. Dow Chemical Co., 44 Misc.3d 569, 987 N.Y.S.2d 819 (N.Y.Sup. 2014).

Market-Share Liability A theory under which liability is shared among all firms that manufactured and distributed a particular product during a certain period of time. This form of liability sharing is used only when the specific source of the harmful product is unidentifiable.

How many and what types of warnings against doing back flips on this trampoline must be affixed to eliminate the manufacturer’s liability?

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5–2e Other Applications of Strict Liability Almost all courts extend the strict liability of manufacturers and other sellers to injured bystanders. EXAMPLE 5.10 A forklift that Trent is operating will not go into reverse, and as a result, it runs into a bystander. In this situation, the bystander can sue the manufacturer of the defective forklift under strict liability (and possibly bring a negligence action against the forklift operator as well). n

Strict liability also applies to suppliers of component parts. EXAMPLE 5.11 Toyota buys brake pads from a subcontractor and puts them in Corollas without changing their composi- tion. If those pads are defective, both the supplier of the brake pads and Toyota will be held strictly liable for injuries caused by the defects. n

5–3 Defenses to Product Liability Defendants in product liability suits can raise a number of defenses. One defense, of course, is to show that there is no basis for the plaintiff’s claim. For instance, in a product liability case based on negligence, if a defendant can show that the plaintiff has not met the requirements (such as causation) for an action in negligence, generally the defendant will not be liable. A defendant may also assert that the statute of limitations for a product liability claim has lapsed.14

In a case involving strict product liability, a defendant can claim that the plaintiff failed to meet one of the requirements. If the defendant establishes that goods were altered after they were sold, for instance, the defendant normally will not be held liable.

In the following case, a product’s safety switch had been disabled before the plaintiff used the product.

14. Similar state statutes, called statutes of repose, place outer time limits on product liability actions.

FACTS Drew Verost was employed at a manufac- turing facility in Buffalo, New York, owned by Nut- tall Gear, LLC. While operating a forklift at Nuttall’s facility, Verost climbed out of the seat and attempted to engage a lever on the vehicle. As he stood on the front of the forklift and reached for the lever with his hand, he inadvertently stepped on the vehicle’s gearshift. The activated gears caused part of the forklift to move backward, injuring Verost. He filed a suit in a New York state court against the forklift’s maker, Mitsubishi Caterpillar Forklift America, Inc., and others, asserting claims in product liability. The defendants established that the vehicle had been manufactured with a safety switch that would have prevented the accident had it not been disabled after delivery to Nuttall. The court issued a summary judgment in the defendants’ favor. Verost appealed.

ISSUE Is the modification of a product after its sale an effective defense against a claim of product liability?

DECISION Yes. The state intermediate appellate court affirmed the lower court’s judgment in the product liability defendants’ favor. To succeed in an action based on product liability, the goods at issue must not have been substantially changed from the time the product was sold to the time the injury was sustained.

REASON The forklift was made by Mitsubishi and sold new to Nuttall by Buffalo Lift Trucks, Inc., and Mullen Industrial Handling Corporation. The fork-

lift had been made and delivered to Nuttall with a safety switch to render it inoperable if an operator was not in the driver’s seat. At the time of Verost’s accident, however, someone—“a third party”—had

Under what circumstances can a forklift manufacturer

avoid product liability?

Case 5.3

Verost v. Mitsubishi Caterpillar Forklift America, Inc. New York Supreme Court, Appellate Division, Fourth Department, 124 A.D.3d 1219, 1 N.Y.S.3d 589 (2015).

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5–3a Preemption A defense that has been successfully raised by defendants in recent years is preemption—that government regulations preempt claims for product liability (see Spotlight Case 5.1, for exam- ple). An injured party may not be able to sue a manufacturer of defective products that are subject to comprehensive federal regulatory schemes.

Medical devices, for instance, are subject to extensive government regulation and undergo a rigorous premarket approval process. CASE EXAMPLE 5.12 The United States Supreme Court decided in Riegel v. Medtronic, Inc., that a man who was injured by an approved medical device (a balloon catheter) could not sue its maker for product liability. The Court reasoned that Congress had created a comprehensive scheme of federal safety oversight for medical devices. The U.S. Food and Drug Administration is required to review the design, labeling, and man- ufacturing of medical devices before they are marketed to make sure that they are safe and effective. Because premarket approval is a “rigorous process,” it preempts all common law claims challenging the safety or effectiveness of a medical device that has been approved.15 n

Since the Medtronic decision, some courts have extended the preemption defense to other product liability actions. Other courts have been unwilling to deny an injured party relief simply because the federal government was supposed to ensure the product’s safety.16 Even the United States Supreme Court refused to extend the preemption defense to preclude a drug maker’s liability in one subsequent case.17

5–3b Assumption of Risk Assumption of risk can sometimes be used as a defense in a product liability action. To establish such a defense, the defendant must show that (1) the plaintiff knew and appreciated the risk created by the product defect and (2) the plaintiff voluntarily assumed the risk, even though it was unreasonable to do so. (See Chapter 4 for a more detailed discussion of assumption of risk.)

Although assumption of the risk is a defense in product liability actions, some courts do not allow it to be used as a defense to strict product liability claims. CASE EXAMPLE 5.13 When Savan- nah Boles became a customer of Executive Tans, she signed a contract. One clause stated that signers used the company’s tanning booths at their own risk. It also released the manufacturer and others from liability for any injuries. Later, Boles’s fingers were partially amputated when they came into contact with a tanning booth’s fan. Boles sued the manufacturer, claiming strict product liability. The Colorado Supreme Court held that assumption of risk was not applicable because strict product liability is driven by public-policy considerations. The theory focuses on the nature of the product rather than the conduct of either the manufacturer or the person injured.18 n

15. Riegel v. Medtronic, Inc., 552 U.S. 312, 128 S.Ct. 999, 169 L.Ed.2d 892 (2008). 16. See, for example, McGuan v. Endovascular Technologies, Inc., 182 Cal.App.4th 974, 106 Cal.Rptr.3d 277 (2010), and Paduano v.

American Honda Motor Co., 169 Cal.App.4th 1453, 88 Cal.Rptr.3d 90 (2009). 17. Wyeth v. Levine, 555 U.S. 555, 129 S.Ct. 1187, 173 L.Ed.2d 51 (2009). 18. Boles v. Sun Ergoline, Inc., 223 P.3d 724 (Co.Sup.Ct. 2010).

LEARNING OBJECTIVE 5 What defenses to liability can be raised in a product liability lawsuit?

intentionally disabled the safety switch so that the forklift still had power when the operator was not in the driver’s seat. Seven of Nut- tall’s ten forklifts had disabled safety switches. Verost had asserted causes of action in product liability against Mitsubishi, Buffalo Lift, and Mullen. The appellate court concluded that the lower court had properly issued judgment in these defendants’ favor. “A manufac- turer, who has designed and produced a safe product, will not be

liable for injuries resulting from substantial alterations or modifi- cations of the product by a third party which render the product defective or otherwise unsafe.”

CRITICAL THINKING—Legal Consideration Could Verost succeed in an action against Nuttall alleging that the company’s failure to main- tain the forklift in a safe condition constituted negligence? Discuss.

Under what circumstances can a tanning salon customer sue for injuries even though she or he signed a release?

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5–3c Product Misuse Similar to the defense of voluntary assumption of risk is that of product misuse, which occurs when a product is used for a purpose for which it was not intended. The courts have severely limited this defense. Today, product misuse is recognized as a defense only when the particular use was not reasonably foreseeable. If the misuse is foreseeable, the seller must take measures to guard against it.

CASE EXAMPLE 5.14 David Stults developed “popcorn lung” (bronchiolitis obliterans) from consuming multiple bags of microwave popcorn daily for several years. When he filed suit against the manufacturers of the popcorn and butter flavorings, the defendants asked the court for a summary judgment in their favor. The court denied defendants’ motion and found that a manufacturer has a duty to warn of dangers associated with reasonably foreseeable misuses of a product. If it is foreseeable that a person might consume several bags of the pop- corn a day, then the manufacturer might have to warn users about the potential health risks associated with doing so.19 n

5–3d Comparative Negligence (Fault) Developments in the area of comparative negligence, or fault (discussed in the torts chapter), have also affected the doctrine of strict liability. Today, courts in many jurisdictions consider the negligent or intentional actions of both the plaintiff and the defendant when apportioning liability and awarding damages. A defendant may be able to limit at least some liability for injuries caused by a defective product if it can show that the plaintiff’s misuse of the product contributed to the injuries.

When proved, comparative negligence differs from other defenses in that it does not com- pletely absolve the defendant of liability. It can, however, reduce the amount of damages that will be awarded to the plaintiff. Note that some jurisdictions allow only intentional conduct to affect a plaintiff’s recovery, whereas others allow ordinary negligence to be used as a defense to product liability.

CASE EXAMPLE 5.15 Dan Smith, a mechanic, was not wearing a hard hat at work when he was asked to start the diesel engine of an air compressor. Because the compressor was an older model, he had to prop open a door to start it. When the engine started, the door fell from its position and hit Smith’s head. The injury caused him to suffer from seizures. Smith sued the manufacturer, claiming that the engine was defectively designed. The manufacturer contended that Smith had been negligent by failing to wear a hard hat and propping open the door in an unsafe manner. Smith argued that ordinary negligence could not be used as a defense in product liability cases. The court ruled that defendants can use the plaintiff’s ordi- nary negligence to reduce their liability proportionately.20 n

5–3e Commonly Known Dangers As mentioned, the dangers associated with certain products (such as sharp knives and guns) are so commonly known that manufacturers need not warn users of those dangers. If a defen- dant succeeds in convincing the court that a plaintiff’s injury resulted from a commonly known danger, the defendant normally will not be liable.

CASE EXAMPLE 5.16 In a classic example from 1957, Marguerite Jamieson was injured when an elastic exercise rope slipped off her foot and struck her in the eye, causing a detachment of the retina. Jamieson claimed that the manufacturer should be liable because it had failed to warn users that the exerciser might slip off a foot in such a manner.

19. Stults v. International Flavors and Fragrances, Inc., 31 F.Supp.3d 1015 (N.D. Iowa 2014). 20. Smith v. Ingersoll-Rand Co., 14 P.3d 990 (Alaska 2000). See also Winschel v. Brown, 171 P.3d 142 (Alaska 2007).

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The court stated that to hold the manufacturer liable in these circumstances “would go beyond the reasonable dictates of justice in fixing the liabilities of manufacturers.” After all, stated the court, “almost every physical object can be inherently dangerous or potentially dangerous in a sense. . . . A manufacturer cannot manufacture a knife that will not cut or a hammer that will not mash a thumb or a stove that will not burn a finger. The law does not require [manufacturers] to warn of such common dangers.”21 n

5–3f Knowledgeable User A related defense is the knowledgeable user defense. If a particular danger (such as electrical shock) is or should be commonly known by particular users of the product (such as electri- cians), the manufacturer of electrical equipment need not warn these users of the danger.

CASE EXAMPLE 5.17 The parents of a group of teenagers who had become overweight and developed health problems filed a product liability lawsuit against McDonald’s. The plaintiffs claimed that the well-known fast-food chain should be held liable for failing to warn cus- tomers of the adverse health effects of eating its food products. The court rejected this claim, however, based on the knowledgeable user defense.

According to the court, it is well known that the food at McDonald’s contains high levels of cholesterol, fat, salt, and sugar and is therefore unhealthful. The court’s opinion, which thwarted numerous future lawsuits against fast-food restaurants, stated: “If consumers know (or reasonably should know) the potential ill health effects of eating at McDonald’s, they cannot blame McDonald’s if they, nonetheless, choose to satiate [satisfy] their appetite with a surfeit [excess] of supersized McDonald’s products.”22 n

5–3g Statutes of Limitations and Repose As mentioned previously, statutes of limitations restrict the time within which an action may be brought. The statute of limitations for product liability cases varies according to state law. Usually, the injured party must bring a product liability claim within two to four years. Often, the running of the prescribed period is tolled (that is, suspended) until the party suffering an injury has discovered it or should have discovered it.

To ensure that sellers and manufacturers will not be left vulnerable to lawsuits indefinitely, many states have passed statutes of repose, which place outer time limits on product liability actions. For instance, a statute of repose may require that claims be brought within twelve years from the date of sale or manufacture of the defective product. If the plaintiff does not bring an action before the prescribed period expires, the seller cannot be held liable.

21. Jamieson v. Woodward & Lothrop, 247 F.2d 23, 101 D.C.App. 32 (1957). 22. Pelman v. McDonald’s Corp., 237 F.Supp.2d 512 (S.D.N.Y. 2003).

Tolling Temporary suspension of the running of a prescribed time period, such as a statute of limitations.

Statute of Repose A statute that places outer time limits on product liability actions. Such statutes cut off absolutely the right to bring an action after a specified period of time following some event (often the product’s manufacture or purchase) other than the occurrence of an injury.

Reviewing . . . Product Liability Shalene Kolchek bought a Great Lakes Spa from Val Porter, a dealer who was selling spas at the state fair. After Kolchek signed the contract, Porter handed her the manufacturer’s paperwork and arranged for the spa to be delivered and installed for her. Three months later, Kolchek left her six-year-old daughter, Litisha, alone in the spa. While exploring the spa’s hydromassage jets, Litisha got her index finger stuck in one of the jet holes.

Litisha yanked hard, injuring her finger, and then panicked and screamed for help. Kolchek was unable to remove Litisha’s finger, and the local police and rescue team were called to assist. After a three-hour operation that included draining the spa, sawing out a section of the spa’s plastic molding, and slicing the jet casing, Litisha’s finger was freed. Following this procedure, the spa was no longer functional. Litisha

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was taken to the local emergency room, where she was told that a bone in her finger was broken in two places. Using the information presented in the chapter, answer the following questions.

1. Under which theories of product liability can Kolchek sue Porter to recover for Litisha’s injuries?

2. Would privity of contract be required for Kolchek to succeed in a product liability action against Great Lakes? Explain.

3. For an action in strict product liability against Great Lakes, what six requirements must Kolchek meet?

4. What defenses to product liability might Porter or Great Lakes be able to assert?

DeBATe THIS

▪▪ All liability suits against tobacco companies for causing lung cancer should be thrown out of court now and forever.

In this chapter, you learned that manufac-turing and design defects can give rise to liability. Although it is possible to mini- mize liability through various defenses to product liability claims, all businesspersons know that such defenses do not necessarily fend off expensive lawsuits.

The legal issues surrounding product lia- bility relate directly to quality control. As all of your management courses will emphasize, quality control is a major issue facing man- agers in every organization. Companies that have cost-effective quality control systems produce products with fewer manufacturing and design defects. As a result, these compa- nies incur fewer potential and actual product liability lawsuits.

Three Types of Quality Control Most management systems involve three types of quality control—preventive, con - current, and feedback. They apply at differ- ent stages of the manufacturing process: preventive quality control occurs before the

process begins, concurrent control takes place during the process, and feedback con- trol occurs after it is finished.

In a typical manufacturing process, for example, preventive quality control might involve inspecting raw materials before they are put into the production process. Once the process begins, measuring and monitor- ing devices constantly assess quality stan- dards as part of a concurrent quality control system. When the standards are not being met, employees correct the problem.

Once the manufacturing is completed, the products undergo a final quality inspec- tion as part of the feedback quality control system. Of course, there are economic limits to how complete the final inspection will be. A refrigerator can be tested for an hour, a day, or a year. Management faces a trade-off. The less the refrigerator is tested, the sooner it gets to market and the faster the company receives its payment. The shorter the testing period, however, the higher the probability of a defect that will cost the manufacturer.

Total Quality Management (TQM) Some managers attempt to reduce product liability costs by relying on a concurrent

quality control system known as total quality management (TQM). TQM is an organiza- tion-wide effort to infuse quality into every activity in a company through continuous improvement.

Quality circles are a popular TQM tech- nique. These are groups of six to twelve employees who volunteer to meet regularly to discuss problems and how to solve them. In a continuous stream manufacturing pro- cess, for example, a quality circle might consist of workers from different phases in the production process. Quality circles force changes in the production process that affect workers who are actually on the pro- duction line.

Benchmarking is another technique used in TQM. In benchmarking, a company con- tinuously measures its products against those of its toughest competitors or the industry leaders in order to identify areas for improvement. In the automobile indus- try, benchmarking enabled several Japanese firms to overtake U.S. automakers in terms of quality. Some argue that Toyota gained worldwide market share by effectively using this type of quality control management system.

LINKING BUSINESS LAW TO CORPORATE MANAGEMENT Quality Control

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Another TQM system is called Six Sigma. Motorola introduced the quality principles in this system in the late 1980s, but Six Sigma has now become a generic term for a quality con trol approach based on a five-step methodology: define, measure, analyze, improve, and control. Six Sigma controls emphasize discipline and a relentless attempt to achieve higher quality (and lower costs). A possible impediment to

the institution of a Six Sigma program is that it requires a major commitment from top man- agement because it may involve widespread changes throughout the entire organization.

CRITICAL THINKING

▪▪ Quality control leads to fewer defective products and fewer lawsuits. Consequently,

managers know that quality control is important to their company’s long-term financial health. At the same time, the more quality control managers impose on their organization, the higher the average cost per unit of whatever is produced and sold. How does a manager decide how much quality control to undertake?

market-share liability 128 product liability 118

privity of contract 119 statute of repose 132

tolled 132 unreasonably dangerous product 123

Key Terms

Chapter Summary: Product Liability Liability Based on Negligence

1. The manufacturer must use due care in designing the product, selecting materials, using the appropriate production process, assembling and testing the product, and placing adequate warnings on the label or product.

2. Privity of contract is not required. A manufacturer is liable for failure to exercise due care to any person who sustains an injury proximately caused by a negligently made (defective) product.

3. Fraudulent misrepresentation of a product may result in product liability based on the tort of fraud.

Strict Product Liability— Requirements

1. The defendant must have sold the product in a defective condition. 2. The defendant must normally be engaged in the business of selling that product. 3. The product must be unreasonably dangerous to the user or consumer because of its defective condition (in most states). 4. The plaintiff must incur physical harm to self or property by use or consumption of the product. 5. The defective condition must be the proximate cause of the injury or damage. 6. The goods must not have been substantially changed from the time the product was sold to the time the injury was sustained.

Strict Product Liability—Product Defects

A product may be defective in three basic ways: 1. In its manufacture. 2. In its design. 3. In the instructions or warnings that come with it.

Market-Share Liability

When plaintiffs cannot prove which of many distributors of a defective product supplied the particular product that caused the plaintiffs’ injuries, some courts apply market-share liability. All firms that manufactured and distributed the harmful product during the period in question are then held liable for the plaintiffs’ injuries in proportion to the firms’ respective share of the market, as directed by the court.

Other Applica- tions of Strict Liability

1. Manufacturers and other sellers are liable for harms suffered by bystanders as a result of defective products. 2. Suppliers of component parts are strictly liable for defective parts that, when incorporated into a product, cause injuries

to users.

Defenses to Product Liability

1. Preemption—An injured party may not be able to sue the manufacturer of a product that is subject to comprehensive federal safety regulations, such as medical devices.

2. Assumption of risk—The user or consumer knew of the risk of harm and voluntarily assumed it. 3. Product misuse—The user or consumer misused the product in a way unforeseeable by the manufacturer. 4. Comparative negligence—Liability may be distributed between the plaintiff and the defendant under the doctrine of com-

parative negligence if the plaintiff’s misuse of the product contributed to the risk of injury. 5. Commonly known dangers—If a defendant succeeds in convincing the court that a plaintiff’s injury resulted from a com-

monly known danger, such as the danger associated with using a sharp knife, the defendant will not be liable. 6. Knowledgeable user—If a particular danger is or should be commonly known by particular users of the product, the manu-

facturer of the product need not warn these users of the danger.

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Issue Spotters 1. Rim Corporation makes tire rims that it sells to Superior Vehicles, Inc., which installs them on cars. One set of rims is defective,

which an inspection would reveal. Superior does not inspect the rims. The car with the defective rims is sold to Town Auto Sales, which sells the car to Uri. Soon, the car is in an accident caused by the defective rims, and Uri is injured. Is Superior Vehicles liable? Explain your answer. (See Product Liability.)

2. Bensing Company manufactures generic drugs for the treatment of heart disease. A federal law requires generic drug makers to use labels that are identical to the labels on brand-name versions of the drugs. Hunter Rothfus purchased Bensing’s generic drugs in Ohio and wants to sue Bensing for defective labeling based on its failure to comply with Ohio state common law (rather than the federal labeling requirements). What defense might Bensing assert to avoid liability under state law? (See Defenses to Product Liability.)

—Check your answers to the Issue Spotters against the answers provided in Appendix D at the end of this text.

Learning Objectives Check 1. Can a manufacturer be held liable to any person who suffers an injury proximately caused by the manufacturer’s negligently made

product?

2. What public policy assumptions underlie strict product liability?

3. What are the elements of a cause of action in strict product liability?

4. What are three types of product defects?

5. What defenses to liability can be raised in a product liability lawsuit? —Answers to the even-numbered Learning Objectives Check questions can be found in Appendix E at the end of this text.

Business Scenarios and Case Problems 5–1. Product Liability. Carmen buys a television set manufac-

tured by AKI Electronics. She is going on vacation, so she takes the set to her mother’s house for her mother to use. Because the set is defective, it explodes, causing considerable damage to her mother’s house. Carmen’s mother sues AKI for the dam- age to her house. Discuss the theories under which Carmen’s mother can recover from AKI. (See Product Liability.)

5–2. Product Liability. Jason Clark, an experienced hunter, bought a paintball gun. Clark practiced with the gun and knew how to screw in the carbon dioxide cartridge, pump the gun, and use its safety and trigger. Although Clark was aware that he could purchase protective eyewear, he chose not to. Clark had taken gun safety courses and understood that it was “common sense” not to shoot anyone in the face. Clark’s friend, Chris Wright, also owned a paintball gun and was similarly familiar with the gun’s use and its risks. Clark, Wright, and their friends played a game that involved shooting paintballs at cars whose occupants also had the guns. One night, while Clark and Wright were cruising with their guns, Wright shot at Clark’s car, but hit Clark in the eye. Clark filed a product liability lawsuit against the manufacturer of Wright’s

paintball gun to recover for the injury. Clark claimed that the gun was defectively designed. During the trial, Wright testified that his gun “never malfunctioned.” In whose favor should the court rule? Why? (See Product Liability.)

5–3. Defenses to Product Liability. Brandon Stroud was driv- ing a golf car made by Textron, Inc. The golf car did not have lights, but Textron did not warn against using it on public roads at night. When Stroud attempted to cross a road at 8:30 p.m., his golf car was struck by a vehicle driven by Joseph Thorn- ley. Stroud was killed. His estate filed a suit against Textron, alleging strict product liability and product liability based on negligence. The charge was that the golf car was defective and unreasonably dangerous. What defense might Textron assert? Explain. [Moore v. Barony House Restaurant, LLC, 382 S.C. 35, 674 S.E.2d 500 (S.C.App. 2009)] (See Defenses to Product Liability.)

5–4. Product Liability. Yun Tung Chow tried to unclog a floor drain in the kitchen of the restaurant where he worked. He used a drain cleaner called Lewis Red Devil Lye that contained crystalline sodium hydroxide. The product label said that users should wear eye protection, put one tablespoon of lye directly

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into the drain, and keep their faces away from the drain to avoid dangerous backsplash. Not wearing eye protection, Chow mixed three spoonfuls of lye in a can and poured that mixture down the drain while bending over it. Liquid splashed back into his face, causing injury. He sued for product liability based on inadequate warn- ings and a design defect. The trial court granted summary judgment to the manufacturer. Chow appealed. An expert for Chow stated that the product was defective because it had a tendency to backsplash. Is that a convincing argument? Why or why not? [Yun Tung Chow v. Reckitt & Coleman, Inc., 17 N.Y.3d 29, 950 N.E.2d 113 (2011)] (See Product Liability.)

5–5. Strict Product Liability. David Dobrovolny bought a new Ford F-350 pickup truck. A year later, the truck spontaneously caught fire in Dobrovolny’s driveway. The truck was destroyed, but no other property was damaged, and no one was injured. Dobrovolny filed a suit in a Nebraska state court against Ford Motor Co. on a theory of strict product liability to recover the cost of the truck. Nebraska limits the application of strict product liability to situations involving personal injuries. Is Dobrovolny’s claim likely to succeed? Why or why not? Is there another basis for liability on which he might recover? Explain. [Dobrovolny v. Ford Motor Co., 281 Neb. 86, 793 N.W.2d 445 (2011)] (See Strict Product Liability.)

5–6. Product Misuse. Five-year-old Cheyenne Stark was riding in the backseat of her parents’ Ford Taurus. Cheyenne was not sitting in a booster seat. Instead, she was using a seatbelt designed by Ford, but was wearing the shoulder belt behind her back. The car was involved in a collision. As a result, Cheyenne suffered a spinal cord injury and was paralyzed from the waist down. The family filed a suit against Ford Motor Co., alleging that the seatbelt was defectively designed. Could Ford success- fully claim that Cheyenne had misused the seatbelt? Why or why not? [Stark v. Ford Motor Co., 365 N.C. 468, 723 S.E.2d 753 (2012)] (See Defenses to Product Liability.)

5–7. Business Case Problem with Sample Answer— Product Liability. While driving on Interstate 40 in North Carolina, Carroll Jett became distracted by a tex- ting system in the cab of his tractor-trailer truck. He

smashed into several vehicles that were slowed or stopped in front of him, injuring Barbara and Michael Durkee and others. The injured motorists filed a suit in a federal district court against Geologic Solutions, Inc., the maker of the texting sys- tem, alleging product liability. Was the accident caused by Jett’s inattention or the texting device? Should a manufacturer be required to design a product that is incapable of distracting a

driver? Discuss. [Durkee v. Geologic Solutions, Inc., 2013 WL 14717 (4th Cir. 2013)] (See Product Liability.) —For a sample answer to Problem 5–7, go to Appendix F at

the end of this text.

5–8. Strict Product Liability. Medicis Pharmaceutical Corp. makes Solodyn, a prescription oral antibiotic. Medicis warns physicians that “autoimmune syndromes, including drug- induced lupus-like syndrome,” may be associated with use of the drug. Amanda Watts had chronic acne. Her physician pre- scribed Solodyn. Information included with the drug did not mention the risk of autoimmune disorders, and Watts was not otherwise advised of it. She was prescribed the drug twice, each time for twenty weeks. Later, she experienced debilitat- ing joint pain and, after being hospitalized, was diagnosed with lupus. On what basis could Watts recover from Medicis in an action grounded in product liability? Explain. [Watts v. Medicis Pharmaceutical Corp., 236 Ariz. 511, 342 P.3d 847 (2015)] (See Strict Product Liability.)

5–9. A Question of Ethics—Strict Product Liability. Susan Calles lived with her four daughters, Amanda (age 11), Vic- toria (age 5), and Jenna and Jillian (age 3). In March 1998, Calles bought an Aim N Flame utility lighter, which she

stored on the top shelf of her kitchen cabinet. A trigger can ignite the Aim N Flame after an on/off switch is slid to the “on” position. On the night of March 31, Calles and Victoria left to get videos. Jenna and Jillian were in bed, and Amanda was watching television. Calles returned to find fire trucks and emergency vehicles around her home. Robert Finn, a fire inves- tigator, determined that Jenna had started a fire using the lighter. Jillian suffered smoke inhalation, was hospitalized, and died on April 21. Calles filed a suit in an Illinois state court against Scripto-Tokai Corp., which distributed the Aim N Flame, and others. In her suit, which was grounded, in part, in strict liability claims, Calles alleged that the lighter was an “unrea- sonably dangerous product.” Scripto filed a motion for sum- mary judgment. [Calles v. Scripto-Tokai Corp., 224 Ill.2d 247, 864 N.E.2d 249, 309 Ill.Dec. 383 (2007)] (See Strict Product Liability.) 1. A product is “unreasonably dangerous” when it is dangerous

beyond the expectation of the ordinary consumer. Whose expectation—Calles’s or Jenna’s—applies here? Why? Does the lighter pass this test? Explain.

2. A product is also “unreasonably dangerous” when a less dan- gerous alternative was economically feasible for its maker, and the maker failed to produce it. Scripto contended that because its product was “simple” and the danger was

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“obvious,” it should not be liable under this test. Do you agree? Why or why not?

3. Calles presented evidence as to the likelihood and serious- ness of injury from lighters that do not have child-safety devices. Scripto argued that the Aim N Flame is a useful,

inexpensive, alternative source of fire and is safer than a match. Calles admitted that she was aware of the dangers presented by lighters in the hands of children. Scripto admit- ted that it had been a defendant in at least twenty-five suits for injuries that occurred under similar circumstances. With these factors in mind, how should the court rule? Why?

Critical Thinking and Writing Assignments 5–10. Business Law Critical Thinking Group Assignment.

Bret D’Auguste was an experienced skier when he rented equipment to ski at Hunter Mountain Ski Bowl in New York. When D’Auguste entered an extremely difficult trail,

he noticed immediately that the surface consisted of ice with almost no snow. He tried to exit the steeply declining trail by making a sharp right turn, but in the attempt, his left ski snapped off. D’Auguste lost his balance, fell, and slid down the mountain, striking his face and head against a fence along the trail. According to a report by a rental shop employee, one of the bindings on D’Auguste’s skis had a “cracked heel housing.”

D’Auguste filed a lawsuit against the bindings’ manufacturer on a theory of strict product liability. The manufacturer filed a motion for summary judgment. (See Product Liability.)

1. The first group will take the position of the manufacturer and develop an argument why the court should grant the summary judgment motion and dismiss the strict product liability claim.

2. The second group will take the position of D’Auguste and formulate a basis for why the court should deny the motion and allow the strict product liability claim.

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6

Intellectual property is any property resulting from intel- lectual, creative processes—the products of an individu- al’s mind, as suggested in the chapter-opening quotation. Although it is an abstract term for an abstract concept, intellectual property is nonetheless familiar to almost everyone. The apps for your iPhone, iPad, or Samsung Galaxy, the movies you see, and the music you listen to are all forms of intellectual property.

More than two hundred years ago, the framers of the U.S. Constitution recognized the importance of protecting creative works in Article I, Section 8 (see Appendix B). Statutory protection of these rights began in the 1940s and continues to evolve to meet the needs of modern society. In today’s global economy, however, protecting intellectual property in one country is no longer suffi- cient. The United States is participating in various international agreements to secure own- ership rights in intellectual property in other countries, as you will learn in this chapter.

Whether locally or globally, businesspersons have a vital need to protect their rights in intellectual property, which may be more valuable than their physical property, such as machines and buildings. Consider, for instance, the importance of intellectual property rights to technology companies, such as Apple, Inc., and Samsung Electronics Company. In today’s world, intellectual property rights can be a company’s most valuable assets, which is why Apple recently sued its rival Samsung. Apple claimed that Samsung’s Gal- axy line of mobile phones and tablets (those that run Google’s Android software) copy the look, design, and user interface of Apple’s iPhone and iPad. Although Apple is one of Samsung’s biggest customers and buys many of its components from Samsung, Apple also needs to protect its iPhone and iPad revenues from competing Android products. You will read about the verdict in this case later in this chapter.

Intellectual Property Property resulting from intellectual and creative processes.

LEARNING OBJECTIVE 1 What is intellectual property?

Intellectual Property RightsLEARNING OBJECTIVESThe five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions:

1. What is intellectual property?

2. Why is the protection of trademarks important?

3. How does the law protect patents?

4. What laws protect authors’ rights in the works they create?

5. What are trade secrets, and what laws offer protection for this form of intellectual property?

CHAPTER OUTLINE ▪▪ Trademarks ▪▪ Patents ▪▪ Copyrights ▪▪ Trade Secrets ▪▪ International Protections

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“My words and my ideas are my property, and I’ll keep and protect them as surely as I do my stable of unicorns.”

Jarod Kintz 1982–present (American author)

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6–1 Trademarks A trademark is a distinctive word, symbol, sound, or design that identifies the manufacturer as the source of particular goods and distinguishes its products from those made or sold by others. At common law, the person who used a symbol or mark to identify a business or product was protected in the use of that trademark. Clearly, if another company used the trademark, it could lead consumers to believe that its goods were made by the trademark owner. The law seeks to avoid this kind of confusion. (For information on how companies use trademarks and service marks, see the Linking Business Law to Marketing feature at the end of this chapter.)

In the following Classic Case concerning Coca-Cola, the defendants argued that the Coca- Cola trademark was not entitled to protection under the law because the term did not accu- rately represent the product.

Trademark A distinctive word, symbol, or design that identifies the manufacturer as the source of particular goods and distinguishes its products from those made or sold by others.

LEARNING OBJECTIVE 2 Why is the protection of trademarks important?

••• CLASSIC CASE 6.1 •••

Coca-Cola Co. v. Koke Co. of America Supreme Court of the United States, 254 U.S. 143, 41 S.Ct. 113, 65 L.Ed. 189 (1920).

COMPANY PROFILE John Pemberton, an Atlanta phar- macist, invented a caramel-colored, carbonated soft drink in 1886. His bookkeeper, Frank Robinson, named the bev- erage Coca-Cola after two of the ingredients, coca leaves and kola nuts. Asa Candler bought the Coca-Cola Company in 1891 and, within seven years, had made the soft drink available throughout the United States and in parts of Canada and Mexico as well. Candler continued to sell Coke aggressively and to open up new markets, reaching Europe before 1910. In doing so, however, he attracted numerous competitors, some of whom tried to capitalize directly on the Coke name.

FACTS The Coca-Cola Company brought an action in a federal dis- trict court to enjoin (prevent) other beverage companies from using the names Koke and Dope for their products. The defendants con- tended that the Coca-Cola trademark was a fraudulent representa- tion and that Coca-Cola was therefore not entitled to any help from the courts. By using the Coca-Cola name, the defendants alleged, the Coca-Cola Company represented that the beverage contained cocaine (from coca leaves). The district court granted the injunction, but the federal appellate court reversed. The Coca-Cola Company appealed to the United States Supreme Court.

ISSUE Did the marketing of products called Koke and Dope by the Koke Company of America and other firms constitute an infringe- ment on Coca-Cola’s trademark?

DECISION Yes for Koke, but no for Dope. The United States Supreme Court enjoined the competing beverage companies from calling their products Koke but not from calling their products Dope.

REASON The Court noted that before 1900 the Coca- Cola beverage had contained a small amount of cocaine. This ingredient had been deleted from the formula by 1906 at the latest, however, and the Coca-Cola Com- pany had advertised to the public that no cocaine was present in its drink. The court emphasized that Coca- Cola was a widely popular drink “to be had at almost any soda fountain.” Because of the public’s widespread familiarity with Coca-Cola, the retention of the name (referring to coca leaves and kola nuts) was not mis- leading: “Coca-Cola probably means to most persons the plaintiff’s familiar product to be had everywhere rather than a compound of particular substances.” The

name Coke was found to be so common a term for the trademarked product Coca-Cola that the defendants’ use of the similar-sounding Koke as a name for their beverages was disallowed. The Court could find no reason to restrain the defendants from using the name Dope, however.

WHAT IF THE FACTS WERE DIFFERENT? Suppose that Coca-Cola had been trying to make the public believe that its product contained cocaine. Would the result in the case likely have been different? Explain your answer.

IMPACT OF THIS CASE ON TODAY’S LAW In this early case, the United States Supreme Court made it clear that trademarks and trade names (and nicknames for those marks and names, such as “Coke” for “Coca-Cola”) that are in common use receive protection under the com- mon law. This holding is significant historically because it is the prede- cessor to the federal statute later passed to protect trademark rights (the Lanham Act of 1946, discussed next).

How is Coca-Cola protected?

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6–1a Statutory Protection of Trademarks Statutory protection of trademarks and related property is provided at the federal level by the Lanham Act of 1946.1 The Lanham Act was enacted in part to protect manufacturers from losing business to rival companies that used confusingly similar trademarks. The Lanham Act incorporates the common law of trademarks and provides remedies for owners of trademarks who wish to enforce their claims in federal court. Many states also have trademark statutes.

Trademark Dilution In 1995, Congress amended the Lanham Act by passing the Federal Trade- mark Dilution Act,2 which allowed trademark owners to bring suits in federal court for trademark dilution. In 2006, Congress further amended the law on trademark dilution by passing the Trademark Dilution Revision Act (TDRA).3

Under the TDRA, to state a claim for trademark dilution, a plaintiff must prove the following:

1. The plaintiff owns a famous mark that is distinctive. 2. The defendant has begun using a mark in commerce that allegedly is diluting the famous

mark.

3. The similarity between the defendant’s mark and the famous mark gives rise to an association between the marks.

4. The association is likely to impair the distinctiveness of the famous mark or harm its reputation.

Trademark dilution laws protect “distinctive” or “famous” trademarks (such as Rolls-Royce, McDonald’s, Starbucks, and Apple) from certain unauthorized uses. Such a mark is protected even when the unauthorized use is on noncompeting goods or is unlikely to confuse. More than half of the states have also enacted trademark dilution laws.

The Marks Need Not Be Identical A famous mark may be diluted not only by the use of an identical mark but also by the use of a similar mark, provided that it reduces the value of the famous mark.4 A similar mark is more likely to lessen the value of a famous mark when the companies using the marks provide related goods or compete against each other in the same market.

CASE EXAMPLE 6.1 When Samantha Lundberg opened Sambuck’s Coffeehouse in Astoria, Oregon, she knew that Starbucks was one of the largest coffee chains in the nation. Starbucks Corporation filed a dilution lawsuit, and a federal court ruled that use of the Sambuck’s mark constituted trademark dilution because it created confusion for consumers. Not only was there a “high degree” of similarity between the marks, but also both companies provided coffee- related services through stand-alone retail stores. Therefore, the use of the similar mark (Sambuck’s) reduced the value of the famous mark (Starbucks).5 n

6–1b Trademark Registration Trademarks may be registered with the state or with the federal government. To register for protection under federal trademark law, a person must file an application with the U.S. Patent and Trademark Office in Washington, D.C. A mark can be registered (1) if it is currently in commerce or (2) if the applicant intends to put it into commerce within six months.

In special circumstances, the six-month period can be extended by thirty months. Thus, the applicant would have a total of three years from the date of notice of trademark approval

1. 15 U.S.C. Sections 1051–1128. 2. 15 U.S.C. Section 1125. 3. Pub. L. No. 103-312, 120 Stat. 1730 (2006). 4. See Moseley v. V Secret Catalogue, Inc., 537 U.S. 418, 123 S.Ct. 1115, 155 L.Ed.2d 1 (2003). 5. Starbucks Corp. v. Lundberg, 2005 WL 3183858 (D.Or. 2005).

Trademark Dilution The unauthorized use of a distinctive and famous mark in a way that impairs the mark’s distinctiveness or harms its reputation.

KNOW THIS Trademark dilution laws protect the owners of distinctive marks from unauthorized uses even when the defendants’ use involves noncompeting goods or is unlikely to cause confusion.

Why can’t someone call its coffee shop “Sambuck’s”?

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to make use of the mark and to file the required use statement. Registration is postponed until the mark is actually used.

During this waiting period, an applicant can legally protect his or her trademark against a third party who has neither used the mark previously nor filed an application for it. Registra- tion is renewable between the fifth and sixth years after the initial registration and every ten years thereafter (every twenty years for trademarks registered before 1990).

6–1c Trademark Infringement Registration of a trademark with the U.S. Patent and Trademark Office gives notice on a nationwide basis that the trademark belongs exclusively to the registrant. The registrant is also allowed to use the symbol ® to indicate that the mark has been registered. Whenever that trademark is copied to a substantial degree or used in its entirety by another, intentionally or unintentionally, the trademark has been infringed (used without authorization).

When a trademark has been infringed, the owner has a cause of action against the infringer. To succeed in a lawsuit for trademark infringement, the owner must show that the defendant’s use of the mark created a likelihood of confusion about the origin of the defendant’s goods or services. The owner need not prove that the infringer acted intentionally or that the trade- mark was registered (although registration does provide proof of the date of inception of the trademark’s use).

The most commonly granted remedy for trademark infringement is an injunction to pre- vent further infringement. Under the Lanham Act, a trademark owner that successfully proves infringement can recover actual damages, plus the profits that the infringer wrongfully received from the unauthorized use of the mark. A court can also order the destruction of any goods bearing the unauthorized trademark. In some situations, the trademark owner may also be able to recover attorneys’ fees.

6–1d Distinctiveness of the Mark A central objective of the Lanham Act is to reduce the likelihood that consumers will be con- fused by similar marks. For that reason, only those trademarks that are deemed sufficiently distinctive from all competing trademarks will be protected.

Strong Marks Fanciful, arbitrary, or suggestive trademarks are generally considered to be the most distinctive (strongest) trademarks. These marks receive automatic protection because they serve to identify a particular product’s source, as opposed to describing the product itself.

Fanciful and Arbitrary Trademarks. Fanciful trademarks use invented words. Examples include Xerox for one company’s copiers and Google for another company’s search engine.

Arbitrary trademarks use common words that would not ordinarily be associated with the product, such as Dutch Boy as a name for paint. Even a single letter used in a particular style can be an arbitrary trademark. CASE EXAMPLE 6.2 Sports entertainment company ESPN sued Quiksilver, Inc., a maker of youth-oriented clothing, alleging trademark infringement. ESPN claimed that Quiksilver had used on its clothing the stylized “X” mark that ESPN uses in con- nection with the “X Games” (competitions in extreme action sports).

Quiksilver filed counterclaims for trademark infringement and dilution, arguing that it had a long history of using the stylized X on its products. ESPN created the X Games in the mid-1990s, and Quiksilver has used the X mark since 1994. ESPN asked the court to dismiss Quiksilver’s counterclaims, but the court refused, holding that the X on Quiksilver’s clothing was clearly an arbitrary mark. The court found that the two Xs were “similar enough that a consumer might well confuse them.” Therefore, Quicksilver could continue its claim for trademark infringement.6 n

6. ESPN, Inc. v. Quiksilver, Inc., 586 F.Supp.2d 219 (S.D.N.Y. 2008).

KNOW THIS To prove trademark infringement, the trademark owner must show that the other party’s use of the mark has created a likelihood of confusion about the origin of that party’s goods or services.

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Suggestive Trademarks. Suggestive trademarks indicate something about a product’s nature, quality, or characteristics without describing the product directly. For instance, “Blu-ray” is a suggestive mark that is associated with the high-quality, high-definition video contained on a particular optical data storage disc. Although blue-violet lasers are used to read blu-ray discs, the term blu-ray does not directly describe the disc.

Secondary Meaning Descriptive terms, geographic terms, and personal names are not inher- ently distinctive and do not receive protection under the law until they acquire a secondary meaning. Whether a secondary meaning becomes attached to a term or name usually depends on how extensively the product is advertised, the market for the product, the number of sales, and other factors.

A secondary meaning may arise when customers begin to associate a specific term or phrase (such as London Fog) with specific trademarked items made by a partic- ular company (coats with “London Fog” labels). CASE EXAMPLE 6.3 Unity Health Plans Insurance Corporation has been a health maintenance organization (HMO) insurer in Wisconsin since 1955. In 2013, another health-care provider, Iowa Health System, began rebranding itself (changing its name and marketing) as UnityPoint Health. When the company expanded into Wisconsin, where Unity Health already had an established presence, Unity Health filed a trademark infringement suit in federal court.

The court found that Unity Health was a descriptive mark, and thus not inher- ently distinctive. But the court also held that the Unity Health mark had acquired a secondary meaning, largely because it had been used for so long and so exclusively by one health insurer in Wisconsin. It made no difference to the court that only one part of the mark (Unity) was common to both trademarks. To allow Iowa Health Systems to use the mark UnityPoint Health in Wisconsin would likely create confu-

sion for consumers. Therefore, the court issued an injunction and blocked Iowa Health from using the trademark UnityPoint Health.7 n

Once a secondary meaning is attached to a term or name, a trademark is considered dis- tinctive and is protected. Even a color can qualify for trademark protection, such as the color schemes used by four state university sports teams, including Ohio State University and Lou- isiana State University.8

Generic Terms Generic terms that refer to an entire class of products, such as bicycle and com- puter, receive no protection, even if they acquire secondary meanings. A particularly thorny problem for a business arises when its trademark acquires generic use. For instance, aspirin and thermos were originally trademarked products, but today the words are used generically. Other trademarks that have acquired generic use include escalator, trampoline, raisin bran, dry ice, lanolin, linoleum, nylon, and cornflakes.

A trademark that is commonly used does not automatically become generic, though. CASE. .EXAMPLE 6.4 In 2014, David Elliot and Chris Gillespie sought to register numerous domain names, including “googledisney.com” and “googlenewstvs.com.” (A domain name is part of an Internet address, such as “cengage.com.”) They were unable to register the names because all of them used the word google, a trademark of Google, Inc.

Elliot and Gillespie brought an action in federal court to have the Google trademark can- celed because it had become a generic term. They argued that because most people now use google as a verb (“to google”) when referring to searching the Internet with any search engine (not just Google), the term should no longer be protected. The court held that even if people do use the word google as a verb, it is still a protected trademark if consumers associate the noun with one company. The court concluded that “the primary significance of the word

7. Unity Health Plans Insurance Co. v. Iowa Health System, 995 F.Supp.2d 874 (W.D. Wis. 2014). 8. Board of Supervisors of LA State University v. Smack Apparel Co., 438 F.Supp.2d 653 (2006).

Health maintenance organization insurers exist in many states. If one is called Unity Health and another is called UnityPoint Health, is there a problem?

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Domain Name Part of an Internet address, such as “cengage .com.”

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google to a majority of the public who utilize Internet search engines is a designation of the Google search engine.”9 n

6–1e Service, Certification, and Collective Marks A service mark is essentially a trademark that is used to distinguish the services (rather than the products) of one person or company from those of another. For instance, each airline has a particular mark or symbol associated with its name. Titles and character names used in radio and television are frequently registered as service marks.

Other marks protected by law include certification marks and collective marks. A certification mark is used by one or more persons, other than the owner, to certify the region, materials, mode of manufacture, quality, or other characteristic of specific goods or services. Certification marks include such marks as “Good Housekeeping Seal of Approval” and “UL Tested.”

When used by members of a cooperative, association, labor union, or other organization, a certification mark is referred to as a collective mark. EXAMPLE 6.5 Collective marks appear at the end of a movie’s credits to indicate the various associations and organizations that par- ticipated in making the movie. The labor union marks found on the tags of certain products are also collective marks. n

6–1f Trade Dress The term trade dress refers to the image and overall appearance of a product. Trade dress is a broad concept that can include all or part of the total image or overall impression created by a product or its packaging. EXAMPLE 6.6 The distinctive decor, menu, and style of service of a particular restaurant may be regarded as the restaurant’s trade dress. Similarly, trade dress can include the layout and appearance of a mail-order catalogue, the use of a lighthouse as part of a golf hole, the fish shape of a cracker, or the G-shaped design of a Gucci watch. n

Basically, trade dress is subject to the same protection as trademarks. In cases involving trade dress infringement, as in trademark infringement cases, a major consideration is whether consumers are likely to be confused by the allegedly infringing use. EXAMPLE 6.7 Converse makes All-Star shoes, which were the first shoes ever endorsed by a famous basketball player, Chuck Taylor. Nike, Inc., which now owns Converse, filed a suit against thirty-one com- panies, including Ralph Lauren, for manufacturing knock-off versions of these shoes. Nike claims that consumers are likely to be confused because the knock-offs use the same white rubber soles, rubber cap on the toes, canvas tops, and conspicuous stitching as used on All- Stars. In 2015, Ralph Lauren agreed to settle its dispute with Nike by destroying all remaining fake All-Stars and paying Nike an undisclosed sum. n

6–1g Counterfeit Goods Counterfeit goods copy or otherwise imitate trademarked goods but are not genuine. The importation of goods bearing counterfeit trademarks poses a growing problem for U.S. busi- nesses, consumers, and law enforcement. It is estimated that nearly 7 percent of the goods imported into the United States are counterfeit. In addition to having negative financial effects on legitimate businesses, sales of certain counterfeit goods, such as pharmaceuticals and nutri- tional supplements, can present serious public health risks.

Stop Counterfeiting in Manufactured Goods Act In 2006, Congress enacted the Stop Coun- terfeiting in Manufactured Goods Act10 (SCMGA). The act made it a crime to intentionally

9. Elliot v. Google Inc., ___ F.Supp.3d ___, 2014 WL 4470390 (D.Ariz. 2014). 10. Pub. L. No. 109-181 (2006), which amended 18 U.S.C. Sections 2318–2320.

Service Mark A trademark that is used to distinguish the services (rather than the products) of one person or company from those of another.

Certification Mark A mark used by one or more persons, other than the owner, to certify the region, materials, mode of manufacture, quality, or other characteristic of specific goods or services.

Collective Mark A mark used by members of a cooperative, association, union, or other organization to certify the region, materials, mode of manufacture, quality, or other characteristic of specific goods or services.

Trade Dress The image and overall appearance of a product.

Can the layout and appearance of a restaurant chain’s menu qualify as trade dress?

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traffic in, or attempt to traffic in, counterfeit goods or services, or to knowingly use a counter- feit mark on or in connection with goods or services.

Before this act went into effect, the law did not prohibit the creation or shipment of coun- terfeit labels that were not attached to products. Therefore, counterfeiters would make labels and packaging bearing a counterfeit trademark, ship the labels to another location, and then affix them to inferior products to deceive buyers. The SCMGA closed this loophole by making it a crime to traffic in counterfeit labels, stickers, packaging, and the like, whether or not they are attached to goods.

Penalties for Counterfeiting Persons found guilty of violating the SCMGA may be fined up to $2 million or imprisoned for up to ten years (or more if they are repeat offenders). If a court finds that the statute was violated, it must order the defendant to forfeit the counterfeit prod-

ucts (which are then destroyed), as well as any property used in the commis- sion of the crime. The defendant must also pay restitution to the trademark holder or victim in an amount equal to the victim’s actual loss.

CASE EXAMPLE 6.7 Wajdi Beydoun pleaded guilty to conspiring to import cigarette-rolling papers from Mexico that were falsely marked as “Zig-Zags” and sell them in the United States. The defendant was sentenced to prison and ordered to pay $566,267 in restitution. On appeal, the court affirmed the prison sentence but ordered the trial court to reduce the amount of restitution because it exceeded the actual loss suffered by the legitimate sellers of Zig-Zag rolling papers.11 n

Combating Online Sales of Counterfeit Goods The United States cannot prosecute foreign counterfeiters under U.S. laws, because our national laws do not apply to them. One effective tool that U.S. officials are using to combat

online sales of counterfeit goods is to obtain a court order to close down the domain names of Web sites that sell such goods.

EXAMPLE 6.8 In 2013, U.S. agents shut down 297 domain names on the Monday after Thanksgiving. (This so-called “Cyber Monday” is the online version of “Black Friday,” the day after Thanksgiving, when the holiday shopping season begins.) Europol, an international organization, shut down 393 domain names. Of course, some criminal enterprises may con- tinue selling counterfeit products under different domain names. Nevertheless, shutting down the Web sites, particularly on key shopping days, prevents some counterfeit goods from enter- ing the United States. n

6–1h Trade Names Trademarks apply to products. The term trade name refers to part or all of a business’s name, whether the business is a sole proprietorship, a partnership, or a corporation. Generally, a trade name is directly related to a business and its goodwill.

A trade name may be protected as a trademark if the trade name is the same as the com- pany’s trademarked product—for instance, Coca-Cola. Unless it is also used as a trademark or service mark, a trade name cannot be registered with the federal government. Trade names are protected under the common law, but only if they are unusual or fancifully used. The word Safeway, for example, was sufficiently fanciful to obtain protection as a trade name for a grocery chain.

6–1i Licensing One way to avoid litigation and still make use of another’s trademark or other form of intel- lectual property is to obtain a license to do so. A license in this context is an agreement

11. United States v. Beydoun, 469 F.3d 102 (5th Cir. 2006).

Trade Name A name that a business uses to identify itself and its brand. A trade name is directly related to a business’s reputation and goodwill and is protected under trademark law.

License An agreement by the owner of intellectual property to permit another to use a trademark, copyright, patent, or trade secret for certain limited purposes.

How easy is it to create fake Zig-Zag cigarette rolling papers? Is so doing a civil or criminal wrong?

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permitting the use of a trademark, copyright, patent, or trade secret for certain limited pur- poses. The party that owns the intellectual property rights and issues the license is the licensor, and the party obtaining the license is the licensee.

A license grants only the rights expressly described in the license agreement. A licensor might, for instance, allow the licensee to use a trademark as part of its company or domain name, but not otherwise use the mark on any products or services. Disputes frequently arise over licensing agreements, particularly when the license involves Internet use.

Typically, license agreements are very detailed and should be carefully drafted. Con- sult with an attorney before signing any licensing contract to make sure that the wording of the contract is very clear as to what rights are or are not being conveyed. This safeguard can help you to avoid litigation. Moreover, to prevent misunderstandings over the scope of the rights being acquired in intellectual property, determine whether any other parties hold licenses to use the same intellectual property and the extent of those rights.

6–2 Patents A patent is a grant from the government that gives an inventor the exclusive right to make, use, and sell an invention for a period of twenty years. Patents for designs, as opposed to inventions, are given for a fourteen-year period. The applicant must demonstrate to the satis- faction of the U.S. Patent and Trademark Office that the invention, discovery, process, or design is novel, useful, and not obvious in light of current technology.

Until recently, patent law in the United States differed from the laws of many other coun- tries because the first person to invent a product or process obtained the patent rights, rather than the first person to file for a patent. It was often difficult to prove who invented an item first, however, which prompted Congress to change the system in 2011 by passing the Amer- ica Invents Act.12 Now, the first person to file an application for a patent on a product or process will receive patent protection. In addition, the law established a nine-month limit for challenging a patent on any ground.

The period of patent protection begins on the date when the patent application is filed, rather than when the patent is issued, which can sometimes be years later. After the patent period ends (either fourteen or twenty years later), the product or process enters the public domain, and anyone can make, sell, or use the invention without paying the patent holder.

6–2a Searchable Patent Databases A significant development relating to patents is the availability online of the world’s patent databases. The Web site of the U.S. Patent and Trademark Office (www .uspto.gov) provides searchable databases covering U.S. patents granted since 1976. The Web site of the European Patent Office (www.epo.org) provides online access to 50 million patent documents in more than seventy nations through a searchable network of databases.

Businesses use these searchable databases in many ways. Companies may con- duct patent searches to list or inventory their patents, which are valuable assets. Patent searches also enable companies to study trends and patterns in a specific technology or to gather information about competitors in the industry.

12. The full title of this law is the Leahy-Smith America Invents Act, Pub. L. No. 112-29 (2011), which amended 35 U.S.C. Sections 1, 41, and 321.

Patent A property right granted by the federal government that gives an inventor an exclusive right to make, use, sell, or offer to sell an invention in the United States for a limited time.

LEARNING OBJECTIVE 3 How does the law protect patents?

This is the home page of the U.S. Patent and Trademark Office. Is its database searchable?

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6–2b What Is Patentable? Under federal law, “[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.”13 Thus, to be patentable, an invention must be novel, useful, and not obvious in light of current technology.

Almost anything is patentable, except the laws of nature, natural phenomena, and abstract ideas (including algorithms14). Even artistic methods and works of art, certain business pro- cesses, and the structures of storylines are patentable, provided that they are novel and not obvious.15

Plants that are reproduced asexually (by means other than from seed), such as hybrid or genetically engineered plants, are patentable in the United States, as are genetically engi- neered (or cloned) microorganisms and animals. CASE EXAMPLE 6.9 Monsanto, Inc., has sold its patented genetically modified (GM) seeds to farmers to help them achieve higher crop yields using fewer pesticides. Monsanto has required farmers who bought GM seeds to sign agreements promising to plant the seeds for only one crop and to pay a technology fee for each acre planted. To ensure compliance, seventy-five Monsanto employees are assigned to investigate and prosecute farmers who use the GM seeds illegally. Monsanto has filed lawsuits against nearly 150 farmers in the United States and has been awarded more than $15 million in damages (not including out-of-court settlement amounts).16 n

A patent application was rejected in the following case as obvious in light of previous pat- ents. The applicant challenged the rejection. The court’s decision turned on the meaning of the terms wireless and streaming video.

13. 35 U.S.C. 101. 14. An algorithm is a step-by-step procedure, formula, or set of instructions for accomplishing a specific task. An example is the

set of rules used by a search engine to rank the listings contained within its index in response to a particular query. 15. For a United States Supreme Court case discussing the obviousness requirement, see KSR International Co. v. Teleflex, Inc., 550

U.S. 398, 127 S.Ct. 1727, 167 L.Ed.2d 705 (2007). For a discussion of business process patents, see In re Bilski, 545 F3d 943 (Fed. Cir. 2008).

16. See, for example, Monsanto Co. v. Bowman, 657 F.3d 1341 (Fed.Cir. 2011); and Monsanto Co. v. Scruggs, 459 F.3d 1328 (2006).

KNOW THIS A patent is granted to inventions that are novel (new) and not obvious in light of prior discoveries.

FACTS Kevin Imes filed a patent application for a device that can send digital camera images and videos wire- lessly over a network. The U.S. Patent and Trademark Office examiner rejected Imes’s device as obvious based on earlier patents—the Schuetzle and Knowles patents. The Schuetzle patent protects a device that can trans- fer images to a computer via a removable memory card. The examiner concluded that this device was wireless because to transfer images, the card is removed from the camera and inserted into the computer. “In other words, no wire is utilized.” The Knowles system allows a user to take multiple consecutive still images and queues them so that they can be serially transmitted as e-mail attach- ments. The examiner explained that “a continuous process of sending images is the equivalent of streaming video.” The Patent Trial and

Appeal Board affirmed the examiner’s rejection of Imes’s application. Imes appealed.

ISSUE Did the examiner misconstrue the terms wireless and streaming video?

DECISION Yes. The U.S. Court of Appeals for the Federal Circuit reversed the Patent Trial and Appeal Board’s rejec- tion of Imes’s application and remanded the case.

REASON The court concluded that the examiner’s con- struction of the term wireless to include communication via the metal contacts of a removable memory card and a computer is “inconsistent with the broadest reasonable

interpretation” of the term. Imes’s application used wireless “to refer to methods and devices that carry waves through atmospheric

What constitutes a wireless transfer of data from a digital

camera over a network?

Case 6.2

In re Imes United States Court of Appeals, Federal Circuit, 778 F.3d 1250 (2015).

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6–2c Patent Infringement If a firm makes, uses, or sells another’s patented design, product, or process without the patent owner’s permission, it commits the tort of patent infringement. Patent infringement may occur even though the patent owner has not put the patented product in commerce. Patent infringe- ment may also occur even though not all features or parts of an invention are copied. (To infringe the patent on a process, however, all steps or their equivalent must be copied.) To read about an important issue in patent infringement today, see this chapter’s Adapting the Law to the Online Environment.

Patent Infringement Suits and High-Tech Companies Obviously, companies that specialize in developing new technology stand to lose significant profits if someone “makes, uses, or sells” devices that incorporate their patented inventions. Because these firms are the holders of numerous patents, they are frequently involved in patent infringement lawsuits (as well as other types of intellectual property disputes).

A complication in many such lawsuits is their global scope. Many companies that make and sell electronics and computer software and hardware are based in foreign nations (for instance, Samsung Electronics Company is a Korean firm). Foreign firms can apply for and obtain U.S. patent protection on items that they sell within the United States, just as U.S. firms can obtain protection in foreign nations where they sell goods.

In the United States, however, the Supreme Court has narrowly construed patent infringe- ment as it applies to exported software. As a general rule, under U.S. law, no patent infringe- ment occurs when a patented product is made and sold in another country. CASE EXAMPLE 6.10. AT&T Corporation holds a patent on a device used to digitally encode, compress, and process recorded speech. AT&T brought an infringement case against Microsoft Corporation, which admitted that its Windows operating system incorporated software code that infringed on AT&T’s patent.

The case reached the United States Supreme Court on the question of whether Microsoft’s liability extended to computers made in another country. The Court held that it did not. Mic- rosoft was liable only for infringement in the United States and not for the Windows-based computers produced in foreign locations. The Court reasoned that Microsoft had not “sup- plied” the software for the computers but had only electronically transmitted a master copy, which the foreign manufacturers then copied and loaded onto the computers.17 n

Apple, Inc. v. Samsung Electronics Company Apple sued Samsung in federal court alleging that Samsung’s Galaxy smartphones and tablets that use Google’s HTC Android operating sys- tem infringe on Apple’s patents. Apple has design patents that cover the devices’ graphical user interface, shell, and screen and button design. Apple has also patented the way information is displayed on iPhones and other devices, the way windows pop open, and the way information is scaled and rotated.

17. Microsoft Corp. v. AT&T Corp., 550 U.S. 437, 127 S.Ct. 1746, 167 L.Ed.2d 737 (2007).

“To invent, you need a good imagination and a pile of junk.”

Thomas Edison 1847–1931 (American inventor)

AT&T owns numerous patents, including one for digitally encoding, compressing, and processing recorded speech, which is used in Microsoft’s Windows operating system. Is Microsoft liable for infringement of Windows-based computers produced outside the United States?

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space, such as Bluetooth and various cellular protocols.” The court found that this was the correct meaning of the term, and this construction did not support the examiner’s rejection of Imes’s application. As for the examiner’s conclusion with respect to the Knowles patent, the court found no substantial evidence to sup- port the examiner’s determination that Knowles’s system transmits streaming video. “Streaming video is the continuous transmission

of video. A series of e-mails with attachments does not meet the definition of ‘streaming’ and still images do not meet the definition of ‘video.’”

CRITICAL THINKING—Legal Consideration How should an inven- tion be described in a patent application—in broad terms, specific terms, or both? Discuss.

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In 2012, a jury issued a verdict in favor of Apple, finding that Samsung had willfully infringed five of Apple’s patents. Although the jury awarded more than $1 billion in damages— one of the largest awards ever made in a patent case—a judge later ruled that part of the damages had been incorrectly calculated.18 The case provided an important precedent for Apple in its legal battles against Android devices made by other companies worldwide. Nev- ertheless, litigation between Apple and Samsung over the current generation of smartphones and mobile devices has continued.

6–2d Remedies for Patent Infringement If a patent is infringed, the patent holder may sue for relief in federal court. The patent holder can seek an injunction against the infringer and can also request damages for royalties and lost profits. (A royalty is a payment made to a patent or copyright holder for the privilege of using the patent or the copyrighted work.) In some cases, the court may grant the winning party

18. Apple, Inc. v. Samsung Electronics Co., Ltd., 926 F.Supp.2d 1100 (N.D.Cal. 2013); and Apple, Inc. v. Samsung Electronics Co., Ltd., 735 F.3d 1352 (2013).

“The patent system . . . added the fuel to the fire of genius.”

Abraham Lincoln 1809–1865 (Sixteenth president of the United States, 1861–1865)

ADAPTING THE LAW TO THE ONLINE ENVIRONMENT The Problem of Patent Trolls

In recent years, a huge number of patent infringement lawsuits have been filed against software and technology firms. Many patent cases involve companies defend- ing real innovations, but some lawsuits are “shakedowns” by patent trolls.

Patent trolls—more formally called non- practicing entities (NPEs) or patent assertion entities (PAEs)—are firms that do not make or sell products or services but are in the business of patent litigation. These firms buy patents and then try to enforce them against companies that do sell products or services, demanding licensing fees and threatening infringement lawsuits. Patent trolls usually target online businesses.

“I’m Going to Sue You Unless You Pay Me to Go Away” Patent trolls literally bank on the fact that when threatened with infringement suits, most companies would rather pay to set- tle than engage in costly litigation, even if they believe they could win. Consider an example. Soverain Software, LLC, sued doz- ens of online retailers, including Amazon,

Avon, Home Depot, Macy’s, Nordstrom, Kohl’s, RadioShack, The Gap, and Victoria’s Secret. Soverain claimed that it owned pat- ents that covered nearly any use of online shopping-cart technology and that all these retailers had infringed on its patents. Ama- zon paid millions to settle with Soverain, as did most of the other defendants.

Interestingly, one online retailer, Newegg, Inc., refused to pay Soverain and ultimately won in court. In 2013, a federal appellate court held that the shopping-cart patent claim was invalid on the ground of obvious- ness because the technology for it already existed before Soverain obtained its patent.a

The Role of Software Patents The patent troll problem is concentrated in software patents, which often include descriptions of what the software does rather than the computer code involved. Many software patents are vaguely worded and overly broad. In the United States, both the patent system and the courts have had

difficulty evaluating and protecting such patents.

As a result, nearly any business that uses basic technology can be a target of patent trolls. In fact, more than 60 percent of all new patent cases are filed by patent trolls. The firms most commonly targeted by patent trolls, however, are large technology com- panies, including AT&T, Google, Apple, Sam- sung, Amazon, and Verizon. In 2013 alone, “AT&T was sued for patent infringement by so-called patent trolls a startling 54 times— more than once a week.”b

CRITICAL THINKING

▪▪ Some argue that the best way to stop patent trolls from taking advantage of the system would be to eliminate software patents completely and pass a law that makes software unpatentable. Would this be fair to software and tech- nology companies? Why or why not?

b. Roger Parloff, “Taking on the Patent Trolls,” Fortune, February 27, 2014.

a. Soverain Software, LLC v. Newegg, Inc., 728 F.3d 1332 (Fed.Cir. 2013), cert. denied, 134 S.Ct. 910 (2014).

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reimbursement for attorneys’ fees and costs. If the court determines that the infringement was willful, the court can triple the amount of damages awarded (treble damages).

In the past, permanent injunctions were routinely granted to prevent future infringement. Today, however, according to the United States Supreme Court, a patent holder must prove that it has suffered irreparable injury and that the public interest would not be disserved by a permanent injunction.19 Thus, courts have the discretion to decide what is equitable in the circumstances and to consider the public interest rather than just the interests of the parties.

CASE EXAMPLE 6.11 Cordance Corporation developed some of the technology and soft- ware that automates Internet communications. Cordance sued Amazon.com, Inc., for patent infringement, claiming that Amazon’s one-click purchasing interface infringed on one of Cor- dance’s patents. After a jury found Amazon guilty of infringement, Cordance requested the court to issue a permanent injunction against Amazon’s infringement or, alternatively, to order Amazon to pay Cordance an ongoing royalty.

The court refused to issue a permanent injunction, because Cordance had not proved that it would otherwise suffer irreparable harm. Cordance and Amazon were not direct competi- tors in the relevant market. Cordance had never sold or licensed the technology infringed by Amazon’s one-click purchasing interface and had presented no market data or evidence to show how the infringement negatively affected Cordance. The court also refused to impose an ongoing royalty on Amazon.20 n

6–3 Copyrights A copyright is an intangible property right granted by federal statute to the author or orig- inator of certain literary or artistic productions. The Copyright Act of 1976,21 as amended, governs copyrights. Works created after January 1, 1978, are automatically given statutory copyright protection for the life of the author plus 70 years. For copyrights owned by pub- lishing companies, the copyright expires 95 years from the date of publication or 120 years from the date of creation, whichever is first. For works by more than one author, the copyright expires 70 years after the death of the last surviving author.

CASE EXAMPLE 6.12 The popular character Sherlock Holmes originated in stories written by Arthur Conan Doyle and published from 1887 through 1927. Over the years, elements of the characters and stories created by Doyle have appeared in books, movies, and television series, including the recent Elementary on CBS and Sherlock on BBC. Before 2013, those who wished to use the copyrighted Sherlock material had to pay a licensing fee to Doyle’s estate. Then, in 2013, the editors of a book of Holmes-related stories filed a lawsuit in federal court claiming that the basic Sherlock Holmes story elements introduced before 1923 should no longer be protected. The court agreed and ruled that these elements have entered the public domain—that is, the copyright has expired, and they can be used without permission.22 n

Copyrights can be registered with the U.S. Copyright Office (www.copyright.gov) in Washington, D.C. Registration is not required, however. A copyright owner need not place a © or Copr. or Copyright on the work to have the work protected against infringement. Chances are that if somebody created it, somebody owns it.

Generally, copyright owners are protected against the following:

1. Reproduction of the work. 2. Development of derivative works. 3. Distribution of the work. 4. Public display of the work.

19. eBay, Inc. v. MercExchange, LLC, 547 U.S. 388, 126 S.Ct. 1837, 164 L.Ed.2d 641 (2006). 20. Cordance Corp. v. Amazon.com, Inc., 730 F.Supp.2d 333 (D.Del. 2010). 21. 17 U.S.C. Sections 101 et seq. 22. Klinger v. Conan Doyle Estate, Ltd., 988 F.Supp.2d 879 (N.D.III. 2013).

LEARNING OBJECTIVE 4 What laws protect authors’ rights in the works they create?

Copyright The exclusive right of an author or originator of a literary or artistic production to publish, print, sell, or otherwise use that production for a statutory period of time.

KNOW THIS A creative work that is not copyrightable may be protected by other intellectual property law.

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6–3a What Is Protected Expression? Works that are copyrightable include books, records, films, artworks, architectural plans, menus, music videos, product packaging, and computer software. To be protected, a work must be “fixed in a durable medium” from which it can be perceived, reproduced, or communicated. As noted, protection is automatic, and registration is not required.

To obtain protection under the Copyright Act, a work must be original and fall into one of the following categories:

1. Literary works (including newspaper and magazine articles, computer and training manuals, catalogues, brochures, and print advertisements).

2. Musical works and accompanying words (including advertising jingles). 3. Dramatic works and accompanying music. 4. Pantomimes and choreographic works (including ballets and other forms of dance). 5. Pictorial, graphic, and sculptural works (including cartoons, maps, posters,

statues, and even stuffed animals).

6. Motion pictures and other audiovisual works (including multimedia works). 7. Sound recordings. 8. Architectural works.

Section 102 Exclusions Generally, anything that is not an original expression will not qual- ify for copyright protection. Facts widely known to the public are not copyrightable. Page numbers are not copyrightable because they follow a sequence known to everyone. Mathe- matical calculations are not copyrightable.

In addition, it is not possible to copyright an idea. Section 102 of the Copyright Act specifi- cally excludes copyright protection for any “idea, procedure, process, system, method of opera- tion, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied.” Thus, others can freely use the underlying ideas or principles embodied in a work. What is copyrightable is the particular way in which an idea is expressed. Whenever an idea and an expression are inseparable, the expression cannot be copyrighted.

An idea and its expression, then, must be separable to be copyrightable. Thus, for the design of a useful item to be copyrightable, the sculptural features—that is, the way it looks— must be separate from its utilitarian (functional) purpose. In the following case, the court was asked to apply this principle.

Artist Shepard Fairey created a poster portrait of Barack Obama. It was clearly based on an Associated Press file photo taken by Manny Garcia. Did Fairey violate copyright law?

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FACTS A hookah is a device for smoking tobacco by filtering the smoke through water. The water is held in a container at the base of the hookah. Inhale, Inc., claimed to hold a registered copyright on a hoo- kah that covered the shape of the hookah’s water container. Inhale filed a suit in a federal district court against Starbuzz Tobacco, Inc., for copyright infringement, alleging that Starbuzz sold hookahs with water containers shaped exactly like the Inhale containers. The court determined that the shape

of the water container on Inhale’s hookahs was not copyrightable and issued a summary judgment in Starbuzz’s favor. Inhale appealed.

ISSUE Was Inhale’s registered copyright infringed by Starbuzz’s sale of hookahs with water containers identical in shape to Inhale’s containers?

DECISION No. The U.S. Court of Appeals for the Ninth Circuit affirmed the lower court’s judgment.

Is the shape of this hookah’s water container copyrightable?

Case 6.3

Inhale, Inc. v. Starbuzz Tobacco, Inc. United States Court of Appeals for the Ninth Circuit, 755 F.3d 1038 (2014).

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Compilations of Facts As mentioned, facts widely known to the public are not copyright- able. Compilations of facts, however, may be copyrightable. Under Section 103 of the Copy- right Act, a compilation is a work formed by the collection and assembling of preexisting materials or of data that are selected, coordinated, or arranged in such a way that the resulting work as a whole constitutes an original work of authorship.

The key requirement for the copyrightability of a compilation is originality. The White Pages of a telephone directory do not qualify for copyright protection because they simply list names and telephone numbers alphabetically. The Yellow Pages of a directory can be copy- rightable, provided that the information is selected, coordinated, or arranged in an original way. Similarly, a court held that a compilation of information about yachts listed for sale may qualify for copyright protection.23

6–3b Copyright Infringement Whenever the form or expression of an idea is copied, an infringement of copyright occurs. The reproduction does not have to be exactly the same as the original, nor does it have to reproduce the original in its entirety. If a substantial part of the original is reproduced, copy- right infringement has occurred.

Remedies for Copyright Infringement Those who infringe copyrights may be liable for dam- ages or criminal penalties. These range from actual damages or statutory damages, imposed at the court’s discretion, to criminal proceedings for willful violations. Actual damages are based on the harm caused to the copyright holder by the infringement, while statutory damages, not to exceed $150,000, are provided for under the Copyright Act. In addition, criminal pro- ceedings may result in fines and/or imprisonment. In some instances, a court may grant an injunction against the infringer.

CASE EXAMPLE 6.13 Rusty Carroll operated an online term paper business, R2C2, Inc., that offered up to 300,000 research papers for sale on nine different Web sites. Individuals whose work was posted on these Web sites without their permission filed a lawsuit against Carroll for copyright infringement. Because Carroll repeatedly failed to comply with court orders regard- ing discovery, the court found that the copyright infringement was likely to continue unless an injunction was issued. The court therefore issued a permanent injunction prohibiting Carroll and R2C2 from selling any term paper without sworn documentary evidence that the paper’s author had given permission.24 n

The “Fair Use” Exception An exception to liability for copyright infringement is made under the “fair use” doctrine. In certain circumstances, a person or organization can reproduce

23. BUC International Corp. v. International Yacht Council, Ltd., 489 F.3d 1129 (11th Cir. 2007). 24. Weidner v. Carroll, 2010 WL 310310 (S.D.Ill. 2010).

“Don’t worry about people stealing an idea. If it’s original and it’s any good, you’ll have to ram it down their throats.”

Howard Aiken 1900–1973 (Engineer and pioneer in computing)

REASON The federal appellate court stated, “The shape of a con- tainer is not independent of the container’s utilitarian function—to hold the contents within its shape—because the shape accomplishes the function.” The water container on a hookah is a “useful article.” Thus, the shape of the container is copyrightable only if it incorporates sculptural features that can be identified separately from the contain- er’s useful aspect. Inhale argued that the shape of its hookah water container was distinctive. In an earlier case involving bottle designs, the U.S. Copyright Office had reasoned that whether an item’s shape is

distinctive does not affect a determination of whether the item’s sculp- tural features can be separated from the item’s utility. With regard to Inhale’s water container, “The shape of the alleged artistic features and of the useful article are one and the same.” Thus, the shape of the water container on Inhale’s hookahs was not copyrightable.

WHAT IF THE FACTS WERE DIFFERENT? Suppose that Inhale had claimed a copyright in the design of a vodka bottle instead of a hookah. Would the result have been different? Why or why not?

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copyrighted material without paying royalties. Section 107 of the Copyright Act provides as follows:

[T]he fair use of a copyrighted work, including such use by reproduction in copies or phonorecords or by any other means specified by [Section 106 of the Copyright Act], for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include— (1) the purpose and character of the use, including whether such use is of a commercial

nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work

as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work.

What Is Fair Use? Because the fair use guidelines are very broad, the courts determine whether a particular use is fair on a case-by-case basis. Thus, anyone reproducing copyrighted material may be committing a violation. In determining whether a use is fair, courts have often considered the fourth factor to be the most important.

CASE EXAMPLE 6.14 BMG Music Publishing, an owner of copyrighted music, granted a license to Leadsinger, Inc., a manufacturer of karaoke devices. The license gave Leadsinger permission to reproduce the sound recordings, but not to reprint the song lyrics. The lyrics, however, appeared at the bottom of a TV screen when the karaoke device was used.

BMG demanded that Leadsinger pay a “lyric reprint” fee and a “synchronization” fee for this use of the song lyrics. Leadsinger refused, claiming that its use of the lyrics was educational and thus did not constitute copyright infringement under the fair use exception. A federal appellate court disagreed. The court held that Leadsinger’s display of the lyrics was not a fair use because it would negatively affect the value of the copyrighted work.25 n

Should fair use include the creation of a full-text searchable database of millions of books? Back in 2004, a number of research universities, in partnership with Google, Inc., agreed to digitize books from their libraries and create a repository for them. In 2008, the HathiTrust Digital Library was formed by eighty institutions, including the University of Cal- ifornia at Berkeley, Cornell University, and the University of Michigan. As of 2012, the library contained some 10 million digitized works.

Not all authors whose works were represented in the library were happy with what they considered a violation of their intellectual property rights. After all, shouldn’t copyright law protect authors (and publishers) from having Google, Inc., electronically scan their books with- out their permission? Google and the HathiTrust responded that there was no copyright viola- tion. The library’s main interest was preservation, and its full-text searchable database of the library’s books was an aid to scholarship. It enabled researchers to find terms of interest in the digital volumes—not to read the volumes online. Search results yielded only page numbers where the terms could be found.

In 2011, a group of authors and authors’ associations sued the HathiTrust and several asso- ciated entities for copyright infringement. The U.S. District Court for the Southern District of New York granted summary judgment in favor of the defendants.26 On appeal, the reviewing court noted, “A fair use must not excessively damage the market for the original by providing the public with a substitute for that original work.” But, the appellate court pointed out, the HathiTrust database “does not allow users to view any portion of the books they are search-

25. Leadsinger, Inc. v. BMG Music Publishing, 512 F.3d 522 (9th Cir. 2008). 26. Authors Guild, Inc. v. HathiTrust, 902 F.Supp.2d 445 (S.D.N.Y. 2012).

Do makers of karaoke machines automatically have the right to reproduce printed lyrics?

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ing. Consequently, in providing this service, the [HathiTrust] does not add into circulation any new, human-readable copies of any books.” Indeed, the court suggested that full-text searches might add to the value of copyrighted works.27

The First Sale Doctrine Section 109(a) of the Copyright Act provides that “the owner of a particular copy or phonorecord lawfully made under [the Copyright Act], or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” This rule is known as the first sale doctrine.

Under this doctrine, once a copyright owner sells or gives away a particular copy of a work, the copyright owner no longer has the right to control the distribution of that copy. EXAMPLE 6.15. Miranda buys The Hunger Games by Suzanne Collins, a copyrighted book. She can legally sell the book to another person. n

In 2012, the United States Supreme Court heard the appeal of a case involving the resale of textbooks on eBay. To read about the Court’s decision in this important case, see this chapter’s Beyond Our Borders feature.

27. Authors Guild, Inc. v. HathiTrust, 755 F.3d 87 (2d Cir. 2014).

Students and professors alike complain about the high price of college textbooks. Some enterprising students have found that if they purchase textbooks printed abroad, they may save enough to justify the ship- ping charges. Textbook prices are lower in other countries because production costs are lower there and average incomes are also lower, so students are unable to pay higher prices.

A University Student Starts a Side Business Supap Kirtsaeng, a citizen of Thailand, was a graduate student at the University of South- ern California. He enlisted friends and family in Thailand to buy copies of textbooks there and ship them to him in the United States. Kirtsaeng resold the textbooks on eBay, where he eventually made about $100,000.

John Wiley & Sons, Inc., had printed eight of those textbooks in Asia. Wiley sued Kirt- saeng in federal district court for copyright

infringement. Kirtsaeng argued that Section 109(a) of the Copyright Act allows the first purchaser-owner of a book to sell it without the copyright owner’s permission. But the trial court held in favor of Wiley, and that decision was affirmed on appeal.a The lower courts reasoned that the first sale doctrine in the Copyright Act refers specifically to works manufactured in the United States and should not apply to textbooks printed and sold abroad. Kirtsaeng appealed to the United States Supreme Court.

The Supreme Court Weighs In Can a copy of a book or CD or DVD that was legally produced abroad, acquired abroad, and then imported into the United States be resold in the United States without the copyright owner’s permission? That was the issue before the Supreme Court. The answer has implications not only for individuals but

also for discount sellers such as Costco and online businesses such as eBay and Google.

The Supreme Court ruled in Kirtsaeng’s favor, reversing the appellate court’s deci- sion.b The Court held that the first sale doctrine applies even to goods purchased abroad. According to the Court, “the common- law history of the ‘first-sale’ doc- trine . . . favors a non-geographical interpre- tation.” The justices were clearly concerned about what might occur if the Court did not reverse the appellate court’s decision. Allow- ing that decision to stand could have made it possible to “prevent a buyer from domes- tically selling or even giving away copies of a video game made in Japan.”

CRITICAL THINKING

▪▪ What options do textbook publishers face given this Supreme Court decision?

The Resale of Textbooks Purchased Abroad

BEYOND OUR BORDERS

a. John Wiley & Sons, Inc. v. Kirtsaeng, 2009 WL 3364037 (S.D.N.Y. 2009); and John Wiley & Sons, Inc. v. Kirtsaeng, 654 F.3d 210 (2d Cir. 2011).

b. Kirtsaeng v. John Wiley & Sons, Inc., ___ U.S. ___, 133 S.Ct. 1351, 185 L.Ed.2d 392 (2013).

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6–3c Copyright Protection for Software In 1980, Congress passed the Computer Software Copyright Act, which amended the Copy- right Act to include computer programs in the list of creative works protected by federal copyright law. Generally, copyright protection extends to those parts of a computer program that can be read by humans, such as the high-level language of a source code. Protection also extends to the binary-language object code, which is readable only by the computer, and to such elements as the overall structure, sequence, and organization of a program.

Not all aspects of software are protected, however. Courts typically have not extended copyright protection to the “look and feel”—the general appearance, command struc- ture, video images, menus, windows, and other screen displays—of computer pro- grams. EXAMPLE 6.16 MiTek develops a software program for laying out wood trusses (used in construction). A competing company comes out with a program that has similar ele- ments, including the menu and submenu command structures. MiTek cannot successfully sue for copyright infringement, because the command structure of software is not pro- tected. n Note that copying the “look and feel” of another’s product may be a violation of trade dress or trademark laws, however.

As will be discussed in Chapter 7, technology has vastly increased the potential for copy- right infringement via the Internet.

6–4 Trade Secrets The law of trade secrets protects some business processes and information that are not or cannot be protected under patent, copyright, or trademark law. A trade secret is basically information of commercial value. A company’s customer lists, plans, and research and devel- opment are trade secrets. Trade secrets may also include pricing information, marketing tech- niques, and production methods—anything that makes an individual company unique and that would have value to a competitor.

Unlike copyright and trademark protection, protection of trade secrets extends both to ideas and to their expression. (For this reason, and because there are no registration or filing requirements for trade secrets, trade secret protection may be well suited for software.) Of course, the secret formula, method, or other information must be disclosed to some persons, particularly to key employees. Businesses generally attempt to protect their trade secrets by having all employees who use the process or information agree in their contracts, or in confi- dentiality agreements, never to divulge it.

6–4a State and Federal Law on Trade Secrets Under Section 757 of the Restatement of Torts, those who disclose or use another’s trade secret, without authorization, are liable to that other party if either of the following is true:

1. They discovered the secret by improper means. 2. Their disclosure or use constitutes a breach of a duty owed to the other party.

Stealing of confidential business data by industrial espionage, as when a business taps into a competitor’s computer, is a theft of trade secrets without any contractual violation and is actionable in itself.

Although trade secrets have long been protected under the common law, today most states’ laws are based on the Uniform Trade Secrets Act, which has been adopted in forty-seven states. Additionally, the Economic Espionage Act made the theft of trade secrets a federal crime, as we will discuss in Chapter 8.

LEARNING OBJECTIVE 5 What are trade secrets, and what laws offer protection for this form of intellectual property?

Trade Secret A formula, device, idea, process, or other information used in a business that gives the owner a competitive advantage in the marketplace.

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6–4b Trade Secrets in Cyberspace Today’s computer technology undercuts a business firm’s ability to protect its confidential information, including trade secrets. For instance, a dishonest employee could e-mail trade secrets in a company’s computer to a competitor or a future employer. If e-mail is not an option, the employee might walk out with the information on a flash pen drive.

Misusing a company’s social media accounts is yet another way in which employees may appropriate trade secrets. CASE EXAMPLE 6.17 Noah Kravitz worked for a company called Phone- Dog for four years as a product reviewer and video blogger. PhoneDog provided him with the Twitter account “@PhoneDog_Noah.” Kravitz’s popularity grew, and he had approximately 17,000 followers by the time he quit in 2010. PhoneDog requested that Kravitz stop using the Twitter account. Although Kravitz changed his handle to “@noahkravitz,” he continued to use the account. PhoneDog subsequently sued Kravitz for misappropriation of trade secrets, among other things. Kravitz moved for a dismissal, but the court found that the complaint adequately stated a cause of action for misappropriation of trade secrets and allowed the suit to continue.28 n

For a summary of trade secrets and other forms of intellectual property, see Exhibit 6–1.

28. PhoneDog v. Kravitz, 2011 WL 5415612 (N.D.Cal. 2011).

Exhibit 6–1 Forms of Intellectual Property

DEFINITION HOW ACQUIRED DURATION REMEDY FOR INFRINGEMENT

Patent A grant from the gov- ernment that gives an inventor exclusive rights to an invention.

By filing a patent applica- tion with the U.S. Patent and Trademark Office and receiving its approval.

Twenty years from the date of the application; for design patents, fourteen years.

Monetary damages, including royalties and lost profits, plus attorneys’ fees. Damages may be tripled for intentional infringement.

Copyright The right of an author or originator of a literary or artistic work, or other pro- duction that falls within a specified category, to have the exclusive use of that work for a given period of time.

Automatic (once the work or creation is put in tangible form). Only the expression of an idea (and not the idea itself) can be protected by copyright.

For authors: the life of the author plus 70 years.

For publishers: 95 years after the date of publi- cation or 120 years after creation.

Actual damages plus profits received by the party who infringed or statutory dam- ages under the Copyright Act, plus costs and attorneys’ fees in either situation.

Trademark (service mark and trade dress)

Any distinctive word, name, symbol, or device (image or appearance), or combination thereof, that an entity uses to distin- guish its goods or services from those of others. The owner has the exclusive right to use that mark or trade dress.

1. At common law, owner- ship created by use of the mark. 2. Registration with the appropriate federal or state office gives notice and is permitted if the mark is currently in use or will be within the next six months.

Unlimited, as long as it is in use. To continue notice by registration, the owner must renew by filing between the fifth and sixth years, and thereafter, every ten years.

1. Injunction prohibiting the future use of the mark. 2. Actual damages plus prof- its received by the party who infringed (can be increased under the Lanham Act). 3. Destruction of articles that infringed. 4. Plus costs and attorneys’ fees.

Trade Secret Any information that a business possesses and that gives the business an advantage over competi- tors (including formulas, lists, patterns, plans, pro- cesses, and programs).

Through the originality and development of the infor- mation and processes that constitute the business secret and are unknown to others.

Unlimited, so long as not revealed to others. Once revealed to others, it is no longer a trade secret.

Monetary damages for misappropriation (the Uni- form Trade Secrets Act also permits punitive damages if willful), plus costs and attorneys’ fees.

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6–5 International Protections For many years, the United States has been a party to various international agreements relating to intellectual property rights. For example, the Paris Convention of 1883, to which about 173 countries are signatory, allows parties in one country to file for patent and trademark protection in any of the other member countries. Other international agreements include the Berne Convention, the Trade-Related Aspects of Intellectual Property Rights (known as the TRIPS agreement), the Madrid Protocol, and the Anti-Counterfeiting Trade Agreement.

6–5a The Berne Convention Under the Berne Convention of 1886, an international copyright agreement, if a U.S. citizen writes a book, every country that has signed the convention must recognize her or his copy- right in the book. Also, if a citizen of a country that has not signed the convention first pub- lishes a book in one of the 168 countries that have signed, all other countries that have signed the convention must recognize that author’s copyright. Copyright notice is not needed to gain protection under the Berne Convention for works published after March 1, 1989.

In 2011, the European Union altered its copyright rules under the Berne Convention by agreeing to extend the period of royalty protection for musicians from fifty years to seventy years. This decision aids major record labels as well as performers and musicians. The profits of musicians and record companies have been shrinking in recent years because of the sharp decline in sales of compact discs and the rise in digital downloads (both legal and illegal).

6–5b The TRIPS Agreement The Berne Convention and other international agreements have given some protection to intellectual property on a worldwide level. None of them, however, has been as significant and far reaching in scope as the TRIPS agreement.

Representatives from more than one hundred nations signed the TRIPS agreement in 1994. The agreement established, for the first time, standards for the international protection of intellectual property rights, including patents, trademarks, and copyrights for movies, com- puter programs, books, and music. The TRIPS agreement provides that each member country must include in its domestic laws broad intellectual property rights and effective remedies (including civil and criminal penalties) for violations of those rights.

Generally, the TRIPS agreement forbids member nations from discriminating against for- eign owners of intellectual property rights in the administration, regulation, or adjudication of such rights. In other words, a member nation cannot give its own nationals (citizens) favorable treatment without offering the same treatment to nationals of all member coun- tries. EXAMPLE 6.18 A U.S. software manufacturer brings a suit for the infringement of intel- lectual property rights under Germany’s national laws. Because Germany is a member of the TRIPS agreement, the U.S. manufacturer is entitled to receive the same treatment as a German manufacturer. n

Each member nation must ensure that legal procedures are available for parties who wish to bring actions for infringement of intellectual property rights. Additionally, a related docu- ment established a mechanism for settling disputes among member nations.

6–5c The Madrid Protocol In the past, one of the difficulties in protecting U.S. trademarks internationally was that it was time consuming and expensive to apply for trademark registration in foreign countries. The fil- ing fees and procedures for trademark registration vary significantly among individual countries. The Madrid Protocol, which was signed into law in 2003, may help to resolve these problems.

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The Madrid Protocol is an international treaty that has been signed by seventy-three coun- tries. Under its provisions, a U.S. company wishing to register its trademark abroad can submit a single application and designate other member countries in which it would like to register the mark. The treaty was designed to reduce the costs of obtaining international trademark protection by more than 60 percent.

Although the Madrid Protocol may simplify and reduce the cost of trademark registra- tion in foreign nations, it remains to be seen whether it will provide significant benefits to trademark owners. Even with an easier registration process, the question of whether member countries will enforce the law and protect the mark still remains.

6–5d The Anti-Counterfeiting Trade Agreement In 2011, Australia, Canada, Japan, Korea, Morocco, New Zealand, Singapore, and the United States signed the Anti-Counterfeiting Trade Agreement (ACTA), an international treaty to combat global counterfeiting and piracy. The members of the European Union, Mexico, Swit- zerland, and other nations that support the ACTA are still developing domestic procedures to comply with its provisions. Once a nation has adopted appropriate procedures, it can ratify the treaty.

Provisions and Goals The goals of the treaty are to increase international cooperation, facili- tate the best law enforcement practices, and provide a legal framework to combat counterfeit- ing. The treaty will have its own governing body.

The ACTA applies not only to counterfeit physical goods, such as medications, but also to pirated copyrighted works being distributed via the Internet. The idea is to create a new stan- dard of enforcement for intellectual property rights that goes beyond the TRIPS agreement and encourages international cooperation and information sharing among signatory countries.

Border Searches Under ACTA, member nations are required to establish border mea- sures that allow officials, on their own initiative, to search commercial shipments of imports and exports for counterfeit goods. The treaty neither requires nor prohibits random border searches of electronic devices, such as laptops and iPads, for infringing content.

If border authorities reasonably believe that any goods in transit are counterfeit, the treaty allows them to keep the suspect goods unless the owner proves that the items are authentic and noninfringing. The treaty allows member nations, in accordance with their own laws, to order online service providers to furnish information about (including the identity of) sus- pected trademark and copyright infringers.

Reviewing . . . Intellectual Property Rights Two computer science majors, Trent and Xavier, have an idea for a new video game, which they propose to call “Hallowed.” They form a business and begin developing their idea. Several months later, Trent and Xavier run into a problem with their design and consult with a friend, Brad, who is an expert in creating computer source codes. After the software is completed but before Hallowed is marketed, a video game called Halo 2 is released for both the Xbox and PlayStation 3 systems. Halo 2 uses source codes similar to those of Hallowed and imitates Hallowed’s overall look and feel, although not all the features are alike. Using the information presented in the chapter, answer the following questions.

1. Would the name Hallowed receive protection as a trademark or as trade dress?

2. If Trent and Xavier had obtained a business process patent on Hallowed, would the release of Halo 2 infringe on their patent? Why or why not?

Continues

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3. Based only on the facts presented above, could Trent and Xavier sue the makers of Halo 2 for copy- right infringement? Why or why not?

4. Suppose that Trent and Xavier discover that Brad took the idea of Hallowed and sold it to the com- pany that produced Halo 2. Which type of intellectual property issue does this raise?

DEBATE THIS

▪▪ Congress has amended the Copyright Act several times. Copyright holders now have protection for many decades. Was Congress justified in extending the copyright time periods? Why or why not?

In your marketing courses, you have learned or will learn about the importance of trademarks. If you become a marketing manager, you will likely be involved in cre- ating trademarks or service marks for your firm, protecting the firm’s existing marks, and ensuring that the firm does not infringe on anyone else’s marks.

The Broad Range of Trademarks and Service Marks The courts have held that trademarks and service marks consist of much more than well-known brand names, such as Apple and Amazon. As a marketing manager, you will need to be aware that parts of a brand name or other forms of product identification may qualify for trademark protection.

▪▪ Catchy phrases—Certain brands have established phrases that are associated with the brands, such as Nike’s “Just Do It!” Marketing managers for competing product should avoid using similar phrases

in their marketing programs. Note, though, that not all phrases can become part of a trademark or service mark. When a phrase is extremely common, the courts normally will not grant trademark or service mark protection to it.

▪▪ Abbreviations—The public sometimes abbreviates a well-known trademark. For example, Budweiser beer is known as Bud and Coca-Cola as Coke. Marketing man- agers should avoid using any name for a product or service that closely resembles a well-known abbreviation, such as Koke for a cola drink.

▪▪ Shapes—The shape of a brand name, a service mark, or a container can take on exclusivity if the shape clearly aids in product or service identification. For example, just about everyone throughout the world recognizes the shape of a Coca- Cola bottle. Marketing managers would do well to avoid using a similar shape for a new carbonated drink.

▪▪ Ornamental colors—Sometimes, color combinations can become part of a service mark or trademark. For example,

FedEx established its unique identity with the use of bright orange and purple. The courts have protected this color combina- tion. The same holds for the black-and- copper color combination of Duracell batteries.

▪▪ Ornamental designs—Symbols and designs associated with a particular mark are normally protected. Marketing man- agers should not attempt to copy them. Levi’s places a small tag on the left side of the rear pocket of its jeans. Cross uses a cutoff black cone on the top of its pens.

▪▪ Sounds—Sounds can also be protected. For example, the familiar roar of the Metro-Goldwyn-Mayer (MGM) lion is protected.

When to Protect Trademarks and Service Marks Every business should register its logo as a trademark, and perhaps also its business name and Web site address, to provide the company with the highest level of protec- tion. A trademark will discourage counter- feiting and will give your firm the advantage in the event of future infringement.

LINKING BUSINESS LAW TO MARKETING Trademarks and Service Marks

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Once your company has established a trademark or a service mark, as a manager, you will have to decide how aggressively you wish to protect those marks. If you fail to protect them, your company faces the possi- bility that they will become generic. Remem- ber that aspirin, cellophane, thermos, dry ice, shredded wheat, and many other familiar

terms were once legally protected trade- marks. Protecting exclusive rights to a mark can be expensive, however, so you will have to determine how much it is worth to your company to protect your rights. If you work in a small company, making major expendi- tures to protect your trademarks and service marks might not be cost-effective.

CRITICAL THINKING

▪▪ The U.S. Patent and Trademark Office requires that a registered trademark or service mark be put into commercial use within three years after the application has been approved. Why do you think the federal government established this requirement?

certification mark 143 collective mark 143 copyright 149 domain name 142 intellectual property 138

license 144 patent 145 service mark 143 trade dress 143 trade name 144

trade secret 154 trademark 139 trademark dilution 140

Key Terms

Chapter Summary: Intellectual Property Rights Trademarks 1. A trademark is a distinctive word, symbol, or design that identifies the manufacturer as the source of the goods and

distinguishes its products from those made or sold by others. 2. The major federal statutes protecting trademarks and related property are the Lanham Act of 1946 and the Federal Trade-

mark Dilution Act of 1995. Generally, to be protected, a trademark must be sufficiently distinctive from all competing trademarks.

3. Trademark infringement occurs when one party uses a mark that is the same as, or confusingly similar to, the protected trademark, service mark, trade name, or trade dress of another party without permission when marketing goods or services.

Patents 1. A patent is a grant from the government that gives an inventor the exclusive right to make, use, and sell an invention for a period of twenty years (fourteen years for a design patent) from the date when the application for a patent is filed. To be patentable, an invention (or a discovery, process, or design) must be genuine, novel, useful, and not obvious in light of current technology. Computer software may be patented.

2. Almost anything is patentable, except the laws of nature, natural phenomena, and abstract ideas (including algorithms). Even artistic methods and works of art, certain business processes, and the structures of storylines may be patentable.

3. Patent infringement occurs when someone uses or sells another’s patented design, product, or process without the patent owner’s permission. The patent holder can sue the infringer in federal court and request an injunction, but must prove irreparable injury to obtain a permanent injunction against the infringer. The patent holder can also request damages and attorneys’ fees. If the infringement was willful, the court can grant treble damages.

Copyrights 1. A copyright is an intangible property right granted by federal statute to the author or originator of certain literary or artistic productions. The Copyright Act of 1976, as amended, governs copyrights.

2. Copyright infringement occurs whenever the form or expression of an idea is copied without the permission of the copy- right holder. An exception applies if the copying is deemed a “fair use.”

3. In 1980, Congress passed the Computer Software Copyright Act, which amended the Copyright Act to include computer programs in the list of creative works protected by federal copyright law.

Trade Secrets Trade secrets include customer lists, plans, research and development, and pricing information. Trade secrets are protected under the common law and, in most states, under statutory law against misappropriation by competitors. The Economic Espionage Act made the theft of trade secrets a federal crime.

International Protections

Various international agreements provide international protection for intellectual property. A landmark agreement is the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, which provides for enforcement procedures in all countries signatory to the agreement.

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Issue Spotters 1. Roslyn, a food buyer for Organic Cornucopia Food Company, decides to go into business for herself as Roslyn’s Kitchen. She con-

tacts Organic’s suppliers, offering to buy their entire harvest for the next year. She also contacts Organic’s customers, offering to sell her products for less than Organic. Has Roslyn violated any of the intellectual property rights discussed in this chapter? Explain. (See Trade Secrets.)

2. Global Products develops, patents, and markets software. World Copies, Inc., sells Global’s software without the maker’s permis- sion. Is this patent infringement? If so, how might Global save the cost of suing World for infringement and at the same time profit from World’s sales? (See Patents.)

—Check your answers to the Issue Spotters against the answers provided in Appendix D at the end of this text.

Learning Objectives Check 1. What is intellectual property?

2. Why is the protection of trademarks important?

3. How does the law protect patents?

4. What laws protect authors’ rights in the works they create?

5. What are trade secrets, and what laws offer protection for this form of intellectual property? —Answers to the even-numbered Learning Objectives Check questions can be found in Appendix E at the end of this text.

Business Scenarios and Case Problems 6–1. Patent Infringement. John and Andrew Doney invented

a hard-bearing device for balancing rotors. Although they obtained a patent for their invention from the U.S. Patent and Trademark Office, it was never used as an automobile wheel balancer. Some time later, Exetron Corp. produced an auto- mobile wheel balancer that used a hard-bearing device similar to the Doneys’ device. Given that the Doneys had not used their device for automobile wheel balancing, does Exetron’s use of a similar device infringe on the Doneys’ patent? (See Patents.)

6–2. Fair Use. Professor Wise is teaching a summer seminar in business torts at State University. Several times during the course, he makes copies of relevant sections from business law texts and distributes them to his students. Wise does not realize that the daughter of one of the textbook authors is a member of his seminar. She tells her father about Wise’s copy- ing activities, which have taken place without her father’s or his publisher’s permission. Her father sues Wise for copyright infringement. Wise claims protection under the fair use doc- trine. Who will prevail? Explain. (See Copyrights.)

6–3. Licensing. Redwin Wilchcombe composed, performed, and recorded a song called Tha Weedman at the request of Lil Jon, a member of Lil Jon & the East Side Boyz (LJESB), for LJESB’s album Kings of Crunk. Wilchcombe was not paid, but was given credit on the album as a producer. After the album had sold two million copies, Wilchcombe filed a suit against LJESB, alleg- ing copyright infringement. The defendants claimed that they

had a license to use the song. Do the facts support this claim? Explain. [Wilchcombe v. TeeVee Toons, Inc., 555 F.3d 949 (11th Cir. 2009)] (See Copyrights.)

6–4. Spotlight on Macy’s—Copyright Infringement. United Fabrics International, Inc., bought a fabric design from an Italian designer and registered a copyright to the design with the U.S. Copyright Office. When Macy’s, Inc., began

selling garments with a similar design, United filed a copyright infringement suit against Macy’s. Macy’s argued that United did not own a valid copyright to the design and so could not claim infringement. Does United have to prove that the copy- right is valid to establish infringement? Explain. [United Fabrics International, Inc. v. C & J Wear, Inc., 630 F.3d 1255 (9th Cir. 2011)] (See Copyrights.)

6–5. Copyright Infringement. SilverEdge Systems Software hired Catherine Conrad to perform a singing telegram. Silver- Edge arranged for James Bendewald to record Conrad’s per- formance of her copyrighted song to post on the company’s Web site. Conrad agreed to wear a microphone to assist in the recording, told Bendewald what to film, and asked for an addi- tional fee only if SilverEdge used the video for a commercial purpose. Later, the company chose to post a video of a differ- ent performer’s singing telegram instead. Conrad filed a suit in a federal district court against SilverEdge and Bendewald for copyright infringement. Are the defendants liable? Explain. [Conrad v. Bendewald, 2013 WL 310194 (7th Cir. 2013)] (See Copyrights.)

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6–6. Business Case Problem with Sample Answer—Patents. The U.S. Patent and Trademark Office (PTO) denied Ray- mond Gianelli’s application for a patent for a “Rowing Machine”—an exercise machine on which a user pulls on

handles to perform a rowing motion against a selected resis- tance. The PTO considered the device obvious in light of a pre- viously patented “Chest Press Apparatus for Exercising Regions of the Upper Body”—an exercise machine on which a user pushes on handles to overcome a selected resistance. On what ground might this result be reversed on appeal? Discuss. [In re Gianelli, 739 F.3d 1375 (Fed. Cir. 2014)] (See Patents.) —For a sample answer to Problem 6–6, go to Appendix F

at the end of this text.

6–7. Patents. Rodney Klassen was employed by the U.S. Depart- ment of Agriculture (USDA). Without the USDA’s authorization, Klassen gave Jim Ludy, a grape grower, plant material for two unreleased varieties of grapes. For almost two years, most of Ludy’s plantings bore no usable fruit, none of the grapes were sold, and no plant material was given to any other person. The plantings were visible from publicly accessible roads, but none of the vines were labeled, and the variety could not be identi- fied by simply viewing the vines. Under patent law, an applicant

may not obtain a patent for an invention that is in public use more than one year before the date of the application. Could the USDA successfully apply for patents on the two varieties given to Ludy? Explain. [Delano Farms Co. v. California Table Grape Commission, __ F.3d __, 2015 WL 127317 (Fed.Cir. 2015)] (See Patents.)

6–8. A Question of Ethics—Copyright Infringement. Cus- tom Copies, Inc., prepares and sells coursepacks, which contain compilations of readings for college courses. A teacher selects the readings and delivers a syllabus to the

copy shop, which obtains the materials from a library, copies them, and binds the copies. Blackwell Publishing, Inc., which owns the copyright to some of the materials, filed a suit, alleg- ing copyright infringement. [Blackwell Publishing, Inc. v. Custom Copies, Inc., 2006 WL 1529503 (N.D.Fla. 2006)] (See Copyrights.)

1. Custom Copies argued, in part, that it did not “distribute” the coursepacks. Does a copy shop violate copyright law if it only copies materials for coursepacks? Does the fair use doctrine apply in these circumstances? Discuss.

2. What is the potential impact if copies of a book or journal are created and sold without the permission of, and the pay- ment of royalties or a fee to, the copyright owner? Explain.

Critical Thinking and Writing Assignments 6–9. Case Analysis Question—Copyright Infringement. Go

to Appendix G at the end of this text and examine the excerpt of Case No. 1, Winstead v. Jackson. Review and then brief the case, making sure that your brief answers the

following questions. (See Copyrights.)

1. Issue: This case focused on an allegation of copyright infringement involving what parties and which creative works?

2. Rule of Law: What is the test for determining whether a creative work infringes the copyright of another work?

3. Applying the Rule of Law: How did the court determine whether the claim of copyright infringement was supported in this case?

4. Conclusion: Was the defendant liable for copyright infringe- ment? Why or why not?

6–10. Business Law Critical Thinking Group Assignment. After years of research, your company has developed a product that might revolutionize the green (environmen- tally conscious) building industry. The product is made

from relatively inexpensive and widely available materials com- bined in a unique way that can substantially lower the heating and cooling costs of residential and commercial buildings. The company has registered the trademark it intends to use for the product and has filed a patent application with the U.S. Patent and Trademark Office. (See Patents.)

1. One group should provide three reasons why this product does or does not qualify for patent protection.

2. Another group should develop a four-step plan for how the company can best protect its intellectual property rights (trademark, trade secret, and patent) and prevent domestic and foreign competitors from producing counterfeit goods or cheap knockoffs.

3. Another group should list and explain three ways in which the company can utilize licensing.

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7

The Internet has changed our lives and our laws. Tech- nology has put the world at our fingertips and now allows even the smallest business to reach customers around the globe. Because the Internet allows the world to “pass around notes” so quickly, as Jon Stewart joked in the chapter-opening quotation, it presents a variety of chal- lenges for the law.

Courts are often in uncharted waters when decid- ing disputes that involve the Internet, social media, and online privacy. There may not be any common law precedents for judges to rely on when resolving cases. Long-standing principles of justice may be inapplicable. New rules are evolving, as we discuss in this chapter, but often not as quickly as technology.

7–1 Internet Law A number of laws specifically address issues that arise only on the Internet. These issues include unsolicited e-mail, domain names, cybersquatting, and meta tags, as we discuss here. We also discuss how the law is dealing with problems of trademark infringement and dilution online as well as licensing.

Internet Law, Social Media, and Privacy

LEARNING OBJECTIVES The five Learning Objectives below are designed to help improve your understanding of the chapter. After reading this chapter, you should be able to answer the following questions:

1. What is cybersquatting, and when is it illegal?

2. What steps have been taken to protect intellectual prop- erty rights in the digital age?

3. When does the law pro- tect a person’s electronic communications from being intercepted or accessed?

4. What law governs whether Internet service providers are liable for online defam- atory statements made by users?

5. How do online retailers track their users’ Web browsing activities?

CHAPTER OUTLINE ▪▪ Internet Law ▪▪ Copyrights in Digital

Information

▪▪ Social Media ▪▪ Online Defamation ▪▪ Privacy

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“The Internet is just the world passing around notes in a classroom.”

Jon Stewart 1962–present (American comedian and former host of The Daily Show)

162

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7–1a Spam Businesses and individuals alike are targets of spam.1 Spam is the unsolicited “junk e-mail” that floods virtual mailboxes with advertisements, solicitations, and similar communications. Considered relatively harmless in the early days of the Internet, spam has become a serious problem. By 2016, it accounted for roughly 75 percent of all e-mails.

State Regulation of Spam In an attempt to combat spam, thirty-seven states have enacted laws that prohibit or regulate its use. Many state laws that regulate spam require the senders of e-mail ads to instruct the recipients on how they can “opt out” of further e-mail ads from the same sources. For instance, in some states, an unsolicited e-mail must include a toll-free phone number or return e-mail address that the recipient can use to ask the sender not to send unsolicited e-mails.

The Federal CAN-SPAM Act In 2003, Congress enacted the Controlling the Assault of Non-Solicited Pornography and Marketing (CAN-SPAM) Act.2 The legislation applies to any “commercial electronic mail messages” that are sent to promote a commercial product or ser- vice. Significantly, the statute preempts state antispam laws except those provisions in state laws that prohibit false and deceptive e-mailing practices.

Generally, the act permits the sending of unsolicited commercial e-mail but prohibits certain types of spamming activities. Prohibited activities include the use of a false return address and the use of false, misleading, or deceptive information when sending e-mail. The statute also prohibits the use of “dic- tionary attacks”—sending messages to randomly generated e-mail addresses—and the “harvesting” of e-mail addresses from Web sites through the use of specialized software.

EXAMPLE 7.1 Federal officials arrested Robert Alan Soloway, con- sidered to be one of the world’s most prolific spammers. Soloway, known as the “Spam King,” had been using botnets (automated spamming networks) to send out hundreds of millions of unwanted e-mails. In 2008, Soloway pleaded guilty to mail fraud, spam, and failure to pay taxes. n

Arresting prolific spammers, however, has done little to curb spam, which continues to flow at a rate of 70 billion messages per day. In other words, the federal CAN-SPAM act has not successfully reduced the amount of spam.

The U.S. Safe Web Act The CAN-SPAM Act prohibited false and deceptive e-mails originat- ing in the United States. After that, spamming from servers located in other nations increased. These cross-border spammers generally were able to escape detection and legal sanctions because the Federal Trade Commission (FTC) lacked the authority to investigate foreign spamming.

Congress sought to rectify the situation by enacting the U.S. Safe Web Act (also known as the Undertaking Spam, Spyware, and Fraud Enforcement with Enforcers Beyond Borders Act).3 The act allows the FTC to cooperate and share information with foreign agencies in investigating and prosecuting those involved in spamming, spyware, and various Internet frauds and deceptions.

1. The term spam is said to come from the lyrics of a Monty Python song that repeats the word spam over and over. 2. 15 U.S.C. Sections 7701 et seq. 3. Pub. L. No. 109-455, 120 Stat. 3372 (2006), codified in various sections of 15 U.S.C. and 12 U.S.C. Section 3412.

Spam Bulk, unsolicited (junk) e-mail.

Have state and federal laws against spam reduced its use?

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The Safe Web Act also provides a “safe harbor” for Internet service providers (ISPs)— organizations that provide access to the Internet. The safe harbor gives ISPs immunity from liability for supplying information to the FTC concerning possible unfair or deceptive conduct in foreign jurisdictions.

7–1b Domain Names As e-commerce expanded worldwide, one issue that emerged involved the rights of a trade- mark owner to use the mark as part of a domain name. A domain name is part of an Internet address, such as “cengage.com.”

Structure of Domain Names Every domain name ends with a top-level domain (TLD), which is the part of the name to the right of the period. This part of the name often indicates the type of entity that operates the site. For instance, com is an abbreviation for commercial, and edu is short for education.

The second-level domain (SLD)—the part of the name to the left of the period—is cho- sen by the business entity or individual registering the domain name. Competition for SLDs among firms with similar names and products has led to numerous disputes. By using an identical or similar domain name, one company may attempt to profit from a competitor’s goodwill (the nontangible value of a business).

Domain Name Distribution System The Internet Corporation for Assigned Names and Numbers (ICANN), a nonprofit corporation, oversees the distribution of domain names and operates an online arbitration system. Due to numerous complaints, ICANN recently over- hauled the domain name distribution system.

In 2012, ICANN started selling new generic top-level domain names (gTLDs) for an ini- tial price of $185,000 plus an annual fee of $25,000. Whereas TLDs were limited to only a few terms (including com, net, and org), gTLDs can take any form. By 2016, many compa- nies and corporations had acquired gTLDs based on their brands, such as aol, bmw, target, and walmart. Some companies have numerous gTLDs. Google’s gTLDs, for instance, include android, chrome, gmail, goog, and YouTube.

Because gTLDs have greatly increased the potential number of domain names, domain name registrars have proliferated. Registrar companies charge a fee to businesses and indi- viduals to register new names and to renew annual registrations (often through automated software). Many of these companies also buy and sell expired domain names.

7–1c Cybersquatting One of the goals of the new gTLD system was to alleviate the problem of cybersquatting. Cybersquatting occurs when a party registers a domain name that is the same as, or confus- ingly similar to, the trademark of another and then offers to sell the domain name back to the trademark owner.

CaSe eXaMPLe 7.2 Apple, Inc., has repeatedly sued cybersquatters that registered domain names similar to the names of its products, such as iphone4s.com and ipods.com. In 2012, Apple won a judgment in litigation at the World Intellectual Property Organization (WIPO) against a company that was squatting on the domain name iPhone5.com.4 n

Anticybersquatting Legislation Because cybersquatting has led to so much litigation, Con- gress enacted the Anticybersquatting Consumer Protection Act (ACPA) in 1999.5 The act amended the Lanham Act—the federal law protecting trademarks. The ACPA makes cyber- squatting illegal when both of the following are true:

4. WIPO Case No. D2012-0951. 5. 15 U.S.C. Section 1129.

Internet Service Provider (ISP) A business or organization that offers users access to the Internet and related services.

Domain Name The series of letters and symbols used to identify a site operator on the Internet; an Internet “address.”

Goodwill In the business context, the valuable reputation of a business viewed as an intangible asset.

“Almost overnight, the Internet’s gone from a technical wonder to a business must.”

Bill Schrader 1953–present (Internet pioneer and co-founder of the first commercial Internet service provider)

Cybersquatting The act of registering a domain name that is the same as, or confusingly similar to, the trademark of another and then offering to sell that domain name back to the trademark owner.

LEARNING OBJECTIVE 1 What is cybersquatting, and when is it illegal?

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1. The domain name is identical or confusingly similar to the trademark of another. 2. The one registering, trafficking in, or using the domain name has a “bad faith intent” to

profit from that trademark.

Despite the ACPA, cybersquatting continues to present a problem for businesses as the Inter- net continues to evolve.

Cybersquatting and the Domain Name Distribution System As mentioned, domain name registrars are in the business of registering new domain names and renewing registrations. All registrars are supposed to relay information about these transactions to ICANN and other companies that keep a master list of domain names, but this does not always occur. The speed at which domain names change hands and the difficulty in tracking mass automated registra- tions have created an environment in which cybersquatting can flourish.

CASE EXAMPLE 7.3 OnNet USA, Inc., owns the English-language rights to 9Dragons, a game with a martial arts theme, and operates a Web site for its promotion. When a party known as “Warv0x” began to operate a pirated version of the game at Play9D.com, OnNet filed an action under the ACPA in a federal court. OnNet was unable to obtain contact information for the owner of Play9D.com through its Australian domain name registrar, however, and thus could not complete service of process. The federal court allowed OnNet to serve the defendant by publishing a notice of the suit in a newspaper in Gold Coast, Australia.6 n

Typosquatting A relatively new form of cybersquatting is typosquatting, or registering a name that is a misspelling of a popular brand name, such as googl.com or appple.com. Because many Internet users are not perfect typists, Web pages using these misspelled names may receive a lot of traffic. More traffic generally means increased profit (advertisers often pay Web sites based on the number of unique visits, or hits).

Typosquatters may sometimes fall beyond the reach of the ACPA. If the misspelling that they use is significant, the trademark owner may have difficulty proving that the name is iden- tical or confusingly similar to the trademark of another, as the ACPA requires.

Typosquatting adds costs for businesses seeking to protect their domain name rights. Com- panies must attempt to register not only legitimate variations of their domain names but also potential misspellings. Large corporations may have to register thousands of domain names across the globe just to protect their basic brands and trademarks.

Applicability and Sanctions of the ACPA The ACPA applies to all domain name registrations of trademarks. Successful plaintiffs in suits brought under the act can collect actual damages and profits, or they can elect to receive statutory damages ranging from $1,000 to $100,000.

Although some companies have been successful suing under the ACPA, there are road- blocks to pursuing such lawsuits. Some domain name registrars offer privacy services that hide the true owners of Web sites, making it difficult for trademark owners to identify cyber- squatters. Thus, before bringing a suit, a trademark owner has to ask the court for a subpoena to discover the identity of the owner of the infringing Web site. Because of the high costs of court proceedings, discovery, and even arbitration, many disputes over cybersquatting are settled out of court.

To facilitate dispute resolution, ICANN now offers the Uniform Rapid Suspension (URS) system. URS allows trademark holders with clear-cut infringement claims to obtain rapid relief. EXAMPLE 7.4 In the first dispute filed involving gTLDs, IBM filed a complaint with URS against an individual who registered the domain names IBM.guru and IBM.ventures in Febru- ary 2014. A week later, the URS panel decided in IBM’s favor and suspended the two domain names. n

6. OnNet USA, Inc. v. Play9D.com, 2013 WL 120319 (N.D.Cal. 2013).

“National borders aren’t even speed bumps on the information superhighway.”

Timothy C. May 1962–present (Engineer and technical and political writer)

Typosquatting A form of cybersquatting that relies on mistakes, such as typographical errors, made by Internet users when inputting information into a Web browser.

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7–1d Meta Tags As noted in Chapter 2, meta tags are key words that give Internet browsers specific information about a Web page. Meta tags can be used to increase the likelihood that a site will be included in search engine results, even if the site has nothing to do with the key words. Using this tech- nique, one site can appropriate the key words of other sites with more frequent hits so that the appropriating site will appear in the same search engine results as the more popular sites.

Using another’s trademark in a meta tag without the owner’s permission normally consti- tutes trademark infringement. Some uses of another’s trademark as a meta tag may be per- missible, however, if the use is reasonably necessary and does not suggest that the owner authorized or sponsored the use.

CASE EXAMPLE 7.5 Farzad and Lisa Tabari are auto brokers—the personal shoppers of the automotive world. They contact authorized dealers, solicit bids, and arrange for customers to buy from the dealer offering the best combination of location, availability, and price. The Tabaris offered this service at the Web sites buy-a-lexus.com and buyorleaselexus.com.

Toyota Motor Sales U.S.A., Inc., the exclusive distributor of Lexus vehicles and the owner of the Lexus mark, objected to the Tabaris’ use of the Lexus trademark. The Tabaris removed Toyota’s photographs and logo from their site and added a disclaimer in large type at the top, but they refused to give up their domain names. Toyota sued for infringement. The court forced the Tabaris to stop using any “domain name, service mark, trademark, trade name, meta tag or other commercial indication of origin that includes the mark LEXUS.”7 n

7–1e Trademark Dilution in the Online World As previously explained, trademark dilution occurs when a trademark is used, without authori- zation, in a way that diminishes the distinctive quality of the mark. Unlike trademark infringe- ment, a claim of dilution does not require proof that consumers are likely to be confused by a connection between the unauthorized use and the mark. For this reason, the products involved need not be similar, as the following Spotlight Case illustrates.

7. Toyota Motor Sales, U.S.A., Inc. v. Tabari, 610 F.3d 1171 (9th Cir. 2010).

Spotlight on Internet Porn: Case 7.1

Hasbro, Inc. v. Internet Entertainment Group, Ltd. United States District Court, Western District of Washington, 1996 WL 84853 (1996).

FACTS Hasbro, Inc., the maker of Candy Land, a children’s board game, owns the Candy Land trade- mark. The defendants, Brian Cartmell and the Inter- net Entertainment Group, Ltd., used candyland .com as a domain name for a sexually explicit Internet site. Any person who performed an online search for “candyland” was directed to this adult Web site. Hasbro filed a trademark dilution claim in a federal court, seeking a permanent injunc- tion to prevent the defendants from using the CANDYLAND trademark.

ISSUE Did the defendants’ use of the word can- dyland in connection with a sexually explicit Web site violate Hasbro’s trademark rights?

DECISION Yes. The district court granted Hasbro a permanent injunction and ordered the defen- dants to remove all content from the candyland. com Web site and to stop using the CANDYLAND mark.

REASON The court reasoned that Hasbro had shown that the defendants’ use of the CANDYLAND

Candy Land is a children’s board game. Why did its parent company,

Hasbro, Inc., sue a Web site?

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7–1f Licensing Recall that a company may permit another party to use a trademark (or other intellectual property) under a license. A licensor might grant a license allowing its trademark to be used as part of a domain name, for instance.

Another type of license involves the use of a product such as software. This sort of licensing is ubiquitous in the online world. When you download an application on your smartphone, tablet, or other mobile device, for instance, you are typically entering into a license agreement. You are obtaining only a license to use the software and not ownership rights in it. Apps pub- lished on Google Play, for instance, may use its licensing service to prompt users to agree to a license at the time of installation and use.

Licensing agreements frequently include restrictions that prohibit licensees from sharing the file and using it to create similar software applications. The license may also limit the use of the application to a specific device or give permission to the user for a certain time period.

7–2 Copyrights in Digital Information Copyright law is probably the most important form of intellectual property protection on the Internet. This is because much of the material on the Internet (including software and data- base information) is copyrighted, and in order for that material to be transferred online, it must be “copied.” Generally, whenever a party downloads software, movies, or music into a computer’s random access memory, or RAM, without authorization, a copyright is infringed.

In 1998, Congress passed additional legislation to protect copyright holders—the Digi- tal Millennium Copyright Act (DMCA).8 Because of its significance in protecting against the piracy of copyrighted materials in the online environment, this act is presented as this chap- ter’s Landmark in the Law feature.

7–2a Copyright Infringement Technology has vastly increased the potential for copyright infringement. CASE EXAMPLE 7.6. In one case, a rap song that was included in the sound track of a movie had used a few seconds from the guitar solo of another’s copyrighted sound recording without permission. Neverthe- less, a federal court held that digitally sampling a copyrighted sound recording of any length constitutes copyright infringement.9 n

Federal courts have not consistently found that digital sampling is always illegal. Some courts have allowed the defense of fair use, while others have not. EXAMPLE 7.7 Hip hop stars

8. 17 U.S.C. Sections 512, 1201–1205, 1301–1332; and 28 U.S.C. Section 4001. 9. Bridgeport Music, Inc. v. Dimension Films, 410 F.3d 792 (6th Cir. 2005).

LEARNING OBJECTIVE 2 What steps have been taken to protect intellectual property rights in the digital age?

“The Internet is the world’s largest library. It’s just that all the books are on the floor.”

John Allen Paulos 1945–present (American mathematics professor)

mark and the domain name candyland.com in connection with their Internet site was causing irreparable injury to Hasbro. As required to obtain an injunction, Hasbro had demonstrated a likelihood of pre- vailing on its claims that the defendants’ conduct violated both the federal and the Washington State statutes against trademark dilu- tion. “The probable harm to Hasbro from defendants’ conduct out- weighs any inconvenience that defendants will experience if they are required to stop using the CANDYLAND name.”

WHY IS THIS CASE IMPORTANT? This was the first case alleging dilution on the Web. The court precluded the use of candyland.com as a URL for an adult site, even though consumers were not likely to confuse an adult Web site with a children’s board game.

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Jay-Z and Kanye West were sued for digitally sampling music by soul musician Syl Johnson. Given the uncertain outcome of the litigation, they ended up settling the suit in 2012 for an undisclosed amount. n

Initially, criminal penalties for copyright violations could be imposed only if unauthorized copies were exchanged for financial gain. Yet much piracy of copyrighted materials online was “altruistic” in nature—unauthorized copies were made simply to be shared with others. Then, Congress amended the law and extended criminal liability for the piracy of copyrighted materials to persons who exchange unauthorized copies of copyrighted works without realizing a profit.

What happens if “sharing” involves posting hacked information? See this chapter’s Adapting the Law to the Online Environment feature to find out what happened when hackers accessed e-mail at Sony Pictures and made damaging information available to the public.

7–2b MP3 and File-Sharing Technology Soon after the Internet became popular, a few enterprising programmers created software to compress large data files, particularly those associated with music. The best-known compres- sion and decompression system is MP3, which enables music fans to download songs or entire CDs onto their computers or onto portable listening devices, such as smartphones. The MP3 system also made it possible for music fans to access other fans’ files by engaging in file- sharing via the Internet.

Methods of File-Sharing File-sharing is accomplished through peer-to-peer (P2P) network- ing. The concept is simple. Rather than going through a central Web server, P2P networking

“We’re into a whole new world with the Internet, and whenever we sort of cross another plateau in our development, there are those who seek to take advantage of it. So this is a replay of things that have happened throughout our history.”

Bill Clinton 1946–present (Forty-second President of the United States)

Peer-to-Peer (P2P) Networking The sharing of resources (such as files, hard drives, and processing styles) among multiple computers without the requirement of a central network server.

The United States leads the world in the production of creative products, includ- ing books, films, videos, recordings, and soft- ware. Exports of U.S. creative products surpass those of every other U.S. industry in value.

Given the importance of intellectual property to the U.S. economy, the United States has actively supported international efforts to protect ownership rights in intel- lectual property, including copyrights. In 1996, to curb unauthorized copying of copy- righted materials, the member nations of the World Intellectual Property Organization (WIPO) adopted a treaty to upgrade global standards of copyright protection, particu- larly for the Internet.

IMPLEMENTING THE WIPO TREATY Congress implemented the provisions of the WIPO treaty by enacting a new statute

to update U.S. copyright law in 1998. The law—the Digital Millennium Copyright Act (DMCA)—is a landmark step in the protec- tion of copyright owners. Because of the leading position of the United States in the creative industries, the law also serves as a model for other nations. Among other things, the DMCA established civil and crim- inal penalties for anyone who circumvents (bypasses) encryption software or other technological antipiracy protection. Also prohibited are the manufacture, import, sale, and distribution of devices or services for circumvention.

The act provides for exceptions to fit the needs of libraries, scientists, universi- ties, and others. In general, the law does not restrict the “fair use” of circumvention meth- ods for educational and other noncommer- cial purposes. For instance, circumvention is allowed to test computer security, conduct encryption research, protect personal pri- vacy, and enable parents to monitor their

children’s use of the Internet. The exceptions are to be reconsidered every three years.

LIMITING THE LIABILITY OF INTERNET SERVICE PROVIDERS The DMCA also lim- ited the liability of Internet service providers (ISPs). Under the act, an ISP is not liable for any copyright infringement by its customer unless the ISP is aware of the subscriber’s violation. An ISP may be held liable only if it fails to take action to shut the subscriber down after learning of the violation. A copy- right holder has to act promptly, however, by pursuing a claim in court, or the subscriber has the right to be restored to online access.

APPLICATION TO TODAY’S WORLD With- out the DMCA, copyright owners would have a more difficult time obtaining legal redress against those who, without authorization, decrypt or copy copyrighted materials. Never- theless, problems remain, particularly because of the global nature of the Internet.

The Digital Millennium Copyright ActLANDMARK IN THE LAW

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uses numerous personal computers (PCs) that are connected to the Internet. Individuals on the same network can access files stored on one another’s PCs through a distributed network. Parts of the network may be distributed all over the country or the world, which offers an unlimited number of uses. Persons scattered throughout the country or the world can work together on the same project by using file-sharing programs.

A newer method of sharing files via the Internet is cloud computing, which is essentially a subscription-based or pay-per-use service that extends a computer’s software or storage capabilities. Cloud computing can deliver a single application through a browser to multi- ple users. Alternatively, cloud computing might be a utility program to pool resources and

ADAPTING THE LAW TO THE ONLINE ENVIRONMENT E-Mail Hacking at Sony Pictures— Can You Put the Cat Back into the Bag?

Sony Pictures was ready to release The Interview on Christmas Day, 2014. The comedy described a bogus CIA attempt to assassinate North Korea’s dictator, Kim Jong-Un. In late November, hackers entered Sony’s internal e-mail system and released 32,000 hacked documents in an apparent attempt to block release of the film.

A Company’s Worst Nightmare Comes True Had the hacked e-mails only concerned cor- porate decision making, nothing much would have come of the event. Many of the e-mails, though, were quite damaging to Sony’s image. In particular, there were spiteful comments from corporate executives about famous stars, such as Angelina Jolie. A high- level executive was revealed to be mocking President Barack Obama. In brief, the hacked e-mails, which were revealed by the press, were embarrassing to Sony management, to say the least.

Sony Reacts, but Perhaps in Vain Sony went on the offensive against major news organizations. Through its lawyer, it sent letters to the New York Times and other publications characterizing the hacked e-mails as “stolen information” and demand- ing that they be destroyed. Sony warned news media outlets that it did “not con- sent to [their] possession, review, copying,

dissemination, publication, uploading, down- load, or making any use” of the information.

Can Sony Successfully Sue Those Who Publish Hacked Sony Documents? There is relatively little precedent concerning the ability to sue news media for publication of readily available hacked e-mails. Two cases have some precedential value, though. One involved copied documents taken from a U.S. senator’s office. The copies were sent to investigative reporters, who then published articles based on the documents. The senator sued, claiming invasion of privacy and the use of stolen property (conversion). The D.C. Cir- cuit Court of Appeals rejected the theories.a

In another case, a radio commentator replayed an illegally intercepted recording of a private conversation. That case went to the Supreme Court, which rejected the plaintiff’s argument that the playing of the recording violated a federal statute that made both the interception and the use of such conver- sations illegal. The Court argued that play- ing the illegally intercepted conversation was constitutionally protected because the broadcaster was not involved in the illegal interception and the communication was “a matter of public concern.”b

If Sony Pictures ultimately sues news media organizations, such as the New York Times, for continuing to reveal the contents of hacked e-mails, Sony will probably not prevail. Of the hacked e-mails that were publicly revealed, none disclosed facts about individuals that were highly private. Thus, their publication is not actionable as a tort (the disclosure of private facts).

CRITICAL THINKING

▪▪ Sony revealed that the script for a new James Bond movie had been hacked and leaked. Could a news publication legally print or post online that entire script? Why or why not?

a. Pearson v. Dodd, 410 F.2d 701 (D.C. Cir. 1969). b. Bartnicki v. Vopper, 532 U.S. 514, 121 S.Ct. 1753, 149

L.Ed.2d 787 (2001).

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When Sony Pictures was about to release a comedy, The Interview, based on an attempt

to assassinate North Korea’s leader, that country purportedly hacked into the company’s e-mail

accounts. Can Sony prohibit news media from publishing those e-mails?

Distributed Network A network that can be used by persons located (distributed) around the country or the globe to share computer files.

Cloud Computing The delivery to users of on-demand services from third-party servers over a network.

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provide data storage and virtual servers that can be accessed on demand. Amazon, Face- book, Google, IBM, and Sun Microsystems are using and developing more cloud computing services.

Sharing Stored Music Files When file-sharing is used to download others’ stored music files, copyright issues arise. CASE EXAMPLE 7.8 The issue of file-sharing infringement has been the subject of an ongoing debate since the highly publicized cases against two com- panies (Napster, Inc., and Grokster, Ltd.) that created software used for copyright infringe- ment. In the first case, Napster operated a Web site with free software that enabled users to copy and transfer MP3 files. Firms in the recording industry sued Napster. Ultimately, the court held that Napster was liable for contributory and vicarious (indirect) copyright infringement.

As technology evolved, Grokster, Ltd., and several other companies created and distributed new types of file-sharing software. This software did not maintain a central index of content, but allowed P2P network users to share stored music files. The court held that because the companies distributed file-sharing software “with the object of promoting its use to infringe the copyright,” they were liable for the resulting acts of infringement by the software’s users.10 n

It is not difficult to understand why recording artists and their labels are concerned about file-sharing. They stand to lose large amounts of royalties and revenues if relatively few digital downloads or CDs are purchased and then made available on distributed networks. These concerns have prompted recording companies to pursue not only companies involved in file-sharing but also individuals who have file-shared copyrighted works.

CASE EXAMPLE 7.9 Maverick Recording Company and other recording companies sued Whitney Harper in federal court for copyright infringement. Harper had used a file-sharing program to download a number of copyrighted songs from the Internet and had then shared the audio files with others via a P2P network. The plaintiffs sought $750 per infringed work— the minimum amount of statutory damages available under the Copyright Act.

Harper claimed that she was an “innocent” infringer because she was unaware that her actions constituted copyright infringement. Under the act, innocent infringement can result in a reduced penalty. The court, however, noted that a copyright notice appeared on all the songs that Harper had downloaded. She therefore could not assert the innocent infringer defense, and the court ordered her to pay damages of $750 per infringed work.11 n

DVDs and File-Sharing File-sharing also creates problems for the motion picture industry, which loses significant amounts of revenue annually as a result of pirated DVDs. Numerous Web sites offer software that facilitates the illegal copying of movies. An example is BitTorrent, which enables users to download high-quality files from the Internet.

CASE EXAMPLE 7.10 TorrentSpy, a popular BitTorrent indexing Web site, enabled users to locate and exchange files. The Motion Picture Association of America (MPAA) and Colum- bia Pictures, Inc., brought a lawsuit against the operators of TorrentSpy for facilitating copy- right infringement. The MPAA also claimed that the operators had destroyed evidence that would reveal the identity of individual infringers. The operators had ignored a court order to keep server logs of the Internet addresses of people who had facilitated the trading of files via the site. Because TorrentSpy’s operators had willfully destroyed evidence, a fed- eral court found in favor of the MPAA and ordered the defendants to pay a judgment of $111  million.12 n

10. A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004 (9th Cir. 2001); and Metro-Goldwyn-Mayer Studios, Inc. v Grokster, Ltd., 545 U.S. 913, 125 S.Ct. 2764, 162 L.Ed.2d 781 (2005). Grokster, Ltd., later settled this dispute out of court and stopped distributing its software.

11. Maverick Recording Co. v. Harper, 598 F.3d 193 (5th Cir. 2010). 12. Columbia Pictures, Inc., v. Bunnell, 2007 WL 4877701 (C.D.Cal. 2007).

As more individuals and companies store their data on “the cloud,” what security issues might arise?

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7–3 Social Media Social media provide a means by which people can create, share, and exchange ideas and comments via the Internet. Social networking sites, such as Facebook, Google+, MySpace, LinkedIn, Pinterest, and Tumblr, have become ubiquitous. Studies show that Internet users spend more time on social networks than at any other sites. The amount of time people spend accessing social networks on their smartphones and other mobile devices has increased every year (by nearly 30 percent in 2015 alone).

EXAMPLE 7.11 Facebook, which was launched in 2004, had more than 1.3 billion active users by 2016. Individuals of all ages use Facebook to maintain social contacts, update friends on events, and distribute images to others. Facebook members often share common interests based on their school, location, or recreational affiliation, such as a sports team. n

7–3a Uses in the Legal Process The emergence of Facebook and other social networking sites has affected the legal process in various ways. Here, we explain some uses of social media posts in the litigation process, as well as in the investigations that precede prosecutions or other actions. We also discuss what can happen when employees violate their employers’ social media policies.

Impact on Litigation Social media posts now are routinely included in discovery in litiga- tion. Such posts can provide damaging information that establishes a person’s intent or what she or he knew at a particular time. Like e-mail, posts on social networks can be the smoking gun that leads to liability.

In some cases, social media posts have been used to reduce damages awards. EXAMPLE 7.12 Omeisha Daniels sued for injuries she sustained in a car accident. She claimed that her injuries made it impossible for her to continue working as a hairstylist. The jury originally awarded her $237,000, but when the jurors saw Daniels’s tweets and photographs of her partying in New Orleans and vacationing on the beach, they reduced the damages to $142,000. n

Impact on Settlement Agreements Social media posts have been used to invalidate settle- ment agreements that contained confidentiality clauses. CASE EXAMPLE 7.13 Patrick Snay was the headmaster of Gulliver Preparatory School in Florida. When Gulliver did not renew Snay’s employment contract for 2010–2011, Snay sued the school for age discrimination. During mediation, Snay agreed to settle the case for $80,000 and signed a confidentiality clause that required his wife and he not to disclose the “terms and existence” of the agreement. Neverthe- less, Snay and his wife told their daughter, Dana, that the dispute had been settled and that they were happy with the results.

Dana, a college student, had recently graduated from Gulliver and, according to Snay, had suffered retaliation at the school. Dana posted a Facebook comment that said, “Mama and Papa Snay won the case against Gulliver. Gulliver is now officially paying for my vacation to Europe this summer. SUCK IT.” The comment went out to 1,200 of Dana’s Facebook friends, many of whom were Gulliver students, and school officials soon learned of it. The school immediately notified Snay that he had breached the confidentiality clause and refused to pay the settlement amount. Ultimately, a state intermediate appellate court agreed and held that Snay could not enforce the settlement agreement.13 n

Criminal Investigations Law enforcement uses social media to detect and prosecute criminals. A surprising number of criminals boast about their illegal activities on social media. EXAMPLE 7.13 A nineteen-year-old posts a message on Facebook bragging about how

13. Gulliver Schools, Inc. v. Snay, 137 So.3d 1045 (Fla.App. 2014).

Social Media Forms of communication through which users create and share information, ideas, messages, and other content via the Internet.

“Twitter is just a multiplayer notepad.”

Ben Maddox (Global technology officer at New York University)

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drunk he was on New Year’s Eve and apologizing to the owner of the parked car that he hit. The next day, police officers arrest him for drunk driving and leaving the scene of an acci- dent. n Police may also use social media to help them to locate a particular suspect or to determine the identity of other suspects within a criminal network.

Should police be able to use fake identities on Facebook? As part of Operation Crew Cut, New York Police Department (NYPD) officers routinely pretend to be young women in order to “friend” suspects on Facebook. Using these false identities, officers are able to bypass the social media site’s privacy settings and gain valuable information about illegal activities. This practice is hardly limited to the NYPD. Hundreds of federal, state, and local law enforcement agencies encourage their agents to go undercover in this manner, raising not only legal questions but also ethical questions about respect for users’ online privacy—or lack thereof.

Certainly, all major police departments have a long tradition of using deceptive practices that are legal. For example, officers often assume false identities to go undercover. But Face- book’s statements of rights and responsibilities, or “community standards,” include a provision that claiming to be another person violates Facebook terms. Facebook asks users, including law enforcement officials, to use their authentic identities. Facebook’s chief security officer, Joe Sul- livan, has argued that police officers’ creation of fake Facebook identities threatens Facebook’s trust-based social ecosystem. Nevertheless, according to at least one court, it is legally accept- able for law enforcement officers to set up a phony social media account to catch a suspect.14

Administrative Agencies Federal regulators also use social media posts in their investiga- tions into illegal activities. EXAMPLE 7.14 Reed Hastings, the top executive of Netflix, stated on Facebook that Netflix subscribers had watched a billion hours of video the previous month. As a result, Netflix’s stock price rose, which prompted a federal agency investigation. Under securities laws, such a statement is considered to be material information to investors. Thus, it must be disclosed to all investors, not just a select group, such as those who had access to Hastings’s Facebook post.

The agency ultimately concluded that it could not hold Hastings responsible for any wrong- doing because the agency’s policy on social media use was not clear. The agency then issued new guidelines that allow companies to disclose material information through social media if investors have been notified in advance. n

An administrative law judge can base his or her decision on the content of social media posts. CASE EXAMPLE 7.15 Jennifer O’Brien was a tenured teacher at a public school in New Jersey when she posted two messages on her Facebook page. “I’m not a teacher—I’m a warden for future criminals!” and “They had a scared straight program in school—why couldn’t I bring first graders?” Not surprisingly, outraged parents protested. The deputy superintendent of schools filed a complaint against O’Brien with the state’s commissioner of education, charging her with conduct unbecoming a teacher.

After a hearing, an administrative law judge (ALJ) ordered that O’Brien be removed from her teaching position. O’Brien appealed to a state court, claiming that her Facebook postings were protected by the First Amendment and could not be used by the school district to discipline or discharge her. The court found that O’Brien had failed to establish that her Facebook postings were protected speech and that the seriousness of O’Brien’s conduct warranted removal from her position.15 n

Employers’ Social Media Policies Many large corporations have established specific guide- lines on using social media in the workplace. Employees who use social media in a way that violates their employer’s stated policies may be disciplined or fired from their jobs. Courts and

14. U.S. v. Gatson, ___ F.Supp.2d ___, 2014 WL 7182275 (D.N.J. 2014). 15. In re O’Brien, 2013 WL 132508.

Can a public school teacher be fired for making derogatory comments about students on Facebook?

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administrative agencies usually uphold an employer’s right to terminate a person based on his or her violation of a social media policy.

CASE EXAMPLE 7.16 Virginia Rodriquez worked for Wal-Mart Stores, Inc., for almost twenty years and had been promoted to management. Then she was dis- ciplined for violating the company’s policies by having a fellow employee use Rodriquez’s password to alter the price of an item that she purchased. Under Wal- Mart’s rules, another violation within a year would mean termination.

Nine months later, on Facebook, Rodriquez publicly chastised employees under her supervision for calling in sick to go to a party. The posting violated Wal-Mart’s “Social Media Policy,” which was “to avoid public comment that adversely affects employees.” Wal-Mart terminated Rodriquez. She filed a lawsuit, alleging discrimination, but the court issued a summary judgment in Wal-Mart’s favor.16 n Note, though, that some employees’ posts on social media may be pro- tected under labor law.

7–3b The Electronic Communications Privacy Act The Electronic Communications Privacy Act (ECPA)17 amended federal wiretapping law to cover electronic forms of communications. Although Congress enacted the ECPA many years before social media networks existed, it nevertheless applies to communications through social media.

The ECPA prohibits the intentional interception of any wire, oral, or electronic communi- cation. It also prohibits the intentional disclosure or use of the information obtained by the interception.

Exclusions Excluded from the ECPA’s coverage are any electronic communications through devices that an employer provides for its employee to use “in the ordinary course of its busi- ness.” Consequently, if a company provides the electronic device (cell phone, laptop, tablet) to the employee for ordinary business use, the company is not prohibited from intercepting busi- ness communications made on it. This “business-extension exception” to the ECPA permits employers to monitor employees’ electronic communications made in the ordinary course of business. It does not permit employers to monitor employees’ personal communications. Another exception allows an employer to avoid liability under the act if the employees consent to having the employer monitor their electronic communications.

Stored Communications Part of the ECPA is known as the Stored Communications Act (SCA).18 The SCA prohibits intentional and unauthorized access to stored electronic commu- nications and sets forth criminal and civil sanctions for violators. A person can violate the SCA by intentionally accessing a stored electronic communication. The SCA also prevents “provid- ers” of communication services (such as cell phone companies and social media networks) from divulging private communications to certain entities and individuals.

CASE EXAMPLE 7.17 Two restaurant employees, Brian Pietrylo and Doreen Marino, were fired after their manager uncovered their password-protected MySpace group. The group’s communications, stored on MySpace’s Web site, contained sexual remarks about custom- ers and management, as well as comments about illegal drug use and violent behavior. One employee said the group’s purpose was to “vent about any BS we deal with out of work with- out any outside eyes spying on us.”

16. Rodriquez v. Wal-Mart Stores, Inc., 2013 WL 102674 (N.D.Tex. 2013). 17. 18 U.S.C. Sections 2510–2521. 18. 18 U.S.C. Sections 2701–2711.

LEARNING OBJECTIVE 3 When does the law protect a person’s electronic communications from being intercepted or accessed?

If a Wal-Mart employee posts a comment on Facebook that casts other employees in a negative light, can that employee be fired?

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The restaurant learned about the private MySpace group when a hostess showed it to a manager who requested access. The hostess was not explicitly threatened with termination but feared she would lose her job if she did not comply.

After they were fired, Pietrylo and Marino filed a lawsuit against the restau- rant, claiming that their former employer had gained unauthorized access to their MySpace group communications in violation of the SCA. The court allowed the employees’ claim, and the jury awarded them $17,003 in compensatory and puni- tive damages.19 n

7–3c Protection of Social Media Passwords In recent years, employees and applicants for jobs or colleges have sometimes been asked to divulge their social media passwords. Employers and schools have some- times looked at an individual’s Facebook or other account to see if it included controversial postings such as racially discriminatory remarks or photos of drug parties. Such postings can have a negative effect on a person’s prospects even if they were made years earlier or are taken out of context.

By 2016, about half of the states had enacted legislation to protect individuals from having to disclose their social media passwords. These laws vary. Some states,

such as Michigan, prohibit employers from taking adverse action against an employee or job applicant based on what the person has posted online. Michigan’s law also applies to e-mail and cloud storage accounts. The federal government is considering legislation that would pro- hibit employers and schools from demanding passwords to social media accounts.

Legislation will not completely prevent employers and others from taking actions against employees or applicants based on their social network postings, however. For example, man- agement and human resources personnel are unlikely to admit that they based a hiring deci- sion on what they saw on someone’s Facebook page. They may not even have to admit to looking at the Facebook page if they use private browsing, which enables people to keep their Web browsing activities confidential. How, then, would a rejected job applicant prove that he or she was rejected because the employer accessed social media postings?

7–3d Company-wide Social Media Networks Many companies, including Dell, Inc., and Nikon Instruments, form their own internal social media networks. Software companies offer a variety of systems, including Salesforce.com’s Chatter, Microsoft’s Yammer, and Cisco Systems’ WebEx Social. Posts on these internal net- works, or intranets, are quite different from the typical posts on Facebook, LinkedIn, and Twitter. Employees use them to exchange messages about topics related to their work, such as deals that are closing, new products, production flaws, how a team is solving a problem, and the details of customer orders. Thus, the tone is businesslike.

An important advantage to using an internal system for employee communications is that the company can better protect its trade secrets. The company usually decides which employ- ees can see particular intranet files and which employees will belong to each “social group” within the company. Generally, the company will keep the data in its system on its own secure server.

Internal social media systems also offer additional benefits. They provide real-time infor- mation about important issues, such as production glitches, along with information about products, customers, and competitors. Another major benefit is a significant reduction in e-mail. Rather than wasting fellow employees’ time on mass e-mailings, workers can post messages or collaborate on presentations via the company’s social network.

19. Pietrylo v. Hillstone Restaurant Group, 2009 WL 3128420 (D.N.J. 2009).

“My favorite thing about the Internet is that you get to go into the private world of real creeps without having to smell them.”

Penn Jillette 1955–present (American illusionist, comedian, and author)

Suppose that two employees use a private MySpace account to share sometimes offensive remarks about customers. If their employer, without their permission, gains access to that account, can that employer retaliate against the employees for their social media behavior?

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7–4 Online Defamation Cyber torts are torts that arise from online conduct. One of the most prevalent cyber torts is online defamation. Recall that defamation is wrongfully hurting a person’s reputation by com- municating false statements about that person to others. Because the Internet enables individ- uals to communicate with large numbers of people simultaneously (via a blog or tweet, for instance), online defamation is a common problem in today’s legal environment.

EXAMPLE 7.18 Singer-songwriter Courtney Love was sued for defamation based on remarks she posted about fashion designer Dawn Simorangkir on Twitter. Love claimed that her state- ments were opinion (rather than statements of fact, as required) and therefore were not actionable as defamation. Nevertheless, Love ended up paying $430,000 to settle the case out of court. n

7–4a Identifying the Author of Online Defamation An initial issue raised by online defamation is simply discovering who is committing it. In the real world, identifying the author of a defamatory remark generally is an easy matter. Suppose, though, that a business firm has discovered that defamatory statements about its policies and products are being posted in an online forum. Such forums allow anyone—customers, employ- ees, or crackpots—to complain about a firm that they dislike while remaining anonymous.

Therefore, a threshold barrier to anyone who seeks to bring an action for online defamation is discovering the identity of the person who posted the defamatory message. An Internet ser- vice provider (ISP) can disclose personal information about its customers only when ordered to do so by a court. Consequently, businesses and individuals are increasingly bringing law- suits against “John Does” (John Doe, Jane Doe, and the like are fictitious names used in law- suits when the identity of a party is not known or when a party wishes to conceal his or her name for privacy reasons). Then, using the authority of the courts, the plaintiffs can obtain from the ISPs the identity of the persons responsible for the defamatory messages.

Does requiring an ISP to reveal the identities of its anonymous users violate those users’ rights under the First Amendment? That was the question before the court in the case that follows.

Cyber Tort A tort committed via the Internet.

“In cyberspace, the First Amendment is a local ordinance.”

John Perry Barlow 1947–present (American poet and essayist)

FACTS Yelp, Inc., operates a social networking Web site that allows users to post and read reviews on local businesses. The site, which has more than 100 million visitors per month, features about 40 million local reviews. Yelp records and stores the Internet protocol address from which each posting is made.

Seven Yelp users posted negative reviews of Hadeed Carpet Cleaning, Inc., of Alexandria, Vir- ginia. Hadeed brought an action in a Virginia state court against the anonymous posters, claiming def- amation. Hadeed alleged that the reviewers were not actual customers. Their statements that Hadeed had provided them with shoddy service were there- fore false and defamatory. When Yelp failed to com- ply with a subpoena seeking the users’ identities,

the court held the site in contempt. Yelp appealed, arguing that the subpoena violated the users’ First Amendment rights.

ISSUE Did requiring Yelp to reveal the identities of some anonymous users who had posted potentially defamatory statements violate those users’ First Amendment rights?

DECISION No. A state intermediate appellate court affirmed the lower court’s ruling. “The judgment of the [lower] court does not constitute a forbidden intrusion on the field of free expression.”

REASON Under the First Amendment, “Congress shall make no law . . . abridging the freedom of speech.”

Can a business that receives poor reviews on Yelp force Yelp to disclose the reviewers’ identities in a lawsuit for online

defamation?

Case 7.2

Yelp, Inc. v. Hadeed Carpet Cleaning, Inc. Court of Appeals of Virginia, 62 Va.App. 678, 752 S.E.2d 554 (2014).

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In cyberspace, it is relatively common for disgruntled employees, competitors, and others to post negative comments online about business firms. Cyber slurs can obvi- ously damage a firm’s reputation and profitability. One way for business owners to deal with online defamation without resorting to costly (and sometimes unsuccessful) litigation is to retain an online reputation management service. Some of these services use automated soft- ware to identify negative comments and attempt to get them removed. Owners can often pay a monthly monitoring fee without entering a long-term contract.

7–4b Liability of Internet Service Providers Recall from the discussion of defamation in Chapter 4 that normally those who repeat or oth- erwise republish a defamatory statement are subject to liability. Thus, newspapers, magazines, and television and radio stations are subject to liability for defamatory content that they pub- lish or broadcast, even though the content was prepared or created by others. Applying this rule to cyberspace, however, raises an important issue: Should ISPs be regarded as publishers and therefore be held liable for defamatory messages that are posted by their users in online forums or other arenas?

General Rule The Communications Decency Act (CDA) states that “[n]o provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.”20 Thus, under the CDA, ISPs usually are treated differently from publishers in print and other media and are not liable for publishing defamatory statements that come from a third party.

Exceptions Although the courts generally have construed the CDA as providing a broad shield to protect ISPs from liability for third party content, some courts have started estab- lishing limits to this immunity. CASE EXAMPLE 7.19 Roommate.com, LLC, operates an online roommate-matching Web site that helps individuals find roommates based on their descrip- tions of themselves and their roommate preferences. Users respond to a series of online ques- tions, choosing from answers in drop-down and select-a-box menus. Some of the questions asked users to disclose their sex, family status, and sexual orientation—which is not permitted under the federal Fair Housing Act.

When a nonprofit housing organization sued Roommate.com, the company claimed it was immune from liability under the CDA. A federal appellate court disagreed and ordered Room- mate.com to pay nearly $500,000. By creating the Web site and the questionnaire and answer

20. 47 U.S.C. Section 230.

LEARNING OBJECTIVE 4 What law governs whether Internet service providers are liable for online defamatory statements made by users?

Internet users do not lose this right “at the log-in screen.” Thus, the defendants had a constitutional right to speak—or post— anonymously over the Internet. But their right must be balanced against Hadeed’s right to protect its reputation. The First Amend- ment protects a user’s opinion about a business if the user was a customer of the business and the post was based on personal experi- ence. If the user never patronized the business, however, the post is a false statement of fact. “And there is no constitutional value in false statements of fact.”

Here, Hadeed was unable to match the anonymous defendants’ reviews with the actual customers in its database. Hadeed asked Yelp to identify the defendants, but the site refused. Thus, a subpoena became necessary. “Without the identity of the . . . defendants, Hadeed cannot move forward with its defamation lawsuit. There is no other option.”

CRITICAL THINKING—Ethical Consideration Why would some- one post a negative review of a business that he or she had never patron- ized? Discuss the ethics of this practice.

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choices, Roommate.com prompted users to express discriminatory preferences and matched users based on these preferences in violation of federal law.21 n

7–5 Privacy In recent years, Facebook, Google, and Yahoo have all been accused of violating users’ privacy rights. The right to privacy is guaranteed by the Bill of Rights and some state constitutions. (See this chapter’s Beyond Our Borders feature for a discussion of how the European Union now recognizes a “right to be forgotten.”) To maintain a suit for the invasion of privacy, though, a person must have a reasonable expectation of privacy in the particular situation.

7–5a Reasonable Expectation of Privacy People clearly have a reasonable expectation of privacy when they enter their personal bank- ing or credit-card information online. They also have a reasonable expectation that online companies will follow their own privacy policies. But it is probably not reasonable to expect privacy in statements made on Twitter—or photos posted on Twitter, Flickr, or Instagram, for that matter.

21. Fair Housing Council of San Fernando Valley v. Roommate.com, LLC, 666 F.3d 1216 (9th Cir. 2012).

“Science fiction does not remain fiction for long. And certainly not on the Internet.”

Vinton Cerf 1943–present (American Internet pioneer, comedian, and author)

As the saying goes, the Internet never forgets. If fifteen years ago you had some financial problems and had to sell your house at auction, that information about you remains available forever. A Spanish lawyer, Mario Costeja Gonzàlez, found himself in just that situation. If anyone Googled his name, they discovered that his house had gone into foreclosure when he was a younger man.

Taking Google to Court Costeja Gonzàlez requested that Google’s search engine no longer access those old court records. Google refused. The case ultimately ended up in the European Union Court of Justice. Google lost.a The company had to remove the links to publicly available

information that Costeja Gonzàlez con- sidered damaging and an invasion of his privacy.

What “The Right to Be Forgotten” Means The new “right to be forgotten” in the Euro- pean Union allows individuals to petition Google to remove search result links that are personal in nature and that have become “outdated” or “irrelevant.” Does that mean that anyone in Europe can ask that links to old information be removed? Not really. Right now, a European wishing to remove a link to older personal data needs a lawyer to make the request. Moreover, the original “offensive” documents are not removed— only the Google search link to those doc- uments. According to Viviane Reading, vice-president of the European Commission, “It is clear that the right to be forgotten can- not amount to a right of the total erasure of history.”

Can the Ruling Be Applied Outside Europe? As it stands, the Court of Justice’s ruling applies only within the twenty-eight coun- tries of the European Union. Nonetheless, in 2015, the head of the French Data Pro- tection Authority, Isabel Falque-Pierrotin, began campaigning to expand the ruling. She argued that if an individual has the right to be delisted from search results, such delist- ing should happen worldwide.

In 2015, an advisory group sponsored by Google issued a report recommending that the right to be forgotten be limited just to the European Union. According to that report, the same legal framework used in Europe would not work in the U.S. because of the First Amendment.

CRITICAL THINKING

▪▪ How could the “right to be forgotten” affect free speech?

“The Right to Be Forgotten” in the European Union

BEyoND ouR BoRDERs

a. SL, Google Inc. v. Agencia Española de Protección de Datos, Mario Costeja Gonzalez, Court of Justice for the European Union (Grand Chamber), Case C-131/12, May 13, 2014.

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EXAMPLE 7.20 In 2014, Boston Red Sox player David Ortiz used his cell phone to take a “selfie” showing him standing with President Barack Obama. Ortiz tweeted the photo to his followers, who then resent it tens of thousands of times. Eventually, Samsung used the picture in an ad on Twitter (because Ortiz had taken it with a Samsung phone), which prompted an objection from the White House. n

Sometimes, people mistakenly believe that they are making statements or posting photos in a private forum. EXAMPLE 7.21 Randi Zuckerberg, the older sister of Mark Zuckerberg (the founder of Facebook), used a mobile app called Poke to post a photo on Facebook of their family gathering during the holidays. Poke allows the sender to decide how long the photo can be seen by others. Facebook allows users to configure their privacy settings to limit access to photos, which Randi thought she had done. Nonetheless, the photo showed up in the Face- book feed of Callie Schweitzer, who then put it on Twitter, where it eventually “went viral.” Schweitzer apologized and removed the photo, but it had already gone public for the world to see. n

In the following case, the court considered whether a Facebook user’s expectation of pri- vacy in photos that she posted on the site was reasonable.

FACTS Maria Nucci filed a suit in a Florida state court against Target Corporation, alleging that she suffered an injury when she slipped and fell on a “foreign substance” on the floor of a Target store. Target filed a motion to compel an inspection of Nucci’s Facebook profile, which included 1,249 pho- tos. Target argued that it was entitled to view the profile because Nucci’s lawsuit put her physical and mental condition at issue. Nucci responded that her Facebook page’s privacy setting prevented the general public from having access to it. She claimed that she had a reasonable expectation of privacy in the profile and that Target’s access would invade that privacy right. The court issued an order to compel discovery of certain photos, including some on Nucci’s Facebook page, that were relevant to her physical and mental condition before and following the alleged injury. Nucci peti- tioned a state intermediate appellate court for relief from the order.

ISSUE Did the relevance of the photos on Nucci’s Facebook page to her claim outweigh her expectation of privacy?

DECISION Yes. The state intermediate appellate court denied Nuc- ci’s petition for relief from the order to compel discovery of her photos. The court concluded that “the photographs sought were rea- sonably calculated to lead to the discovery of admissible evidence and Nucci’s privacy interest in them was minimal.”

REASON In a personal injury case, the plaintiff’s quality of life is subject to examination before and after the event that gave rise to the claim to determine the extent of the alleged loss. The best portrayal of a person’s life is in the photos that the person shares through social media. The Florida constitution protects a person’s right to privacy, but this protection requires that the person first must have a legitimate expectation of privacy. Generally, the photos posted on a social network- ing site such as Facebook are not protected by a right of privacy, regardless of the user’s privacy

settings. Facebook itself does not guarantee privacy. In creating a Facebook account, a user is made aware that her personal informa- tion will be shared with others. “Indeed, that is the very nature and purpose of these social networking sites else they would cease to exist.” Thus, an expectation that photos posted on the site will be private would not be reasonable.

WHAT IF THE FACTS WERE DIFFERENT? Suppose that Target had asked for a much broader range of Facebook material that concerned not just Nucci’s physical and mental condition at the time of her alleged injury but her personal relationships with her family, romantic part- ners, and other significant others. Would the result have been the same? Discuss.

In a “slip-and-fall” case, can the defendant show example

photos from the plaintiff’s Facebook account?

Case 7.3

Nucci v. Target Corp. District Court of Appeal of Florida, Fourth District, 162 So.3d 146 (2015).

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7–5b Data Collection and Cookies Whenever a consumer purchases items online from a retailer, the retailer collects information about the consumer. Cookies are invisible files that computers, smartphones, and other mobile devices create to track a user’s Web browsing activities. Cookies provide detailed infor- mation to marketers about an individual’s behavior and preferences, which is then used to personalize online services.

Over time, a retailer can amass considerable data about a person’s shopping habits. Does collecting this information violate the person’s right to privacy? Should retailers be able to pass on the data they have collected to their affiliates? Should they be able to use the information to predict what a consumer might want and then create online “coupons” customized to fit the person’s buying history?

EXAMPLE 7.22 Facebook, Inc., recently settled a lawsuit over its use of a targeted advertis- ing technique called “Sponsored Stories.” An ad would display a Facebook friend’s name and profile picture, along with a statement that the friend “likes” the company sponsoring the advertisement. A group of plaintiffs filed suit, claiming that Facebook had used their pictures for advertising without their permission. When a federal court refused to dismiss the case, Facebook agreed to settle. n

7–5c Internet Companies’ Privacy Policies The Federal Trade Commission (FTC) investigates consumer complaints of privacy violations. The FTC has forced many companies, including Google, Facebook, Twitter, and MySpace, to enter an agreement consenting to give the FTC broad power to review their privacy and data practices. It can then sue companies that violate the terms of the decree.

EXAMPLE 7.23 In 2012, Google settled a suit brought by the FTC alleging that it had mis- represented its use of tracking cookies to users of Apple’s Safari Internet browser. Google allegedly had used cookies to trick the Safari browser on Macs, iPhones, and iPads so that Google could monitor users who believed they had blocked such tracking. This violated the consent decree with the FTC. Google agreed to pay $22.5 million to settle the suit without admitting liability. n

Facebook has faced a number of complaints about its privacy policy and has changed its policy several times to satisfy its critics and ward off potential government investigations. Other companies, including mobile app developers, have also changed their privacy policies to provide more information to consumers. Consequently, it is frequently companies, rather than courts or legislatures, that define the privacy rights of their online users.

7–5d Protecting Consumer Privacy To protect consumers’ personal information, the Obama administration has proposed a con- sumer privacy bill of rights (see Exhibit 7–1). The goal is to ensure that personal information is safe online.

If this proposed privacy bill of rights becomes law, retailers will have to change some of their procedures. They will have to give customers better choices about what data are collected and how the data are used for marketing. They may also have to take into account consumers’ expectations about how their information will be used once it is collected.

Cookie A small file sent from a Web site and stored in a user’s Web browser to track the user’s Web browsing activities.

LEARNING OBJECTIVE 5 How do online retailers track their users’ Web browsing activities?

Why did Facebook eliminate its advertising program called “Sponsored Stories”?

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Reviewing . . . Internet Law, Social Media, and Privacy While he was in high school, Joel Gibb downloaded numerous songs to his smartphone from an unli- censed file-sharing service. He used portions of the copyrighted songs when he recorded his own band and posted videos on YouTube and Facebook. He also used BitTorrent to download several movies from the Internet. Now Gibb has applied to Boston University. The admissions office has requested access to his Facebook password, and he has complied. Using the information presented in the chapter, answer the following questions.

1. What laws, if any, did Gibb violate by downloading the music and videos from the Internet?

2. Was Gibb’s use of portions of copyrighted songs in his own music illegal? Explain.

3. Can individuals legally post copyrighted content on their Facebook pages? Why or why not?

4. Did Boston University violate any laws when it asked Joel to provide his Facebook password? Explain.

DEBATE THIS

▪▪ Internet service providers should be subject to the same defamation laws as newspapers, magazines, and television and radio stations.

cloud computing 169 cookie 179 cybersquatting 164 cyber tort 175

distributed network 169 domain name 164 goodwill 164 Internet service provider (ISP) 164

peer-to-peer (P2P) networking 168 social media 171 spam 163 typosquatting 165

Key Terms

Exhibit 7–1 Proposed Consumer Privacy Bill of Rights

1. Individual Control—Consumers have a right to exercise control over what personal data organizations collect from them and how they use it.

2. Transparency—Consumers have the right to easily understandable information about privacy and security practices.

3. Respect for Context—Consumers have a right to expect that organizations will collect, use, and disclose personal data in ways that are consis- tent with the context in which consumers provide the data.

4. Security—Consumers have the right to secure and responsible handling of personal data.

5. Access and Accuracy—Consumers have a right to access and correct personal data in usable formats, in a manner that is appropriate to the sensitivity of the data and the risk of adverse consequences to consumers if the data are inaccurate.

6. Focus Collection—Consumers have a right to reasonable limits on the personal data that companies collect and retain.

7. Accountability—Consumers have a right to have personal data handled by companies with appropriate measures in place to assure that they adhere to the Consumer Privacy Bill of Rights.

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Chapter Summary: Internet Law, Social Media, and Privacy Internet Law

1. Spam—Unsolicited junk e-mail accounts for about three-quarters of all e-mails. Laws to combat spam have been enacted by thirty-seven states and the federal government, but the flow of spam continues. a. The Controlling the Assault of Non-Solicited Pornography and Marketing (CAN-SPAM) Act prohibits false and deceptive

e-mails originating in the United States. b. The U.S. Safe Web Act allows U.S. authorities to cooperate and share information with foreign agencies in investigating and

prosecuting those involved in spamming, spyware, and various Internet frauds and deceptions. The act includes a safe harbor for Internet service providers.

2. Domain names—Trademark owners often use their mark as part of a domain name (Internet address). The Internet Corporation for Assigned Names and Numbers (ICANN) oversees the distribution of domain names. ICANN recently expanded the available domain names to include new generic top-level domain names (gTLDs).

3. Cybersquatting—Disputes arise when a person registers a domain name that is the same as, or confusingly similar to, the trade- mark of another and then offers to sell the domain name back to the trademark owner. This is known as cybersquatting, and it is illegal if the one registering, trafficking in, or using the domain name has a “bad faith intent” to profit from that mark. Anticyber- squatting legislation is aimed at combatting the problem, but it has had only limited success.

4. Meta tags—Search engines compile their results by looking through a Web site’s meta tags, or key words. Using another’s trade- mark in a meta tag without the owner’s permission normally constitutes trademark infringement.

5. Trademark dilution—When a trademark is used online, without authorization, in a way that diminishes the distinctive quality of the mark, it constitutes trademark dilution. Unlike infringement actions, trademark dilution claims do not require proof that consumers are likely to be confused by a connection between the unauthorized use and the mark.

6. Licensing—Many companies choose to permit others to use their trademarks and other intellectual property online under a license. The purchase of software generally involves a license agreement. Licensing agreements frequently include restrictions that prohibit licensees from sharing the file and using it to create similar software applications.

Copyrights in Digital Information

1. Copyrighted works online—Much of the material on the Internet (including software and database information) is copyrighted. In order for that material to be transferred online, it must be “copied.” Generally, whenever a party downloads software or music without authorization, a copyright is infringed.

2. Digital Millennium Copyright Act—To protect copyrights in digital information, Congress passed the Digital Millennium Copyright Act (DMCA). The DMCA establishes civil and criminal penalties for anyone who bypasses encryption software or other antipiracy technologies, but provides exceptions for certain educational and nonprofit uses. It also limits the liability of Internet service pro- viders for infringement unless the ISP is aware of the user’s infringement and fails to take action.

3. File-sharing—When file-sharing is used to download others’ stored music files or illegally copy movies, copyright issues arise. Indi- viduals who download the music or movies in violation of copyright laws are liable for infringement. Companies that distribute file-sharing software or provide such services have been held liable for the copyright infringement of their users if the software or technology involved promoted copyright infringement.

Social Media

1. Uses in the legal process—The emergence of Facebook and other social networking sites has had a number of effects on the legal process. Law enforcement and administrative agencies now routinely use social media to detect illegal activities and conduct investigations, as do many businesses.

2. The Electronic Communications Privacy Act (ECPA)—The ECPA prohibits the intentional interception or disclosure of any wire, oral, or electronic communication. a. The ECPA includes a “business-extension exception” that permits employers to monitor employees’ electronic communications

made in the ordinary course of business (but not personal communications). b. The Stored Communications Act is part of the ECPA and prohibits intentional unauthorized access to stored electronic commu-

nications (such as backup data stored by an employer). 3. Social media passwords—Private employers and schools have sometimes looked at an individual’s Facebook or other social media

account to see if it included controversial postings. A number of states have enacted legislation that protects individuals from having to divulge their social media passwords. Such laws may not be completely effective in preventing employers from reject- ing applicants or terminating workers based on their social media postings.

4. Company-wide social media networks—Many companies today form their own internal social media networks through which employees can exchange messages about topics related to their work.

Online Defamation

Federal and state statutes apply to certain forms of cyber torts, or torts that occur in cyberspace, such as online defamation. Under the federal Communications Decency Act (CDA), Internet service providers generally are not liable for defamatory messages posted by their subscribers.

Privacy 1. Expectation of privacy—Numerous Internet companies have been accused of violating users’ privacy rights. To sue for invasion of privacy, though, a person must have a reasonable expectation of privacy in the particular situation. It is often difficult to deter- mine how much privacy can reasonably be expected on the Internet.

2. Data collection and cookies—Whenever a consumer purchases items online from a retailer, the retailer collects information about the consumer through “cookies.” Consequently, retailers have gathered large amounts of data about individuals’ shopping habits. It is not always clear whether collecting such information violates a person’s right to privacy.

3. Internet companies’ privacy policies—Many companies establish Internet privacy policies, which typically inform users what types of data they are gathering and for what purposes it will be used.

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