Introduction To Law PDF

**INTRODUCTION TO LAW** **LO 1-1** Understand the broad definition and origins of law. The term [**[law]**](javascript:void(0)) has been defined in a variety of ways throughout recorded history. A generally accepted generic definition of the law is a *body of rules of action or conduct prescribed...

**INTRODUCTION TO LAW** **LO 1-1** Understand the broad definition and origins of law. The term [**[law]**](javascript:void(0)) has been defined in a variety of ways throughout recorded history. A generally accepted generic definition of the law is a *body of rules of action or conduct prescribed by controlling authority, and having legal binding force.*[^^](javascript:void(0)) When studying law in any context, it is important to think of the law in broad terms. While many equate the law with stacks of neatly bound volumes of codes in a library, this is only one component of a much larger body of law. Law may be set down in a written code as prescribed by an elected legislative body, but it also takes the form of judicial decisions and actions of government agencies. While there are many sources of American law, the common characteristic of the current state of law is that it creates *duties,* *obligations,* and *rights* that reflect accepted views of a given society. Much of the origins of the law dealt with issues related to ownership of property; however, modern legal doctrines have evolved into a relatively complex system of principles and protections. Most importantly, the law also provides a mechanism to resolve disputes arising from those duties and rights and allows parties to enforce promises in a court of law. Law is often classified by subject matter so that one refers to certain rules regarding agreements as *contract law,* while other laws that regulate certain rights of employees are referred to as *employment law*. [**[Jurisprudence]**](javascript:void(0)), roughly defined as the science and philosophy of law, defines several schools of thought that are used to describe various approaches to the appropriate function of law and how legal doctrines should be developed and applied. Most schools of jurisprudential thought center on how legal rights are recognized. **Purposes of Law** **LO 1-2** List and explain the purposes of the law. The most visible function of the law on a day-to-day basis is to provide for some system of order that defines rules of conduct and levies punishment or other consequences for the violation of those rules. However, there are many other purposes of recognizing a uniform system of laws. The origins of recorded law were initially a collection of rules of powerful tribal chieftains intended to perpetuate their domination and the power of their authority with little consideration for the rights of individuals. However, over the better part of three millennia, the purpose of law evolved substantially into ensuring consistency and fairness. In the United States, lawmakers have increasingly embraced legal mechanisms, such as antidiscrimination laws, to help promote equality and justice in society, in education, as well as in the workplace. The law also sets out a method for resolving disputes by providing a basis for deciding the legal interests and rights of the parties. For purposes of studying the impact of law on business, it is important to recognize that the law also serves as an important catalyst for commerce by promoting *good faith dealing* among merchants and consumers and giving some degree of *reliability* in applying the law evenly so that the law can be considered in business planning and commercial transactions. For example, assume Clothing Manufacturing Corporation (CMC) orders 100 bales of wool from Woolpack, Inc., in anticipation of a large order for winter clothing from retail outlets. The laws that govern the various transactions that arise from the CMC-Woolpack agreement set a standard of good faith and provide both parties the confidence necessary to set the business process in motion (e.g., to begin making decisions related to financing, operations, and marketing). Moreover, the merchants may rely on the courts if either party needs to recoup any losses resulting from the other party's unlawful actions. **Language of the Law** In order to maximize the value of interaction between business owners/managers and attorneys, a basic understanding of legal terminology is useful. Students studying business law face the task of learning legal syntax at the same time as they learn how to apply the legal doctrines in a business context. This is analogous to learning a complicated subject matter in a foreign language, yet it is manageable with careful study. Legal terms are sometimes referred to as *jargon* or *legalese,* but having a working knowledge of some common legal terminology is an important step to mastering the material. Although much of the language of the law has Latin roots, the terminology is primarily a combination of Latin, early and modern English, and French. The vocabulary of American law is drawn from the various cultures and events that shaped American history. To facilitate your understanding of legal expression, important legal terms are highlighted throughout the text, summarized at the end of each chapter, and also featured alphabetically in the glossary. The authoritative source for legal terms is [***Black's Law Dictionary***](javascript:void(0)), first published in 1891. There are also several websites that provide definitions and examples for legal terms. ***KEY POINT*** The primary purposes of the law are - To provide a system of order that defines conduct and consequences. - To promote equality and justice in society. - To provide a method for resolving disputes. - To promote good faith dealing among merchants. - To provide a degree of reliability in applying the law evenly. **\ ** **LEGAL DECISIONS IN A BUSINESS ENVIRONMENT: THEORY TO PRACTICE** **LO 1-3** Explain the importance and benefits of legal awareness for business owners and managers in creating a strategy and adding value to a company. While an in-depth understanding of the various areas of law is a vast undertaking requiring years of intensive study, the primary objective of this textbook is to cover a variety of legal topics that are most commonly encountered in the business environment. However, developing legal insight by understanding the fundamentals of legal theory and how they may impact business is only a first step in learning how legal decisions should be made in a business context. The second step involves learning to *apply* legal theories in practice and recognizing that having legal awareness may present opportunities for proactive business planning---empowering business owners and managers to limit liability, gain a competitive edge, and add value to the business. Relying exclusively on attorneys to drive the legal decision-making process in the context of business is expensive and involves the significant risk that a decision will be made without sufficient knowledge of business operations, objectives, and current economic realities. Instead, studies and research indicate that when managers work *cooperatively* with their attorneys, the results contribute to better strategic business decisions that add value to the business. For example, recognizing that having a code of conduct for employees and creating a standardized procedure for hiring new employees are issues that a good manager should view as essential, attorneys regularly play a part in ensuring compliance with applicable federal, state, and local laws. Later in this chapter, we will discuss a mechanism that business owners and managers may use to spot legal issues, apply an appropriate analysis, decide on alternative solutions, and plan a legal and ethical course of action that both limits liability and maximizes business opportunities. ***KEY POINT*** Learning to apply legal theories in practice and having legal awareness present opportunities for proactive business planning, empowering managers to limit liability, gain a competitive edge, and add value to the business. **\ ** **Legal Insight and Business Strategy** **LO 1-4** Articulate the role of counsel in legal decision making in a business context. To understand the way various areas of the law impact business and the importance of having legal insight in a business context, let's examine a typical business planning process. Suppose that the management team at Indiana Printing Company (IPC) is planning to expand its existing business into new markets. The team is considering several options and will have to have a sufficient understanding of the legal risks and business opportunities associated with each option. [[Table 1.1]](clbr://internal.sandbox/book/text/XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX) sets out possible options for IPC's expansion and some of the potential legal impacts for each option. +-----------------------+-----------------------+-----------------------+ | **TABLE 1.1 Expansion | | | | Options and Potential | | | | Legal Impacts** | | | +=======================+=======================+=======================+ | **Option** | **Area of Law** | **Potential Legal | | | | Impact** | +-----------------------+-----------------------+-----------------------+ | *Expansion through | - Contracts | - Contract law | | acquisition of | | governs | | another company.* One | | negotiations and | | common way to expand | | agreements for | | is to purchase an | | the acquisition. | | existing business | | | | entity through an | | | | acquisition of assets | | | | or of stock. | | | +-----------------------+-----------------------+-----------------------+ | | - Property/environ | - If the | | | mental | acquisition | | | | involves any land | | | | purchase, real | | | | estate law (such | | | | as zoning) and | | | | environmental law | | | | must be | | | | considered. | +-----------------------+-----------------------+-----------------------+ | | - Employment and | - The hiring of | | | labor | new employees by | | | | IPC (even former | | | | employees of the | | | | target company) | | | | or the layoff of | | | | IPC or | | | | target-company | | | | employees must be | | | | done in | | | | conformance with | | | | state and federal | | | | employment and | | | | labor laws. | +-----------------------+-----------------------+-----------------------+ | | - Tax | - The transaction | | | | may create tax | | | | liability under | | | | local, state, | | | | and/or federal | | | | laws. | +-----------------------+-----------------------+-----------------------+ | | - Antitrust | - If the | | | | acquisition | | | | results in IPC's | | | | gaining too much | | | | market share, | | | | federal antitrust | | | | laws must be | | | | considered and | | | | preacquisition | | | | approvals may be | | | | needed from the | | | | government. | +-----------------------+-----------------------+-----------------------+ | *Expansion through | - Securities law | - Any solicitation | | introducing and | | by IPC to sell | | aggressively | | shares of its | | marketing a new | | business to the | | product | | public is highly | | line.* Expanding | | regulated by | | through marketing of | | securities law. | | a new product line | | | | generally involves | | | | raising sufficient | | | | capital to properly | | | | develop, manufacture, | | | | and go to market. | | | +-----------------------+-----------------------+-----------------------+ | | - Intellectual | - In order to | | | property | maintain its | | | | competitive edge, | | | | IPC will need to | | | | put measures in | | | | place to help | | | | guarantee | | | | protection of | | | | ideas and | | | | processes by | | | | trade secret law; | | | | the final design | | | | may be protected | | | | by patent law. | +-----------------------+-----------------------+-----------------------+ | | - Administrative | - Federal | | | law | regulatory | | | | agencies have | | | | guidelines for | | | | the advertising | | | | and labeling of | | | | products. | +-----------------------+-----------------------+-----------------------+ | *Expansion through | - Jurisdiction | - Website | | aggressive | | expansion may | | integration of a | | result in IPC's | | highly interactive | | being subject to | | website and | | the jurisdiction | | e-marketing | | of more | | campaigns, including | | out-of-state | | international | | courts than under | | markets.* In light of | | its previous | | the growth in | | business model. | | e-commerce, some | | | | companies find this | | | | to be the most | | | | cost-efficient method | | | | of expansion. | | | +-----------------------+-----------------------+-----------------------+ | | - International | - IPC may be | | | law | subject to | | | | international | | | | agreements and | | | | treaties | | | | regarding sales | | | | and intellectual | | | | property. | +-----------------------+-----------------------+-----------------------+ The list of legal issues in [[Table 1.1]](clbr://internal.sandbox/book/text/XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX) is meant to be illustrative and not exhaustive. Indeed, issues regarding negligence, criminal law, administrative law, bankruptcy, consumer protection, agency, and many others may present themselves before, during, or after the transaction is complete. **Role of Counsel** Although this textbook emphasizes understanding legal issues in the context of business decision making, this is not to suggest that an attorney's role in this process is diminished---quite the opposite. The content, features, and exercises contained in this textbook emphasize that working closely with a business attorney results in business opportunities, reduced costs, and limitation of risk and liability. Attorneys, particularly in a business context, may also be referred to as [**[counsel]**](javascript:void(0)). Business owners and managers work with counsel in one of two formats. For larger companies or companies that have extraordinary regulatory burdens (such as complying with securities or patent laws), counsel may very well be a part of the executive or midlevel management team. These attorneys are referred to as *in-house counsel* and usually have the title "general counsel" at the executive management level (e.g., vice president and general counsel). Depending on the size and complexity of the company, the page 6general counsel may also supervise one or more attorneys, usually with the title "associate counsel." Additionally, the general counsel may also serve as a corporate officer of the company, called the secretary, and be responsible for record keeping and complying with notice and voting requirements for the board of directors.[^^](javascript:void(0)) The general counsel is also responsible for selecting and supervising lawyers from outside law firms when a particular field of expertise is needed, such as a trial lawyer (also called a *litigator*). The majority of companies, however, rely on attorneys employed by *law firms* for their legal needs. These attorneys devote a significant amount of their professional time page 7to advising businesses on issues such as formation, governance, labor and employment laws, regulatory agency compliance, legal transactions (such as an acquisition), intellectual property (such as trademarks or patents), and other legal issues important to business operations. These attorneys (known as *business lawyers* or *corporate lawyers*) rarely if ever appear in court or perform other tasks that are associated with lawyers in the minds of the general public. Indeed, the law has become increasingly complex and specialized. Therefore, it is not unusual that more than one attorney's advice is needed when facing a significant legal issue such as an employment discrimination lawsuit or when obtaining financing for a corporation from the general public through the sale of stock. Law firms vary greatly in size, from those that have one or just a few lawyers in a local or regional practice to firms that have hundreds of lawyers spread throughout the globe. In a business context, law firms bill clients based on an hourly rate that is tied to an individual lawyer's experience, her reputation in the field, and the market being served (with large cities that are the center of business operations having higher rates). **\ ** **SOURCES AND LEVELS OF AMERICAN LAW** **LO 1-5** Recognize, explain, and give examples of sources of American law. American law is composed of a unique blend from various sources based on U.S. historical roots. Fundamentally, much of American law is derived from English legal doctrines that came with the English settlers of the colonies. In the West and Southwest, land once controlled by Mexico, there are strong Spanish influences, while in Louisiana, once French territory, French civil law roots are evident. Modern law in the United States regulating businesses and individuals is generally a combination of [**constitutional law**](javascript:void(0)), [**statutory law**](javascript:void(0)), [**common law**](javascript:void(0)), and [**administrative law**](javascript:void(0)) (or *regulatory law*) at the federal, state, and local levels. These sources of law are known as *primary sources* of law and may sometimes work in conjunction with one another or independently. For example, law related to the protection of trade secrets[^3^](javascript:void(0)) is composed from a variety of sources of law. Perhaps the most famous and profitable example of a trade secret is the recipe and process for making Coca-Cola. While most states have specific trade secret statutes that give legal recourse to a party who has suffered a loss as a result of the unlawful use of trade secrets, some do not. Does this mean that the company that owns the Coca-Cola page 8recipe has no legal recourse against someone who steals its trade secret in those states where no *specific statutes* exist? The answer is no because even absent a specific statute, the law still provides the damaged party some recourse against the violator. This recourse is provided by court case history (called *common law,* discussed later), which provides guidance to the trial courts deciding trade secret disputes. Even in states that *do* have statutes related to trade secret protection, there is case law that helps courts apply the statute consistently. ***Legal Speak \>))*** **Enumerated Powers** Article I, Section 8, of the U.S. Constitution names 17 specific powers granted to the federal government. These are known as *enumerated powers.* **Constitutional Law** Constitutional law is the foundation for all other law in the United States and is the supreme law of the land. It functions in tandem with other sources of law in three broad areas: (1) establishing a *structure* for federal and state governments (including qualifications for certain offices and positions), setting rules for amending the constitution, and granting specific *enumerated powers* to the different branches of government; (2) establishing the concept of *federalism,* allowing the federal and state governments shared powers; and (3) establishing individual *civil rights* and providing *procedural protections* for U.S. citizens from wrongful government actions. Constitutional law is different from other sources of law primarily in terms of *permanence* and *preemption.* In terms of permanence, a constitution is thought to reflect the basic principles of a particular society and should be amended only in extraordinary cases and only when a majority of its constituents agree over a certain period of time. Preemption in this context means that constitutional law is supreme over all other sources of law such as federal and state statutes, treaties, and common law. The U.S. Congress is the exclusive legislative body for the passage of federal law. Jill Braaten/McGraw-Hill Education Constitutional law exists at both the federal and state levels because each state has its own constitution that is the highest source of law within the state's borders (so long as it is not inconsistent with federal law). States tend to amend their constitutions more frequently than is the case with the U.S. Constitution. Constitutional issues that impact businesses include Congress's powers to regulate interstate commerce; the creation of legal protections for intellectual property (such as patents and copyrights); the protection of certain forms of commercial speech from unwarranted government regulation; limitations on a state's authority to tax products and services in commerce; and powers of the executive, legislative, and judicial branches to regulate business activity. Congressional powers and other aspects of constitutional law are discussed in detail in [[Chapter 2]](javascript:void(0)), "Business and the Constitution." **Statutory Law** Statutes are written laws that are passed by the federal or a state legislature and then either approved or rejected by the executive branch. The U.S. Congress is the exclusive legislative body for the passage of federal law. When Congress is drafting a federal statute, but has not yet passed it or had the executive page 9branch's concurrence, it is known as a *bill.* On the *federal* level, the president is the executive and may either sign a bill into law (thereby adopting it as a statute) or veto (reject) the bill, in which case the bill becomes subject to the Congress's right to override the veto and make the bill into a statute with a two-thirds majority vote. At the *state* level, the state legislature (called by different names in different states, such as the *General Assembly*) passes statutes that regulate such areas as motor vehicle laws, business corporation and partnership laws, and other traditional state matters. The governor (as executive) has authority to sign a state bill into law or to exercise other rights as laid out in the state constitution. Written laws at the *local* level are called [**[ordinances]**](javascript:void(0)) (sometimes referred to as *local regulations*). Ordinances generally regulate issues such as zoning (regulating where certain businesses, such as factories, may be located) or impose health and safety regulations on local merchants such as restaurants. **Interpreting Statutes** When interpreting statutes, courts initially apply the [**[plain meaning rule]**](javascript:void(0)). This means that if the words in the statute have clear and widely understood meanings, the court applies the statute in accordance with the rule. However, more complex statutes require further analysis, and courts look to two sources for guidance. The structure of the statute itself generally provides some indication of how the legislature intended it to be applied. The structure of the statute and the format of its mandates in a law are referred to as its [**[statutory scheme]**](javascript:void(0)). When interpreting statutes, courts also look to the records kept by the legislature, including the debates, committee and conference reports, and legislative findings of fact. These records are known as the statute's [**[legislative history]**](javascript:void(0)) and may provide some indication of the intent of the legislative body that passed the statute. For example, in [[Chapter 2]](javascript:void(0)), "Business and the Constitution," we discuss the U.S. Supreme Court's ruling on the constitutionality of the Patient Protection and Affordable Care Act (commonly referred to as "Obamacare").[^^](javascript:void(0)) The act includes an individual mandate requiring individuals to be covered by health insurance by a certain date or face a penalty. The court analyzed the application of the mandate from multiple points of view and, using the act's statutory scheme and legislative history, it validated the individual mandate's constitutionality based on its application as a tax rather than as a penalty. Henry II established English common law courts, called "King's Bench" courts, around 1178. 19th era/Alamy One of the biggest challenges courts face when interpreting a statute is applying the law in a context that did not exist at the time the statute became law. In [[Case 1.1]](javascript:void(0)), a federal trial court applies a 1986 law outlawing money laundering in the context of digital currency on the notorious (and now defunct) Silk Road online marketplace. Finding Statutory Law The official publication of federal statutory law is the United States Code (U.S.C.), which arranges all existing federal laws in a system organized by title and divided into chapters and sections. The legal community uses a special format, known as a [citation](javascript:void(0)), to express where a statutory law can be found. You'll note citations in the footnotes of each chapter of this text that identify a specific reference for the statutes being covered in the chapter. For example, later in this textbook, students will study a federal law called the Fair Labor Standards Act (also known, in part, as the "minimum wage" law) in detail. The citation for the law (listed in the footnote) is 29 U.S.C. § 201. This indicates that in order to find the Fair Labor Standards Act, we need to consult Title 29 of the United States Code and turn to section (abbreviated § in singular or §§ in plural) 201 for the first chapter of the statute. Although attorneys and judges often use specialized software and legal research services to find and understand statutes, an increasing amount of information about statutory resources and statutes themselves is available online for free. Note also that Appendix to [Chapter 1](javascript:void(0)) ("A Business Student's Guide to Understanding Cases and Finding the Law") provides information on using the Internet to find and apply statutory law. State statutes have the same fundamental format and purpose as the U.S.C., but the actual term used to refer to state statutes varies from state to state. *Codes* or *consolidated statutes* are two common terms. Commercial services also sell print and online versions of federal and state statutes in a unique format that includes annotations and short comments used to interpret the statutes correctly. Attorneys use these commercial services in performing legal research so that they can properly counsel their clients on the law. **Common Law** Common law is essentially law made by the courts. Although lawmaking is primarily the responsibility of state and federal legislatures, courts must fill in the gaps when a controversy arises that is not covered under existing law. Consider, for example, the impact of the Internet on the development of law. Settled laws related to contracts, jurisdiction, trespass, obscenity, and many other areas must be reconsidered in light of the widespread use of the Internet. Courts have to fill in the gaps to apply existing law to Internet use until the legislature can respond with statutory law aimed at resolving cyber-related disputes. The U.S. system of common law is deeply rooted in British common law that developed over several centuries, beginning around 1066 when the Norman kings established uniform methods for resolving (mostly land) disputes in England. The largest industrialized nations using the common law in some form include the United States, the United Kingdom, Canada, Australia, and generally the former colonies of Britain. Other countries, such as Japan and France, use a *civil law* system that requires courts to adhere to a strict interpretation of a legislatively established code or regulation. While the general notion of *precedent* is recognized by civil law, its role is substantially reduced in a civil law system. The power of courts to establish law in matters not specifically addressed by the code is very limited in civil law countries. Legal systems and sources of law in foreign countries are covered in [[Chapter 25]](javascript:void(0)), "International Law and Global Commerce." **\ ** **Stare Decisis and Precedent** **LO 1-6** Understand the legal doctrine of stare decisis. The common law also includes the application of past judicial decisions to contemporary cases. The [**[doctrine of stare decisis]**](javascript:void(0)), one of the most important concepts in American law, is the principle that similar cases with similar facts and issues should have similar judicial outcomes. This allows individuals and businesses to have some degree of confidence that the law will remain reasonably constant from year to year and court to court. The notion of applying the law of previous cases to current cases with substantially similar circumstances is called [**precedent**](javascript:void(0)). Precedent is created when an *appellate court* renders a decision, known as the *holding* of the case, absent a controlling statute. Should a similar fact situation later occur, all *lower courts,* such as trial courts, are bound to follow the appellate court's decision as long as no new statutory law has been enacted. This provides an element of predictability for lawyers and litigants when they are contemplating legal and business decisions and actions. ***Legal Speak \>))*** **Appellate Courts** Courts that review the decisions of trial courts and have the authority to overturn decisions if they are inconsistent with the current state of the law. Trial courts, appellate courts, and other types of dispute resolution forums are covered in detail in [Chapter 3](javascript:void(0)), "The American Judicial System, Jurisdiction, and Venue." Precedent established in one state's court will have no bearing on the courts of other states. A state court facing an issue for the first time (known as a "case of first impression") might look to precedent created in other states for insight; however, nothing requires its adherence to the other states' decisions. Note that the court system and how appellate courts form precedent are topics covered in detail in [Chapter 3](javascript:void(0)), "The American Judicial System, Jurisdiction, and Venue." **Stare Decisis and Business** To understand the importance of stare decisis in the business environment, consider the opportunities for business planning that may benefit the company by understanding the legal impact of a certain course of action. Suppose that Jackson is a manager in charge of managing the acquisition of certain assets from another company. One important aspect of such a transaction is how the acquisition will be *taxed.* If Jackson's company enters into an agreement with Main Street Industries (MSI) to acquire certain assets from MSI, how will the transaction be treated by the Internal Revenue Service (IRS)?[^5^](javascript:void(0)) This, of course, is a very important fact in determining the price of the transaction and planning for the allocation of the tax burden between the buyer and the seller. How can the parties structure the transaction to be sure that the taxation represents the parties' intent? Ultimately, because stare decisis is a deeply rooted concept that applies to all laws, Jackson need only learn how the IRS has treated similar transactions in the past and how courts have ruled on the IRS's interpretation and actions in applying the law. If a certain transaction has been taxed in a certain way in the past, the doctrine of stare decisis dictates that if Jackson structures her transaction in a similar fashion, her transaction will be taxed in the same way. With sufficient legal certainty about the taxation impact, the parties may now proceed with negotiations and structure a mutually acceptable agreement. ***Legal Speak \>))*** **Case of First Impression** A case with issues that have never been litigated before in the court hearing it. **Departing from Precedent** Strict adherence to precedent and the doctrine of stare decisis has a significant drawback: It doesn't allow for evolving societal standards of behavior or expectations. In one famous case, a state's highest court provided a memorable metaphor for departing from precedent: On a case-by-case basis, courts sometimes justify departing from precedent on the basis that technological or societal changes render a particular precedent unworkable. In [Case 1.2](javascript:void(0)), the U.S. Supreme Court considers the question of when to abandon standing precedent based on economic and technological changes in the online marketplace. **Administrative Law** While statutory law stems from the authority of the legislature and common law is derived from the courts, administrative law is the source of law that authorizes the exercise of authority by *executive branch* agencies and *independent* government agencies. Members of the House and Senate can't be experts on all things and can't be expected to research the details of all matters before Congress. For efficiency, Congress creates administrative agencies to focus on particular areas, much like a large company creates departments and committees to streamline decision making. Federal administrative law is largely authorized by statutes and the Constitution, and rules for applying the law are articulated and carried out by *administrative agencies.* Pursuant to congressional mandates, these agencies are empowered to administer the details of federal statutes and have broad powers to impose regulations, make policy, and enforce the law in their designated areas of jurisdiction. State legislatures also are empowered to create administrative agencies to address state matters. For example, the U.S. Environmental Protection Agency (EPA) is charged with drafting regulations that carry out the broad mandates set by Congress in the Clean Air Act (among many others) to reduce air pollution. The EPA sets regulations and imposes restrictions on some industries to help accomplish that goal. The EPA is also empowered to enforce those regulations. Courts are highly deferential to agency decisions involving how and when an agency enforces a regulation. Detailed coverage of this source of law and administrative agencies is featured in [[Chapter 17]](javascript:void(0)), "Administrative Law." Some of the specific types of laws that impact business owners and managers and are covered in this textbook are featured in [[Table 1.2]](clbr://internal.sandbox/book/text/XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX). **TABLE 1.2 Examples of Laws That Impact Business** ------------------------------------------------------ ---------------------------------------- ----------------------------------------- **Type of Law** **Source(s)** **Level(s)** Negligence (tort) Statutory and common law Primarily state Employment discrimination Primarily statutory and administrative Primarily state and federal, some local Copyright Statutory and administrative Federal Contracts for sale of goods Statutory State Contracts for services Primarily common law State Bankruptcy Statutory and administrative Federal Securities law (selling company stock to the public) Statutory and administrative Federal and state Zoning ordinances Statutory Local Taxes Statutory and administrative Federal, state, and local Primary sources of law are applied consistent with a hierarchy in which one source may trump another source if the two sources conflict. This is called *preemption.* For example, think about where you're seated at this moment. What law applies to you? You're subject to the U.S. Constitution, U.S. treaties, federal statutory and administrative law, and federal common law. You're also in a state, so state constitutional, statutory, administrative, and common law apply to you. County, city, township, and other local laws might also apply. There is certainly a potential for conflict. [[Figure 1.1]](javascript:void(0)) illustrates the hierarchy of primary sources of federal and state law. **Secondary Sources of Law** When interpreting statutory law or applying judicially created law, courts also look to [**[secondary sources]**](javascript:void(0)) of law. In the business context, the most important secondary sources page 15of law are (1) the [***Restatements of the Law***](javascript:void(0)), a collection of uniform legal principles focused in a particular area of traditional state law, and (2) various sets of [**[model state statutes]**](javascript:void(0)) drafted by legal experts as a model for state legislatures to adopt in their individual jurisdictions. The purpose behind these secondary sources of law is to increase the level of uniformity and fairness across courts in all 50 states. The secondary sources of law also feature commentary and examples to help guide courts in applying the law. However, secondary sources of law have *no independent authority* or legally binding effect. State legislatures and courts are free to adopt all, adopt part of, or reject secondary sources of law. **Uniform Model Laws** In 1892, the National Conference of Commissioners on Uniform State Laws (NCCUSL) was formed by the American Bar Association for the purpose of establishing uniform page 16standards in areas of the law where national interests would be achieved through use of uniform laws. Imagine that a business in Delaware purchases goods from a seller in New York. While these goods are being shipped by truck via an independent trucking company, they are destroyed in an accident in New Jersey. Which state's law applies? Without a uniform set of laws, businesses would be required to know and apply the law in all 50 states and would be overwhelmed by excessive litigation. Uniform laws solve many such problems. The primary focus of the model laws is commerce, and chief among these is the Uniform Commercial Code (UCC), which was drafted by the NCCUSL and has been adopted in some form by every state except Louisiana. The UCC provides a comprehensive set of rules and principles intended to increase reliability and predictability in business transactions. Although this textbook refers to several different sections of the UCC, extensive coverage is given to Article 2, which governs contracts for the sale of goods. The NCCUSL also created several uniform codes related to the formation and structure of business entities, such as the Uniform Partnership Act and the Model Business Corporation Act. The NCCUSL will, from time to time, revise these model acts, and the new model laws are referred to using the term *Revised* (e.g., the *Revised* Uniform Partnership Act). ***Restatements of the Law*** In the 1920s, the American Law Institute (ALI) was formed to reduce the undue complexity and growing uncertainty of judicial decisions by systematically publishing a *statement* of common law legal principles and rules in a given area of the law, such as torts. The ALI is composed of law professors, judges, and lawyers, and it has developed the *Restatements of the Law* in various legal categories. Explanatory notes and applicable examples accompany the restatements, and the restatements are continuously revised. When the ALI publishes a revision, the new version is referred to by the name and edition; thus, the second edition of the contracts restatement is called *Restatement (Second) of Contracts.* The areas covered by the restatements that are included in this textbook are contracts, property, agency, torts, and foreign relations law. **CATEGORIES OF LAW** **LO 1-7** Classify the law into several broad categories. Because the body of American law is so vast and diverse, it is sometimes helpful to break down the law into broad categories based on classifications related to a particular legal function or a right afforded by law. It is important to note that these classifications are not mutually exclusive. One particular act or transaction may be classified in more than one legal category. For example, suppose that a party to a contract breaks her promise to the other party (an act known as a *breach of contract*). The remedy for the breach may depend on the legal classification of contracts as *civil law.* At the same time, one party may have rights classified as *substantive law,* which are derived from a source of *statutory law.* **Criminal Law versus Civil Law** Laws, primarily statutes, are either *criminal* or *civil* in nature. [**[Civil laws]**](javascript:void(0)) are designed to compensate parties (including businesses) for losses as a result of another's conduct. These losses are known as [**[damages]**](javascript:void(0)). [**[Criminal laws]**](javascript:void(0)) are designed to protect society, and the violation of criminal laws results in penalties to the violator such as fines or imprisonment. Criminal fines are paid to the government and do not reimburse the victim. Remember that these categories are not mutually exclusive. For instance, a driver who is intoxicated and injures a pedestrian in an accident has committed both a criminal act (driving while intoxicated), for which he can be prosecuted by authorities, and a civil wrong (negligence), for which the driver can be sued by the injured party to recover for any losses suffered as a result of the injury (medical bills, etc.). Criminal law as it relates to business is discussed in [[Chapter 22]](javascript:void(0)), "Criminal Law and Procedure in Business." **Substantive Law versus Procedural Law** [**[Substantive laws]**](javascript:void(0)) provide individuals with rights and create certain duties. [**[Procedural laws]**](javascript:void(0)) provide a structure and set out rules for pursuing substantive rights. For example, while state common law may provide an individual who has suffered losses due to the negligence of another the right to obtain restitution from the wrongdoer (substantive law), a state statute will prescribe the procedure for using legal means to actually collect the restitution (procedural law). This includes rules that govern court procedures such as how and when to file a lawsuit as well as the process for obtaining the restitution once a court has given the injured party a certain money award. Procedural law also sets out the steps the government must take if it needs to infringe on substantive rights. For example, if the police believe that a business owner is committing a nonviolent crime such as embezzlement or fraud, they may not simply barge into the owner's office without notice to search for and seize evidence. The Fourth Amendment to the U.S. Constitution protects citizens against unreasonable searches and seizures, a substantive right of privacy. The Fourth Amendment also specifies the procedural steps that must be taken to override the substantive rights in question in order to obtain a search warrant. These procedural steps require police to convince a judge or magistrate, through evidence of probable cause, that a crime is being committed, as well as provide evidence necessary to prove that crime is in the owner's possession. **Law versus Equity** **LO 1-8** Differentiate between the concepts of law and equity. Most modern American courts are combined courts of law and equity. However, we still use the terms *law* and *equity* when describing the appropriate *measure of judicial action* intended to compensate an injured party in a civil lawsuit. These measures are known as [**[remedies]**](javascript:void(0)). Remedies at law generally take the form of *money damages:* A court orders the wrongdoer to pay another party a certain sum of money to compensate for any losses suffered as a result of the wrongdoer's conduct. However, in some cases, a party will not necessarily be fully or even partially compensated through money damages. In such a case, a court may award [**[equitable relief]**](javascript:void(0)) instead of (or in addition to) a remedy at law. Most commonly, equitable relief can include an *injunction* or *restraining order* (a judicial order requiring a party to either perform or cease performing a certain activity) and *specific performance* (an order requiring a party to carry out her obligations as specified in a contract). Specific performance is available only if the goods contracted for are rare or one of a kind. To understand this concept in a business context, suppose that Maxwell enters into a valid written agreement with Book Barn to purchase a first edition of *The Old Man and the Sea,* autographed by Ernest Hemingway, for \$25,000. Maxwell leaves the store to obtain page 19a certified check from his bank. When he returns one hour later, the owner of Book Barn refuses to sell him the book because he has received a phone call from another buyer offering \$30,000. In this case, Maxwell may file a lawsuit for Book Barn's failure to live up to the agreement (known as *breach of contract,* discussed in [[Chapter 7]](javascript:void(0)), "Contract Enforceability and Performance"), but he has not suffered an out-of-pocket loss because he never had the opportunity to present Book Barn with the check. However, Maxwell may seek a *remedy at equity* from a court, where he can request an injunction to prevent Book Barn from selling the book to another buyer until the court can hear the case. If Maxwell wins the case, he may seek an order of *specific performance* whereby the court orders Book Barn to transfer ownership of the book to Maxwell in exchange for the \$25,000 price as specified in the agreement between the parties. Maxwell would likely be awarded these equitable remedies because the legal remedies available to him are not adequate to address his injury. In [[Case 1.3]](javascript:void(0)), a state appellate court reviews a case that resulted in a remedy of specific performance. The term *equity* is also used in the context of common law rules that guide courts in deciding cases and controversies before them. These equity rules are called [**equitable maxims**](javascript:void(0)), and they are intended to be broad statements of rules that are based on notions of fairness and justice in applying the law. These doctrines are applied in suits seeking both legal and equitable damages. [Table 1.3](clbr://internal.sandbox/book/text/XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX) summarizes the most commonly used maxims. ***KEY POINT*** When a remedy at law is inadequate, an injured party may also obtain a remedy at equity. When a remedy at law is fully sufficient to bring justice, equitable remedies are not permitted. **TABLE 1.3 Equitable Maxims** -------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ **Maxim** **Rule** **Example** Equity aids the vigilant The law favors those who exercise vigilance in pursuing their claims and disfavors those who rest on their legal rights by failing to act to protect their rights in a reasonable period of time. Statute of limitations imposes a deadline on when an aggrieved party must file a claim. After the deadline has passed, the party is barred from recovering any losses or damages. Substance over form Courts look to the intent of parties involved and adhere to a standard of good faith and fair play instead of applying the letter of the law in a way that would violate fundamental principles of fairness and consistency. Blackwell signs an agreement that she is a limited partner. In substance, she acts like a general partner. Courts will treat her as a general partner despite what the parties call themselves. Clean hands doctrine Courts are guided in their decisions not only by the letter of the law but also on the basis that one seeking the aid of a court must come to the court with clean hands that are unstained by bad faith, misrepresentations, or deceit. Kauffman fraudulently transfers stock to his brother to avoid paying a legal judgment entered against him. When a dispute arises with his brother, Kauffman sues to try and recover the stock. Kauffman is barred from recovering the stock because he committed fraud in transferring it to his brother in the first place. **Public Law versus Private Law** **LO 1-9** Identify and apply important equitable maxims. [**[Public laws]**](javascript:void(0)) are those derived from some government entity. Examples include statutes (legislature/executive) and administrative regulations (state or federal administrative agencies). [**[Private laws]**](javascript:void(0)) are recognized as binding between two parties even though no specific statute or regulation provides for the rights of the parties. The most common example is a contract for services. For example, suppose Claude hires Pablo to paint a portrait of page 21Claude's wife. After it is complete, Claude thinks Pablo's painting is too abstract and refuses to pay for it. Although no specific public law exists that regulates this relationship, the agreement is still legally binding and the rules of the transaction are governed by the common law of contracts. **STRATEGIC LEGAL SOLUTIONS: THE BIG PICTURE** Law interacts with business in many different ways and on many different levels. In this section, we focus on the big picture, on the *strategic* nature of these complex and multifaceted interactions. In fact, because legal rules often have gaps or grey areas, because legal compliance is costly, and because laws are not always perfectly enforced, the legal environment of business in the real world is essentially a *strategic* environment. Strategy is integrated throughout this textbook in a variety of ways. This overview is intended to introduce students to the intersection between law and strategy and to help them think of the law as part of business decision making rather than as a book of rules. "Strategic Legal Solutions" are featured in a problem/solution format and offer an in-depth discussion of specific legal issues and possible strategic solutions. "Strategy 101" is featured at the end of each chapter and helps students understand how strategic considerations may fit into the topics covered in the chapter. **Overview** Generally speaking, a strategy refers to a plan of action. Strategies are helpful when one is operating under conditions of uncertainty. For example, because of various real-world factors---such as limited resources, opportunistic behavior, and asymmetrical information---the legal environment is full of uncertainty: Laws are not always obeyed, nor are laws always enforced. This uncertainty regarding the level of legal compliance and the level of legal enforcement opens up many types of legal strategies, strategies business leaders often pursue as they compete for customers and market share. For convenience, we will classify legal strategies into four major categories or "ideal types": (1) *noncompliance,* (2) *avoidance,* (3) *prevention,* and (4) *value creation* or "legal competitive advantage." Now, let's take a closer look at these four major forms of legal strategy below, illustrating each type of legal strategy with concrete examples. **Strategy \#1---Noncompliance** One possible legal strategy in an uncertain and competitive environment is *noncompliance.* Simply put, noncompliance consists of openly disregarding or flouting the law. But why would a business firm ever openly choose noncompliance as its legal strategy? Why risk flouting the law? Put crudely, in cost-benefit terms, when the costs of compliance are greater than the costs of noncompliance, it might actually pay to break the law. Definition of *strategy.* ©Dragana Gerasimoski/Shutterstock Consider the market for overnight delivery and other shipping services in New York City, a highly lucrative and competitive industry. Instead of fully complying with burdensome parking regulations, it's a "dirty little secret" that shipping companies like FedEx, UPS, and even the U.S. Postal Service have openly adopted a noncompliance strategy: These firms write the costs of parking infractions into their business model, paying page 22millions of dollars annually for the parking fines that their delivery trucks incur in New York City in order to effectively compete for the lucrative Gotham market.[^^](javascript:void(0)) **Strategy \#2---Avoidance** When business firms decide to create legal loopholes or exploit grey areas in the law, they are essentially adopting an *avoidance* approach to law, a legal strategy that is very frequently used in the business world. Before proceeding, notice that avoidance is technically not the same as noncompliance. Strictly speaking, the avoidance approach views legal compliance as a cost to be minimized; hence a company using an avoidance strategy takes steps to minimize its costs of legal compliance. By way of example, a familiar---and controversial---illustration of the avoidance approach is the decision to relocate overseas or outsource certain activities to another jurisdiction in order to avoid burdensome and costly local regulations. Consider one of the biggest corporate megadeals of this decade: Pfizer's \$160-billion merger with the Irish drug company Allergan. Pfizer, a U.S. company, was the world's 48th largest company before the merger. The parties structured this deal as a tax inversion; in other words, Pfizer will reconstitute itself as an Irish company in order to lower its U.S. tax burden.[^^](javascript:void(0)) In sum, companies are likely to adopt an avoidance strategy when they see a law as a costly obstacle or burdensome impediment that is interfering with their desired business goals **Strategy \#3---Prevention** Simply put, the *prevention* strategy consists of identifying potential legal risks to one's business and taking deliberate and proactive measures to minimize those risks *before* the risks materialize. In other words, business leaders adopting a preventive legal approach work directly with legal counsel in order to anticipate potential legal pitfalls their business may confront and then attempt to devise effective legal solutions ahead of time. The widespread use of legal disclaimers in many types of consumer contracts provides a good example of the prevention strategy. For example, have you ever entered a spicy food contest? Increasingly, page 23restaurateurs have used liability waivers to prevent any liability based on some physical injury that accompanies a potentially hazardous food item such as a "ghost pepper." According to the *Journal of Emergency Medicine,* one man was hospitalized for 23 days with a tear in his esophagus after participating in a ghost-pepper-eating contest. At Mikey's Late Night Slice in Columbus, Ohio, the "Fiery Death with Hate Sausage" is a pizza loaded with a mix of the hottest peppers. However, customers can only try it once they've signed a three-page waiver outlining dangers and safety precautions, like how to wash skin and eyes, and agreeing to "disclaim, release and relinquish any and all claims, actions and lawsuits. **Strategy \#4---Value Creation (or "Legal Competitive Advantage")** Last, but certainly not least, business leaders can use the law creatively and strategically not only to minimize costs and risks but also to create new sources of value as well as generate new streams of revenue. We refer to this form of legal strategy as *value creation* or "legal competitive advantage" to acknowledge that law can often be a source of competitive advantage.[^^](javascript:void(0)) How can a business outperform its competitors? The concept of competitive advantage attempts to answer this fundamental question. Briefly, there are two types of business strategies a firm may follow in order to outperform its rivals. One strategy is lower cost. The other strategy is differentiation. Here, let's focus on the strategy of differentiation. From a legal perspective, one major method of differentiating one's business and of creating durable forms of value is through intellectual property law. A great example of legal competitive advantage is Google's popular search engine algorithm, which was invented by Larry Page and Sergey Brin while they were graduate students at Stanford. The original patent for their search engine algorithm (US 6,285,999) contains a detailed description of their first algorithm and also lists Stanford University as the "assignee" or legal owner of their important invention.[^^](javascript:void(0)) Subsequently, however, Larry Page and Sergey Brin left Stanford and founded their own private search-engine company. They also continued to refine and improve their search engine algorithm over the years, but now, instead of using patent law to protect their rights to their search-engine page 24algorithm, they have opted to keep their world-famous algorithm a trade secret. In other words, no one but Larry Page and Sergey Brin knows the exact details of how the Google search engine works. Another form of legal competitive advantage occurs through lobbying efforts (i.e., when companies lobby legislatures like the Congress to enact laws protecting their business from competition). One of the most egregious examples of this form of legal competitive advantage is the Walt Disney Company's efforts to protect its intellectual property rights in Mickey Mouse, perhaps the most iconic cartoon character of all time. Mickey is quite possibly the world's most famous personality; according to market researchers, his 97 percent recognition rate in the United States edges out even Santa Claus) *Forbes* has even dubbed him "the world's richest fictional billionaire," placing his estimated worth to Disney at \$5.8 billion per year. In any case, in the words of one commentator: "Disney has done everything in its power to make sure it retains the copyright on Mickey... Every time Mickey's copyright is about to expire, Disney spends millions lobbying Congress for extensions, and trading campaign contributions for legislative support. With crushing legal force, they've squelched anyone who attempts to disagree with them."[^12^](javascript:void(0)) The nearby chart will give you some idea as to how much of its resources Disney expends on lobbying efforts in order to maintain its competitive advantage.