Lecture notes on Business ethics

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Published Date:26-07-2017
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21e STAND A R D VOLUME ANDERSON’S BUSINESS LAW And The Legal Environment4 Part 1 The Legal and Social Environment of Business hy have law? If you have ever been stuck in a traffic jam or jostled in a crowd leaving a stadium, you have observed the need for order to keep those involved moving in an efficient and safe manner. W The interruptions and damages from Internet viruses demonstrate the need for rules and order in this era of new technology. When our interactions are not orderly, whether at our concerts or through our e-mail, all of us and our rights are affected. The order or pattern of rules that society uses to govern the conduct of individuals and their relationships is called law. Law keeps society running smoothly and efficiently. law–the order or pattern of rules that society establishes to govern the conduct of individuals and A. NATURE OF LAW AND LEGAL RIGHTS the relationships among them. Law consists of the body of principles that govern conduct and that can be enforced in courts or by administrative agencies. The law could also be described as a collection or bundle of rights. 1. Legal Rights right–legal capacity to A right is a legal capacity to require another person to perform or refrain from require another person to performing an act. Our rights flow from the U.S. Constitution, state constitutions, perform or refrain from an federal and state statutes, and ordinances at the local levels, including cities, counties, action. and boroughs. Within these sources of rights are also duties. A duty is an obligation duty–an obligation of law of law imposed on a person to perform or refrain from performing a certain act. imposed on a person to Duties and rights coexist. No right exists in one person without a corresponding perform or refrain from performing a certain act. duty resting on some other person or persons. For example, if the terms of a lease provide that the premises will remain in a condition of good repair so that the tenant can live there comfortably, the landlord has a corresponding duty to provide a dwelling that has hot and cold running water. 2. Individual Rights The U.S. Constitution gives individuals certain rights. Those rights include the right to freedom of speech, the right to due process or the right to have a hearing before any freedom is taken away, and the right to vote. There are also duties that accompany individual rights, such as the duty to speak in a way that does not cause harm to others. For example, individuals are free to express their opinions about the government or its officials, but they would not be permitted to yell “Fire” in a crowded theater and cause unnecessary harm to others. The rights given in the U.S. Constitution are rights that cannot be taken away or violated by any statutes, ordinances, or court decisions. These rights provide a framework for the structure of government and other laws. 3. The Right of Privacy One very important individual legal right is the right of privacy, which has two components. The first is the right to be secure against unreasonable searches and seizures by the government. The Fourth Amendment of the U.S. ConstitutionChapter 1 The Nature and Sources of Law 5 right of privacy–the right to guarantees this portion of the right of privacy. A police officer, for example, may be free from unreasonable not search your home unless the officer has a reasonable suspicion (which is intrusion by others. generally established through a warrant) that your home contains evidence of a crime, such as illegal drugs. If your home or business is searched unlawfully, any items obtained during that unlawful search could be excluded as evidence in a criminal trial because of the Fourth Amendment’s exclusionary rule. For Example, in the murder trial of O.J. Simpson, Judge Lance Ito excluded some of the evidence the police had obtained from inside Mr. Simpson’s Ford Bronco, which was parked on the street outside his home. Judge Ito ruled that the officers should have first obtained a warrant for the locked vehicle, which was not going to be taken anywhere because Mr. Simpson was out of town at that time. When Warrants Are Involved, No Brief Photographs FACTS: In the early morning hours of April 16, 1992, a special team of Deputy U.S. Marshals and police officers executed warrants that had been issued against Dominic Wilson, who was wanted for robbery, theft, and assault and who had a “use caution” warning posted on law enforcement files and records. The team was accompanied by a reporter and a photographer from the Washington Post, who had been invited by the marshals to accompany them as part of a Marshals Service ride-along policy. The officers, with media representatives in tow, entered the dwelling noted in the warrant at 6:45 A.M. The home they entered and that was on the arrest warrant actually belonged to Dominic’s parents, Charles and Geraldine Wilson. Charles and Geraldine were still in bed. When they heard the officers enter the home, Charles Wilson, dressed only in a pair of briefs, ran into the living room to investigate. He angrily cursed the officers. Geraldine Wilson then entered the living room to investigate, wearing only a nightgown. She observed her husband being restrained by the armed officers. Dominic Wilson was not in the house, and the officers left. However, the Washington Post photographer had already taken numerous pictures of the confrontation between the police and Charles Wilson. The Washington Post never published its photographs of the incident. The Wilsons filed suit against the officers for invasion of their privacy and violation of their Fourth Amendment rights. The district court found that the officers could be held liable. The Court of Appeals reversed and found that the officers had immunity. The U.S. Supreme Court granted certiorari because of several conflicting circuit decisions on the issue of cameras and reporters being present during arrests and warrant executions. DECISION: The Court held that although there were reasons for having the reporters and cameras present, such as public relations, safety for officers, and assistance, those reasons were not sufficient enough to disregard the Fourth Amendment rights of the homeowners. Citing “a man’s home is his castle,” the Court noted the longstanding history of protecting individuals in their homes. The Court held that having reporters and photographers along in the execution of a warrant is a violation of the Fourth Amendment rights of the parties being searched. Officers can be subject to some liability for their failure to honor privacy protections. Wilson v 1 Layne, 526 US 603 (1999) 1 Police officers who record the arrest of a DUI suspect have not violated the suspect’s privacy, State v Morris, 214 P 3d 883 (UT App 2009).6 Part 1 The Legal and Social Environment of Business A second aspect of the right of privacy protects individuals against intrusions by others. Your private life is not subject to public scrutiny when you are a private citizen. This right is provided in many state constitutions and exists through 2 interpretation at the federal level in the landmark case of Roe v Wade, in which the U.S. Supreme Court established a right of privacy that gives women the right to choose whether to have an abortion. These two components of the right to privacy have many interpretations. These interpretations are often found in statutes that afford privacy rights with respect to certain types of conduct. For Example, a federal statute provides a right of privacy to bank customers that prevents their banks from giving out information about their accounts except to law enforcement agencies conducting investigations. Some laws protect the rights of students. For Example, the Family Educational Rights and Privacy Act of 1974 (FERPA, also known as the Buckley Amendment) prevents colleges and universities from disclosing students’ grades to third parties without the students’ permission. From your credit information to your Social Security number, you have great privacy protections. 4. Privacy and Technology Technology creates new situations that may require the application of new rules of law. Technology has changed the way we interact with each other, and new rules of law have developed to protect our rights. Today, business is conducted by computers, wire transfers of funds, e-mail, electronic data interchange (EDI) order Googling Job Applicants A recent survey shows a new component such a search. Experts tell college students in the background searches performed by to remember that what may seem to be potential employers of job applicants: something noncontroversial in your youth can later come back to haunt you when you ● 61 percent of professional service begin your professional career. Their advice firms, including accounting, consulting, is to watch what you put in MySpace, engineering, and law firms, do Google Facebook, and all other Internet sites. Dis- searches on their job candidates. cuss privacy rights and whether there is any legal issue ● Fifty percent of professional services hired by when information is posted voluntarily on the Internet. Is employers to do background checks use Google. there an ethical issue with these types of searches? One employer commented that a Google search is so Source: Sandhya Bathija , “Have a Profile on MySpace? Better Keep It simple that it would be irresponsible not to conduct Clean,” National Law Journal, June 4, 2007, 10. 2 410 US 113 (1973).Chapter 1 The Nature and Sources of Law 7 placements, and the Internet. We still expect that our communication is private. However, technology also affords others the ability to eavesdrop on conversations and intercept electronic messages. The law has stepped in to reestablish that the right of privacy still exists even in these technologically nonprivate circumstances. Some laws now make it a crime and a breach of privacy to engage in such 3 interceptions of communications. (See Chapter 11) Employers, E-mail, and Privacy Scott Kennedy, a computer system admin- While Heckenkamp was online and istrator for Qualcomm Corporation in San logged into the university’s system, Diego, California, discovered that some- Savoy, along with detectives, went to body had obtained unauthorized access Heckenkamp’s room. The door was ajar, (or “hacked into,” in popular parlance) the and nobody was in the room. Savoy company’s computer network. Kennedy entered the room and disconnected the contacted the Federal Bureau of Investiga- network cord that attached the computer tion (FBI). Working together, Kennedy and the FBI were to the network. In order to be sure that the computer he able to trace the intrusion to a computer on the had disconnected from the network was the computer University of Wisconsin at Madison network. They that had gained unauthorized access to the university contacted Jeffrey Savoy, the University of Wisconsin server, Savoy wanted to run some commands on the computer network investigator, who found evidence computer. Detectives located Heckenkamp, explained that someone using a computer on the university the situation, and asked for Heckenkamp’s password, network was in fact hacking into the Qualcomm system which Heckenkamp voluntarily provided. Savoy then and that the user had gained unauthorized access to the ran tests on the computer and copied the hard drive university’s system as well. Savoy traced the source of without a warrant. When Heckenkamp was charged intrusion to a computer located in university housing, with several federal computer crimes, he challenged the the room of Jerome Heckenkamp, a computer science university’s access to his account and Savoy’s steps that graduate student at the university. Savoy knew that night, including the copy of the hard drive, as a breach Heckenkamp had been terminated from his job at the of his privacy. Was Heckenkamp correct? Was his university computer help desk two years earlier for privacy breached? similar unauthorized activity. U.S. v Heckenkamp, 482 F3d 1132 (CA 9 2007). B. SOURCES OF LAW constitution–a body of principles that establishes the structure of a Several layers of law are enacted at different levels of government to provide the government and the framework for business and personal rights and duties. At the base of this relationship of the framework of laws is constitutional law. Constitutional law is the branch of law that government to the people who are governed. is based on the constitution for a particular level of government. A constitution is a 3 State v Christensen, 79 P3d 12 (CA Wash 2003).8 Part 1 The Legal and Social Environment of Business body of principles that establishes the structure of a government and the relationship of that government to the people who are governed. A constitution is generally a combination of the written document and the practices and customs that develop with the passage of time and the emergence of new problems. In each state, two constitutions are in force: the state constitution and the federal Constitution. statutory law–legislative Statutory law includes legislative acts. Both Congress and the state legislatures acts declaring, enact statutory law. Examples of congressional legislative enactments include the commanding, or Securities Act of 1933 (Chapter 46), the Sherman Antitrust Act (Chapter 5), prohibiting something. the bankruptcy laws (Chapter 35), and consumer credit protection provisions (Chapter 33). At the state level, statutes govern the creation of corporations, probate of wills, and the transfer of title to property. In addition to the state legislatures and the U.S. Congress, all cities, counties, and other governmental subdivisions have some power to adopt ordinances within their sphere of operation. Examples of the types of laws found at this level of government include traffic laws, zoning laws, and pet and bicycle licensing laws. administrative Administrative regulations are rules promulgated by state and federal admin- regulations–rules made by istrative agencies, such as the Securities and Exchange Commission and the National state and federal Labor Relations Board. These regulations generally have the force of statutes. administrative agencies. Even individuals and businesses create their own laws, or private law. Private law private law–the rules and consists of the rules and regulations parties agree to as part of their contractual regulations parties agree to relationships. For Example, landlords develop rules for tenants on everything from as part of their contractual relationships. parking to laundry room use. Employers develop rules for employees on everything from proper computer use to posting pictures and information on bulletin boards located within the company walls. Homeowner associations have rules on everything case law–law that includes from your landscaping to the color of your house paint. principles that are Law also includes principles that are expressed for the first time in court expressed for the first time decisions. This form of law is called case law. When a court decides a new question in court decisions. or problem, its decision becomes a precedent, which stands as the law in future precedent–a decision of a cases that involve that particular problem. court that stands as the law Using precedent and following decisions in similar cases is the doctrine of stare for a particular problem in the future. decisis. However, the rule of stare decisis is not cast in stone. Judges have some flexibility. When a court finds an earlier decision to be incorrect, it overrules that decision. stare decisis–“let the For Example, in 1954, the U.S. Supreme Court departed from the general rule of decision stand”; the 4 principle that the decision stare decisis in Brown v Board of Education. In that case, the Court decided that its of a court should serve as a 5 1896 decision Plessy v Ferguson, that held separate facilities for blacks were equal to guide or precedent and facilities for whites, was incorrect. control the decision of a similar case in the future. Court decisions do not always deal with new problems or make new rules. In many cases, courts apply rules as they have been for many years, even centuries. common law–the body of These time-honored rules of the community are called the common law. Statutes unwritten principles originally based upon the sometimes repeal or redeclare the common law rules. Many statutes depend on the usages and customs of the common law for definitions of the terms in the statutes. community that were Law also includes treaties made by the United States and proclamations and recognized and enforced by the courts. executive orders of the president of the United States or of other public officials. 4 349 US 294 (1954). 5 163 US 537 (1895).Chapter 1 The Nature and Sources of Law 9 C. UNIFORM STATE LAWS To facilitate the national nature of business and transactions, the National Conference of Commissioners on Uniform State Laws (NCCUSL), composed of representatives from every state, has drafted statutes on various subjects for adoption by the states. 6 The best example of such laws is the Uniform Commercial Code (UCC). (See Chapters 23–31, Chapter 34.) The UCC regulates the sale and leasing of goods; commercial paper, such as checks; funds transfers; secured transactions in personal property; banking; and letters of credit. Having the same principles of law on contracts for the sale of goods and other commercial transactions in most of the 50 states makes doing business easier and less expensive. Other examples of uniform laws across the states include the Model Business Corporations Act (Chapter 44), the Uniform Partnership Act (Chapter 42), and the Uniform Residential Landlord Tenant Act (Chapter 51). The Uniform Computer Information Transactions Act (UCITA) as well as the Uniform Electronic Transactions Act (UETA) are new technology statutes that have been adopted or are under consideration for passage by the states. These two uniform laws and versions of them take contract law from the traditional paper era to the paperless computer age. D. CLASSIFICATIONS OF LAW substantive law–the law Law is classified in many ways. Substantive law creates, defines, and regulates rights that defines rights and and liabilities. Procedural law specifies the steps that must be followed in enforcing liabilities. those rights and liabilities. For example, the laws that grant employees protection procedural law–the law against discrimination are substantive laws. The regulations of the Equal Employ- that must be followed in ment Opportunity Commission (EEOC) for bringing suits against or investigations enforcing rights and of employers for discrimination charges are procedural laws. The laws that prohibit liabilities. computer theft are substantive laws. The prosecution of someone for computer theft follows procedural law. Law may also be classified in terms of its origin from Roman (or civil) law, from English common law based on customs and usages of the 7 community, or from the law merchant. Law may be classified according to subject matter, such as the law of contracts, the law of real estate, or the law of wills. equity–the body of Law is at times classified in terms of principles of law and principles of equity. The principles that originally developed because of the early English courts were very limited as to the kinds of cases they could handle. inadequacy of the rules Persons who could not obtain relief in those courts would petition the king to grant then applied by the them special relief according to principles of equity and justice. In the course of time, common law courts of England. these special cases developed certain rules that are called principles of equity. In general, 6 The UCC has been adopted in every state, except that Louisiana has not adopted Article 2, Sales. Guam, the Virgin Islands, and the District of Columbia have also adopted the UCC. The NCCUSL has adopted amendments to Article 8, Investment Securities (1977 and 1994), and Article 9, Secured Transactions (1999, and as amended 2001). There have been new articles of the UCC: Article 2A, Leases, and Article 4A, Funds Transfers. The United Nations Convention on Contracts for the International Sale of Goods (CISG) has been adopted as the means for achieving uniformity in sale- of-goods contracts on an international level. Provisions of CISG were strongly influenced by Article 2 of the UCC. 7 For example, in Washington State Grange v Washington Republican Party, 552 US 442 (2008), Justice Antonin Scalia wrote, “Washington’s law is like a law that encourages Oscar the Grouch (Sesame Street’s famed bad-taste resident of a garbage can) to state a “preference” for Campbell’s at every point of sale, while barring the soup company from disavowing his endorsement, or indeed using its name at all, in those same crucial locations.” In BMW of North America, Inc. v Gore, 517 US 559 (1996), Justice Scalia, in his dissenting opinion, wrote, “One expects the court to conclude, ‘To thine own self be true.’”10 Part 1 The Legal and Social Environment of Business On March 17, 2005, former and current major league the testing policy will be implemented; how it baseball (MLB) players, Commissioner Bud Selig, and will effectively address the use of prohibited the parents of young baseball players who had taken drugs by players; and, most importantly, the their own lives after taking steroids testified before the larger societal and public health ramifications U.S. House of Representatives Government Reform of steroid use. Committee. The House held the hearings to determine Mark McGwire, now a retired MLB player and a whether government regulation of baseball is necessary. record holder, stated during the hearings: Committee Chair Tom Davis made an opening statement with the following excerpts: Asking me, or any other player, to answer questions about who took steroids in front of Fourteen years ago, anabolic steroids were television cameras, will not solve this problem. added to the Controlled Substance Act as a If a player answers ‘no,’ he simply will not be Schedule III drug, making it illegal to possess or believed. If he answers ‘yes,’ he risks public sell them without a valid prescription. Today, scorn and endless government investigations. however, evidence strongly suggests that ster- My lawyers have advised me that I cannot oid use among teenagers—especially aspiring answer these questions without jeopardizing athletes—is a large and growing problem. my friends, my family, or myself. I intend to Today we take the committee’s first steps follow their advice. toward understanding how we got here, and how we begin turning those numbers around. Give a list of all the laws, rights, and duties you can Down the road, we need to look at whether find in this information. and how Congress should exercise its legisla- tive powers to further restrict the use and distribution of these substances. Our specific purpose today is to consider http://reform.house.gov/GovReform/Hearings/EventSingle.aspx? MLB’s recently negotiated drug policy; how EventID=1637. Click on Mark McGwire the rules of equity apply when the remedies provided at law cannot provide adequate relief in the form of monetary damages. At one time, the United States had separate law courts and equity courts. Except in a few states, these courts have been combined so that one court applies principles of both law and equity. A party may ask for both 8 legal and equitable remedies in a single court. For Example, suppose a homeowner contracts to sell his home to a buyer. If the homeowner then refuses to go through with the contract, the buyer has the legal remedy of recovering damages. The rules of equity go further, when appropriate, and could require the owner to actually transfer the ownership of the house to the buyer. Such remedies require a court order for specific conduct, known as specific performance. Equitable remedies may also be available in certain contract breaches (see Chapter 2, 12 and 20). 8 For example, Jennifer Lopez and Marc Anthony filed suit against the manufacturer of a British company that produces baby carriages for using their images on its Web site and in ads without permission; they asked for 5 million in damages as well as an injunction to stop use of their photos and likenesses in the company’s ads. Lopez v Silver Cross, 2009 WL 481386 (CD Cal).Chapter 1 The Nature and Sources of Law 11 And Justice for All (1979) (R) An excellent film that gives an overview of the judicial system in Maryland. Rights, precedent, and the role of lawyers are all topics for satire and analysis in the movie. Check out LawFlix at www.cengage.com/blaw/dvl to access movie clips that illustrate business law concepts. MAKE THE CONNECTION SUMMARY Law provides rights and imposes duties. One such right is the right of privacy, which affords protection against unreasonable searches of our property and intrusion into or disclosure of our private affairs. Law consists of the pattern of rules established by society to govern conduct and relationships. These rules can be expressed as constitutional provisions, statutes, administrative regulations, and case decisions. Law can be classified as substantive or procedural, and it can be described in terms of its historical origins, by the subject to which it relates, or in terms of law or equity. The sources of law include constitutions, federal and state statutes, administrative regulations, ordinances, and uniform laws generally codified by the states in their statutes. The courts are also a source of law through their adherence to case precedent under the doctrine of stare decisis and through their development of time- honored principles called the common law. LEARNING OUTCOMES After studying this chapter, you should be able to clearly explain: A. NATURE OF LAW AND LEGAL RIGHTS LO.1 Discuss the nature of law and legal rights See Wilson v Layne,p.5. See E-Commerce and Cyberlaw, p. 7. B. SOURCES OF LAW LO.2 List the sources of law See the For Example discussion of landlords developing rules for tenants on everything from parking to laundry room use on p. 8.12 Part 1 The Legal and Social Environment of Business See the Sports & Entertainment Law discussion of steroids in baseball on p. 10. C. UNIFORM STATE LAWS LO.3 Explain uniform state laws See the list and explanation of uniform laws on p. 9. D. CLASSIFICATIONS OF LAW LO.4 Describe the classifications of law See the discussion of law, equity, and substantive law on p. 9. See footnote 8 with the discussion of the Jennifer Lopez/Marc Anthony suit on p. 10. KEY TERMS administrative equity right regulations law stare decisis case law precedent statutory law common law private law substantive law constitution procedural law duty right of privacy QUESTIONS AND CASE PROBLEMS 1. Glenda Brunette, a 60-year old widow, operates a pedigreed cat breeding business on her 11-acre ranch and avocado farm in Ojai, California. You can enter Brunette’s ranch only by passing through a locked gate that has a “No Trespass” sign. Concerned citizens reported to the Humane Society that Brunette was “selling cats that looked sick, with eyes matted shut and covered in flies and feces.” The Humane Society, a quasi-public body in California, can investigate reports of animal cruelty, impound animals, place liens on property, and bring criminal charges against citizens. The Humane Society obtained a warrant to search Brunette’s property and invited Tim Dewar of the Ojai Valley News to come along and photograph the search of the ranch. Dewar came in his own car and arrived after the Humane Society had severed the lock on the gate. When he arrived, Dewar went in and began photographing the search, the animals, and Brunette. Brunette filed suit against Dewar and the Ojai Valley News for invasion of her privacy. Can she recover damages? Be sure to refer to the Wilson v Layne case (on p. 5) as you consider your answer. Brunette v Humane Society of Ventura County, 294 F3d 1205 (CA 9). 2. The Family Educational Rights and Privacy Act (FERPA) protects students’ rights to keep their academic records private. What duties are imposed and upon whom because of this protection of rights? Discuss the relationship between rights and duties.Chapter 1 The Nature and Sources of Law 13 3. List the sources of law. 4. What is the difference between common law and statutory law? 5. Classify the following laws as substantive or procedural: a. A law that requires public schools to hold a hearing before a student is expelled b. A law that establishes a maximum interest rate for credit transactions of 24 percent c. A law that provides employee leave for the birth or adoption of a child for up to 12 weeks d. A law that requires the county assessor to send four notices of taxes due and owing before a lien can be filed (attached) to the property 6. What do uniform laws accomplish? Why do states adopt them? Give an example of a uniform law. 7. Cindy Nathan is a student at West University. While she was at her 9:00 A.M. anthropology class, campus security entered her dorm room and searched all areas, including her closet and drawers. When Cindy returned to her room and discovered what had happened, she complained to the dorm’s senior resident. The senior resident said that this was the university’s property and that Cindy had no right of privacy. Do you agree with the senior resident’s statement? Is there a right of privacy in a dorm room? 8. Professor Lucas Phelps sent the following e-mail to Professor Marlin Jones: “I recently read the opinion piece you wrote for the Sacramento Bee on affirmative action. Your opinion is incorrect, your reasoning and analysis are poor, and I am embarrassed that you are a member of the faculty here at Cal State Yolinda.” Professor Jones forwarded the note from Professor Phelps to the provost of the university and asked that Professor Phelps be disciplined for using the university e-mail system for harassment purposes. Professor Phelps objected when the provost contacted him: “He had no right to forward that e-mail to you. That was private correspondence. And you have no right of access to my e-mail. I have privacy rights.” Do you agree with Professor Phelps? Was there a breach of privacy? 9. Under what circumstances would a court disregard precedent? 10. What is the difference between a statute and an administrative regulation? 11. What is the difference between a remedy in equity and other forms of judicial remedies? 12. Give examples of areas covered by federal laws. Give examples of areas covered by city ordinances. What are the limitations on these two sources of laws? What could the laws at these two levels not do? 13. What is the principle of stare decisis? 14. List some purposes of law that you were able to spot in reading this chapter.14 Part 1 The Legal and Social Environment of Business 15. During the 2001 baseball season, San Francisco Giants player Barry Bonds hit 73 home runs, a new record that broke the one set by Mark McGwire in 2000 (72 home runs). FN Be sure to read the text box on p.9 for more background on McGwire’s hitting prowess. When Mr. Bonds hit his record- breaking home run, the ball went into the so-called cheap seats. Alex Popov was sitting in those seats and had brought along his baseball glove for purposes of catching any hits that might come into the stands. Everyone sitting in the area agreed that Mr. Popov’s glove touched Bonds’s home-run ball. Videotape also shows Mr. Popov’s glove on the ball. However, the ball dropped and, following a melee among the cheap-seat fans, Patrick Hayashi ended up with Bonds’s home-run ball. Mr. Popov filed suit for the ball, claiming it as his property. Such baseballs can be very valuable. The baseball from Mr. McGwire’s record- breaking home run in 2000 sold for 3 million. List those areas of law that will apply as the case is tried and the owner of the baseball is determined.Chapter 2 THE COURT SYSTEM AND DISPUTE RESOLUTION 11. MEDARB A. The Court System 12. REFERENCE TO A THIRD PERSON 1. THE TYPES OF COURTS 13. ASSOCIATION TRIBUNALS 2. THE FEDERAL COURT SYSTEM 14. SUMMARY JURY TRIAL 3. STATE COURT SYSTEMS 15. RENT-A-JUDGE B. Court Procedure 16. MINITRIAL 4. PARTICIPANTS IN THE COURT SYSTEM 17. JUDICIAL TRIAGE 5. WHICH LAW APPLIES—CONFLICTS OF LAW 18. CONTRACT PROVISIONS 6. INITIAL STEPS IN A LAWSUIT 19. DISPOSITION OF COMPLAINTS AND 7. THE TRIAL OMBUDSMEN 8. POSTTRIAL PROCEDURES C. Alternative Dispute Resolution (ADR) 9. ARBITRATION 10. MEDIATION16 Part 1 The Legal and Social Environment of Business espite carefully negotiated and well-written contracts and high safety standards in the workplace or in product design and production, businesses can still encounter disputes that may result in a D lawsuit. For Example, you could hire the brightest and most expensive lawyer in town to prepare a contract with another party and believe the final agreement is “bulletproof.” However, even a bulletproof contract does not guarantee performance by the other party, and a lawsuit for damages may be necessary. Business disputes can be resolved in court or through alternative means. This chapter covers the structure of the court system and the litigation process as well as alternative means used outside the court system to resolve disputes. A. THE COURT SYSTEM A court is a tribunal established by government to hear and decide matters brought court–a tribunal established by government before it, provide remedies when a wrong has been committed, and prevent possible to hear and decide matters wrongs from happening. A court could award money damages to a business party properly brought to it. for a breach of contract, but it could also issue an injunction to halt patent infringement. For Example, in 2006, a court’s threat to issue an injunction to shut down operation of the BlackBerry wireless e-mail device system resulted in a settlement of the patent infringement case between Research in Motion, Ltd. (RIM), the BlackBerry service provider, and NTP, Inc., the company that had won its patent infringement case against RIM for the technology used in the BlackBerry 1 device. 1. The Types of Courts Every type of court is given the authority to decide certain types or classes of cases. jurisdiction–the power of a The power to hear cases is called jurisdiction. One form of jurisdiction, subject court to hear and determine matter jurisdiction, covers the type of proceedings that the court holds. A court a given class of cases; the power to act over a with original jurisdiction is the trial court or the court with the authority to particular defendant. conduct the first proceedings in the case. For Example, a court of original jurisdiction would be one where the witnesses actually testify, the documents are admitted into subject matter jurisdiction–judicial evidence, and the jury, in the case of a jury trial, is present to hear all the evidence authority to hear a and to make a decision. particular type of case. Other types of subject matter jurisdiction are applicable to courts. A court with original jurisdiction– general jurisdiction has broad authority over different types of cases. The authority the authority to hear a of a court with general jurisdiction can extend to both general civil and criminal controversy when it is first cases. When a general jurisdiction trial court hears criminal cases, it conducts the brought to court. trials of those charged with crimes. When a general trial court exercises its civil general jurisdiction–the jurisdiction, it uses its authority to hear civil disputes, such as breach of contract power to hear and decide cases and disputes about leases between landlords and tenants. most controversies involving legal rights and 1 duties. RIM eventually settled the suit with NTP by agreeing to pay 612.5 million.Chapter 2 The Court System and Dispute Resolution 17 limited (special) A court with limited or special jurisdiction has the authority to hear only jurisdiction–the authority particular kinds of cases. For Example, many states have courts that can hear only to hear only particular disputes in which the damages are 10,000 or less. Many types of courts have special kinds of cases. jurisdiction, including juvenile courts, probate courts, and domestic relations courts. States vary in the names they give these courts, but all are courts of special or limited jurisdiction because they have very narrow authority for their subject matter jurisdiction. In the federal system, courts with limited or special jurisdiction include bankruptcy courts and the U.S. Tax Court. A court with appellate jurisdiction reviews the work of a lower court. appellate jurisdiction–the power of a court to hear For Example, a trial court may issue a judgment that a defendant in a breach of and decide a given class contract suit should pay 500,000 in damages. That defendant could appeal the of cases on appeal from decision to an appellate court and seek review of the decision itself or even the another court or 2 administrative agency. amount of the damages. An appeal is a review of the trial and decision of the lower court. An appellate court does not hear witnesses or take testimony. An appellate appeal–taking a case to a court, usually a panel of three judges, simply reviews the transcript and evidence reviewing court to determine whether the from the lower court and determines whether there has been reversible error.A judgment of the lower court reversible error is a mistake in applying the law or a mistake in admitting evidence or administrative agency that affected the outcome of the case. An appellate court can affirm or reverse a was correct. (Parties– appellant, appellee) lower court decision or remand that decision for another trial or additional hearings. reversible error–an error or defect in court proceedings of so serious a nature that on appeal the appellate court will set aside the proceedings of the lower court. Law and Order on TV and in the Court affirm–action taken by an appellate court that FACTS: Andrea Yates was charged with capital murder in the approves the decision of drowning deaths of her five young children. Mrs. Yates had been in the court below. and out of treatment facilities, had been taking antidepressants, and reverse–the term used was under the care of several experts for her depression. She was when the appellate court also experiencing postpartum depression when she drowned each of sets aside the verdict or her five children in the bathtub at their family home. She then judgment of a lower court. called her husband to ask him to come home and also called 9-1-1. remand–term used when She entered a “not guilty by reason of insanity” plea, and 10 psychiatrists and two an appellate court sends a psychologists testified at the trial about Mrs. Yates’s mental condition before, during, and after case back to trial court for the deaths of the children. additional hearings or a Dr. Parke Dietz, the psychiatrist for the prosecution, testified that he believed Mrs. Yates new trial. knew right from wrong and that she was not insane at the time of the drownings. Dr. Dietz had also served as a consultant for the television series Law and Order and testified as follows about one of the shows in the series: As a matter of fact, there was a show of a woman with postpartum depression who drowned her children in the bathtub and was found insane and it was aired shortly before the crime occurred. The prosecution used this information about the television show to cross-examine witnesses for Mrs. Yates and also raised its airing in its closing argument to the jury. 2 A case that is sent back for a redetermination of damages is remanded for what is known as remittur.18 Part 1 The Legal and Social Environment of Business Continued The jury found Mrs. Yates guilty. The defense lawyers later discovered that Dr. Dietz was mistaken and that there had been no such Law and Order show on postpartum depression. They appealed on the grounds that the evidence was material, prejudiced the jury, and required a new trial. DECISION: The court held that because Dr. Dietz had testified about the show, that his testimony and the subject matter of the show were a part of the prosecution’s examination of defense witnesses, that the prosecution raised the airing of the show in closing arguments, and that the defense had to respond by talking about it meant that the testimony was material. Inasmuch as it was false, there was a reversible error and a retrial was required without the 3 untrue and highly prejudicial evidence. Yates v State, 171 SW 3d 215 (Tex App 2005) 2. The Federal Court System The federal court system consists of three levels of courts. Figure 2.1 illustrates federal court structure. federal district court–a (A)FEDERAL DISTRICT COURTS. The federal district courts are the general trial courts general trial court of the of the federal system. They are courts of original jurisdiction that hear both civil and federal system. criminal matters. Criminal cases in federal district courts are those in which the defendant is charged with a violation of federal law (the U.S. Code). In addition to the criminal cases, the types of civil cases that can be brought in federal district courts include (1) civil suits in which the United States is a party, (2) cases between citizens of different states that involve damages of 75,000 or more, and (3) cases that arise under the U.S. Constitution or federal laws and treaties. Federal district courts are organized within each of the states. There are 94 federal districts (each state has at least one federal district and there are 89 federal districts in the United States with the remaining courts found in Puerto Rico, Guam, etc.). Judges and courtrooms are assigned according to the caseload in that geographic 4 area of the state. Some states, such as New York and California, have several federal districts because of the population base and the resulting caseload. Figure 2.2 shows the geographic structure of the federal court system, including the appellate circuits. The federal system has additional trial courts with limited jurisdiction, differing from the general jurisdiction of the federal district courts. These courts include, for example, the federal bankruptcy courts, Indian tribal courts, Tax Court, Court of Federal Claims, Court of Veterans Appeals, and the Court of International Trade. (B) U.S. COURTS OF APPEALS. The final decision in a federal district court can be appealed to a court with appellate jurisdiction. In the federal court system, the federal districts are grouped together geographically into 12 judicial circuits, including one for the District of Columbia. Additionally, a thirteenth federal circuit, called the Federal Circuit, hears certain types of appeals from all of the circuits, 3 Mrs. Yates was found to be criminally insane in her 2006 retrial and is now institutionalized. 4 For complete information about the courts and the number of judgeships, go to 28 USC §§ 81-144 and 28 USC §133.Chapter 2 The Court System and Dispute Resolution 19 FIGURE 2-1 The Federal Court System U.S. SUPREME COURT U.S. COURTS OF APPEALS FEDERAL DISTRICT COURTS SPECIALTY COURTS COURT OF U.S. COURT OF BANKRUPTCY TAX U.S. CLAIMS MILITARY INTERNATIONAL COURT COURT COURT APPEALS TRADE Appeals often go directly to U.S. Courts of Appeals. including specialty cases such as patent appeals. Each circuit has an appellate court called the U.S. Court of Appeals, and the judges for these courts review the decisions of the federal district courts. Generally, a panel of three judges reviews the en banc–the term used cases. However, some decisions, called en banc decisions, are made by the circuit’s when the full panel of full panel of judges. For Example, in 2003, the Ninth Circuit heard an appeal on a judges on the appellate father’s right to challenge the requirement that his daughter recite the Pledge of court hears a case. Allegiance in the public school she attended. The contentious case had so many issues that the Ninth Circuit issued three opinions and the third opinion was issued 5 after the case was heard en banc. (C) U.S. SUPREME COURT. The final court in the federal system is the U.S. Supreme Court. The U.S. Supreme Court has appellate jurisdiction over cases that are appealed from the federal courts of appeals as well as from state supreme courts 5 Newdow v U.S. Congress, 292 F3d 597, 602 (CA 9 2002) (Newdow I); Newdow v U.S. Congress, 313 F3d 500, 502 (CA 9 2002) (Newdow II); and Newdow v U.S. Congress, 328 F3d 466, 468 (CA 9 2003) (Newdow III). The U.S. Supreme Court eventually heard the case. Elkgrove Unified School District v Newdow, 542 US 1 (2004). Another en banc hearing occurred at the Ninth Circuit over the issues in the California gubernatorial recall election. The three- judge panel held that the voting methods in California violated the rights of voters and therefore placed a stay on the election. However, the Ninth Circuit then heard the case en banc and reversed the decision of the original three-judge panel. The recall election then proceeded.20 Part 1 The Legal and Social Environment of Business FIGURE 2-2 The Thirteen Federal Judicial Circuits D.C. Circuit Federal Circuit Washington, D.C. Washington, D.C. Indiana North Minnesota New Montana Michigan Washington Dakota 1 Hampshire Vermont Maine Wisconsin South 2 Dakota Idaho Massachusetts Oregon 8 New York Rhode Island Wyoming C CHIC CHI HICA AGO G GO O Iowa BOSTON Nebraska 3 Connecticut 7 Ohio DENVER C CINCINN CINCIN INCINNA ATI TI TI NEW YORK Illinois 9 New Jersey Utah W We est est st Colorado Nevada Kansas 4 PHILADELPHIA ST. LOUIS 6 V Viirginia irginia rginia 10 Virginia Pennsylvania Kentucky Missouri California Delaware North Oklahoma Tennessee Maryland Arkansas Carolina Arizona New Mexico A ATLANT T TLAN LANTA A RICHMOND South 5 Georgia Texas SAN FRANCISCO Carolina 11 Puerto Rico 1 Alabama Louisiana Mississippi Alaska NEW ORLEANS Hawaii Florida Virgin 9 Islands Guam 3 A sizable portion of the caseload of the D.C. Circuit comes from the federal administrative agencies and offices located in Washington, D.C., such as the Securities and Exchange Commission, the National Labor Relations Board, the Federal Trade Commission, the Secretary of the Treasury, and the Labor Department, as well as appeals from the U.S. District Court of the District of Columbia. Rather than being defined by geography like the regional courts of appeals, the Federal Circuit is defined by subject matter, having jurisdiction over such matters as patent infringement cases, appeals from the Court of Federal Claims and the Court of International Trade, and appeals from administrative rulings regarding subject matter such as unfair import practices and tariff schedule disputes. when a constitutional issue is involved in the case or a state court has reversed a federal court ruling. The U.S. Supreme Court does not hear all cases from the writ of certiorari–order by federal courts of appeals but has a process called granting a writ of certiorari, which the U.S. Supreme Court is a preliminary review of those cases appealed to decide whether a case will be heard granting a right of review by 6 or allowed to stand as ruled on by the lower courts. the court of a lower court The U.S. Supreme Court is the only court expressly created in the U.S. decision. Constitution. All other courts in the federal system were created by Congress pursuant to its Constitutional power. The Constitution also makes the U.S. Supreme Court a court of original jurisdiction. The U.S. Supreme Court serves as the trial court for cases involving ambassadors, public ministers, or consuls and for cases in which two states are involved in a lawsuit. For Example, the U.S. Supreme 6 For example, the Supreme Court refused to grant certiorari in a Fifth Circuit case on law school admissions at the University of Texas. However, it granted certiorari in a later case involving law school admissions at the University of Michigan. Gratz v Bollinger, 539 US 244 (2003).Chapter 2 The Court System and Dispute Resolution 21 Court has served for a number of years as the trial court for a Colorado River water rights case in which California, Nevada, and Arizona are parties. 3. State Court Systems (A)GENERAL TRIAL COURTS. Most states have trial courts of general jurisdiction that may be called superior courts, circuit courts, or county courts. These courts of general and original jurisdiction usually hear both criminal and civil cases. Cases that do not meet the jurisdictional requirements for the federal district courts would be tried in these courts. Figure 2.3 illustrates a sample state court system. (B)SPECIALTY COURTS. Most states also have courts with limited jurisdiction, sometimes referred to as specialty courts. For Example, most states have juvenile courts, or courts with limited jurisdiction over criminal matters that involve defendants who are under the age of 18. Other specialty courts or lesser courts in state systems are probate and family law courts. FIGURE 2-3 Sample State Court System STATE SUPREME COURTS STATE APPELLATE COURTS GENERAL TRIAL COURTS SPECIALTY COURTS JUVENILE PROBATE FAMILY LAW COURTS COURTS COURTS LESSER COURTS MUNICIPAL JUSTICE SMALL CLAIMS COURTS COURTS COURTS22 Part 1 The Legal and Social Environment of Business (C)CITY,MUNICIPAL, AND JUSTICE COURTS. Cities and counties may also have lesser courts with limited jurisdiction, which may be referred to as municipal courts or justice courts. These courts generally handle civil matters in which the claim made in the suit is an amount below a certain level, such as 5,000 or 10,000. These courts may also handle misdemeanor types of offenses, such as traffic violations or violations of noise ordinances, and the trials for them. small claims courts–courts (D)SMALL CLAIMS COURTS. Most states also have small claims courts at the county or that resolve disputes city level. These are courts of limited jurisdiction where parties with small amounts between parties when those in dispute may come to have a third party, such as a justice of the peace or city disputes do not exceed a judge, review their disputes and determine how they should be resolved. A true minimal level; no lawyers are permitted; the parties small claims court is one in which the parties are not permitted to be represented by represent themselves. counsel. Rather, the parties present their cases to the judge in an informal manner without the strict procedural rules that apply in courts of general jurisdiction. Small claims courts provide a faster and inexpensive means for resolving a dispute that does not involve a large amount of claimed damages. (E)STATE APPELLATE COURTS. Most states also have intermediate-level courts similar to the federal courts of appeals. They are courts with appellate jurisdiction that review the decisions of lower courts in that state. Decisions of the general trial courts in a state would be appealed to these courts. (F)STATE SUPREME COURTS. The highest court in most states is generally known as the state supreme court, but a few states, such as New York, may call their highest court the court of appeals; Maine and Massachusetts, for example, call their highest court the supreme judicial court. State supreme courts primarily have appellate jurisdiction, but some states’ courts do have original jurisdiction, such as in Arizona, where counties in litigation have their trial at the supreme court level. Most state supreme courts also have a screening process for cases. They are required to hear some cases, such as criminal cases in which the defendant has received the death penalty. A decision of a state supreme court is final except in those circumstances in which a federal law or treaty or the U.S. Constitution is involved. Cases with these federal subject matter issues can then be appealed to the U.S. Supreme Court. B. COURT PROCEDURE Once a party decides to use the court system for resolution of a dispute, that party plaintiff–party who enters a world with specific rules, procedures, and terms that must be used to have a initiates a lawsuit. case proceed. prosecutor–party who originates a criminal proceeding. 4. Participants in the Court System defendant–party charged The plaintiff is the party that initiates the proceedings in a court of original with a violation of civil or jurisdiction. In a criminal case in which charges are brought, the party initiating the criminal law in a proceeding. proceedings would be called the prosecutor. The party against whom the civil or criminal proceedings are brought is the defendant.A judge is the primary officer of judge–primary officer of the court. the court and is either an elected or an appointed official who presides over the

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