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The Foundation of Law and Ethics

Unit I

Chapter 1 The Civil Law and Common Law Traditions

In this chapter you will:

• Understand the importance of studying law and its relationship to business.

Chapter 2 Beginning a Civil Lawsuit

In this chapter you will:

• Be able to distinguish between criminal and civil litigation.

• Take a case step-by-step through a civil lawsuit.

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Chapter 3 Completing a Civil Lawsuit and Alternative Dispute Resolution

In this chapter you will:

• Understand the importance of alternative dispute resolution and its application to business.

Chapter 4 Business Ethics and Conflict Management

In this chapter you will:

• Identify ethical issues one might confront in legal and business matters.

Chapter 5 Administrative Law

In this chapter you will:

• Identify the different types of administrative agencies and explain their functions.

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The Civil Law and Common Law Traditions 1

Why should a business student study law? After all, you are not going to law school, and if you ever have a legal problem, you can always consult an attorney. Perhaps you have never sued anyone, been sued yourself, been arrested, or written a contract. If all this is true, the law probably seems like some foreign country that you have never been to and have no desire to visit. The truth is, as a businessperson, you can no longer view the law from a distance. Your life and the law, whether you like it or not, will be intertwined, and having a basic understanding of the law’s scope, application, and influence will serve you well, both in business and in your personal life.

If you are a manager, business owner, employee, or entrepreneur, the law will impact your daily decision making and have far-reaching consequences in all your business activities. Believe it or not, a law course is an integral part of your education. This will become clearer to you as you read cases and witness for yourself the unfortunate situations that people have gotten themselves into.

Whereas larger companies have in-house legal departments or have access to the expertise of large law firms, small businesses often operate with little knowledge of the law and minimal access to legal counsel, making a legal background even more valuable in the marketplace. Regardless of size, any business can benefit greatly from employing people at all levels who have at least a basic understanding of the law and a solid grasp of essential legal principles so that they can recognize potential legal problems and refer them to legal counsel before they become costly matters that threaten the health of a business. This is especially true in the United States, which has no unified legal system but rather an overlay of federal, state, and local laws. Further, the trend toward more global commerce and trade, governed by international treaties such as the North American Free Trade Agreement, has implications for businesses of all sizes and types. Today, many business trans- actions involve two or more states and may even include parties separated by the full continent, so a much greater amount of business is conducted by various means across state lines.

While no textbook can become a comprehensive hands-on guide to American law (the legal ency- clopedias that attempt to do so run tens of thousands of pages and still do not cover all aspects of the law), it is the purpose of this text to provide an accurate, easy-to-understand, useful guide to some areas of the law that have the greatest impact on business. Business law, as well as the legal environment of business and legal studies courses, will provide students with the skills to recognize and apply the proverbial ounce of prevention to their business careers and personal lives. This can prove more useful to employers and to themselves than pounds of competent, costly legal advice obtained too late to remedy a problem that could have been avoided.

Although this course will not “make you a lawyer,” it will provide you with a number of advan- tages. First, you will better be able to recognize legal problems before they happen, a topic often referred to as preventive law. If you can prevent a situation or conflict from developing into a law- suit, you may save your business money and the embarrassment of a lawsuit, as well as maintain a lawful and ethical work environment. Second, in the event that you are involved in a controversy, you may be able to resolve the dispute outside of court through “alternative dispute resolution” techniques such as negotiations, mediation, or arbitration. You will learn about each of these and their advantages and disadvantages. If you do have to deal with a lawyer, this course will teach you many legal concepts and the vocabulary to effectively communicate with legal counsel. You will also learn how to hire an attorney, manage legal counsel, and deal with the legal profession.

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4

Section 1.1 Law: Its Scope and Origins CHAPTER 1

1.1 Law: Its Scope and Origins

No single course or textbook can address all of the complexities of law. If you stop to think about it, law—and legal systems—have been in effect since early civili-zation began. Thus, there have been many forms of law and legal systems, too many to enumerate. Suffice it to say that people need rules to maintain order; otherwise, society would revert to barbarism. Throughout the ages, philosophers, jurists, political scientists, political leaders, and common people from all walks of life have defined law in a number of ways. Cicero viewed law as “nothing but a correct principle drawn from the inspiration of the gods, commanding what is honest, and forbidding the contrary.” For the eminent British jurist William Blackstone, law could be defined as “a rule of civil conduct, prescribed by the supreme power in a state, commanding what is right and pro- hibiting what is wrong.” Saint Thomas Aquinas, on the other hand, defined law as “an ordinance of reason for the common good, made by him who has care of the community.” Whatever our working definition, law is often what Justice Felix Frankfurter described as “all we have standing between us and the tyranny of mere will.” We will see that this is true and, even more so, come to appreciate that law also allows us to conduct business, enter into formal relationships, depend on some predictability in our affairs, and create order in our lives.

At its simplest, law comprises rules of behavior that a government imposes on its people for the benefit of society as a whole. As such, it represents the governing body’s subjective views of what is best for that society, combined with precedent and tradition. And even though most legal systems attempt to protect society and promote the common good, there can be radical differences in the law from one country to another, and even in dif- ferent regions within countries, the 50 United States being a prime example. Although federal and constitutional law serve to balance and put a check on state and local law, for example, and in turn, the federal government is limited in its powers to legislate and must give states the power to regu- late certain matters, there is no “one” law, as in a country whose legal system is based on civil law (codified statutes alone). Unlike the U.S. common law system, a civil law system, such as prevails in Europe and South America, is more effi- cient and stable, leaving little room for judicial interpretation and lawyers. Trial by jury is not an option, so judges apply the law in a highly predictable, rel- atively swift proceeding, and the law itself is slow to change. In common law jurisdictions like the United Kingdom and the United States, however, there is much more litigation, so you need to be prepared.

The United States Capitol in Washington, D.C., is the meeting place of Congress, the nation’s federal legislative body.

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Section 1.2 Sources of Law CHAPTER 1

One of the reasons that studying law is difficult is that the numerous “factions” that con- stitute our legal system are all operating at the same time. There is state and federal law, statutory law, administrative law, local law, and so on. For example, each of the 50 states has a legislative body that passes state statutes. Each of the states also has a state court system ruling on cases and making state “case or judicial law.” Operating at the same time is the federal legislative body—Congress, which makes federal statutes—and the federal courts, which make federal case law. These are just a few of the “places” making law. As you can imagine, there are thousands of volumes and treatises dealing with questions about what is the law and legal history, as well as reporting on all of the new law being made every day. The law is vast and complicated, no doubt, but understanding how it works and how the layers of lawmaking bodies fit together into the larger scheme is an essential part of your education.

1.2 Sources of Law

Table 1.1 lists the four major sources of law in the United States: judicial, statutory, constitutional, and administrative. Note that each source of law has both a federal and state component. Table 1.1: The foundations of the American legal system

Judicial Law

Federal case law State case law

Statutory Law

Federal statutes State statutes

Constitutional Law

U.S. Constitution State constitutions

Administrative Law

Federal administrative agencies State administrative agencies

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Section 1.2 Sources of Law CHAPTER 1

Judicial (Case) Law

The phrase judicial law is used interchangeably with case law. Judicial law is law made in courts, by judges, when they rule on a case and write an opinion; it had its origins in what is called the common law. When the early pilgrims immigrated to America, they brought with them their legal system, along with customs, traditions, and values that helped to shape our legal system. It is in the nature of common law, however, that it adapts to the local customs, traditions, and needs of a people. Thus, despite its English roots, American law has evolved to fit the needs of our federalist system and reflects regional differences and values. As a result, law in the United States today resembles more the early English common law system, with its regional differences based on local customs and traditions, than it does the relatively unified law of the modern-day United Kingdom.

Before a judge can “make law,” there first must be a controversy brought to the court- room for a decision. Such a controversy involves two parties: the plaintiff, or the person bringing the lawsuit, and the defendant, or the person being sued. A civil lawsuit is one in which the plaintiff is seeking money, or restitution. (This should be contrasted with a criminal action, which is being brought to punish and possibly incarcerate the defendant.) As more and more cases are decided, they form a body of law. These cases become prec- edent for cases that follow, building one upon the other. Judges rely on previous cases to form their opinions and so on down the line.

When a judge decides a case in court, the judge will often write an opinion that is pub- lished in case books, or compendiums of court opinions. In that way, others can look up and read the decisions to determine what the law is and how a judge ruled on a specific topic. Figure 1.1 provides an example of a case as it appears in a case book.

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Section 1.2 Sources of Law CHAPTER 1

Figure 1.1: Example of a case

Stare Decisis and Precedent Yet another name for a case or an opinion is precedent. Precedent also means a previous case. If you look at the case in Figure 1.1, you will see in the last paragraph a series of cita- tions that begin like this:

Ciofalo v. Vic Tanney Gyms, supra, 10 N.Y.2d 297, 220 N.Y.S.2d 962, 177 N.E.2d 925;

Franzek v. Calspan Corp.

78 A.D.2d 134, 434 N.Y.S.2d 288

N.Y.A.D., 1980.

December 23, 1980 (Approx. 4 pages)

This litigation arises as a result of an attempt to traverse the “white water” of the lower

Niagara River on a rubber raft. Twenty-nine persons were aboard on this ex-

perimental trip to determine the feasibility of offering regular passenger trips to

the general public. During the journey the raft capsized. Three persons died and a

number including plaintiff, Michael J. Franzek, were injured. Franzek sued Niagara

Gorge River Trips, Inc. (Niagara) and its president, George Butterfield, who were the

rafter trip operators. He also sued Calspan Corporation (Calspan) an engineering

firm located in Buffalo which allegedly designed, tested and evaluated the raft.

In the first and third causes of action asserted in his complaint, Franzek al-

leges that Niagara and Butterfield negligently caused the accident; specifical-

ly that Butterfield was negligent in offering the ride to the public, and plaintiff in

particular, when he knew or should have known that the raft was

unsafe and unsuitable as a means to carry passengers upon the lower Ni-

agara River. The second cause of action, asserted against Calspan, alleges that

Calspan failed to test the raft properly and negligently recommended

to Niagara and Butterfield that it was suitable for use on the Niagara River.

Where the waiver extends to claims arising out of the negligence of a party, wheth-

er by use of the term “negligence” or by words of similar import, it provides the

negligent party with a valid defense (Ciofalo v. Vic Tanney Gyms, supra, 10 N.Y.2d

p. 297, 220 N.Y.S.2d 962, 177 N.E.2d 925; Solodar v. Watkins Glen Grand Prix Corp.,

36 A.D.2d 552, 317 N.Y.S.2d 228; Theroux v. Kedenburg Racing Assn., 50 Misc.2d

97, 269 N.Y.S.2d 789 affd. 28 A.D.2d 960, 282 N.Y.S.2d 930, mot. for lv. to app. den.

20 N.Y.2d 648, 286 N.Y.S.2d 1026, 233 N.E.2d 300; see, Gross v. Sweet, supra, 49

N.Y.2d, p. 108, 424 N.Y.S.2d 365, 400 N.E.2d 306). The agreement here extends

specifically to claims based upon the negligence of Niagara and Butterfield, its

officer and agent, and bars, therefore, plaintiff Franzek’s claim against them.

This is the citation. It tells you where to find the case. For example, 434 is the volume number, N.Y.S. stands for New York Supple- ment books, and 288 is the page number.

The third paragraph states the rules.

The last sentence in the case is the holding of the court, whose pronoucement actually makes law.

The second paragraph details the cause of action, negligence.

The first paragraph presents the facts of the case.

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Section 1.2 Sources of Law CHAPTER 1

The judge is using each of these cases to decide in the current case. Each one of these cases is precedent. The actual use of the case to form a decision in the current controversy is called stare decisis, which is Latin for “standing on previous decisions.” Stare decisis is a fundamental principle of both English and American legal systems. The stability of com- mon law depends on judges following legal precedent guided by the doctrine of stare decisis. This stability allows legal practitioners to predict how a given case will be decided by examining how similar cases were decided in the past. Judges don’t “invent” or “make up” the law, depending on whim; for the most part, they rely heavily on previous cases to write their opinions. Under the principle of stare decisis, a court should follow established legal precedent unless there is a compelling reason not to do so. This principle is crucial to common law; if judges did not follow established precedent, there would be little pre- dictability to the legal system. Attorneys would have no solid guidelines upon which to base their advice to clients and no stable guideposts on which to base legal arguments and chart legal strategies for arguing cases in court.

Changing Precedent Sometimes, however, the judge will reject a previous decision and refuse to follow it. Recall, for example, the U.S. Supreme Court decision of Roe v. Wade, which struck down state laws limiting abortion and held that abortion is legal. In doing so, the Court rejected previous cases that stated abortion was illegal. When do courts reject stare decisis? The decisions of a state’s highest court are binding on that state’s lower courts, which must follow it, but are only persuasive precedent on the courts of other states, which are free to follow or ignore such precedent. This means that if a case is being heard in New York and the attorney attempts to use a Pennsylvania case as precedent, the judge can refuse to recognize the Pennsylvania case. Thus, managers should be aware that state law is binding only within that state, and the law varies greatly from one state to another. This is important to you as a business manager because there may be instances in which “law” from another state is brought to your attention but does not apply to you at all. Thus, the doctrine of stare decisis is limited to decisions within the same jurisdiction, state, or region.

Another reason that stare decisis is not always followed is the result of a change in the political climate of the country. Sometimes opinion around an issue changes so much that the courts reflect a change in attitude and reject well-established doctrine. Consider racial discrimination in the United States, which at one time was legal and upheld as consti- tutional by the U.S. Supreme Court. Over time, both the law and cases have changed to reflect a different philosophy. This was true in 1954, when the Supreme Court found racial discrimination illegal in the case of Brown v. Board of Education. Until that time, the doc- trine of “separate but equal” accommodations for blacks and whites had been applied by the courts. The Brown decision eradicated the doctrine and replaced it with a new “law.” Here was an example of social mores changing to such a degree that the Court refused to follow previous cases.

In summary, case or judicial law is made in courts by judges rendering an opinion. Each state has at least one state court that is hearing controversies and rendering opinions. Thousands of opinions are being written each day from all of these states. All of these state court opinions form a body of law called case or judicial law because they are based on cases, or controversies between people. Thus, when you wonder, “What is the law?” remember that only one aspect of law includes state court opinions.

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Section 1.2 Sources of Law CHAPTER 1

Statutory Law

Another key site for lawmaking is in both state and federal legislatures, which are govern- ing bodies whose job is to make new laws. Law made by a legislature is called a statute. Legislatures gain consensus from their members to pass the bills making new laws, after which the bills are signed by the governor (for the state) or the president (for Congress). At any time in the United States, there are 50 state legislatures passing state statutes and a federal legislature (Congress) passing federal laws.

Federal At the federal level, Congress can legislate over a broad range of areas through the exer- cise of its constitutionally granted powers. These powers are set out in the federal (U.S.) Constitution in Article I, Section 8. Whenever Congress legislates within its area of consti- tutionally granted power, the resulting legislation has the force of law, although its legal- ity can be challenged in federal court, as will be discussed later on. Federal law is not some remote or arcane academic exercise; it affects each of us on a daily basis. This is especially true for people involved in business. As a manager, you will deal with many important federal laws. For example, the Americans with Disabilities Act of 1990 spells out how employers must accommodate disabled workers. This is a federal law that applies to all businesses, as opposed to a state law that applies only to businesses within that particular state. Other examples of federal statutory law include the Civil Rights Acts of 1964, which prohibits discrimination on the basis of race, and the Age Discrimination in Employment Act of 1967, which describes the rules for hiring and firing employees above the age of 40. The Senate also plays a role in international agreements, or treaties, as it is empowered to ratify treaties negotiated by the president. These treaties (e.g., the North American Free Trade Agreement, or NAFTA, approved in 1994) impact businesses in all 50 states if they engage in international commerce. See also Timeline of Major 20th-Century Legal Devel- opments That Affect Modern Businesses in Appendix C.

Figure 1.2 provides an example of a federal statute. Notice that a federal statute looks completely different than a case. Federal statutes do not have parties, nor do they involve a controversy between people. Instead, they are a pronouncement of the law and there- fore are sometimes much shorter and terse than a case, which involves people, a specific controversy, and an explanation of events. Note the citation for where to find the statute in the U.S. Code books.

Figure 1.2: Example of a federal statute

29 USC § 623

(a) Employer practices

It shall be unlawful for an employer —

(1) to fail to refuse to hire or to discharge an individual or otherwise

discriminate against any individual with respect to his compensa-

tion, terms, conditions, or privileges or employment, because of

such individual’s age;

Note that the citation for a federal statute is USC, which stands for United States Code. This is where all federal statutes are located. This particular statute is in volume 29 of the United States Code at section 623.

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Section 1.2 Sources of Law CHAPTER 1

State Every state has its own legislature, which is usually patterned after Congress, with two chambers (often, house and senate) comprising elected members from the two main polit- ical parties, one of which forms a majority. These legislatures enact state laws in a wide range of areas, including civil and criminal law and procedure, business regulation, and, of course, taxation. The power of state legislatures to regulate both business and private conduct is far greater than that of the federal government, since most states reserve to themselves in their state constitutions broad powers to legislate in all areas touching on the welfare of their citizens. In addition, the Founding Fathers explicitly limited the pow- ers of the federal government to regulate state matters. In general, states have the right to regulate all areas of private or public life as long as they do not infringe on any right protected by the U.S. Constitution (see Table 1.2).

State and local legislation that does not infringe on a constitutionally protected right is valid as long as it can pass a relatively flexible rational relationship test, which simply means that any state law that is rationally related to the preservation of a valid societal interest is valid. This litmus test of constitutionality is a simple one to pass, since nearly any law can be rationally justified as serving some valid purpose. The test is somewhat more stringent, however, when a vital interest or suspect classification is involved; in such instances, the state must pass a strict scrutiny test of constitutionality, wherein the courts weigh the state’s interest against the infringement of protected rights in determining the validity of a statute. For purposes of the strict scrutiny test, a vital interest can be defined as any constitutionally protected right, such as the rights enumerated under the Bill of Rights. A suspect classification would include a law that makes distinctions based on race, sex, color, religion, or national origin.

A Closer Look: Finding the Law on the Internet

During the course of your work, you may have occasion to research laws. Since you will most likely be accessing legal materials via the Internet, an excellent site that is free to all users is the Cornell University Law School Legal Information Institute (LII), which can be found at http://www.law.cornell.edu/. One advantage of online research is that you do not need an actual citation. For example, if you go to this website and type in “age discrimination law,” the appropriate statute will appear. Please note the exten- sive legal materials that are available online for free.

Many times, finding federal statutes is not useful because their language is overly complex and diffi- cult to understand. In that case, be aware that there are many resources that will explain or interpret what a statute actually means in down-to-earth language along with the underlying reasons for pas- sage of the law. For example, the Congressional Research Service located at http://www.fas.org/sgp/ crs/misc/97-589.pdf explains many complicated federal statutes.

Suppose, for example, that your supervisor asked you to rewrite part of the employee handbook pertaining to discrimination. Many reliable websites exist that can explain the law, from the more basic aspects to detailed and legally sophisticated information. While these do not take the place of utilizing an attorney, there are many daily tasks that you will perform as a manager for which access to law sites will be informative and helpful to your work.

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Section 1.2 Sources of Law CHAPTER 1

Figure 1.3 provides an example of what a state statute “looks like.” Notice that it begins with a number, in this case 28-1381, which is a typical way to recognize that this is statu- tory law. Next, note that it has a title, in this case the sentence beginning with “Driving . . .” Notice that there are differences between the format of a case and a statute. Remember that cases begin with the name of the parties and are the result of a controversy between two people, whereas a statute is passed by a legislative body.

Figure 1.3: Example of a state statute

Local In addition to state and federal legislatures, “local” legislative bodies (e.g., city councils and various town boards and planning commissions) have the power to legislate in areas allowed them by their local charters. These local ordinances also carry the weight of law and form a part of the state’s statutory law. Often when doing business, these local laws are the first place to check when a question about the legality of a certain action arises, such as zoning. Local laws are frequently restrictive and much more narrow in scope and intent than either state or federal laws.

Constitutional Law

In addition to judicial and statutory law, 51 constitutions play a significant role in formu- lating “the law.” There are 51 constitutions because each state has a constitution (50) and there is one federal constitution, the U.S. Constitution. A country or state’s constitution is the most fundamental source of law. It delineates in general terms the sovereign state’s form of government and provides the basic framework for its laws. Article VI, Section 2, of the U.S. Constitution specifically sets the U.S. Constitution as the “supreme law of the land” (see Appendix A). As such, no other law passed by a state or the federal government can conflict with it; any law that does can be found by the courts to be unconstitutional and void.

Constitutions are necessarily broad documents. In the United States, the job of interpret- ing the federal constitution and that of every state is left to the courts. Both state and federal courts have the power to interpret the U.S. Constitution, but the final word on the analysis of the federal constitution is reserved to the U.S. Supreme Court, whose interpre- tation of the Constitution is final and represents binding precedent on all lower courts, state and federal.

28-1381. Driving or actual physical control while under the influence; trial by jury;

presumptions; admissible evidence; sentencing; classification

A. It is unlawful for a person to drive or be in actual physical control of a vehicle in this

state under any of the following circumstances:

1. While under the influence of intoxicating liquor, any drug, a vapor releasing substance

containing a toxic substance or any combination of liquor, drugs or vapor releasing sub-

stances if the person is impared to the slightest degree.

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Section 1.2 Sources of Law CHAPTER 1

The U.S. Constitution serves as an important source of law in the areas of governmental power. It empowers states and the federal government to pass and enforce laws that regu- late people’s interactions with one another and with their government while limiting the government’s ability to legislate in certain areas.

Under our Constitution, the federal government is one of limited powers. Congress has the power to legislate only in areas that it has been specifically granted the power to regu- late by the U.S. Constitution. The powers of Congress are enumerated in Article I, Section 8 (see Table 1.2).

Table 1.2: Powers of Congress listed in Article I, Section 8, of the U.S. Constitution

Collect taxes and import duties, pay debts, and provide for the common defense and general welfare of the United States

Borrow money

Regulate commerce with foreign nations, among the states, and with the Indian tribes

Establish rules for naturalization and bankruptcy

Coin money, regulate its value, and fix a standard of weights and measures

Punish counterfeiting

Establish post offices and post roads

Issue patents and copyrights

Set up federal courts inferior to the U.S. Supreme Court

Define and punish crimes on the high seas and crimes against the United States

Declare war, grant letters of marque and reprisal, and make rules regarding the seizure of property under letters of marque and reprisal

Raise and support armies

Create a navy

Regulate the armed forces

Exercise control over the territory encompassing the seat of government

Under the U.S. Constitution, states are free to create legislation to regulate any area not spe- cifically reserved to the federal government. Thus, states can adopt any laws they wish within their borders as long as they do not conflict with a duly enacted federal law or transgress upon any right guaranteed by the U.S. Constitution, as interpreted in the courts.

While the Constitution gives broad regulatory powers to states and the federal govern- ment, it also preserves the rights of the individual in the Bill of Rights. The most significant body of constitutional law concerns itself with the prohibitions on governmental powers enumerated in the Constitution—in particular, the guarantees provided to individuals by the Bill of Rights (the first 10 amendments to the U.S. Constitution), the Fourteenth Amendment, and the U.S. Supreme Court’s interpretation of the broad language in which they are framed.

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Section 1.2 Sources of Law CHAPTER 1

But even the U.S. Constitution is not static. Under Article V of the Constitution, Congress may propose a constitutional amendment by a two-thirds vote by the House of Represen- tatives and the Senate. If a proposed amendment is approved by Congress, it then goes to all the states’ legislatures. If three-quarters of the states’ legislatures approve the amend- ment, it becomes part of the Constitution and the preeminent law of the land. States may also propose amendments to the Constitution to Congress on their own initiative by votes for such a proposal in two-thirds of the states’ legislatures. If the states make the initia- tive, Congress must decide whether to allow ratification by constitutional conventions in three-quarters of the states; the change is then ratified upon its approval by three-quarters of the states’ legislatures, by a constitutional convention in three-quarters of the states, or by a vote for ratification by three-quarters of the states’ legislatures.

Other than the right to each state’s equal representation in the Senate, there is no limit to what changes can be written into the Constitution. To date, the Constitution has been amended 27 times. In the case of the Eighteenth Amendment (1919) (better known as Prohibition), which outlawed the manufacturing, sale, or transportation of intoxicating liquors in the United States, Congress changed its mind and repealed Prohibition in the Twenty-First Amendment (1933), leaving it up to the individual states to prohibit the sale of alcoholic beverages as they saw fit.

Administrative Law

One of the least visible entities that “makes law” is the state or federal administrative agency, whose members are appointed by government leaders but who operate quasi- independently, reporting to Congress and the public. When Congress decided to regulate nuclear energy, for example, it created the Nuclear Regulatory Commission and empow- ered it with the ability to both create and enforce rules for the safe civil use of nuclear energy. Although Congress could have created and enforced these rules itself, individual members of Congress have neither the necessary expertise nor time to engage in such micromanagement of the regulatory environment. The same holds true for other agencies whose primary purpose is the regulation of business and industry, including the Federal Aviation Administration, the Securities and Exchange Commission, the National Labor Relations Board, the Federal Trade Commission, and the Federal Communications Com- mission, among many others.

At the state level, state legislatures and governors also set up administrative agencies to help them regulate business and carry out other important governmental functions. Taken together, the rules that all federal and state agencies promulgate are quasi-judicial and quasi-legislative. That is, they have the force of law and form the most important component of administrative law. Like statutes, however, most administrative rules and many administrative agency decisions are subject to judicial review, the process whereby statutes, administrative rules, and administrative agency decisions are reviewed by courts when challenged. (See Chapter 5, Administrative Law, for a fuller discussion.)

All agencies have this in common: a need to regulate a highly technical industry or busi- ness environment in order to ensure safety and fair practices. Administrative agencies are empowered by either the executive or legislative branches of the state or federal govern- ment to assist them in carrying out necessary governmental functions that they lack either the time or expertise to carry out themselves.

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Section 1.3 The Three Branches of Government and the Balance of Power CHAPTER 1

1.3 The Three Branches of Government and the Balance of Power

The U.S. government comprises three branches: judicial, executive, and legislative. These branches were designed to balance each other so that one cannot become too powerful. For example, the courts can review the actions by the legislative and executive branches.

No matter how clear the language of a statute or how plain its import, it is generally impossible in a com- mon law jurisdiction to interpret a statute, or the fed- eral or state constitutions, at face value. Ultimately, the validity of any statute is determined by the courts, as is its meaning. A case in point is the Second Amend- ment to the U.S. Constitution, which reads: “A well- regulated militia being necessary to the security of a free state, the right of the people to keep and bear arms shall not be infringed.” Any reasonable interpretation of that amendment that looks at the plain meaning of the language used, particularly when viewed with its revolutionary framers’ inherent distrust of govern- ment, leads one to believe that the U.S. Constitution guarantees the right of citizens to own and bear guns. Nevertheless, the amendment has been interpreted to mean only that individual states can raise their own militias (e.g., national guards) if they so choose.

Regardless of the wisdom of such an interpretation, one message is clear: any statute, including the U.S.

Constitution, means only what the courts ultimately decide it means. This has been the case ever since Marbury v. Madison (5 U.S. 137 [1803]), when Chief Justice John Marshall first announced the power of judicial review (the power of courts to declare the acts of legislative bodies, including the U.S. Congress, void if they violate the courts’ interpre- tation of the Constitution). In what is arguably the greatest act of judicial activism in the history of U.S. jurisprudence, Chief Justice Marshall argued, “It is a proposition too plain to be contested that the Constitution controls any legislative act repugnant to it, or that the legislature may not alter the Constitution by an ordinary act. . . .” This novel proposition was not challenged. The power of the courts generally, and ultimately of the U.S. Supreme Court, to declare any act of the U.S. Congress or any federal or state law unconstitutional has now been well established by more than 200 years of legal prec- edent. Nothing in the U.S. Constitution itself explicitly reserves this right to the courts, and British courts did not historically enjoy a similar privilege (only the king, queen, or Parliament itself could invalidate a royal edict or Act of Parliament). Arguably, the chief justice could have been successfully impeached for overstepping his bounds and infring- ing on congressional legislative privilege. By not challenging the decision, Congress left the courts as the ultimate authority on the Constitution, empowering the judicial branch of government to curb the actions of legislative and executive branches when these, in its view, transgressed the U.S. Constitution.

John Marshall was the first chief justice to enact the power of judicial review.

Wikimedia Commons/Public Domain

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15

Key Terms CHAPTER 1

administrative agency A governmental entity established to regulate a particularly complex, technical area of business or industry (e.g., nuclear power, communica- tions, securities exchanges) that relies on special expertise.

administrative law Law made by a state or federal administrative agency.

Bill of Rights The first 10 amendments to the U.S. Constitution, enumerating the individual rights and powers of citizens.

case law Law made by a judge (or panel of judges) as the result of a controversy between two parties. Also called judicial law.

citation The abbreviations following legal sources that tell the reader where to find the original text of the law.

common law The name given to the body of law established by the English and brought to the United States as the first law established in the colonies. Can also mean case law or the aggregate body of case law.

Congress The federal legislative body that enacts federal statutes.

controversy A dispute between two or more parties that may be decided in court.

federal (U.S.) Constitution The “supreme law of the land” to whose standards all laws must be submitted.

federal statute A law passed by Congress and signed into law by the president.

judicial law See case law.

judicial review The power of courts to declare the acts of legislative bodies, including the U.S. Congress, void if they violate the courts’ interpretation of the U.S. Constitution.

lawsuit A controversy brought to court by litigants: the plaintiff and defendant.

litigation The act of suing someone in court; a plaintiff bringing a lawsuit against a defendant.

precedent A previous case or body of cases that holds sway over current legal decisions in a common law system.

quasi-judicial In the context of adminis- trative agencies, describes the process of adjudicating disputes over agency rules or their application in hearings similar to trials, presided over by administrative law judges—that is, when an agency acts “like a court.”

quasi-legislative Describes the process of creating one’s own rules (such as when an administrative agency exercises a legisla- tive power).

stare decisis The use by a judge of previ- ous decisions (precedent) to make a legal decision or ruling.

state constitution Each state’s governing document that sets the standard for all laws within its borders. State constitutions are established, written, and amended by the state legislature.

state statute A law passed by a state legis- lature and signed into law by the governor.

statute A law passed by either a state or federal legislature.

U.S. Code (U.S.C.) The set of books that contains all the federal statutes passed by Congress.

Key Terms

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16

Critical Thinking and Discussion Questions CHAPTER 1

Critical Thinking and Discussion Questions

1. Why do business managers and others need to understand the foundations, origins, and scope of the law?

2. What is the advantage to the American legal system of using stare decisis? 3. How does the concept of judicial review empower the court system? 4. Locate the website for your state’s legislature. Find a recent law passed by your

state legislature and give the citation for the statute as well as a brief summary of the legislation.

5. Locate a case on the Internet. What is the citation for the case? What happened in the case? How did you go about finding the case? Does the case use stare decisis in its decision, and if so, how?

6. Why were administrative agencies created? Find the website for an administra- tive agency and explain what types of issues the agency deals with and whether it holds hearings. If the agency does hold hearings, describe the types of opinions it issues.

7. Suppose that Judge Harrison is hearing a case in her court and that the attorneys present her with two disparate cases to use in her decision. Based on the concept of stare decisis, how would the judge go about making her decision? Does Judge Harrison have to use previous cases to make a ruling in the current case?

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Beginning a Civil Lawsuit 2 In the course of your business career, you may be involved in one or more lawsuits. In 2010 alone, filings of civil and criminal cases in the U.S. district courts grew 2%, to 361,323 (United States Courts, 2011). Considering that this is only one of hundreds of courts in the United States, the amount of litigation taking place on a daily basis is astounding. (See the United States Courts website for more details and statistics: http://www.uscourts.gov/news/newsview/11-03-15/Fil ings_in_the_Federal_Judiciary_Continued_to_Grow_in_Fiscal_Year_2010.aspx.)

Understanding what a lawsuit is and how it works, some of the ways to defend against one, and when to seek legal assistance is essential for efficiently running a business. This chapter will begin by discussing the steps involved in a civil lawsuit, paying particular attention to in personam jurisdiction and subject matter jurisdiction. To set the foundation for this discussion, we first clarify a number of important concepts.

2.1 Distinguishing Between Civil and Criminal Actions

It is important to be able to distinguish between civil and criminal matters. A civil lawsuit is one brought by a private plaintiff, whereas a criminal action is brought by the government through the state attorney or district attorney; if a federal matter, it is brought through the U.S. Attorney. A civil action is brought to seek the remedy of money damages (or other remedies such as an injunction), whereas criminal actions seek jail sentences, penalties, and fines. Finally, the bur- den of proof in a civil action is a preponderance of the evidence, whereas for criminal actions, it is evidence that is beyond a reasonable doubt. A preponderance of the evidence is a much lower burden of proof and can mean that a majority of the jurors must be more convinced than not that the defendant is liable. In a criminal action, however, the state (in the person of the prosecutor), for example, must convince every single member of the jury of the defendant’s guilt, leaving only a small amount of doubt, perhaps quantifiable as less than 10%. Table 2.1 provides a comparison of civil and criminal actions.

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Section 2.1 Distinguishing Between Civil and Criminal Actions CHAPTER 2

Table 2.1: Comparison of civil versus criminal actions

CIVIL CRIMINAL

What type of action? Plaintiff seeks monetary damages for the defendant’s actions

The state or U.S. government seeks to punish the defendant, impose fines, or require restitution

Where is the action brought? Civil court Criminal court

Who initiates the action? A private plaintiff, usually through an attorney

The state or the U.S. government through the district attorney or the U.S. Attorney

How does the action commence?

The defendant is served with papers called the summons and complaint

The defendant is arrested or a grand jury is convened; eventually, the defendant is brought to court for an arraignment, where the charges are read to him or her

What is the burden of proof? Preponderance of the evidence: A majority of the jury (51% or more) must be more convinced than not (51% or more) that the defendant is liable

Beyond a reasonable doubt: All of the jury must be convinced by more than 90% that the defendant is guilty

What is especially confusing to students when studying the difference between civil and criminal actions is that many events are both civil and criminal. For example, suppose a stranger enters your business and makes threatening gestures while yelling, “I am going to kill you!”; he then rushes toward you with a gun in his hand. You are so frightened that you have a heart attack and miss a month of work. You could sue that stranger for the torts (in a civil case) of assault, seeking monetary damages for your injuries and lost wages. This would be a private lawsuit in which you would hire an attorney and sue the defendant in civil court. At the same time, you could press charges against the same defendant and turn the matter over to the police. They would file a report that the district attorney would then consider. If they thought there was enough evidence of a crime, their office could start a prosecution against the defendant for criminal assault.

Criminal defendants have constitutional protections such as the “right to a speedy trial,” and the proceedings will most likely take place in court many years before a civil lawsuit would. Note that in both the civil and criminal actions, the cause of action or incident is assault and battery; but the burdens of proof are different, the trials will take place at differ- ent times, different parties bring the lawsuit, and what makes up the tort and what makes up the crime have different definitions. Think of torts and crimes as parallel highways, each with their own unique landmarks.

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Section 2.2 Steps in a Civil Lawsuit CHAPTER 2

2.2 Steps in a Civil Lawsuit

Now that we have distinguished between civil and criminal, the rest of this chapter will deal only with civil litigation (criminal law is discussed in Chapter 6). The choices discussed below are confined to the vocabulary used only for civil cases. Suing a person in court for money is called litigation. Litigation is time consuming and expensive and should be avoided whenever possible. It is a public matter and can be reported in the newspaper, discussed among strangers, and subjected to interpretation by anyone in the community. A business whose name is splashed across the evening news or discussed on the Internet, even if it has done nothing wrong, will look guilty. Custom- ers may avoid doing business with this entity, and potential clients may form a negative opinion of it. Litigants often report that it is the most stressful experience of their lives, and one not to be embarked upon lightly. One way to avoid litigation is to seek a form of alternative dispute resolution, which will be discussed in Chapter 3. However, should you become involved in litigation, it is important to understand the steps in a civil lawsuit. The first three are determining cause of action, determining in personam jurisdiction, and determining subject matter jurisdiction.

Step One: Determining Cause of Action

Often, people feel wronged due to incidents that have no basis in law. Hurt feelings, name- calling, and derision are examples. An individual contemplating a lawsuit must first con- sider whether or not there is a justiciable cause of action. A justiciable cause of action is one that involves a protected legal right and is “able to be adjudicated,” as opposed to a nonjusticiable cause of action, which would involve something like hurt feelings or a bruised ego. A cause of action is a wrong defined by law and recognized as a viable legal claim. For example, negligence is a cause of action when someone unintentionally injures another. Suing for an incident that does not have a viable cause of action will result in dis- missal of the lawsuit. Attorneys are trained to recognize causes of action, and one of the most important reasons to consult an attorney is to determine whether one’s grievance is worth addressing in court.

If a cause of action seems viable, the next determination is where to bring the lawsuit. By where, we mean what state. Many students immediately jump to the conclusion that law- suits are brought where the incident occurred. This is more likely true in criminal actions. In civil actions, however, where to sue is a more complex process, dealing with the con- cept of in personam jurisdiction.

Step Two: Determining In Personam Jurisdiction

In personam, or personal, jurisdiction determines the power of a court to decide a case between the specific litigants involved. In order to have in personam jurisdiction over the defendant, at least two requirements must be met:

1. The state where the plaintiff wishes to sue the defendant must have minimal contacts with the defendant.

2. The defendant must be notified of the lawsuit.

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Section 2.2 Steps in a Civil Lawsuit CHAPTER 2

Minimal Contacts The U.S. Constitution guarantees due process of law, or fairness to its citizens. It would not be fair to be sued in a state in which one had never traveled or conducted business. Stated another way, it is fair to sue a defendant if he or she has been in a state and entered into a contract or committed a wrong there.

Generally speaking, state courts’ personal jurisdiction extends only to persons who have substantial contacts with the state. Although state laws vary somewhat as to what consti- tutes a substantial contact with the state, in general, defendants who meet any one of the following criteria are deemed to have sufficient contact with a state to allow its courts to adjudicate matters in which they are a party:

A. PHYSICAL PRESENCE: The defendant is present in the state when he or she is served with notice of the lawsuit; OR

B. DOMICILIARY: The defendant is living in the state; OR

C. THE LONG-ARM STATUTE OR DOING BUSINESS: The defendant is doing business in the state (e.g., working or conducting business in the state on a regular basis); OR

D. THE LONG-ARM STATUTE OR COMMITTING A TORT: The defendant is committing a tort in the state; OR

E. OWNING REAL PROPERTY: The defendant is owning real or personal property in the state, but if property ownership is the only contact with the state, courts in the state may not issue a judgment that extends beyond the value of the prop- erty. When personal jurisdiction is based on property ownership in the state, it is referred to as quasi in rem jurisdiction, and it is the property itself that is sued rather than the person of its owner. If the property owner chooses not to appear in the state to defend himself, a default judgment can be issued and the property seized and sold to satisfy the judgment; OR

F. AGREEING TO IN PERSONAM JURISDICTION: The defendant voluntarily agrees to allow the state to exert personal jurisdiction by personally appearing before the court as a plaintiff (one who institutes a lawsuit) or defendant (one who defends oneself against a lawsuit initiated by another).

A Closer Look: In Personam Jurisdiction

Read the following article and then consider all of the possible states that would have in perso- nam jurisdiction, all of the possible federal courts that would have subject matter jurisdiction, and which state courts by type, not name, would have subject matter jurisdiction. Assume that Gabriela Cedillo was not an employee at the time of the injury. Ask yourself why this would make a difference. Assume that Paramount Pictures is located in California.

http://www.latimes.com/entertainment/envelope/cotown/la-et-ct-injured-worker-transform ers-20120523,0,7893794.

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Section 2.2 Steps in a Civil Lawsuit CHAPTER 2

In Personam Jurisdiction: The Long-Arm Statute in Depth States have enacted long-arm statutes that allow them to extend personal jurisdiction to people who do not meet any of the noted jurisdictional criteria. Typically, states’ long-arm statutes allow them to exert personal jurisdiction over anyone who commits a crime or a tort in the state or who enters into a contract that is the subject of the lawsuit in the state. Under a state’s long-arm statute, for example, a person who drives from Rhode Island to Florida can be forced to appear and defend himself in lawsuits brought by citizens of any East Coast state he drove through on the way, for accidents or traffic violations alleged to have been committed by him while driving through those states, even if he has had abso- lutely no other contact with those states. Likewise, a citizen of Nevada who mails a letter bomb to a citizen of California can be sued in California for any civil or criminal damages flowing from that act, even if he has no other contacts with that state.

To gain a better understanding of in personam jurisdiction, read the following case excerpts and respond to the questions at the end of the section. In the first case, the issue before the court is whether (consistently with the Due Process Clause of the Fourteenth Amend- ment) an Oklahoma court may exercise in personam jurisdiction over a nonresident auto- mobile retailer and its wholesale distributor in a products-liability action. In this situation, the defendants’ only connection with Oklahoma was an automobile sold in New York to New York residents, who later became involved in an accident in Oklahoma.

Cases to Consider: World-Wide Volkswagen v. Woodson

World-Wide Volkswagen v. Woodson, 444 U.S. 286 (1980)

Harry and Kay Robinson purchased a new Audi automobile from petitioner Seaway Volk- swagen, Inc. (Seaway), in Massena, N.Y., in 1976. The following year the Robinson fam- ily, who resided in New York, left that State for a new home in Arizona. As they passed through the State of Oklahoma, another car struck their Audi in the rear, causing a fire which severely burned Kay Robinson and her two children. The Robinsons subsequently brought a products-liability action in . . . , Oklahoma, claiming that their injuries resulted from defective design and placement of the Audi’s gas tank and fuel system.

World-Wide is incorporated and has its business office in New York. It distributes vehi- cles, parts, and accessories, under contract with Volkswagen, to retail dealers in New York, New Jersey, and Connecticut. Seaway, one of these retail dealers, is incorporated and has its place of business in New York. Insofar as the record reveals, Seaway and World-Wide are fully independent corporations whose relations with each other and with Volkswagen and Audi are contractual only. Respondents adduced no evidence that either World-Wide or Seaway does any business in Oklahoma, ships or sells any products to or in that State, has an agent to receive process there, or purchases advertisements in any media calculated to reach Oklahoma. In fact, as respondents’ counsel conceded at oral argument, there was no showing that any automobile sold by World-Wide or Seaway has ever entered Oklahoma with the single exception of the vehicle involved in the present case. (continued)

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Section 2.2 Steps in a Civil Lawsuit CHAPTER 2

Cases to Consider: World-Wide Volkswagen v. Woodson (continued)

The Due Process Clause of the Fourteenth Amendment limits the power of a state court to render a valid personal judgment against a nonresident defendant. Due process requires that the defendant be given adequate notice of the suit and be subject to the personal jurisdiction of the court. In the present case, it is not contended that notice was inadequate; the only question is whether these particular petitioners were subject to the jurisdiction of the Oklahoma courts.

As has long been settled, and as we reaffirm today, a state court may exercise personal jurisdiction over a nonresident defendant only so long as there exist “minimum contacts” between the defendant and the forum State. The concept of minimum contacts, in turn, can be seen to perform two related, but distinguishable, functions. It protects the defen- dant against the burdens of litigating in a distant or inconvenient forum. And it acts to ensure that the States, through their courts, do not reach out beyond the limits imposed on them by their status as coequal sovereigns in a federal system. . . .

The limits imposed on state jurisdiction by the Due Process Clause, in its role as a guar- antor against inconvenient litigation, have been substantially relaxed over the years. As we noted in McGee v. International Life Ins. Co., supra, at 222–223, this trend is largely attributable to a fundamental transformation in the American economy:

Today many commercial transactions touch two or more States and may involve parties separated by the full continent. With this increasing nationalization of commerce has come a great increase in the amount of business conducted by mail across state lines. At the same time modern transportation and communication have made it much less burdensome for a party sued to defend himself in a State where he engages in eco- nomic activity.

Thus, the Due Process Clause “does not contemplate that a state may make binding a judgment in personam against an individual or corporate defendant with which the state has no contacts, ties, or relations.” Even if the defendant would suffer minimal or no inconvenience from being forced to litigate before the tribunals of another State; even if the forum State has a strong interest in applying its law to the controversy; even if the forum State is the most convenient location for litigation, the Due Process Clause, acting as an instrument of interstate federalism, may sometimes act to divest the State of its power to render a valid judgment.

Applying these principles to the case at hand, we find in the record before us a total absence of those affiliating circumstances that are a necessary predicate to any exercise of state-court jurisdiction. Petitioners carry on no activity whatsoever in Oklahoma. They close no sales and perform no services there. They avail themselves of none of the privi- leges and benefits of Oklahoma law. They solicit no business there either through sales- persons or through advertising reasonably calculated to reach the State. Nor does the record show that they regularly sell cars at wholesale or retail to Oklahoma customers or residents or that they indirectly, through others, serve or seek to serve the Oklahoma market. In short, respondents seek to base jurisdiction on one, isolated occurrence and whatever inferences can be drawn therefrom: the fortuitous circumstance that a single Audi automobile, sold in New York to New York residents, happened to suffer an accident while passing through Oklahoma. (continued)

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Section 2.2 Steps in a Civil Lawsuit CHAPTER 2

Cases to Consider: World-Wide Volkswagen v. Woodson (continued)

Respondents observe that the very purpose of an automobile is to travel, and that travel of automobiles sold by petitioners is facilitated by an extensive chain of Volkswagen ser- vice centers throughout the country, including some in Oklahoma. However, financial benefits accruing to the defendant from a collateral relation to the Forum State will not support jurisdiction if they do not stem from a constitutionally cognizable contact with that State. See Kulko v. California Superior Court, 436 U.S., at 94–95. In our view, what- ever marginal revenues petitioners may receive by virtue of the fact that their products are capable of use in Oklahoma is far too attenuated a contact to justify that State’s exer- cise of in personam jurisdiction over them.

Read the full text of the case here: http://www.law.cornell.edu/supremecourt/text/444/286.

Questions to Consider

1. Why is taking an automobile purchased in New York State to Oklahoma not sufficient to grant in personam jurisdiction?

2. Why did the Supreme Court of Oklahoma think that it had in personam jurisdiction over World- Wide Volkswagen?

3. What does the Supreme Court say here about the purpose of minimum contacts? 4. What did the court say about whether or not Oklahoma had minimal contacts with World-Wide? 5. Did the court say that the plaintiffs could or could not sue World-Wide in Oklahoma? 6. What was the court’s reasoning?

In the next case we consider whether or not in personam jurisdiction is established because a manufacturer from another country is aware that parts it makes and sells will eventu- ally reach the United States. The manufacturer, Asahi, made the valve stems that go into motorcycle tires. The stems were then shipped to tire manufacturers worldwide, who inserted them into the tires and sold them. One of the tires was on a motorcycle involved in an accident in the State of California.

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Section 2.2 Steps in a Civil Lawsuit CHAPTER 2

Cases to Consider: Asahi Metal Industry v. Superior Court of California

Asahi Metal Industry v. Superior Court of California, 480 U.S. 102 (1987)

Excerpts of the opinion are as follows:

On September 23, 1978, on Interstate Highway 80 in Solano County, California, Gary Zurcher lost control of his Honda motorcycle and collided with a tractor. Zurcher was severely injured, and his passenger and wife, Ruth Ann Moreno, was killed. In September 1979, Zurcher filed a product liability action in the Superior Court of the State of California in and for the County of Solano. Zurcher alleged that the 1978 accident was caused by a sudden loss of air and an explosion in the rear tire of the motorcycle, and alleged that the motorcycle tire, tube, and sealant were defective. (He sued Cheng Shin, the Taiwanese manufacturer of the tube and Cheng Shin then sued Asahi, the manufacturer of the stem inside the tube. Cheng Shin was eventually dropped from the case, leaving the lawsuit against Asahi.)

Sales to Cheng Shin accounted for 1.24 percent of Asahi’s income in 1981 and 0.44 per- cent in 1982. Cheng Shin alleged that approximately 20 percent of its sales in the United States are in California. Cheng Shin purchases valve assemblies from other suppliers as well, and sells finished tubes throughout the world. In 1983 an attorney for Cheng Shin conducted an informal examination of the valve stems of the tire tubes sold in one cycle store in Solano County. The attorney declared that of the approximately 115 tire tubes in the store, 97 were purportedly manufactured in Japan or Taiwan, and of those 97, 21 valve stems were marked with the circled letter “A,” apparently Asahi’s trademark. Of the 21 Asahi valve stems, 12 were incorporated into Cheng Shin tire tubes. The store contained 41 other Cheng Shin tubes that incorporated the valve assemblies of other manufacturers. An affidavit of a manager of Cheng Shin whose duties included the pur- chasing of component parts stated: “‘In discussions with Asahi regarding the purchase of valve stem assemblies the fact that my Company sells tubes throughout the world and specifically the United States has been discussed. I am informed and believe that Asahi was fully aware that valve stem assemblies sold to my Company and to others would end up throughout the United States and in California.’” An affidavit of the president of Asahi, on the other hand, declared that Asahi “‘has never contemplated that its limited sales of tire valves to Cheng Shin in Taiwan would subject it to lawsuits in California.’”

***

The Due Process Clause of the Fourteenth Amendment limits the power of a state court to exert personal jurisdiction over a nonresident defendant. “[The] constitutional touch- stone” of the determination whether an exercise of personal jurisdiction comports with due process “remains whether the defendant purposefully established ‘minimum con- tacts’ in the forum State.” Most recently we have reaffirmed the oft-quoted reasoning of Hanson v. Denckla, 357 U.S. 235, 253 (1958), that minimum contacts must have a basis in “some act by which the defendant purposefully avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws.” “Jurisdiction is proper . . . where the contacts proximately result from actions by the defendant himself that create a ‘substantial connection’ with the forum State.”

It had been argued in World-Wide Volkswagen that because an automobile retailer and its wholesale distributor sold a product mobile by design and purpose, they could fore- see being haled into court in the distant States into which their customers (continued)

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Section 2.2 Steps in a Civil Lawsuit CHAPTER 2

Cases to Consider: Asahi Metal Industry v. Superior Court of California (continued) might drive. The Court rejected this concept of foreseeability as an insufficient basis for jurisdiction under the Due Process Clause. The Court disclaimed, however, the idea that “foreseeability is wholly irrelevant” to personal jurisdiction, concluding that “[the] forum State does not exceed its powers under the Due Process Clause if it asserts personal juris- diction over a corporation that delivers its products into the stream of commerce with the expectation that they will be purchased by consumer[s] in the forum State.” The Court reasoned: “When a corporation ‘purposefully avails itself of the privilege of conducting activities within the forum State,’ Hanson v. Denckla, it has clear notice that it is subject to suit there, and can act to alleviate the risk of burdensome litigation by procuring insur- ance, passing the expected costs on to customers, or, if the risks are too great, severing its connection with the State. Hence if the sale of a product of a manufacturer or distributor . . . is not simply an isolated occurrence, but arises from the efforts of the manufacturer or distributor to serve, directly or indirectly, the market for its product in other States, it is not unreasonable to subject it to suit in one of those States if its allegedly defective merchandise has there been the source of injury to its owners or to others.”

***

The reasoning of the Supreme Court of California in the present case illustrates the for- mer interpretation of World-Wide Volkswagen. The Supreme Court of California held that, because the stream of commerce eventually brought some valves Asahi sold Cheng Shin into California, Asahi’s awareness that its valves would be sold in California was sufficient to permit California to exercise jurisdiction over Asahi consistent with the requirements of the Due Process Clause. The Supreme Court of California’s position was consistent with those courts that have held that mere foreseeability or awareness was a constitutionally sufficient basis for personal jurisdiction if the defendant’s product made its way into the Forum State while still in the stream of commerce. . . .

. . . We have previously explained that the determination of the reasonableness of the exercise of jurisdiction in each case will depend on an evaluation of several factors. A court must consider the burden on the defendant, the interests of the Forum State, and the plaintiff’s interest in obtaining relief. It must also weigh in its determination “the interstate judicial system’s interest in obtaining the most efficient resolution of contro- versies; and the shared interest of the several States in furthering fundamental substan- tive social policies.”

. . . The possibility of being haled into a California court as a result of an accident involv- ing Asahi’s components undoubtedly creates an additional deterrent to the manufac- ture of unsafe components; however, similar pressures will be placed on Asahi by the purchasers of its components as long as those who use Asahi components in their final products, and sell those products in California, are subject to the application of California tort law. . . .

In the present case, this advice calls for a court to consider the procedural and substan- tive policies of other nations whose interests are affected by the assertion of jurisdiction by the California court. . . . “Great care and reserve should be exercised when extending our notions of personal jurisdiction into the international field.” (continued)

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Section 2.2 Steps in a Civil Lawsuit CHAPTER 2

Cases to Consider: Asahi Metal Industry v. Superior Court of California (continued) Because the facts of this case do not establish minimum contacts such that the exercise of personal jurisdiction is consistent with fair play and substantial justice, the judgment of the Supreme Court is reversed.

Read the full text of the case here: http://www.law.cornell.edu/supremecourt/text/480/102.

Questions to Consider

1. Did the California Supreme Court agree that California had in personam jurisdiction over Asahi? 2. How did the Supreme Court use the World-Wide opinion in this case? 3. What did the Court say about the use of “foreseeability” as a reason to grant in personam

jurisdiction? 4. Is putting a product into the stream of commerce sufficient cause to grant in personam juris-

diction? Where does the boundary start and stop? 5. What did the U.S. Supreme Court say is the determinative factor for establishing minimum

contacts? 6. What is the difference between “purposefully availing oneself of the forum” from “foreseeability”? 7. How would you characterize “traditional notions of fair play”? 8. What was the final conclusion by the Court in regard to in personam jurisdiction over Asahi?

Why?

With the advent of the Internet, the law is still evolving with regard to what constitutes a minimum contact. Since the defendant is not physically present in the state, the question becomes whether or not doing business online suffices to grant a minimum contact over a defendant. At present, the law varies widely from state to state. For example, in New York, a website through which Internet users could access a seller’s products was held to be suf- ficient to grant in personam jurisdiction when the total yearly sales surpassed $2,000 (Bliss- world, LLC v. Kovack, N.Y. Sup.Ct., July 9, 2001). In contrast, an Ohio opinion stated that “a passive Internet website that does little more than make information available to those who are interested in it is not grounds for the exercise of personal jurisdiction” (Edwards v. Erdey, 770 N.E.2d. 673 [Ohio Com. Pl. 2001]). To date, it appears that sales of goods may constitute sufficient minimum contacts, but committing a tort via the Internet does not.

Service of Process Now that we have established the first requirement of in personam jurisdiction, minimum contacts, we will next address the second component, service of process. Service of pro- cess simply means that the defendant must be given notice of the lawsuit, which may be done by handing the defendant the papers telling him that he or she is being sued. The papers that are used to initiate a lawsuit are the summons and the complaint. In most states, these two papers are served together. The summons is usually a one-page docu- ment telling the defendant to appear in court, while the complaint is much more detailed and gives the plaintiff’s version of what happened, tells the court the name of the cause of action, sets forth the basis for in personam jurisdiction, and ends with a prayer for relief or request for money. Figure 2.1 provides an example of a complaint.

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27

Section 2.2 Steps in a Civil Lawsuit CHAPTER 2

Figure 2.1: Sample complaint

Example taken from http://www.nycourts.gov/courts/6jd/forms/SRForms/complaint_examp.pdf

Notice that the complaint is organized in numbered paragraphs and contains distinct parts, including the name of the court at the very top, the litigants, and the description of events, at least from the plaintiff’s point of view. You may be surprised to learn that com- plaints are sometimes hundreds of pages long owing to the number of defendants listed and the range of causes of actions brought.

SUPREME COURT OF THE STATE OF NEW YORK

COUNTY OF BROOME

-------------------------------------------------------------------------

JOHN JONES,

Plaintiff , Index No. 2012-0130

- against -

COMPLAINT

GEORGE SMITH,

Defendant.

-------------------------------------------------------------------------

TO THE SUPREME COURT OF THE STATE OF NEW YORK

The complaint of the plaintiff, John Jones, respectfully shows and alleges

as follows:

1. The plaintiff herein, John Jones, is a resident of the State of New York.

Mr. Jones resides at 32 Adams Street, Vestal, New York.

2. The defendant herein, George Smith, has a principal place of business

at 125 Main Street, Binghamton, New York. Defendant is engaged in the business

of building submarines.

3. Plaintiff Jones desired to have a small submarine built pursuant to a design

prepared by him. He and defendant discussed his needs and specifications for this

project.

4. On March 1, 2012, plaintiff and defendant entered into a written agreement.

Pursuant thereto, plaintiff agreed to pay the sum of $200,000.00 for the submarine.

Plaintiff was obligated to make a down payment of $100,000.00 on or before April 1,

2012, with the balance to be due upon delivery of the submarine. The defendant

agreed to build the submarine in accordance with plaintiff’s design for the aforesaid

price and to complete the work and deliver the boat to a fixed place on or before

July 15, 2012.

5. On March 8, 2012, plaintiff delivered to defendant a certified check in the sum

of $100,000.00, which defendant cashed.

6. Defendant failed to deliver the submarine on or before July 15, 2012, as

agreed. Plaintiff made numerous phone calls and sent several letters to defendant

about the contract, but received no response.

7. By reason of the facts and circumstances stated above, defendant has

breached the contract.

8. By reason of the facts and circumstances stated above, plaintiff has been

damaged by defendant in the sum of $120,000.00. WHEREFORE, plaintiff

demands judgment against defendant in the sum of $120,000.00, plus interest

from July 15, 2012, costs and disbursements, together with any other relief the

Court finds to be just and proper.

-----------------------

,

Name of plaintiff

Name of court where filed

Name of defendant

Filing number supplied by the state

Establishes the in personam jurisdiction

States the cause of action

States the damages the plaintiff is asking the court to award

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28

Section 2.2 Steps in a Civil Lawsuit CHAPTER 2

There are a number of different ways to notify the defendant of the lawsuit. First, the defendant may receive notice through personal delivery, which means that the defen- dant is handed the summons and the complaint. In some states this is done by the sheriff, and in others, by a private, paid process server. This is often called actual or personal service of process.

If the process server shows up at the defendant’s home to serve the papers, and the defen- dant is not at home, many states allow the papers to be left with delivery upon a family member so long as he or she is above the age of 16, or similar. This is called substituted service of process. On occasion, the defendant cannot be found, nor is there anyone ever at the home, but the defendant does have a home. In that case, the courts allow the process server to attach the summons and complaint to the defendant’s door and mail a certified copy to the defendant. While this is not an exhaustive list of all the ways to serve process, it does convey some of the more common methods.

If the defendant is a business, such as a corporation, then service of process usually takes place through an agent of the corporation. This agent is listed in corporate papers on file with the state where the corporation was formed and is easily discernible.

Let’s suppose for a moment that the defendant does not own a home and lives by him- self or herself but at an unknown address. In that case, there is no home or apartment, so a summons and complaint cannot be attached; there is no one at home, so there is no substituted service; and the defendant cannot be found, so there is no personal service. If the process server cannot find the defendant, then the bottom line is that the lawsuit cannot proceed. In this way, it is possible for a defendant to avoid ever being sued in a civil lawsuit.

Step Three: Determining Subject Matter Jurisdiction

Subject matter jurisdiction (also referred to as in rem jurisdiction) is the power of a court to adjudicate a certain type of case. Once the plaintiff has decided the in personam juris- diction, or in which state to bring the lawsuit, the next consideration is in which court to try the case. The U.S. legal regime is actually composed of two very distinct court sys- tems. Each of the 50 states has its own court system (so there are 50 different state court regimes), and there is one federal court system located in each of the states.

State Court System Typically, state courts are divided into the following classifications: courts of limited jurisdiction or general jurisdiction, and courts that hear trials or appellate courts. Sup- pose that a state’s family court is empowered to adjudicate issues relating to domestic relations, such as divorce and child custody disputes. We would say that the subject mat- ter jurisdiction of the family court is divorce and child custody, meaning that when this state’s family court was created, it was given the power to settle controversies over these specific areas. It cannot, however, hear cases relating to traffic violations, breach of con- tract, or negligence because it was not empowered to adjudicate those types of cases. Ulti- mately, however, the final word on the interpretation of all federal law rests with the U.S. Supreme Court, which can hear appeals relating to cases involving federal law or the U.S. Constitution from any lower federal court or from any state’s highest court.

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29

Section 2.2 Steps in a Civil Lawsuit CHAPTER 2

The jurisdiction of state courts is set by the state constitution or other state statutes creat- ing and governing the court system (see Figure 2.2). Generally speaking, access to the state courts is broader than that of the federal courts. This is because states have the power to adjudicate all cases and controversies arising out of a state’s laws for its citizens (and oth- ers who have sufficient contacts with the state). State courts can also hear issues relating to federal law unless jurisdiction to hear such cases has been limited to the federal courts, as is the case, for example, with claims against the United States, which must be brought in federal court. Most states impose subject matter jurisdiction limits on their court systems for the sake of expediency, setting up specialized courts with limited subject matter juris- diction to handle routine matters (e.g., traffic court, small claims court).

Figure 2.2: Sample court system

The courts on the bottom level represent where plaintiffs typically begin their lawsuit. The higher levels represent the courts to which they can then appeal.

A court of limited jurisdiction is limited either as to the types of controversies (subject matter) it can hear or to the amount of money it can award. Take, for example, a typical small claims court. Usually these courts are limited to claims filed for $5,000 or less. If a plaintiff sued for $5 million in a small claims court and won, the most the judge could award would be $5,000.

Appeals Court

Trial Courts of General Jurisdiction

Criminal Courts

Surrogate’s Courts

Family Courts

Trial Courts of Limited Jurisdiction Small Claims Courts

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30

Section 2.2 Steps in a Civil Lawsuit CHAPTER 2

Courts of general jurisdiction, on the other hand, are not limited to any type of claim or controversy; they can hear any type of lawsuit and can award any amount of money.

Every state has a court of limited and a court of general jurisdiction. What is confusing is that the names for these courts differ from state to state. It is important that you not try to identify the type of court by its name. For example, in New York State, the Supreme Court is a trial court of general jurisdiction and would be the appropriate place to have a jury trial, for example, in a breach of contract lawsuit. In Mississippi, by contrast, the Supreme Court is the top appeals court, or the very highest court in the state, and hears matters only after they have gone to trial. So while the names are the same, the types of courts they represent are completely different. There is no way to accurately guess the type of state court merely by looking at its name. Table 2.2 lists examples of naming conventions within state court systems.

Table 2.2: Comparison of state courts

Type of Court Possible Names Jurisdiction of Court

Trial or Appeals Location

Appeals Supreme Limited to appeals from the General Trial Court

Appeals State capitol

Trial Circuit Court Claims Court

General: It can hear any type of claim and award any amount of money

Trial One in every county

Trial Small Claims

Justice of the Peace Court

Village Court

Town Court

Traffic Courts

Limited in the amount of money it can award and the types of claims it can hear

Trial In towns, cities

Another major demarcation for courts is whether they are for trials or appeals. Trial courts hear disputes and may impanel a jury that makes a decision about what happened, based on the facts. They call witnesses who give testimony, have a judge that presides, and fol- low rules of evidence for what testimony is admitted for the jury to hear.

Appeals courts, on the other hand, hear cases after there has been a trial. They do not decide facts; instead, they rule on errors of law that took place in the lower court trial. All appeals courts are courts of limited jurisdiction because they are limited as to the type of controversy: appeals.

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Section 2.2 Steps in a Civil Lawsuit CHAPTER 2

The Federal Court System The federal court system was created in the U.S. Constitution and consists of three tiers: trial courts, called U.S. District Courts; appeals courts, called U.S. Courts of Appeal; and at the top, the U.S. Supreme Court. Table 2.3 provides a breakdown of the federal court system.

Table 2.3: The federal court system

Name of Court Type of Court Limited or General Jurisdiction

Location of Court

U.S. Supreme Court Hears appeals from the top state courts and the U.S. Courts of Appeal

Limited to appeals Washington, D.C.

U.S. Court of Appeals Hears appeals from the U.S. District Courts

Limited to appeals 13 circuits throughout the United States; see Figure 2.3

U.S. District Court Trial court Limited to diversity* plus $75,000 or a federal question

At least two in every state

*Meaning that all the plaintiffs are from different states than all the defendants.

Table 2.3 clearly shows that the federal courts are all courts of limited jurisdiction, which means that there are no courts of general jurisdiction at this level. To enter the federal court system, there are only two doors: diversity plus $75,000 or a federal question.

“Diversity” refers to the phrase diversity of citizenship, which means that all the plaintiffs are from different states than all the defendants. In its simplest form, this means that if A, a resident of New York, wished to sue B, a resident of California, there would be diversity, as both the plaintiff and the defendant are from different states. (The plaintiff would also have to sue for the sum of $75,000 or more to meet the second part of the requirement.) The issue of diversity becomes much more complicated when there are hundreds of plain- tiffs and defendants. In such a case, multiple plaintiffs could be from the same state, and multiple defendants could be from the same state, but none of the plaintiffs could be from the same state as any of the defendants, or diversity would fail. In such a case, either the whole lawsuit would have to be heard in state court or the parties defeating diversity would have to be dropped so that the others could stay in federal court.

The other way into federal court is through a federal question, such as a federal statute or a question “arising under the U.S. Constitution,” such as one pertaining to the First Amendment. There is no minimum dollar requirement for federal questions.

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Section 2.2 Steps in a Civil Lawsuit CHAPTER 2

U.S. District Courts There are at least two U.S. District Courts in each state, as shown in Figure 2.3. The State of California, for example, has four bounded districts: Northern, Eastern, Central, and Southern. These represent the locations of the four U.S. District Courts of California; there are four because of the large population of the state. Wisconsin, on the other hand, has only two U.S. District Courts: a Western and an Eastern division.

Figure 2.3: Geographic boundaries of U.S. Courts of Appeals and U.S. District Courts

Federal Bar Association, About U.S. federal courts, http://fedbar.org/Public-Messaging/About-US-Federal-Courts_1.aspx

TX LA

FL

PR VI

GA

SC

NC

VA

ALMS

AR

MO

IA

MN

WI

IL IN

OH

WV

KY

TN

PA

MI NY

VT NH

ME

MA

RI CT

NJ DE MD

FED DC

NM

10

9

5 11

4

6

7

8

3

2 1

CO

WY

MT

ID

UT

AZ

NV

WA

OR

CA

AK

OK Western

Western

Northern

Northern

Northern

Northern Northern

Northern

Northern

Southern

Southern

Central

Southern Southern

Southern

Southern

Southern

Northern

NorthernNorthern Northern

Northern

Northern

Southern

Southern

Southern

Southern

Southern

Central

Southern

Southern

Eastern

Eastern

Eastern

Western

Western

Western

Western

Western

Western

Western

Western

Western

Western

Western

Western

Eastern

Eastern

Eastern

Eastern

Eastern Eastern

Eastern

Eastern

Eastern

Eastern

EasternEastern

Eastern

Eastern

Eastern

Middle

Middle

Middle Middle

Middle

Middle

Middle

KS

NE

SD

ND

MP GU HI

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33

Section 2.2 Steps in a Civil Lawsuit CHAPTER 2

U.S. Courts of Appeal If litigants lose their case in the U.S. District Courts, they can take their case to the U.S. Court of Appeals for the circuit in which their district court sits. The map in Figure 2.3 shows some black circles with numbers in them. Each circle corresponds to an area with a specific color. There are 11 numbers, which represent 11 courts of appeal. There are two more courts of appeal that do not appear on the map, the Federal Appeals Court and the Washington, D.C., Appeals Court. For example, the State of Colorado sits in the 10th Cir- cuit. The 10th Circuit Court of Appeals is located in Denver, Colorado. If a civil suit began in the U.S. District Court in New Mexico, Utah, or Wyoming, the losing parties could appeal to the 10th Circuit Court of Appeals.

As is the case for all appeals, these courts are concerned only with issues of law, not of fact. The losing party can appeal to them only if he or she can show that an error was made in the trial court judge’s application of the law.

Specialized Courts A number of federal courts with limited original jurisdiction are not shown on the map. These include the U.S. Tax Court (which hears cases relating to federal income tax law), the U.S. Claims Court (in which lawsuits against the U.S. government must be filed), and the U.S. Court of International Trade (which adjudicates matters relating to foreign com- merce). Appeals from these courts may generally be taken to the U.S. Court of Appeals that has personal jurisdiction over the litigants.

U.S. Supreme Court The U.S. Supreme Court, the nation’s highest, can hear appeals from all U.S. Courts of Appeal as well as from each state’s highest courts, as long as a question of federal law or the U.S. Constitution is involved.

The process to have an appeal heard by the U.S. Supreme Court consists of filing a peti- tion for a writ of certiorari asking the Court to hear the appeal. If the Court agrees to hear the appeal, we say that the Court has granted a writ of certiorari; if not, it is a denial of a writ of certiorari (cert. denied, for short). The highest court typically receives more than 5,000 requests for appeals each year and grants writs of certiorari at its sole discretion. In recent years, the Court has heard oral arguments for fewer than 100 cases each term. If the Court denies cert., then the decision of the lower court stands.

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34

Key Terms CHAPTER 2

adjudicate To take a matter to court, to litigate, or to sue in a civil action.

appeals court A court that reviews litiga- tion after it has gone to trial and deter- mines whether errors were made by the trial court.

beyond a reasonable doubt The burden of proof in a criminal case, which states that every single member of the jury must be convinced of the defendant’s guilt.

burden of proof The degree to which the plaintiff or the state must convince the jury in order to prevail in the lawsuit or crimi- nal case.

cause of action An underlying legal right that is the basis of a lawsuit and the plain- tiff’s grievance.

civil action A lawsuit based on a civil action and usually requesting monetary damages.

complaint The initial paper served on the defendant in a civil lawsuit that tells the defendant he or she is being sued, the cause of action, and the amount of dam- ages sought.

criminal action A court action brought by the state through the district attorney or the federal government through the U.S. Attorney seeking confinement of the defendant for a wrong.

defendant The person either sued in a civil action or against whom charges are brought in a criminal action.

delivery upon a family member One of the ways to serve process on a defendant if the defendant cannot be found.

denial of a writ of certiorari When the U.S. Supreme Court will not hear the appeal, ending the case.

district attorney A state government employee who prosecutes crimes on behalf of the citizens of the state.

diversity of citizenship When all the plaintiffs are from different states than all the defendants.

domiciliary An individual living in the state.

due process The concept, grounded in the U.S. Constitution, that to ensure “fairness,” all defendants must be given notice of a lawsuit.

federal question A question or issue “aris- ing under the U.S. Constitution” or having a basis in federal law.

general jurisdiction Refers to a court that can hear any type of controversy and award any amount of money.

grant of a writ of certiorari When the U.S. Supreme Court has agreed to hear an appeal.

in personam jurisdiction The power of the state over the defendant’s assets so that if the plaintiff prevails in the lawsuit, the plaintiff can collect money from the defendant.

in rem jurisdiction Jurisdiction of a court over the person’s real or personal property.

justiciable cause of action A cause of action that involves a protected legal right and is “able to be adjudicated,” as opposed to a nonjusticiable cause of action, which involves subjective wrongs, such as hurt feelings or a bruised ego.

Key Terms

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35

Key Terms CHAPTER 2

limited jurisdiction Refers to a court that cannot hear all types of controversy and is limited as to how much money it can award a party.

long-arm statute A law that allows a state to acquire in personam jurisdiction over a defendant who comes into the state and commits a tort or enters into a contract.

minimal contacts The least contact a defendant must have with a state before the state will have jurisdiction over that defendant and his or her assets.

negligence When a person falls short of a reasonable or statutory standard of care and causes foreseeable injury to others.

personal delivery One way to serve the defendant with notice of the lawsuit; hand- delivering the summons and the complaint to the defendant.

personal jurisdiction Jurisdiction of the court over a person, meaning that all of the person’s assets are subject to a taking and sale by the court.

petition for a writ of certiorari A request to the U.S. Supreme Court asking the Court to review a decision from a lower court.

physical presence When the defendant is in the state where he or she is handed the summons and the complaint, thus giving that state in personam jurisdiction over the defendant and his or her assets.

plaintiff The party bringing a civil lawsuit.

prayer for relief The last paragraph in a complaint in which the plaintiff requests damages in a dollar amount.

preponderance of the evidence The bur- den of proof in a civil case. In most states, the plaintiff must convince a majority of the jury “more so than not,” or by 51% or more, that the defendant did a civil wrong and should be liable.

service of process Delivery of the sum- mons and the complaint to the defendant, giving him or her notice of the lawsuit.

small claims courts Courts that are usu- ally limited to claims filed for $5,000 or less.

specialized courts Courts within the federal system that have been established to hear very narrow types of disputes, e.g., bankruptcy or trademarks.

subject matter jurisdiction Which court can hear the case, based on the legislation establishing what that particular court has power to adjudicate.

summons A paper served on the defen- dant that tells the defendant he or she is being sued, by whom, and how long he or she has to respond, but that offers little other information.

tort A civil wrong, other than breach of contract, for which the court can award money damages.

trial court A court that is empowered to hold trials consisting of taking testimony before a judge or jury, rendering decisions, and awarding damages.

U.S. Attorney The federal government employee who prosecutes federal crimes.

U.S. Court of Appeals One of 11 federal courts that hear appeals from the U.S. Dis- trict Courts.

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36

Critical Thinking and Discussion Questions

1. What are the two elements of in personam jurisdiction? 2. What is the difference between in personam jurisdiction and subject matter

jurisdiction? 3. Name the courts of general jurisdiction in the federal system. 4. How are service of process and due process related? Can you think of an

example? 5. What is the burden of proof in a criminal trial? What does this mean? What about

in a civil trial? 6. What is the difference between a court of general jurisdiction and a court of lim-

ited jurisdiction? 7. ABC Corporation is domesticated in the State of California and is doing business

throughout the Southwest. ABC manufactures luxury hot tubs that retail in the $25,000 range. It uses salespeople who travel throughout the Southwest to contact potential clients, arrange for sales, and then follow up for any subsequent issues customers may have. On September 9, 2009, salesperson Horatio Hamilton sold a hot tub to the Anderson family in Albuquerque, New Mexico. Following installa- tion, the hot tub shorted out and severely injured one of the Anderson’s children, who suffered burns on his right leg. The Andersons wish to sue ABC in New Mexico for the injuries suffered under a negligence theory. How would the Ander- sons obtain in personam jurisdiction over ABC? What courts would have subject matter jurisdiction and why?

Critical Thinking and Discussion Questions CHAPTER 2

U.S. District Court The trial court of limited jurisdiction in the federal system; limited to trials involving either diver- sity of citizenship plus $75,000 or more in requested damages, or a federal question.

writ of certiorari A request for a review of the record from the trial court.

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Comstock/Thinkstock

Criminal Law and Torts

Unit II

Chapter 6 Criminal Law

In this chapter you will:

• Understand the elements and classifications of different types of crime.

• Identify defenses to criminal liability.

Chapter 7 Intentional Torts

In this chapter you will:

• Understand the elements and classifications of intentional torts.

Chapter 8 Negligence, Strict Liability, and Product Liability

In this chapter you will:

• Understand the elements of negligence and use of the “reasonable person standard.”

• Identify defenses to negligence.

• Distinguish between strict liability and product liability.

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Criminal Law 6 Criminal law is the branch of law that concerns itself with the punishment of prohibited behav-ior seen as harmful to society as a whole. In every society, criminal law is the primary vehicle through which government imposes standards of behavior for its citizens as a means of pre- venting antisocial behavior and maintaining order. Because criminal law punishes behavior deemed to be damaging to society, it is the branch of law that most clearly reflects a society’s ethical values. All crimes are offenses against society, and convicted criminals are punished by having them for- feit their property (by having to pay a fine), their freedom, and even their lives, depending on the seriousness of their crime. In a criminal trial, a prosecutor (the government representative who is charged with proving the guilt at trial of individuals accused of committing crimes) charges a per- son suspected of committing a crime (the criminal defendant) in order to have that person punished by having to pay a fine, being sentenced to jail, or both. In extreme cases, convicted criminals may also be put to death. Thus, criminal law is punitive in nature, with the intended result of a successful conviction being the punishment of the criminal for having committed the prohibited act.

Although criminal law in both England and the United States developed as common law based on custom and tradition, today all states have extensive criminal codes that enumerate a wide range of prohibited conduct and specify its punishment. As is often the case in our legal system, there are important differences in criminal law statutes at the state and federal level, in terms of both the kinds of conduct that are prohibited and the kinds of punishment that can be exacted for such conduct. Despite these differences, there are still many similarities in the kinds of conduct that are prohibited in each of the 50 states and by the federal government, since all criminal statutes trace their roots to the common law. Most states today have incorporated at least in part the Model Penal Code promulgated by the American Law Institute in 1962 and revised in 1981. (Go to the American Law Institute website http://www.ali.org/index.cfm?fuseaction=publications.ppage&node_id=92 to access this source.) In this chapter, we will focus on areas of criminal law that are fairly standard in most states. Keep in mind, however, that the law is fluid and subject to revision and change; this is particularly true in the area of criminal law, where legislatures are constantly making changes, both to the types of conduct deemed criminal and to the punishment for such conduct, in order to reflect changing societal values and varying needs for law and order.

6.1 Elements of a Crime

There are two elements to every crime that the prosecution must prove before a criminal defen-dant can be found guilty of having committed a crime: (1) a criminal act or omission by the accused and (2) the existence of a wrongful state of mind or intent at the time of the commis- sion of the wrongful act or omission. (A criminal omission is a failure to act when the law imposes a duty to act, such as the duty of a parent to care for and protect a minor child.) If a criminal act (or criminal omission) is carried out with the required criminal intent, then a crime is complete; but criminal intent alone or a harmful act that was not committed with the required criminal intent does not rise to the level of a crime. A few examples should help to illustrate.

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Section 6.1 Elements of a Crime CHAPTER 6

1) Jane hates Josh and wishes he were dead. She spends every waking moment hop- ing for his demise and imagining ingenious, painful ways of bringing it about. One day, Josh is struck by lightning and dies, much to Jane’s delight. Jane is guilty of no crime, since she committed no act to help bring about Josh’s death.

2) Jane wishes Josh were dead. She takes a butcher knife and plunges it into Josh, intending to kill him. Josh dies. Jane is guilty of a crime (murder) since she under- took a criminal act (plunging the knife into Josh) while possessing the necessary criminal intent (the intent to kill him).

3) Jane, while deer hunting, sees the luckless Josh in the woods 100 yards away. He is wearing a tan deerskin-colored coat and hat and crawling on all fours look- ing for a lost contact lens. Believing Josh to be a deer, Jane shoots and kills him. Jane is not guilty of a crime under the facts given, despite the fact that a criminal act was committed (homicide), since she lacked the required criminal intent. (The wrongful act was caused by a mistake rather than the intent to do harm.)

In general, failure to act will not result in criminal liability unless the accused had a duty to act. In our society, individuals are generally free to stand by and do nothing when oth- ers are faced with danger unless:

1) There is a special relationship that by its nature requires the bystander to come to the assistance of the person in danger; or

2) The dangerous situation was caused or contributed to by the bystander.

If a special relationship exists that imposes a duty to act on a bystander, or if the bystander contributed through his actions to placing the victim in a dangerous situation, then the bystander will be guilty of criminal omission if he does not render assistance. The follow- ing example will illustrate:

Sam, a sadistic sociopath who enjoys others’ suffering, watches as a sightless stranger crosses a busy intersection while a tractor-trailer approaches her at a high rate of speed. He does not warn the stranger of the danger or move to assist her. If the truck strikes the sightless woman, Sam will not generally be guilty of any crime. As a stranger, he has no duty to warn or assist another in danger. His failure to do so is clearly morally reprehensible, but since he did not place the woman in the dangerous situation and owed her no legal duty, he is guilty of no crime in failing to assist her through word or deed. Sam would, however, have had an affirmative duty to at least warn the woman if he were the woman’s husband or father, or if he were a police officer on duty whose responsibility is to protect and safeguard the welfare of all citizens in his community.

It is possible to be guilty of a crime without having the required criminal intent in a few kinds of special cases. There are certain types of behavior that legislatures want to prevent regardless of the intent of the person engaging in the behavior, usually because of the inherently dangerous nature of the behavior and the danger it poses to others. Such crimi- nal offenses are termed strict liability crimes. Whenever a strict liability crime is involved, the only issue is whether the act was committed; the mental state of the person committing the act is irrelevant. Typical strict liability offenses include traffic violations and driving

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while under the influence of alcohol or other drugs. If a person is accused of speeding or running a red light, for example, all that needs to be shown by the prosecutor is that the act occurred. It is irrelevant that the accused did not intend to speed or did not see the red light before crossing it; what is punishable is the act itself. Likewise, with driving while under the influence or driving with ability impaired, the fact that the accused may not have intended the violation or was so intoxicated that he or she lacked the ability to form criminal intent is irrelevant.

6.2 Classification of Crimes

Traditionally, crimes have been classified into three basic categories based upon their seriousness: felonies, misdemeanors, and violations. Felonies are the most serious crimes and are punishable by more than one year’s imprisonment in a state or fed- eral penitentiary. Misdemeanors are less serious criminal offenses that can carry a maxi- mum penalty of one year’s imprisonment. Violations are minor offenses that typically are punishable by a fine or short prison sentence of 30 days or less.

Felonies and misdemeanors are further subdivided into other categories based upon the maximum penalty by which they are punishable. The following example is typical, but be aware that, in keeping with our common law system, there is great variation in the crimi- nal statutes among the states in both the classifications and punishment of crimes.

• First-degree felony: Punishable by death or imprisonment from 15 years to life, or by a fine of up to $250,000

• Second-degree felony: Punishable by imprisonment of up to 15 years and/or a fine of up to $10,000

• Third-degree felony: Punishable by imprisonment of up to 5 years and/or a fine of up to $5,000

Violations are also classed by their type and the maximum sentence or fine to which viola- tors can be subjected. Common violations include minor traffic infractions as well as such offenses as littering and spitting on the sidewalk. The maximum fine for each violation is commonly $500 or less.

6.3 Crimes in Business: White Collar Crime

The most common type of crime that you will experience in your work life is so-called white collar crime. When most people speak of white collar crime, they mean nonviolent state or federal crimes committed in a business setting. There are liter- ally hundreds of types of white collar crimes, ranging from insurance fraud to embezzle- ment, so it is impossible to cover all of these in one textbook. As a manager, your primary concerns should be the following:

(1) Not engaging in illegal behavior, even unknowingly; (2) Keeping clear, concise, and organized records in the event that your business is

investigated or subpoenaed;

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(3) Complying with all local, state, and federal taxes; and (4) Complying with all laws regarding workers, such as those from the Occupational

Safety and Health Administration (OSHA), workers’ compensation board, Social Security, and the Federal Insurance Contributions Act (FICA).

Furthermore, as an employee, rather than a manager, you should be aware of your duty to not engage in illegal activity even when ordered to do so by a superior. Following orders is not an excuse for illegal conduct and can result in criminal charges.

Fraud in the Workplace

As a manager, it is important that you be acutely aware of fraud in the workplace. In a 2012 survey of businesses, the Association of Certified Fraud Examiners determined that the typical organization loses 5% of its revenues to fraud each year, which translates to $3.5 trillion worldwide per year for all businesses—a staggering amount (Report to the Nations on Occupation Fraud and Abuse: 2012 Global Fraud Study). Fraud is the most likely crime to take place at work, and perhaps surprisingly, the fraud perpetrator usu- ally has no prior fraud charges or convictions. Employees who commit fraud at work are most likely to be in one of six departments: accounting, operations, sales, executive/ upper management, customer service, or purchasing.

Computer Fraud and Hacking

One of the more likely types of fraud taking place in business is computer fraud. The fed- eral statute law that governs this crime is known as the Computer Fraud and Abuse Act (18 USC §1030). This federal law makes the following acts illegal:

1. Intentionally accessing a computer without authorization to obtain:

• Information contained in a financial record of a financial institution, or con- tained in a file of a consumer reporting agency on a consumer;

• Information from any department or agency of the United States; or • Information from any protected computer;

2. Intentionally accessing without authorization a government computer and affect- ing the use of the government’s operation of the computer; and

3. Knowingly accessing a protected computer with the intent to defraud and thereby obtaining anything of value.

For example, in International Airport Centers v. Citrin (which can be found at http://case law.findlaw.com/us-7th-circuit/1392048.html), an employee erased all the information on his laptop computer when he quit his job. Much of the data he erased was valuable information that the company needed. One reason he chose to delete all the files was to hide his own improper conduct. The provision of the Computer Fraud and Abuse Act (CFAA) on which the employer relied was successfully applied against the employee.

Consider the key excerpts from the following case (citations omitted) and its application of the CFAA to an employee:

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Cases to Consider: U.S. v. Nosal

U.S. v. Nosal (676 F.3d 854) C.A.9 (Cal.) (2012)

Computers have become an indispensable part of our daily lives. We use them for work; we use them for play. Sometimes we use them for play at work. Many employers have adopted policies prohibiting the use of work computers for non-business purposes. Does an employee who violates such a policy commit a federal crime? How about someone who violates the terms of service of a social network- ing website? This depends on how broadly we read the Computer Fraud and Abuse Act.

David Nosal used to work for Korn/Ferry, an executive search firm. Shortly after he left the company, he convinced some of his former colleagues who were still working for Korn/Ferry to help him start a competing business. The employees used their log-in credentials to download source lists, names and contact information from a confidential database on the company’s computer, and then trans- ferred that information to Nosal. The employees were authorized to access the database, but Korn/ Ferry had a policy that forbade disclosing confidential information. The government indicted Nosal on twenty counts, including trade secret theft, mail fraud, conspiracy and violations of the CFAA. The CFAA counts charged Nosal with violations of 18 U.S.C. §1030(a)(4), for aiding and abetting the Korn/ Ferry employees in “exceed[ing their] authorized access” with intent to defraud.

Nosal filed a motion to dismiss the CFAA counts, arguing that the statute targets only hackers, not individuals who access a computer with authorization but then misuse information they obtain by means of such access.

Discussion

The CFAA defines “exceeds authorized access” as “to access a computer with authorization and to use such access to obtain or alter information in the computer that the accesser is not entitled so to obtain or alter.” 18 U.S.C. §1030(e)(6). This language can be read either of two ways: First, as Nosal suggests and the district court held, it could refer to someone who’s authorized to access only certain data or files but accesses unauthorized data or files—what is colloquially known as “hacking.” For example, assume an employee is permitted to access only product information on the company’s computer but accesses customer data: He would “exceed [ ] authorized access” if he looks at the customer lists. Second, as the government proposes, the language could refer to someone who has unrestricted physical access to a computer, but is limited in the use to which he can put the informa- tion. For example, an employee may be authorized to access customer lists in order to do his job but not to send them to a competitor.

***

Congress enacted the CFAA in 1984 primarily to address the growing problem of computer hack- ing, recognizing that, “[i]n intentionally trespassing into someone else’s computer files, the offender obtains at the very least information as to how to break into that computer system.”

Minds have wandered since the beginning of time and the computer gives employees new ways to procrastinate, by g-chatting with friends, playing games, shopping or watching sports highlights. Such activities are routinely prohibited by many computer-use policies, although employees are seldom disciplined for occasional use of work computers for personal purposes. Nevertheless, under the broad interpretation of the CFAA, such minor dalliances would become federal crimes. While it’s unlikely that you’ll be prosecuted for watching Reason.tv on your work (continued)

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Cases to Consider: U.S. v. Nosal (continued) computer, you could be. Employers wanting to rid themselves of troublesome employees without following proper procedures could threaten to report them to the FBI unless they quit. Ubiquitous, seldom-prosecuted crimes invite arbitrary and discriminatory enforcement.

Enforcement of the CFAA against minor workplace dalliances is not chimerical. Employers have invoked the CFAA against employees in civil cases.

***

Employer-employee and company-consumer relationships are traditionally governed by tort and contract law; the government’s proposed interpretation of the CFAA allows private parties to manip- ulate their computer-use and personnel policies so as to turn these relationships into ones policed by the criminal law.

Basing criminal liability on violations of private computer use policies can transform whole categories of otherwise innocuous behavior into federal crimes simply because a computer is involved. Employ- ees who call family members from their work phones will become criminals if they send an email instead. Employees can sneak in the sports section of the New York Times to read at work, but they’d better not visit ESPN.com.

. . . The Internet is a means for communicating via computers: Whenever we access a web page, commence a download, post a message on somebody’s Facebook wall, shop on Amazon, bid on eBay, publish a blog, rate a movie on IMDb, read www.NYT.com, watch YouTube and do the thou- sands of other things we routinely do online, we are using one computer to send commands to other computers at remote locations. Our access to those remote computers is governed by a series of private agreements and policies that most people are only dimly aware of and virtually no one reads or understands.

For example, it’s not widely known that, up until very recently, Google forbade minors from using its services. . . . Adopting the government’s interpretation would turn vast numbers of teens and pre-teens into juvenile delinquents—and their parents and teachers into delinquency contributors. Similarly, Facebook makes it a violation of the terms of service to let anyone log into your account. (“You will not share your password, . . . let anyone else access your account, or do anything else that might jeopardize the security of your account.”) (last visited Mar. 4, 2012). Yet it’s very common for people to let close friends and relatives check their email or access their online accounts. Some may be aware that, if discovered, they may suffer a rebuke from the ISP or a loss of access, but few imag- ine they might be marched off to federal prison for doing so.

Not only are the terms of service vague and generally unknown—unless you look real hard at the small print at the bottom of a webpage—but website owners retain the right to change the terms at any time and without notice. Accordingly, behavior that wasn’t criminal yesterday can become criminal today without an act of Congress, and without any notice whatsoever.

The government assures us that, whatever the scope of the CFAA, it won’t prosecute minor viola- tions. But we shouldn’t have to live at the mercy of our local prosecutor. And it’s not clear we can trust the government when a tempting target comes along. Take the case of the mom who posed as a 17-year-old boy and cyber-bullied her daughter’s classmate. The Justice Department prosecuted her under 18 U.S.C. §1030(a)(2)(C) for violating MySpace’s terms of service, (continued)

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6.4 Crimes Against Property

Crimes against property include offenses that result in the destruction of property or the permanent or temporary deprivation of the owner’s right to exclusively use and enjoy real or personal property. Arson

Under common law, arson was defined as the intentional burning of another’s home. Today, the definition of arson has been substantially expanded in the criminal law statutes of most jurisdictions to include the intentional burning of another’s occupied structure or the intentional burning of any property, including one’s own, for the purpose of col- lecting insurance. For purposes of arson, an occupied structure is usually defined as any personal or real property that is constructed so as to permit overnight accommodation of persons or the conducting of business therein, whether or not the structure is actually occupied at the time that it is burned. Thus, all homes and businesses are subject to arson, as are mobile homes and trailers that are set up for human occupancy. Arson is typically a second-degree felony.

Cases to Consider: U.S. v. Nosal (continued) which prohibited lying about identifying information, including age. See United States v. Drew, 259 F.R.D. 449 (C.D. Cal. 2009). Lying on social media websites is common: People shave years off their age, add inches to their height and drop pounds from their weight.

We therefore respectfully decline to follow our sister circuits and urge them to reconsider instead. For our part, we continue to follow in the path blazed by Brekka, 581 F.3d 1127, and the growing number of courts that have reached the same conclusion. These courts recognize that the plain language of the CFAA “target[s] the unauthorized procurement or alteration of information, not its misuse or misappropriation.”

Conclusion

Because Nosal’s accomplices had permission to access the company database and obtain the infor- mation contained within, the government’s charges fail to meet the element of “without authoriza- tion, or exceeds authorized access” under 18 U.S.C. §1030(a)(4). Accordingly, we affirm the judgment of the district court dismissing counts 2 and 4–7 for failure to state an offense. The government may, of course, prosecute Nosal on the remaining counts of the indictment.

Affirmed.

Read the full text of the case here: http://www.ca9.uscourts.gov/datastore/opinions/2012/04/10/ 10-10038.pdf.

Questions to Consider

1. What does the Computer Fraud and Abuse Act make illegal? 2. What was the defendant in this case charged with doing that was allegedly illegal? 3. What did the court say was legal under the act? What did the court say was illegal under

the act?

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Criminal Mischief

Damaging the personal or real property of another purposely, recklessly, or negligently by the use of explosives, fire, or other dangerous means constitutes criminal mischief. Criminal mischief can be a third-degree felony, a class A, B, or C misdemeanor, or a viola- tion, depending on the nature and extent of the damage caused. (Under §220.3, paragraph 2 of the Model Penal Code, for example, it is a third-degree felony if damage in excess of $5,000 is caused, a misdemeanor if more than $100 but less than $5,000 in damages is caused, a petty misdemeanor if more than $25 but less than $100 in damages is caused, and a violation if $25 or less in damages results from the criminal mischief.)

Burglary

Under common law, burglary was defined as breaking and entering into the dwelling house of another at night with the intent to commit a serious crime inside. As is the case with arson, modern criminal law statutes have liberalized the definition to be less restric- tive. A common definition of burglary today is breaking and entering any occupied structure with the intent of committing any crime inside. The requirement of a breaking is fulfilled whenever the burglar exerts any amount of force to gain access to a building; turning a doorknob or gently pushing in a door that is unlocked both constitute a sufficient break- ing in most states. The requirement of entering is satisfied by the intrusion of any part of a person or any tool in his or her control into the occupied structure. The crime is complete as soon as the breaking and entering is accomplished, provided that the burglar intended to commit a crime inside (see Section 6.1, Elements of a Crime).

The following three examples constitute the crime of burglary.

• Bob Burglar kicks in a door and enters Victoria Victim’s home in order to steal her valuables. Once inside, he is scared off by Victoria wielding a shotgun before he has a chance to take anything of value.

• Belinda Burglar pushes an unlocked door and walks into Vince Victim’s apartment in order to physically assault him.

• Ben Burglar slides open a window to Victoria’s home and, using a fishing pole, manages to hook and reel in a purse and a gold chain from her nightstand as she sleeps.

Bob, Belinda, and Ben are all guilty of burglary since the requirement of breaking and entering with a criminal intent is met in all three cases. Notice that in the third case, Ben never physically enters Victoria’s home; nevertheless, when he casts the fishing line through the window, it is the same as if he had entered himself. Notice too, in that exam- ple, that the sliding up of an unlocked window constitutes a sufficient breaking, and the crime is complete as soon as the line is cast through the window with the intent to commit a crime (stealing the purse and chain), even if he fails to snag the personal property after several casts and goes away empty handed.

Burglary is usually a third-degree felony, but it can be raised to a second-degree felony in many states if the crime is committed at night, if anyone is injured during the commission of the crime, or if the burglar carries a deadly weapon during the burglary.

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Criminal Trespass

Anyone who knowingly enters real property owned by another without permission to do so is guilty of criminal trespass, a misdemeanor. Entering any building not open to the general public without permission constitutes criminal trespass, as does the enter- ing into posted land that warns intruders not to trespass, or the entering into land that the trespasser knows or reasonably should have known belongs to another. Failure to leave another’s property when instructed to do so also constitutes trespass, even if the trespasser originally was given permission to enter the land by its owner or tenant. Will- fully throwing a rock onto another’s land is trespass, as is firing a bullet or arrow above another’s land—even if the bullet or arrow never touches the ground. On the other hand, if a ball accidentally bounces onto a neighbor’s land when children are playing basketball, it would not constitute trespass because the ball was not intentionally thrown there. But the intentional act of retrieving the basketball without consent would constitute trespass.

Under common law, property rights extended below one’s real property (subsurface rights) to the center of the earth and above one’s property (air rights) all the way to the heavens. Today, every jurisdiction limits air rights, typically to a given number of feet above the tallest structure on one’s land. Were this not the case, it would be virtually impossible to engage in civil aviation, and even satellites orbiting miles above the earth would be trespassing on landowners’ air rights.

Robbery

A theft that is accomplished through either the use of force or the threat of force consti- tutes the crime of robbery. Robbery is usually a second-degree felony, but it can become a first-degree felony if the perpetrator inflicts or attempts to inflict serious bodily harm during the course of the crime.

Larceny

The intentional taking and carrying away of the property of another with the intent to permanently deprive the owner of its use constitutes the crime of larceny. Larceny can be either a third-degree felony or misdemeanor, depending upon the value of the stolen property.

Embezzlement

The misappropriation of property in one’s care belonging to another constitutes the crime of embezzlement, which is typically punishable the same as larceny.

Receiving Stolen Property

A person who purchases or otherwise acquires stolen property is guilty of the crime of receiving stolen property, which is usually punishable exactly the same way as larceny, provided that the property is received with actual knowledge that it was stolen or under circumstances that should have made the receiver suspicious that it might be stolen.

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Theft of Services

A person who knowingly receives the benefit of services that are available for compensa- tion through the use of deception or any physical means to avoid paying for such services is guilty of theft of services, a crime punishable the same way as larceny. Common exam- ples of theft of services include using slugs in public telephones, vending machines, or parking meters, as well as illegal hookups to cable services and the use of illegal descram- blers to obtain scrambled satellite broadcasts.

Forgery

The crime of forgery consists of any material alteration to a written document issued by another that is made in order to defraud or mislead anyone. The crime of forgery is a felony or misdemeanor depending on the nature of the offense. Altering government or commercial enterprise instruments that purport to have monetary value, such as cur- rency, stamps, stocks, bonds, and similar instruments, represents a second-degree felony. Altering documents that affect legal relationships, such as wills, trusts, deeds, contracts, and claims releases, is a felony in the third degree. Any other forgery, such as the material alteration of the date in a driver’s license, is a misdemeanor.

Issuing a Bad Check

It is a misdemeanor to issue a bad check: a check drawn on an account that no longer exists or on an account with insufficient funds to honor the check when it is presented. In many states, a person may avoid criminal liability for such checks, also known as bounced checks, by promptly paying the due amount (typically within 10 days of the notice of dishonor).

Credit Card Fraud

Using a forged or stolen credit card to obtain goods, services, or cash advances and using a credit card after it has been canceled or recalled constitutes credit card fraud. Credit card fraud is usually a third-degree felony if the amount of the fraudulent charge exceeds $500 or a misdemeanor if the amount is $500 or less.

6.5 Bribery, Extortion, and Crimes Against the Judicial Process

To ensure fairness in the administration of justice and in the normal conduct of busi-ness, the criminal statutes of every state prohibit conduct that seeks to interfere with fair business practices or the impartial administration of justice. Bribery of a Public Official

At common law, the crime of bribery consisted of promising to give something of value in exchange for a public official’s official conduct. The solicitation, acceptance, or promise

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to give or accept a bribe—called bribery of a public official—is all equally punishable as a misdemeanor. The consideration involved need not be monetary; a promise of sexual favors made to a judge, police officer, or housing inspector for favorable official action is as much bribery as a promise to exchange money or goods for such action.

Commercial Bribery

It is a misdemeanor in most states to solicit, accept, or agree to accept anything of value in exchange for violating a duty of fidelity owed to one’s employer, client, or company as an employee, officer of a corporation, partner, trustee, guardian, or member of a profession. Commercial bribery applies to a wide variety of settings and would include each of the following:

• A promise by a parent to pay a little league umpire $100 if he does not call a child out on strikes;

• A promise to give the CEO of XYZ Company an executive position in ABC Com- pany if she discloses trade secrets;

• An offer by a plaintiff’s attorney to a defendant’s attorney in a civil suit to pay him $100,000 if he loses the case;

• An offer of a new car by an unqualified applicant to Ivy League University to the director of admissions if she is accepted as a student;

• An offer of a designer suit made by Failing Student to Scruffy Professor in exchange for a passing grade.

Threatening a Public Official

Threatening any public official with harm in order to influence official action is a misde- meanor. Making similar threats to influence a judicial or administrative proceeding, how- ever, is a third-degree felony. (Members of a jury are deemed public officials for purposes of this crime.)

Influence Peddling

It is a misdemeanor to solicit, receive, or agree to receive any consideration for the trading of political influence by a public servant. This crime, called influence peddling, includes the solicitation, giving, or receiving of a political endorsement by a public official in exchange for something of value.

Perjury

Making a material misrepresentation while under oath or through a sworn statement (such as an affidavit) constitutes the crime of perjury, a third-degree felony. A misrepresentation is material if it can affect the course or outcome of a proceeding.

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Tampering With Public Records

It is a misdemeanor to knowingly falsify, destroy, or attempt to hide any official govern- ment record or document. This crime, called tampering with public records, also includes creating or using falsified documentation issued by the government, such as using a false Social Security or Alien Registration Card. If the tampering is done to defraud or injure anyone, then the offense is a third-degree felony. Simply carrying a false Social Security card, for example, is a misdemeanor, but using it to attempt to obtain social services that one is not entitled to receive, thereby defrauding the government, is a third-degree felony.

Obstruction of Justice

Any intentional interference with the administration of justice in a person’s official or pri- vate conduct is a misdemeanor called obstruction of justice, regardless of whether such interference is obtained through physical force or official action. Physically interfering with an arrest, disrupting courtroom proceedings, or giving false information that mis- leads police in an investigation are all examples of obstructing justice.

6.6 Attempted Crimes and Criminal Conspiracy

The law punishes not only completed criminal acts, but also the attempted commis-sion of a crime that for some reason is not completed. In addition, conspiring to commit a crime, whether or not the crime is ultimately committed, is a separate offense unto itself.

Aiding in the Commission of a Crime

Any assistance rendered to a criminal in the commission of a crime, called aiding in the commission of a crime, and hiding or converting the proceeds of criminal activity are punishable as a misdemeanor. If the underlying crime was a first- or second-degree fel- ony, however, then facilitating its commission is a third-degree felony.

The Crime of Attempt

Under the Model Penal Code and the criminal codes of most states, the attempt to commit a crime that is not ultimately carried out is punishable to the same degree that the crime itself would have been punishable if completed. In general, in order to convict a criminal defendant for a crime of attempt, all that is necessary is that the defendant have taken a substantial step toward committing the criminal act and that the defendant have acted with the required criminal intent. The penalty for attempting a crime is the same as that for committing the crime attempted, with the exception that first-degree crimes become second-degree attempted crimes.

For example, attempted murder is a second-degree felony because murder is a first-degree felony. But attempted robbery is a second-degree felony because robbery is a second- degree felony, and attempted larceny is either a third-degree felony or a misdemeanor depending on the value of the goods, exactly as is the case with larceny itself.

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It must be noted that a defendant can be tried and convicted for either the attempt to com- mit a crime or the crime itself, but not both.

Criminal Conspiracy

Either planning and agreeing to commit a crime with others or agreeing to assist others in the commission of a crime results in the crime of criminal conspiracy. Criminal conspir- acy, like the crime of attempt, is subject to the same punishment as the underlying crime that the conspirators intend to perpetrate. As is the case with the crime of attempt, crimi- nal conspiracies to commit crimes that are first-degree felonies are punished as second- degree felonies, and the punishment for conspiring to commit any second-degree felony or lower crime is exactly the same as for the underlying crime itself.

The crime of conspiracy is a completely separate crime from the underlying crime that the conspirators intend to commit. Therefore, persons found guilty of criminal conspiracy can also be found guilty of the underlying crime that the conspirators perpetrated, or its attempt if the crime was not fully carried out. The following example will illustrate.

Tom, Dick, and Harriet agree to kill Bill Billionaire and to steal the valuables from his home. Tom agrees to buy a gun from a local illegal gun dealer that spe- cializes in untraceable weapons, Dick agrees to drive the car and disable Bill’s alarm system, while Harriet agrees to do the actual killing. On the appointed day, the three thugs arrive at Bill’s home and break in. Harriet attempts to shoot Bill several times, but the gun jams and will not fire. The three panic, run out, and are arrested a short time later. They are charged with burglary and criminal conspiracy to commit murder, and Harriet is charged with attempted murder. Under the facts given, the three are guilty on all counts.

Despite the fact that there was a criminal conspiracy to commit more than one crime in the example (burglary and murder), there can be only a single conviction for any conspiracy that is ongoing. In this case, the conspiracy charge would be based on attempted murder rather than burglary, since it is the more serious offense. Similarly, if a group of bank rob- bers plan and execute a dozen successful robberies, they can be charged with 12 separate counts of bank robbery but only a single count of conspiracy to commit bank robbery, since the criminal affiliation was ongoing and subject to the same agreement by the parties to commit the crimes.

6.7 Defenses to Criminal Liability

As previously noted, there are two prerequisites to criminal liability: a criminal act and criminal intent. Unless a prosecutor can establish both beyond a reasonable doubt, the defendant is entitled to an acquittal. It stands to reason, then, that crimi- nal defendants can avoid a conviction by presenting evidence that they did not commit the criminal act (such as an alibi that shows they were not present in the area at the time the crime was committed) or, if the criminal act occurred, that the defendant lacked the

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required intent for criminal culpability. To put it another way, criminal defense attorneys have two basic pillars on which to base their defense: that the act in question was not com- mitted by the criminal defendant or that, if the act was committed, the defendant did not possess the requisite criminal intent. In addition, behavior that is normally criminal may be justifiable under certain circumstances, such as the intentional infliction of bodily harm to another in self-defense.

In a criminal trial, the prosecutor must establish beyond a reasonable doubt both that a criminal act occurred and that the defendant committed the act with the required criminal intent. In turn, all that counsel for the defense needs to do in order to be entitled to an acquittal is to inject a reasonable doubt into the minds of jurors as to the defendant having committed the alleged act or as to the defendant having acted with the required criminal intent. Even in situations when the defense cannot effectively raise a reasonable doubt as to a defendant’s guilt, there are some affirmative defenses that the defense can raise to excuse criminal liability. When any of the affirmative defenses is raised at trial, the burden of proof is on the defendant’s attorney to prove the defense by a preponderance of the evi- dence. The following example will illustrate.

Andrew Angry runs up to Don Dunderhead, a candidate for political office in his state, yelling “I’m going to punch your lights out, you blundering idiot. I’ve been listening to your meandering speeches for months and have yet to hear you say a single thing that makes any sense.” Andrew then jumps onto the speaker’s platform and beats Don silly. At his trial for aggravated assault, Andrew’s attorney won’t be able to deny either the act or the intent, since both were broadcast for a week over every television news program. But she might be able to assert an affirmative defense, such as insanity or intoxication, to win Andrew’s acquittal.

Specific defenses to criminal liability include insanity, intoxication, infancy, self-defense, defense of others, defense of property, and entrapment.

Insanity

The basic premise behind the insanity defense is that a person who, owing to some mental illness or deficiency, commits a criminal act that he or she would not otherwise commit should not be held responsible for such an act. A defendant who effectively raises an insanity defense in fact proves to the satisfaction of the jury that, even though he or she committed the criminal act as charged, the act was committed without the requisite crimi- nal intent. In other words, whenever the insanity defense is successfully used, the defense convinces the jury that although a criminal act was committed, its cause was not criminal intent but rather the defendant’s mental infirmity.

Intoxication

The defense of intoxication is very similar to the insanity defense in that it seeks to excul- pate criminal behavior by showing that, at the time the behavior took place, the criminal defendant was incapable of forming criminal intent because he or she was intoxicated.

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If the intoxication is involuntary, the intoxication is treated exactly in the same manner as insanity. If, for example, a state subscribes to the Model Penal Code definition of insanity, then a person who is involuntarily intoxicated cannot be found guilty of a crime if the intoxication prevented the defendant at the time of committing the criminal act from rec- ognizing the wrongfulness of his conduct or from conforming his conduct to the require- ments of the law. In order to qualify for involuntary intoxication, the defendant must establish that he or she was tricked or forced into taking the intoxicating substance.

In cases of voluntary intoxication, where the defendant took the intoxicating substance freely, the effect on the defense varies depending on the nature of the crime. If the crime is one that requires a finding of willful criminal intent in order to prove culpability, as is the case with such offenses as murder, rape, or robbery, then it makes no difference whether the intoxication was voluntary or involuntary. Voluntary intoxication will not be a valid defense, however, when the crime is one that does not require willful criminal intent, such as a strict liability crime (driving while intoxicated or general traffic offenses, for example) or a crime based on negligence or recklessness, such as reckless endangerment or negli- gent homicide. The following two examples will illustrate.

Juan while at a party eats several cookies that, unknown to him, have been laced with LSD. An hour later, while his world seems to melt around him, Juan burns down his college’s administration building and drives away in the college president’s car. He then drives the car at 95 miles per hour in a 15-mph school zone, killing a pedestrian. He is charged with arson, vehicular manslaughter, larceny of the automobile, speeding, and driving while intoxi- cated. In most states, he has a valid defense of involuntary intoxication to all charges, since none of the offenses would have been committed but for his unintentional intoxication.

If Juan committed the above offenses after voluntarily drinking a fifth of vodka while at the party and became so drunk as to lose the ability to know what he was doing, how- ever, his voluntary intoxication would be a valid defense in most states to the arson and larceny charges, for they require willful intent, but not to the manslaughter, speeding, or driving-while-intoxicated charges, since these are offenses based on recklessness and strict liability.

Self-Defense

A person is free to use reasonable force in defense against an unprovoked attack. A per- son may generally use any necessary force to repel a physical attack or the threat of an attack. A person faced with an attack that he or she reasonably believes may cause death or serious bodily injury may use any physical force to repel such a threat or attack, up to and including deadly physical force. The key to the justification of the use of force is the reasonableness in the mind of the victim of the perceived danger. If, for example, a mugger pulls a realistic-looking toy gun on a victim who shoots him with a real gun in response, the victim of the mugging would be justified in repelling the attack even if the mugger were killed in the process, provided that he or she reasonably feared death or serious injury before fending off the attack. If the mugger’s gun in the last example were clearly visible to the victim as a neon-green, transparent toy water pistol, however, the shooting in self-defense would not be justified. In addition, some states require that a victim exhaust

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all reasonable options, including flight from the scene, where practical, before resorting to the use of deadly force (other states have laws that allow would-be victims to “stand their ground”). Even in states where the victim must exhaust reasonable options, though, he or she may generally use deadly force to repel a reasonably perceived threat of death or serious injury within his or her own home without first trying to evade the home invader.

Defense of Others

In every state, a person who rushes to the aid of another who is being victimized may use as much force in defending the person as the person could use himself in his own defense. Thus, if Susan, a passerby, sees Sam with his back against a wall being held up by a gun- man who is threatening to kill him, she can use any force against the assailant that Sam himself could use (she can injure or even kill the assailant in this example, since Sam is clearly in danger of death or serious bodily injury). A problem arises for good Samari- tans when, as is often the case, they act impulsively and base their actions on how things appear, not how they actually are.

Mohammed, a passerby, notices Carla, who is dressed as a police officer, being held at gunpoint by Frank, whom he hears saying “If you move, I’ll shoot.” Mohammed, sure that a police officer is in danger, tackles Frank, wrestles with him for the gun, and shoots him during the scuffle. Later, he learns that Frank was an undercover police officer attempting to arrest Carla, who had held up a convenience store while impersonating a police officer.

Mohammed’s fate as a mistaken good Samaritan depends upon the state where the action occurred. In some states, Mohammed’s actions would be judged simply on their reason- ableness under the circumstances; if a reasonable person would have believed Carla to have been a police officer in danger, then Mohammed’s actions would be justified and not subject him to criminal liability. In other states, however, good Samaritans are held to “stand in the shoes” of persons they try to defend; in such states, a person can use only as much force as the perceived victim had a legal right to use against the perceived attacker. In a state with such a rule, Mohammed would be criminally liable for the injury inflicted on Frank (the undercover police officer) since Carla, the person he perceived to be a vic- tim, in fact had no actual right to defend herself under the circumstances.

Defense of Property

All states recognize the right of an individual to protect property from being taken, mis- used, or damaged by another. Any force short of deadly physical force (force that may reasonably be expected to cause death or life-threatening injury) may be used to protect one’s property. In other words, you may threaten, restrain, or physically prevent another from harming or taking your property, but you may not kill or seriously wound another merely to protect your property. Keep in mind that you may use deadly physical force if you reasonably feel threatened with death or serious bodily injury. For example, in most states, you may use deadly force to protect yourself from a carjacking during the course of which you are threatened with serious injury, but you may not use deadly force to prevent your car from being stolen from your driveway by shooting the thief from inside your home when you are not directly being threatened.

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Entrapment

A person who is enticed or convinced to commit a crime by law enforcement agents when he or she is not otherwise predisposed to commit such a crime can escape criminal liabil- ity by asserting the defense of entrapment. In order to successfully assert the defense, the criminal defendant must prove two elements:

1. That the commission of the crime was instigated or enticed by a law enforcement agent(s); and

2. That the crime would not have been committed but for the enticement or instiga- tion of the law enforcement agent(s).

It is not enough for a defendant to show that police provided the opportunity for the crime to occur or that police suggested the crime’s commission; to successfully assert an entrapment defense, the defendant must show that he or she was not predisposed to com- mit the crime. Let’s look at two examples for the sake of clarification.

Lina, an undercover police officer, offers to purchase a vial of crack cocaine from Freddy, a drug dealer. Freddy sells Lina the crack and Lina immediately arrests him.

Lyssandra, a special agent for the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), offers Rosalie, a state legislator, $20,000 to transport a kilogram of heroin from a contact in Mexico. Rosalie initially refuses, but Lyssandra manages to convince her, wearing down her resistance through the use of hard-sell tactics over a period of several weeks. When Rosalie delivers the drugs, Lyssandra arrests her for drug trafficking.

Freddy, in the first example, will not be able to successfully assert the defense of entrap- ment. Even though he was approached by a police officer, he was clearly predisposed to commit the crime and was not in any way convinced to do so. In the second example, however, Rosalie will be able to successfully assert the defense of entrapment, since it is clear from the facts given that she was not predisposed to commit the crime but was con- vinced to do so by Lyssandra.

In the real world, the more pressure a police officer needs to exert on a would-be perpe- trator to agree to commit the illegal act, the likelier it is that the defendant will be able to successfully assert the defense of entrapment. A criminal defendant who offers little or no resistance to the suggestion of committing a crime will not be able to successfully assert the defense of entrapment. One of the key elements for prosecutors trying to overcome the defense when it is raised is the criminal predisposition of the defendant to commit the crime. Predisposition is usually shown by a pattern of previous behavior; thus, persons who are enticed by police to commit criminal acts that they are known to have committed in the past have a very difficult time in raising the defense of entrapment because their previous acts point to a predisposition to commit the crime they are charged with.

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6.8 Responding to a Criminal Investigation

This section will cover two events that may take place during the course of a criminal investigation, search and seizure and grand jury inquiries. Search and Seizure

The Fourth Amendment provides that a search of a person or place and the seizure of a person (arrest) or property cannot take place without probable cause. Probable cause is a standard meaning “more likely than not that a crime has been committed.” If the police see someone sell another person crack cocaine, there is probable cause to arrest, for exam- ple, because the crime is being committed in front of the police, or “in plain view.” If there is probable cause, but the crime is not committed in plain view, the police may obtain either a search or arrest warrant, which may be served on a business or residence. The seizure of people or property can then legally take place. From a strictly legal (as opposed to ethical) point of view, if a police officer arrives at a place of business without a warrant and makes inquiries about business activities or a particular employee, the business does not have to answer those questions or turn over any documents.

If serious crimes are involved, the district attorney will most likely convene a grand jury to bring a criminal proceeding against a business or individual, as described next.

Grand Jury Inquiries

Criminal charges for white collar crime will most likely begin with proceedings in a grand jury. Grand juries are convened by the state or federal prosecutor for the purpose of pre- senting evidence to a group of jurors, who then determine whether there is enough evi- dence to issue an indictment, which is a formal criminal charge against the defendant. Grand juries can conduct extensive investigations and subpoena all sorts of records. One question that may confront you as a manager is how you should appropriately respond to a subpoena.

The subpoena may be for a person to appear before the grand jury, for the production of records, or both (i.e., for a person to bring specific records). A subpoena is an order from the court that can take a number of forms. A subpoena test is an order to show up at a deposition to give testimony. A subpoena duces tecum is an order issued to produce records. A simple subpoena is an order to show up at a criminal proceeding to testify.

The subpoena will most likely be served at the workplace by a police officer or, if a federal matter, by an FBI agent. To prevent the embarrassment of being served at work, a business should have its attorney receive the subpoena, if possible.

As a general rule, the materials (files) requested in a subpoena are presumed to be reason- able under the case U.S. v. R. Enterprises, Inc. (498 U.S. 292, 111 S. Ct. 722, 112 L.Ed.2d 795 [1991]), unless “there is no reasonable possibility that the category of materials the Gov- ernment seeks will produce information relevant to the general subject of the grand jury investigation.” Since it is relatively easy to show that any information is relevant to any procedure, this standard is considered extremely low, meaning that anything is subject to

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aiding in the commission of a crime Ren- dering assistance to a criminal in the com- mission of a crime, hiding, or converting the proceeds of criminal activity; punish- able as a misdemeanor.

arson Intentional burning of any property, including one’s own, for the purpose of collecting insurance.

Association of Certified Fraud Examin- ers A U.S. organization that publishes literature and educates the public in the areas of fraud and certifies fraud examiners.

bribery of a public official Promising to give something of value in exchange for a public official’s official conduct.

burglary Breaking and entering any occu- pied structure with the intent of commit- ting any crime inside.

commercial bribery To solicit, accept, or agree to accept anything of value in exchange for violating a duty of fidelity owed to one’s employer, client, or com- pany as an employee, officer of a corpora- tion, partner, trustee, guardian, or member of a profession; a misdemeanor in most states.

the subpoena. As a manager, it is imperative that you respond to a subpoena in a timely and professional manner. This means that you should contact the office that issued the subpoena, show up at court early, dress professionally, and present all records in an orga- nized manner. The best circumstance, of course, is to refer the matter to the business’s counsel where a subpoena is concerned, since it indicates that a serious criminal matter is under way.

In the event that the subpoena or the legal proceeding personally involves you in any way, then it is imperative that you hire your own attorney and that your attorney respond to the subpoena and deal directly with the prosecutor’s office. Even if you have the best intentions and are completely innocent, criminal proceedings are intimidating, compli- cated, and can result in serious consequences. The cost of hiring an experienced criminal defense attorney is well worth protecting your freedom. Although your attorney cannot be present inside the grand jury room if you testify, you can leave the grand jury room and confer with your attorney to obtain advice about your answers during the session.

For further information about responding to criminal actions, consult the following:

1. “Business Crime: What to Do When the Law Pursues You,” by John Akula, MIT Sloan Management Review, http://www.mitexeced.com/lal/images/51333_ sloan-rev.pdf.

2. Responding to Federal Criminal Trial Subpoenas, http://www.orrick.com/file upload/2121.pdf; and Federal Grand Jury Crash Course, http://library.findlaw .com/2008/May/1/247197.html.

3. Federal Practice: Responding to a Subpoena, by David J. Lender, Jared R. Friedmann, and Jason B. Bonk Weil, Gotshal & Manges LLP, http://www.weil.com/files/ Publication/925ba5e1-3ebb-4758-8e83-a1424fdff940/Presentation/Publication Attachment/e8247337-b86d-4df9-b01b-a953f20b0545/10.18.10-Federal%20Practice %20Responding%20To%20A%20Subpoena%20(1-503-1741)%20(2)%20(2).pdf.

Key Terms

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Computer Fraud and Abuse Act Federal law (18 USC §1030), which makes it illegal to intentionally access a computer without authorization to obtain consumer finan- cial or U.S. government information, or to access a protected computer with the intent to defraud (through hacking).

credit card fraud Using a forged or stolen credit card to obtain goods, services, or cash advances or using a credit card after it has been canceled or recalled.

crime of attempt Taking a substantial step toward committing a criminal act, wherein the defendant acted with criminal intent.

criminal act or omission A wrong as defined by state or federal statute.

criminal conspiracy Either planning and agreeing to commit a crime with others or agreeing to assist others in the commission of a crime.

criminal intent Also known as mens rea (literally, guilty mind), the definition of criminal intent varies from crime to crime. The mens rea for murder is the intent to kill; for robbery, it is the intent to permanently deprive the owner of his property.

criminal mischief Damaging the personal or real property of another purposely, reck- lessly, or negligently by the use of explo- sives, fire, or other dangerous means.

criminal trespass Knowingly entering (or refusing to leave when asked) real prop- erty owned by another without permission to do so.

embezzlement The misappropriation of property in one’s care belonging to another.

entrapment Being enticed or convinced to commit a crime by law enforcement agents when not otherwise predisposed to do so; a defense that can be asserted to escape criminal liability.

felony The most serious type of crime; punishable by more than one year’s imprisonment in a state or federal penitentiary.

forgery Material alteration to a written document issued by another that is made in order to defraud or mislead.

grand jury Group of jurors convened by the state or federal prosecutor for the purpose of presenting evidence; the jury determines whether evidence is sufficient to indict (formally charge) the defendant with a crime.

indictment Formal written accusation of a criminal charge against a defendant, brought by a grand jury.

influence peddling To solicit, receive, or agree to receive any consideration for the trading of political influence by a public servant; a misdemeanor.

issuing a bad check To issue a check drawn on an account that no longer exists or on an account with insufficient funds to honor the check when it is presented.

larceny The intentional taking and carry- ing away of the property of another with the intent to permanently deprive the owner of its use.

misdemeanor Offense that can carry a maximum penalty of one year’s imprisonment.

Model Penal Code Criminal law guide- lines promulgated by the American Law Institute in 1962 and revised in 1981.

Key Terms CHAPTER 6

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Critical Thinking and Discussion Questions

1. What is the basic purview of criminal law? What are the defining elements of all crimes?

2. What is a grand jury proceeding? 3. What is a subpoena? What types of subpoenas are there? 4. In general, is there a legal duty for citizens in our society to come to the assis-

tance of those in need? Should there be one, in your opinion? Explain fully. 5. Consider the many uses you and your friends make of computers and devices to

access the Internet. Where would you draw the line as to what data on a com- puter are work- or school-related rather than personal? How would you write such a law? What language would you use?

6. Your immediate supervisor asks that you write a computer policy for your company. Assume that no one has a laptop computer to take home and that all computing is done on site at your company headquarters. Based on the Nosal case, what sort of company policy would you develop?

obstruction of justice Any intentional interference with the administration of justice in a person’s official or private con- duct; a misdemeanor.

perjury Making a material misrepresenta- tion while under oath or through a sworn statement.

probable cause More likely than not, a crime has been committed: standard used by police before arresting a person or seiz- ing property.

prosecution The state district attorney or U.S. Attorney who brings criminal charges against a defendant on behalf of the government.

robbery A theft that is accomplished through either the use of force or the threat of force.

simple subpoena A court order to appear at a criminal proceeding to testify.

subpoena Legal document issued by a court ordering the receiving party to testify in court or to bring documents to court.

subpoena duces tecum A court order issued to produce records.

subpoena test A court order to appear at a deposition to give testimony.

tampering with public records To know- ingly falsify, destroy, or attempt to hide any official government record or docu- ment; a misdemeanor.

theft of services Knowingly receiving the benefit of services that are available for compensation through the use of decep- tion or any physical means to avoid paying for such services.

violation Minor offense that is typically punishable by a fine or prison sentence of 30 days or less.

white collar crime Nonviolent state or federal crime committed in a business setting.

wrongful state of mind The mindset nec- essary to find in the defendant for a crimi- nal conviction.

Critical Thinking and Discussion Questions CHAPTER 6

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7. Ben sets fire to a grain silo in his neighbor’s farm after a heated argument. For- tunately, the silo is not attached to the neighbor’s house or barn, so the damage does not spread beyond the destruction of the silo and its contents. The next day, Ben is arrested and charged with arson. Should he be convicted of the crime if the prosecutor can show that he purposely set the fire? Explain.

8. Spark and Flash, malicious but less than brilliant arsonists, agree to burn down a number of apartment buildings in exchange for a fee from landlords eager to collect insurance on unprofitable rent-controlled apartment buildings. As they arrive at the first site, they slosh several gallons of gasoline onto the building only to discover that they neglected to bring matches or a lighter. Housing police arrest the two after observing them go from door to door asking tenants for matches. What crime or crimes, if any, can they be charged with, and what is the maximum penalty they face for each crime or crimes?

Critical Thinking and Discussion Questions CHAPTER 6

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Administrative Law 5 Administrative law governs and defines the powers of government agencies. A number of political and technological factors have led to an explosion in the growth of government since the turn of the 20th century, at both the federal and state levels. Even though these bureaucracies fall under the executive or legislative branch, their rapid growth has given rise to what is commonly referred to as the “fourth branch of government”: administrative agencies.

5.1 What Is the Purpose of an Administrative Agency?

Beginning in the 1930s, the federal government has been steadily expanding its regulatory pow-ers over business and individuals through the creation of agencies such as the Federal Trade Commission, Internal Revenue Service, and Food and Drug Administration. Under the U.S. Supreme Court’s broad interpretation of the Commerce Clause, Congress has the power to regulate nearly any matter that has an impact on interstate commerce. How- ever, the 535 men and women that make up the 112th Con- gress have neither the time nor the expertise to become involved in the specifics of drafting regulatory rules for each federal agency. What Congress has done instead is to create administrative agencies to oversee or carry out specific governmental functions and then empower those agencies to create the rules by which they will operate. The same holds true for the executive branch of government, where the president uses administrative agencies to help carry out the responsibilities of the office.

When an agency is created, Congress gives the agency the power to draft its own agency rules—the guidelines under which the agency operates and that must be followed by persons over whom the agency is given regulatory pow- ers. When federal agencies enact rules, they must follow the guidelines set forth in the Administrative Procedure Act (APA), which specifies the procedures agencies must follow in promulgating new rules. As long as an agency creates rules in accordance to the Administrative Proce- dure Act, such rules have the force of law.

Agencies have two main purposes: assisting in carrying out vital government functions and exert- ing regulatory control. They are the instruments through which Congress and the president institute policies and implement government regulation. As both government and government regulation have steadily grown, starting in the first half of the 20th century, agencies, as the instrumentality of

The Internal Revenue Service is one example of an agency created by the federal government to expand its regulatory power.

Comstock/Thinkstock

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Section 5.2 The Administrative Procedure Act CHAPTER 5

that growth, have likewise swelled in size and power. While the titular seat of power may rest with legislative and executive branches of government, it is administrative agencies that carry out the day-to-day operation of governmental regulatory and service functions, and they often take on a life of their own.

5.2 The Administrative Procedure Act

An independent federal agency is created through an act of Congress that estab-lishes the agency and empowers it to perform whatever duties Congress specifi-cally delegates to the agency. The actual creation of the agency and the scope of its authority are detailed in the enabling legislation—the act of Congress that creates the agency. The details of the agency’s operation are left to the agency, which creates its own rules in accordance with the guidelines set forth in the 1946 Administrative Procedure Act (APA). The APA gives agencies broad rulemaking powers, as long as they act within the guidelines that the APA provides. Federal executive agencies are usually created by presidential order. Like independent agencies, executive agencies are also subject to the guidelines of the APA.

What relevance does this have to you as a businessperson? One effect could be that if an act by an administrative agency exceeds the powers given to it by its enabling legislation, and this impacts your business, then the act by the administrative agency is unenforceable.

Rulemaking Requirements

Under the Administrative Procedure Act, agencies have the power to create rules that have the force of law provided that the guidelines of the APA are observed. The basic requirements that all federal agencies must observe in rulemaking are as follows:

• Giving notice to the general public that a new rule or rule change is being consid- ered by publication of the proposed rule in the Federal Register

• Providing an opportunity for all interested parties to participate in the rulemak- ing process by conducting public hearings and giving all interested parties a reasonable opportunity to voice their views on the proposed new rule or rule change

• Publishing in the Federal Register a draft containing the essential factors relating to the proposed rule and its purpose at least 30 days before the rule is to take effect

Once the requirements of the APA have been met, the proposed rule takes effect on its proposed effective date and has the force of law.

Limits on Administrative Agencies

As previously noted, federal agencies have far-reaching powers within the areas that they oversee. A congressional grant of authority to an agency often includes the ability to carry out investigations, create rules that are the functional equivalent of statutes, hold hearings to adjudicate alleged violation of agency rules, and assess punishment (usually by way of fines) to those adjudicated to be in violation of the agency’s rules. Agencies with such powers, such as the Internal Revenue Service, can act as legislator, police, judge, and jury.

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Section 5.3 Types of Administrative Agencies CHAPTER 5

While this concentration of power leads to the swift administration of justice, the average citizen facing an administrative hearing may take comfort in the knowledge that both agency rules and most agency decisions are subject to judicial review on any of the fol- lowing grounds:

• The agency acted beyond the scope of its authority under the agency’s enabling act; • The agency misinterpreted federal law (including its enabling act) in its rulemak-

ing or in the adjudication of any matter before the agency; • Agency action violates the U.S. Constitution or any federal law; or • Agency rules or the findings of administrative law judges are arbitrary or

capricious.

Agency rules and procedures, as well as the adjudications by administrative law judges of agency hearings conducted as informal trials, are upheld by the courts as long as they meet the noted requirements.

5.3 Types of Administrative Agencies

Federal agencies fall into two basic categories: independent and executive. Indepen-dent agencies are created by Congress to assist it in exerting regulatory control or to carry out governmental administration. Once created, these agencies are headed by a director who is appointed by the president and confirmed by the Senate. In order to dis- tance these agencies from the political process, independent agency directors serve for set terms that are staggered so as to prevent any given administration from having too great an impact on such agencies through presidential appointments.

Independent Federal Agencies

Independent federal agencies can wield tremendous power. Congress often imbues these agencies with quasi-judicial, quasi-legislative, and quasi-executive powers: they create their own rules (a legislative power), enforce these rules and conduct investigations (executive pow- ers), and adjudicate disputes relating to these rules or their applications in administrative hearings similar to trials (a judicial power). Administrative law judges (ALJs) preside over hearings, rule on issues of evidence, decide the outcome of cases, and write opinions. Inde- pendent agency directors are appointed by the president and confirmed by the Senate.

Independent agencies perform a vital function in areas where specific expertise is a requirement in order to perform a governmental function or regulate a specific business. They include the Central Intelligence Agency, the Environmental Protection Agency, the Equal Employment Opportunity Commission, the Federal Communications Commis- sion, the Interstate Commerce Commission, the Federal Trade Commission, the Nuclear Regulatory Commission (NRC), and the Securities and Exchange Commission, among many others. Although Congress may have the right to regulate aviation (because of avi- ation’s impact on interstate and international commerce), the civilian and military use of nuclear energy, and intelligence gathering, few senators or representatives have the highly specialized knowledge necessary to effectively regulate any of these areas. Rather than regulating these areas directly, Congress can set up agencies staffed with experts who can promulgate rules by relying on their superior knowledge of the fields they regulate or operate in, with appropriate congressional oversight. Consider the following examples.

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1. The Nuclear Regulatory Commission (NRC), concerned about safety in the nation’s nuclear power generating stations, wishes to impose new safety regula- tions affecting such power-generating plants. After issuing a notice to the gen- eral public that it is considering safety rule changes, the agency conducts hear- ings from interested persons in the industry as well as from the general public for a period of 60 days. At the conclusion of these hearings, it decides that it would be in the best interest of the industry to ban the sale of alcoholic beverages in counties where nuclear generating plants are located. It then publishes a copy of the proposed regulation as well as a general statement of the need for such regu- lation in the Federal Register 30 days before the regulations are to take effect. After the effective date of the regulations, it is challenged in a federal district court of appeals by liquor store owners in affected counties. What is the result?

2. In the last example, assume that the NRC followed the same procedure and promulgated a rule that forbade nuclear generating plant workers from work- ing with a blood alcohol level of .05%, subjecting violators to a fine of $5,000. Is such a regulation likely to be upheld if it is challenged in court? Explain.

3. The Federal Communications Commission, concerned with the increasing violence and hatred depicted in the popular media, decides to consider new rules affecting the broadcasting of material of a violent, sexual, or hateful nature. After follow- ing the established procedures for rulemaking under the APA, it promulgates the following new rules:

A. Material of a violent or sexual nature can be broadcast only between the hours of 12:00 a.m. and 6:00 a.m.;

B. Music that advocates physical violence, the degradation of women, or racial bigotry cannot be broadcast at any time.

Will these two regulations withstand court challenges? Explain.

Executive Agencies

Federal agencies have also been created to assist the execu- tive branch in carrying out its responsibilities. Notable execu- tive branch agencies include the Federal Bureau of Investiga- tion (Justice Department), the U.S. Customs Service (Treasury Department), the Food and Drug Administration (Health and Human Services Department), the Bureau of Indian Affairs (Interior Department), the Immigration and Naturalization Service (Justice Department),

Members of the president’s cabinet direct executive agencies such as the Departments of State, Justice, and Homeland Security.

Pablo Martinez Monsivais/Associated Press

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the Secret Service (Treasury Department), the Federal Aviation Administration (Transpor- tation Department), and the Social Security Administration (Health and Human Services Department), to name only a few. Consider the following example.

The Federal Aviation Administration wants to institute new safety regula- tions relating to the use of drugs and alcohol by pilots in civil aviation. After conducting a study, the agency decides that it would be in the best interest of the general public to begin weekly random drug testing of all airline pilots effective immediately. At the direction of the agency director, the FAA sends out notices to all airlines that a new drug testing program is now in effect. Is this regulation valid under the facts given? Explain.

Unlike independent agencies, executive agencies are under the control of the presi- dent, who can appoint and remove their directors at will. Executive agency directors, including members of the president’s cabinet, serve at the pleasure of the president. These agencies are, therefore, much more responsive to political issues and subject to the winds of political change, at least at the top levels. Nonetheless, most agency workers are civil servants, not political appointees, and enjoy the relative job security that status conveys. Thus, while the heads of executive agencies may come and go with chang- ing administrations, the bureaucracy itself is well entrenched and grows yearly as new agencies are created and existing agencies expanded to help implement government goals and programs.

State Agencies

Agencies are used not only by the federal government but also by state governments. State administrative agencies are set up to assist the executive and legislative branches to carry out their responsibilities. States use agencies to assist with such matters as the administration of workers’ compensation, social services, tax collection, and the regula- tion of business. For example, each state has a tax division that not only oversees the col- lection of state taxes but also has a component with hearing boards that hold “trials” or hearings presided over by government ALJs. There is also an appeals component wherein the loser can take the tax issue to another level in the same agency. The decisions of the hearings are published and become stare decisis for further hearings. Businesses can easily consult these matters to see the current state of the law.

Workers’ Compensation Boards Because workers’ compensation is such an important business-related topic, this section will focus on a “typical” workers’ compensation board and how it makes law, but keep in mind that each state creates its own workers’ compensation law, so the rules discussed next vary throughout the United States. If you want to view your own state’s workers’ compensation rules and procedures, search the words “workers’ compensation State C.” The Colorado workers’ compensation can be found at http://www.colorado.gov/cs/Sat ellite/CDLE-WorkComp/CDLE/1240336932511; Utah at laborcommission.utah.gov; and so on. Each state’s website is detailed and provides information unique to its systems and rules. For an overview, the U.S. Small Business Administration website sets out links for business managers looking for workers’ compensation information throughout the states at http://www.sba.gov/content/workers-compensation.

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How Workers’ Compensation Boards Make Law In the early 1900s, when the United States had a large industrial base, many employees who were injured or killed at work, or their families, could not pay their medical expenses and often lost their jobs if their injuries were serious. Workers’ compensation laws serve an important social and political purpose in that they force employers to pay into an insurance fund to guarantee that employees will have medical and hospital coverage for injuries or death on the job. The trade-off is that the employee cannot sue the employer for negligence, a proceeding that would most likely result in much larger monetary com- pensation for the employee than the awards available through workers’ compensation.

When an employee is injured at work, the employee submits any medical bills to the employer and the bills are then paid. On occasion, an employer may refuse to pay an injured employee’s claim. Suppose, for example, that an employee suffers a heart attack at work. The employer may argue that the injury is not work related, and thus the employer is not liable. The employee, on the other hand, may disagree, contending that the job caused his heart attack, making him eligible for benefits. Such a workers’ compensation claim is deemed controverted. When this occurs, the employee may request a hearing before a workers’ compensation administrative judge. At the hearing there will be doc- tors, the employer, the employee, and the judge, who will listen to the “testimony” and render a decision about whether or not the employee is entitled to payment. Thus, the hearing resembles a trial in which there are witnesses and testimony and a decision by a judge. Because the hearing is “like a trial” but does not have all the formalities of a trial, it is called quasi-judicial. The judge’s decisions are written down and can serve as prec- edent, thereby providing some predictability. In this way, workers’ compensation hear- ings “make law.” The following case excerpt (with citations omitted) is an example of a controverted matter before the New York Workers’ Compensation Board.

Cases to Consider: Richman v. Workers’ Compensation Board

Richman v. Workers’ Compensation Board, 936 N.Y.S. 2d 722 (Jan. 2012)

Appeal from a decision of the Workers’ Compensation Board, filed August 18, 2010, which ruled that claimant sustained a compensable injury and awarded workers’ compensation benefits.

On August 10, 2007, claimant, a court reporter, was found unconscious at her workplace and rushed to a local hospital, where she was diagnosed with a subarachnoid hemorrhage caused by a ruptured basilar artery aneurysm. Although claimant survived, she apparently remains unable to communi- cate. A workers’ compensation claim subsequently was filed on her behalf, and the employer and its workers’ compensation carrier (hereinafter collectively referred to as the employer) controverted the claim, asserting that the ruptured aneurism was not related to claimant’s employment. Following a hearing, a Workers’ Compensation Law Judge (hereinafter WCLJ) found that the employer did not overcome the presumption of compensability set forth in Workers’ Compensation Law § 21 (1). The Workers’ Compensation Board affirmed the WCLJ’s decision, prompting this appeal by the employer.

We affirm. Pursuant to Workers’ Compensation Law § 21 (1) a presumption of compensability exists where, as here, an unwitnessed or unexplained injury occurs during the course of the affected work- er’s employment. “The employer may overcome the presumption by presenting substantial evidence to the contrary.” (continued)

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How Workers’ Compensation Boards Determine Payment When an employee is injured on the job, the next step in the process is for that employee to receive medical attention. The doctor will make a determination about the extent of the injury, deeming it either temporary or permanent. For example, if the worker suffered a broken arm, the injury is temporary; if the worker suffered a spinal injury, the injury may be permanent. In the case of permanent injuries, the doctor (or doctors) will make an assignment of the percentage of injury, for example, 32% permanent partial disability. That number will then be converted using the state’s permanent partial disability sched- ules to an actual dollar amount. For example, a right index finger under the schedule might be worth $2,500. The complexities of determining a workers’ compensation award are illustrated in the excerpts from the following case, which shows the ways in which claimants are classified and paid:

Cases to Consider: Richman v. Workers’ Compensation Board (continued) Here, we find no basis upon which to disturb the Board’s conclusion that the employer did not present sufficient evidence to overcome the presumption. The record establishes that, prior to claimant’s collapse, she was under considerable stress at work and her workplace was loud and overheated. While the employer’s expert opined that claimant’s ruptured aneurysm was unrelated to her employment, the Board agreed with the WCLJ that the expert’s report and testimony were not credible—in large measure because he was evasive when questioned as to whether work- induced stress could raise a person’s blood pressure high enough to cause an aneurysm to rupture. Notably, the expert acknowledged that high blood pressure could be a factor in the rupture of an aneurysm and conceded that he did not know what claimant’s blood pressure was at the time the rupture occurred. Contrary to the employer’s argument, the Board, which “is the sole arbiter of witness credibility” was not required to wholly credit the expert’s opinion on this point simply because it was the only expert proof presented. The employer’s remaining arguments on this point, to the extent not specifically addressed, have been examined and found to be lacking in merit.

ORDERED that the decision is affirmed, without costs.

Read the full text of the case here: http://law.justia.com/cases/new-york/appellate-division-third- department/2012/512356.html.

Questions to Consider

1. What did the court mean by a “presumption of compensability”? What does this mean? 2. How does the employer overcome this presumption? Did the employer succeed in this case?

Why or why not?

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Cases to Consider: Schmidt v. Falls Dodge, Inc.

Schmidt v. Falls Dodge, Inc. New York State Court of Appeals (2012)

Workers’ Compensation Law §15(6) provides that compensation for any disability, partial or total, shall not exceed a fixed maximum per week. At issue in this case is the application of the cap when an employee has received several awards for different injuries, at least one of which is a so-called “schedule loss of use” award being paid periodically pursuant to the pre–2009 version of Workers’ Compensation Law §25. We hold that in such cases an employee’s total weekly payment may not exceed the cap. The schedule award is not nullified by the other awards, but must be deferred until the time comes when the cap will not be exceeded.

I

Plaintiff worked as a collision shop technician, repairing automobiles. He suffered several injuries on the job, of which three, all occurring in 2005, are relevant to this appeal. On February 21, he slipped on ice, injuring his hip and back. On March 18, he suffered a lower back sprain. He left his job on June 27, and later reported hearing loss beginning on that date, attributable to loud noise at his place of work. He applied for and received workers’ compensation benefits for all three injuries.

For the hip and back injuries, the workers’ compensation carrier for claimant’s employer was directed, in separate awards, to pay claimant a total of $400 per week—the maximum allowed, at the relevant time. . . . Though the disabilities caused by the hip and back injuries were designated as “temporary,” nothing in the record indicates that these $400 weekly payments have ever been discontinued.

On September 21, 2007, a Workers’ Compensation Law Judge made an award for the hearing loss claim. Claimant was found to have a permanent partial disability, entitling him to a schedule loss of use award under Workers’ Compensation Law §15. . . .

The Judge in this case found that claimant’s hearing loss entitled him to 32.145 weeks of benefits at the rate of $400 per week; the award specified a period from September 27, 2005 (the “date of dis- ablement” found by the Judge) to May 10, 2006. After considering the carrier’s objections, the Judge concluded on November 23, 2007 that the schedule award was “currently payable in full,” notwith- standing the fact that claimant had received during the period in question, and was still receiving, $400 per week for his other claims. The Judge found the issue to be controlled by Matter of Miller v. North Syracuse Cent. School Dist. in which the Appellate Division held that because a schedule award “is not allocable to any particular period,” it “cannot be deemed to overlap with” a temporary total disability award.

II

Workers’ Compensation Law § 15(6)(a) says, in relevant part:

Compensation for permanent or temporary partial disability, or for permanent or tem- porary total disability due to an accident or disablement resulting from an occupational disease that occurs . . . on or after July first, nineteen hundred ninety two [and before July one, two thousand seven], shall not exceed four hundred dollars per week.

The Board and the Appellate Division have held in this case that claimant was entitled to receive $800 per week for a period of roughly 32 weeks. That result cannot be squared with the cap imposed by section 15(6). The Appellate Division’s decision in Miller, which upheld a similar award, is incorrect and should not be followed. (continued)

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Workers’ Compensation as the Exclusive Remedy As mentioned above, workers’ compensation serves an important social function by guar- anteeing that workers hurt on the job are taken care of medically and that their bills are paid. There is a trade-off for this guarantee, however. Employees are not allowed to sue their employers for injuries on the job that are a result of the employer’s negligence. Thus, we say that workers’ compensation is the exclusive remedy, meaning it is the only rem- edy available to an injured worker against an employer. If an employer does not put up an adequate guard around a machine and an employee is seriously maimed, the employ- ee’s monetary award is limited to workers’ compensation rather than a lawsuit in court. (However, the employee in such a situation could sue the manufacturer of the machine, who, of course, is not the employer.) (See Chapter 8, Negligence, Strict Liability, and Prod- uct Liability.) This is the maximum amount that an employee could recover under work- ers’ compensation, whereas in a tort lawsuit, the same injury might be worth millions of dollars, figuring in punitive damages, compensation for emotional distress, and so forth. There is usually no choice; workers’ compensation is the only remedy afforded to employ- ees against employers, except in rare exceptions.

One of those exceptions is if the employer intentionally injured the worker, as discussed in the Washington State case Brame v. Western State Hospital, excerpted here with citations omitted:

Cases to Consider: Schmidt v. Falls Dodge, Inc. (continued) We therefore hold that periodic payments of a schedule loss of use award must be deferred to the extent that those payments, when combined with payments of another disability award, would exceed the cap imposed by Workers’ Compensation Law § 15(6). We hold no more than this, and do not decide what implications, if any, our holding may or may not have for cases governed by the 2009 amendment to section 25(b): that section, as amended, now says that schedule loss of use awards “shall be payable in one lump sum, without commutation to present value upon the request of the injured employee.”

Accordingly, the order of the Appellate Division should be reversed, with costs, and the case remit- ted to the Appellate Division with directions to remand it to the Workers’ Compensation Board for further proceedings in accordance with this opinion.

Read the full text of the case here: http://www.nycourts.gov/ctapps/Decisions/2012/May12/ 76opn12.pdf.

Questions to Consider

1. What different injuries did this employee suffer at work, and what were his workers’ compen- sation awards for each?

2. This case is concerned with the cap that a worker may receive for workers’ compensation. Why does the state impose a cap? And what possible effect does this have on an employee?

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Cases to Consider: Brame v. Western State Hosp.

Brame v. Western State Hosp., 136 Wash. App. 740, 150 P.3d 637 (2007)

In 1911, the legislature passed the Industrial Insurance Act, which provided injured workers a system of certain, no-fault compensation for injuries on the job while granting employers immunity from civil suits by workers. The act generally bars employee lawsuits against employers for on-the-job injuries.

This bar is subject to a limited exception when an employer intentionally injures an employee:

If injury results to a worker from the deliberate intention of his or her employer to pro- duce such injury, the worker or beneficiary of the worker shall have the privilege to take under this title and also have cause of action against the employer as if this title had not been enacted, for any damages in excess of compensation and benefits paid or payable under this title.

This exception prevents employers who engage in egregious conduct from burdening the industrial insurance risk pool. We interpret the deliberate intention exception narrowly. Neither gross negli- gence nor failure to observe safety laws or procedures rise to the level of deliberate intention. Even an act that has a substantial certainty of producing injury is insufficient to show a deliberate intent to injure.

The Birklid Test

Until 1995, courts found deliberate intention only in cases where an employer or its agent physi- cally assaulted an employee. But in Birklid our Supreme Court interpreted the exception to include conduct other than physical assaults. In that case, the plaintiffs alleged that a supervisor reported to management that fumes from a new product were making employees sick; management denied a request for improved ventilation before increasing use of the product; workers became ill after the product went into full production; and Boeing knew that the symptoms were the result of exposure to the product. The court, finding that the employees had alleged sufficient facts to find deliberate intent on the part of Boeing to injure them, held that deliberate intention exists where the employer (1) has actual knowledge that an injury is certain to occur and (2) willfully disregards that knowledge.

***

Since Birklid, the Supreme Court continues to emphasize the need to show actual, not substan- tial, certainty. For example, in Vallandigham employees alleged that the school district deliberately intended to injure them because it willfully disregarded its knowledge that a severely disabled spe- cial education student would injure them. The employees alleged that over the course of a school year the student had injured staff and other students about 96 times, resulting in 7 workers’ compen- sation claims. The school district had taken numerous steps to try to modify the student’s behavior, including implementing a behavior plan, hiring a one-on-one aide, and creating an isolation space. The court rejected the employees’ claims, holding that they met neither prong of the Birklid test.

The court emphasized that the first prong “can be met in only very limited circumstances where continued injury is not only substantially certain [to occur] but certain to occur.” Foreseeability is not enough to establish deliberate intent to injure an employee, nor is an admission that injury would probably occur. And the plaintiffs’ case could not meet this test because “the behavior of a child with special needs is far from predictable”; no one knew that the violent behavior would not stop as quickly as it began. This was unlike Birklid where the employer knew that continued exposure to the chemical would make employees sick absent increased ventilation. (continued)

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Employers’ Duties Under Workers’ Compensation Law Employers have many responsibilities under workers’ compensation too numerous to list here. Among the most important requirements, however, are that the employer must have in place insurance, either through a private carrier or through the state fund. In New York, for example, an employer’s failure to provide workers’ compensation coverage is a crime, punishable by fines and/or criminal prosecution. If an employer does not have coverage and an employee files for workers’ compensation, the employer will be liable for the actual cost of medical care and compensation payments, in addition to penalties. If a corporation has failed to secure workers’ compensation coverage, the president, secretary, and treasurer of the corporation are personally liable for the medical care, compensa- tion payments, penalties, and possible criminal prosecution. This applies to situations in which employers might hire someone “under the table.” If that person is injured and is not listed on the books, there are numerous workers’ compensation violations associated with such conduct, some of them criminal.

Cases to Consider: Brame v. Western State Hosp. (continued) In addressing the second prong of the test, the court disapproved of two Court of Appeals cases that considered whether the steps the employer took to prevent injury were reasonable and whether they were effective. These tests, according to the court, adopted, at least in part, a negligence stan- dard; the court again emphasized that the deliberate intent exception does not apply in cases of negligence, even gross negligence.

The Employees contend that the trial court erred in granting the Hospital summary judgment because issues of material fact exist as to whether the Hospital deliberately intended to injure them. They argue that the Hospital knew with certainty that patients would assault staff and that it will- fully disregarded this knowledge. They point to the history of patient assaults on staff as proof that the Hospital knew with certainty that patients would assault staff in the future. And they assert that the Hospital willfully disregarded this knowledge because it did not effectively train staff in defend- ing themselves against patient assaults and instead implemented a non-violence initiative aimed at eliminating the use of physical restraint of patients.

Even taking the facts in the light most favorable to the Employees, they cannot meet the stringent requirements of the Birklid test. The Employees do not contend that the Hospital knew that any specific assault would occur. They rely instead on the history of patient-to-staff assaults. But past patient-to-staff assaults demonstrate, at the most, that such assaults are foreseeable, not that they are certain. Foreseeability is not sufficient to establish deliberate intent to injure an employee. In Vallandigham, 96 prior assaults by one student were not sufficient to predict with absolute certainty any particular future assault. Similarly, here the past assaults of hospital patients on hospital staff are not sufficient to create a certainty that any individual patient will assault any individual staff member.

Read the full text of the case here: http://caselaw.findlaw.com/wa-court-of-appeals/1432625.html.

Questions to Consider

1. Under what circumstances may an employee sue his or her employer for injuries sustained at work under this court’s theory?

2. Why does this court make an exception to the rule, allowing employees to sue their employers? Do you agree with this policy shift?

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Key Terms CHAPTER 5

administrative law judge Government employee (state or federal) who presides over agency hearings and writes opinions upon the conclusion of the hearing that resemble a judicial decision and are there- fore quasi-judicial.

Administrative Procedure Act Specifies the procedures that administrative agen- cies must follow in promulgating new rules.

agency rules Guidelines under which an agency operates and that must be followed by persons over whom the agency is given regulatory powers.

controverted Refers to a workers’ com- pensation case in which the employer refuses to pay following a worker’s injury or death.

exclusive remedy The concept that employees may not sue their employers for injuries or death on the job but can seek a remedy only through the workers’ com- pensation process.

executive agencies Agencies that have been created to assist the executive branch in carrying out its responsibilities.

independent federal agencies Agencies created by Congress to assist it in exerting regulatory control or to carry out govern- mental administration.

permanent partial disability A determi- nation in workers’ compensation that the disability suffered by the employee covers part of the body but will be permanent, thereby converting it to a “schedule loss of use award.” The injury is given a fixed number of lost weeks’ compensation according to the bodily member injured.

private insurance carrier An insurance carrier for an employer to cover matters like workers’ compensation claims.

state fund A general statewide fund to which employers contribute and which then pays out workers’ compensation claims.

workers’ compensation board A state administrative agency that adjudicates cases requesting compensation to workers for death or injury on the job.

Workers’ compensation rules are detailed, but each state has a website devoted to the issue. On it, the responsibilities of the employer are clearly spelled out.

Key Terms

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Critical Thinking and Discussion Questions CHAPTER 5

Critical Thinking and Discussion Questions

1. What is the basic purpose of government agencies? 2. What is the purpose of state administrative agencies? 3. What are the basic Administrative Procedure Act requirements that agencies

must observe in rulemaking? 4. What are the quasi-judicial and quasi-legislative powers that some agencies are

given in their enabling legislation? 5. Where does one look to find the exact power that Congress has given to an inde-

pendent federal agency? 6. Although agency heads change from time to time as part of the political process,

most agency employees are unaffected by changes in political administrations. Why?

7. Julian works in a shoe manufacturing plant putting the soles on leather shoes using a machine similar to a lathe, a rotating metal pipe. On the day in question, Julian was preparing to place the leather into the machine when a piece of his clothing became caught on the lathe, pulling on his arm and causing severe inju- ries. His employer refuses to pay for any of his injuries, claiming that the injury is completely the fault of Julian’s negligence. What options for remedy would Julian have? Assume that another employee pushed Julian into the machine, and that is why he suffered the injuries. Now what would Julian’s options for remedy be? Now assume the employer pushed him into the machine, and that is the sole reason he suffered the injuries. In this situation what would Julian’ s options for remedy be?

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Business Ethics and Conflict Management 4

Business ethics has become one of the most important and timely topics for business students. Traditionally, business ethics was approached as a discussion of individual ethical philoso-phies. This is still important and will be part of this chapter. However, since the 1960s, busi- ness ethics has become an area of scholarly study within the business academy, a specialty worthy of research into the day-to-day issues faced by companies of all sizes as well as the individuals making crucial decisions that affect our whole economy. Business scandals prompt distrust of our profession, trigger government regulation, and can be so serious that some businesses do not sur- vive them.

As a manager, you set standards for those who work for you, and employees look to you for guid- ance. As such, having an understanding of the connection between ethics and business law is cru- cial to your success. In this chapter, we will review the basics of ethical philosophy as it relates to business law, look at some of the important findings scholars have discovered in the last 50 years of studying business ethics, and provide specific suggestions for how to create an ethical corporate culture and how to make individual ethical decisions.

4.1 Ethics and the Law

By definition, law concerns itself with issues of right and wrong and the administration of jus-tice. Those who help shape the law need valid ethical reference points to steer the law in the direction of the common good. Philosophy of Ethics

Ethics is the branch of philosophy that is concerned with the study of morality. Ethical inquiry centers on concepts such as good and evil and right and wrong. Thousands of years of philosophi- cal inquiry into the field of ethics have produced numerous conflicting theories by noted classical and contemporary philosophers. Not surprisingly, however, no consensus has emerged as to which theory is the most valid. While this may not be surprising, it is troubling, since law is closely tied to the fragile, ephemeral principles that are at the heart of ethics.

Legislators, judges, presidents, governors, and regular citizens who help to shape the law through their official capacity or at the ballot box may not consciously engage in the study of ethics in shap- ing their views on what constitutes justice or how to best promote the common good. Nevertheless, most of us act in accordance with certain principles that we may commonly refer to as our values. Whether we acknowledge it or not, the guiding principles by which we steer our lives and which form the basis for our core ideas about right and wrong are an expression of our ethical philosophy. The names of the ethical systems we adhere to, and the notable philosophers who espouse them, are not as important as the views themselves, which help shape our government and mold our laws.

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Philosophical Theories

The quest to discover ethical truths has led Western philosophers on some very different paths throughout the past 2,500 years. Law inevitably reflects a society’s ethical views and values. Therefore, even a brief glimpse at some of the core principles that underlie various systems of ethics can be very useful. This study will enhance our understanding of the common thread of ethics that runs through every nation’s system of jurisprudence.

Ethical Absolutism Ethical absolutism is an ethical philosophy with many diverse branches all tied in to the central idea that there are certain universal standards by which to measure morality. Under this philosophy, concepts such as good and evil, right and wrong, and justice have a separate objective existence that can be discovered and understood by human beings through philosophical inquiry and introspection. Right and wrong are concepts that stand on their own and do not change based on circumstances or on the outcome of a person’s actions. If stealing is wrong, then it is always wrong, regardless of the circumstances sur- rounding it. Thus, stealing is always morally wrong, whether it is done out of greed, for sport, or to feed a hungry child. Proponents of this broad branch of ethics represent a wide range of schools of thought that often include diametrically opposed worldviews.

Religious Fundamentalism Like ethical absolutism, religious fundamentalism as a theory of ethics relies on the exis- tence of certain immutable truths. Unlike ethical absolutism, however, which requires that these values be discovered through philosophical inquiry and introspection, ethical norms under religious fundamentalism can be found by studying the lives and writings of prophets or by consulting holy scriptures. Under this philosophy, living a moral life depends upon strict adherence to religious principles and values. Also, its proponents often view theocracy (a state governed by divinely revealed principles) as the most just form of government.

Utilitarianism Utilitarianism has as its ethical basis the assignment of value to actions based on their outcome. Under utilitarianism, the ultimate good is defined as actions intended to bring about the greatest utility (or greatest good) for the greatest number of people. Thus, moral action under utilitarianism requires the constant evaluation of actions based on their intended result. Actions that bring about the greatest good to the greatest number of people are ethical, or good, whereas actions that fall short of that goal are unethical, or wrong. Put another way, utilitarianism does not recognize an intrinsic value to actions but rather assigns a positive or negative moral judgment to actions only in view of their intended consequences.

Deontology Deontology is a duty-based ethical theory that focuses on individual rights and good intentions. In this school of thought, an act’s morality depends on the actor’s motive, and the only unconditionally good motive is duty. Therefore, for an act to be moral or good, it

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must be undertaken out of a sense of duty. Unlike utilitarianism, in deontology, the rights of the individual are very important and there are some things one should not do, even if they would benefit a large number of people.

Ethical Relativism Like utilitarianism, ethical relativism denies the existence of absolute moral values. Also known as situational ethics, this system of thought holds that moral judgments cannot be made in a vacuum. Unlike utilitarianism, however, the yardstick by which to measure the morality of an act is not the common good but rather the circumstances that surrounded the person committing an act at the time it was committed. It is a precept of this philosophy that a person’s actions cannot be judged other than by placing oneself in the same situation that the actor faced at that point in time. So, stealing to feed one’s hungry child, for exam- ple, is not necessarily wrong. On a societal level, ethical relativism acknowledges differ- ences among cultures (cultural relativism) in the definition of right and wrong, which means that what is considered wrong or even hateful in one culture may be acceptable in another.

Nihilism Nihilism is a philosophy that denies the existence of any ethical standards. Derived from the Latin word for nothing, nihilism originated as a German philosophical movement that was popularized in 19th-century Russia and that is central to the political philosophy of anarchists, who reject all centralized authority. In nihilism, we find the ultimate rejection of order, absolute codes of behavior, or the existence of any transcendent truths. Assuming that each individual’s will, guided by the individual’s conscience, can dictate what is right or wrong, then centralized government with its “arbitrary” laws and sanctions represents an illegitimate, oppressive restraint on individual freedom.

Virtue Ethics Virtue ethics looks at the basic values one needs to develop to have a good moral char- acter. We develop these traits by making personal commitments and practicing them in our lives. Some of the virtues we can encourage are honesty, truth, trust, tolerance, kind- ness, diligence, and self-restraint. We can learn as well as absorb these qualities from our parents, religion, and schools or consciously choose to strive to be virtuous persons. This philosophy has practical application in the business world because we can model, encour- age, and reward these traits among our employees and within our companies.

Justice Ethics Justice ethics is based on the concept of fairness. This theory is closely related to deontol- ogy and the rights of the individual. The U.S. legal system has a strong grounding in pro- cedural justice and is focused on judicial process. Many of our constitutional rights protect the integrity of the legal process and ensure that all people are treated fairly in the courts. We also find this philosophy in the procedures and consistent rules that businesses create for their employees and other stakeholders. In a similar fashion, appellate judges decide cases that set precedents that apply to all of us. They must balance doing justice for the individuals involved in the case with the ramifications of how decisions will affect future case law and society as a whole.

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Ethics and Political Systems

The different ethical systems described above all have important political implications. Whether by design or by default, the ethical values held by political leaders and lawmak- ers invariably become a part of the political system and are reflected in the legal system. Ethical systems have profoundly influenced both public policy and the politics of nations. For example, the influence of religious fundamentalism can readily be seen today in a number of countries, including the United States. Taken to their logical conclusion, abso- lutist ideals can be used to justify totalitarianism. If there are certain knowable, immu- table truths that are valid for all time, then the only moral form of government, the argu- ment goes, is one that educates (or indoctrinates) the people to recognize those truths and ensures that they conform to the moral conduct that those truths dictate. Ethical absolut- ism is also readily observable in its secular (or atheistic) form in 20th-century, nonreligious totalitarian regimes. Totalitarian regimes, be they Marxist, communist, or fascist in nature, are usually based on principles of ethical absolutism.

If totalitarian regimes are based on ethical absolutism or religious fundamentalism, it is clear that democratic systems lean toward nonfundamentalist ethical principles. The assumption that a variety of plausible views exists, even on essential ethical principles, is central to a democratic form of government. The principles of representative government and majority rule inevitably lead to the adoption of some type of moral relativism as the guiding ethical principle. The very notion that issues of great import are subject to debate and can ultimately be decided by a vote, and the democratic tolerance for opposing view- points, institutionalize a kind of ethical relativism. Laws are subject to change and do, in fact, undergo change slowly over time, reflecting the changing values of their society. Individuals in democracies are free to reject ethical relativism, and many do. They can lobby their government for change, arguing for the adoption of their point of view. But a pluralistic democratic system that completely abandons ethical relativism cannot remain a democracy for long. Ultimately, questions of ethics come down to personal belief. The strength of a democracy rests in its ability to incorporate differing points of view and to obtain functional compromise on a host of issues.

Ethics and Legal Systems

It can be argued that the ethical principles of a society are reflected even in the type of legal system it chooses. The civil law system that we find in most of Europe, with its detailed codes that carefully prescribe individual rights and responsibilities, its swift administration of justice, and its limited power of judicial interpretation, tends to rein- force an absolutist or deontological ethical philosophy. In effect, governments with such systems demand strict adherence to set codes of behavior and leave relatively little room for their citizens to deviate from the established norm.

Common law systems such as ours, on the other hand, leave the judiciary wide latitude for interpreting governmental edicts found in legislative enactments. Such systems pro- vide a multilayered structure of appellate courts to further review trial courts’ application of the law, with the determinations of fact usually left to the interpretation of juries. (See also Chapter 1, The Civil Law and Common Law Traditions.)

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In short, the civil law leaves little room for arguing the validity or meaning of the law, while the common law allows great latitude to litigants to argue both. Criminal law is largely based on prohibiting and punishing antisocial behavior; as such, criminal law inevitably reflects society’s ethical standards and attempts to discourage behavior that society deems immoral. (See Chapter 6 for further discussion.)

4.2 The Regulatory Environment of Business

The ethical accountability of business is one of the areas in which government has tried to legislate ethical conduct. These policies have been vigorously debated over the years. Many people today believe that businesses have a duty to society to act in a responsible manner and to work for the betterment of society as the price for being allowed to do business and make a profit. Others hold that the sole social responsibility of business is to obey the law and turn a profit for investors. Although the issue is by no means settled, the trend over time—especially since the mid-20th century—has been to increase the amount of government regulation of business, both at the federal and state levels. Primarily through the establishment of administrative agencies (see Chapter 5), federal and state governments have put in place far-reaching regulations to ensure that business is conducted responsibly. Notably, the federal government actively regulates business through antitrust laws, securities laws, and regulations (see Chapter 31); labor laws (see Chapter 21); tax incentives; and consumer protection. The federal government has responded to business scandals by passing regulatory legislation.

Sarbanes–Oxley Act of 2002

The Sarbanes–Oxley Act of 2002 (SOX) was passed by Congress in response to the Enron scandal and other corporate misconduct. The act holds CEOs and CFOs of U.S. public companies, international companies that have registered equity or debt securities with the Security and Exchange Commission, and all accounting firms that provide auditing services to them personally liable for the accuracy of their financial reports. It also requires that companies have their internal control systems audited by an external auditor at the same time that their financial statements are being audited. The main goal of SOX is to instill in companies a culture of careful, responsible, and transparent financial reporting and corporate governance. That goal does come at a price, however. Since the passage of the bill, businesses have spent millions of dollars per year complying with the act’s strict accounting requirements. (For more on this law, see Chapter 31, Federal Securities and Antitrust Laws.)

Most corporate law is state rather than federal. The regulation of privately held and close corporations is specific to the states in which they are registered or doing business; thus, the standards may differ from state to state and from the federal rules in SOX. However, the SOX requirements can provide a model of good practice that exempt companies can use to create more transparent and accountable processes.

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Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010

In 2010, unethical acts by business organizations again triggered new regulation. In response to the 2008 financial crisis, Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act. This act was intended to increase oversight of the finan- cial industry and prevent the types of risk-taking and deceptive practices (in subprime mortgage lending, for example) that were blamed for the failure of several large financial service firms, the housing market collapse, and the subsequent recession. It also created a Consumer Financial Protection Bureau (CFPB) to enforce federal consumer protection laws. CFPB has a mandate to educate and inform consumers so they can understand the terms of the agreements they make with financial companies, such as credit card issuers. (For a brief, 16-page summary, see the U.S. Senate Banking Committee website: http:// banking.senate.gov/public/_files/070110_Dodd_Frank_Wall_Street_Reform_compre hensive_summary_Final.pdf.)

Dodd–Frank also strengthened federal protections for whistleblowers (many states have similar laws) and promised financial rewards for individuals who come forward with information about unlawful business acts. The act aims to protect workers who come for- ward with potentially incriminating information from retaliation and firing.

A Closer Look: The Enron Scandal

The downfall of energy giant Enron in 2001 led to the government enactment of sweeping legislation to regulate the accounting prac- tices of business: the Sarbanes–Oxley Act of 2002. Operating in a newly deregulated energy industry, in the 1990s Enron had made enormous profits from trading electricity and natural gas resources to state utility companies. However, its increasingly unethical busi- ness culture created a complex web of subterfuges and deception.

In November 2001, Enron lost the vast majority of its $11 billion value. Investigated by the Securities and Exchange Commission, it was discovered that the firm was hiding billions of dollars in debt under the cover of shell companies, from which its executives were profiting richly. The company routinely destroyed, altered, or fabri- cated financial documents to hide its true actions. The scandal also led to the dissolution of accounting firm Arthur Andersen, one of the largest auditing firms worldwide at that time, which was found guilty in federal court for its negligent oversight of Enron’s finances. Several Enron company executives received jail sentences for their role in the scandal. The enactment of Sarbanes–Oxley was intended to require transparency from public companies and to prevent financial fraud from happening again on such a vast scale. According to the authors of The Smartest Guys in the Room, “The Enron scandal grew out of a steady accumulation of habits and values and actions that began years before and finally spiraled out of control.” For a description of the unfolding events, see the 2002 Time article “Enron: Who’s Accountable?” at http://www.time.com/time/magazine/article/0,9171,1001636,00. html.

The Sarbanes–Oxley Act of 2002 (SOX) was passed in response to the Enron scandal and other incidences of corporate misconduct.

James Nielsen/Stringer/Getty Images

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International Business

Legislatures and the courts (both state and federal) have also addressed ethical concerns about U.S. companies doing business abroad that are trying to skirt U.S. regulations or evade taxes. Conduct that was once seen as acceptable, such as the bribery of foreign offi- cials in the regular course of business in some foreign countries, can now bring criminal penalties. In 1977, in response to an international scandal involving U.S. companies brib- ing foreign officials to receive contracts, Congress passed the Foreign Corrupt Practices Act (FCPA). This act makes it unlawful for American companies to make payments to for- eign governments and officials to assist in obtaining or retaining business. It has also been amended to make it so that foreign officials who facilitate these bribes in the United States can be held criminally liable. Companies have paid hundreds of thousands of dollars in fines for violating this act—perhaps they consider this just another cost of doing business.

A debate has also been taking place for years about the responsibility of American firms that are selling products in foreign countries that cannot be sold in the United States (because it would violate health and safety regulations) but whose sale is not prohibited in foreign countries. This battle is likely to be fought largely in civil courts in the United States and abroad, as foreign nationals sue American companies for selling allegedly unsafe products. In the past, such claims have been made with regard to a wide range of products, including baby formula, pharmaceutical products, and pesticides. Thus, there is often a chasm between what is legal and what is right.

In an attempt to set a higher standard for the world’s businesses, the United Nations has created the U.N. Global Compact, a set of 10 principles to be voluntarily used by busi- nesses to guide their global enterprises:

• Support and respect the protection of internationally proclaimed human rights; • Ensure that businesses are not complicit in human rights abuses; • Uphold the freedom of association and the right to collective bargaining; • Work toward the elimination of forced and compulsory labor; • Work toward the abolition of child labor; • Eliminate discrimination in employment and occupation; • Support a precautionary approach to environmental challenges; • Undertake initiatives toward greater environmental responsibility; • Work toward the development and diffusion of environmentally friendly tech-

nologies; and • Resist corruption of all forms, including extortion and bribery.

Regulating From Within

In the wake of the many highly publicized corporate lapses of good ethical judgment by key players at companies such as WorldCom, Enron, and Arthur Andersen, companies rushed to implement codes of ethics, ethical training, and other processes. These measures were meant to help make employees more aware of ethical issues and provide them with practical tools for resolving potential ethical problems when they arise. While these were steps in the right direction, they cannot merely be public relations maneuvers or schemes to avoid litigation for poor risk management.

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Perhaps the best way to ensure ethical conduct from corporate citizens is to hire, promote, and retain ethical leaders. The most effective training model for ethics in any company is to have its leaders—from boards of directors to line supervisors—model ethical behavior. In such a company, leaders consistently act ethically and make it clear that they expect the same of their subordinates. In an ideal company, individuals are not rewarded for unethical behavior that is profitable but reprimanded for ethical behavior that hurts the bottom line. People who work for these organizations will not only consistently act in an ethical manner but will likely feel positive about themselves and the company for which they work.

Often, the law reactively seeks to address well-publicized ethical lapses by imposing new and stiffer penalties for ethical violations and corporate mismanagement of corporate directors and officers. In turn, corporations struggle to implement processes to show their stakeholders that they are “doing something” about the problem. Instead, they might ask themselves the following questions:

• Are existing policies or procedures encouraging unethical behavior in their employees?

• Are they appropriately screening current and prospective employees for ethical competency and integrity?

• Are employees who lie on their resumés fired if the lie is discovered? • Is adherence to ethical standards a criterion evaluated during periodic performance

reviews? • Can subordinates trust the word and motives of supervisors and executives at all

levels? • Are principled leaders, who take personal responsibility for the failure of those

they lead and share credit for the success that others have made possible, pro- moted and retained? Do people at all levels feel valued for their contributions and proud to go to work every day?

If the answer to these and similar questions is no, then ethical training and implemen- tation programs will be seen for what they are by employees and stakeholders in a company—mere window dressing.

4.3 Social Responsibility of Businesses

In the 1960s, when academia began to see business ethics as a separate topic worthy of study, the term corporate social responsibility was coined. The role of the organiza-tion as a corporate citizen that has great power to affect the whole of society became a serious topic for discussion.

Some scholars firmly contend that the corporation’s one and only responsibility is to be a lawfully run, profitable business. This point of view has many good arguments. A profitable company provides valuable goods and services, jobs, tax revenues, and return on investments by shareholders and venture capitalists. A successful economy depends on thriving businesses. However, while this is true, some people feel it does not go far enough.

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There is an old saying that “with great power comes great responsibility.” Business in the United States is very powerful, and the decisions and actions of businesses have a great influence on society, so their responsibility goes further than just making a profit and doing what is legally required of them. Rather, corporations should use their wealth and power to take on voluntary roles to support social good. One way to be socially responsible is through charitable giving. Many arts and social programs in the United States are supported by funds from corporate sponsors. Some entrepreneurs see oppor- tunities to solve social problems while nurturing a viable business venture. They are using their skills to start new companies and projects in which they can be innovative, creative, and socially responsible and make a good living at the same time. This is often referred to as “enlightened self-interest.” For example, if you have a strong personal commitment to improving the environment, you might start a business that provides recycling for rural areas not covered by a municipal recycling program, thereby help- ing the environmental cause and making money at the same time. In his book Stirring It Up: How to Make Money and Save the World (Hyperion, 2008), Gary Hirshberg describes how he built a $300 million-per-year business (Stonyfield Farm) using environmentally sound practices to manufacture organic yogurt.

All businesses employ skilled individuals that can benefit society in many ways. For example, an engineering firm or a company that has many scientists on staff could give their employees release time to work with children in their local schools to interest them in science. An accounting firm could volunteer time to audit the books of local nonprofits. Many companies now pride themselves in their commitment to improving (or at least not harming) the environment through responsible business practices. Companies that con- tribute to their communities create goodwill and make their employees proud to work for them, which is a potent motivator.

Companies should approach planning for social responsibility like any other business strategy. Possible steps to achieve this goal are as follows:

• Look at the core competencies of your organization and see what skills you have to offer;

• Look for unmet needs in the community that your employees would be proud to be involved in;

• Ask your employees for ideas and projects; • Find partners you can work with. For example, a TV station could launch a

yearly coat drive and team up with a dry-cleaning company to provide clean, mended coats to people in need;

• Assign someone the responsibility of implementing and following through. You may need to form a committee to make decisions and do planning;

• Make a timeline, set goals, and determine a budget; • If charitable giving is what you feel would be best, set a financial limit and deter-

mine the criteria for distribution. For example, decide on a goal to fund special projects for the public schools;

• Carry through with your plan; • Assess the success of your efforts; and • Make improvements if necessary.

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4.4 How to Create an Ethical Company: Lessons From the Field of Business Ethics

In the almost 50 years of studying business ethics, several important specific lessons have been learned: 1. Ethical businesses are more successful. 2. It is crucial to have the commitment of the leadership of the company to create an

ethical organization. 3. The values and ethics of the corporate culture from the top to the bottom of a

company are vitally important and difficult to change. 4. It is important to hire good people, but that isn’t enough. Companies need to

train people on how to handle the specific issues that may arise in their work and how to think through difficult ethical choices.

5. Businesspeople need to be able to “voice their values” and be heard. 6. Ethics must be implemented like any other strategic business decision.

Let’s discuss these key principles in more detail.

Ethical Businesses Are More Successful

Although not all businesses practice ethical integrity, research shows that ethical busi- nesses are more financially successful (“2010 World’s Most Ethical Companies,” 2010, http://ethisphere.com/past-wme-honorees/wme2010). A study of companies that had been consistently successful for more than 100 years revealed that greater than 80% of them shared some interesting common characteristics. They all had a highly focused strat- egy based on their reputation, concentrated on good relationships with customers, valued long-term employees, and held to strong core values that had been passed on through the years by the company’s leaders (TenHagen, 2008).

Many other reasons account for the success of ethical organizations:

• A good reputation is crucial: All stakeholders, customers, suppliers, bankers, and others in the mercantile community need to trust a company and want to do business with it. For example, investors don’t want to invest in companies they cannot trust to handle their funds.

• Employees want to be proud of where they work. Employee commitment and satisfaction are crucial for productivity.

• An ethical workplace where people are making good decisions and clearly understand their job responsibilities increases efficiency in daily operations. In contrast, placing unrealistic expectations on employees may make them feel so pressured that they make bad decisions and cut corners. According to Friedrich and Ferrell (1992, pp. 243–252), approximately 60% of the unethical behavior in companies is not motivated by personal greed but comes from pressure to reach business goals.

• Ethical disasters large and small are costly to companies. Even the publicity of a minor ethical mistake can adversely affect share prices for up to six months. O. C. Ferrell, a respected scholar of business ethics, refers to “ethical tsunamis” that

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can damage a company as badly as any natural disaster can wreak havoc on a city. We have seen large, famous companies fail completely after an ethical disas- ter. Businesses that are found guilty of crimes often pay huge fines and have their reputations permanently tarnished (Brewer, Chandler, & Ferrell, 2006).

• Ethical thinking is strategic, holistic thinking: the ability to look at the big picture and determine consequences large and small. Ethical thinking requires planning, looking at alternatives, and making wise choices. It also thrives on awareness, analysis, and action, just like any other sound business decision making.

Creating an Ethical Corporate Culture

Corporate culture refers to the values, goals, and character of the organization. You learn these by osmosis—by being part of the organization, from your leaders and peers. We have all started a new job and worried whether we are dressed correctly and what we need to learn to fit in, know how things are done, and what to expect. We proceed to learn how to dress, behave, and communicate from being part of a group. The culture of a business enterprise is unique. A company’s character and goals may have been set up by its founders and are imbedded in the day-to-day life of the company. If one is lucky, it is an ethical culture, and in that case, all that is needed is to reinforce the existing culture or bring it up to date. However, if ethical problems are endemic to an organization, changing that established culture can be difficult and will take time and effort to achieve.

To create an ethical corporate culture, it is crucial to have the commitment of company leadership, which sets the direction and tone of the business. Strategic planning, overall goals, and commitment of resources are decided at the top. Further, leaders are the role models for their employees and the organization’s values. Boards of directors who hire CEOs are well served to look for individuals of good character who can do the kind of holistic thinking that is needed to make both good business decisions and ethical decisions. Being the best in business certainly requires making a profit, but it also requires making a commitment to all your stakeholders. An exemplary business is fair to its employees, pays its bills on time, makes useful and safe products, operates with transparency, and is a good neighbor and citizen.

Guidelines and Codes of Conduct Leaders have the resources to implement the steps to create an ethical environment in their companies. They also know that companies and managers can be held liable for the illegal and unethical behavior of their employees. However, these guidelines and laws won’t be effective if they are just a superficial way to create better public opinion and avoid legal fines. Creating an ethical corporate culture takes a deeper commitment by leadership and must become part of the everyday thinking and action of the individuals throughout the organization.

In 1991, Congress passed the Federal Sentencing Guidelines (FSG), which encourage employers to adopt ethics and compliance programs. Because employers can be held liable for their employees’ conduct, the FSG gives organizations incentives to put into place organizational structures that build up ethical cultures. Its seven requirements are as follows:

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1. The organization must develop and disseminate a code of conduct that commu- nicates the required standards and risk areas.

2. High-ranking personnel who are known to abide by the law must have oversight of the program.

3. No one with a known tendency to engage in misconduct should be put in a posi- tion of authority.

4. A communications system for disseminating standards and procedures must be put in place.

5. Organizations must create a way for employees to report ethical issues without fear of retaliation. Monitoring and auditing systems to detect misconduct must also be developed.

6. If misconduct is detected, then the firm must take appropriate and fair disciplin- ary action.

7. After misconduct has been discovered, the organization must take steps to pre- vent similar offenses in the future.

Companies that have implemented these voluntary guidelines can reduce their liability and penalties when one of their employees commits a crime. As a result, many companies have done at least the basics necessary to comply with them.

Many organizations have developed a code of conduct and a mission and value state- ment. A good value statement is specific to your company, meaningful for your work, and something all your employees can aspire to achieve. However, creating it and posting it on your website or on the wall is not enough. This may meet the minimum standards of the FSG, but without a more active commitment, it will not be effective at creating a truly ethical corporate culture. These values must be a priority, modeled by managers, and integrated into the thinking and actions of the company. Deep-seated ethical goals should be included in the strategic planning of the company and measured like any other corporate goal for effectiveness. These general goals are important, but the company must also find practical ways to affect all employees and send this message to every corner of the enterprise.

Protecting Whistleblowers The whistleblower provisions of Dodd–Frank have been criticized for encouraging indi- viduals to go outside the organization before using the internal procedures to solve the problem. This gives companies even more incentive to make sure they are really listening to employees. Many companies are hiring independent contractors to act as ombudsper- sons who enable individuals to make anonymous reports of ethical violations without fear of reprisal. Again, this works only if it is done well with real follow-up on information and if anonymity is actually maintained.

Ethical “Risk Management” One crucial first step toward instilling an ethical culture in an organization is identifying the specific ethical risks your employees will be facing and developing a training program to directly address these risks. For example, a bank may have different ethical pitfalls than a company dealing largely in sales and marketing. A buyer may face different ethical

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questions than an engineer. The issues one faces in business may differ from those faced in everyday life. A person may be prepared to handle the ethical dilemmas in everyday life but not so much the difficult and complex issues that arise in a business setting. Hiring good people is a good start, but managers must also make sure that new hires have the tools to make decisions specific to their work.

Cross-Cultural Business Ethics Many American companies, large and small, are now doing business internationally. So they need to address the ethical and legal issues they will face doing business in other countries. Companies should not assume that the laws or codes of ethics that work well in the United States can simply be imposed on their expatriate employees and foreign subsidiaries. Creating realistic policies and procedures that are sensitive to the particular locales in which one is doing business is crucial. This doesn’t mean simply following the ethical standards of another country and jettisoning one’s own. Businesspeople must be careful to address the cultural standards in each country in a way that supports their own ethical commitments but does not offend others. Having clear guidelines protects employees and gives them solid guidance on how to address problems they encounter far from home.

Monitoring Ethics Policies Lastly, it isn’t enough for companies to put policies into effect and assume they work. Like all business actions, they must go back and evaluate effectiveness, not once but regularly, and act to correct and improve what has been put into place. Some companies are even hiring independent specialists to do “ethics audits.” For the truly committed company, these audits can give new insight from an impartial source.

How Managers Can Create an Ethical Environment

As a manager or future manager, you also have great input in creating an ethical environ- ment for the people you supervise and work with. Although a manager’s company lead- ership is vitally important in this effort, you will have daily contact with the people you supervise. Managers hire, fire, reward, discipline, train, and lead. You are the person who will be primarily responsible for the ethical decisions of your employees. Shared values that you want all your employees to possess might include honesty, respect, responsibil- ity, fairness, kindness, compassion, commitment, and trustworthiness.

Hiring Good People Hiring good people is the first step in the process. When you advertise for an open posi- tion, be clear that you are looking for an individual with not just great business skills but also one possessing sound character. Clearly state the values you expect your employees to have. When interviewing, ask situational or hypothetical questions that may be ethi- cally challenging. It will be important to see how the candidate responds. Check refer- ences and, if people are willing to tell you, don’t just find out about their job skills but also about their character.

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Train your new employees on the issues that are likely to come up in their job that may be ethically and legally challenging. This is an ongoing process. As you learn and read, pass your wisdom along and become a teacher and a supporter. Businesspeople tend to be very results oriented. One of the worst messages they can send to their employees is “Just get it done; I don’t care how.” Instead, they must reward not just results but also process. It does matter how one gets the job done. Nothing is more demoralizing to employees than seeing someone of bad character rewarded. If managers reward good results achieved the wrong way, they are encouraging unethical behavior.

Applying Discipline On the flip side, business leaders must also apply appropriate sanctions for bad or illegal behavior. It is important that companies have clear procedures and policies to guide man- agers in the area of discipline. But it is equally important for managers to be very profes- sional and consistent in applying these procedures and following the policies. Violating the code of ethics or conduct is just as serious as not having the skills for the job.

Setting the Tone A manager can create a microculture within the larger culture of the organization. The tone you set for your employees and your example are extremely important. The old say- ing “Do as I say, not as I do” doesn’t work any better in the workplace than it does with children. Your employees will be taking their cues from you. Most people would prefer and feel most comfortable doing the ethical thing. Keep in mind that the majority of your employees will basically follow company policies or simply go along with what is hap- pening in their work group. So the culture of the company and the culture you create for your employees both count.

Your employees need to feel comfortable coming to you with their most difficult prob- lems. Keep your door open. Send the message “If there is a problem, I want to hear about it.” Don’t just say it; back it up with your actions, which speak louder than words. If you have a tendency to “shoot the messenger,” the messages will stop coming, or worse, will ambush you when you least expect it. Your employees need your input when faced with issues about which they are unsure. Hearing bad news in time to deal with it isn’t easy, but it is a lot easier than cleaning up the mess later. Even with the best training and prepa- ration, you and your employees will face situations you have not anticipated. Something that is clearly wrong is easy to spot, but not all business decisions are black and white. These are the times that communication and discussion, gathering information with care- ful analysis of possible consequences, and considering business alternatives are essential. Here you can fall back on your values statement, training, and if necessary, your legal department to determine what is right and proceed accordingly.

4.5 Ethical Conflict Management

Here is a broad definition of conflict: “Conflict is when we have a different idea than someone else.” Often we may have a different idea of what is ethical than someone else. This becomes most difficult when someone in an organization is

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told to do something by a superior that the employee feels is wrong. This can happen in many circumstances. The CEO could be asked by the board of directors to do something he or she is not comfortable with, a manager may be asked by a superior, or a worker by a supervisor. Thus, we have the making of conflict. The most commonly cited figure is that managers spend up to 42% of their time resolving conflict (Watson & Hoffman, 1996). For more on structured forms of legal conflict resolution, such as ADR, negotiation, and arbitration, see Chapter 3.

Conflict Can Be Positive

Many of us think of conflict as negative and angry. However, conflict is a fact of life, and how we handle it is the crucial part. Conflict in an organization doesn’t always result from bad management; rather, it is often a sign that people care about what happens and are invested in ideas they believe to be worthwhile. Contrary to most of our first reactions, conflict can even be positive. Conflict can spark great conversations and stimulate our cre- ativity. People with two or more different ideas can work together and often come up with a creative solution no one would have thought of individually. In business, we often work in teams, and being able to solve problems together can strengthen relationships. Ethical dilemmas solved through cooperation can help us learn and grow and be better equipped to handle the next problem that crops up.

Handled calmly, competently, and professionally, conflict can be the seed of growth. However, handled badly, it can lead to poor communication and polarization within the workplace, decrease productivity, and damage people’s trust in one another. Unethical decisions that are forced on employees can propel them to leave for other jobs or even be fired.

Principled Negotiation

One of the best ways to handle the discussion of conflict is to use the skills of principled negotiation from Fisher and Ury’s classic book, Getting to Yes (2011). This method assumes that the vast majority of people with whom we negotiate also have a continuing relation- ship with us. The goals of principled negotiation are to improve, but at least not damage, relationships; reach a fair conclusion; and do this efficiently, without wasting time, money, or emotional energy.

Be Hard on the Problem but Soft on the People The first step in principled negotiation is to be hard on the problem but soft on the people. An ethical question is a problem that needs to be worked on together to come up with an answer. This is not the time to blame or point fingers. Working together to solve a prob- lem, rather than approaching the problem as an adversarial situation with different sides, brings people together. This is the time to understand the other person’s point of view and to communicate clearly what each one sees as the problem.

Define Your Interests, Not Positions The second step is to define your interests, not positions. This is where you work to com- municate your goals. What is the outcome you need in this situation? Fisher and Ury

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use the excellent example of two people sitting at a table in the library. One person gets up and opens the window by the table they are sitting at. The other person gets up and closes it. The librarian, sensing a problem, goes over to the table and asks what is going on. One person takes the position that he wants the window open, and the other says she wants it closed. The librarian, in order to discover their goals and their interests, asks each, “Why?” He says it is stuffy, and she says she doesn’t like a draft blowing on her. The librarian walks over to a nearby table and opens a window. She has solved the conflict by looking at the goals they wanted to achieve and solved the problem with a solution nei- ther had thought of. When dealing with conflict, if you dig in your heels instead of look- ing at the goal you want to achieve, you don’t leave room to solve your problem.

Invent Options for Mutual Gain The third step is to invent options for mutual gain. This is the time to look at all the differ- ent ways to reach your goals. If someone takes the position that the only way to make a profit is to cheat, that no doubt limits your options. By brainstorming and coming up with a variety of ethical ways to make a profit, you can look at alternatives and pick a better, more ethical way to handle something. Don’t stifle your creativity and leave your values behind by assuming only one way to handle the situation.

Looking for mutual gain means starting your discussion by looking for shared interests. For example, you might say, “I know we both want what is best for our company” or, “Finding a good solution to this problem is going to help us all.” Start out by practicing agreement rather than emphasizing areas of conflict.

Use Objective Criteria The fourth step in principled negotiation is to use objective criteria. Support your options with real data and information. Look at the pros and cons, the cost and benefits. Employ the tools at hand, which include online resources, business and legal libraries, and statisti- cal data, to reinforce your decisions.

Yield Only to Principle Fisher and Ury leave us with some final advice. Never yield to pressure but only to prin- ciple. Make your decisions based on real information and using your best values and character. In order to do this, be open to listen and be persuaded to do the right thing. Good ethical decisions, like all sound business decisions, come from careful thinking and planning and accurate information. Look at the possible consequences of different options and the whole picture of what is happening.

4.6 Making Ethical Decisions

In section 4.1, Ethics and the Law, we discussed personal philosophies. Making good decisions also means knowing and understanding what makes us tick. We all have to consciously decide what kind of person we want to be. Living with the guilt and stress of acting unlawfully or unethically can take its toll, and most of us want to do the right thing and are happier being our best self.

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Failing to Act

In a study done by Yale professor Mary Gentile, and as discussed in her book Giving Voice to Values (2010, p. 214), the author found a profound difference between people who chose to do the right thing and those who did not. The people who did the right thing weren’t smarter, stronger, or better businesspeople than those who did not choose the ethical course. The difference was in how they posed the question they needed to answer. The people who chose not to act asked, “What are the risks of doing something?” The people who made the ethical choice asked, “What are the risks of doing nothing?”

The people who acted by doing the ethical thing looked at the consequences of failing to act. They took a broad, holistic look at the possible consequences to their company and themselves instead of what might happen to them now. This way of approaching a prob- lem fits well into our discussion of ethical thinking as good business and strategic think- ing: We need to project the results of our decisions into the future and base our decisions on real facts and information that rest on our principles and values.

Many people look only at the immediate risks of a decision. The greatest fear of an employee may be the ultimate consequence of losing a job or facing retaliation. This is a serious and real fear because we all know that not all managers are open to discussion and not all companies act on the values to which they pay lip service. Here are some sugges- tions for approaching a superior about an ethical problem:

1. “I need to talk.” 2. “I need your help.” 3. “Can we work on this together?”

As discussed in section 4.5, Ethical Conflict Management, go into a discussion prepared with a good ethical and business argument. Have facts and figures to support your con- cerns. Be ready with ethical alternatives that will allow you to reach the same goal. Be ready to be persuasive, not accusatory, and remain professional, calm, and confident.

Avoiding Liability

If you do something illegal in your workplace, you will be held individually responsible. (See also the discussion of respondeat superior in Chapter 21, Establishing the Employment Relationship.) The law does not accept the defense of “But they told me to do it!” If you did the act and intended to do it, you will be held personally liable. Sometimes you have to say no. You must use your instincts and values to determine whether, in some situa- tions, you just can’t do what is asked.

Giving Voice to Your Values

According to Gentile, you need to give voice to your values. This becomes easier with practice. Be open when interviewing for a job about your values, and make good character what you practice every day—not just on the day you need to talk to someone about a specific problem. Be comfortable with yourself and treat value discussions like any other

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Key Terms CHAPTER 4

anarchist A person who rebels against any authority, established order, or ruling power.

business ethics The application of moral codes or values to problems faced by com- panies or managers in their work.

civil law system Found in most of Europe, a form of government that includes detailed legal codes prescribing indi- vidual rights and responsibilities, swiftly administers justice, and limits the power of judicial interpretation. This system tends toward an absolutist or deontological ethi- cal philosophy.

common law system A form of govern- ment that leaves the judiciary with lati- tude for interpreting the governmental edicts found in legislative enactments and provides a system of appellate courts to review trial courts’ application of the law; determinations of fact are usually left to juries. This system adapts to the local cus- toms, traditions, and needs of a people.

Consumer Financial Protection Bureau (CFPB) Agency created by the Dodd– Frank Wall Street Reform and Consumer Protection Act of 2010 to enforce federal consumer protection laws. It also has a mandate to educate and inform consumers about terms of the agreements they make with financial companies.

corporate culture The values, goals, and character of an organization.

corporate social responsibility The role of the organization as a corporate citizen rather than merely a profit-making enter- prise; the notion that corporations should use their wealth and power to take on voluntary roles to support social good.

criminal law An area of the legal system that tries to prohibit and punish antisocial behavior; it reflects society’s ethical stan- dards and attempts to discourage behavior that society deems immoral.

deontology A duty-based ethical theory that emphasizes individual rights and good intentions.

Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 Legisla- tion that increased oversight of the finan- cial industry and sought to prevent the types of risk-taking and deceptive prac- tices that led to the 2008 financial crisis.

ethical absolutism An ethical philosophy tied in to the central idea that there are certain universal standards by which to measure morality and justice.

open conversation. You are much less likely to be asked to do something wrong if you live by your values every day. Be brave: You may have to make some hard choices to stay true to yourself.

We all make mistakes, but the great thing about being human is that we have choices. Sometimes we can’t change the past, but we can forgive ourselves, learn to live with the consequences, and strive to do better next time. It is never too late to be proud of the per- son you are. Doing the right thing is not always easy, but hopefully this chapter has given you some tools you can use both as a manager and an employee to reach ethical decisions.

Key Terms

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Key Terms CHAPTER 4

ethical philosophy A set of beliefs about right and wrong that guides decision mak- ing both in individuals and in societies at large.

ethical relativism A system of thought that denies the existence of absolute moral values. Also known as “situational ethics.”

ethics The branch of philosophy con- cerned with the study of morality.

Federal Sentencing Guidelines (FSG) Voluntary parameters that companies can implement to reduce their liability and pen- alties if one of their employees commits a crime; the guidelines encourage employers to adopt ethics and compliance programs.

Foreign Corrupt Practices Act (FCPA) An act that made it unlawful for American companies to make payments to foreign governments and officials to assist in obtaining or retaining business.

justice ethics A philosophical system based on the concept of fairness guiding actions.

nihilism Derived from the Latin word for nothing, a philosophy that denies the existence of any ethical standards.

principled negotiation A system of prin- cipled business negotiation that aims to improve, and at least not damage, relation- ships; reach a fair conclusion; and avoid wasting time, money, or emotional energy.

religious fundamentalism A theory of ethics that relies on the existence of cer- tain immutable truths. Ethical norms can be found by studying the lives and writ- ings of prophets or by consulting holy scriptures.

Sarbanes–Oxley Act of 2002 (SOX) Leg- islation passed by Congress in response to the Enron scandal. It makes CEOs and CFOs personally liable for the accuracy of their financial reports and requires that companies have their internal control sys- tems audited by an external auditor at the same time that their financial statements are being audited. Its goal is to instill in companies a culture of careful, responsible, and transparent financial reporting and corporate governance.

utilitarianism The assignment of value to actions based upon their outcome. Defines the ultimate good as actions to bring about the greatest utility (or greatest good) for the greatest number of people.

values Core, underlying, or guiding prin- ciples that form the basis for one’s ideas about right and wrong and are an expres- sion of an ethical philosophy.

virtue ethics A philosophical theory that looks at the basic values one needs to develop to have a good moral character.

whistleblowers Individuals who come forward with information about unlawful business acts. Both federal and many state laws protect these people from recrimina- tions, retaliation, and firing.

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Critical Thinking and Discussion Questions CHAPTER 4

Critical Thinking and Discussion Questions

1. How does ethical absolutism differ from utilitarianism? 2. “You cannot judge a man until you have walked a mile in his shoes” is a state-

ment that is best linked to which philosophy of ethics? 3. What area of law most clearly involves a society’s effort to “legislate morality”?

Do you believe this is an effective way to change behavior? 4. Where foreign countries do not yet regulate the safety of consumer products or

the workplace, what ethical responsibility do U.S. companies working abroad have to their foreign customers and workers?

5. In your view, what is the best way for a company to promote ethical conduct among its employees?

6. Explain the steps of principled negotiation. What part of this process do you find most useful? What would be the hardest to do?

7. Some argue that government needs to increase its regulation of business for the good of society as a whole, while others believe that the marketplace is self- regulating and that government intervention through needless regulation places an unfair, costly burden on businesses generally and small businesses in par- ticular. What role do you believe government regulation should play to ensure ethical conduct by businesses?

8. XYZ Pharmaceuticals develops a new drug that causes the abortion of female fetuses up to the first trimester of pregnancy but does not affect male fetuses. The drug has no known side effects for women who take it and seems perfectly safe to use. While awaiting FDA approval of the drug, a process that takes several years, the company receives very negative publicity, and numerous groups call for a boycott of the manufacturer. Because of the negative reaction to the drug by the general public, the manufacturer decides to scrap plans to produce the drug in the United States but wants to market it abroad in a number of countries, where it expects the drug to be well received. There is nothing in U.S. law or in the laws of the countries where it intends to market the drug to prevent its sale. Make an ethical argument either for or against the drug’s sale abroad. Justify your argument with sound reasoning.

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Completing the Civil Lawsuit and Alternative

Dispute Resolution

3

In Chapter 2, we discussed the first steps of a civil lawsuit. In this chapter we will discuss the second half of a civil lawsuit as well as some of the options for alternative dispute resolution, mentioned in Chapter 2 as a way to avoid litigation. 3.1 Completing the Civil Lawsuit

To review, the first three steps in a civil lawsuit are:(1) Determining a viable cause of action; (2) Deciding what state to bring the action in (in personam or personal jurisdiction) and how

to deliver the summons and the complaint to the defendant; and (3) Finding out what court in that state has the power to hear the case (subject matter

jurisdiction).

Now that all these elements are in place, several preparatory steps follow.

Step Four: Preparing an Answer

Recall that the defendant is served with the summons and the complaint to begin the lawsuit. Now the defendant has the opportunity to respond to those papers with a formal document called an Answer. The Answer responds to each of the numbered allegations in the complaint by saying that the defendant admits, denies, or doesn’t know. For example, the defendant could say, “With regard to plaintiff’s complaint paragraphs 2 through 4, the defendant denies the allegations con- tained therein.” Here is an important fact to remember about the Answer: if the defendant fails to answer any of the paragraphs, even by mistake or omission, then the allegations in that paragraph are admitted as true. Therefore, it is very important to check the Answer to make sure all of the plaintiff’s numbered paragraphs are answered.

Sometimes the defendant receives the Answer and does not bother to respond at all. If the defendant does not file an Answer, then the plaintiff can continue to court and ask for a default judgment, meaning essentially that the defendant has not shown up for the proceeding and the plaintiff should be declared the winner. Why would a defendant risk a default judgment? One answer is that the defendant has no assets, and so the plaintiff is not going to get anything from the defendant anyway.

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People often think that you have to show up for a court case, but in a civil proceeding, where the plaintiff is seeking money, this is not true; if there is no money to be had, then the plaintiff is going to end up with nothing, even if the plaintiff “wins” the case.

Step Five: Discovery

Unlike in television dramas, where the testimony in court always seems to surprise every- one (including the lawyers), in real life the answers to all of the questions are usually known well ahead of time. This is the result of a proceeding before trial called discovery. Discovery allows any of the parties to gather information before trial in both testimony and documents.

There are two major forms of discovery: one is called interrogatories and the other is called a deposition. Interrogatories are a set of written questions that are sent to a party or witness to answer. Usually that party will sit down with his or her attorney and discuss his or her answers, and the attorney will actually write the response, which is under oath. A question in an interrogatory might look something like this:

45. What type of homeowner’s insurance do you have in place?

Please attach a copy of your policy to this interrogatory.

Witnesses and parties must respond to all the questions in the interrogatories. If they refuse, the matter may go to court for a hearing on the issue of not responding. The judge will usually rule that a party must answer and, if the refusal is prolonged, may award the other side attorney’s fees. (Attorney’s fees are generally paid by the respective parties to their attorneys. However, if one of the parties is especially obstinate and refuses to cooper- ate, and as a result the litigants have to go to court to force the obstinate party to cooper- ate, judges have it in their power to make that party pay the other side’s attorney fees.)

Another type of discovery is the deposition. Unlike written questions, the deposition doc- uments oral testimony that usually takes place at an attorney’s office, where a hired ste- nographer is present to make a transcript. A typical deposition would have all the attor- neys present, as well as the parties to the lawsuit, and then the witnesses one at a time enter the room to “give their deposition.” When the deposition is transposed, it looks like this:

Attorney Jenkins: Does your company have in place a nondiscrimination policy?

M. Dutcher: Yes, we do.

Attorney Jenkins: And what does that policy state?

M. Dutcher: That we must follow all of the rules in the company handbook.

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Section 3.1 Completing the Civil Lawsuit CHAPTER 3

These documents are signed at the end under oath so that if the person giving the deposi- tion “changes his mind” in court, the deposition can be shown to the jury to impeach or question the credibility of the witness.

As you can imagine, if one deposes all of the witnesses and parties before getting to trial, then every answer to every question is going to be answered well ahead of time. Some of the advantages of discovery include seeing how people are going to testify (Are they nervous? Believable? Will a jury feel sorry for them?), what they are going to say (Do they change their story? Do they seem dishonest? Credible?), and how prepared the other side is. In short, the attorneys will get a good idea of how strong the other side’s case is. If the case looks very strong, and the witnesses and parties seem believable, then it might be time to settle out of court.

The major disadvantage to discovery—and it is a huge obstacle—is the cost. Few litigants can afford extensive discovery. The transcriptionist alone charges for each day and then, when the testimony is converted to a document, the parties must pay by the page. Every hour an attorney sits in a deposition costs $200–$400. All told, this may run into many thousands or even hundreds of thousands of dollars, and that is before reaching the trial phase. For this reason, many litigants completely forgo or greatly limit discovery.

Step Six: Settling Out of Court

At this pretrial phase, the attorneys have a great deal of information. If documents have been acquired in discovery, they know how much insurance coverage a defendant has. Bank account balances have been revealed, as has the temperament of the plaintiff’s prime witness. At this point, the costs are mounting, and each party is starting to wonder about cutting losses and settling out of court.

Settling out of court is similar to entering into a contract. It is a legally enforceable agree- ment that sets out terms for the agreement of the parties. It is typically negotiated between the attorneys for each side and involves the litigants signing a release in which they give up any further legal actions against one another. In fact, one should never settle a lawsuit without acquiring a guarantee that this is indeed the end of the lawsuit, which is the pur- pose of a release.

Attorneys have a legal and ethical obligation to present their clients with all settlement offers. At the very least, even if an offer is absurd, a client has the right to consider it and then reject it. If an out-of-court settlement is reached, and the parties agree, the attorneys will prepare the appropriate paperwork, and the suit will be formally dismissed by the court “with prejudice,” meaning that all rights under the lawsuit have ceased and the lawsuit is over.

Step Seven: Going to Trial

If the parties cannot reach a settlement, then the case will eventually proceed to trial. Many people are not aware that it takes years, sometimes from three to six, for a civil case to actually reach trial. Once scheduled and in the courtroom, the trial will begin with impan- eling a jury (unless a jury has been waived). Impaneling (also called voir dire, meaning

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Section 3.2 Alternative Dispute Resolution CHAPTER 3

“to speak the truth”) involves selecting jurors that each side feels will be nonbiased in their deliberations. Next, each attorney will make what are called opening statements, in which the attorneys will tell the jurors what they plan to present through the witnesses. Next comes the presentation of evidence through witnesses by way of testimony and, finally, the closing statements. Note that all testimony is transcribed in court into what is called the Record, which has all the testimony, objections to evidence, and descriptions of the admitted evidence. Only admitted evidence can be considered by the jury when reach- ing its final decision, or verdict. At the end of the trial, the judge will read to the jury a set of instructions, which are a set of parameters for how the jury must reach its decision. The jury will then deliberate and reach its verdict, which in a civil lawsuit may include a dollar amount for the plaintiff, if the plaintiff prevails.

Step Eight: Enforcing Judgments

You may think that now that the plaintiff has suffered through many years and has won the trial, the parties stand up, shake, and hand over to the plaintiff a sizeable check for damages. However, nothing could be further from the truth. The winning plaintiff may be completely without payment until another proceeding to collect the money. Sometimes the plaintiff will have to garnish the wages of the defendant by issuing a court order to have a portion of the judgment taken directly out of the defendant’s paycheck, of which the defendant will receive notice. Another method to obtain relief is to go to court to get an order to sell some of the defendant’s assets. That’s why it is so important before suing someone to know exactly where his or her assets are and how much they are worth, as the assets are usually what will be converted to cash to pay the final judgment.

3.2 Alternative Dispute Resolution

Alternative dispute resolution (ADR) is the name given to settling a dispute between people (or businesses) without going to court. Perhaps best known as a way to prevent couples from embarking on contested or adversarial divorce proceedings, ADR is also useful in business-related disputes. It can take many forms, but some of the more popular are negotiation, mediation, and arbitration. We will discuss each of these, and their distinct advantages and disadvantages, in the following sections.

Negotiation

Negotiation is generally considered a form of dispute resolution in which the parties try to work out the problem between (or among) themselves. It can take the form of a discussion over a cup of coffee or a formal negotiation session in which both sides are represented by attorneys, such as in a labor dispute. Negotiations are usually less formal than litiga- tion and have the advantage of being quick, private, confidential, and inexpensive; in fact, since negotiations don’t necessitate hiring anyone, this makes them the least expensive form of dispute resolution.

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Section 3.2 Alternative Dispute Resolution CHAPTER 3

One drawback to a negotiation is that the parties may never reach an agreement. But sup- pose they do. Another drawback is that even if they reach an agreement, that agreement is a contract. (This is true even if the agreement is oral, as most oral contracts are enforce- able.) The problem with a contract is that the only place it can be enforced is in court, which is what the parties were trying to avoid in the first place. Here is the reason: No agreements between any parties are enforceable unless the parties can go to court. In court, the “force of the law” means that the loser’s assets can be sold and the property converted into money; thus, enforcement means that the winning party gets a monetary award.

Conversely, two parties can agree to anything, but trying to enforce the agreement outside of court is no simple matter! You might try persuasion; if that doesn’t work, threats; and if that doesn’t work, greater threats, until you run the risk of committing a crime. The bot- tom line is that if someone chooses to go back on his or her word, court is the only place that can effect a remedy.

Mediation

One drawback to negotiation is that the parties may not be able to arrive at a mutually agreeable solution, and that is where mediation has an advantage. In mediation, a third party enters the scene to help the two parties figure out a reasonable solution to their dif- ficulty. Like negotiation, mediation is fast, inexpensive, private, and confidential. When a mediator is necessary, there are numerous online sites available, with perhaps the most highly recommended being the American Arbitration Association (www.adr.org). Note that this site has training for businesspersons who need to learn how to mediate as well as free access to state and federal laws.

Many towns and cities also have mediation centers, often free of charge, that provide mediators. These are available by using the search term “free mediation services.” And many courts, especially small claims courts, have mandatory court-ordered mediation in cases such as child custody and divorce, in an effort to cut down on the number of cases they must hear.

Students often find the role of a mediator confusing because mediators do not make a decision about who is wrong or right. Instead, they listen to the controversy and make suggestions for different ways to approach resolution. A clever mediator might make sug- gestions that the parties had not considered or be able to frame them in more palatable ways. The parties are not obligated to accept any of the suggestions. Instead, a persuasive mediator might be able to help the parties see the benefits to arriving at a satisfactory agreement in mediation as opposed to going to court.

Like negotiation, however, mediation has the same drawback of lack of enforcement. Even when the parties agree to a proposal by the mediator, their agreement is still a contract, and if one of them fails to follow through, then court is the only place to go for enforce- ment of the agreement.

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Section 3.2 Alternative Dispute Resolution CHAPTER 3

A Closer Look: Mediation

Mediation is a form of alternative dispute resolution that can help you to save time and money by settling a dispute out of court. View the two video clips showing mediations in progress and then consider the questions that follow.

Questions to Consider

http://www.youtube.com/watch?v=heUcre2d9wg&feature=related

1. What are the four phases of the mediation process that you witnessed in this video? 2. What was the issue between the parties? 3. What steps did the mediator take to resolve this issue? 4. What are your impressions of the process? Do you think it is an effective way to resolve

disputes? http://www.youtube.com/watch?v=H0_h1BDOhtw

1. How would you describe the dispute taking place between these parties? 2. What are the biggest obstacles to successful resolution of this dispute? 3. What steps did the mediator take to resolve this dispute? 4. What did you learn from watching this mediator that might help you in resolving problems in

the workplace?

Arbitration

Arbitration is the most formal form of dispute resolution. Here a third party is brought in to actually resolve the dispute by pronouncing one person the “winner” and the other the “loser.” In short, an arbitrator is akin to a judge and jury who listen to the dispute and then decide the case.

Arbitration is often used because the parties submitted to an arbitration agreement. For example, if you purchase a new car, you probably agreed somewhere in the fine print that if you had a problem with the car, you waived your right to sue in court and agreed to submit the dispute to arbitration. The arbitration panel, in such a case, is established and chosen by the manufacturer, putting the consumer at a severe disadvantage.

It is true that arbitration is faster than litigation, private, confidential, and compared with litigation, much cheaper. Arbitrators, however, can be very expensive, depending on their qualifications and experience. There are numerous disadvantages to arbitration. There is no discovery, so parties enter the fray without any knowledge of the other side’s case. If there is an error in the paperwork, there is no one with the power to dismiss the case, as there would be in court. Nor can parties appeal the decision of the arbitrator, even if it is erroneous.

If arbitration is a good fit for a particular dispute, the rules of evidence are not needed, and reliance on an arbitrator won’t be a problem, then it might be a viable option. Gener- ally, however, parties are better off taking a chance with a jury.

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Section 3.3 The Role of the Manager in Hiring an Attorney to Help Resolve Disputes CHAPTER 3

Private Judges

Some states allow people to hire a private judge to hear a dispute. Usually the judges are retired from the bench and hire themselves out at a $400 or higher hourly rate. If the disputants can afford the rates, the hearings are private, confidential, and very fast, but expensive. One huge advantage is that the decision of the judge is appealable and that the rules of evidence apply; thus, for example, there are motions filed and cases can be dismissed. For an excellent article on hiring a private judge, go to

http://www.dgslaw.com/documents/articles/NLJ-PrivateJudges.pdf.

3.3 The Role of the Manager in Hiring an Attorney to Help Resolve Disputes

The day might come when you need to work with an attorney on a problem, or per-haps you might need legal advice for your business. As a manager, it is crucial to know how to find the best attorney for your needs and what to expect when work- ing with an attorney.

Hiring an Attorney

When searching for an attorney, your first temptation may be to pick up the telephone and call a trusted advisor, like a family member or buddy from college, and ask for the name of his attorney. But is this the best way to choose a lawyer for your business? What is the cost of legal advice? And what kind of work is it realistic to expect from a lawyer?

As you are aware, a law student is a graduate of a four-year college and goes on to an addi- tional three-year graduate program that results in a J.D. (juris doctor) degree. Attorneys who graduate from law school must then pass a bar examination and an ethics test before they can be licensed, a process that usually takes six months after law school graduation.

While there are law schools with specialties, such as international law, many lawyers are generalists who take on a wide variety of cases such as simple traffic tickets, wills and estates, real estate closings, and simple contracts. In law, as in medicine, there are general practitioners, or lawyers whose practice covers a wide variety of topics, and there are spe- cialists, some practicing in very narrow areas of expertise. A friend’s lawyer who helped him with a speeding ticket is a much different type of attorney from one who sets up busi- nesses or reviews contracts.

There are certain types of law for which it is better to get an expert. These areas include copyright, trademark, trade name, patents, business formation, and discrimination suits that end up going to trial. Most lawyers have no experience with these on a daily basis; thus, it is essential to hire someone with experience.

While it may seem overwhelming to sift through all the information online to locate the right attorney, there are ways to limit your search to make it more accurate and productive.

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One good beginning point is the bar association in your state, if for no other reason than to check that any attorneys you consider have a valid license and are admitted to practice law in that state. The bar association usually regulates licensing and conduct of attor- neys, and many keep websites where you can check to see if they are in good standing or have malpractice actions pending. To find the appropriate website, just type into a search engine a phrase like “bar association for the state of Florida” or “attorneys in good stand- ing in Colorado.” You should look for the state bar website and then follow the links to the information for admitted, reputable attorneys.

Another way to search for a specialist is to search for attorneys who have won cases on the same topic as the one for which you need a lawyer. For example, if you need representa- tion for a workers’ compensation–related eye injury, search for that in the particular state and add phrases like “won largest settlement,” “heads the workers’ compensation section of the bar,” or “nationally known for his work in the field of workers’ compensation.” Search using any phrase that may lead you to reported news clips about attorneys who have “won big” in that particular subject area.

One of the oldest and most reliable sources for attorneys is Martindale Hubbell, located at http://www.martindale.com/About_Martindale-Hubbell/index.aspx. This service pro- vides the names of attorneys by specialty and ranks attorneys with an “AV” or “BV” or “CV” rating, with “AV” being the highest. So, for example, you could search for an attor- ney in a particular state and town who specializes in immigration law. If you look at all the attorneys listed, you can next pick the ones with an AV rating. Ratings are made by judges and fellow attorneys, so they are based on information from competitors and adversaries, and an “AV” rating speaks very highly of one’s standing. Note, however, that an attorney has to have been in practice for at least 10 years before receiving an AV rating; thus, there are many excellent younger attorneys who are rated BV. Many other places to locate an attorney can be found on the Web or at your local law library.

Working With an Attorney

How are attorneys paid? The answer is that there are different types of fee arrangements. If you hire an attorney to draft a will, you may be charged a flat fee that is given to you up front. There are a number of services similar to will drafting for which flat fees are the norm, including house closings and writing a simple letter. If the matter is more compli- cated, however, most attorneys charge by the hour. Attorneys so hired keep a form for each client that shows work performed per 15 minutes, or quarter of an hour. If the attor- ney talks to the client on the phone for 15 minutes and bills at the rate of $200 per hour, then that phone call will be charged $50 toward the client’s bill. As you can see, these fees can quickly add up to large sums. Every time you pick up the phone to ask your attorney a question, the attorney is logging the phone call and it is going on your bill.

In personal injury cases, it is typical not to charge clients any money up front but instead to take a percentage of the money won in the lawsuit if it succeeds. The attorney is taking the chance that the jury will award a substantial money verdict to cover his or her time expended in the preparation, discovery, and trial of the case. Attorneys typically receive 33 1/3% at the end of a successful trial and 50% at the end of a successful appeal. For an attor- ney with a winning record of very large claims, this will add up to a fortune. Most attor- neys, however, do not win every case, and very few win cases that entail million-dollar

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admitted as true If the defendant does not answer the allegations in the plaintiff’s complaint, then the allegation in the com- plaint is considered true.

allegations in the complaint The individ- ually numbered paragraphs in the plain- tiff’s complaint.

alternative dispute resolution A way to settle a dispute, sometimes using a third party, without going to court.

Answer The formal paper filed by the defendant in response to the plaintiff’s complaint.

arbitration The process of hiring or employing a designated third party as an arbitrator who renders an opinion that is binding on the parties.

attorney’s fees The amount paid to an attorney for services rendered, which may include an hourly fee or a percentage of a final judgment in a civil case.

default judgment A judgment entered by the court when the defendant fails to answer the complaint or show up for the court proceedings.

deposition A form of discovery whereby the parties can ask questions about the upcoming lawsuit and the other side has to answer. The deposition testimony can be in the form of a written record, an audio- tape or videotape, or both.

discovery Prior to a civil trial, a proceed- ing in which the evidence and testimony are divulged to the other side.

Key Terms CHAPTER 3

verdicts. As of 2011, the average yearly salary of an attorney was $137,000 according to the Bureau of Labor Statistics (http://www.bls.gov/oes/current/oes231011.htm).

Bearing in mind that the attorney is paid by the hour, if you work for a company that is being sued, you want to make sure your company structures its time with the attorney so that people are not interrupting each other or engaging in idle chitchat. Management should put one person in charge of organizing any meetings with the attorney and finding out what the attorney needs to know to avoid long and costly and unproductive meetings.

Once you find out what the attorney wants, it is essential to organize materials. If the attor- ney is preparing for litigation, for example, and needs to talk to members of the organiza- tion’s staff, it is helpful to provide a list of the names of employees to interview, phone num- bers, times to call, e-mail addresses, and a paragraph summarizing what each one knows. That way, if what they know is irrelevant, you have saved perhaps an hour of the attorney’s time. If the attorney wants documents, make sure they are clearly labeled and organized.

If you are an entrepreneur and need to start a business, it is essential that you hire an attor- ney with experience in forming a business and experience with tax issues. For a detailed discussion of forms of incorporation, see Unit VII, Business Organizations, Chapters 27–31. You will most likely enter into a fee arrangement. To see a website setting forth different fee arrangement letters, go to http://www.americanbar.org/newsletter/public ations/gp_solo_magazine_home/gp_solo_magazine_index/sampleengageletters.html.

For an excellent website on hiring an attorney, consult Understanding the Legal Fees Agree- ment: Consumer Rights at http://practice.findlaw.com/financing-a-law-firm/understand ing-the-legal-fees-agreement-consumer-rights.html.

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Critical Thinking and Discussion Questions

1. In a civil lawsuit, what is the most important document to acquire from the defendant during discovery, and why?

2. In a civil lawsuit, what are the most important questions to ask the defendant during discovery, and why?

3. Under what circumstances might one consider settling out of court? What are the advantages and disadvantages of doing so?

4. What are the advantages of employing a private judge over a mediator or arbitrator?

5. Why is it important to spend the time to find the right attorney for your specific legal situation?

6. You are asked by the attorney for your company to review the responses to a law- suit. The attorney presents you with the Answer and asks you to look it over. What are you looking for? What should you ask for to properly complete the task?

7. As the manager of 15 employees, you have 2 who cannot get along and have reached an impasse. Describe what forms of alternative dispute resolution you could use and the advantages and disadvantages of each. Do research online to see how much it would cost to bring in a third party to help you resolve the dis- pute. Report the costs in your town/city and state.

garnishment of wages A court proceed- ing against a defendant who refuses to pay a judgment. In it, money is taken out of the defendant’s paycheck and given to the plaintiff.

impaneling a jury Choosing the jury; also called voir dire.

impeach To place the integrity and verac- ity of a witness in doubt by demonstrating before a jury the inaccuracies and contra- dictions between the witness’s testimony and deposition.

interrogatories A form of discovery whereby the other side is given a set of written questions to answer.

judgment The final order by a court in which one side is declared the winner and the other the loser; the declaration that the loser has to pay the winner a certain sum of money. A monetary judgment.

mediation Bringing in a third party to assist with a dispute.

negotiation Attempting to work out a res- olution to a dispute with the other party.

opening statements In a civil trial, the phase in which the lawyers tell the jury what they are going to prove in the trial.

private judge, consultation with Another form of alternative dispute resolution in which a former practicing judge is hired by both sides to make a decision.

Record, the The bound transcript of the trial, which includes all the testimony, objections, and admitted evidence.

settling out of court When both sides agree to a monetary settlement rather than having the case go to trial.

testimony The statements made by wit- nesses in court that become part of the Record.

verdict The final decision of a jury about guilt or liability.

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