THE LEGAL OF BUSINESS

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THELEGALENVIRONMENTBUSINESSOF

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oachSIXTH EDITIONNANCY K.KUBASEKBARTLEY A.BRENNANM. NEILBROWNEBoston Columbus Indianapolis New York San Francisco Upper Saddle RiverAmsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal TorontoDelhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo

Assistant Vice President, Executive Editor: Stephanie WallEditorial Senior Project Manager: Karen KirincichEditorial Director: Sally YaganEditor in Chief: Donna BattistaDirector of Editorial Services: Ashley SantoraEditorial Assistant: Brian ReillyDirector of Marketing: Patrice JonesMarketing Assistant: Ian GoldSenior Managing Editor: Cynthia ZonneveldProject Manager: Carol O’RourkeSenior Operations Specialist: Diane PeiranoArt Director: Jonathon BoylanCover Designer: Jonathon BoylanManager, Cover Visual Research & Permissions: Karen SanatarCover Art: Ron Koeber/ Aurora Photos/AlamyMedia Development Manager: Cathi ProfitkoFull-Service Project Management: S4Carlisle Publishing ServicesComposition: S4Carlisle Publishing ServicesPrinter/Binder: WebcraftersCover Printer: Lehigh-Phoenix Color/HagerstownText Font: 10.5/12 GaramondCredits and acknowledgments borrowed from other sources and reproduced, with permission, in thistextbook appear on appropriate page within text.Copyright 2012, 2009, 2006, 2003, 1999 Pearson Education, Inc., Upper Saddle River, New Jersey04758. All rights reserved. Manufactured in the United States of America. This publication is protected byCopyright, and permission should be obtained from the publisher prior to any prohibited reproduction,storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical,photocopying, recording, or likewise. To obtain permission(s) to use material from this work, pleasesubmit a written request to Pearson Education, Inc., Permissions Department.Many of the designations by manufacturers and seller to distinguish their products are claimed astrademarks. Where those designations appear in this book, and the publisher was aware of a trademarkclaim, the designations have been printed in initial caps or all caps.Library of Congress Cataloging-in-Publication DataKubasek, Nancy.The legal environment of business : a critical thinking approach / Nancy K.Kubasek, Bartley A. Brennan, M. Neil Brown. — 6th ed.p. cm.ISBN-13: 978-0-13-266484-4ISBN-10: 0-13-266484-41. Industrial laws and legislation—United States. 2. Business law—UnitedStates. 3. Trade regulation—United States. I. Brennan, Bartley A. II.Brown, M. Neil. III. Title.KF1600.K83 2011346.7307—dc22201005453210 9 8 7 6 5 4 3 2 1ISBN 10:0-13-266484-4ISBN 13: 978-0-13-266484-4

To the numerous students who appreciate the importance of developing theircritical thinking skills for their personal growth and developmentNANCY K. KUBASEK AND M. NEIL BROWNEIn memory of Professor Thomas Dunfeeof the Wharton School of FinanceBARTLEY A. BRENNAN

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Brief ContentsP A R TO N EIntroduction to the Law and the Legal Environmentof Business 11 Critical Thinking and Legal Reasoning 22 Introduction to Law and the Legal Environmentof Business 153 The American Legal System 334 Alternative Tools of Dispute Resolution 705 Constitutional Principles 996 Cyberlaw and Business 1347 White-Collar Crime and the Business Community 1608 Ethics, Social Responsibility, and the Business Manager9 The International Legal Environment of Business 228P A R T202T W OPrivate Law and the Legal Environment of Business 261101112131415161718The Law of Contracts and Sales—I 262The Law of Contracts and Sales—II 289The Law of Torts 309Product and Service Liability Law 342Law of Property: Real and Personal 372Intellectual Property 394Agency Law 413Law and Business Associations—I 434Law and Business Associations—II 453P A R TT H R E EPublic Law and the Legal Environment of Business 4771920212223242526The Law of Administrative Agencies 478The Employment Relationship 499Laws Governing Labor–Management Relations 527Employment Discrimination 557Environmental Law 600Rules Governing the Issuance and Trading of Securities 629Antitrust Laws 680Laws of Debtor–Creditor Relations and Consumer Protection 721APPENDIX A The Constitution Of the United States 763APPENDIX B Uniform Commercial Code (2000 Official Text), Article 2GLOSSARYINDEX769783797vii

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ContentsPREFACExxxiACKNOWLEDGMENTSxxxvABOUT THE AUTHORSxxxviiP A R TO N EIntroduction to the Law and the Legal Environmentof Business 11Critical Thinking and Legal Reasoning2The Importance of Critical Thinking 2A Critical Thinking Model 3United States of America v. Martha Stewart and Peter Bacanovic 4The Critical Thinking Steps 5Facts 5Issue 6Reasons and Conclusion 6Rules of Law 6Ambiguity 7Ethical Norms 7Analogies 7Missing Information 8Using Critical Thinking to Make Legal Reasoning Come Alive 9Legal Reasoning 10Applying the Critical Thinking Approach 13Assignment on the Internet 14On the Internet 14For Future Reading 142Introduction to Law and the Legal Environmentof Business 15Definition of the Legal Environment of Business 16Definition of Law and Jurisprudence 17Natural Law School 18Positivist School 19Sociological School 19American Realist School 20Critical Legal Studies School 20Feminist School 20Law and Economics School 21Sources of Law 21The Legislature as a Source of Statutory Law 21The Judicial Branch as a Source of Case Law 23The Executive Branch as a Source of Law 25Administrative Agencies as a Source of Law 25ix

xCONTENTSClassifications of Law 26Criminal Law and Civil Law 26Public and Private Law 27Substantive and Procedural Law 27Cyberlaw 27Global Dimensions of the Legal Environment of BusinessSummary 28Review Questions 28Review Problems 29Case Problems 29Thinking Critically about Relevant Legal Issues 31Assignment on the Internet 31On the Internet 32For Future Reading 323The American Legal System2833Jurisdiction 33Original versus Appellate Jurisdiction 33Jurisdiction over Persons and Property 34World-Wide Volkswagen Corp. v. Woodson, District Judgeof Cook County 35Subject Matter Jurisdiction 37West Virginia University Board of Governors for and on Behalfof West Virginia University v. Richard Rodriguez 39Venue 40The Structure of the Court System 42The Federal Court System 42State Court Systems 42The Actors in the Legal System and their Relationshipto the Business Community 45The Attorney 45The Judge 46The Jury 48The Adversary Process 49Criticisms of the Adversary System 49Steps in Civil Litigation and the Role of Businesspersons 50The Pretrial Stage 50The Trial 55J.E.B. v. Alabama, ex rel. T.B. 56Appellate Procedure 60Class Actions 62Global Dimensions of the American Legal System 63Summary 65Review Questions 65Review Problems 65Case Problems 66Thinking Critically about Relevant Legal Issues 68Assignment on the Internet 68

CONTENTSOn the Internet 69For Future Reading 694Alternative Tools of Dispute Resolution70Negotiation and Settlement 71Mediation 72Selection of a Mediator 72Common Uses of Mediation 73Advantages of Mediation 73Criticisms of Mediation 74Arbitration 74Hall Street Associates, L.L.C. v. Mattel, Inc. 75Methods of Securing Arbitration 76Southland Corp. v. Keating 77Ignazio v. Clear Channel Broadcasting, Inc., et al. 80Selection of an Arbitrator 84Common Uses of Arbitration 85Problems with Arbitration 86Minitrials 87Early Neutral Case Evaluation 88Private Trials 88Summary Jury Trials 89Court-Annexed Alternative Dispute Resolution 89Use of Court-Annexed ADR in the State and FederalSystems 89Differences between Court-Annexed and Voluntary ADRThe Future of Alternative Dispute Resolution 91Global Dimensions of Alternative Dispute Resolution 92Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth 92Summary 93Review Questions 94Review Problems 94Case Problems 94Thinking Critically about Relevant Legal Issues 97Assignment on the Internet 97On the Internet 98For Future Reading 98590Constitutional Principles 99The Constitution 99Federalism 99Supremacy Clause 100Federal Preemption 100Separation of Powers 101William Jefferson Clinton v. Paula Corbin Jones 102The Impact of the Commerce Clause on Business 104The Commerce Clause as a Source of Federal Authority104xi

xiiCONTENTSGonzales v. Raich 106The Commerce Clause as a Restriction on State Authority 108United Haulers Association, Inc. v. Oneida-Herkimer Solid WasteManagement Authority 110The Taxing and Spending Powers of the Federal Government 113The Impact of the Amendments on Business 114The First Amendment 114Central Hudson Gas & Electric Corp. v. Public ServiceCommission of New York 116The Fourth Amendment 121The Fifth Amendment 123D.A.B.E., Inc. v. City of Toledo 126The Fourteenth Amendment 128Summary 128Review Questions 129Review Problems 129Case Problems 130Thinking Critically about Relevant Legal Issues 131Assignment on the Internet 132On the Internet 132For Future Reading 1336Cyberlaw and Business134Cyberlaw and Business: How Law Changes as Society Changes 135The Flexibility of Law 135Changes in the Ways Courts Function 136Challenges to the Limits and Powers of Government 137Janet Reno, Attorney General of the United States, et al.,Appellants v. American Civil Liberties Union, et al., Appellee 137Intellectual Property Issues in Cyberspace 141Patents 141Trademarks 141Copyrights 142A & M Records, Inc. v. Napster, Inc. 143E-Commerce Issues 145Privacy 145Online Marketing 147Centocor, Inc. (Plaintiff-Appellant) v. Patricia Hamilton(Respondent) 147Cybersignatures 148Employment Law Issues in Cyberspace 149Privacy versus Employment-at-Will 149Michael A. Smyth v. the Pillsbury Co. 149Online Harassment 150The War against Cybercrime 152Denial-of-Service Attacks 152Identity Theft 152Insider Trading 153Internet Gambling 154

CONTENTSSummary 154Review Questions 155Review Problems 155Case Problems 156Thinking Critically about Relevant Legal IssuesAssignment on the Internet 158On the Internet 159For Future Reading 1597157White-Collar Crime and the Business Community160Crime and Criminal Procedure 163Crime 163Criminal Procedure 164Distinguishing Features of White-Collar Crime 168The Corporation as a Criminal 169Arguments in Support of Corporate Liability 170Arguments in Opposition to Corporate Liability 171Imposition of Liability on Corporate Executives 171United States v. Park 172Imposition of Liability on Lower-Level Corporate Criminals 175Factors Encouraging the Commission of White-Collar Crime 175Sentencing of White-Collar Criminals 176Common White-Collar Crimes 178Bribery 179Violations of Federal Regulations 179Criminal Fraud 180United States v. Gray 181Larceny 183Embezzlement 183Computer Crimes 183Prevention of White-Collar Crime 186Federal Laws Used in the Fight Against White-Collar Crime 189The Racketeer Influenced and Corrupt OrganizationsAct (RICO) 189False Claims Act 189Rockwell International Corp. v. United States 191Sarbanes-Oxley Act 193Whistleblower Protection Act 193State Laws Used in the Fight Against White-Collar Crime 194Global Dimensions of White-Collar Crime 195Summary 196Review Questions 196Review Problems 196Case Problems 197Thinking Critically about Relevant Legal Issues 199Assignment on the Internet 200On the Internet 200For Future Reading 201xiii

xivCONTENTS8Ethics, Social Responsibility, and the BusinessManager 202Definition of Business Ethics and Social Responsibility 204Business Ethics 204The Social Responsibility of Business 204In re Exxon Valdez 205Theories of Ethical Thought 206Consequential Theories 206Deontological Theories 208Humanist Theories 208Codes of Ethics 208Individual Codes of Ethics 208Corporate Codes of Ethics 210Industry Codes of Ethics 211Professional Codes of Ethics 212Bates v. State Bar of Arizona 214Schools of Social Responsibility 216Profit-Oriented School 216Managerial School 219Cooper Industries v. Leatherman Tool Group, Inc. 219Institutional School 220Professional Obligation School 220Regulation School 221Fog Cutter Capital Group v. Securities and Exchange Commission 221Global Dimensions of Ethics and Social Responsibility 222Code of Conduct for Transnational Corporations 222Summary 223Review Questions 223Review Problems 223Case Problems 224Thinking Critically about Relevant Legal Issues 225Assignment on the Internet 226On the Internet 227For Future Reading 2279The International Legal Environment of BusinessDimensions of the International Environment of BusinessPolitical Dimensions 229Economic Dimensions 230Cultural Dimensions 231Corruption and Trade 231United States v. Kay 232Legal Dimensions 234Crosby v. National Foreign Trade Council 237Methods of Engaging in International Business 238Trade 238International Licensing and Franchising 239Foreign Direct Investment 240228229

CONTENTSIn re Union Carbide Corp. Gas Plant Disaster v.Union Carbide Corp. 241Risks of Engaging in International Business 243Expropriation of Private Property 243Sovereign Immunity Doctrine 244Keller v. Central Bank of Nigeria 244Act-of-State Doctrine 245Republic of the Philippines v. Ferdinand E. Marcos 246Export and Import Controls 246Legal and Economic Integration as a Means of EncouragingInternational Business Activity 247The World Trade Organization 249The European Union 250North American Free Trade Agreement 254Global Dispute Resolution 256Arbitration 256Litigation 256Globalization: Hurts or Helps 257Summary 257Review Questions 258Review Problems 258Case Problems 259Thinking Critically about Relevant Legal Issues 259Assignment on the Internet 260On the Internet 260For Future Reading 260P A R TT W OPrivate Law and the Legal Environment of Business 26110The Law of Contracts and Sales—I262Definition, Sources, and Classifications of Contract Law 263Definition 263Sources of Contract Law 263Classifications of Contracts 264Fox v. Mountain West Electric 265Audito v. City of Providence 266Elements of a Legal Contract 268Legal Offer 268Satellite Entertainment Center v. Keaton 269Legal Acceptance 270The Private Movie Company, Inc. v. Pamela Lee Anderson et al. 271Consideration 273Genuine Assent 275Stambovsky v. Ackley and Ellis Realty 276Dissenting Opinion 277xv

xviCONTENTSCompetent Parties 278Legal Object 279Moore v. Midwest Distribution, Inc. 280Contracts That Must Be in Writing 281Contracts for the Sale of an Interest in Land 281Contracts to Pay the Debts of Another 281Contracts Not Performable in One Year 282Sale of Goods of 500 or More 282Iacono v. Lyons 282Nonbusiness Contracts 283Parol Evidence Rule 283Third-Party Beneficiary Contracts and Assignment of RightsTypes of Third-Party Beneficiary Contracts 284Assignment of Rights 284Summary 285Review Questions 286Review Problems 286Case Problems 286Thinking Critically about Relevant Legal Issues 287Assignment on the Internet 288On the Internet 288For Future Reading 28811The Law of Contracts and Sales—II289Methods of Discharging a Contract 290Discharge by Performance 290Plante v. Jacobs 290Discharge by Mutual Agreement 292Discharge by Conditions Precedent and Subsequent 293Architectural Systems, Inc. v. Gilbane Building Co. 293Discharge by Impossibility of Performance 294Discharge by Commercial Impracticability 294Facto v. Pantagis 295Remedies for a Breach of Contract 296Monetary Damages (“Legal” Remedies) 296Shirley Parker v. Twentieth Century Fox Film Corp. 297Arrowhead School District No. 75, Park County,Montana v. James A. Klyap, Jr. 298Equitable Remedies 300Remedies for Breach of a Sales Contract (Goods) 301Fitl v. Strek 301E-Contracts 302E-Signatures 302The Uniform Computer Information TransactionAct 303Global Dimensions of Contract and Sales Law 304Summary 305Review Questions 305284

CONTENTSReview Problems 305Case Problems 306Thinking Critically about Relevant Legal IssuesAssignment on the Internet 307On the Internet 308For Future Reading 30812307The Law of Torts 309The Goals of Tort Law 309Damages Available in Tort Cases 310Compensatory Damages 310Nominal Damages 311Punitive Damages 311BMW of North America, Inc. v. Gore, Jr. 312Classifications of Torts 318Intentional Torts 318Intentional Torts against Persons 318Nemet Chevrolet, Ltd. v. Consumeraffairs.com, Inc. 321Ellen Johnston v. One America Productions, Inc. 325Intentional Torts against Property 329Intentional Torts against Economic Interests 329Negligent Torts 331Elements of Negligence 331Defenses to Negligence 333Vicki Lynn Shultz v. Cheney School District No. 360 335Strict Liability Torts 336Global Dimensions of Tort Law 336Summary 336Review Questions 337Review Problems 337Case Problems 338Thinking Critically about Relevant Legal Issues 340Assignment on the Internet 340On the Internet 341For Future Reading 34113Product and Service Liability Law 342Theories of Recovery in Product Liability Cases 343Negligence 343Donna S. Riegel v. Medtronic, Inc. 350Strict Liability in Contract for Breach of WarrantyWilliams v. Braum Ice Cream Store, Inc. 354Strict Liability in Tort 357Welge v. Planters Lifesavers Co. 358Susan Calles v. Scripto-Tokai Corp. et al. 360Liability to Bystanders 363Market Share Liability 363352xvii

xviiiCONTENTSService Liability 364Accountants’ Liability 365Global Dimensions of Product Liability Law 366Summary 367Review Questions 368Review Problems 368Case Problems 368Thinking Critically about Relevant Legal Issues 370Assignment on the Internet 371On the Internet 371For Future Reading 37114Law of Property: Real and Personal372Real Property 373Definition of Real Property 374Extent of Ownership 374Interests in Real Property 374Fee Simple Absolute 375Conditional Estate 375Life Estate 375Future Interest 375Leasehold Estates 376Easements 376License 376Co-Ownership 377Condominiums and Cooperatives 377Burton Stevens v. Elk Run Homeowners’ Association, Inc. 378Voluntary Transfer of Real Property 379Execution 380Delivery 382Acceptance 382Recording 382Involuntary Transfer of Real Property 382Adverse Possession 382Condemnation 382Susette Kelo et al., Petitioners, v. City of New London,Connecticut, et al. 384Restrictions on Land Use 385Restrictive Covenants 386Zoning 387Other Statutory Restrictions on Land Use 387Personal Property 388Voluntary Transfer of Personal Property 388Involuntary Transfers of Personal Property 388Bailments 389Global Dimensions of Property Law 389Summary 390Review Questions 390Review Problems 391

CONTENTSCase Problems 391Thinking Critically about Relevant Legal IssuesAssignment on the Internet 393On the Internet 393For Future Reading 39315Intellectual Property392394Introduction to Intellectual Property 394Trademarks 394Toys “R” Us, Inc., v. Canarsie Kiddie Shop, Inc. 395Trade Dress 398Federal Trademark Dilution Act of 1995 398Victor Moseley and Kathy Moseley et al., dba Victor’s Little Secret v.V Secret Catalogue, Inc. et al. 400Trade Secrets 401Patents 401Copyrights 402Fair Use Doctrine 403Zomba Enterprises, Inc.; Zomba Songs, Inc., Plaintiffs-Appellees v.Panorama Records, Inc., Defendant-Appellant 403Copyrights in the Digital Age 406RealNetworks, Inc. v. DVD Control Copy Association,Inc., et al. 407Global Dimensions of Intellectual PropertyLaw 408Summary 409Review Questions 409Review Problems 410Case Problems 410Thinking Critically about Relevant Legal Issues 411Assignment on the Internet 412On the Internet 412For Future Reading 41216Agency Law413Definition and Types of Agency Relationships 414Definition of Agency 414Types of Agency Relationships 414Alberty-Vélez v. Corporación de Puerto Rico 416Creation of an Agency Relationship 418Expressed Agency or Agency by Agreement 418Agency by Implied Authority 418Penthouse International v. Barnes 419Agency through Ratification by Principal 420Agency by Estoppel or Apparent Authority 420Duties of Agents and Principals 420Principal’s Duties to Agent 420Agent’s Duties to Principal 421xix

xxCONTENTSCousins v. Realty Ventures, Inc. 421Gossels v. Fleet National Bank 423Principal’s and Agent’s Liability to

9 The International Legal Environment of Business 228 PART TWO Private Law and the Legal Environment of Business 261 10 The Law of Contracts and Sales—I 262 11 The Law of Contracts and Sales—II 289 12 The Law of Torts 309 13 Product and Service Liability Law 342 14 Law of Property: Real and Personal 372 15 Intellectual Property 394 16 .

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